<PAGE>
As filed with the Securities and Exchange Commission on March 1, 1996
-----------------
Registration Nos. 33-80966
811-8598
====================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [x]
Pre-Effective Amendment No. ____ [ ]
Post-Effective Amendment No. 2 [x]
------
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [x]
Amendment No. 3 [x]
------
____________________________
The Commerce Funds
(Exact Name of Registrant as Specified in Charter)
4900 Sears Tower
Chicago, IL 60606
(Address of Principal Executive Offices)
Registrant's Telephone Number:
800-621-2550
W. Bruce McConnel III, Esquire
Drinker Biddle & Reath
1100 Philadelphia National Bank Building
1345 Chestnut Street
Philadelphia, Pennsylvania 19107-3496
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box)
[x] immediately upon filing pursuant to paragraph (b)
[ ] on July 5, 1995 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE>
REGISTRANT HAS PREVIOUSLY FILED A DECLARATION OF INDEFINITE REGISTRATION OF ITS
SHARES OF BENEFICIAL INTEREST PURSUANT TO RULE 24f-2 UNDER THE INVESTMENT
COMPANY ACT OF 1940, AS AMENDED. REGISTRANT'S RULE 24f-2 NOTICE WITH RESPECT TO
THE COMMERCE SHORT-TERM GOVERNMENT FUND, BOND FUND, BALANCED FUND, GROWTH FUND,
AGGRESSIVE GROWTH FUND, INTERNATIONAL EQUITY FUND, NATIONAL TAX-FREE BOND FUND
AND MISSOURI TAX-FREE BOND FUND FOR THE FISCAL YEAR ENDED OCTOBER 31, 1995 WAS
FILED ON NOVEMBER 15, 1995.
<PAGE>
THE COMMERCE FUNDS
SHORT-TERM GOVERNMENT FUND
BOND FUND
BALANCED FUND
GROWTH FUND
AGGRESSIVE GROWTH FUND
INTERNATIONAL EQUITY FUND
CROSS REFERENCE SHEET
---------------------
Pursuant to Rule 495(a)
under the Securities Act of 1933
Form N-1A Part A Item Number Prospectus Caption
- ---------------------------- ------------------
<TABLE>
<CAPTION>
<S> <C> <C>
1. Cover Page.................................... Cover Page
2. Synopsis...................................... Summary of Expenses
3. Condensed Financial Information............... Financial Highlights
4. General Description of Registrant............. Cover Page; Investment
Objectives and Policies;
The Business of The
Commerce Funds
5. Management of the Fund........................ The Business of The
Commerce Funds; How to
Buy Shares; How to Sell
Shares
5A. Management's Discussion of Fund Performance... Not Applicable
6. Capital Stock and Other Securities............ How to Buy Shares; How to
Sell Shares; Dividend and
Distribution Policies;
Tax Information; How Are
Shares Priced?
7. Purchase of Securities Being Offered.......... How to Buy Shares;
How to Sell Shares
8. Redemption or Repurchase...................... How to Sell Shares
9. Pending Legal Proceedings..................... Not Applicable
</TABLE>
<PAGE>
THE COMMERCE FUNDS
NATIONAL TAX-FREE BOND FUND
MISSOURI TAX-FREE BOND FUND
CROSS REFERENCE SHEET
---------------------
Pursuant to Rule 495(a)
under the Securities Act of 1933
Form N-1A Part A Item Number Prospectus Caption
- ---------------------------- ------------------
<TABLE>
<CAPTION>
<S> <C> <C>
1. Cover Page.................................. Cover Page
2. Synopsis.................................... Summary of Expenses
3. Condensed Financial Information............. Financial Highlights
4. General Description of Registrant........... Cover Page; Investment
Objectives and Policies;
The Business of The
Commerce Funds; Other
Information
5. Management of the Fund...................... The Business of The
Commerce Funds; How to
Buy Shares; How to Sell
Shares
5A. Management's Discussion of Fund Performance. Not Applicable
6. Capital Stock and Other Securities.......... How to Buy Shares; How to
Sell Shares; Dividend and
Distribution Policies; Tax
Information; How Are
Shares Priced?
7. Purchase of Securities Being Offered........ How to Buy Shares; How
to Sell Shares
8. Redemption or Repurchase.................... How to Sell Shares
9. Pending Legal Proceedings................... Not Applicable
</TABLE>
<PAGE>
CROSS REFERENCE SHEET
---------------------
SHORT-TERM GOVERNMENT FUND
BOND FUND
BALANCED FUND
GROWTH FUND
AGGRESSIVE GROWTH
INTERNATIONAL EQUITY FUND
NATIONAL TAX-FREE BOND FUND
MISSOURI TAX-FREE BOND FUND
<TABLE>
<CAPTION>
Statement of Additional
Form N-1A Part B Item Information Caption
- --------------------- -----------------------
<S> <C> <C>
10. Cover Page.............................. Cover Page
11. Table of Contents....................... Table of Contents
12. General Information and History......... Description of Shares
13. Investment Objectives and Policies...... Investment Objectives, Policies
and Risk Factors
14. Management of Registrant................ Management of The Commerce
Funds
15. Control Persons and Principal........... Description of Shares
Holders of Securities
16. Investment Advisory and Other Services.. Management of The Commerce
Funds
17. Brokerage Allocation and other Practices Investment Objectives, Policies
and Risk Factors
18. Capital Stock and Other Securities...... Net Asset Value; Additional
Purchase and Redemption
Information; Description of
Shares
19. Purchase, Redemption and Pricing........ Net Asset Value; Additional
of Securities Being Offered Purchase and Redemption Information
20. Tax Status.............................. Additional Information
Concerning Taxes
21. Underwriters............................ Not Applicable
22. Calculation of Performance Data......... Additional Information on
Performance
23. Financial Statements.................... Report of Independent Auditors
Financial Statements
</TABLE>
<PAGE>
COMMERCE FUNDS(TM)
THE SHORT-TERM GOVERNMENT FUND
THE BOND FUND
THE BALANCED FUND
THE GROWTH FUND
THE AGGRESSIVE GROWTH FUND
THE INTERNATIONAL EQUITY FUND
February 29, 1996
<PAGE>
HOW CAN I CONTACT THE COMMERCE FUNDS?
To authorize the special features described in this prospectus or to obtain
additional information about The Commerce Funds, you may:
. Write to The Commerce Funds at:
The Commerce Funds
P.O. Box 16931
St. Louis, MO 63105; or
. Call The Commerce Funds transfer agent directly at 1-800-995-6365; or
. Call The Commerce Funds Shareowner Services at 1-800-305-2140; or
. Contact a registered investment representative at selected Commerce
Bank branches; or
. Contact your plan sponsor or account administrator for specific
information regarding your 401(k) or Investment Management Group
account.
<PAGE>
THE COMMERCE FUNDS
The Commerce Funds is an open-end, management investment company registered
under the Investment Company Act of 1940 (the "1940 Act"). The Commerce Funds
currently consists of eight investment portfolios, each of which has a
separate pool of assets with separate investment objectives and policies.
However, only the Short-Term Government, Bond, Balanced, Growth, Aggressive
Growth and International Equity Funds (individually, a "Fund" and
collectively, the "Funds") are offered by this Prospectus. Each Fund is
classified as a diversified investment portfolio under the 1940 Act.
THE SHORT-TERM GOVERNMENT FUND seeks current income consistent with
preservation of principal. The Fund pursues this objective through investment
in short-term obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities.
THE BOND FUND seeks total return through current income and, secondarily,
capital appreciation. The Fund pursues this objective through investment in a
diversified portfolio of investment grade corporate debt obligations and
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities.
THE BALANCED FUND seeks total return through a balance of capital
appreciation and current income consistent with preservation of capital. The
Fund pursues this objective through investment in a diversified portfolio of
equity and fixed income securities.
THE GROWTH FUND seeks capital appreciation and secondarily, current income
and dividend growth potential. The Fund pursues this objective through
investment in a diversified portfolio of equity securities of companies with
the potential for above average growth in earnings and dividends.
THE AGGRESSIVE GROWTH FUND seeks long-term capital appreciation. The Fund
pursues this objective through investment in a diversified portfolio of equity
securities of companies with medium-sized market capitalizations and the
potential for above average earnings growth.
THE INTERNATIONAL EQUITY FUND seeks total return with an emphasis on growth
of capital. The Fund pursues this objective through investment in a
diversified portfolio of common stocks of established foreign companies.
Commerce Bank, N.A. (St. Louis) and Commerce Bank, N.A. (Kansas City) serve
as investment advisors to the Funds (together, the "Advisor"). Rowe Price-
Fleming International, Inc. serves as sub-investment advisor to the
International Equity Fund (the "Sub-Advisor").
This Prospectus contains information you should know about the Funds before
you invest. Please read it carefully and keep it for your future reference. It
contains your Shareowner Guide and a description of shareowner features. A
Statement of Additional Information (dated February 29,1996) contains
additional information about the Funds. The Statement of Additional
Information has been filed with the Securities and Exchange Commission and is
incorporated by reference into this Prospectus. The Statement of Additional
Information is available without charge by writing to The Commerce Funds at
P.O. Box 16931, St. Louis, MO 63105 or by calling 1-800-305-2140.
<PAGE>
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED,
ENDORSED OR OTHERWISE SUPPORTED BY, COMMERCE BANK, N.A. (ST. LOUIS), COMMERCE
BANK, N.A. (KANSAS CITY), THEIR PARENT OR AFFILIATES, AND THE SHARES ARE NOT
FEDERALLY INSURED OR GUARANTEED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENTAL
AGENCY. AN INVESTMENT IN THE FUNDS INVOLVES INVESTMENT RISKS, INCLUDING
POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
FEBRUARY 29, 1996
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
SUMMARY OF EXPENSES......................................................... 4
FINANCIAL HIGHLIGHTS........................................................ 6
INVESTMENT OBJECTIVES AND POLICIES.......................................... 7
Short-Term Government Fund................................................ 7
Bond Fund................................................................. 8
Balanced Fund............................................................. 10
Growth Fund............................................................... 12
Aggressive Growth Fund.................................................... 13
International Equity Fund................................................. 14
ADDITIONAL RISK CONSIDERATIONS.............................................. 16
OTHER INVESTMENT PRACTICES.................................................. 17
INVESTMENT RESTRICTIONS..................................................... 28
SHAREOWNER GUIDE............................................................ 29
HOW CAN I CONTACT THE COMMERCE FUNDS?..................................... 29
HOW TO BUY SHARES......................................................... 29
What Is The Minimum Investment For Each Fund?........................... 29
How Are Shares Priced?.................................................. 30
How Do I Buy Shares?.................................................... 33
What Price Will I Receive When I Buy Shares?............................ 34
What Else Should I Know About Buying Shares?............................ 34
HOW TO SELL SHARES........................................................ 34
How Do I Sell My Shares?................................................ 34
What Price Will I Receive For Shares I Want To Sell?.................... 36
How Quickly Can I Receive Proceeds From A Sale?......................... 36
What If I Want To Reinvest Sales Proceeds?.............................. 37
DIVIDEND AND DISTRIBUTION POLICIES........................................ 37
SHAREOWNER FEATURES AND PRIVILEGES........................................ 38
Can I Use The Funds In My Retirement Plan?.............................. 38
What Is Dollar Cost Averaging And How Can I Implement It?............... 39
Can I Exchange My Investment From One Commerce Fund To Another?......... 39
Can I Have Exchanges Made Automatically?................................ 40
Can I Reinvest Dividends From One Commerce Fund In Another?............. 40
How Do I Obtain Other Information About My Account?..................... 41
Can I Make Transactions By Telephone?................................... 41
Can I Arrange Automatic Withdrawals?.................................... 41
THE BUSINESS OF THE COMMERCE FUNDS.......................................... 42
Board of Trustees......................................................... 42
Service Providers......................................................... 42
Expenses.................................................................. 46
TAX INFORMATION............................................................. 46
HOW PERFORMANCE IS MEASURED................................................. 47
OTHER INFORMATION........................................................... 48
Voting Rights............................................................. 49
Shareowner Reports........................................................ 49
Inquiries................................................................. 50
ACCOUNT APPLICATION FORM
</TABLE>
3
<PAGE>
SUMMARY OF EXPENSES
Expenses are one of several factors to consider when investing in a Fund.
SHAREOWNER TRANSACTION EXPENSES are charges you pay when buying or selling
shares. ANNUAL FUND OPERATING EXPENSES are paid out of a Fund's assets and
include fees for portfolio management, maintenance of shareowner accounts,
general Fund administration, accounting, custody and other services. Examples
based on the summary are also shown.
<TABLE>
<CAPTION>
SHORT-TERM AGGRESSIVE
GOVERNMENT BOND BALANCED GROWTH GROWTH INTERNATIONAL
FUND FUND FUND FUND FUND EQUITY FUND
---------- ---- -------- ------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
SHAREOWNER TRANSACTION
EXPENSES
Maximum Sales Charge
Imposed on Purchases
(as a percentage of
offering price)(1).... 3.50% 3.50% 3.50% 3.50% 3.50% 3.50%
Maximum Sales Charge
Imposed on Reinvested
Distributions......... None None None None None None
Deferred Sales Charge
Imposed on
Redemptions........... None None None None None None
Redemption Fees........ None None None None None None
Exchange Fees(2)....... None None None None None None
ANNUAL FUND OPERATING
EXPENSES
(as a percentage of
average daily net
assets)
Management Fees (after
fee waivers)(3)....... 0.30% 0.50% 0.75% 0.75% 0.75% 0.90%
Other Expenses (after
fee waivers and
expense
reimbursements)(4).... 0.38% 0.38% 0.38% 0.36% 0.58% 0.82%
---- ---- ---- ---- ---- ----
Total Fund Operating
Expenses (after fee
waivers and expense
reimbursements)(5).... 0.68% 0.88% 1.13% 1.11% 1.33% 1.72%
==== ==== ==== ==== ==== ====
EXAMPLE: Assume a Fund's
annual return is 5% and
its expenses are the
same as those stated
above. For every $1,000
you invest, here's how
much you would pay in
total expenses if you
closed your account
after the number of
years indicated,
assuming deduction at
the time of purchase of
the maximum applicable
sales load and
redemption at the end
of each time period:
One Year............... $ 42 $ 44 $ 46 $ 46 $ 48 $ 52
Three Years............ $ 56 $ 62 $ 70 $ 69 $ 76 $ 87
Five Years............. $ 72 $ 82 $ 95 $ 94 $106 $125
Ten Years.............. $117 $139 $167 $165 $190 $231
</TABLE>
- --------
(1) Certain investors may not be charged a sales charge. See "Shareowner
Guide--When There is No Sales Charge."
(2) No charge is imposed on exchanges through the Automatic Exchange feature
or for up to five exchanges made within a twelve month period. Additional
exchanges may be subject to a $5.00 fee.
(3) Without fee waivers by the Advisor, "Management Fees" would be charged at
an annual rate of .50%, 1.00% and 1.50%, respectively, of the average
daily net assets of the Short-Term Government, Balanced and International
Equity Funds, respectively.
(4) In addition to the advisory fee waivers referred to in note 3, during the
last fiscal year the Advisor voluntarily reimbursed expenses to the extent
necessary for the Short-Term Government, Bond and Balanced Funds to
maintain annual expense ratios of not more than 0.68%, 0.88% and 1.13%
respectively, excluding interest, taxes and extraordinary expenses and the
Advisor intends to
4
<PAGE>
voluntarily reimburse such expenses during the current year to the extent
necessary for the Short-Term Government, Bond, Balanced, Growth and
International Equity Funds to maintain an annual expense ratio of not more
than 0.68%, 0.88%, 1.13%, 1.13% and 1.72%, respectively. The Commerce Funds
has adopted a Shareholder Administrative Services Plan pursuant to which it
may enter into agreements with institutions under which they will render
shareowner administrative support services for their customers who
beneficially own shares of the Funds in return for a fee of up to 0.25% per
annum of the value of such shares.
(5) Without such fee waivers and expense reimbursements, "Other Expenses"
(including Shareowner Servicing Fees) would be 0.65%, 0.38%, 0.46%, and
2.00% and "Total Fund Operating Expenses" would be 1.15%, 0.88%, 1.46%, and
3.50% of the average daily net assets of the Short-Term Government, Bond,
Balanced and International Equity Funds.
The above expense information is provided to help you understand the expenses
you would pay either directly (i.e., transaction expenses) or indirectly (i.e.,
annual operating expenses) as a shareowner in the Funds. The information with
respect to the Short-Term Government, Bond, Balanced, Growth and Aggressive
Growth Funds is based on the expenses incurred by those Funds during the last
fiscal year. The information with respect to the International Equity Fund is
based on expenses incurred by that Fund during the last fiscal year, restated
to reflect the expenses the Fund expects to incur during the current fiscal
year. In addition, Service Organizations may charge their clients account fees
for providing account services in connection with their clients' investments in
shares of The Commerce Funds. You should note that any fees that are charged by
The Commerce Funds' Advisor, their affiliates or any other institutions
directly to their customer accounts for services related to an investment in
the Funds are in addition to and not reflected in the fees and expenses
described above. If you purchase or redeem shares directly from The Commerce
Funds Shareowner Services or an account representative at a Commerce Bank
branch, you may avoid these fees by following the procedures described under
"How To Buy Shares" on page 29 of this Prospectus.
For more information about shareowner transaction expenses and The Commerce
Funds' operating expenses, see "Shareowner Guide" and "The Business of The
Commerce Funds."
- --------------------------------------------------------------------------------
THE EXAMPLES SHOWN ABOVE SHOULD NOT BE CONSIDERED REPRESENTATIONS OF FUTURE
INVESTMENT RETURN OR OPERATING EXPENSES. ACTUAL OPERATING EXPENSES AND
INVESTMENT RETURN MAY BE GREATER OR LESS THAN THOSE INDICATED. INFORMATION
ABOUT THE ACTUAL PERFORMANCE OF THE FUNDS IS CONTAINED IN THE COMMERCE FUNDS'
ANNUAL REPORT, WHICH MAY BE OBTAINED WITHOUT CHARGE BY CONTACTING TH E
COMMERCE FUNDS AT THE ADDRESS OR TELEPHONE NUMBER INDICATED ON THE COVER
PAGE OF THIS PROSPECTUS.
- --------------------------------------------------------------------------------
5
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights presented below set forth certain information
concerning the investment results for shares of each Fund for the fiscal
period ended October 31, 1995. The information has been audited by KPMG Peat
Marwick LLP, independent accountants for the Funds, whose report thereon is
contained in The Commerce Funds' Annual Report. Such financial highlights
should be read in conjunction with the financial statements and notes thereto
contained in the Annual Report and incorporated by reference into the
Statement of Additional Information. Further information about the performance
of the Funds is available in the Annual Report. Both the Statement of
Additional Information and the Annual Report may be obtained free of charge by
contacting The Commerce Funds at the address or telephone number on page 29 of
this Prospectus.
Financial highlights for a share outstanding throughout the period
indicated:
<TABLE>
<CAPTION>
SHORT-TERM
GOVERNMENT BALANCED AGGRESSIVE INTERNATIONAL
FUND BOND FUND FUND GROWTH FUND GROWTH FUND EQUITY FUND
---------- ----------- ----------- ----------- ----------- -------------
DEC. 12,
1994(1) DEC. 12, DEC. 12, DEC. 12, DEC. 12, DEC. 12,
THROUGH 1994(1) 1994(1) 1994(1) 1994(1) 1994(1)
OCTOBER THROUGH THROUGH THROUGH THROUGH THROUGH
31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
1995 1995 1995 1995 1995 1995
---------- ----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $ 18.00 $ 18.00 $ 18.00 $ 18.00 $ 18.00 $ 18.00
------- ------- ------- -------- ------- -------
Income from Investment
Operations:
Net investment income
(loss)................ 1.06 1.12 0.59 0.15 (0.04) 0.12
Net realized and
unrealized
gain on
investments(2)........ 0.83 1.61 4.06 6.68 7.34 0.95
Net realized and
unrealized
loss on foreign
currency related
transactions(2)....... -- -- -- -- -- (0.40)
------- ------- ------- -------- ------- -------
Total from investment
operations............ 1.89 2.73 4.65 6.83 7.30 0.67
------- ------- ------- -------- ------- -------
Less Distributions to
Shareholders:
From net investment
income................ (1.06) (1.12) (0.55) (0.15) -- (0.03)
------- ------- ------- -------- ------- -------
Total distributions.... (1.06) (1.12) (0.55) (0.15) -- (0.03)
------- ------- ------- -------- ------- -------
Net Increase in Net
Asset Value............ 0.83 1.61 4.10 6.68 7.30 0.64
Net Asset Value, End of
Period................. $ 18.83 $ 19.61 $ 22.10 $ 24.68 $ 25.30 $ 18.64
======= ======= ======= ======== ======= =======
Total Return(3)......... 10.72% 15.59% 26.14% 38.06% 40.56% 3.73%
======= ======= ======= ======== ======= =======
Ratios/Supplemental
Data:
Net assets at end of
period (000).......... $20,211 $98,504 $48,329 $141,735 $41,665 $21,014
Ratio of net expenses
to
average net assets(4). 0.68% 0.88% 1.13% 1.11% 1.32% 1.81%
Ratio of net investment
income to
average net assets(4). 6.38% 6.64% 3.28% 0.81% (0.29)% 1.06%
Ratio of expenses to
average net
assets without waivers
and reimbursements(4). 1.14% 0.88% 1.45% 1.11% 1.32% 3.50%
Ratio of net investment
income to
average net assets
without waivers and
reimbursements(4)..... 5.92% 6.64% 2.96% 0.81% (0.29)% (0.63)%
Portfolio turnover
rate.................. 158% 58% 59% 33% 59% 25%
</TABLE>
- --------
(1) Commencement of operations.
(2) Includes the balancing effect of calculating per share amounts.
(3) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no
sales charge. Total return would be reduced if a sales charge were taken
into account.
(4) Annualized.
6
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objective and policies of each of the Funds are described
below. There is no assurance that any Fund will achieve its investment
objective. No Fund, by itself, constitutes a complete investment program.
Additional information regarding the investment objective, policies and
restrictions of each Fund are described in the Statement of Additional
Information.
The investment objective of a Fund may not be changed without the
affirmative vote of the holders of at least a majority of outstanding shares
of such Fund (as defined under "Other Information"). Except as noted below
under "Investment Limitations," a Fund's investment policies may be changed
without a vote of shareowners.
SHORT-TERM GOVERNMENT FUND
INVESTMENT OBJECTIVE
THE INVESTMENT OBJECTIVE OF THE SHORT-TERM GOVERNMENT FUND IS TO SEEK
CURRENT INCOME CONSISTENT WITH PRESERVATION OF PRINCIPAL. THE FUND PURSUES
THIS OBJECTIVE THROUGH INVESTMENT IN SHORT-TERM OBLIGATIONS ISSUED OR
GUARANTEED BY THE U.S. GOVERNMENT, ITS AGENCIES OR INSTRUMENTALITIES.
INVESTMENT STRATEGY
In pursuing its investment objective, the Fund will invest at least 65% of
its total assets in obligations issued or guaranteed by the U.S. Government,
its agencies or instrumentalities, including U.S. Treasury bills, notes and
bonds ("U.S. Government Obligations"), with remaining maturities of five years
or less, and repurchase agreements with respect to such obligations.
The Fund may also purchase mortgage-backed securities which represent pools
of mortgage loans assembled for sale to investors by various governmental
agencies as well as private issuers. The average life of mortgage-backed
securities varies with the maturities of the underlying mortgage instruments.
The average life is likely to be substantially less than the original maturity
of the mortgage pools underlying the securities as the result of mortgage
prepayments. The rate of such prepayments, and accordingly the life of the
certificates, will be a function of current market rates and current
conditions in the relevant housing markets. Estimated average life will be
determined by the Advisor, and such securities may be purchased by the Fund if
the estimated average life is determined to be five years or less. See "Other
Investment Practices--Mortgage-Related Securities" below.
The Fund's dollar-weighted average maturity will not exceed three years. The
Fund may purchase U.S. Government Obligations and mortgage-backed securities
with stated maturities in excess of five years in an amount not to exceed 25%
of its total assets. In addition, U.S. Government Obligations with nominal
maturities in excess of five years that have variable or floating interest
rates or put features may be deemed to have remaining maturities of five years
or less and therefore to be permissible investments for the Fund.
See "Other Investment Practices" below for a description of other types of
securities in which the Fund may invest.
RISKS ASSOCIATED WITH AN INVESTMENT IN THE FUND
U.S. Government Obligations have historically involved little risk of loss
of principal if held to maturity. The Fund, however, will not necessarily hold
its securities to maturity. Generally, the market value of securities not held
to maturity can be expected to vary inversely to changes in prevailing
interest
7
<PAGE>
rates. See "Additional Risk Considerations--Risks Associated With Fixed Income
Investments." In addition, neither the U.S. Government, nor any agency or
instrumentality thereof, has guaranteed, sponsored or approved the Fund or its
shares.
Mortgage-backed securities may be subject to risks including price
volatility, liquidity and interest rate risk. The prices of such securities
may be inversely affected by changes in interest rates and prepayment of the
underlying mortgage collateral may result in a decreased rate of return. See
"Other Investment Practices--Mortgage-Related Securities" below.
BOND FUND
INVESTMENT OBJECTIVE
THE INVESTMENT OBJECTIVE OF THE BOND FUND IS TO SEEK TOTAL RETURN THROUGH
CURRENT INCOME AND SECONDARILY, CAPITAL APPRECIATION. THE FUND PURSUES THIS
OBJECTIVE THROUGH INVESTMENT IN A DIVERSIFIED PORTFOLIO OF INVESTMENT-GRADE
CORPORATE DEBT OBLIGATIONS AND OBLIGATIONS ISSUED OR GUARANTEED BY THE U.S.
GOVERNMENT, ITS AGENCIES OR INSTRUMENTALITIES.
INVESTMENT STRATEGY
In pursuing its investment objective, the Fund will invest, during normal
market conditions, at least 65% of its total assets in fixed income debt
securities rated at the time of purchase A- or better by Standard & Poor's
Ratings Group ("S&P") or Moody's Investors Service, Inc. ("Moody's") or, if
unrated, deemed by the Advisor to be comparable to instruments that are so
rated, including corporate debt obligations such as fixed and variable-rate
bonds, zero coupon bonds and debentures, obligations issued or guaranteed by
the U.S. Government, its agencies or instrumentalities and money market
instruments. All of the fixed income securities acquired by the Fund other
than those subject to the 65% requirement described above will be rated
investment-grade at the time of purchase. For purposes of this investment
policy, 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. Except for temporary defensive
periods, the Fund's market weighted average credit rating will be at least AA-
/Aa3 as rated by S&P or Moody's, respectively, or the equivalent rating of
another NRSRO. Obligations rated BBB by S&P, Baa by Moody's or the equivalent
rating of another NRSRO are considered to have speculative characteristics and
are subject to greater credit and market risk than securities rated in the top
three investment-grade categories. Subsequent to their purchase by the Fund,
up to 5% of its portfolio securities may represent securities downgraded below
investment-grade or may be deemed by the Advisor to be no longer comparable to
investment-grade securities. The Advisor will consider such an event in
determining whether the Fund should continue to hold the security. See
Appendix A to the Statement of Additional Information for a description of
applicable debt ratings.
The Fund may invest up to 65% of its total assets in certain mortgage-backed
and asset-backed securities. Mortgage-backed securities represent pools of
mortgage loans assembled for sale to investors by various governmental
agencies as well as by private issuers. See "Other Investment Practices--
Mortgage-Related Securities" below. Asset-backed securities represent a
participation in, or are secured
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by or payable from, a stream of payments governed by particular assets. Such
securities may include motor vehicle installment purchase obligations, credit
card receivables and home equity loans. See "Other Investment Practices--
Asset-Backed Securities" below. The Fund may also invest in "stripped" and
convertible securities. See "Other Investment Practices--Stripped Securities"
and "Other Investment Practices--Convertible Securities" below.
Additionally, up to 20% of the total assets of the Fund may be invested
directly in debt obligations of foreign issuers. These obligations may include
obligations of foreign corporations as well as investments in obligations of
foreign governments and their political sub-divisions (which will be limited
to direct government obligations and government-guaranteed securities). The
Fund is also permitted to invest up to 20% of its total assets in obligations
issued by or on behalf of states, territories and possessions of the United
States, the District of Columbia and their authorities, agencies,
instrumentalities and political subdivisions ("Municipal Obligations"). The
purchase of Municipal Obligations may be advantageous when, as a result of
prevailing economic, regulatory or other circumstances, the yield of such
securities, on a pre-tax basis, is comparable to that of corporate obligations
or U.S. Government Obligations. See "Other Investment Practices--Municipal
Obligations" below.
In acquiring particular portfolio securities, the Advisor will consider,
among other things, historical yield relationships between corporate and
government bonds, intermarket yield relationships among various industry
sectors, current economic cycles and the creditworthiness of particular
issuers.
The Fund seeks to equal or exceed the return of the Lehman Brothers
Aggregate Bond Index (the "Aggregate Bond Index"). The Aggregate Bond Index is
a broad market-weighted index which encompasses three major classes of
investment-grade fixed income securities with maturities greater than one
year, including: U.S. Treasury securities, corporate bonds and mortgage-backed
securities. Although the Fund seeks to equal or exceed the return of the
Aggregate Bond Index, the Fund may invest a substantial portion of its assets
in securities that are not included in its benchmark index. The Fund is not,
therefore, an "index" fund, which typically holds only securities that are
included in the index it attempts to replicate.
Although the Fund has no restriction as to the maximum or minimum duration
of any individual security held by it, the Fund's average effective duration
will be within ^ 30% of the duration of the Aggregate Bond Index. "Duration"
is a term used by investment managers to express the average time to receipt
of expected cash flows (discounted to their present value) on a particular
fixed income instrument or a portfolio of instruments. Duration takes into
account the pattern of a security's cash flow over time, including how cash
flow is affected by prepayments and changes in interest rates. For example,
the duration of a five-year zero coupon bond which pays no interest or
principal until the maturity of the bond is five years. This is because a zero
coupon bond produces no cash flow until the maturity date. On the other hand,
a coupon bond that pays interest semiannually and matures in five years will
have a duration of less than five years, which reflects the semiannual cash
flows resulting from coupon payments. Duration also generally defines the
effect of interest rate changes on bond prices. Generally, if interest rates
increase by one percent, the value of a security having an effective duration
of five years would decrease in value by five percent.^
See "Other Investment Practices" below for a description of other types of
securities in which the Fund may invest.
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RISKS ASSOCIATED WITH AN INVESTMENT IN THE FUND
Generally, the market value of fixed income securities is subject to
interest rate fluctuation and can be expected to vary inversely to changes in
the prevailing interest rates. Fixed income securities with longer maturities,
which tend to produce higher yields, are subject to potentially greater
capital appreciation and depreciation than obligations with shorter
maturities.
Investments in asset-backed securities may be subject to risks in addition
to those presented by mortgage-backed securities. Asset-backed securities are
dependent upon payment of the underlying loan or receivable and are generally
unsecured. Additional risks may include the prepayment of the underlying
collateral, liquidity and valuation. See "Other Investment Practices--Asset-
Backed Securities."
Because the Fund may invest in securities issued by foreign issuers, the
Fund may be subject to additional investment risks for those securities that
are different in some respects from those incurred by a Fund which invests
solely in securities of domestic U.S. issuers. Such risks include foreign
taxation, changes in currency rates or currency brokerage, currency exchange
costs and differences between domestic and foreign legal, auditing, brokerage
and economic standards. See "Additional Risk Considerations--Risks Associated
with Foreign Securities and Currencies."
See "Short-Term Government Fund--Risks Associated with an Investment in the
Fund" above for risks associated with investments in mortgage-backed
securities.
See "Additional Risk Considerations--Risks Associated with Fixed Income
Investments" below.
BALANCED FUND
INVESTMENT OBJECTIVE
THE INVESTMENT OBJECTIVE OF THE BALANCED FUND IS TO SEEK TOTAL RETURN
THROUGH A BALANCE OF CAPITAL APPRECIATION AND CURRENT INCOME CONSISTENT WITH
PRESERVATION OF CAPITAL. THE FUND PURSUES THIS OBJECTIVE THROUGH INVESTMENT IN
A DIVERSIFIED PORTFOLIO OF EQUITY SECURITIES, FIXED INCOME SECURITIES AND CASH
EQUIVALENTS.
INVESTMENT STRATEGY
Equity securities in which the Fund normally invests are common stocks,
preferred stocks, securities or bonds which are convertible into common or
preferred stocks and warrants. The Fund may also participate in rights
offerings. The Fund seeks to acquire equity securities of companies with
market capitalizations of over $200 million. (For further information
regarding equity securities in which the Fund may invest and the Fund's
policies regarding the selection of equity securities, see "Growth Fund--
Investment Strategy" below.)
Fixed income securities in which the Fund may invest include corporate debt
obligations such as fixed and variable-rate bonds, zero coupon bonds and
debentures, obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities, "stripped" securities, convertible securities
and money market instruments. All of the fixed income securities acquired by
the Balanced Fund will be rated investment-grade at the time of purchase by
S&P, Moody's or another NRSRO or will be unrated but deemed by the Advisor to
be comparable in quality to instruments that are so rated. Obligations rated
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BBB by S&P, Baa by Moody's or the equivalent rating of another NRSRO are
considered to have speculative characteristics and are subject to greater
credit and market risk than securities rated in the top three investment-grade
categories. Except for temporary defensive periods, the Fund's market-weighted
average credit rating will be at least AA-/Aa3 as rated by S&P, Moody's or the
equivalent rating of another NRSRO. Subsequent to their purchase by the Fund,
up to 5% of the fixed income portion of its portfolio securities may represent
securities downgraded below investment-grade or may be deemed by the Advisor
to be no longer comparable to investment-grade securities. The Advisor will
consider such an event in determining whether the Fund should continue to hold
the security. (For further information regarding fixed income securities in
which the Fund may invest and the Fund's policies regarding the selection of
fixed income securities, see "Bond Fund--Investment Strategy" and "Bond Fund--
Risks Associated with an Investment in the Fund" above.)
The Fund may invest up to 65% of the fixed income portion of its portfolio
in certain mortgage-backed and asset-backed securities and is also permitted
to invest up to 20% of the fixed income portion of its portfolio in Municipal
Obligations.
Up to 20% of the fixed income portion of the Fund's portfolio may be
invested directly in debt obligations of foreign issuers. These obligations
may include obligations of foreign corporations as well as investments in
obligations of foreign governments and their political sub-divisions (which
will be limited to direct government obligations and government-guaranteed
securities).
Although equity securities acquired by the Balanced Fund will generally be
issued by U.S. issuers, the Fund may also invest up to 10% of the equity
portion of its portfolio in securities issued by foreign issuers either
directly or indirectly through investments in sponsored and unsponsored
American Depository Receipts ("ADRs"). ADRs are receipts issued by an American
bank or trust company evidencing ownership of underlying securities issued by
a foreign issuer. ADR prices are denominated in United States dollars while
the securities underlying an ADR are normally denominated in a foreign
currency.
The actual percentage of assets invested in equity and fixed income
securities will vary from time to time, depending on the judgment of the
Advisor. The Advisor will attempt to take advantage of changing economic
conditions by increasing or decreasing the ratio of equity securities to fixed
income securities or cash equivalents in the Fund. At least 25% of the Fund's
total assets will be invested in fixed income senior securities (including
cash equivalents, long-term debt securities and convertible debt securities
and convertible preferred stock to the extent their value is attributable to
their fixed income characteristics).
See "Other Investment Practices" below for a description of other types of
securities in which the Fund below may invest.
RISKS ASSOCIATED WITH AN INVESTMENT IN THE FUND
Because the Fund may invest in securities issued by foreign issuers, the
Fund may be subject to additional investment risks that are different in some
respects from those incurred by a Fund which invests solely in securities of
U.S. domestic issuers. Such risks include foreign taxation, changes in
currency rates or currency brokerage, currency exchange costs and differences
between domestic and foreign legal, auditing, brokerage and economic
standards. See "Additional Risk Considerations--Risks Associated with Foreign
Securities and Currencies" below.
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See "Short-Term Government Fund--Risks Associated with an Investment in the
Fund" above for risks associated with investments in mortgage-backed
securities.
See "Bond Fund--Risks Associated with an Investment in the Fund" above for
risks associated with investments in asset-backed and fixed income securities.
See "Additional Risk Considerations--Risks Associated with Fixed Income
Investments" below for information concerning other pertinent risks.
GROWTH FUND
INVESTMENT OBJECTIVE
THE INVESTMENT OBJECTIVE OF THE GROWTH FUND IS TO SEEK CAPITAL APPRECIATION
AND, SECONDARILY, CURRENT INCOME AND DIVIDEND GROWTH POTENTIAL. THE FUND
PURSUES THIS OBJECTIVE THROUGH INVESTMENT IN A DIVERSIFIED PORTFOLIO OF EQUITY
SECURITIES OF COMPANIES WITH THE POTENTIAL FOR ABOVE AVERAGE GROWTH IN
EARNINGS AND DIVIDENDS.
INVESTMENT STRATEGY
In pursuing its investment objective the Fund will invest, under normal
market conditions, at least 65% of its total assets in equity securities,
including common stocks, preferred stocks and securities convertible into
common stocks. The Advisor will seek to acquire stocks of companies that, in
the aggregate, will experience growth in sales, dividends or earnings per
share greater than the average of the companies comprising the Standard &
Poor's Composite Stock Price Index (the "S&P 500 Index"), an unmanaged Index
which emphasizes large capitalization companies. The Fund uses the S&P 500
Index as a benchmark for comparison because it represents roughly two-thirds
of the market value of all publicly traded common stocks in the United States
and is a widely accepted measure of common stock investment returns. Although
the Fund seeks to exceed the return of the S&P 500 Index, the Fund may invest
its assets in securities that are not included in this Index. The Fund is not,
therefore, an index fund which typically holds only securities that are
included in the index it attempts to replicate. The Fund will generally
acquire equity securities of companies with market capitalizations over $500
million. The Advisor anticipates that from time to time certain industry
sectors will not be represented in the Fund while other sectors will represent
a significant portion of invested assets.
In selecting stocks for the Fund, the Advisor employs a "bottom-up" security
analysis. "Bottom-up" security analysis refers to an analytical approach to
securities selection which first focuses on the company and company-related
matters as contrasted to a "top-down" analysis which first focuses on the
industry or the economy. The Advisor believes that a "bottom-up" approach is
more likely to identify attractive companies which might otherwise be
neglected or overlooked.
While emphasis will be placed on investments in equity securities, primarily
common stocks, the Fund may also invest in other types of equity securities,
including warrants and securities which are convertible into common or
preferred stocks and may participate in rights offerings. The Fund may also
invest, either directly or through investments in sponsored and unsponsored
ADRs, up to 10% of its total assets in the securities of foreign issuers. See
"Balance Fund--Investment Strategy" above for a description of ADRs.
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See "Other Investment Practices" below for a description of other types of
securities in which the Fund may invest.
RISKS ASSOCIATED WITH AN INVESTMENT IN THE FUND
Because the Fund may invest in securities issued by foreign issuers, it may
be subject to additional investment risks that are different in some respects
from those incurred by a fund which invests solely in securities of U.S.
domestic issuers. Such risks include foreign taxation, changes in currency
rates or currency brokerage, currency exchange costs and differences between
domestic and foreign legal, auditing, brokerage and economic standards. See
"Additional Risk Considerations--Risks Associated with Foreign Securities and
Currencies" below.
AGGRESSIVE GROWTH FUND
INVESTMENT OBJECTIVE
THE INVESTMENT OBJECTIVE OF THE AGGRESSIVE GROWTH FUND IS TO SEEK LONG-TERM
CAPITAL APPRECIATION. THE FUND PURSUES THIS OBJECTIVE THROUGH INVESTMENT IN A
DIVERSIFIED PORTFOLIO OF EQUITY SECURITIES OF COMPANIES WITH MEDIUM-SIZED
MARKET CAPITALIZATIONS AND THE POTENTIAL FOR ABOVE AVERAGE EARNINGS GROWTH.
INVESTMENT STRATEGY
In pursuing its investment objective the Fund will, under normal market
conditions, invest at least 65% of its total assets in equity securities,
including common stocks, warrants and securities convertible into common or
preferred stock. The Fund may also participate in rights offerings. The Fund
will generally acquire equity securities of companies with market
capitalizations between $200 million and $3 billion. The Advisor believes that
the companies in which the Fund may invest offer greater opportunity for
growth of capital than larger, more mature companies.
The Advisor selects common stocks of companies which, in its opinion, have
attractive fundamental financial characteristics. Such characteristics
include, as compared to the Standard & Poor's 400 Mid-Cap Index ("S&P Mid-Cap
Index"), market liquidity as measured by average daily trading volume,
profitability as measured by above average return on equity, and operating
consistency, as measured by above average earnings growth. The Advisor intends
to purchase securities of companies which, in its opinion, are the most
attractive in light of their expected earnings growth and relative valuation.
The S&P Mid-Cap Index is a capitalization-weighted index that measures the
performance of the mid-range sector of the U.S. stock market. Its median
market capitalization is approximately $700 million. Generally, the market
capitalization of companies measured by the S&P Mid-Cap Index will be between
$150 million and $6.5 billion. Although the Fund uses the S&P Mid-Cap Index as
a benchmark for weighing investments, it is not an "index" fund, which holds
only securities included on the index.
In selecting stocks for the Aggressive Growth Fund, the Advisor employs a
"bottom-up" security analysis, as described under "Growth Fund--Investment
Strategy" above.
The Fund may also invest up to 10% of its total assets in the securities of
foreign issuers either directly or through investments in sponsored and
unsponsored ADRs. See "Balanced Fund--Investment Strategy" above for a
description of ADRs.
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See "Other Investment Practices" below for a description of other types of
securities in which the Fund may invest.
RISKS ASSOCIATED WITH AN INVESTMENT IN THE FUND
The securities of smaller companies may be subject to more abrupt or erratic
market movements than larger, more established companies, both because such
securities are typically traded in lower volume and because the issuers
typically are subject to a greater degree to changes in earnings and
prospects. The Fund's net asset value per share may be subject to rapid and
substantial changes. Additionally, such securities may not be traded every day
or in the volume typical of trading on a national securities exchange. As a
result, the disposition by the Fund of portfolio securities, to meet
redemptions or otherwise, may require the Fund to sell these securities at a
discount from market prices, to sell during periods when such disposition is
not desirable, or to make many small sales over a lengthy period of time.
See "Additional Risk Considerations--Risks Associated with Foreign
Securities and Currencies" below for information concerning other pertinent
risks.
INTERNATIONAL EQUITY FUND
INVESTMENT OBJECTIVE
THE INVESTMENT OBJECTIVE OF THE INTERNATIONAL EQUITY FUND IS TO SEEK TOTAL
RETURN WITH AN EMPHASIS ON GROWTH OF CAPITAL. THE FUND PURSUES THIS OBJECTIVE
THROUGH INVESTMENT IN A DIVERSIFIED PORTFOLIO OF COMMON STOCKS OF ESTABLISHED
FOREIGN COMPANIES.
INVESTMENT STRATEGY
In pursuing its investment objective, the Fund will, under normal market
conditions, invest at least 65% of its total assets in common stocks of
established companies that conduct their principal activities or are domiciled
outside the United States or whose securities are traded on a foreign
exchange. The Fund may also invest in other types of securities, including
securities convertible into common stocks or preferred stocks, warrants and
bonds, notes and other debt securities of U.S. and foreign corporations and
governmental issuers. Under normal market conditions, the Fund will invest in
equity securities of companies in at least three different foreign countries.
Countries in which the Fund may invest include, but are not limited to:
Argentina, Australia, Austria, Bangladesh, Belgium, Botswana, Brazil, Canada,
Chile, China, Czech Republic, Denmark, Finland, France, Germany, Hong Kong,
Hungary, India, Israel, Italy, Japan, Jordan, Korea, Malaysia, Mexico, the
Netherlands, New Zealand, Norway, Portugal, Singapore, South Africa, Spain,
Sweden, Switzerland, Thailand and the United Kingdom. The Fund may invest in
developed as well as developing countries. The domicile or the location of the
principal activities of a company will be the country under whose laws the
company is organized, in which the principal trading market for the equity
securities issued by the company is located, or in which the company has over
half of its assets or derives over half of its revenues or profits.
The International Equity Fund may invest without limitation in securities of
foreign issuers in the form of sponsored and unsponsored ADRs and European
Depository Receipts ("EDRs"). EDRs are receipts issued 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. See "Balanced Fund--Investment Strategy"
above for a description of ADRs.
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The International Equity Fund may also invest up to 10% of its total assets
in hybrid investments. These instruments, which are derivatives, combine the
characteristics of securities, futures and options. Generally, a hybrid
instrument will be a debt security, preferred stock, depository share, trust
certificate, certificate of deposit or other evidence of indebtedness on which
a portion of or all interest payments and/or the principal or stated amount
payable at maturity, redemption or retirement, is determined by reference to
prices or differences between prices of securities, currencies, intangibles,
goods, articles or commodities or by another objective index, economic factor
or other measure such as interest rates, currency exchange rates or other
indices. For example, the principal amount, redemption or conversion terms of
a security could be related to the market price of some commodity, currency or
securities index. Such securities may bear interest or pay dividends at below
market (or even relatively nominal) rates. Under certain conditions, the
redemption value of such an investment could be zero. Hybrids can have
volatile prices and limited liquidity and, accordingly, their use by the Fund
may not enhance investment return.
See "Other Investment Practices" below for a description of other types of
securities in which the Fund may invest.
RISKS ASSOCIATED WITH AN INVESTMENT IN THE FUND
Although investment in any mutual fund has certain inherent risks, an
investment in the International Equity Fund may have even greater risks than
investments in most other types of mutual funds. The International Equity Fund
may not be appropriate for an investor if the investor cannot bear financially
the loss of at least a significant portion of the investment. Investors should
understand that in addition to the International Equity Fund's volatile net
asset value per share, the expense ratios of the Fund can be expected to be
higher than those of Funds investing primarily in domestic securities. The
costs attributable to investing abroad are usually higher for several reasons,
such as the higher cost of investment research, higher cost of custody of
foreign securities, higher commissions paid on comparable transactions on
foreign markets and additional costs arising from delays in settlements of
transactions involving foreign securities.
The International Equity Fund may invest its assets in countries with
emerging economies or securities markets. These countries are located in the
Asia-Pacific region, Eastern Europe, Latin and South America and Africa.
Political and economic structures in many of such countries may be undergoing
significant evolution and rapid development, and such countries may lack the
social, political and economic stability characteristic of more developed
countries. Some of these countries may have failed in the past to recognize
private property rights and at times have nationalized or expropriated the
assets of private companies. As a result, the risks described above, including
the risks of nationalization or expropriation of assets, may be heightened. In
addition, unanticipated political or social developments may affect the value
of a Fund's investments in those countries and the availability of additional
investments in those countries. The small size and inexperience of the
securities markets in certain countries and the limited volume of trading in
securities in those countries may make the Fund's investments in such
countries illiquid and more volatile than investments in Japan or most Western
European countries. The Fund may also be required to establish special
custodial or other arrangements before making certain investments in those
countries. There may be little financial or accounting information available
with respect to issuers located in certain of such countries, and it may be
difficult as a result to assess the value or prospects of an investment in
such issuers.
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ADDITIONAL RISK CONSIDERATIONS
RISKS ASSOCIATED WITH FIXED INCOME INVESTMENTS
Generally, the market value of fixed income securities in the Funds can be
expected to vary inversely to changes in prevailing interest rates. Investors
should also recognize that, in periods of declining interest rates, the yields
of investment funds composed primarily of fixed income securities will tend to
be higher than prevailing market rates and, in periods of rising interest
rates, yields will tend to be somewhat lower. 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. Debt
securities with longer maturities, which tend to produce higher yields, are
subject to potentially greater capital appreciation and depreciation than
obligations with shorter maturities. Changes in the financial strength of an
issuer or changes in the ratings of any particular security may also affect
the value of these investments. Fluctuations in the market value of fixed
income securities subsequent to their acquisition will not affect cash income
from such securities but will be reflected in a Fund's net asset value.
RISKS ASSOCIATED WITH FOREIGN SECURITIES AND CURRENCIES
The International Equity Fund intends to invest primarily in the securities
of foreign issuers. In addition, as described above, the Bond, Balanced,
Growth and Aggressive Growth Funds also may invest a portion of their assets
in the securities of foreign issuers.
Investment in foreign securities involves special risks including market
risk, foreign currency risk, interest rate risk and the risks of investing in
securities of foreign issuers and of companies whose securities are
principally traded outside the United States. Market risk involves the
possibility that stock prices will decline over short or extended periods.
Stock markets tend to be cyclical, with alternate periods of generally rising
and generally declining prices. In addition, the performance of investments in
securities denominated in a foreign currency will depend on the strength of
the foreign currency against the U.S. dollar and the interest rate environment
in the country issuing the currency. Absent other events which could otherwise
affect the value of a foreign security (such as a change in the political
climate or an issuer's credit quality), appreciation in the value of the
foreign currency generally can be expected to increase the value of a foreign
currency-denominated security in terms of U.S. dollars. An increase in foreign
interest rates or a decline in the value of the foreign currency relative to
the U.S. dollar generally can be expected to depress the value of a foreign
currency-denominated security.
There are other risks and costs involved in investing in foreign securities
which are in addition to the usual risks inherent in domestic investments.
Investment in foreign securities involves higher costs than investment in U.S.
securities, including higher transaction and custody costs as well as the
imposition of additional taxes by foreign governments. Foreign investments
also involve risks associated with the level of currency exchange rates, less
complete financial information about the issuers, less market liquidity, more
market volatility and political instability. Future political and economic
developments, the possible imposition of withholding taxes, the possible
seizure or nationalization of foreign holdings, the possible establishment of
exchange controls, or the adoption of other governmental restrictions might
adversely affect an investment in foreign securities. Additionally, foreign
banks and foreign branches of domestic banks are subject to less stringent
reserve requirements, and to different accounting, auditing and recordkeeping
requirements.
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The Bond and Balanced Funds may invest in foreign debt or in the securities
of foreign governments. The risks of such investments include the risk that
foreign governments may default on their obligations, may not respect the
integrity of such debt, may attempt to renegotiate the debt at a lower rate
and may not honor investments by United States entities or citizens.
The Balanced, Growth, Aggressive Growth and International Equity Funds may
invest in ADRs, some of which may not be sponsored by the issuing institution.
A non-sponsored depository may not be required to disclose material
information that a sponsored depository would be required to provide under its
contractual relationship with the issuer. Accordingly, there may not be a
correlation between such information and the market value of such securities.
Although a Fund may invest in securities denominated in foreign currencies,
its portfolio securities and other assets are valued in U.S. dollars. Currency
exchange rates may fluctuate significantly over short periods of time causing,
together with other factors, a Fund's net asset value to fluctuate as well.
Currency exchange rates generally are determined by the forces of supply and
demand in the foreign exchange markets and the relative merits of investments
in different countries, actual or anticipated changes in interest rates and
other complex factors, as seen from an international perspective. Currency
exchange rates also may be affected unpredictably by the intervention or the
failure to intervene by U.S. or foreign governments or central banks, or by
currency controls or political developments in the U.S. or abroad. To the
extent that a Fund's total assets, adjusted to reflect the Fund's net position
after giving effect to currency transactions, are denominated in the
currencies of foreign countries, the Fund will be more susceptible to the risk
of adverse economic and political developments within those countries. In
addition, the respective net currency positions of the International Equity
Fund may expose it to risks independent of its securities positions. Although
the net long and short foreign currency exposure of the International Equity
Fund will not exceed its total asset value, to the extent that the Fund is
fully invested in foreign securities while also maintaining currency
positions, it may be exposed to greater risk than it would have if it did not
maintain the currency positions. The Funds investing in foreign securities are
also subject to the possible imposition of exchange control regulations or
freezes on convertibility of currency.
Dividends, capital gains and interest payable on a Fund's foreign portfolio
securities may be subject to foreign withholding taxes. To the extent such
taxes are not offset by credits or deductions allowed to investors under U.S.
federal income tax law, they may reduce the net return to the shareowners.
OTHER INVESTMENT PRACTICES
ZERO COUPON BONDS
Each Fund may acquire zero coupon bonds. Such obligations will not result in
the payment of interest until maturity and typically have greater price
volatility than coupon obligations. A Fund will accrue income on such
investments for tax and accounting purposes, as required, which is
distributable to shareowners and which, because no cash is received at the
time of accrual, may require the liquidation of other portfolio securities to
satisfy the Fund's distribution obligations. These actions may occur under
disadvantageous circumstances and may reduce a Fund's assets, thereby
increasing its expense ratio and decreasing its rate of return. Zero coupon
bonds are subject to greater market fluctuations from changing interest rates
than debt obligations of comparable maturities which make current
distributions of interest.
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U.S. GOVERNMENT OBLIGATIONS
Each Fund 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.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS
Each Fund may purchase securities on a "when-issued" basis and may purchase
or sell securities on a "forward commitment" basis. These transactions, which
involve a commitment by a Fund to purchase or sell particular securities with
payment and delivery taking place at a future date (perhaps one or two months
later), permit the Fund to lock in a price or yield on a security it owns or
intends to purchase, regardless of future changes in interest rates. When-
issued and forward commitment transactions involve the risk, however, that the
yield obtained in a transaction (and therefore the value of the security) may
be less favorable than the yield (and therefore the value of the security)
available in the market when the securities delivery takes place. A Fund is
required to hold and maintain in a segregated account until the settlement
date cash, U.S. Government securities or liquid, high grade debt obligations
in an amount sufficient to meet the purchase price. No Fund intends to engage
in when-issued purchases and forward commitments for speculative purposes.
INTEREST RATE SWAPS, MORTGAGE SWAPS, CAPS AND FLOORS
In order to hedge against fluctuations in interest rates, the Short-Term
Government, Bond and Balanced Funds may enter into interest rate swaps,
mortgage swaps and other types of swap agreements such as caps and floors.
Interest rate swaps involve the exchange by a Fund with another party of their
respective commitments to pay or receive interest, such as an exchange of
fixed rate payments for floating rate payments. Mortgage swaps are similar to
interest rate swaps in that they represent commitments to pay and receive
interest. The notional principal amount, however, is tied to a reference pool
or pools of mortgages. In a typical cap or floor agreement, one party agrees
to make payments only under specified circumstances, usually in return for
payment of a fee by the other party. For example, the buyer of an interest
rate cap obtains the right to receive payment to the extent that a specified
interest rate exceeds an agreed-upon level, while the seller of an interest
rate floor is obligated to make payments to the extent that a specified
interest rate falls below an agreed-upon level. Since interest rate swaps,
mortgage swaps, caps and floors are individually negotiated, a Fund expects to
achieve an acceptable degree of correlation between its portfolio investments
and its swap, cap and floor positions.
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A Fund will enter into interest rate and mortgage swaps only on a net basis,
which means that the two payment streams are netted out, with the Fund
receiving or paying, as the case may be, only the net amount of the two
payments. A Fund will maintain cash, U.S. Government securities and liquid,
high grade debt securities equal to the net amount, if any, of the excess of
the Fund's obligations over its entitlements with respect to swap transactions
in a segregated account with its custodian. Interest rate and mortgage swaps
do not involve the delivery of securities, other underlying assets or
principal. Accordingly, the risk of loss with respect to interest rate and
mortgage swaps is limited to the net amount of interest payments that a Fund
is contractually obligated to make. If the other party to an interest rate or
mortgage swap defaults, a Fund's risk of loss consists of the net amount of
interest payments that the Fund is contractually entitled to receive. To the
extent that the net amount of an interest rate or mortgage swap is held in a
segregated account consisting of cash, U.S. Government securities and liquid,
high-grade debt securities, the Funds and the Advisor believe that such swaps
will not constitute senior securities under the 1940 Act and, accordingly,
will not treat them as being subject to the Funds' borrowing restriction.
The use of interest rate swaps, mortgage swaps, caps and floors is a highly
specialized activity which involves investment techniques and risks different
from those associated with ordinary portfolio securities transactions. If the
Advisor is incorrect in its forecasts of market values and interest rates, the
investment performance of a Fund would be less favorable than it would have
been if these investment techniques were not used. The staff of the Securities
and Exchange Commission ("SEC") currently takes the position that swaps, caps
and floors are illiquid for purposes of a Fund's limitation on illiquid
securities.
MORTGAGE-RELATED SECURITIES
The Short-Term Government, Bond and Balanced Funds may invest in mortgage-
related securities. Purchasable mortgage-related securities are represented by
pools of mortgage loans assembled for sale to investors by various
governmental agencies such as the Government National Mortgage Association and
government-related organizations such as the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"),
as well as by private issuers such as commercial banks, savings and loan
institutions, mortgage bankers and private mortgage insurance companies.
Although certain mortgage-related securities are guaranteed by a third party
or are otherwise similarly secured, the market value of the security, which
may fluctuate, is not so secured. If a Fund purchases a mortgage-related
security at a premium, that portion may be lost if there is a decline in the
market value of the security whether resulting from increases in interest
rates or prepayment of the underlying mortgage collateral. As with other
interest-bearing securities, the prices of such securities are inversely
affected by changes in interest rates. However, though the value of a
mortgage-related security may decline when interest rates rise, the converse
is not necessarily true because mortgages underlying securities are prone to
prepayment in periods of declining interest rates. For this and other reasons,
a mortgage-related security's maturity may be shortened by unscheduled
prepayments on underlying mortgages and, therefore, it is not possible to
accurately predict the security's return to a Fund. Mortgage-related
securities provide regular payments consisting of interest and principal. No
assurance can be given as to the return a Fund will receive when these amounts
are reinvested.
Mortgage-related securities acquired by a Fund may include collateralized
mortgage obligations ("CMOs"), a type of derivative, issued by FNMA, FHLMC or
other U.S. Government agencies or instrumentalities, as well as by private
issuers. CMOs provide an investor with a specified interest in the
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cash flow of a pool of underlying mortgages or other mortgage-related
securities. Issuers of CMOs frequently elect to be taxed as pass-through
entities known as real estate mortgage investment conduits ("REMICs"). CMOs
are issued in multiple classes, each with a specified fixed or floating
interest rate and a final distribution date. The relative payment rights of
the various CMO classes may be structured in many ways. Generally, payments of
principal are applied to the CMO classes in the order of their respective
stated maturities, so that no principal payments will be made on a CMO class
until all other classes having an earlier stated maturity date are paid in
full. Sometimes, however, CMO classes are "parallel pay," i.e. payments of
principal are made to two or more classes concurrently.
CMOs may involve additional risks other than those found in other types of
mortgage-related obligations. CMOs may exhibit more price volatility and
interest rate risk than other types of mortgage-related obligations. During
periods of rising interest rates, CMOs may lose their liquidity as CMO market
makers may choose not to repurchase, or may offer prices, based on current
market conditions, which are unacceptable to a Fund based on the Fund's
analysis of the market value of the security.
ASSET-BACKED SECURITIES
The Bond and Balanced Funds may purchase asset-backed securities issued by
either governmental or non-governmental entities which represent a
participation in, or are secured by and payable from, a stream of payments
generated by particular assets, most often a pool of assets similar to one
another. Primarily, these securities do not have the benefit of the same
security interest in the underlying collateral. Payment on asset-backed
securities of private issues is typically supported by some form of credit
enhancement, such as a letter of credit, surety bond, limited guaranty, or
subordination. Assets generating such payments will consist of such
instruments as motor vehicle installment purchase obligations, credit card
receivables and home equity loans. 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 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 (i.e., credit card and automobile loan receivables as opposed to real
estate mortgages). Ultimately, asset-backed securities are dependent upon
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payment of the consumer loans or receivables by individuals, and the
certificate holder frequently has no recourse against the entity that
originated the loans or receivables. Credit card receivables are generally
unsecured and the debtors are entitled to the protection of a number of state
and federal consumer credit laws, many of which have given debtors the right
to set off certain amounts owed on the credit cards, thereby reducing the
balance due. In addition, default may require repossession of the personal
property of the debtor which may be difficult or impossible in some cases.
Most issuers of automobile receivables permit the servicers to return
possession of the underlying obligations. If the servicers were to sell these
obligations to another party, there is a risk that the purchaser would acquire
an interest superior to that of the holders of the related automobile
receivables. In addition, because of the number of vehicles involved in a
typical issuance and technical requirements under state law, the trustee for
the automobile receivables may not have an effective security interest in all
of the obligations backing such receivables. Therefore, there is a possibility
that recoveries of repossessed collateral may not, in some cases, be able to
support payments on these securities.
Asset-backed securities are relatively new instruments and may be subject to
greater risk of default during periods of economic downturn than other
instruments. Also, the secondary market for certain asset-backed securities
may not be as liquid as the market for other types of securities, which could
result in a Fund's experiencing difficulty in valuing or liquidating such
securities. In certain circumstances, asset-backed securities may be
considered illiquid securities subject to the percentage limitations described
below under "Illiquid Securities."
MORTGAGE DOLLAR ROLLS
The Short-Term Government, Bond and Balanced Funds may enter into mortgage
"dollar rolls" in which a Fund sells securities for delivery in the current
month and simultaneously contracts with the same counterparty to repurchase
similar (same type, coupon and maturity) but not identical securities on a
specified future date. A Fund gives up the right to receive principal and
interest paid on the securities sold. However, a Fund would benefit to the
extent of any difference between the price received for the securities sold
and the lower forward price for the future purchase (often referred to as the
"drop") or fee income plus the interest earned on the cash proceeds of the
securities sold until the settlement date of the forward purchase. Unless such
benefits exceed the income, capital appreciation, and gain or loss due to
mortgage prepayments that would have been realized on the securities sold as
part of the mortgage dollar roll, the use of this technique will diminish the
investment performance of a Fund. A Fund will hold and maintain in a
segregated account until the settlement date cash or liquid, high grade debt
securities in an amount equal to the forward purchase price. The benefits
derived from the use of mortgage dollar rolls may depend upon the Advisor's
ability to correctly predict mortgage prepayments and interest rates. There is
no assurance that mortgage dollar rolls can be successfully employed.
For financial reporting and tax purposes, each Fund proposes to treat
mortgage dollar rolls as two separate transactions; one transaction involving
the purchase of a security and a separate transaction involving a sale. No
Fund currently intends to enter into mortgage dollar rolls that are accounted
for as a financing.
STRIPPED SECURITIES
The Bond and Balanced Funds may invest in instruments known as "stripped"
securities. These instruments include U.S. Treasury bonds and notes and
federal agency obligations on which the
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unmatured interest coupons have been separated from the underlying obligation.
Such obligations are usually issued at a discount to their "face value," and
because of the manner in which principal and interest are returned may exhibit
greater price volatility than more conventional debt securities. The Funds may
invest in "interest only" stripped securities that have been issued by a
federal instrumentality known as the Resolution Funding Corporation and other
stripped securities issued or guaranteed by the U.S. Government, where the
principal and interest components are traded independently under the Separate
Trading of Registered Interest and Principal Securities program ("STRIPS").
Under STRIPS, the principal and interest components are individually numbered
and separately issued by the U.S. Treasury at the request of depository
financial institutions, which then trade the component parts independently.
Each of these Funds may also invest in instruments that have been stripped by
their holder, typically a custodian bank or investment brokerage firm, and
then resold in a custodian receipt program under names such as TIGRs and CATS.
Although stripped securities do not pay interest to their holders before
they mature, federal income tax rules require a Fund each year to recognize a
part of the discount attributable to a security as interest income. This
income must be distributed along with the other income 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.
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.
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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 liquid assets or other high grade debt securities
that have a value equal to or greater than the repurchase price. The account
is then continuously monitored by the Advisor to make sure that an appropriate
value is maintained. Reverse repurchase agreements involve the risk that the
value of portfolio securities a Fund relinquishes may decline below the price
the Fund must pay on the repurchase date. A Fund will only enter into reverse
repurchase agreements to avoid the need to sell its securities to meet
redemption requests during unfavorable market conditions. As reverse
repurchase agreements are deemed to be borrowings by the SEC, each Fund is
required to maintain continuous asset coverage of 300%. Should the value of a
Fund's assets decline below 300% of borrowings, a Fund may be required to sell
portfolio securities within three days to reduce the Fund's debt and restore
300% asset coverage.
VARIABLE AND FLOATING RATE INSTRUMENTS
Instruments purchased by the Funds may include variable and floating rate
demand instruments issued by corporations, industrial development authorities
and governmental entities. Although variable and floating rate demand
instruments are frequently not rated by credit rating agencies, unrated
instruments purchased by a Fund will be determined to be of comparable quality
to rated instruments that may be purchased by the Fund. While there may be no
active secondary market with respect to a particular variable or floating rate
instrument purchased by a Fund, the 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 or during periods that the Fund is not entitled to
exercise its demand rights, and the Fund could, for these or other reasons,
suffer a loss. Variable and floating rate instruments with no active secondary
market and with notice/termination dates in excess of seven days will be
included in the calculation of a Fund's illiquid assets.
SECURITIES ISSUED BY OTHER INVESTMENT COMPANIES
Each Fund may invest in securities issued by other investment companies
within the limits prescribed by the 1940 Act. Each Fund currently intends to
limit its investments so that, as determined immediately after a purchase is
made: (a) not more than 5% of the value of its total assets will be invested
in the securities 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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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 become uninterested in purchasing these securities. The
ability to sell to qualified institutional buyers under Rule 144A is a
relatively recent development and it is not possible to predict how this
market will develop.
SECURITIES LENDING
To increase return on portfolio securities, each Fund may lend its
securities to broker/dealers and other institutional investors pursuant to
agreements requiring that the loans be continuously secured by collateral
equal at all times in value to at least the market value of the securities
loaned. Such loans will not be made if, as a result, the aggregate of all
outstanding loans exceeds 33 1/3% of the value of a Fund's total assets. There
may be risks of delay in receiving additional collateral or in recovering the
securities loaned or even a loss of rights in the collateral should the
borrower of the securities fail financially. However, loans are made only to
borrowers deemed by the Advisor to be of good standing and when, in its
judgment, the income to be earned from the loan justifies the attendant risks.
OPTIONS AND FUTURES CONTRACTS
Each Fund may purchase put and call options and may write covered call and
secured put options which will be listed on a national securities exchange and
issued by the Options Clearing Corporation. Such options may relate to
particular securities, and various stock indexes or currencies. The Bond,
Balanced, Growth, Aggressive Growth and International Equity Funds may also
invest in futures contracts and options on futures, index futures contracts or
interest rate futures contracts, as applicable for hedging purposes or to seek
to increase total return. The International Equity Fund may also invest in
currency futures contracts. A Fund may not purchase or sell futures contracts
or options on futures contracts to increase total return unless immediately
after any such transaction the aggregate amount of premiums paid for put
options and the amount of margin deposits on its existing futures positions do
not exceed 5% of the total assets of the Fund. Purchasing options is a
specialized investment technique that may entail the risk of a complete loss
of the amounts paid as premiums to the writer of the option.
Writing a covered call option means that a Fund owns or has the right to
acquire the underlying security subject to call at the stated exercise price
at all times during the option period. Writing a secured put option means that
a Fund maintains in a segregated account with its custodian cash or U.S.
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Government securities in an amount not less than the exercise price of the
option at all times during the option period. In order to close out these
types of option positions, a Fund will be required to enter into a "closing
purchase transaction"--the purchase of a call or put option (depending upon
the position being closed out) on the same security with the same exercise
price and expiration date as the option that it previously wrote. The
aggregate value of securities subject to options written by the Bond, Balanced
and International Equity Funds will not exceed 5% of the respective Fund's
total assets. The aggregate value of securities subject to options written by
the Growth and Aggressive Growth Funds will not exceed 25% of the respective
Fund's total assets.
By writing a covered call option, a Fund forgoes the opportunity to profit
from an increase in the market price of the underlying security above its
exercise price except insofar as the premium represents such a profit, and it
is not able to sell the underlying security until the option expires or is
exercised or a Fund effects a closing purchase transaction by purchasing an
option of the same series. If a Fund writes a secured put option, it assumes
the risk of loss should the market value of the underlying security decline
below the exercise price of the option. The use of covered call and secured
put options will not be a primary investment technique of any Fund, and they
are expected to be used infrequently. If the Advisor is incorrect in its
forecast for the underlying security or other factors when writing the
foregoing options, a Fund would be in a worse position than it would have been
had the foregoing investment techniques not been used.
In contrast to an option on a particular security, an option on an index
provides the holder with the right to make or receive a cash settlement upon
exercise of the option. The amount of this settlement will be equal to the
difference between the closing price of the index at the time of exercise and
the exercise price of the option expressed in dollars, times a specified
multiple.
To enter into a futures contract, a Fund must make a deposit of initial
margin with its custodian in a segregated account in the name of its futures
broker. Subsequent payments to or from the broker, called variation margin,
will be made on a daily basis as the price of the underlying security or index
fluctuates, making the long and short positions in the futures contracts more
or less valuable.
The risks related to the use of options and futures contracts include: (i)
the correlation between movements in the market price of the portfolio
investments (held or intended for purchase) being hedged and in the price of
the futures contract or option may be imperfect; (ii) possible lack of a
liquid secondary market for closing out options or futures positions; (iii)
the need for additional fund management skills and techniques; and (iv) losses
due to unanticipated market movements. Successful use of options and futures
by a Fund is subject to the Advisor's ability to correctly predict movements
in the direction of stock prices, interest rates and other economic factors.
For example, if a Fund uses futures contracts as a hedge against the
possibility of a decline in the market adversely affecting securities held by
it and securities prices increase instead, the Fund will lose part or all of
the benefit of the increased value of its securities which it has hedged
because it will have approximately equal offsetting losses in its futures
positions. The risk of loss in trading futures contracts in some strategies
can be substantial and is potentially unlimited, due both to the low margin
deposits required, and the extremely high degree of leverage involved in
futures pricing. As a result, a relatively small price movement in a futures
contract may result in immediate and substantial loss or gain to a Fund. Thus,
a purchase or sale of a futures contract may result in losses or gains in
excess of the amount invested in the contract.
For additional information and a description of the risks relating to option
and futures contract trading practices, see the Statement of Additional
Information.
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FORWARD CURRENCY EXCHANGE CONTRACTS
The International Equity Fund may enter into forward currency exchange
contracts in an effort to hedge all or any portion of its portfolio positions.
Specifically, foreign currency contracts may be used for this purpose to
reduce the level of volatility caused by changes in foreign currency exchange
rates or when such transactions are economically appropriate for the reduction
of risks in the ongoing management of the Fund. The Fund may also enter into
foreign currency exchange contracts to seek to increase total return when the
Advisor anticipates that a foreign currency will appreciate or depreciate in
value, but securities denominated in that currency do not present attractive
investment opportunities and are not held by the Fund. In addition, the
International Equity Fund may engage in cross-hedging by using forward
contracts in one currency to hedge against fluctuations in the value of
securities denominated in a different currency if the Advisor believes that
there is a pattern of correlation between the two currencies. A forward
currency exchange contract is an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of
contract. Although the contracts may be used to minimize the risk of loss due
to a decline in the value of the hedged currency, at the same time they tend
to limit any potential gain that might be realized should the value of such
currency increase. In connection with its forward currency exchange contracts,
the Fund will create a segregated account of liquid assets, such as cash, U.S.
Government securities or other liquid high grade obligations, or will
otherwise cover its position in accordance with applicable requirements of the
SEC.
CONVERTIBLE SECURITIES
The Bond, Balanced, Growth, Aggressive Growth and International Equity Funds
may invest in convertible securities, including bonds, notes and preferred
stock, that may be converted into common stock either at a stated price or
within a specified period of time. With investment in convertible securities,
a Fund may be looking for the opportunity, through the conversion feature, to
participate in the capital appreciation of the common stock into which the
securities are convertible, while earning higher current income than is
available from alternative investments.
MUNICIPAL OBLIGATIONS
The Bond and Balanced Funds may invest in Municipal Obligations from time to
time when the yield spread between taxable corporate and municipal obligations
is deemed by the Advisor to be advantageous. The two principal classifications
of Municipal Obligations which may be held by the Funds are "general
obligation" securities and "revenue" securities. General obligation securities
are secured by the issuer's pledge of its full faith, credit and taxing power
for the payment of principal and interest. Revenue securities are payable only
from the revenues derived from a particular facility or class of facilities
or, in some cases, from the proceeds of a special excise tax or other specific
revenue source such as the issuer of the facility being financed. Private
activity bonds (e.g., bonds issued by industrial development authorities) that
are issued by or on behalf of public authorities to finance various privately-
operated facilities are included within the term "Municipal Obligations" if
the interest paid thereon is exempt from regular federal income tax. Private
activity bonds are in most cases revenue securities and are not payable from
the unrestricted revenues of the issuer. The credit quality of such bonds is
usually directly related to the credit standing of the corporate user of the
facility involved.
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Each of these Funds may also hold "moral obligation" securities, which are
normally issued by special purpose public authorities. If the issuer of moral
obligation securities is unable to meet its debt service obligations from
current revenues, it may draw on a reserve fund, the restoration of which is a
moral commitment but not a legal obligation of the state or municipality which
created the issuer.
Further, each of these Funds may purchase Municipal Obligations known as
"certificates of participation" which represent undivided proportional
interests in lease payments by a governmental or non-profit entity. The lease
payments and other rights under the lease provide for and secure the payments
on the certificates. Lease obligations may be limited by applicable municipal
charter provisions or the nature of the appropriation for the lease. In
particular, lease obligations may be subject to periodic appropriation. If the
entity does not appropriate funds for future lease payments, the entity cannot
be compelled to make such payments. Furthermore, a lease may or may not
provide that the certificate trustee can accelerate lease obligations upon
default. If the trustee could not accelerate lease obligations upon default,
the trustee would only be able to enforce lease payments as they became due.
In the event of a default or failure of appropriation, it is unlikely that the
trustee would be able to obtain an acceptable substitute source of payment.
Certificates of participation are generally subject to redemption by the
issuing municipal entity under specified circumstances. If a specified event
occurs, a certificate is callable at par either at any interest payment date
or, in some cases, at any time. As a result, certificates of participation are
not as liquid or marketable as other types of Municipal Obligations.
TEMPORARY INVESTMENTS
Each Fund may assume a temporary defensive position at times when the
Advisor believes such a position is warranted by uncertain or unusual market
conditions. Such a position would allow a Fund to deviate from its fundamental
and non-fundamental policies. Each Fund may invest for temporary defensive
purposes up to 100% of its total assets in cash or cash equivalent short-term
obligations including "money market instruments," a term which includes, among
other things, bank obligations, commercial paper and notes, U.S. Government
Obligations, foreign government securities (if permitted) and repurchase
agreements.
Bank obligations include bankers' acceptances, negotiable certificates of
deposit and non-negotiable time deposits, including U.S. dollar-denominated
instruments issued or supported by the credit of U.S. or foreign banks or
savings institutions. Bank obligations also include obligations of foreign
banks or foreign branches of U.S. banks. All investments in bank obligations
are limited to the obligations of financial institutions having more than $1
billion in total assets at the time of purchase.
The International Equity Fund may also hold foreign or domestic money market
instruments and debt securities rated at the time of purchase in one of the
three highest investment-grade categories by Moody's, 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.
PORTFOLIO TURNOVER
Each Fund may sell a portfolio investment soon after its acquisition if the
Advisor believes that such a disposition is consistent with attaining the
Fund's investment objective. Portfolio investments may be sold for a variety
of reasons, such as a more favorable investment opportunity or other
circumstances bearing on the desirability of continuing to hold such
investments.
27
<PAGE>
A high rate of portfolio turnover (100% or more) involves correspondingly
greater brokerage commission expenses and other transaction costs, which must
be borne directly by a Fund and ultimately by its shareowners. See "Financial
Highlights" above or "Portfolio Transactions" in the Statement of Additional
Information. Portfolio turnover may result in the realization of short-term
capital gains which are taxable to shareowners as ordinary income.
INVESTMENT RESTRICTIONS
The Funds are subject to certain investment restrictions which, as described
in more detail in the Statement of Additional Information, are fundamental
policies that cannot be changed without the affirmative vote of a majority of
the outstanding shares of a Fund (as defined under "Other Information"). Each
Fund will limit its investments so that, with respect to 75% of a Fund's total
assets: (i) not more than 5% of a Fund's total assets will be invested in the
securities of any one issuer; (ii) not more than 25% of a Fund's total assets
will be invested in the securities of issuers in any one industry; and (iii)
not more than 10% of the outstanding voting securities of any one issuer will
be held by a Fund. Securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities and repurchase agreements fully collateralized
by such securities are excepted from 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.
28
<PAGE>
SHAREOWNER GUIDE
THE FOLLOWING SECTION WILL PROVIDE YOU WITH
ANSWERS TO SOME OF THE MOST OFTEN-ASKED QUESTIONS
ABOUT BUYING AND SELLING A FUND'S SHARES AND
ABOUT A FUND'S DIVIDENDS AND DISTRIBUTIONS
HOW CAN I CONTACT THE COMMERCE FUNDS?
To authorize the special features described below or to obtain additional
information about The Commerce Funds, you may:
. Call The Commerce Funds Shareowner Services at 1-800-305-2140; or
. Write to The Commerce Funds at:
The Commerce Funds
P.O. Box 16931
St. Louis, MO 63105; or
. Call the transfer agent, State Street Bank and Trust Company,
directly at 1-800-995-6365; or
. Contact a registered investment representative at selected Commerce
Bank branches; or
. For specific information regarding your 401(k) or investment
management group account, contact your plan sponsor or account
administrator.
HOW TO BUY SHARES
WHAT IS THE MINIMUM INVESTMENT FOR EACH FUND?
Generally, the minimum investment requirement is $1,000 for initial
purchases and $250 for subsequent purchases, although it may differ in certain
circumstances as shown below.
INVESTMENT MINIMUMS FOR SPECIFIC TYPES OF ACCOUNTS
<TABLE>
<CAPTION>
INITIAL SUBSEQUENT
INVESTMENT INVESTMENT
---------- -----------
<S> <C> <C>
Regular Account......................................... $1,000 $250
Automatic Investment Feature............................ $1,000 $75/Quarter
Individual Retirement Accounts (including SEP-IRAs),
Keogh Plans, corporate retirement plans, public
employer deferred plans, profit sharing plans and
401(k) plans........................................... $1,000 $250
</TABLE>
The minimum initial investment requirement is $250 for initial purchases and
$100 for subsequent purchases for employees, directors, officers and retirees
(as well as their spouses and legal dependents) of Commerce Bancshares, Inc.,
Goldman Sachs & Co. and their subsidiaries or affiliates, although it may
differ in certain circumstances as shown below.
<TABLE>
<CAPTION>
INITIAL SUBSEQUENT
INVESTMENT INVESTMENT
---------- ----------
<S> <C> <C>
Regular Account.......................................... $250 $100
Automatic Investment Feature............................. $100 $25*
Individual Retirement Accounts (including SEP-IRAs),
Keogh Plans.............................................. $100 $25*
</TABLE>
- --------
*Minimum of six bi-monthly investments within first year of Fund ownership.
29
<PAGE>
HOW ARE SHARES PRICED?
SHARES OF THE FUNDS ARE PURCHASED AT THEIR PUBLIC OFFERING PRICE, WHICH IS A
FUND'S NET ASSET VALUE PER SHARE PLUS A FRONT-END SALES CHARGE. A FUND'S NET
ASSET VALUE PER SHARE ("NAV") IS CALCULATED AS FOLLOWS:
NAV= (VALUE OF FUND ASSETS)--(FUND LIABILITIES)
NUMBER OF OUTSTANDING SHARES
The net asset value is determined as of the close of regular trading hours
on the New York Stock Exchange (the "Exchange") (currently 4:00 p.m. Eastern
Time) on days the Exchange is open (a "Business Day"). On those Business Days
on which the Exchange closes prior to the close of its regular trading hours
("Early Closing Time"), the net asset value of each Fund will be determined
and its shares will be priced as of such Early Closing Time.
A Fund's investments are valued at market value or, where market quotations
are not readily available, at fair value as determined in good faith by or
under the supervision of the Board of Trustees. Certain short-term securities
may be valued at amortized cost, which approximates fair value.
Trading in foreign securities is generally completed prior to the end of
regular trading on the Exchange and may occur on Saturdays and U.S. holidays
and at other times when the Exchange is closed. As a result, there may be
delays in reflecting changes in the market values of foreign securities in the
calculation of the net asset value of the International Equity Fund. There may
be variations in the net asset value per share of the Fund on days when net
asset value is not calculated and on which shareowners of the Fund cannot
redeem their shares due to changes in values of securities traded in foreign
markets. For more information about valuing securities, see the Statement of
Additional Information.
SALES CHARGE. The maximum front-end sales charge is 3.50% and may be less
based on the amount you invest, as shown in the following chart:
<TABLE>
<CAPTION>
MAXIMUM
DEALER'S
AS A % OF AS A % OF REALLOWANCE AS
OFFERING NET ASSET A % OF
PRICE VALUE OFFERING PRICE
AMOUNT OF PURCHASE PER SHARE PER SHARE PER SHARE*
- ------------------ --------- --------- --------------
<S> <C> <C> <C>
Less than $100,000........................... 3.50 3.63 3.15
$100,000 but less than $250,000.............. 2.50 2.56 2.25
$250,000 but less than $500,000.............. 1.50 1.52 1.35
$500,000 but less than $1,000,000............ 1.00 1.01 0.90
$1,000,000 or more........................... 0.00 0.00 0.00
</TABLE>
- --------
*Dealer's reallowance may be changed periodically.
Goldman, Sachs & Co. (the "Distributor") 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 addition, at its expense, the
Distributor will provide additional compensation and promotional incentives to
dealers in connection with the sales of shares of the Funds. Compensation may
include promotional and other merchandise, sales and training programs and
other special events sponsored by dealers. Compensation may also include
payment for reasonable expenses incurred in connection with trips taken by
invited registered representatives for meetings or seminars of a business
nature.
30
<PAGE>
WHEN THERE IS NO SALES CHARGE. There is no sales charge on shares purchased
by the following types of investors or transactions:
. automatic reinvestments (and cross-reinvestments) of dividends and
capital gain distributions by existing shareowners;
. the Exchange Privilege described below on page 53;
. the Redemption Reinvestment Privilege described on page 50;
. non-profit organizations, foundations and endowments qualified under
Section 501(c)(3) of the Code;
. current and retired members of the Board of Trustees of The Commerce
Funds;
. any state, county or city, or any instrumentality, department, authority
or agency thereof, prohibited by applicable laws from paying a sales
charge for the purchase of Fund shares;
. employees, directors, advisory directors, officers and retirees (as well
as their spouses and legal dependents) of Commerce Bancshares, Inc.,
Goldman, Sachs & Co. or their subsidiaries or affiliates;
. employees, directors, advisory directors, officers and retirees (as well
as their spouses and legal dependents) of banks that have signed a
definitive agreement to become affiliated with Commerce Bancshares, Inc.;
. shares purchased for and held in a trust, management agency, asset
allocation, custodial or other account maintained by an Investment
Management Group (Trust Department) within a bank affiliated, or within
banks that have signed a definitive agreement to become affiliated with
Commerce Bancshares, Inc. (including shares purchased with distributions
from such accounts);
. shares purchased for and held in a trust for which a bank affiliated with
Commerce Bancshares, Inc., is named as successor trustee or co-trustee
immediately after the current trustee ceases to serve, and shares
purchased for and held by individuals who have named a bank affiliated
with Commerce Bancshares, Inc., as their primary personal representative
or co-personal representative under will; and
. plans qualified under Section 401 of the Internal Revenue Code of 1986,
as amended (the "Code") (including corporate retirement plans, Keogh
plans, and Section 401(k) plans), custodial accounts treated as tax-
sheltered annuities under Section 403(b) of the Code, and deferred
compensation plans for public, religious and other tax-exempt employers
(including plans described in Section 457 of the Code) maintained by an
Investment Management Group (Trust Department) within a bank affiliated,
or with banks that have signed a definitive agreement to become
affiliated, with Commerce Bancshares, Inc. (including shares purchased
with distributions from such accounts).
The Distributor may periodically waive all or a portion of the sales charge
for all investors with respect to the sales of shares of the Funds. The
Distributor may also offer special concessions to enable investors to purchase
shares of the Funds at net asset value, without payment of a sales charge. To
qualify for this special net asset value purchase when applicable, the
investor must pay for such purchase with the proceeds from the redemption of
shares of a non-affiliated mutual fund or unit investment trust on which a
sales charge was paid. A qualifying purchase of shares in a Fund must occur
within five Business Days of the prior redemption and must be evidenced by a
confirmation of the redemption transaction. At the time of purchase, The
Commerce Funds must be notified that the purchase qualifies for a purchase
without a sales charge. Proceeds from the redemption of shares on which no
sales charges or commissions were paid would not qualify for the special net
asset value purchase program.
31
<PAGE>
These sales charge exemptions are based on the type of investor and/or the
reduced sales effort that will be needed in obtaining Fund investments. In
order to take advantage of these exemptions, you must certify eligibility on
your account application.
RIGHTS OF ACCUMULATION. When you buy shares in The Commerce Funds, your
current total investment determines the sales charge that you pay. Since
larger investments receive a discounted sales charge, the sales charge you pay
may subsequently be reduced as you build your investment.
Over time, as your current total investment in shares accumulates to
$100,000 or beyond, the sales charge on subsequent investments is decreased.
Your current total investment is the combination of your immediate investment
along with the shares that you own in any investment portfolio of The Commerce
Funds on which you paid a sales charge (including shares of the Financial
Square Treasury, Prime and Tax-Free Money Market Funds that carry no sales
charge but were obtained through an exchange and can be traced back to shares
that were acquired with a sales charge). Shares purchased without a sales
charge may not be aggregated with shares purchased subject to a sales charge.
To buy shares at a reduced sales charge under Rights of Accumulation, you
must indicate at the time of purchase that a quantity discount is applicable.
A reduction in sales charge is subject to a check of appropriate records,
after which you will receive the lowest applicable sales charge.
Example: Suppose you own Commerce Fund shares with a total current value
of $90,000 that can be traced back to the purchase of shares with a sales
charge. If you subsequently invest $10,000 in any Fund within The Commerce
Funds family, you will pay a reduced sales charge of 2.50% of the public
offering price on the additional purchase.
LETTER OF INTENT. You may also buy shares at a reduced sales charge under a
written Letter of intent, a non-binding commitment to invest a total of at
least $100,000 in one or more Funds of The Commerce Funds within a period of
13 months and under the terms and conditions of the Letter of Intent. Shares
you buy under a Letter of Intent will be eligible for the same sales charge
discount that would have been available had all of your share purchases been
made at once. To use this feature, complete the Letter of Intent section on
your account application. A Letter of Intent must be filed with The Commerce
Funds within 90 days of the first investment under the Letter of Intent
provision.
While submitting a Letter of Intent does not bind you to buy, or The
Commerce Funds to sell, the full amount at the sales charge indicated in the
Letter of Intent, you must complete the intended purchase to obtain the
reduced sales charge. When you sign a Letter of Intent, The Commerce Funds
holds in escrow a sufficient number of shares which can be sold to make up any
difference in the sales charge on the amount actually invested. After you
fulfill the terms of the Letter of Intent, the shares in escrow will be
released.
If your aggregate investment exceeds that indicated in your Letter of
Intent, you will receive an adjustment which reflects the further reduced
sales charge applicable to your excess investment. It will be in the form of
additional shares credited to your account at the then current offering price
applicable to a single purchase of the total amount of the total purchase. You
must inform The Commerce Funds that the Letter of Intent is in effect each
time you buy shares.
You may include the value of all shares on which a sales charge had
previously been paid as a credit toward fulfillment of the Letter of Intent,
but no price adjustment will be made on shares previously purchased.
You may combine purchases that are made by members of your immediate family,
or the total investments of a trustee or custodian of any qualified pension or
profit-sharing plan or IRA established for your benefit or the benefit of any
member of your immediate family, for the purpose of obtaining reduced sales
charges by means of a written Letter of Intent or Right of Accumulation. You
must indicate on the account application the accounts that are to be combined
for this purpose.
32
<PAGE>
HOW DO I BUY SHARES?
You may purchase shares of a Fund through The Commerce Funds Shareowner
Services or an investment representative at a Commerce Bank branch. The
following chart describes ways to invest directly in The Commerce Funds:
<TABLE>
<CAPTION>
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
------------------------------------ ------------------------------------
<S> <C> <C>
By Mail Send a completed account application Send a check with your Fund account
with a check (payable to The number printed on it, along with the
Commerce Funds) directly to the stub from the previous confirmation
address set forth in "How Can I directly to the address set forth in
Contact The Commerce Funds?" on page "How Can I Contact The Commerce
29. Funds?" on page 29.
In Person Whether opening or adding to an account, you are welcome to stop into a
Commerce Bank branch office location. A registered investment
representative can assist you.
By Wire After an account application is Contact your bank to request that
completed and an account is opened, funds be wired to your existing Fund
instruct your bank to wire funds to: account. Follow instructions at
left. Be sure to include your name
and your Fund account number.
Commerce Bank, N.A.
(Kansas City)
Kansas City, MO
ABA #1010-00019
Account #2800255
Be sure to have your bank indicate
your name, address, tax
identification number, the name of
the Fund and your new account
number.
Ask your bank for specific information about making federal wires,
including associated charges.
By Telephone Subsequent purchases of Fund shares
Via Electronic may be made by electronic funds
Funds Transfer transfer from your bank, checking or
money market account.
You can authorize this feature and
provide necessary bank information
on your account application. Then,
when you wish to make a subsequent
purchase, you can do so by
contacting The Commerce Funds at the
telephone number set forth in "How
Can I Contact The Commerce Funds?"
on page 29.
</TABLE>
33
<PAGE>
Other investment features, including exchanges and automatic investments,
are also available. Additional information pertaining to investments in the
Funds is included in the following pages or can be obtained by contacting The
Commerce Funds Shareowner Services.
WHAT PRICE WILL I RECEIVE WHEN I BUY SHARES?
Your shares will be purchased at a Fund's public offering price calculated
at the next close of regular trading on the Exchange (currently 4:00 p.m.
Eastern Time) after your purchase order is received in proper form by The
Commerce Funds' transfer agent, State Street Bank and Trust Company (the
"Transfer Agent"), at its Kansas City office.
WHAT ELSE SHOULD I KNOW ABOUT BUYING SHARES?
Federal regulations require you to provide a certified Taxpayer
Identification Number upon opening or reopening an account.
If your check used for investment does not clear, a fee may be imposed by
the Transfer Agent. All payments by check must be in U.S. dollars and be drawn
only on U.S. banks. The Commerce Funds reserves the right to reject any
specific purchase order (including exchanges) or to restrict purchases or
exchanges by a particular purchaser (or group of related purchasers). The
Commerce Funds may reject or restrict purchases or exchanges of shares by a
particular purchaser or group, for example, when a pattern of frequent
purchases and sales or exchanges of shares of a Fund is evident, or if the
purchase and sale or exchange orders are, or a subsequent abrupt redemption
might be, of a size that would disrupt the management of a Fund.
The Commerce Funds will not issue share certificates. The Transfer Agent
will maintain a complete record of your account and will issue you a statement
at least quarterly. You will also be sent confirmations showing purchases and
redemptions.
HOW TO SELL SHARES
HOW DO I SELL MY SHARES?
The Commerce Funds makes it easy to sell, or "redeem," all or part of your
shares. The Commerce Funds does not charge you to sell shares. However, the
value of the shares you sell may be more or less than your cost, depending on
a Fund's current net asset value. The following chart describes ways to sell
your shares of The Commerce Funds:
34
<PAGE>
HOW TO SELL SHARES:
Through The Commerce Funds Shareowner Services or an investment
representative at a Commerce Bank branch.
By Mail Send a written request signed by each owner,
including each joint owner, to the address set
forth in "How Can I Contact The Commerce
Funds?" on page 29. [/R]
Proper written authority is required to execute
redemption requests on behalf of corporations,
partnerships, trusts, and/or fiduciary
accounts. Redemption requests require SIGNATURE
GUARANTEES as described on page 36 with the
exception of redemptions sent to a shareowner
name/address of record in effect for no less
than 30 days.
In Person You are welcome to deliver your written request
signed by each owner, including each joint
owner, to a Commerce Bank branch office
location. A registered investment
representative can assist you. [/R]
By Telephone You may redeem shares (to a shareowner) by
telephone and request to receive proceeds by
check (to a shareowner name/address of record
in effect for no less than 30 days), federal
wire (for amounts exceeding $1,000) or
electronic funds transfer. In order to request
a federal wire or electronic funds transfer,
appropriate information regarding your bank,
checking or money market account must be
previously established on your account. This
information may be provided on the account
application or in a SIGNATURE GUARANTEED letter
of instruction (see description of SIGNATURE
GUARANTEES on page 36). [/R]
Redemption requests may be placed by contacting
The Commerce Funds at the telephone number set
forth in "How Can I Contact The Commerce
Funds?" on page 29. Additional information
pertaining to Fund share redemptions is
included in the following pages or can be
obtained by contacting The Commerce Funds
Shareowner Services.
Other redemption features, including exchanges
and automatic withdrawals, are also available.
Please refer to the Shareowner Features and
Privileges section in this prospectus for
additional information about telephone
redemption features.
Written requests to sell shares must be signed by each shareowner, including
each joint owner.
35
<PAGE>
Certain types of redemption requests will need to include a SIGNATURE
GUARANTEE. You may obtain a SIGNATURE GUARANTEE from:
(1)a bank which is a member of the FDIC;
(2)a securities broker or dealer;
(3)a credit union having the authority to issue SIGNATURE GUARANTEES;
(4)a savings and loan association;
(5)a building and loan association;
(6)a cooperative bank;
(7)a federal savings bank or association;
(8)a national securities exchange; or
(9)a registered securities association or a clearing agency.
Guarantees must be signed by an authorized signatory of the guarantor
institution and be accompanied by the words "SIGNATURE GUARANTEED." Guarantees
from notaries public will not be accepted.
Share redemptions can be suspended and the payment of redemption proceeds
delayed when the Exchange is closed (other than for customary weekend and
holiday closings), during periods when trading on the Exchange is restricted
as determined by the SEC, during any emergency as determined by the SEC which
makes it impracticable for a Fund to sell its securities or value its assets
or during any other period permitted by order of the SEC for the protection of
investors.
Other redemption features, including exchanges and automatic withdrawals,
are also available. Please refer to Shareowner Features and Privileges for
more information.
WHAT PRICE WILL I RECEIVE FOR SHARES I WANT TO SELL?
The price you will receive when you sell your shares is the net asset value
per share (as described on page 30) determined after receipt of an order in
proper form by the Transfer Agent.
The Commerce Funds reserves the right to redeem accounts involuntarily if,
after sixty days' written notice to the shareowner, the account's net asset
value remains below a $500 minimum balance. Involuntary redemptions will not
be implemented if the value of your account falls below the minimum balance as
a result of market conditions.
HOW QUICKLY CAN I RECEIVE PROCEEDS FROM A SALE?
Ordinarily, redemption proceeds will be disbursed the next Business Day
following receipt of an order in proper form by the Transfer Agent. Payment
must be made within seven calendar days following redemption.
You can have your proceeds sent by federal wire to your bank checking or
money market account. Proceeds will normally be wired the Business Day after
your request to redeem shares is received in good order by the Transfer Agent.
Wiring of sales proceeds may be delayed one additional day if the Federal
Reserve Bank is not open on the day your wire is to be made. Your request to
wire proceeds is subject to the bank's wire charges.
36
<PAGE>
Fund shares must be paid in full in order for you to redeem them and receive
proceeds. If the shares you wish to sell were a recent purchase by check or
telephone, The Commerce Funds can delay the subsequent payment of sales
proceeds up to 15 days after the check or telephone payment is received. This
does not apply if Fund shares were purchased by federal wire.
WHAT IF I WANT TO REINVEST SALES PROCEEDS?
You may reinvest all or any portion of your redemption proceeds in shares of
any Fund within 60 days of your redemption without a sales charge. Shares will
be purchased at a price equal to the net asset value per share next determined
after the Transfer Agent receives a reinvestment order and payment in proper
form.
If you wish to use the Redemption Reinvestment Privilege, you must submit a
written reinvestment request to the Transfer Agent stating that you are
eligible to use the feature.
Generally, using the Redemption Reinvestment Privilege will not affect any
gain or loss realized on redemptions for federal income tax purposes. However,
if a redemption results in a loss, the reinvestment may result in the loss
being disallowed under Internal Revenue Service "wash sale" rules.
DIVIDEND AND DISTRIBUTION POLICIES
AS A FUND SHAREOWNER, YOU ARE ENTITLED TO ANY DIVIDENDS AND DISTRIBUTIONS
ARISING
FROM NET INVESTMENT INCOME AND NET REALIZED CAPITAL GAINS.
The Short-Term Government and Bond Funds declare dividends daily and
distribute dividends on or about the last Business Day of the current month.
The Balanced and Growth Funds declare and distribute dividends quarterly. The
Aggressive Growth and International Equity Funds declare and distribute
dividends annually. Each Fund declares and distributes net realized capital
gains annually.
For purchases by check, shares of the Short-Term Government and Bond Funds
begin earning dividends and distributions on the next day after payment for
the shares is received by the Transfer Agent. In the case of the Balanced,
Growth, Aggressive Growth and International Equity Funds, if you are a
shareowner of record on the record date, you are eligible to receive such
dividend or distribution.
YOU CAN CHOOSE A DISTRIBUTION OPTION FOR DIVIDENDS AND CAPITAL GAINS:
(1) reinvest all dividend and capital gain distributions in additional
Fund shares without a sales charge;
(2) receive dividend distributions in cash and reinvest capital gain
distributions in additional Fund shares without a sales charge;
(3) receive all dividend and capital gain distributions in cash; or
(4) have all dividend and capital gain distributions deposited directly
into a designated checking account.
37
<PAGE>
If you do not select an option when you open an account, all distributions
will automatically be reinvested in additional shares of the same Fund without
a sales charge. For your protection, if you elect to have distributions mailed
to you which cannot be delivered, they will be reinvested in additional shares
of the same Fund without a sales charge.
You may invest dividend or capital gain distributions from one Fund in
another Fund of The Commerce Funds. There is no sales charge on purchases made
through the Cross Reinvestment Privilege; however, both Fund accounts must be
established at the minimum initial investment requirement and have identical
account registration. Cross Reinvestment Privileges do not apply to the
Financial Square Treasury, Prime and Tax-Free Money Market Funds ("Money
Market Funds") described below under "Can I Exchange My Investment From One
Commerce Fund To Another." Goldman Sachs Asset Management, a separate
operating division of Goldman, Sachs & Co., serves as investment advisor for
the Money Market Funds.
Your election to reinvest the distributions paid by a Fund in additional
shares of the Fund or any other Fund of The Commerce Funds will not affect the
tax treatment of such dividends and distributions, which will be treated as
received by the shareowner and then used to purchase shares of the Fund or
another Fund of The Commerce Funds.
To change your distribution option, contact The Commerce Funds at the
address or telephone number set forth in "How Can I Contact The Commerce
Funds?" on page 29.
The change will become effective after it is received and processed by the
Transfer Agent.
SHAREOWNER FEATURES AND PRIVILEGES
THE COMMERCE FUNDS PROVIDES A VARIETY OF WAYS TO
MAKE MANAGING YOUR INVESTMENTS MORE CONVENIENT.
Some or all of the following features as well as others described in this
Prospectus may have different conditions imposed on them in addition to those
described in this Prospectus. Consult your investment representative or
contact The Commerce Funds as described in "How Can I Contact The Commerce
Funds?" on page 29 for more information.
CAN I USE THE FUNDS IN MY RETIREMENT PLAN?
The Commerce Funds makes available: (1) individual retirement accounts
("IRAs"), including IRAs set up under a Simplified Employee Pension Plan
("SEP-IRAs"); (2) Keogh plans; (3) corporate retirement plans; (4) public
employer deferred compensation plans; and (5) profit sharing plans (including
401(k) plans) and money-purchase plans.
YOUR INVESTMENTS GROW TAX DEFERRED UNTIL WITHDRAWAL AT RETIREMENT, AND IN
MANY CASES THE INITIAL INVESTMENT IS TAX DEDUCTIBLE.
Information concerning these plans is available through The Commerce Funds
Shareowner Services or your investment representative.
38
<PAGE>
WHAT IS DOLLAR COST AVERAGING AND HOW CAN I IMPLEMENT IT?
DOLLAR COST AVERAGING INVOLVES INVESTING A FIXED DOLLAR AMOUNT AT REGULAR
INTERVALS. BECAUSE MORE SHARES ARE PURCHASED DURING PERIODS WITH LOWER SHARE
PRICES AND FEWER SHARES ARE PURCHASED WHEN THE PRICE IS HIGHER, YOUR AVERAGE
COST PER SHARE MAY BE REDUCED.
In order to be effective, Dollar Cost Averaging should be followed on a
regular basis. You should be aware, however, that shares bought using Dollar
Cost Averaging are made without regard to their price on the day of investment
or to market trends. In addition, while you may find Dollar Cost Averaging to
be beneficial, it will not prevent a loss if you ultimately redeem your shares
at a price that is lower than their purchase price. Dollar cost averaging does
not assure a profit or protect against a loss in a declining market. You can
invest through Dollar Cost Averaging on your own or through the Automatic
Investment feature described above.
The Automatic Investment feature lets you transfer money from your checking
account into your Fund account automatically on the date you specify in any
month you choose. The Automatic Investment Feature is one way to use Dollar
Cost Averaging to invest (see below). Only checking accounts at U.S. financial
institutions which permit automatic withdrawals through the Automated Clearing
House are eligible. Check with your bank or financial institution to determine
eligibility.
To establish an Automatic Investment account that uses the Dollar Cost
Averaging method, check the appropriate box and supply the necessary
information on the account application or send a subsequent written request
with an appropriate SIGNATURE GUARANTEE.
You may change the amount of purchase or cancel this feature at any time by
mailing written notification to The Commerce Funds at the address set forth in
"How Can I Contact The Commerce Funds?" on page 29.
Notification will be effective three Business Days following receipt. The
Commerce Funds may modify or terminate this feature at any time or charge a
service fee, although no such fee is currently contemplated.
CAN I EXCHANGE MY INVESTMENT FROM ONE COMMERCE FUND TO ANOTHER?
As a shareowner, you have the privilege of exchanging your shares for shares
of another Fund of The Commerce Funds. Exchanges may also be made to or from
the Financial Square Treasury, Prime and Tax-Free Money Market Funds. NO
ADDITIONAL SALES CHARGE IS IMPOSED WHEN EXCHANGING SHARES OF A FUND FOR SHARES
OF ANOTHER FUND OFFERED BY THE COMMERCE FUNDS.
You can exchange shares of one Fund for shares in another Fund within The
Commerce Funds family that may be legally sold in your state of residence by
writing or calling The Commerce Funds as described under "How To Sell Shares"
on page 34. The Exchange Privilege is automatic for all shareowners unless
declined on an account application. All telephone exchanges must be registered
in the same name(s) and with the same address as are registered in the Fund
from which the exchange is made. See the section below regarding telephone
transactions for a description of The Commerce Funds' policy regarding
responsibility for telephone instructions. Shares purchased by check may not
be exchanged until the check has cleared.
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Fund shares being exchanged are subject to the minimum initial and
subsequent investment requirements as described on page 29. Before using this
feature, you should consider carefully the investment objective, policies,
risks and expenses of the acquired Fund, as described in such Fund's
prospectus. You can request a current Prospectus from your investment
representative or by contacting The Commerce Funds at the address or telephone
number set forth in "How Can I Contact The Commerce Funds?" on page 29.
In addition to free automatic exchanges pursuant to the Automatic Exchange
feature discussed below, five free exchanges are permitted in each twelve-
month period. Additional exchanges may be subject to a $5 exchange fee.
The Commerce Funds reserves the right to reject any exchange request and the
Exchange Privilege may be modified or terminated at any time. At least 60
days' notice of any material modification or termination of the Exchange
Privilege will be given to shareowners except where notice is not required
under the regulations of the SEC.
An exchange may result in a taxable gain or loss. Any sales charge paid on
the original purchase cannot be taken into account in determining such gain or
loss if the exchange occurs within ninety (90) days after the original
purchase of shares and no sales charge is imposed on such exchange.
CAN I HAVE EXCHANGES MADE AUTOMATICALLY?
You may request on your account application that a specified dollar amount
of shares at net asset value be automatically exchanged for shares of any
other Fund of The Commerce Funds. No sales charge is imposed on exchanges.
These automatic exchanges may be made on any one day of each month and are
subject to the following conditions: The minimum dollar amount for automatic
exchanges must be at least $250 per month. In addition, the value of the
account in the acquired Fund must equal or exceed the acquired Fund's minimum
initial investment requirement. The names, addresses and taxpayer
identification number for the shareowner accounts of the exchanged and
acquired Funds must be identical. You should consider the investment
objective, policies, risks and expenses of the acquired Fund, as described in
such Fund's prospectus, before establishing an automatic exchange into that
Fund.
CAN I REINVEST DIVIDENDS FROM ONE COMMERCE FUND IN ANOTHER?
YOU MAY ELECT TO HAVE YOUR DIVIDENDS, CAPITAL GAIN DISTRIBUTIONS, OR BOTH
RECEIVED FROM A NON-RETIREMENT FUND ACCOUNT AUTOMATICALLY INVESTED IN
ADDITIONAL SHARES OF ANY OTHER INVESTMENT PORTFOLIO OF THE COMMERCE FUNDS IN
WHICH YOU CURRENTLY MAINTAIN AN OPEN NON-RETIREMENT ACCOUNT. To participate in
this program check the appropriate box and supply the necessary information on
the account application or in a subsequent written request.
Dividend reinvestments will be made at a price equal to the net asset value
of the purchased shares next determined after receipt of the distribution
proceeds by the Transfer Agent.
The distribution must exceed $50 in order to use this feature. You should
consider carefully the investment objective, policies and applicable fees of
the acquired Fund before using this feature.
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HOW DO I OBTAIN OTHER INFORMATION ABOUT MY ACCOUNT?
Contact The Commerce Funds Shareowner Services or your investment
representative for account information such as current balance, account
transactions, distributions, and other applicable information. Share prices of
each Fund will be listed in the mutual funds pricing section of most daily
newspapers under The Commerce Funds.
CAN I MAKE TRANSACTIONS BY TELEPHONE?
YOU MAY AUTHORIZE ELECTRONIC TRANSFERS OF MONEY TO MAKE ADDITIONAL
INVESTMENTS IN OR REDEEM SHARES FROM AN ESTABLISHED ACCOUNT IF THIS FEATURE
WAS SELECTED ON THE ACCOUNT APPLICATION OR IN A SUBSEQUENT WRITTEN REQUEST.
THE SERVICE MAY BE USED LIKE AN "ELECTRONIC CHECK" TO MOVE MONEY TO OR FROM
YOUR CHECKING OR MONEY MARKET ACCOUNT AND YOUR FUND ACCOUNT BY CALLING THE
COMMERCE FUNDS SHAREOWNER SERVICES AT THE TELEPHONE NUMBER SET FORTH IN "HOW
CAN I CONTACT THE COMMERCE FUNDS?" ON PAGE 29.
Telephone purchases will be effected at the public offering price next
determined after the Transfer Agent receives payment for the transaction.
Proceeds from sales of shares will be deposited into your Commerce checking or
money market account generally two business days after the redemption request
is received. You may also request receipt of your redemption proceeds by
check, which will only be sent to the registered owner of your account and
only to the address of record. If you should experience difficulty in
redeeming shares by telephone (i.e., because of unusual market activity), you
are urged to consider redeeming your shares by mail or in person.
You should note that the Transfer Agent may act upon a telephone purchase or
redemption request from any person representing himself or herself to be you
and reasonably believed by the Transfer Agent to be genuine. Neither The
Commerce Funds nor any of its service contractors will be liable for any loss
or expense in acting upon telephone instructions that are reasonably believed
to be genuine. In attempting to confirm that telephone instructions are
genuine, The Commerce Funds will use such procedures as are considered
reasonable, including recording those instructions and requesting information
as to account registration (such as the name in which the account is
registered, the account number, recent transactions in the account, or the
account holder's tax identification number, address or bank). To the extent
that The Commerce Funds fails to use reasonable procedures as a basis for its
belief, it and/or its service contractors may be liable for instructions that
prove to be fraudulent or unauthorized.
The Commerce Funds may modify this feature at any time or charge a service
fee upon notice to shareowners. No such fee is currently contemplated.
CAN I ARRANGE AUTOMATIC WITHDRAWALS?
IF YOU ARE A SHAREOWNER WITH AN ACCOUNT VALUED AT $5,000 OR MORE, YOU MAY
WITHDRAW AMOUNTS IN MULTIPLES OF $100 OR MORE FROM YOUR ACCOUNT ON A MONTHLY,
QUARTERLY, SEMI-ANNUAL OR ANNUAL BASIS THROUGH THE AUTOMATIC WITHDRAWAL
FEATURE.
At your option, monthly withdrawals may be made on either the first or
fifteenth day of the month and quarterly, semiannual and annual withdrawals
will be made on either the first or fifteenth day of the month(s) selected. To
participate in this feature, check the appropriate box and supply the
necessary information on the account application or in a subsequent written
request. Purchases of additional shares concurrently with withdrawals are
ordinarily not advantageous because of the sales charge imposed on the Funds.
This feature may be suspended should the value of your account fall below
$500.
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THE BUSINESS OF THE COMMERCE FUNDS
BOARD OF TRUSTEES
The business affairs of The Commerce Funds are managed under the general
supervision of the Board of Trustees. Information about the Trustees and
officers of The Commerce Funds is included in the Statement of Additional
Information.
SERVICE PROVIDERS
----------------
INVESTMENT ADVISOR
COMMERCE BANK, N.A. (ST. LOUIS) AND
COMMERCE BANK, N.A. (KANSAS CITY)
(THE "ADVISOR")
Commerce Bank, N.A. (St. Louis) and Commerce Bank, N.A. (Kansas City) serve
as Advisor for the Funds, selecting investments and making purchases and sale
orders for securities in each Fund's portfolio.
SUB-ADVISOR
ROWE PRICE-FLEMING INTERNATIONAL, INC.
("PRICE-FLEMING" OR THE "SUB-ADVISOR")
Price-Fleming serves as Sub-Advisor to the International Equity Fund. Price-
Fleming's U.S. office is located at 100 East Pratt Street, Baltimore, Maryland
21202.
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.
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
(THE "TRANSFER AGENT")
State Street Bank and Trust Company ("State Street Bank") has delegated its
responsibilities as Transfer Agent to its indirect subsidiary, National
Financial Data Services, Inc. ("NFDS"), which maintains the account records of
all shareowners in the Funds and administers the distribution of income earned
as a result of investing in the Funds. State Street Bank 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 Bank and Trust Company also serves as the Custodian of each of
the Funds.
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MORE ABOUT THE ADVISOR
Commerce Bank, N.A. (St. Louis) and Commerce Bank, N.A. (Kansas City), each
a subsidiary of Commerce Bancshares, Inc., a registered multi-bank holding
company, serve as the investment advisor to each Fund. Commerce Bank, N.A.
(St. Louis) is located at 8000 Forsyth Boulevard, St. Louis, Missouri 63105
and Commerce Bank, N.A. (Kansas City) is located at 922 Walnut Street, Kansas
City, Missouri 64106. Although neither Commerce Bank, N.A. (St. Louis) nor
Commerce Bank, N.A. (Kansas City) has previously served as investment advisor
to a registered investment company, each (or its predecessor organizations)
has provided investment management services to private and public pension
funds, endowments and foundations since 1946 and to individuals since 1906. As
of December 31, 1995, the Advisor provided investment management and advisory
services for assets aggregating approximately $4.2 billion. As of the same
date, Commerce Bank, N.A. (St. Louis), Commerce Bank, N.A. (Kansas City) and
their affiliates had in the aggregate $5.3 billion in assets under management.
In the Advisory Agreement with The Commerce Funds, the Advisor has agreed to
manage each Fund's investments and to be responsible for, place orders for,
and make decisions with respect to, all purchases and sales of each Fund's
securities. For the advisory services provided and expenses assumed under the
Advisory Agreement, the Advisor is entitled to receive a fee at the annual
rate of 0.50% of the average daily net assets of the Short-Term Government and
Bond Funds, 1.00% of the average daily net assets of the Balanced Fund, 0.75%
of the average daily net assets of the Growth Fund and Aggressive Growth
Funds, and 1.50% of the average daily net assets of the International Equity
Fund. The Advisor may agree to voluntarily waive its fees in whole or in part
with respect to any particular Fund. The Advisor has voluntarily agreed to
waive a portion of the investment advisory fees otherwise payable by the
Short-Term Government and Balanced ^ Funds during the current fiscal year so
that the advisory fees payable by such Funds will not exceed 0.30% and 0.75%
of the average daily net assets of each respective Fund. The Advisor has
voluntarily agreed to waive a portion of the investment advisory fees
otherwise payable by the International Equity Fund during the current fiscal
year so that advisory fees payable by the Fund will not exceed an annual rate
of 0.90% of the first $20 million of average daily net assets, 0.75% of the
next $30 million of average daily net assets and 0.65% of average daily net
assets over $50 million. For the period December 12, 1994 (commencement of
operations) through October 31, 1995, the Advisor received advisory fees
(after fee waivers) at the effective annual rates of 0.30%, 0.50%, 0.75%,
0.75%, 0.75%, and 0.90% of the average daily net assets of the Short-Term
Government Fund, Bond Fund, Balanced Fund, Growth Fund, Aggressive Growth Fund
and International Equity Fund, respectively. Although the advisory fee rates
payable by the Balanced, Growth, Aggressive Growth and International Equity
Funds are higher than the rates payable by most mutual funds, the Board of
Trustees believes they are comparable in light of the services received to the
rates payable by other balanced, equity and international equity funds.
Scott M. Colbert, CFA and Vice President, is the person primarily
responsible for the day-to-day management of the Short-Term Government and
Bond Funds. Mr. Colbert joined the Investment Management Group of Commerce
Bank, N.A. (St. Louis) in 1993. He served as a portfolio manager for Armco
Investment Management, Inc. from 1987-1993, managing fixed-income investments
for employee benefit, insurance and endowment funds.
Joseph C. Williams III, CFA and Vice President, is the person primarily
responsible for the day-to-day management of the Growth Fund's investments.
Mr. Williams joined Commerce Bank, N.A. (Kansas City) in 1975 and became a
member of its Investment Management Group in 1977.
Joseph C. Williams III and Scott M. Colbert are the persons primarily
responsible for the day-to-day management of the equity and fixed-income
portions, respectively, of the Balanced Fund's investments.
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Paul D. Cox, CFA, CIC and Vice President, is the person primarily
responsible for the day-to-day management of the Aggressive Growth Fund. Mr.
Cox joined the Investment Management Group of Commerce Bank, N.A. (St. Louis)
in 1989. Mr. Cox came to Commerce Bank from Robert Murray Partners, Inc. where
he was a securities analyst and portfolio manager.
The Advisory Agreement authorizes the Advisor to engage a sub-advisor to
assist it in the performance of its services. Pursuant to such authorization,
the Advisor has appointed Rowe Price-Fleming International, Inc. as Sub-
Advisor to the International Equity Fund.
MORE ABOUT ROWE PRICE-FLEMING INTERNATIONAL, INC.
Price-Fleming, as sub-advisor, manages the investment assets of the
International Equity Fund. Price-Fleming was incorporated in Maryland in 1979
as a joint venture between T. Rowe Price Associates, Inc. ("T. Rowe Price")
and Robert Fleming Holdings Limited ("Flemings").
T. Rowe Price was incorporated in Maryland in 1947 as successor of the
investment counseling business founded by the late Thomas Rowe Price, Jr. in
1937. Flemings was incorporated in 1974 in the United Kingdom as successor to
the business founded by Robert Fleming in 1873. Flemings is a diversified
investment organization which participates in a global network of regional
investment offices in New York, London, Zurich, Geneva, Tokyo, Hong Kong,
Manila, Kuala Lumpur, South Korea, and Taiwan. As of December 31, 1995, T.
Rowe Price and its affiliates managed more than $75.4 billion of assets and
Flemings managed the U.S. equivalent of approximately $22.2 billion of assets.
The common stock of Price-Fleming is 50% owned by a wholly-owned subsidiary
of T. Rowe Price, 25% by a subsidiary of Flemings and 25% by Jardine Fleming
Group Limited ("Jardine Fleming"). (Half of Jardine Fleming is owned by
Flemings and half by Jardine Matheson Holdings Limited.) T. Rowe Price has the
right to elect a majority of the Board of Directors of Price-Fleming, and
Flemings has the right to elect the remaining directors, one of whom will be
nominated by Jardine Fleming.
The International Equity Fund is managed by an investment advisory group
that has day-to-day responsibility for managing the International Equity Fund
and developing and executing the Fund's investment program. The Fund's
advisory group is composed of the following members: Martin G. Wade,
Christopher D. Alderson, Peter B. Askew, Richard J. Bruce, Mark J. T. Edwards,
John R. Ford, Robert C. Howe, James B. M. Seddon, Benedict R. F. Thomas and
David J. L. Warren.
Martin Wade joined Price-Fleming in 1979 and has 27 years of experience with
Fleming Group (Fleming Group includes Flemings and/or Jardine Fleming) in
research, client service and investment management. Peter Askew joined Price-
Fleming in 1988 and has 21 years of experience managing multicurrency fixed
income portfolios.
Christopher Alderson joined Price-Fleming in 1988 and has nine years of
experience with the Fleming Group in research and portfolio management.
Richard Bruce joined Price-Fleming in 1991 and has seven years of experience
in investment management with the Fleming Group in Tokyo. Mark Edwards joined
Price-Fleming in 1986 and has 15 years of experience in financial analysis.
John Ford joined Price-Fleming in 1982 and has 16 years of experience with
Fleming Group in research and portfolio management. Robert Howe joined Price-
Fleming in 1986 and has 16 years of experience in economic research, company
research and portfolio management. James Seddon joined Price-Fleming in 1987
and has eight years of experience in investment management. Benedict Thomas
joined Price-Fleming in 1988 and has seven years of portfolio management
experience. David Warren joined Price-Fleming in 1984 and has 16 years of
experience in equity research, fixed income research and portfolio management.
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The Board of Trustees of The Commerce Funds has authorized Price-Fleming to
utilize affiliates of Flemings and Jardine Fleming in the capacity of broker
in connection with the execution of the Fund's portfolio transactions if
Price-Fleming believes that doing so would result in an economic advantage (in
the form of lower execution costs or otherwise) being obtained by the Fund.
For the services provided and expenses assumed under the Sub-Advisory
Agreement, the Advisor will pay the Sub-Advisor a monthly management fee at an
annual rate of 0.75% of the first $20 million of 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. For the period December 12,
1994 (commencement of operations) through October 31, 1995, Price-Fleming
received advisory fees at the effective annual rate of 0.75% of the
International Equity Fund's average daily net assets.
MORE ABOUT THE ADMINISTRATOR
Goldman Sachs Asset Management is the Administrator for the Funds. GSAM is a
separate operating division of Goldman, Sachs & Co., the Distributor of the
Funds. Under the Administration Agreement with The Commerce Funds, GSAM
administers the business affairs of The Commerce Funds, subject to the
supervision of the Board of Trustees, and in connection therewith, furnishes
The Commerce Funds with office facilities and is responsible for ordinary
clerical, recordkeeping and bookkeeping services required to be maintained by
The Commerce Funds (excluding those maintained by The Commerce Funds'
Custodian, Transfer Agent, Advisor and any Sub-Advisor), preparation and
filing of documents required to comply with federal and state securities laws,
supervising the activities of the Custodian and Transfer Agent, providing
assistance in connection with meetings of the Board of Trustees and
shareowners and other administrative services necessary to conduct the
business of The Commerce Funds. For these services and facilities, GSAM is
entitled to receive a monthly fee from each Fund at an annual rate of 0.15% of
its average daily net assets. For the period December 12, 1994 (commencement
of operations) through October 31, 1995, GSAM received administration fees at
the annual rate of 0.15% of the average daily net assets of each Fund.
SERVICE ORGANIZATIONS
Pursuant to a Shareholder Administrative Services Plan ("Services Plan")
adopted by its Board of Trustees, The Commerce Funds may enter into agreements
("Servicing Agreements") with service organizations such as banks and
financial institutions, which may include the Advisor and its affiliates
("Service Organizations"), under which they will render shareowner
administrative support services for their customers who beneficially own
shares. Such services, which are described more fully in the Statement of
Additional information, may include processing purchase and redemption
requests from customers, placing net purchase and redemption orders with the
Distributor, processing, among other things, distribution payments from The
Commerce Funds, providing necessary personnel and facilities to establish and
maintain customer accounts and records and providing information periodically
to customers showing their positions in Fund shares.
For these services, the Service Organizations will be entitled to receive
fees from a Fund at an annual rate of up to 0.25% of the average daily net
asset value of Fund shares held by such Service Organizations for the benefit
of their customers. The Service Organizations are required to provide their
customers with a schedule of any credits, fees or other conditions that may be
applicable to the investment of customer assets in Fund shares.
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Conflict of interest restrictions may apply to the receipt of compensation
paid by The Commerce Funds to a Service Organization in connection with the
investment of fiduciary funds in Fund shares. Banks and other institutions
regulated by the Comptroller of the Currency or other federal or state bank
regulatory agencies, and investment advisers and other money managers subject
to the jurisdiction of the SEC, the Department of Labor or state securities
commissions, are urged to consult legal counsel before entering into
Shareowner Servicing Agreements.
EXPENSES
Except as noted in this Prospectus and the Statement of Additional
Information, the Funds' service providers bear all expenses in connection with
the performance of their services and the Funds bear the expense incurred in
their operations.
As stated in the "Summary of Expenses," the Advisor intends to voluntarily
waive a portion of the advisory fees and/or reimburse expenses for the Short-
Term Government, Bond, Balanced, Growth and International Equity Funds during
the current fiscal year. The result of such fee waivers and expense
reimbursements, which may be reduced or discontinued at any time, will be to
increase the performance of such Funds during the periods for which they are
made.
TAX INFORMATION
AS WITH ANY INVESTMENT YOU SHOULD CONSIDER THE TAX IMPLICATIONS OF AN
INVESTMENT IN A FUND. YOU
SHOULD CONSULT YOUR TAX ADVISOR WITH SPECIFIC REFERENCE TO YOUR OWN TAX
SITUATION.
The following is only a short summary of the important tax considerations
generally affecting the Funds and their shareowners. Each Fund will send
written notices to shareowners annually regarding the tax status of
distributions made by the Fund. You should save your regular account
statements because they contain information you will need to calculate your
capital gains or losses upon your sale or exchange of shares in a Fund.
Federal Taxes. Each Fund intends to qualify as a "regulated investment
company" under the Internal Revenue Code (the "Code"), with the result that to
the extent a Fund's earnings are distributed to shareowners as required by the
Code, the Fund itself generally is not required to pay federal income taxes.
To satisfy various requirements in the Code, each Fund expects to distribute
virtually all its net income each year. Dividends derived from Fund income
other than net capital gains (the excess, if any, of net long-term capital
gains over net short-term capital losses) will be taxable to you as ordinary
income, whether the dividends are paid in cash or reinvested in Fund shares.
Dividends derived from Fund net capital gains ("capital gain dividends")
will be taxable to you as a long-term capital gain regardless of how long you
hold Fund shares, whether such gains were recognized by the Fund before you
acquired shares of the Fund, and whether the dividends are paid in cash or
reinvested in Fund shares.
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If you are considering buying shares of a Fund on or just before the record
date of a dividend, you should be aware that the amount of the forthcoming
dividend payment, although in effect a return of capital, will be taxable to
you.
Any dividends declared in October, November or December with a record date
before the end of the year will be deemed for tax purposes to have been paid
by the Fund and received by you in that year, so long as the dividends are
actually paid on or before January 31 of the following year.
You will recognize a taxable capital gain or loss when redeeming or
exchanging your shares (or in using the Automatic Withdrawal feature to direct
reinvestments), to the extent of any difference between the price at which the
shares are sold or exchanged and the price or prices at which the shares were
originally purchased for cash or under the dividend reinvestment plan. If you
hold shares for six months or less and during that time receive a capital gain
dividend on those shares, any loss realized on the sale or exchange of those
shares will be treated as a long-term capital loss to the extent of the
capital gain dividend.
Dividends and certain interest income earned by the International Equity
Fund from foreign securities may be subject to foreign withholding taxes or
other income taxes. The International Equity Fund may elect, for U.S. federal
income tax purposes, to treat certain foreign taxes paid by it as paid by its
shareowners. Should the Fund make that election, a pro rata portion of such
foreign taxes paid by the Fund will constitute income to you (in addition to
taxable dividends actually received by you), and you may be entitled to claim
an offsetting tax credit or itemized deduction for that amount of foreign
taxes.
Each Fund will be required in certain cases to withhold and remit to the
U.S. Treasury 31% of the dividends paid to any investor (i) who has provided
an incorrect Social Security Number or Taxpayer Identification Number or no
number at all, (ii) who is subject to withholding by the Internal Revenue
Service for failure to properly include on his return payments of interest or
dividends, or (iii) who has failed to certify to the Fund, when required to do
so, that he is not subject to backup withholding or that he is an "exempt
recipient."
Other State and Local Taxes. You should consult your tax advisor regarding
state and local tax consequences which may differ from the federal tax
consequences described above.
HOW PERFORMANCE IS MEASURED
A FUND'S PERFORMANCE MAY BE QUOTED IN TERMS OF AVERAGE ANNUAL TOTAL RETURN,
AGGREGATE TOTAL RETURN AND YIELD AS DISCUSSED BELOW. PERFORMANCE INFORMATION
IS
HISTORICAL AND IS NOT INTENDED TO INDICATE FUTURE RESULTS.
From time to time, each Fund's total return, aggregate total return and
yield may be quoted in advertisements. The performance of each Fund may be
compared to those of other mutual funds with similar investment objectives and
to stock, bond and other relevant indices or to rankings prepared by
independent services or other financial or industry publications that monitor
the performance of mutual funds. For example, the performance of a Fund may be
compared to data prepared by Lipper Analytical Services, Inc., Mutual Fund
Forecaster, Wiesenberger Investment Companies Services, Morningstar or CDA
Investment Technologies, Inc., as well as to indices such as the Dow Jones
Industrial Average, various indices of Standard & Poor's, Lipper, Merrill
Lynch, Salomon Brothers, Lehman Brothers, Wilshire, Morgan Stanley and the
Consumer Price Index. Performance data as reported in national financial
publications such as Money Magazine, Forbes, Barron's, Morningstar, The Wall
Street Journal and The New York Times, or in publications of a local or
regional nature, may also be used in comparing the performance of a Fund.
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Performance is based on historical earnings and is not intended to indicate
future performance. The investment return and principal value of an investment
in a Fund will fluctuate so that shares, when redeemed, may be worth more or
less than their original cost. Performance data may not provide a basis for
comparison with bank deposits and other investments which provide a fixed
yield for a stated period of time. Changes in the net asset value should be
considered in ascertaining the total return to shareowners for a given period.
Total return data should also be considered in light of the risks associated
with a Fund's composition, quality, operating expenses and market conditions.
Any fees charged by The Commerce Funds directly to its customers in connection
with investments in the Funds will not be included in the Funds' calculations
of performance data. The methods used to compute the Fund's yield and total
return are described in more detail in the Statement of Additional
information.
The Funds calculate their total return on an "average annual total return"
basis for various periods from the date a Fund commences investment operations
and for other periods as permitted under SEC rules. Average annual total
return reflects the average annual percentage change in value of an investment
over the measuring period. Total return may also be calculated on an aggregate
total return basis for various periods. Aggregate total return reflects the
total percentage change in value over the measuring period. Both methods of
calculating total return reflect the sales charge imposed by the Funds and
changes in the price of a Fund's shares and assume that dividend and capital
gain distributions are reinvested. When considering average total return
figures for periods longer than one year, you should note that the annual
total return for any one year may be more or less than the average for the
entire period. A Fund may also advertise its total return on an aggregate,
year-by-year or other basis for various specified periods through charts,
graphs, schedules or quotations. The Funds may also advertise quotations of
total return that do not reflect the sales charge imposed on the purchase of
Fund shares. Quotations which do not reflect sales charges will, of course, be
higher than quotations which do reflect sales charges.
The yield of the Short-Term Government and Bond Funds are computed based on
the Fund's net income during a specified 30-day ^ period. More specifically, a
Fund's yield is computed by dividing its per share net income during the
relevant period by the per share maximum public offering price on the last day
of the period and annualizing the result on a semiannual basis.
OTHER INFORMATION
THE COMMERCE FUNDS IS A DELAWARE BUSINESS TRUST
THAT WAS ORGANIZED ON FEBRUARY 7, 1994.
ABOUT THE COMMERCE FUNDS
THE COMMERCE FUNDS' TRUST INSTRUMENT AUTHORIZES THE BOARD OF TRUSTEES TO
ISSUE AN UNLIMITED NUMBER OF FULL AND FRACTIONAL SHARES OF BENEFICIAL
INTEREST, WITHOUT PAR VALUE, OF ONE OR MORE SERIES OF SHARES (OR CLASSES
THEREOF) REPRESENTING INTERESTS IN EIGHT DIFFERENT FUNDS AND SUCH OTHER FUNDS
AS THE TRUSTEES MAY FROM TIME TO TIME CREATE AND ESTABLISH. IN ADDITION TO THE
FUNDS DESCRIBED HEREIN, THE TRUST OFFERS THE FOLLOWING INVESTMENT PORTFOLIOS:
THE COMMERCE NATIONAL TAX-FREE BOND FUND AND MISSOURI TAX-FREE BOND FUND.
Fund shares have no preemptive rights and only such conversion and exchange
rights as the Board of Trustees may grant in its discretion. All shares issued
as described in this Prospectus will be fully paid and non-assessable.
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Each share of a series shall represent an equal beneficial interest in the
net assets of such series. Each holder of shares of a series shall be entitled
to receive distributions of income and capital gains, if any, which are made
with respect to such series and which are attributable to such shares. Upon
redemption of shares, such shareowner shall be paid solely out of the funds
and property of such series of The Commerce Funds.
VOTING RIGHTS
SHAREOWNERS ARE ENTITLED TO ONE VOTE FOR EACH FULL SHARE HELD AND FRACTIONAL
VOTES FOR FRACTIONAL SHARES HELD. Additionally, except when required by the
1940 Act or when the Board of Trustees has determined a matter effects the
interests of more than one series, all shares shall be voted separately by
individual series. The Board of Trustees may also determine that a matter
affects only the interests of one or more classes of a series in which case
any such matter shall be voted on by such class or classes.
The Commerce Funds does not presently intend to hold annual meetings of
shareowners to elect Trustees or for other business. Shareowner meetings will
be held when required by the 1940 Act or other applicable law.
Under certain circumstances, shareowners have the right to call a shareowner
meeting. Such meetings will be held when requested by the shareowners of 10%
or more of The Commerce Funds' outstanding shares of beneficial interest. The
Commerce Funds will assist in shareowner communications in such matters to the
extent required by law and The Commerce Funds' undertaking with the Securities
and Exchange Commission. Voting rights are not cumulative, and accordingly the
owners of more than 50% of the aggregate shares of The Commerce Funds may
elect all of the Trustees irrespective of the vote of the other shareowners.
As of February 8, 1996, the Advisor and their affiliates possessed, on
behalf of their underlying customer accounts, voting or investment power with
respect to 92%, 91%, 88%, 85%, 89% and 99% of the outstanding shares of Short-
Term Government, Bond, Balanced, Growth, Aggressive Growth and International
Equity Funds, respectively, and therefore may be deemed to be a controlling
person of The Commerce Funds for purposes of the 1940 Act.
As used in this Prospectus, a "vote of the holders of a majority of the
outstanding shares" of The Commerce Funds or of a particular Fund means, with
respect to the approval of an investment advisory agreement, a distribution
plan or a change in a fundamental investment policy, the affirmative vote of
the holders of the lesser of (a) more than 50% of the outstanding shares of
The Commerce Funds or such Fund, or (b) 67% or more of the shares of The
Commerce Funds or such Fund present at a meeting if more than 50% of the
outstanding shares of The Commerce Funds or such Fund are represented at a
meeting in person or by proxy.
SHAREOWNER REPORTS
Shareowners of record will be provided each year with a semi-annual report
showing each Fund's investments and other information as of April 30 and,
after the close of The Commerce Funds' fiscal year on October 31, with an
annual report containing audited financial statements.
49
<PAGE>
INQUIRIES
We welcome any inquiries you may have regarding The Commerce Funds. Please
consult your investment representative or call our toll-free service and
information number indicated on page 29.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS OR IN THE STATEMENT OF
ADDITIONAL INFORMATION IN CONNECTION WITH THE OFFERING MADE BY THIS PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMMERCE FUNDS OR THE DISTRIBUTOR. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE COMMERCE FUNDS OR BY THE
DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE
MADE.
50
<PAGE>
Not to be used for Individual Retirement Accounts-- For an IRA application,
call Shareowner Services at 1-800-305-2140 or call the Transfer Agent at 1-800-
995-6365
Account # ______________________________
Order # ________________________________
ACCOUNT APPLICATION FORM LOGO
- --------------------------------------------------------------------------------
THIS ACCOUNT The Commerce Funds c/o Shareowner Services P.O. Box
APPLICATION FORM 16931 St. Louis, MO 63105
SHOULD BE For additional information call 1-800-305-2140
FORWARDED PROMPTLY Date: ___________
TO:
- --------------------------------------------------------------------------------
1. ACCOUNT REGISTRATION
Please Print
INDIVIDUAL
--------------------------------------- ---------------
First NameInitialLast Name(Birthdate) SS# or Tax ID#
JOINT TENANTS
The account will be registered as "Joint Tenants with
Right of Survivorship" unless otherwise specified.
--------------------------------------- ---------------
First NameInitialLast Name(Birthdate) SS# or Tax ID#
--------------------------------------- ---------------
First NameInitialLast Name(Birthdate) SS# or Tax ID#
TRANSFER ON DEATH
----------------------- ----------- ---------------
NameDate of Birth SS#
GIFT TO MINORS
---------------------------------------------------------
Custodian's Name (Only one can be named)
--------------------------------------- ---------------
Minor's Name (Only one) SS#
Under the __ (State of Residence) Uniform Gift to
Minors Act
ADDITIONAL DOCUMENTATION
CORPORATION, TRUST, OR OTHER ENTITY
MAY BE REQUIRED --------------------------------------- ---------------
Name of Corporation, Trust or other Non-Person Entity
Tax ID#
---------------------------------------------------------
Attention
---------------------------------------------------------
Date of Trust Instrument:Name of Beneficiary (If to be
included in the registration)
---------------------------------------------------------
Name(s) of Trustee(s) (If to be included in the
registration)
- --------------------------------------------------------------------------------
( )
2. MAILING ADDRESS ----------------------------------- -------------------
Street Daytime Phone
---------------------------------------------------------
City State Zip Code
<PAGE>
- --------------------------------------------------------------------------------
3. TO PURCHASE SHARES Check appropriate boxes:
[_]Short Term $_______ [_]Aggressive $_______
$1000 MINIMUM PER Government Amount Growth Amount
FUND
#336 #339
[_]Bond $_______ [_International$_______]
Amount Equity Amount
#333
$_______ #340
[_]Balanced [_National]
Amount Tax-Free $_______
#338 Bond
[_]Growth $_______ Amount
Amount
#337 #334
[_Missouri]
Tax-Free $_______
Bond Amount
#335
[_]A check (payable to "The Commerce Funds") for $___ is
enclosed.
[_I/we]certify that I/we am/are an entity exempt from
the sales charge according to the "How To Buy Shares"
section in the Prospectus and I/we am/are, therefore,
entitled to purchase Fund shares at net asset value.
By checking this box, the undersigned agrees that
I/we will notify Commerce Funds Shareowner Services
at or prior to purchase if I/we am/are no longer in
one of the categories of eligible investors.
Reason for exemption ________________________________.
- --------------------------------------------------------------------------------
4. DIVIDEND AND See "Dividend and Distribution Policies" in the
DISTRIBUTION Prospectus
OPTIONS Choose how you wish to receive dividends. If no boxes
are checked, Option A will be assigned.
A. [_] Reinvest all dividends and capital gains.
B. [_] Receive dividends in cash and reinvest capital
gains (Complete cash dividend section below.)
C. [_] Receive all dividends and capital gains in cash
(Complete cash dividend section below.)
D. [_] All dividends and capital gains reinvested in
another Commerce Fund account. (See Prospectus
regarding limitations on this privilege.)
Fund Name _________________ Account Number ____________
Please send cash dividends to:
[_] Account registration address. [_Deposit]to bank
(attach voided
check/deposit
slip)
[_] Check to special payee as follows: (SIGNATURE
GUARANTEE required. See Section 13 of this Form.)
Name of Payee ________________ Account No. (if
applicable) __________
Street Address _________________________________________
City _____________________________ State ____ Zip ______
- --------------------------------------------------------------------------------
5. RIGHT OF ACCUMULATION
See "How To Buy Shares" in the Prospectus
Cumulative quantity discounts are applicable if a
shareowner's current value of existing shares of a Fund
alone or in combination with shares of any other Fund
described in the Prospectus on which a sales charge was
paid, total the requisite amount for receiving a
discount ($100,000 minimum) as described in the
accompanying Prospectus. Below are listed all the
accounts (account name, Fund and number) which should
be aggregated for a right of accumulation.
Name _____________ Name _____________ Name _____________
Fund _____________ Fund _____________ Fund _____________
Acct No. _________ Acct No. _________ Acct No. _________
- --------------------------------------------------------------------------------
6. LETTER OF INTENT See "How To Buy Shares" in the Prospectus
Although not obligated to do so, it is the
undersigned's intention to invest, over a 13-month
period from this date, in shares of a Fund alone or in
combination with shares of any other Fund, on which a
sales charge was paid, described in the Prospectus
which qualify for a quantity discount as described in
the accompanying Prospectus, in an amount that will
equal or exceed:
[_] $100,000 [_] $250,000 [_] $500,000 [_] $1,000,000
I/we agree to the Letter of Intent and Escrow Agreement
described in the accompanying Prospectus under "How to
Buy Shares--Letter of Intent" and incorporated by
reference herein.
<PAGE>
- --------------------------------------------------------------------------------
7. AUTOMATIC INVESTMENT PLAN (ATTACH VOIDED CHECK OR DEPOSIT SLIP)
See "What is Dollar Cost Averaging and How Can I
Implement It?" in the Prospectus
Beginning on the day of these months: J F M A M J J
A S O N D (circle all months that apply), I/We authorize
State Street Bank (the custodian for a Fund) to debit
the amount requested below from my/our bank account for
investment in a Fund. I/We understand that my/our
participation in the Automatic Investment Plan is
subject to the terms and conditions of such plan as
amended from time to time.
---------------------------------------------------------
Amount of each monthly investment (minimum $75/Quarter)
Name of Fund
---------------------------------------------------------
Amount of each monthly investment (minimum $75/Quarter)
Name of Fund
---------------------------------------------------------
Authorized Signature (as shown on bank records)
---------------------------------------------------------
Authorized Signature (if joint bank account both sign)
- --------------------------------------------------------------------------------
See "How To Buy Shares" or "How To Sell Shares" in the
Prospectus
8. FOR TELEPHONE
PURCHASE/REDEMPTION,
THIS SECTION MUST
BE COMPLETED
[_The]Commerce Funds and its agent is hereby authorized
to honor telephone, telegraphic, or other
instructions, without SIGNATURE GUARANTEE, from any
(ATTACH VOIDED person for the redemption of shares for the above
CHECK OR DEPOSIT account, without an obligation on behalf of The
SLIP) Commerce Funds or its agent, to verify that such
person is the shareowner of record or authorized to
give purchase/redemption instructions, provided
proceeds are sent by federal wire (minimum $1,000) or
electronic funds transfer to/from the bank account
indicated on your voided check or deposit slip or
mailed to the account registration address. Neither a
Fund nor its agent shall be liable for telephone
purchases or redemptions or for payments made to any
unauthorized account for instructions reasonably
believed to be genuine. The Commerce Funds will employ
reasonable procedures to confirm that such
instructions given are genuine.
- --------------------------------------------------------------------------------
See "Can I Exchange My Investment From One Commerce Fund
9. TELEPHONE EXCHANGE To Another?" in the Prospectus
Exchange Privilege (you will have this privilege unless
declined)
[_] I/We DO NOT wish to authorize telephone exchanges.
- --------------------------------------------------------------------------------
10. AUTOMATIC EXCHANGES
See "Can I Have Exchanges Made Automatically?" in the
Prospectus
The originating Fund's balance must be at least $1,000
after the exchange and the receiving Fund's minimum
investment must be met. Exchanges will take place each
month after such exchanges commence until terminated.
I/We hereby authorize automatic exchanges of $____ (exact
dollars--$250 minimum) into my/our identically
registered account:
Exchange __________________________________ (Name of
from Fund)
to __________________________________ (Name of
Account No. (if known) _____________________ Fund)
Please make exchanges on the day beginning the month
of .
------------------------- -------------------------
Bank Name Account Number
---------------------------------------------------------
Bank Street Address City State Zip
Code
------------------------- -------------------------
ABA Routing Number Name on Account
- --------------------------------------------------------------------------------
11. DUPLICATE MAILINGS[_Check]the box if you would like duplicate
confirmations/statements sent to another address:
-------------------------------------------------
Name
-------------------------------------------------
Street Address City State Zip
<PAGE>
- -------------------------------------------------------------------------------
Minimum account balance must be $5,000. Withdrawal
minimum is $100.^
12. AUTOMATIC WITHDRAWAL PLAN
Check One: [_] Monthly [_] Quarterly [_] Semi-
Annual [_] Annual
Please make payments via (check one) [_] check [_] ACH
(Bank must be ACH affiliated. Attach voided check).
Payments made via check are withdrawn from your account
on or about the 1st or 15th of a month for monthly
withdrawals or the 15th of the month for
quarterly/semi-annual/annual withdrawals. (I understand
that I may change the date of redemption, via ACH, or
the amount at any time in writing to the Fund at the
address stated above.)
If withdrawal payments are to be made via ACH (attach
voided check/deposit slip)
Please withdraw $ from my account on the
of the month.
Complete this section ONLY if check is to be made
payable to person(s) other than the registered owner.
SIGNATURE GUARANTEE required. (See Section 13 of this
Form.)
--------------------------------------------------------
Name of check recipient Address CityStateZip
- -------------------------------------------------------------------------------
13. TAXPAYER ID CERTIFICATION AND SIGNATUREAUTHORIZATION
1) The number shown on this Account Application Form is
my/our correct Taxpayer Identification number, and 2)
I/we am/are not subject to backup withholding because
(a) I/we am/are exempt from backup withholding, or (b)
I/we have not been notified by the Internal Revenue
Service (IRS) that I/we am/are subject to backup
withholding as a result of a failure to report all
interest or dividends, or (c) the IRS has notified
me/us that I/we am/are no longer subject to backup
withholding.
You must cross out item (2) above if you have been
notified by the IRS that you are currently subject to
federal backup withholding because of under reporting
interest or dividends on your federal tax return or if
you have not been notified by the IRS that you are no
longer subject to backup withholding.
I/we further certify that I/we am/are neither a citizen
nor a resident of the United States for the purpose of
the Internal Revenue Code. I/we am/are a resident of ___
NOTE: FAILURE TO COMPLETE THIS SECTION MAY RESULT IN
BACKUP WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO
YOU.
By checking only the appropriate box and signing below,
I/we certify under penalties of perjury that:
[_] I/we do not have a taxpayer identification
number, but I/we have applied for or intend to
apply for one. I/we understand that the required
31% withholding may apply before I/we provide such
number and certifications, which should be provided
within 60 days.
or [_] I/we am/are an exempt recipient.
or [_] I/we am/are neither a citizen nor a resident of
the United States for the purpose of the Internal
Revenue Code. I/we am/are a resident of ________ .
Permanent Foreign Address:______________________________
________________________________________________________
________________________________________________________
---------------------------------------------------------
SIGNATURE AUTHORIZATION
By the execution of this Account Application Form, the
undersigned represents and warrants that it has the
full right, power and authority to make the investment
applied for pursuant to this Form and is acting for
itself or in some fiduciary capacity in making such
investment.
THE UNDERSIGNED AFFIRMS THAT I/WE HAVE RECEIVED A
CURRENT PROSPECTUS FOR THE FUND AND HAS REVIEWED THE
SAME.
Sign Here:
--------------------------------------------------------
Signature Name (print) and Title
--------------------------------------------------------
Signature Name (print) and Title
SIGNATURE GUARANTEE REQUIRED ONLY IF A SPECIAL
PAYEE/ADDRESS IS DESIGNATED UNDER ITEM #'S 4 AND 12.
SEE "HOW TO SELL SHARES" IN THE PROSPECTUS.
--------------------------------------------------------
SIGNATURE GUARANTEE (IF REQUIRED)
SIGNATURE GUARANTEE
<PAGE>
- -------------------------------------------------------------------------------
14. FOR DEALER ONLY Investment dealer's signature is required for Automatic
Withdrawal Plan or Letter of Intent. If an Automatic
Withdrawal Plan is being opened, we believe that the
amount to be withdrawn is reasonable in light of the
investor's circumstances and we recommend establishment
of the account.
--------------------------------------------------------
Branch Office Location Branch Number/Branch Phone
--------------------------------------------------------
Reg. Rep. NumberReg. Rep.'s Name
--------------------------------------------------------
Authorized Signature State Zip
THE COMMERCE FUNDS DISCLOSURE STATEMENT (YOU MUST SIGN)
The account owner acknowledges that the account owner has read this disclosure
statement and has been told and understands that:
. shares of the Funds are not bank deposits or obligations of, or guaranteed,
endorsed or otherwise supported by Commerce Bank, N.A. (St. Louis), Commerce
Bank, N.A. (Kansas City), their parent company or its affiliates, or any
other bank
. are not federally insured or guaranteed by the U.S. Government, Federal
Deposit Insurance Corporation (FDIC), the Federal Reserve Board, or any
other government agency
. investment in the Funds involves investment risks, including possible loss
of the principal amount invested
. Commerce Bank, N.A. (St. Louis) and Commerce Bank, N.A. (Kansas City) serve
as the investment advisor to the Funds and receive compensation for such
services as disclosed in the current prospectus
. sales charges may apply.
Dated: _________________ --------------------------
Signature
--------------------------
Signature
<PAGE>
COMMERCE FUNDS(TM)
THE NATIONAL TAX-FREE BOND FUND
THE MISSOURI TAX-FREE BOND FUND
February 29, 1996
<PAGE>
HOW CAN I CONTACT THE COMMERCE FUNDS?
To authorize the special features described in this prospectus or to
obtain additional information about The Commerce Funds, you may:
. Write to The Commerce Funds at:
The Commerce Funds
P.O. Box 16931
St. Louis, MO 63105; or
. Call The Commerce Funds transfer agent directly at 1-800-995-6365; or
. Call The Commerce Funds Shareowner Services at 1-800-305-2140; or
. Contact a registered investment representative at selected Commerce
Bank branches.
. Contact your account administrator for specific information regarding
your Investment Management Group Account.
<PAGE>
THE COMMERCE FUNDS
The Commerce Funds is an open-end, management investment company registered
under the Investment Company Act of 1940 (the "1940 Act"). The Commerce Funds
currently consists of eight investment portfolios, each of which has a
separate pool of assets with separate investment objectives and policies.
However, only the National Tax-Free Bond and Missouri Tax-Free Bond Funds
(individually, a "Fund" and collectively, the "Funds") are offered by this
Prospectus. Under the 1940 Act, the National Tax-Free Bond Fund is classified
as a diversified investment portfolio and the Missouri Tax-Free Bond Fund is
classified as a non-diversified investment portfolio.
THE NATIONAL TAX-FREE BOND FUND seeks current income exempt from federal
income tax consistent with the preservation of capital. The Fund pursues this
objective through investment in a diversified portfolio of investment-grade
Municipal Obligations.
THE MISSOURI TAX-FREE BOND FUND seeks current income exempt from federal, and
to the extent possible, from Missouri income taxes, as is consistent with
preservation of capital. The Fund pursues this objective through investment
primarily in Missouri Obligations.
Commerce Bank, N.A. (St. Louis) and Commerce Bank, N.A. (Kansas City) serve
as investment advisors to the Funds (together, the "Advisor").
This Prospectus contains information you should know about the Funds before
you invest. Please read it carefully and keep it for your future reference. It
contains your Shareowner Guide and a description of shareowner features. A
Statement of Additional Information (dated February 29, 1996) contains
additional information about the Funds. The Statement of Additional
Information has been filed with the Securities and Exchange Commission and is
incorporated by reference into this Prospectus. The Statement of Additional
Information, as it may be amended from time to time, is available without
charge by writing to The Commerce Funds at P.O. Box 16931, St. Louis, MO 63105
or by calling 1-800-305-2140.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED,
ENDORSED OR OTHERWISE SUPPORTED BY, COMMERCE BANK, N.A. (ST. LOUIS), COMMERCE
BANK, N.A. (KANSAS CITY), THEIR PARENT OR AFFILIATES, AND THE SHARES ARE NOT
FEDERALLY INSURED OR GUARANTEED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENTAL
AGENCY. AN INVESTMENT IN THE FUNDS INVOLVES INVESTMENT RISKS, INCLUDING
POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
FEBRUARY 29, 1996
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SUMMARY OF EXPENSES........................................................ 3
FINANCIAL HIGHLIGHTS....................................................... 5
INVESTMENT OBJECTIVES AND POLICIES......................................... 6
National Tax-Free Bond Fund.............................................. 6
Missouri Tax-Free Bond Fund.............................................. 6
ADDITIONAL RISK CONSIDERATIONS............................................. 7
OTHER INVESTMENT PRACTICES................................................. 8
INVESTMENT RESTRICTIONS.................................................... 16
SHAREOWNER GUIDE........................................................... 17
HOW CAN I CONTACT THE COMMERCE FUNDS?.................................... 17
HOW TO BUY SHARES........................................................ 17
What Is The Minimum Investment For Each Fund?.......................... 17
How Are Shares Priced?................................................. 18
How Do I Buy Shares?................................................... 22
What Price Will I Receive When I Buy Shares?........................... 23
What Else Should I Know About Buying Shares?........................... 23
HOW TO SELL SHARES....................................................... 23
How Do I Sell My Shares?............................................... 23
How To Sell Shares..................................................... 24
What Price Will I Receive For Shares I Want To Sell?................... 25
How Quickly Can I Receive Proceeds From A Sale?........................ 25
What If I Want To Reinvest Sales Proceeds?............................. 26
DIVIDEND AND DISTRIBUTION POLICIES....................................... 26
SHAREOWNER FEATURES AND PRIVILEGES....................................... 27
Can I Make Regular Investments To A Fund Automatically?................ 27
What Is Dollar Cost Averaging And How Can I Implement It?.............. 27
Can I Exchange My Investment From One Commerce Fund To Another?........ 28
Can I Have Exchanges Made Automatically?............................... 29
Can I Reinvest Dividends From One Commerce Fund In Another?............ 29
How Do I Obtain Other Information About My Account?.................... 29
Can I Make Transactions By Telephone?.................................. 29
Can I Arrange Automatic Withdrawals?................................... 30
THE BUSINESS OF THE COMMERCE FUNDS......................................... 30
Board Of Trustees........................................................ 30
Service Providers........................................................ 31
Expenses................................................................. 33
TAX INFORMATION............................................................ 33
HOW PERFORMANCE IS MEASURED................................................ 35
OTHER INFORMATION.......................................................... 36
Voting Rights............................................................ 37
Shareowner Reports....................................................... 37
Inquiries................................................................ 37
ACCOUNT APPLICATION FORM
</TABLE>
2
<PAGE>
SUMMARY OF EXPENSES
Expenses are one of several factors to consider when investing in a Fund.
SHAREOWNER TRANSACTION EXPENSES are charges you pay when buying or selling
shares. ANNUAL FUND OPERATING EXPENSES are paid out of a Fund's assets and
include fees for portfolio management, maintenance of shareowner accounts,
general Fund administration, accounting, custody and other services. Examples
based on the summary are also shown.
<TABLE>
<CAPTION>
NATIONAL MISSOURI
TAX-FREE TAX-FREE
-------- --------
<S> <C> <C>
SHAREOWNER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases (as a percentage
of offering price)(1).................................... 3.50% 3.50%
Maximum Sales Charge Imposed on Reinvested Distributions.. None None
Deferred Sales Charge Imposed on Redemptions.............. None None
Redemption Fees........................................... None None
Exchange Fees(2).......................................... None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average daily net assets)
Management Fees (after fee waivers)(3).................... 0.50% 0.30%
12b-1 Fees................................................ None None
Other Expenses (after fee waivers and expense
reimbursements)(4)....................................... 0.35% 0.35%
----- -----
Total Fund Operating Expenses
(after fee waivers and expense reimbursements)(5)........ 0.85% 0.65%
===== =====
EXAMPLE: Assume a Fund's annual return is 5% and its
expenses are the same as those stated above. For every
$1,000 you invest, here's how much you would pay in total
expenses if you closed your account after the number of
years indicated, assuming deduction at the time of purchase
of the maximum applicable sales load and redemption at the
end of each time period.
One Year.................................................. $43 $41
Three Years............................................... $61 $55
Five Years................................................ $80 $70
Ten Years................................................. $136 $113
</TABLE>
- --------
(1) Certain investors may not be charged a sales charge. See "Shareowner
Guide--When There Is No Sales Charge."
(2) No charge is imposed on exchanges through the Automatic Exchange feature
or for up to five exchanges made within a twelve month period. Additional
exchanges may be subject to a $5.00 fee.
(3) Without fee waivers by the Advisor, "Management Fees" would have been
charged at the annual rate of 0.50% of the average daily net assets of the
Missouri Tax-Free Bond Fund. ^
(4) In addition to the advisory fee waiver referred to in note 3, during the
last fiscal year the Advisor voluntarily reimbursed expenses to the extent
necessary for the National Tax-Free Bond and Missouri Tax-Free Bond Funds
to maintain annual expense ratios of not more than 0.85% and 0.65%,
respectively, excluding interest, taxes and extraordinary expenses. The
Commerce Funds has adopted a Shareholder Administrative Services Plan
pursuant to which it may enter into agreements with institutions under
which they will render shareowner administrative support services for
their
3
<PAGE>
customers who beneficially own shares of the Funds in return for a fee of
up to 0.25% per annum of the value of such shares.
(5) Without such fee waivers and expense reimbursements, "Other Expenses"
would have been 1.40% and 1.62% and "Total Fund Operating Expenses" would
have been 1.90% and 2.12% of the average daily net assets of the National
Tax-Free Bond and Missouri Tax-Free Bond Funds, respectively.
The above expense information is provided to help you understand the
expenses you would pay either directly (i.e., transaction expenses) or
indirectly (i.e., annual operating expenses) as a shareowner in the Funds. The
information is based on the expenses incurred by the Funds during the last
fiscal year. In addition, Service Organizations may charge their clients
account fees for providing account services in connection with their clients'
investments in shares of The Commerce Funds. You should note that any fees
that are charged by The Commerce Funds' Advisor, their affiliates or any other
institutions directly to their customer accounts for services related to an
investment in the Funds are in addition to and not reflected in the fees and
expenses described above. If you purchase or redeem shares directly from The
Commerce Funds Shareowner Services or an account representative at a Commerce
Bank branch, you may avoid these fees by following the procedures described in
"How To Buy Shares" on page 17 of this Prospectus.
For more information about shareowner transaction expenses and The Commerce
Funds' operating expenses, see "Shareowner Guide" and "The Business of The
Commerce Funds."
- -------------------------------------------------------------------------------
THE EXAMPLES SHOWN ABOVE SHOULD NOT BE CONSIDERED REPRESENTATIONS OF FUTURE
INVESTMENT RETURN OR OPERATING EXPENSES. ACTUAL OPERATING EXPENSES AND
INVESTMENT RETURN MAY BE GREATER OR LESS THAN THOSE INDICATED. INFORMATION
ABOUT THE ACTUAL PERFORMANCE OF THE FUNDS IS CONTAINED IN THE COMMERCE FUNDS'
ANNUAL REPORT, WHICH MAY BE OBTAINED WITHOUT CHARGE BY CONTACTING THE COMMERCE
FUNDS AT THE ADDRESS OR TELEPHONE NUMBER INDICATED ON THE COVER OF THIS
PROSPECTUS.
- -------------------------------------------------------------------------------
4
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights presented below set forth certain information
concerning the investment results for shares of each Fund for the fiscal
period ended October 31, 1995. The information has been audited by KPMG Peat
Marwick LLP, independent accountants for the Funds, whose report thereon is
contained in The Commerce Funds' Annual Report. Such financial highlights
should be read in conjunction with the financial statements and notes thereto
contained in the Annual Report and incorporated by reference into the
Statement of Additional Information. Further information about the performance
of the Funds is available in the Annual Report. Both the Statement of
Additional Information and the Annual Report may be obtained free of charge by
contacting The Commerce Funds at the address or telephone number provided on
page 17 of this Prospectus.
FINANCIAL HIGHLIGHTS FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
INDICATED:
<TABLE>
<CAPTION>
NATIONAL TAX-FREE MISSOURI TAX-FREE
BOND FUND BOND FUND
-------------------- --------------------
FEBRUARY 21, 1995(1) FEBRUARY 21, 1995(1)
THROUGH THROUGH
OCTOBER 31, 1995 OCTOBER 31, 1995
-------------------- --------------------
<S> <C> <C>
Net Asset Value, Beginning of Period. $ 18.00 $18.00
------- ------
Income from Investment Operations:
Net investment income.............. 0.54 0.57
Net realized and unrealized gain on
investments(2).................... 0.54 0.40
------- ------
Total from investment operations... 1.08 0.97
------- ------
Less Distributions to Shareholders:
From net investment income(5)...... (0.54) (0.57)
------- ------
Total distributions................ (0.54) (0.57)
------- ------
Net Increase in Net Asset Value...... 0.54 0.40
Net Asset Value, End of Period....... $ 18.54 $18.40
======= ======
Total Return(3)...................... 6.06% 5.45%
======= ======
Ratios/Supplemental Data:
Net assets at end of period (000).. $10,721 $8,889
Ratio of net expenses to average
net assets(4)..................... 0.85% 0.65%
Ratio of net investment income to
average net assets(4)............. 4.19% 4.41%
Ratio of expenses to average net
assets without waivers and
reimbursements(4)................. 1.90% 2.12%
Ratio of net investment income to
average net assets without waivers
and reimbursements(4)............. 3.14% 2.94%
Portfolio turnover rate............ 19% 52%
</TABLE>
- --------
(1) Commencement of operations.
(2) Includes the balancing effect of calculating per share amounts.
(3) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no
sales charge. Total return would be reduced if a sales charge were taken
into account.
(4) Annualized.
(5) Includes taxable dividends of $0.05 and $0.06 for the National Tax-Free
Bond Fund and the Missouri Tax-Free Bond Fund, respectively.
5
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objective and policies of each of the Funds are described
below. There is no assurance that either Fund will achieve its investment
objective. Neither Fund, by itself, constitutes a complete investment program.
Additional information regarding the investment objective, policies and
restrictions of each Fund are described in the Statement of Additional
Information.
The investment objective of a Fund may not be changed without the
affirmative vote of the holders of at least a majority of the outstanding
shares of such Fund (as defined under "Other Information"). Except as noted
below under "Investment Limitations," a Fund's investment policies may be
changed without a vote of shareowners.
NATIONAL TAX-FREE BOND FUND
INVESTMENT OBJECTIVE
THE INVESTMENT OBJECTIVE OF THE NATIONAL TAX-FREE BOND FUND IS TO SEEK
CURRENT INCOME EXEMPT FROM FEDERAL INCOME TAX CONSISTENT WITH THE PRESERVATION
OF CAPITAL. THE FUND PURSUES THIS OBJECTIVE THROUGH INVESTMENT IN A
DIVERSIFIED PORTFOLIO OF INVESTMENT GRADE MUNICIPAL OBLIGATIONS (AS DEFINED
BELOW).
INVESTMENT STRATEGY
Substantially all of the Fund's assets will be invested in obligations
issued by or on behalf of the states, territories and possessions of the
United States, the District of Columbia and their respective authorities,
agencies, instrumentalities and political subdivisions, the interest on which,
in the opinion of bond counsel, is exempt from regular federal income taxes
("Municipal Obligations"). Dividends paid by the Fund which are derived from
interest attributable to Municipal Obligations will be exempt from regular
federal income taxes. As a matter of fundamental policy (except during
temporary defensive periods), at least 80% of the Fund's net assets will be
invested in Municipal Obligations, the interest on which is exempt from
regular federal income and federal alternative minimum tax. Although the Fund
has no restrictions as to the minimum or maximum maturity of any individual
security held by it, the average weighted effective portfolio maturity of the
Fund will be less than 15 years.
MISSOURI TAX-FREE BOND FUND
INVESTMENT OBJECTIVE
THE INVESTMENT OBJECTIVE OF THE MISSOURI TAX-FREE BOND FUND IS TO SEEK
CURRENT INCOME EXEMPT FROM FEDERAL AND, TO THE EXTENT POSSIBLE, FROM MISSOURI
INCOME TAXES, AS IS CONSISTENT WITH THE PRESERVATION OF CAPITAL. THE FUND
PURSUES THIS OBJECTIVE THROUGH INVESTMENT PRIMARILY IN INVESTMENT GRADE
MISSOURI OBLIGATIONS (AS DEFINED BELOW).
INVESTMENT STRATEGY
In pursuing its investment objective, the Fund normally will invest at least
65% of its total assets in Municipal Obligations issued by the State of
Missouri and its political subdivisions as well as certain other governmental
issuers including Puerto Rico, Guam and the Virgin Islands, the interest on
which, in the
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<PAGE>
opinion of bond counsel, is exempt from federal and Missouri income tax
("Missouri Obligations"). Dividends derived from interest on obligations of
other governmental issuers are exempt from federal income tax but may be
subject to Missouri income tax. As a matter of fundamental policy (except
during temporary defensive periods), at least 80% of the Fund's net assets
will be invested in Municipal Obligations, the interest on which is exempt
from regular federal income and federal alternative minimum tax. The Fund
seeks to maximize the proportion of its dividends that are exempt from both
federal and Missouri income tax and presently expects to invest substantially
all of its assets in Missouri Obligations. The Fund's average weighted
maturity will vary in light of current market and economic conditions, the
comparative yields on instruments with different maturities, and other
factors.
RISKS ASSOCIATED WITH AN INVESTMENT IN THE FUND
The Missouri Tax-Free Bond Fund's ability to achieve its investment
objective is dependent upon the ability of issuers of Municipal Obligations to
meet their continuing obligations for the payment of principal and interest.
There will be additional risks associated with investment in the Fund to the
extent it invests its assets predominantly in Missouri Obligations. The major
sectors of Missouri's economy include agriculture, manufacturing, trade,
government and services. More specifically, farming and defense-related
businesses have played an important role in the state's economy and have
yielded a large portion of the state's revenues. Increased urbanization and
the continued decline in defense appropriations by the U.S. Congress have had
and will continue to have an impact on the state.
The Missouri Constitution requires that the General Assembly appropriate the
annual principal and interest requirements for outstanding general obligation
bonds before any other appropriations are made. Such amounts must be
transferred from the General Revenue Fund to bond interest and sinking funds.
Authorization for these transfers, as well as the actual payments of principal
and interest, are provided in the first appropriation bill of each fiscal
year. In addition to general obligation bonds, the Missouri legislature has
established numerous entities as bodies corporate and politic which are
authorized to issue bonds to carry out their corporate purposes. Investors
should also be aware that certain provisions of and amendments to the Missouri
Constitution and other laws could result in certain adverse consequences
affecting Missouri Obligations. Some of the significant financial
considerations relating to the Fund's investments in Missouri Obligations are
summarized in the Statement of Additional Information.
As indicated previously, the Missouri Tax-Free Bond Fund is classified as
non-diversified under the 1940 Act. Investment return on a non-diversified
portfolio typically is dependent upon the performance of a smaller number of
securities relative to the number held in a diversified portfolio.
Consequently, the change in value of any one security may affect the overall
value of a non-diversified portfolio more than it would a diversified
portfolio. In addition, a non-diversified portfolio may be more susceptible to
economic, political and regulatory developments than a diversified investment
portfolio with similar objectives.
ADDITIONAL RISK CONSIDERATIONS
RISKS ASSOCIATED WITH FIXED INCOME SECURITIES
Generally, the market value of fixed income securities, such as Municipal
Obligations held by the Funds, can be expected to vary inversely to changes in
prevailing interest rates. In periods of declining interest rates, the yields
of investment portfolios composed primarily of fixed income securities will
tend
7
<PAGE>
to be higher than prevailing market rates and, in periods of rising interest
rates, yields will tend to be somewhat lower. 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. Debt
securities with longer maturities, which tend to produce higher yields, are
subject to potentially greater capital appreciation and depreciation than
obligations with shorter maturities. Changes in the financial strength of an
issuer or changes in the ratings of any particular security may also affect
the value of these investments. Fluctuations in the market value of fixed
income securities subsequent to their acquisition will not affect cash income
from such securities but will be reflected in a Fund's net asset value.
RISKS ASSOCIATED WITH MUNICIPAL OBLIGATIONS
When a Fund's assets are concentrated in obligations payable from revenues
of similar projects or issued by issuers located in the same state, or in
industrial development bonds, it will be subject to the particular risks
(including legal and economic conditions) relating to such securities to a
greater extent than if its assets were not so concentrated.
Payment on Municipal Obligations held by the Funds relating to certain
projects may be secured by mortgages or deeds of trust. In the event of a
default, enforcement of a mortgage or deed of trust will be subject to
statutory enforcement procedures and limitations on obtaining deficiency
judgments. Moreover, collection of the proceeds from that foreclosure may be
delayed and the amount of the proceeds received may not be enough to pay the
principal or accrued interest on the defaulted Municipal Obligations.
OTHER INVESTMENT PRACTICES
MUNICIPAL OBLIGATIONS
The two principal classifications of Municipal Obligations which may be held
by the Funds are "general obligation" securities and "revenue" securities.
General obligation securities are secured by the issuer's pledge of its full
faith, credit and taxing power for the payment of principal and interest.
Revenue securities are payable only from the revenues derived from a
particular facility or class of facilities or, in some cases, from the
proceeds of a special excise tax or other specific revenue source such as the
user of the facility being financed. Private activity bonds (e.g., bonds
issued by industrial development authorities) that are issued by or on behalf
of public authorities to finance various privately-operated facilities are
included within the term "Municipal Obligations" if the interest paid thereon
is exempt from regular federal income tax and not treated as a specific tax
preference item under the federal alternative minimum tax. Private activity
bonds are in most cases revenue securities and are not payable from the
unrestricted revenues of the issuer. The credit quality of such bonds is
usually directly related to the credit standing of the corporate user of the
facility involved.
Municipal Obligations may also include "moral obligation" securities, which
are normally issued by special purpose public authorities. If the issuer of
moral obligation securities is unable to meet its debt service obligations
from current revenues, it may draw on a reserve fund, the restoration of which
is a moral commitment but not a legal obligation of the state or municipality
which created the issuer.
8
<PAGE>
Certain of the Municipal Obligations held by the Funds may be insured as to
the timely payment of principal and interest. The insurance policies will
usually be obtained by the issuer of the Municipal Obligation at the time of
its original issuance. In the event that the issuer defaults on an interest or
principal payment, the insurer will be notified and will be required to make
payment to the bondholders. There is, however, no guarantee that the insurer
will meet its obligations. In addition, such insurance will not protect
against market fluctuations caused by changes in interest rates and other
factors. A Fund may, from time to time, invest more than 25% of its assets in
Municipal Obligations covered by insurance policies.
Each Fund may also purchase Municipal Obligations known as "certificates of
participation" which represent undivided proportional interests in lease
payments by a governmental or non-profit entity. The lease payments and other
rights under the lease provide for and secure the payments on the
certificates. Lease obligations may be limited by applicable municipal charter
provisions or the nature of the appropriation for the lease. In particular,
lease obligations may be subject to periodic appropriation. If the entity does
not appropriate funds for future lease payments, the entity cannot be
compelled to make such payments. Furthermore, a lease may or may not provide
that the certificate trustee can accelerate lease obligations upon default. If
the trustee could not accelerate lease obligations upon default, the trustee
would only be able to enforce lease payments as they became due. In the event
of a default or failure of appropriation, it is unlikely that the trustee
would be able to obtain an acceptable substitute source of payment.
Certificates of participation are generally subject to redemption by the
issuing municipal entity under specified circumstances. If a specified event
occurs, a certificate is callable at par either at any interest payment date
or, in some cases, at any time. As a result, certificates of participation are
not as liquid or marketable as other types of Municipal Obligations.
The Advisor, under the supervision of the Board of Trustees, will evaluate
the liquidity of a municipal lease obligation based on all relevant factors.
The Funds may purchase unrated municipal lease obligations. The Advisor, under
the Supervision of the Board of Trustees, will determine the credit quality of
such leases on an ongoing basis, including an assessment of the likelihood
that the underlying lease will be canceled.
Opinions relating to the validity of Municipal Obligations and to the
exemption of interest thereon from regular federal income tax are rendered by
bond counsel to the respective issuers at the time of issuance. Neither The
Commerce Funds nor the Advisor will review the proceedings relating to the
issuance of Municipal Obligations or the bases for such opinions.
VARIABLE AND FLOATING RATE INSTRUMENTS
Municipal Obligations and other instruments purchased by the Funds may
include variable and floating rate demand instruments issued by corporations,
industrial development authorities and governmental entities. Although
variable and floating rate demand instruments are frequently not rated by
credit rating agencies, unrated instruments purchased by a Fund will be
determined to be of comparable quality to rated instruments that may be
purchased by a Fund. While there may be no active secondary market with
respect to a particular variable or floating rate instrument purchased by a
Fund, a Fund may, from time to time as specified in the instrument, demand
payment in full of the principal of the instrument or may resell the
instrument to a third party. The absence of such an active secondary market,
however, could make it difficult for a Fund to dispose of a variable or
floating rate demand instrument if the issuer defaulted on its payment
obligations during periods that a Fund is not entitled to
9
<PAGE>
exercise its demand rights, and a Fund could, for these or other reasons,
suffer a loss. Variable and floating rate instruments with no active secondary
market and with notice/termination dates in excess of seven days will be
included in the calculation of a Fund's illiquid assets.
RATINGS OF SECURITIES
Municipal Obligations acquired by the Funds will be rated investment grade
at the time of purchase. For purposes of this investment policy, investment
grade obligations are those rated at the time of purchase AAA, AA, A or BBB by
Standard & Poor's Ratings Group ("S&P"), Aaa, Aa, A or Baa by Moody's
Investors Service, Inc. ("Moody's") or which are similarly rated by another
nationally recognized statistical rating organization ("NRSRO") (including
Fitch Investors Service, Inc., Duff & Phelps, Thomson BankWatch and IBCA) or
are unrated but deemed by the Advisor to be comparable in quality to
instruments that are so rated. Obligations rated BBB by S&P and Baa by
Moody's, or the equivalent rating by an NRSRO, are considered to have
speculative characteristics and are subject to greater credit and market risk
than securities rated in the top three investment grade categories. The Funds
do not intend to purchase obligations rated below investment grade. Subsequent
to its purchase by a Fund, a portfolio security may be downgraded below
investment grade or may be deemed by the Advisor to be no longer comparable to
investment grade securities. The Advisor will consider such an event in
determining whether the Fund should continue to hold the security. Each Fund
may also acquire tax-exempt commercial paper rated A-1 or higher by S&P or
Prime-1 or higher by Moody's or, when deemed advisable by the Advisor, issues
rated A-2 by S&P or Prime-2 by Moody's which the Advisor considers to be "high
quality," municipal notes rated SP-2 or higher by S&P or MIG-2 or higher by
Moody's and variable rate demand obligations rated VMIG-2 or higher by Moody's
or the equivalent rating of another NRSRO. Each Fund may invest up to 10% of
its assets in unrated obligations provided that such obligations are
determined by the Advisor to be comparable in quality to instruments that are
eligible for purchase by the Funds. See Appendix A to the Statement of
Additional Information for a description of applicable S&P and Moody's debt
obligation ratings.
TAXABLE INVESTMENTS
Each Fund may invest up to 20% of its net assets in Municipal Obligations
the interest on which is exempt from regular federal income tax but is an item
of tax preference for purposes of the federal alternative minimum tax. Each
Fund may also invest up to 20% of its net assets for temporary defensive
purposes in short-term taxable money market instruments as described below, in
securities issued by other investment companies which invest in taxable or
tax-exempt money market instruments and in U.S. Government Obligations (as
defined below under "U.S. Government Obligations"). Each Fund may also enter
into repurchase and reverse repurchase agreements and may lend portfolio
securities.
In addition, each Fund may hold uninvested cash reserves pending investment
during temporary defensive periods, or when, in the opinion of the Advisor,
suitable tax-exempt obligations are unavailable. There is no percentage
limitation on the amount of assets which may be held uninvested by the Funds.
Uninvested cash normally will not represent a significant portion of a Fund's
assets.
ZERO COUPON BONDS
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
10
<PAGE>
purchase zero coupon bonds only if the likely relative greater price
volatility of such zero coupon bonds is not inconsistent with the Fund's
investment objective. A Fund will accrue income on such investments for tax
and accounting purposes, as required, which is distributable to shareowners
and which, because no cash is received at the time of accrual, may require the
liquidation of other portfolio securities to satisfy the Fund's distribution
obligations. These actions may occur under disadvantageous circumstances and
may reduce a Fund's assets, thereby increasing its expense ratio and
decreasing its rate of return. Zero coupon bonds are subject to greater market
fluctuations from changing interest rates than debt obligations of comparable
maturities which make current distributions of interest.
INTEREST RATE SWAPS, MORTGAGE SWAPS, CAPS AND FLOORS
In order to hedge against fluctuations in interest rates, the Funds may
enter into interest rate swaps, mortgage swaps and other types of swap
agreements such as caps and floors. Interest rates swaps involve the exchange
by a Fund with another party of their respective commitments to pay or receive
interest, such as an exchange of fixed rate payments for floating rate
payments. Mortgage swaps are similar to interest rate swaps in that they
represent commitments to pay and receive interest. The notional principal
amount, however, is tied to a reference pool or pools of mortgages. In a
typical cap or floor agreement, one party agrees to make payments only under
specified circumstances, usually in return for payment of a fee by the other
party. For example, the buyer of an interest rate cap obtains the right to
receive payment to the extent that a specified interest rate exceeds an agreed
upon level, while the seller of an interest rate floor is obligated to make
payments to the extent that a specified interest rate falls below an agreed
upon level. Since interest rate swaps, mortgage swaps, caps and floors are
individually negotiated, a Fund expects to achieve an acceptable degree of
correlation between its portfolio investments and its swap, cap and floor
positions.
A Fund will enter into interest rate and mortgage swaps only on a net basis,
which means that the two payment streams are netted out, with the Fund
receiving or paying, as the case may be, only the net amount of the two
payments. A Fund will maintain cash, U.S. Government securities and liquid
high grade debt securities equal to the net amount, if any, of the excess of
the Fund's obligations over its entitlements with respect to swap transactions
in a segregated account with its custodian. Interest rate and mortgage swaps
do not involve the delivery of securities, or other underlying assets or
principal. Accordingly, the risk of loss with respect to interest rate and
mortgage swaps is limited to the net amount of interest payments that a Fund
is contractually obligated to make. If the other party to an interest rate or
mortgage swap defaults, a Fund's risk of loss consists of the net amount of
interest payments that the Fund is contractually entitled to receive. To the
extent that the net amount of an interest rate or mortgage swap is held in a
segregated account consisting of cash, U.S. Government securities and liquid,
high grade debt securities, the Funds and the Advisor believe that such swaps
will not constitute senior securities under the 1940 Act and, accordingly,
will not treat them as being subject to the Funds' borrowing restriction.
The use of interest rate swaps, mortgage swaps, caps and floors is a highly
specialized activity which involves investment techniques and risks different
from those associated with ordinary portfolio securities transactions. If the
Advisor is incorrect in its forecasts of market values and interest rates, the
investment performance of a Fund would be less favorable than it would have
been if these investment techniques were not used. The staff of the Securities
and Exchange Commission ("SEC") currently takes the position that swaps, caps
and floors are illiquid for purposes of a Fund's limitation on illiquid
securities.
11
<PAGE>
U.S. GOVERNMENT OBLIGATIONS
Each Fund may invest in obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities ("U.S. Government Obligations").
Examples of the types of 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.
MONEY MARKET INSTRUMENTS
The Funds may invest from time to time in "money market instruments," a term
that includes, among other things, bank obligations, commercial paper and
corporate bonds with remaining maturities of 397 days or less.
Bank obligations include bankers' acceptances, negotiable certificates of
deposit and non-negotiable time deposits, including U.S. dollar-denominated
instruments issued or supported by the credit of U.S. or foreign banks or
savings institutions. Bank obligations also include obligations of foreign
banks or foreign branches of U.S. banks. Although the Funds will invest in
obligations of foreign banks or foreign branches of U.S. banks only where the
Advisor deems the instrument to present minimal credit risks, such investments
nevertheless entail risks that are different from those of investments in
domestic obligations of U.S. banks due to differences in political, regulatory
and economic systems and conditions. All investments in bank obligations are
limited to the obligations of financial institutions having more than $1
billion in total assets at the time of purchase.
Investments by a Fund in taxable commercial paper will consist of issues
that are rated A-1 or better by S&P, Prime-1 by Moody's or the equivalent
rating of another NRSRO. Commercial paper may include variable and floating
rate instruments.
STAND-BY COMMITMENTS
Each Fund may acquire stand-by commitments under which a dealer agrees to
purchase certain Municipal Obligations at the Fund's option at a price equal
to amortized cost plus interest. These commitments will be used only to assist
in maintaining the liquidity of a Fund and not for trading purposes.
12
<PAGE>
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS
Each Fund may purchase securities on a "when-issued" basis and may purchase
or sell securities on a "forward commitment" basis. These transactions, which
involve a commitment by a Fund to purchase or sell particular securities with
payment and delivery taking place at a future date (perhaps one or two months
later), permit the Fund to lock in a price or yield on a security it intends
to purchase, regardless of future changes in interest rates. When-issued and
forward commitment transactions involve the risk, however, that the yield or
price obtained in a transaction may be less favorable than the yield (and
therefore the value of the security) available in the market when the
securities delivery takes place. A Fund's forward commitments and when-issued
purchases are not expected to exceed 25% of the value of its total assets
absent unusual market conditions. Because a Fund is required to set aside cash
or liquid high grade debt obligations to satisfy its purchase commitments, the
Fund's liquidity and ability to manage its portfolio might be affected during
periods in which its commitments exceed 25% of the value of its assets.
Neither Fund intends to engage in when-issued purchases and forward
commitments for speculative purposes.
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements under which it buys a
security and obtains a simultaneous commitment from the seller to repurchase
the security at a specified time and price. The seller must maintain with a
Fund's custodian collateral equal to at least 100% of the repurchase price
including accrued interest as monitored daily by the Advisor. If the seller
under the repurchase agreement defaults, a Fund may incur a loss if the value
of the collateral securing the repurchase agreement has declined and may incur
disposition costs in connection with liquidating the collateral. If bankruptcy
proceedings are commenced with respect to the seller, liquidation of the
collateral by a Fund may be delayed or limited.
REVERSE REPURCHASE AGREEMENTS
Each Fund may borrow money for temporary purposes by entering into
transactions called reverse repurchase agreements. Under these agreements a
Fund sells portfolio securities to financial institutions (such as banks and
broker-dealers) and agrees to buy them back later at an agreed upon time and
price. When a Fund enters into a reverse repurchase agreement, it places in a
separate custodial account liquid assets or other high grade debt securities
that have a value equal to or greater than the repurchase price. The account
is then continuously monitored by the Advisor to make sure that an appropriate
value is maintained. Reverse repurchase agreements involve the risk that the
value of portfolio securities a Fund relinquishes may decline below the price
the Fund must pay when the transaction closes. A Fund will only enter into
reverse repurchase agreements to avoid the need to sell portfolio securities
to meet redemption requests during unfavorable market conditions. As reverse
repurchase agreements are deemed to be borrowings by the SEC, each Fund is
required to maintain continuous asset coverage of 300%. Should the value of a
Fund's assets decline to below 300% of borrowings, a Fund may be required to
sell portfolio securities within three days to reduce the Fund's debt and
restore 300% asset coverage.
SECURITIES ISSUED BY OTHER INVESTMENT COMPANIES
Each Fund may invest in securities issued by other investment companies
which invest in high quality, short-term taxable or tax-exempt instruments and
which determine their net asset value per share on the amortized cost or
penny-rounding method. Such securities may be acquired by the Funds within
13
<PAGE>
the limits prescribed by the 1940 Act. Income derived by a Fund from the
acquisition of shares of another investment company which invests in taxable
instruments will be, when paid by the Fund as dividends to shareowners,
subject to federal income taxes. Each Fund currently intends to limit its
investments so that, as determined immediately after a purchase is made: (a)
not more than 5% of the value of its total assets will be invested in the
securities of any one investment company; (b) not more than 10% of the value
of its total assets will be invested in the aggregate in securities of
investment companies as a group; (c) not more than 3% of the outstanding
voting stock of any one investment company will be owned by a Fund; and (d)
not more than 10% of the outstanding voting stock of any one investment
company will be owned in the aggregate by a Fund and other investment
companies advised by the Advisor, or any affiliate of Commerce Bancshares,
Inc. As a shareowner of another investment company, a Fund would bear, along
with other shareowners, its pro rata portion of the expenses of such other
investment company, including advisory fees. These expenses would be in
addition to the advisory and other expenses that a Fund bears directly in
connection with its own operations and may represent a duplication of fees to
shareowners of a Fund.
ILLIQUID SECURITIES
Each Fund may invest up to 15% of the value of its net assets in illiquid
securities, including securities having legal or contractual restrictions on
resale or no readily available market (including repurchase agreements,
variable and floating rate instruments and time deposits with
notice/termination dates in excess of seven days, interest rate and currency
swaps and certain securities which are subject to trading restrictions because
they are not registered under the Securities Act of 1933 (the "1933 Act")).
If otherwise consistent with its investment objective and policies, each
Fund may purchase commercial paper issued pursuant to Section 4(2) of the 1933
Act and securities that are not registered under the 1933 Act but can be sold
to "qualified institutional buyers" in accordance with Rule 144A under the
1933 Act. These securities will not be considered illiquid so long as the
Advisor determines, under guidelines approved by the Board of Trustees, that
an adequate trading market exists. A Fund's investment in Rule 144A securities
could increase the level of illiquidity during any period that qualified
institutional buyers become uninterested in purchasing these securities. The
ability to sell to qualified institutional buyers under Rule 144A is a
relatively recent development and it is not possible to predict how this
market will develop.
SECURITIES LENDING
To increase return on portfolio securities, each Fund may lend its portfolio
securities to broker/dealers and other institutional investors pursuant to
agreements requiring that the loans be continuously secured by collateral
equal at all times in value to at least the market value of the securities
loaned. Such loans will not be made if, as a result, the aggregate of all
outstanding loans exceeds 33 1/3% of the value of the Fund's total assets.
There may be risks of delay in receiving additional collateral or in
recovering the securities loaned or even a loss of rights in the collateral
should the borrower of the securities fail financially. However, loans are
made only to borrowers deemed by the Advisor to be of good standing and when,
in its judgment, the income to be earned from the loan justifies the attendant
risks.
OPTIONS AND FUTURES CONTRACTS
Each Fund may purchase put and call options and may write covered call and
secured put options which will be listed on a national securities exchange and
issued by the Options Clearing Corporation.
14
<PAGE>
Such options may relate to particular securities or to various securities
indices. Each Fund may also invest in futures contracts and options on
futures, index futures contracts or interest rate futures contracts, as
applicable, for hedging purposes or to seek to increase total return. A Fund
may not purchase or sell futures contracts or options on futures contracts to
increase total return unless immediately after any such transaction the
aggregate amount of premiums paid for put options and the amount of margin
deposits on its existing futures positions do not exceed 5% of the total
assets of the Fund. Purchasing options is a specialized investment technique
that may entail the risk of a complete loss of the amounts paid as premiums to
the writer of the option.
Writing a covered call option means that a Fund owns or has the right to
acquire the underlying security subject to call at the stated exercise price
at all times during the option period. Writing a secured put option means that
a Fund maintains in a segregated account with its custodian cash or U.S.
Government securities in an amount not less than the exercise price of the
option at all times during the option period. In order to close out these
types of option positions, a Fund will be required to enter into a "closing
purchase transaction"--the purchase of a call or put option (depending upon
the position being closed out) on the same security with the same exercise
price and expiration date as the option that it previously wrote. The
aggregate value of securities subject to options written by a Fund will not
exceed 5% of its total assets.
By writing a covered call option, a Fund forgoes the opportunity to profit
from an increase in the market price of the underlying security above the
exercise price except insofar as the premium represents such a profit, and it
is not able to sell the underlying security until the option expires or is
exercised or the Fund effects a closing purchase transaction by purchasing an
option of the same series. If a Fund writes a secured put option, it assumes
the risk of loss should the market value of the underlying security decline
below the exercise price of the option. The use of covered call and secured
put options will not be a primary investment technique of either Fund, and
they are expected to be used infrequently. If the Advisor is incorrect in its
forecast for the underlying security or other factors when writing the
foregoing options, a Fund would be in a worse position than it would have been
had the foregoing investment techniques not been used.
In contrast to an option on a particular security, an option on an index
provides the holder with the right to make or receive a cash settlement upon
exercise of the option. The amount of this settlement will be equal to the
difference between the closing price of the index at the time of exercise and
the exercise price of the option expressed in dollars, times a specified
multiple.
To enter into a futures contract, a Fund must make a deposit of initial
margin with its custodian in a segregated account in the name of its futures
broker. Subsequent payments to or from the broker, called variation margin,
will be made on a daily basis as the price of the underlying security or index
fluctuates, making the long and short positions in the futures contracts more
or less valuable.
The risks related to the use of options and futures contracts include: (i)
the correlation between movements in the market price of the portfolio
investments (held or intended for purchase) being hedged and in the price of
the futures contract or option may be imperfect; (ii) possible lack of a
liquid secondary market for closing out options or futures positions; (iii)
the need for additional portfolio management skills and techniques; and (iv)
losses due to unanticipated market movements. Successful use of options and
futures by a Fund is subject to the Advisor's ability to correctly predict
movements in the direction of stock prices, interest rates and other economic
factors. For example, if a Fund uses futures contracts as a hedge against the
possibility of a decline in the market adversely affecting securities held by
it and
15
<PAGE>
securities prices increase instead, the Fund will lose part or all of the
benefit of the increased value of its securities which it has hedged because
it will have approximately equal offsetting losses in its futures positions.
The risk of loss in trading futures contracts in some strategies can be
potentially unlimited, due both to the low margin deposits required, and the
extremely high degree of leverage involved in futures pricing. As a result, a
relatively small price movement in a futures contract may result in immediate
and substantial loss or gain to the investor. Thus, a purchase or sale of a
futures contract may result in losses or gains in excess of the amount
invested in the contract.
For additional information and a description of the risks relating to option
and futures contracts trading practices, see the Statement of Additional
Information.
PORTFOLIO TURNOVER
Each Fund may sell a portfolio investment soon after its acquisition if the
Advisor believes that such a disposition is consistent with attaining the
Fund's investment objective. Fund investments may be sold for a variety of
reasons, such as a more favorable investment opportunity or other
circumstances bearing on the desirability of continuing to hold such
investments.
A high rate of portfolio turnover (100% or more) involves correspondingly
greater brokerage commission expenses and other transaction costs, which must
be borne directly by a Fund and ultimately by its shareowners. See "Financial
Highlights" above or "Portfolio Transactions" in the Statement of Additional
Information. Portfolio turnover may result in the realization of short-term
capital gains which are taxable to shareowners as ordinary income.
INVESTMENT RESTRICTIONS
Each Fund is subject to the following investment restrictions which, as
described in more detail in the Statement of Additional Information, are
fundamental policies that cannot be changed without the affirmative vote of a
majority of the outstanding shares of a Fund (as defined under "Other
Information"). Each Fund will limit its investments so that less than 25% of
the Fund's total assets will be invested in the securities of issuers in any
one industry. For the purposes of this restriction, state and municipal
governments and their agencies and instrumentalities, securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities and
repurchase agreements fully collateralized by securities issued or guaranteed
by the U.S. Government, its agencies or instrumentalities are not deemed to be
industries in connection with the issuance of tax-exempt securities. Thus, a
Fund may invest 25% or more of the value of its total assets in Municipal
Obligations which are related in such a way that an economic, business or
political development or change affecting one Municipal Obligation would also
affect other Municipal Obligations. For example, a Fund may so invest in (a)
Municipal Obligations the interest on which is paid solely from revenues of
similar projects such as hospitals, electric utility systems, multi-family
housing, nursing homes, commercial facilities (including hotels), steel
companies or life care facilities, (b) Municipal Obligations whose issuers are
in the same state, or (c) industrial development obligations. The Funds will
not purchase securities (except U.S. Government Obligations) if more than 5%
of its total assets will be invested in the securities of any one issuer,
except that up to 25% of the total assets of the National Tax-Free Bond Fund,
and up to 50% of the total assets of the Missouri Tax-Free Bond Fund, may be
invested without regard to this 5% limitation (although not more than 25% of
the Missouri Tax-Free Bond 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.
16
<PAGE>
SHAREOWNER GUIDE
THE FOLLOWING SECTION WILL PROVIDE YOU WITH ANSWERS TO SOME OF THE MOST
OFTEN-ASKED QUESTIONS ABOUT BUYING AND SELLING A FUND'S SHARES AND
ABOUT A FUND'S DIVIDENDS AND DISTRIBUTIONS
HOW CAN I CONTACT THE COMMERCE FUNDS?
TO AUTHORIZE THE SPECIAL FEATURES DESCRIBED BELOW OR TO OBTAIN ADDITIONAL
INFORMATION ABOUT THE COMMERCE FUNDS, YOU MAY:
. Call The Commerce Funds Shareowner Services at 1-800-305-2140; or
. Write to The Commerce Funds at:
The Commerce Funds
P.O. Box 16931
St. Louis, MO 63105; or
. Call the transfer agent, State Street Bank and Trust Company,
directly at 1-800-995-6365; or
. Contact a registered investment representative at selected Commerce
Bank branches.
. For specific information regarding your investment management group
account, contact your account administrator.
HOW TO BUY SHARES
WHAT IS THE MINIMUM INVESTMENT FOR EACH FUND?
Generally, the minimum investment requirement is $1,000 for initial
purchases and $250 for subsequent purchases, although it may differ in certain
circumstances as shown below.
INVESTMENT MINIMUMS FOR SPECIFIC TYPES OF ACCOUNTS
<TABLE>
<CAPTION>
INITIAL SUBSEQUENT
INVESTMENT INVESTMENT
---------- -----------
<S> <C> <C>
Regular Account......................................... $1,000 $250
Automatic Investment Feature............................ $1,000 $75/Quarter
</TABLE>
The minimum initial investment requirement is $250 for initial purchases and
$100 for subsequent purchases for employees, directors, officers and retirees
(as well as their spouses and legal dependents)
17
<PAGE>
of Commerce Bancshares, Inc., Goldman Sachs & Co. and their subsidiaries or
affiliates, although it may differ in certain circumstances as shown below.
INVESTMENT MINIMUMS FOR CERTAIN TYPES OF INVESTORS
<TABLE>
<CAPTION>
INITIAL SUBSEQUENT
INVESTMENT INVESTMENT
---------- ----------
<S> <C> <C>
Regular Account........................................... $250 $100
Automatic Investment Feature.............................. $100 $ 25*
</TABLE>
- --------
*Minimum of six bi-monthly investments within first year of Fund ownership.
HOW ARE SHARES PRICED?
SHARES OF THE FUNDS ARE PURCHASED AT THEIR PUBLIC OFFERING PRICE, WHICH IS A
FUND'S NET ASSET VALUE PER SHARE PLUS A FRONT-END SALES CHARGE. A FUND'S NET
ASSET VALUE PER SHARE ("NAV") IS CALCULATED AS FOLLOWS:
NAV = (VALUE OF FUND ASSETS)-(FUND LIABILITIES)
-------------------------------------
NUMBER OF OUTSTANDING SHARES
The net asset value is determined as of the close of regular trading hours
on the New York Stock Exchange (the "Exchange") (currently 4:00 p.m. Eastern
Time) on days the Exchange is open (a "Business Day"). On those Business Days
on which the Exchange closes prior to the close of its regular trading hours
("Early Closing Time"), the net asset value of each Fund will be determined
and its shares will be priced as of such Early Closing Time.
A Fund's investments are valued at market value or, where market quotations
are not readily available, at fair value as determined in good faith by or
under the supervision of the Board of Trustees. Certain short-term securities
may be valued at amortized cost, which approximates fair value.
SALES CHARGE. The maximum front-end sales charge is 3.50% and may be less
based on the amount you invest, as shown in the following chart:
<TABLE>
<CAPTION>
MAXIMUM
DEALER'S
AS A % OF AS A % OF REALLOWANCE AS
OFFERING NET ASSET A % OF
PRICE VALUE OFFERING PRICE
AMOUNT OF PURCHASE PER SHARE PER SHARE PER SHARE*
------------------ --------- --------- --------------
<S> <C> <C> <C>
Less than $100,000........................... 3.50 3.63 3.15
$100,000 but less than $250,000.............. 2.50 2.56 2.25
$250,000 but less than $500,000.............. 1.50 1.52 1.35
$500,000 but less than $1,000,000............ 1.00 1.01 0.90
$1,000,000 or more........................... 0.00 0.00 0.00
</TABLE>
- --------
*Dealer's reallowance may be changed periodically.
Goldman, Sachs & Co. (the "Distributor") 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
18
<PAGE>
responsible for purchases of shares of The Commerce Funds. In addition, at its
expense, the Distributor will provide additional compensation and promotional
incentives to dealers in connection with the sales of shares of the Funds.
Compensation may include promotional and other merchandise, sales and training
programs and other special events sponsored by dealers. Compensation may also
include payment for reasonable expenses incurred in connection with trips
taken by invited registered representatives for meetings or seminars of a
business nature.
WHEN THERE IS NO SALES CHARGE. There is no sales charge on shares purchased
by the following types of investors or transactions:
. automatic reinvestments (and cross-reinvestments) of dividends and
capital gain distributions by existing shareowners;
. the Exchange Privilege described below on page 28;
. the Redemption Reinvestment Privilege described below on page 26;
. shares purchased for and held in a trust, management agency, asset
allocation, custodial or other account maintained by an Investment
Management Group (Trust Department) within a bank affiliated, or within
banks that have signed a definitive agreement to become affiliated, with
Commerce Bancshares, Inc. (including shares purchased with distributions
from such accounts);
. non-profit organizations, foundations and endowments qualified under
Section 501(c)(3) of the Internal Revenue Code of 1986, as amended (the
"Code");
. employees, directors, advisory directors, officers and retirees (as well
as their spouses and legal dependents) of Commerce Bancshares, Inc.,
Goldman, Sachs & Co. or their subsidiaries or affiliates;
. employees, directors, advisory directors, officers and retirees (as well
as their spouses and legal dependents) of banks that have signed a
definitive agreement to become affiliated with Commerce Bancshares, Inc.;
. current and retired members of the Board of Trustees of The Commerce
Funds;
. any state, county or city, or any instrumentality, department, authority
or agency thereof, prohibited by applicable laws from paying a sales
charge for the purchase of Fund shares; and
. shares purchased for and held in a trust for which a bank affiliated with
Commerce Bancshares, Inc. is named as successor trustee or co-trustee
immediately after the current trustee ceases to serve; and shares
purchased for and held by individuals who have named a bank affiliated
with Commerce Bancshares, Inc. as their primary personal representative
or co-personal representative under will.^
The Distributor may periodically waive all or a portion of the sales charge
for all investors with respect to the sales of shares of the Funds. The
Distributor may also offer special concessions to enable investors to purchase
shares of the Funds at net asset value, without payment of a sales charge. To
qualify for this special net asset value purchase when applicable, the
investor must pay for such purchase with the proceeds from the redemption of
shares of a non-affiliated mutual fund or unit investment trust on which a
sales charge was paid. A qualifying purchase of shares in a Fund must occur
within five Business Days of the prior redemption and must be evidenced by a
confirmation of the redemption transaction. At the time of purchase, The
Commerce Funds must be notified that the purchase qualifies for a purchase
without a sales charge. Proceeds from the redemption of shares on which no
sales charges or commissions were paid would not qualify for the special net
asset value purchase program.
19
<PAGE>
These sales charge exemptions are based on the type of investor and/or the
reduced sales effort that will be needed in obtaining Fund investments. In
order to take advantage of these exemptions, you must certify eligibility on
your account application.
RIGHTS OF ACCUMULATION. When you buy shares in The Commerce Funds, your
current total investment determines the sales charge that you pay. Since large
investments receive a discounted sales charge, the sales charge you pay may
subsequently be reduced as you build your investment.
Over time, as your current total investment in shares accumulates to
$100,000 or beyond, the sales charge on subsequent investments is decreased.
Your current total investment is the combination of your immediate investment
along with the shares that you own in any Fund of The Commerce Funds on which
you paid a sales charge (including shares of the Financial Square Treasury,
Prime and Tax-Free Money Market Funds that carry no sales charge but were
obtained through an exchange and can be traced back to shares that were
acquired with a sales charge). Shares purchased without a sales charge may not
be aggregated with shares purchased subject to a sales charge.
To buy shares at a reduced sales charge under Rights of Accumulation, you
must indicate at the time of purchase that a quantity discount is applicable.
A reduction in sales charge is subject to a check of appropriate records,
after which you will receive the lowest applicable sales charge.
Example: Suppose you own Commerce Fund shares with a total current value
of $90,000 that can be traced back to the purchase of shares with a sales
charge. If you subsequently invest $10,000 in any Fund within The Commerce
Funds family, you will pay a reduced sales charge of 2.50% of the public
offering price on the additional purchase.
LETTER OF INTENT. You may also buy shares at a reduced sales charge under a
written Letter of Intent, a non-binding commitment to invest a total of at
least $100,000 in one or more Funds of The Commerce Funds within a period of
13 months and under the terms and conditions of the Letter of Intent. Shares
you buy under a Letter of Intent will be eligible for the same sales charge
discount that would have been available had all of your share purchases been
made at once. To use this feature, complete the Letter of Intent section on
your account application. A Letter of Intent must be filed with The Commerce
Funds within 90 days of the first investment under the Letter of Intent
provision.
While submitting a Letter of Intent does not bind you to buy, or The
Commerce Funds to sell, the full amount at the sales charge indicated in the
Letter of Intent, you must complete the intended purchase to obtain the
reduced sales charge. When you sign a Letter of Intent, The Commerce Funds
holds in escrow a sufficient number of shares which can be sold to make up any
difference in the sales charge on the amount actually invested. After you
fulfill the terms of the Letter of Intent, the shares in escrow will be
released.
If your aggregate investment exceeds that indicated in your Letter of
Intent, you will receive an adjustment which reflects the further reduced
sales charge applicable to your excess investment. It will be in the form of
additional shares credited to your account at the then current offering price
applicable to a single purchase of the total amount of the total purchase. You
must inform The Commerce Funds that the Letter of Intent is in effect each
time you buy shares.
20
<PAGE>
You may include the value of all shares on which a sales charge had
previously been paid as a credit toward fulfillment of the Letter of Intent,
but no price adjustment will be made on shares previously purchased.
You may combine purchases that are made by members of your immediate family,
or the total investments of a trustee or custodian of any qualified pension or
profit-sharing plan or IRA established for your benefit or the benefit of any
member of your immediate family, for the purpose of obtaining reduced sales
charges by means of a written Letter of Intent or Right of Accumulation. You
must indicate on the account application the accounts that are to be combined
for this purpose.
21
<PAGE>
HOW DO I BUY SHARES?
You may purchase shares of a Fund through The Commerce Funds Shareowner
Services or an investment representative at a Commerce Bank branch. The
following chart describes ways to invest directly in The Commerce Funds:
<TABLE>
<CAPTION>
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
---------------------------------- ----------------------------------
<S> <C> <C>
By Mail Send a completed account Send a check with your Fund
application with a check (payable account number printed on it,
to The Commerce Funds) directly to along with the stub from the
the address set forth in "How Can previous confirmation directly to
I Contact The Commerce Funds?" on the address set forth in "How Can
page 17. I Contact The Commerce Funds?" on
page 17.
In Person Whether opening or adding to an account, you are welcome to stop into a
Commerce Bank branch office location. A registered investment
representative can assist you.
By Wire After an account application is Contact your bank to request that
completed and an account is funds be wired to your existing
opened, instruct your bank to wire Fund account. Follow instructions
funds to: at left. Be sure to include your
name and your Fund account number.
Commerce Bank, N.A.
(Kansas City)
Kansas City, MO
ABA #1010-00019
Account # 2800255
Be sure to have your bank indicate
your name, address, tax
identification number, name of the
Fund and your new account number.
Ask your bank for specific information about making federal wires,
including associated charges.
By Telephone Subsequent purchases of Fund
Via shares may be made by electronic
Electronic Funds funds transfer from your bank,
Transfer checking or money market account.
You can authorize this feature and
provide necessary bank information
on your account application. Then,
when you wish to make a subsequent
purchase, you can do so by
contacting The Commerce Funds at
the telephone number set forth in
"How Can I Contact The Commerce
Funds?" on page 17.
</TABLE>
22
<PAGE>
Other investment features, including exchanges and automatic investments,
are also available. Additional information pertaining to investments in the
Funds is included in the following pages or can be obtained by contacting The
Commerce Funds Shareowner Services.
WHAT PRICE WILL I RECEIVE WHEN I BUY SHARES?
Your shares will be purchased at a Fund's public offering price calculated
at the next close of regular trading on the Exchange (currently 4:00 p.m.
Eastern Time) after your purchase order is received in proper form by The
Commerce Funds' transfer agent, State Street Bank and Trust Company (the
"Transfer Agent"), at its Kansas City office.
WHAT ELSE SHOULD I KNOW ABOUT BUYING SHARES?
Federal regulations require you to provide a certified Taxpayer
Identification Number upon opening or reopening an account.
If your check used for investment does not clear, a fee may be imposed by
the Transfer Agent. All payments by check must be in U.S. dollars and be drawn
only on U.S. banks. The Commerce Funds reserves the right to reject any
specific purchase order (including exchanges) or to restrict purchases or
exchanges by a particular purchaser (or group of related purchasers). The
Commerce Funds may reject or restrict purchases or exchanges of shares by a
particular purchaser or group, for example, when a pattern of frequent
purchases and sales or exchanges of shares of a Fund is evident, or if the
purchase and sale or exchange orders are, or a subsequent abrupt redemption
might be, of a size that would disrupt the management of a Fund.
The Commerce Funds will not issue share certificates. The Transfer Agent
will maintain a complete record of your account and will issue you a statement
at least quarterly. You will also be sent confirmations showing purchases and
redemptions.
HOW TO SELL SHARES
HOW DO I SELL MY SHARES?
The Commerce Funds makes it easy to sell, or "redeem," all or part of your
shares. The Commerce Funds does not charge you to sell shares. However, the
value of the shares you sell may be more or less than your cost, depending on
a Fund's current net asset value. The following chart describes ways to sell
your shares of The Commerce Funds:
23
<PAGE>
HOW TO SELL SHARES:
Through The Commerce Funds Shareowner Services or an investment
representative at a Commerce Bank branch.
By Mail Send a written request signed by each owner,
including each joint owner, to the address set
forth in "How Can I Contact The Commerce
Funds?" on page 17. [/R]
Proper written authority is required to execute
redemption requests on behalf of corporations,
partnerships, trusts, and/or fiduciary
accounts. Redemption requests require SIGNATURE
GUARANTEES as described below with the
exception of redemptions sent to a shareowner
name/address of record in effect for no less
than 30 days.
In Person You are welcome to deliver your written request
signed by each owner, including each joint
owner, to a Commerce Bank branch office
location. A registered investment
representative can assist you. [/R]
By Telephone You may redeem shares (to a shareowner) by
telephone and request to receive proceeds by
check (to a shareowner name/address of record
in effect for no less than 30 days), federal
wire (for amounts exceeding $1,000) or
electronic funds transfer. In order to request
a federal wire or electronic funds transfer,
appropriate information regarding your bank,
checking or money market account must be
previously established on your account. This
information may be provided on the account
application or in a SIGNATURE GUARANTEED letter
of instruction (see description of SIGNATURE
GUARANTEES below). [/R]
Redemption requests may be placed by contacting
The Commerce Funds at the telephone number set
forth in "How Can I Contact The Commerce
Funds?" on page 17. Additional information
pertaining to Fund share redemptions is
included in the following pages or can be
obtained by contacting The Commerce Funds
Shareowner Services.
Other redemption features, including exchanges
and automatic withdrawals, are also available.
Please refer to the Shareowner Features and
Privileges section in this prospectus for
additional information about telephone
redemption features.
Written requests to sell shares must be signed by each shareowner, including
each joint owner.
Certain types of redemption requests will need to include a SIGNATURE
GUARANTEE. You may obtain a SIGNATURE GUARANTEE from:
(1) a bank which is a member of the FDIC;
(2) a securities broker or dealer;
24
<PAGE>
(3) a credit union having the authority to issue SIGNATURE GUARANTEES;
(4) a savings and loan association;
(5) a building and loan association;
(6) a cooperative bank;
(7) a federal savings bank or association;
(8) a national securities exchange; or
(9) a registered securities association or a clearing agency.
Guarantees must be signed by an authorized signatory of the guarantor
institution and be accompanied by the words "SIGNATURE GUARANTEED." Guarantees
from notaries public will not be accepted.
Share redemptions can be suspended and the payment of redemption proceeds
delayed when the Exchange is closed (other than for customary weekend and
holiday closings), during periods when trading on the Exchange is restricted
as determined by the SEC, during any emergency as determined by the SEC which
makes it impracticable for a Fund to sell its securities or value its assets
or during any other period permitted by order of the SEC for the protection of
investors.
Other redemption features, including exchanges and automatic withdrawals,
are also available. Please refer to Shareowner Features and Privileges for
more information.
WHAT PRICE WILL I RECEIVE FOR SHARES I WANT TO SELL?
The price you will receive when you sell your share is the net asset value
per share (as described on page 18) determined after receipt of an order in
proper form by the Transfer Agent.
The Commerce Funds reserves the right to redeem accounts involuntarily if,
after sixty days' written notice to the shareowner, the account's net asset
value remains below a $500 minimum balance. Involuntary redemptions will not
be implemented if the value of your account falls below the minimum balance as
a result of market conditions.
HOW QUICKLY CAN I RECEIVE PROCEEDS FROM A SALE?
Ordinarily, redemption proceeds will be disbursed the next Business Day
following receipt of an order in proper form by the Transfer Agent. Payment
must be made within seven calendar days following redemption.
You can have your proceeds sent by federal wire to your bank checking or
money market account. Proceeds will normally be wired the Business Day after
your request to redeem shares is received in good order by the Transfer Agent.
Wiring of sales proceeds may be delayed one additional day if the Federal
Reserve Bank is not open on the day your wire is to be made. Your request to
wire proceeds is subject to the bank's wire charges.
25
<PAGE>
Fund shares must be paid in full in order for you to redeem them and receive
proceeds. If the shares you wish to sell were a recent purchase by check or
telephone, The Commerce Funds can delay the subsequent payment of sales
proceeds up to 15 days after the check or telephone payment is received. This
does not apply if Fund shares were purchased by federal wire.
WHAT IF I WANT TO REINVEST SALES PROCEEDS?
You may reinvest all or any portion of your redemption proceeds in shares of
any Fund within 60 days of your redemption without a sales charge. Shares will
be purchased at a price equal to the net asset value per share next determined
after the Transfer Agent receives a reinvestment order and payment in proper
form.
If you wish to use the Redemption Reinvestment Privilege, you must submit a
written reinvestment request to the Transfer Agent stating that you are
eligible to use the feature.
Generally, using the Redemption Reinvestment Privilege will not affect any
gain or loss realized on redemptions for federal income tax purposes. However,
if a redemption results in a loss, the reinvestment may result in the loss
being disallowed under Internal Revenue Service "wash sale" rules.
DIVIDEND AND DISTRIBUTION POLICIES
AS A FUND SHAREOWNER, YOU ARE ENTITLED TO ANY DIVIDENDS AND DISTRIBUTIONS
ARISING
FROM NET INVESTMENT INCOME AND NET REALIZED CAPITAL GAINS.
The Funds declare dividends daily and distribute dividends on or about the
last Business Day of the current month. Each Fund declares and distributes net
realized capital gains annually.
For purchases by check, shares of the Funds begin earning dividends and
distributions on the next day after payment for the shares is received by the
Transfer Agent.
YOU CAN CHOOSE A DISTRIBUTION OPTION FOR DIVIDENDS AND CAPITAL GAINS:
(1) reinvest all dividend and capital gain distributions in additional
Fund shares without a sales charge;
(2) receive dividend distributions in cash and reinvest capital gain
distributions in additional Fund shares without a sales charge;
(3) receive all dividend and capital gain distributions in cash; or
(4) have all dividend and capital gain distributions deposited directly
into a designated checking account.
If you do not select an option when you open an account, all distributions
will automatically be reinvested in additional shares of the same Fund without
a sales charge. For your protection, if you elect to have distributions mailed
to you which cannot be delivered, they will be reinvested in additional shares
of the same Fund without a sales charge.
26
<PAGE>
You may invest dividend or capital gain distributions from one Fund in
another Fund of The Commerce Funds. There is no sales charge on purchases made
through the Cross Reinvestment Privilege; however, both Fund accounts must be
established at the minimum initial investment requirement and have identical
account registration. Cross Reinvestment Privileges do not apply to the
Financial Square Treasury, Prime and Tax-Free Money Market Funds ("Money
Market Funds") described below under "Can I Exchange My Investment From One
Commerce Fund To Another." Goldman Sachs Asset Management, a separate
operating division of Goldman, Sachs & Co., serves as investment advisor for
the Money Market Funds.
Your election to reinvest the distributions paid by a Fund in additional
shares of the Fund or any other Fund of The Commerce Funds will not affect the
tax treatment of such dividends and distributions, which will be treated as
received by the shareowner and then used to purchase shares of the Fund or
another Fund of The Commerce Funds.
To change your distribution option, contact The Commerce Funds at the
address or telephone number set forth in "How Can I Contact The Commerce
Funds?" on page 17. The change will become effective after it is received and
processed by the Transfer Agent.
SHAREOWNER FEATURES AND PRIVILEGES
THE COMMERCE FUNDS PROVIDES A VARIETY OF WAYS TO MAKE MANAGING
YOUR INVESTMENTS MORE CONVENIENT.
Some or all of the following features as well as others described in this
Prospectus may have different conditions imposed on them in addition to those
described in this Prospectus. Consult your investment representative or
contact The Commerce Funds at the address or telephone number set forth in
"How Can I Contact The Commerce Funds?" on page 17.
CAN I MAKE REGULAR INVESTMENTS TO A FUND AUTOMATICALLY?
The Automatic Investment feature lets you transfer money from your checking
account into your Fund account automatically on the date you specify in any
month you choose. The Automatic Investment feature is one way to use Dollar
Cost Averaging to invest (see below). Only checking accounts at U.S. financial
institutions which permit automatic withdrawals through the Automated Clearing
House are eligible. Check with your bank or financial institution to determine
eligibility.
WHAT IS DOLLAR COST AVERAGING AND HOW CAN I IMPLEMENT IT?
DOLLAR COST AVERAGING INVOLVES INVESTING A FIXED DOLLAR AMOUNT AT REGULAR
INTERVALS. BECAUSE MORE SHARES ARE PURCHASED DURING PERIODS WITH LOWER SHARE
PRICES AND FEWER SHARES ARE PURCHASED WHEN THE PRICE IS HIGHER, YOUR AVERAGE
COST PER SHARE MAY BE REDUCED.
In order to be effective, Dollar Cost Averaging should be followed on a
regular basis. You should be aware, however, that shares bought using Dollar
Cost Averaging are made without regard to their price on the day of investment
or to market trends. In addition, while you may find Dollar Cost Averaging to
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be beneficial, it will not prevent a loss if you ultimately redeem your shares
at a price that is lower than their purchase price. Dollar cost averaging does
not assure a profit or protect against a loss in a declining market. You can
invest through Dollar Cost Averaging on your own or through the Automatic
Investment feature described above.
To establish an Automatic Investment account that uses the Dollar Cost
Averaging method, check the appropriate box and supply the necessary
information on the account application or send a subsequent written request
with an appropriate SIGNATURE GUARANTEE.
You may change the amount of purchase or cancel this feature at any time by
mailing written notification to The Commerce Funds at the address set forth in
"How Can I Contact The Commerce Funds?" on page 17.
Notification will be effective three Business Days following receipt. The
Commerce Funds may modify or terminate this feature at any time or charge a
service fee, although no such fee is currently contemplated.
CAN I EXCHANGE MY INVESTMENT FROM ONE COMMERCE FUND TO ANOTHER?
As a shareowner, you have the privilege of exchanging your shares for shares
of another Fund of The Commerce Funds. Exchanges may also be made to or from
the Financial Square Treasury, Prime and Tax-Free Money Market Funds. NO
ADDITIONAL SALES CHARGE IS IMPOSED WHEN EXCHANGING SHARES OF A FUND FOR SHARES
OF ANOTHER FUND OFFERED BY THE COMMERCE FUNDS.
You can exchange shares of one Fund for shares in another Fund within The
Commerce Funds family that may be legally sold in your state of residence by
writing or calling The Commerce Funds as described under "How To Sell Shares"
on page 23. The Exchange Privilege is automatic for all shareowners unless
declined on an account application. All telephone exchanges must be registered
in the same name(s) and with the same address as are registered in the Fund
from which the exchange is made. See the section below regarding telephone
transactions for a description of The Commerce Funds' policy regarding
responsibility for telephone instructions. Shares purchased by check may not
be exchanged until the check has cleared.
Fund shares being exchanged are subject to the minimum initial and
subsequent investment requirements as described on page 17. Before using this
feature, you should consider carefully the investment objective, policies,
risks and expenses of the acquired Fund, as described in such Fund's
prospectus. You can request a current Prospectus from your investment
representative or by contacting The Commerce Funds at the address or telephone
number set forth in "How Can I Contact The Commerce Funds?" on page 17.
In addition to free automatic exchanges pursuant to the Automatic Exchange
feature discussed below, five free exchanges are permitted in each twelve-
month period. Additional exchanges may be subject to a $5 exchange fee.
The Commerce Funds reserves the right to reject any exchange request and the
Exchange Privilege may be modified or terminated at any time. At least 60
days' notice of any material modification or
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termination of the Exchange Privilege will be given to shareowners except
where notice is not required under the regulations of the SEC.
An exchange may result in a taxable gain or loss. Any sales charge paid on
the original purchase cannot be taken into account in determining such gain or
loss if the exchange occurs within ninety (90) days after the original
purchase of shares and no sales charge is imposed on such exchange.
CAN I HAVE EXCHANGES MADE AUTOMATICALLY?
You may request on your account application that a specified dollar amount
of shares at net asset value be automatically exchanged for shares of any
other Fund of The Commerce Funds. No sales charge is imposed on exchanges.
These automatic exchanges may be made on any one day of each month and are
subject to the following conditions: The minimum dollar amount for automatic
exchanges must be at least $250 per month. In addition, the value of the
account in the acquired Fund must equal or exceed the acquired Fund's minimum
initial investment requirement. The names, addresses and taxpayer
identification number for the shareowner accounts of the exchanged and
acquired Funds must be identical. You should consider the investment
objective, policies, risks and expenses of the acquired Fund, as described in
such Fund's prospectus, before establishing an automatic exchange into that
Fund.
CAN I REINVEST DIVIDENDS FROM ONE COMMERCE FUND IN ANOTHER?
YOU MAY ELECT TO HAVE YOUR DIVIDENDS, CAPITAL GAIN DISTRIBUTIONS, OR BOTH
RECEIVED FROM A NON-RETIREMENT FUND ACCOUNT AUTOMATICALLY INVESTED IN
ADDITIONAL SHARES OF ANY OTHER INVESTMENT PORTFOLIO OF THE COMMERCE FUNDS IN
WHICH YOU CURRENTLY MAINTAIN AN OPEN NON-RETIREMENT ACCOUNT. To participate in
this program check the appropriate box and supply the necessary information on
the account application or in a subsequent written request.
Dividend reinvestments will be made at a price equal to the net asset value
of the purchased shares next determined after receipt of the distribution
proceeds by the Transfer Agent.
The distribution must exceed $50 in order to use this feature. You should
consider carefully the investment objective, policies and applicable fees of
the acquired Fund before using this feature.
HOW DO I OBTAIN OTHER INFORMATION ABOUT MY ACCOUNT?
Contact the Commerce Funds Shareowner Services or your investment
representative for account information such as current balance, account
transactions, distributions, and other applicable information. Share prices of
each Fund will be listed in the mutual funds pricing section of most daily
newspapers under The Commerce Funds.
CAN I MAKE TRANSACTIONS BY TELEPHONE?
YOU MAY AUTHORIZE ELECTRONIC TRANSFERS OF MONEY TO MAKE ADDITIONAL
INVESTMENTS IN OR REDEEM SHARES FROM AN ESTABLISHED ACCOUNT IF THIS FEATURE
WAS SELECTED ON THE ACCOUNT APPLICATION OR IN A SUBSEQUENT WRITTEN REQUEST.
THE SERVICE MAY BE USED LIKE AN "ELECTRONIC CHECK" TO MOVE MONEY TO OR
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FROM YOUR CHECKING OR MONEY MARKET ACCOUNT AND YOUR FUND ACCOUNT BY CALLING
THE COMMERCE FUNDS SHAREOWNER SERVICES AT THE TELEPHONE NUMBER SET FORTH IN
"HOW CAN I CONTACT THE COMMERCE FUNDS?" ON PAGE 17.
Telephone purchases will be effected at the public offering price next
determined after the Transfer Agent receives payment for the transaction.
Proceeds from sales of shares will be deposited into your Commerce checking or
money market account generally two business days after the redemption request
is received. You may also request receipt of your redemption proceeds by
check, which will only be sent to the registered owner of your Fund account
and only to the address of record. If you should experience difficulty in
redeeming shares by telephone (i.e. because of unusual market activity), you
are urged to consider redeeming your shares by mail or in person.
You should note that the Transfer Agent may act upon a telephone purchase or
redemption request from any person representing himself or herself to be you
and reasonably believed by the Transfer Agent to be genuine. Neither The
Commerce Funds nor any of its service contractors will be liable for any loss
or expense in acting upon telephone instructions that are reasonably believed
to be genuine. In attempting to confirm that telephone instructions are
genuine, The Commerce Funds will use such procedures as are considered
reasonable, including recording those instructions and requesting information
as to account registration (such as the name in which the account is
registered, the account number, recent transactions in the account, or the
account holder's tax identification number, address or bank). To the extent
that The Commerce Funds fails to use reasonable procedures as a basis for its
belief, it and/or its service contractors may be liable for instructions that
prove to be fraudulent or unauthorized.
The Commerce Funds may modify this feature at any time or charge a service
fee upon notice to shareowners. No such fee is currently contemplated.
CAN I ARRANGE AUTOMATIC WITHDRAWALS?
IF YOU ARE A SHAREOWNER WITH AN ACCOUNT VALUED AT $5,000 OR MORE, YOU MAY
WITHDRAW AMOUNTS IN MULTIPLES OF $100 OR MORE FROM YOUR ACCOUNT ON A MONTHLY,
QUARTERLY, SEMI-ANNUAL OR ANNUAL BASIS THROUGH THE AUTOMATIC WITHDRAWAL
FEATURE.
At your option, monthly withdrawals may be made either the first or
fifteenth day of the month and quarterly, semi-annual and annual withdrawals
will be made on the fifteenth day of the month. To participate in this
feature, check the appropriate box and supply the necessary information on the
account application or in a subsequent written request. Purchases of
additional shares concurrently with withdrawals are ordinarily not
advantageous because of the sales charge imposed on the Funds. This feature
may be suspended should the value of your account fall below $500.
THE BUSINESS OF THE COMMERCE FUNDS
BOARD OF TRUSTEES
The business affairs of The Commerce Funds are managed under the general
supervision of the Board of Trustees. Information about the Trustees and
officers of The Commerce Funds is included in the Statement of Additional
information.
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SERVICE PROVIDERS
----------------
INVESTMENT ADVISOR
COMMERCE BANK, N.A. (ST. LOUIS) AND
COMMERCE BANK, N.A. (KANSAS CITY)
(THE "ADVISOR")
Commerce Bank, N.A. (St. Louis) and Commerce Bank, N.A. (Kansas City) serve
as Advisor for the Funds, selecting investments and making purchases and sale
orders for securities in each Fund's portfolio.
ADMINISTRATOR
GOLDMAN SACHS ASSET MANAGEMENT
("GSAM" OR THE "ADMINISTRATOR")
GSAM serves as Administrator of each of the Funds. GSAM is located at One
New York Plaza, New York, New York 10004.
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
(THE "TRANSFER AGENT")
State Street Bank and Trust Company ("State Street Bank") has delegated its
responsibilities as Transfer Agent to its indirect subsidiary, National
Financial Data Services, Inc. ("NFDS"), which maintains the account records of
all shareowners in the Funds and administers the distribution of income earned
as a result of investing in the Funds. State Street Bank 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 Bank and Trust Company also serves as the Custodian of each of
the Funds.
MORE ABOUT THE ADVISOR
Commerce Bank, N.A. (St. Louis) and Commerce Bank, N.A. (Kansas City), each
a subsidiary of Commerce Bancshares, Inc., a registered multi-bank holding
company, serve as the investment advisor to each Fund. Commerce Bank, N.A.
(St. Louis) is located at 8000 Forsyth Boulevard, St. Louis, Missouri
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63105, and Commerce Bank, N.A (Kansas City) is located at 922 Walnut Street,
Kansas City, Missouri 64106. Although neither Commerce Bank, N.A. (St. Louis)
nor Commerce Bank, N.A. (Kansas City) has previously served as investment
advisor to a registered investment company, each (or its predecessor
organizations) has provided investment management services to private and
public pension funds, endowments and foundations since 1946 and to individuals
since 1906. As of December 31, 1995, the Advisor provided investment
management and advisory services for assets aggregating approximately $4.2
billion. As of the same date, Commerce Bank, N.A. (St. Louis), Commerce Bank,
N.A. (Kansas City) and their affiliates had in the aggregate $5.3 billion in
assets under management.
In the Advisory Agreement with The Commerce Funds, the Advisor has agreed to
manage each Fund's investments and to be responsible for, place orders for,
and make decisions with respect to, all purchases and sales of each Fund's
securities. For the advisory services provided and expenses assumed under the
Advisory Agreement, the Advisor is entitled to receive a fee at the annual
rate of 0.50% of the average daily net assets of each of the National Tax-Free
Bond and Missouri Tax-Free Bond Funds. The Advisor may agree to voluntarily
waive its fees in whole or in part with respect to any particular Fund. The
Advisor has voluntarily agreed to waive a portion of the investment advisory
fees otherwise payable by the Missouri Tax-Free Bond Fund during the current
fiscal year so that the advisory fee payable by such Fund will not exceed
0.30% of the average daily net assets of such Fund. For the period February
21, 1995 (commencement of operations) through October 31, 1995, the Advisor
received advisory fees (after fee waivers) at the effective annual rates of
0.50% and 0.30% of the average daily net assets of the National Tax-Free Bond
Fund and Missouri Tax-Free Bond Fund, respectively.
Craig A. MacPherson, CFA and Vice President, is the person primarily
responsible for the day-to-day management of each Fund's investments. Mr.
MacPherson joined the Investment Management Group of Commerce Bank, N.A.
(Kansas City) in 1991 as a manager of fixed income investments. Mr. MacPherson
came to Commerce Bank from Bank IV, Wichita, Kansas, where he held the title
of Vice President and Trust Investment Officer. He served as portfolio manager
and head of fixed income investments in Bank IV's trust investment section
since 1987 and its predecessor trust divisions since 1972.
MORE ABOUT THE ADMINISTRATOR
Goldman Sachs Asset Management is the Administrator for the Funds. GSAM is a
separate operating division of Goldman, Sachs & Co., the Distributor of the
Funds. Under the Administration Agreement with The Commerce Funds, GSAM
administers the business affairs of The Commerce Funds, subject to the
supervision of the Board of Trustees, and in connection therewith, furnishes
The Commerce Funds with office facilities and is responsible for ordinary
clerical, recordkeeping and bookkeeping services required to be maintained by
The Commerce Funds (excluding those maintained by The Commerce Funds'
Custodian, Transfer Agent, Advisor and any Sub-Advisor), preparation and
filing of documents required to comply with federal and state securities laws,
supervising the activities of the Custodian and Transfer Agent, providing
assistance in connection with meetings of the Board of Trustees and
shareowners and other administrative services necessary to conduct the
business of The Commerce Funds. For these services and facilities, GSAM is
entitled to receive a monthly fee from each Fund at an annual rate of 0.15% of
its average daily net assets. For the period February 21, 1995 (commencement
of operations) through October 31, 1995, GSAM received administration fees at
the annual rate of 0.15% of the average daily net assets of each Fund.
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SERVICE ORGANIZATIONS
Pursuant to a Shareholder Administrative Services Plan ("Services Plan")
adopted by its Board of Trustees, The Commerce Funds may enter into agreements
("Servicing Agreements") with service organizations such as banks and
financial institutions, which may include the Advisor and its affiliates
("Service Organizations"), under which they will render shareowner
administrative support services for their customers who beneficially own
shares. Such services, which are described more fully in the Statement of
Additional Information, may include processing purchase and redemption
requests from customers, placing net purchase and redemption orders with the
Distributor, processing, among other things, distribution payments from The
Commerce Funds, providing necessary personnel and facilities to establish and
maintain customer accounts and records and providing information periodically
to customers showing their positions in Fund shares.
For these services, the Service Organizations will be entitled to receive
fees from a Fund at an annual rate of up to 0.25% of the average daily net
asset value of Fund shares held by such Service Organizations for the benefit
of their customers. The Service Organizations are required to provide their
customers with a schedule of any credits, fees or other conditions that may be
applicable to the investment of customer assets in Fund shares.
Conflict of interest restrictions may apply to the receipt of compensation
paid by The Commerce Funds to a Service Organization in connection with the
investment of fiduciary funds in Fund shares. Banks and other institutions
regulated by the Comptroller of the Currency or other federal or state bank
regulatory agencies, and investment advisers and other money managers subject
to the jurisdiction of the SEC, the Department of Labor or state securities
commissions, are urged to consult legal counsel before entering into
Shareowner Servicing Agreements.
EXPENSES
Except as noted in this Prospectus and the Statement of Additional
Information, the Funds' service providers bear all expenses in connection with
the performance of their services and the Funds bear the expenses incurred in
their operations.
As stated in the "Summary of Expenses," the Advisor intends to voluntarily
waive a portion of advisory fees and/or reimburse expenses for the Funds
during the current fiscal year. The result of such fee waivers and expense
reimbursements, which may be reduced or discontinued at any time, will be to
increase the performance of the Funds during the periods for which they are
made.
TAX INFORMATION
AS WITH ANY INVESTMENT YOU SHOULD CONSIDER THE TAX IMPLICATIONS OF AN
INVESTMENT IN A FUND. YOU SHOULD CONSULT YOUR TAX ADVISOR WITH SPECIFIC
REFERENCE TO YOUR OWN TAX SITUATION.
The following is only a short summary of the important tax considerations
generally affecting the Funds and their shareowners. Each Fund will send
written notices to shareowners annually regarding the tax status of
distributions made by the Funds. You should save your regular account
statements because
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they contain information you will need to calculate your capital gains or
losses upon your sale or exchange of shares in a Fund.
FEDERAL TAXES. Each Fund intends to qualify as a "regulated investment
company" under the Internal Revenue Code (the "Code"), with the result that to
the extent a Fund's earnings are distributed to shareowners as required by the
Code, the Fund itself generally is not required to pay federal income taxes.
To satisfy various requirements in the Code, each Fund expects to distribute
virtually all its net income each year. Each Fund anticipates that most of its
distributions will be dividends derived from interest on Municipal Obligations
("exempt-interest dividends"). Such exempt-interest dividends may be treated
by you as excludable from your gross income (unless, because of your
particular situation, exclusion would be disallowed). You should note that
income that is not subject to federal income taxes may nonetheless have to be
considered along with other adjusted gross income in determining whether any
Social Security payments received by you are subject to federal income taxes.
If the Funds hold certain so-called "private activity bonds," you will need
to include as an item of tax preference for purposes of the federal
alternative minimum tax that portion of the dividends paid by the Fund derived
from interest received on such bonds. In addition, corporate shareowners will
need to take into account all exempt-interest dividends paid by the Funds in
determining certain adjustments for the federal alternative minimum tax and
the environmental tax.
Dividends derived from Fund net capital gains ("capital gain dividends")
(the excess, if any, of net long-term capital gains over net short-term
capital losses) will be taxable to you as a long-term capital gain regardless
of how long you hold Fund shares, whether such gains were recognized by the
Fund before you acquired shares of the Fund, and whether the dividends are
paid in cash or reinvested in Fund shares.
Any dividend based on Fund income other than interest on Municipal
Obligations or net capital gains will be taxable to you as ordinary income,
whether the dividend is received in cash or additional shares. The Funds will
determine annually the percentages of their respective net investment income
which are exempt from tax, which constitute an item of tax preference for
purposes of the federal alternative minimum tax, and which are fully taxable
and will apply these percentages uniformly to all dividends declared from net
investment income during that year.
Any dividends declared in October, November or December with a record date
before the end of the year will be deemed for tax purposes to have been paid
by the Fund and received by you in that year, so long as the dividends are
actually paid on or before January 31 of the following year.
You will recognize a taxable capital gain or loss when redeeming or
exchanging your shares (or in using the Automatic Withdrawal feature to direct
reinvestments), to the extent of any difference between the price at which the
shares are sold or exchanged and the price or prices at which the shares were
originally purchased for cash or under the dividend reinvestment plan. If you
hold shares for six months or less and during that time receive an exempt-
interest dividend attributable to those shares, any loss realized on the sale
or exchange of those shares will be disallowed to the extent of the exempt-
interest dividend. If you hold shares for six months or less and during that
time receive a capital gain dividend
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<PAGE>
on those shares, any loss realized on the sale or exchange of those shares
will be treated as a long-term capital loss to the extent of the capital gain
dividend.
Each Fund will be required in certain cases to withhold and remit to the
U.S. Treasury 31% of the dividends paid to any investor (i) who has provided
an incorrect Social Security Number or Taxpayer Identification Number or no
number at all, (ii) who is subject to withholding by the Internal Revenue
Service for failure properly to include on his return payments of interest or
dividends, or (iii) who has failed to certify to the Fund, when required to do
so, that he is not subject to backup withholding or that he is an "exempt
recipient."
MISSOURI TAXES. Resident individuals, trusts and estates resident in
Missouri, and corporations within Missouri tax jurisdiction, will not be
subject to Missouri income tax on dividends from the Missouri Tax-Free Bond
Fund that are derived from interest on obligations of the State of Missouri
and its political subdivisions (to the extent such interest is exempt from
federal income tax) or on obligations issued by the 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.
OTHER STATE AND LOCAL TAXES. You should consult your tax advisor regarding
state and local tax consequences which may differ from the federal tax
consequences described above.
HOW PERFORMANCE IS MEASURED
A FUND'S PERFORMANCE MAY BE QUOTED IN TERMS OF AVERAGE ANNUAL TOTAL RETURN,
AGGREGATE TOTAL RETURN, YIELD AND TAX-EQUIVALENT YIELD AS DISCUSSED BELOW.
PERFORMANCE INFORMATION IS HISTORICAL AND IS NOT INTENDED TO INDICATE FUTURE
RESULTS.
From time to time, each Fund's total return, yield and tax-equivalent yield
may be quoted in advertisements. The performance of each Fund may be compared
to those of other mutual funds with similar investment objectives and to
relevant indices or to rankings prepared by independent services or other
financial or industry publications that monitor the performance of mutual
funds. For example, the performance of a Fund may be compared to data prepared
by Lipper Analytical Services, Inc., Mutual Fund Forecaster, Wiesenberger
Investment Companies Services, Morningstar or CDA Investment Technologies,
Inc., as well as to indices such as the Lehman Brothers Bond Indexes or the
Consumer Price Index. Performance data as reported in national financial
publications such as Money Magazine, Forbes, Barron's, Morningstar, The Wall
Street Journal and The New York Times, or in publications of a local or
regional nature, may also be used in comparing the performance of a Fund.
Performance is based on historical earnings and is not intended to indicate
future performance. The investment return and principal value of an investment
in a Fund will fluctuate so that shares, when redeemed, may be worth more or
less than their original cost. Performance data may not provide a basis for
comparison with bank deposits and other investments which provide a fixed
yield for a stated period of time. Changes in the net asset value should be
considered in ascertaining the total return to shareowners for a given period.
Total return data should also be considered in light of the risks associated
with a Fund's composition, quality, operating expenses and market conditions.
Any fees charged by The
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Commerce Funds directly to its customers in connection with investments in the
Funds will not be included in the Funds' calculations of performance data. The
methods used to compute the Fund's yield and total return are described in
more detail in the Statement of Additional Information.
The Funds calculate their total return on an "average annual total return"
basis for various periods from the date a Fund commences investment operations
and for other periods as permitted under SEC rules. Average annual total
return reflects the average annual percentage change in value of an investment
over the measuring period. Total return may also be calculated on an aggregate
total return basis for various periods. Aggregate total return reflects the
total percentage change in value over the measuring period. Both methods of
calculating total return reflect the sales charge imposed by the Funds and
changes in the price of a Fund's shares and assume that dividend and capital
gain distributions are reinvested. When considering average total return
figures for periods longer than one year, you should note that the annual
total return for any one year may be more or less than the average for the
entire period. A Fund may also advertise its total return on an aggregate,
year-by-year or other basis for various specified periods through charts,
graphs, schedules or quotations. The Funds may also advertise quotations of
total return that do not reflect the sales charge imposed on the purchase of
Fund shares. Quotations which do not reflect sales charges will, of course, be
higher than quotations which do reflect sales charges.
The yield of a Fund is computed based on the Fund's net income during a
specified 30-day period. More specifically, the Fund's yield is computed by
dividing its per share net income during the relevant period by the per share
maximum public offering price on the last day of the period and annualizing
the result on a semi-annual basis.
The tax-equivalent yield for a Fund shows the amount of taxable yield needed
to produce an after-tax equivalent of a tax-free yield, and is calculated by
increasing the yield by the amount necessary to reflect the payment of federal
and/or state income taxes at a stated rate. A Fund's tax-equivalent yield will
always be higher than a Fund's yield.
OTHER INFORMATION
THE COMMERCE FUNDS IS A DELAWARE BUSINESS TRUST THAT WAS
ORGANIZED ON FEBRUARY 7, 1994.
ABOUT THE COMMERCE FUNDS
THE COMMERCE FUNDS' TRUST INSTRUMENT AUTHORIZES THE BOARD OF TRUSTEES TO
ISSUE AN UNLIMITED NUMBER OF FULL AND FRACTIONAL SHARES OF BENEFICIAL
INTEREST, WITHOUT PAR VALUE, OF ONE OR MORE SERIES OF SHARES REPRESENTING
INTERESTS IN EIGHT DIFFERENT FUNDS AND SUCH OTHER FUNDS (OR CLASSES THEREOF)
AS THE TRUSTEES MAY FROM TIME TO TIME CREATE AND ESTABLISH. In addition to the
Funds described herein, the Trust offers the following investment portfolios:
the Commerce Short-Term Government Fund, Bond Fund, Balanced Fund, Growth
Fund, Aggressive Growth Fund and International Equity Fund.
Fund shares have no preemptive rights and only such conversion and exchange
rights as the Board of Trustees may grant in its discretion. All shares issued
as described in this Prospectus will be fully paid and non-assessable.
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Each share of a series shall represent an equal beneficial interest in the
net assets of such series. Each holder of shares of a series shall be entitled
to receive distributions of income and capital gains, if any, which are made
with respect to such series and which are attributable to such shares. Upon
redemption of shares, such shareowner shall be paid solely out of the funds
and property of such series of The Commerce Funds.
VOTING RIGHTS
SHAREOWNERS ARE ENTITLED TO ONE VOTE FOR EACH FULL SHARE HELD AND FRACTIONAL
VOTES FOR FRACTIONAL SHARES HELD. Additionally, except when required by the
1940 Act or when the Board of Trustees has determined that a matter affects
the interests of more than one series, all shares shall be voted separately by
individual series. The Board of Trustees may also determine that a matter
affects only the interests of one or more classes of a series, in which case
any such matter shall be voted on by such class or classes.
The Commerce Funds does not presently intend to hold annual meetings of
shareowners to elect Trustees or for other business. Shareowner meetings will
be held when required by the 1940 Act or other applicable law.
Under certain circumstances, shareowners have the right to call a
shareowners meeting. Such meetings will be held when requested by the
shareowners of 10% or more of The Commerce Funds' outstanding shares of
beneficial interest. The Commerce Funds will assist in shareowner
communications in such matters to the extent required by law and The Commerce
Funds' undertaking with the Securities and Exchange Commission. Voting rights
are not cumulative, and accordingly, the owners of more than 50% of the
aggregate shares of The Commerce Funds may elect all of the Trustees
irrespective of the vote of the other shareowners.
As of February 8, 1996, the Advisor and their affiliates possessed, on
behalf of their underlying customer accounts, voting or investment power with
respect to 97% of the outstanding shares of each of the National Tax-Free Bond
and Missouri Tax-Free Bond Funds, and therefore may be deemed to be a
controlling person of The Commerce Funds for purposes of the 1940 Act.
As used in this Prospectus, a "vote of the holders of a majority of the
outstanding shares" of The Commerce Funds or of a particular Fund means the
affirmative vote of the holders of the lesser of (a) more than 50% of the
outstanding shares of The Commerce Funds or such Fund, or (b) 67% or more of
the shares of The Commerce Funds or such Fund present at a meeting if more
than 50% of the outstanding shares of The Commerce Funds or such Fund are
represented at a meeting in person or by proxy.
SHAREOWNER REPORTS
Shareowners of record will be provided each year with a semiannual report
showing each Fund's investments and other information as of April 30 and,
after the close of The Commerce Funds' fiscal year on October 31, with an
annual report containing audited financial statements.
INQUIRIES
We welcome any inquiries you may have regarding The Commerce Funds. Please
consult your investment representative or call our toll-free service and
information number indicated on page 17.
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS OR IN THE STATEMENT OF
ADDITIONAL INFORMATION IN CONNECTION WITH THE OFFERING MADE BY THIS PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMMERCE FUNDS OR THE DISTRIBUTOR. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE COMMERCE FUNDS OR BY THE
DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE
MADE.
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Not to be used for Individual Retirement Accounts-- For an IRA application,
call Shareowner Services at 1-800-305-2140 or call the Transfer Agent at 1-800-
995-6365
Account # ______________________________
Order # ________________________________
ACCOUNT APPLICATION FORM LOGO
- --------------------------------------------------------------------------------
THIS ACCOUNT The Commerce Funds c/o Shareowner Services P.O. Box
APPLICATION FORM 16931 St. Louis, MO 63105
SHOULD BE For additional information call 1-800-305-2140
FORWARDED PROMPTLY Date: ___________
TO:
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1. ACCOUNT REGISTRATION
Please Print
INDIVIDUAL
--------------------------------------- ---------------
First NameInitialLast Name(Birthdate) SS# or Tax ID#
JOINT TENANTS
The account will be registered as "Joint Tenants with
Right of Survivorship" unless otherwise specified.
--------------------------------------- ---------------
First NameInitialLast Name(Birthdate) SS# or Tax ID#
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First NameInitialLast Name(Birthdate) SS# or Tax ID#
TRANSFER ON DEATH
--------------------------------------- ---------------
Name Date of Birth [/R] SS# [/R]
GIFT TO MINORS
---------------------------------------------------------
Custodian's Name (Only one can be named)
--------------------------------------- ---------------
Minor's Name (Only one) SS#
Under the __ (State of Residence) Uniform Gift to
Minors Act
ADDITIONAL DOCUMENTATION
CORPORATION, TRUST, OR OTHER ENTITY
MAY BE REQUIRED --------------------------------------- ---------------
Name of Corporation, Trust or other Non-Person Entity
Tax ID#
---------------------------------------------------------
Attention
---------------------------------------------------------
Date of Trust Instrument:Name of Beneficiary (If to be
included in the registration)
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Name(s) of Trustee(s) (If to be included in the
registration)
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( )
2. MAILING ADDRESS ----------------------------------- -------------------
Street Daytime Phone
---------------------------------------------------------
City State Zip Code
<PAGE>
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3. TO PURCHASE SHARES Check appropriate boxes:
[_]Short Term $_______ [_]Aggressive $_______
$1000 MINIMUM PER Government Growth
FUND Amount
Amount
#336 #339 [/R]
[_]Bond $_______ [_International$_______]
Amount Equity
#333 Amount
$_______ #340
[_]Balanced [/R] [_National]
Amount Tax-Free
#338 Bond
[_]Growth $_______
Amount $_______
#337 Amount
#334
[_Missouri]
Tax-Free
Bond
$_______
Amount
#335
[_]A check (payable to "The Commerce Funds") for $___ is
enclosed.
[_I/we]certify that I/we am/are an entity exempt from
the sales charge according to the "How To Buy Shares"
section in the Prospectus and I/we am/are, therefore,
entitled to purchase Fund shares at net asset value.
By checking this box, the undersigned agrees that
I/we will notify Commerce Funds Shareowner Services
at or prior to purchase if I/we am/are no longer in
one of the categories of eligible investors.
Reason for exemption ________________________________.
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4. DIVIDEND AND See "Dividend and Distribution Policies" in the
DISTRIBUTION Prospectus
OPTIONS Choose how you wish to receive dividends. If no boxes
are checked, Option A will be assigned.
A. [_] Reinvest all dividends and capital gains.
B. [_] Receive dividends in cash and reinvest capital
gains (Complete cash dividend section below.)
C. [_] Receive all dividends and capital gains in cash
(Complete cash dividend section below.)
D. [_] All dividends and capital gains reinvested in
another Commerce Fund account. (See Prospectus
regarding limitations on this privilege.)
Fund Name _________________ Account Number ____________
Please send cash dividends to:
[_] Account registration address. [_Deposit]to bank
(attach voided
check/deposit
slip)
[_] Check to special payee as follows: (SIGNATURE
GUARANTEE required. See Section 13 of this Form.)
Name of Payee ________________ Account No. (if
applicable) __________
Street Address _________________________________________
City _____________________________ State ____ Zip ______
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5. RIGHT OF ACCUMULATION
See "How To Buy Shares" in the Prospectus
Cumulative quantity discounts are applicable if a
shareowner's current value of existing shares of a Fund
alone or in combination with shares of any other Fund
described in the Prospectus on which a sales charge was
paid, total the requisite amount for receiving a
discount ($100,000 minimum) as described in the
accompanying Prospectus. Below are listed all the
accounts (account name, Fund and number) which should
be aggregated for a right of accumulation.
Name _____________ Name _____________ Name _____________
Fund _____________ Fund _____________ Fund _____________
Acct No. _________ Acct No. _________ Acct No. _________
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6. LETTER OF INTENT See "How To Buy Shares" in the Prospectus
Although not obligated to do so, it is the
undersigned's intention to invest, over a 13-month
period from this date, in shares of a Fund alone or in
combination with shares of any other Fund, on which a
sales charge was paid, described in the Prospectus
which qualify for a quantity discount as described in
the accompanying Prospectus, in an amount that will
equal or exceed:
[_] $100,000 [_] $250,000 [_] $500,000 [_] $1,000,000
I/we agree to the Letter of Intent and Escrow Agreement
described in the accompanying Prospectus under "How to
Buy Shares--Letter of Intent" and incorporated by
reference herein.
<PAGE>
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7. AUTOMATIC INVESTMENT PLAN (ATTACH VOIDED CHECK OR DEPOSIT SLIP)
See "What is Dollar Cost Averaging and How Can I
Implement It?" in the Prospectus
Beginning on the day of these months: J F M A M J J
A S O N D (circle all months that apply), I/We authorize
State Street Bank (the custodian for a Fund) to debit
the amount requested below from my/our bank account for
investment in a Fund. I/We understand that my/our
participation in the Automatic Investment Plan is
subject to the terms and conditions of such plan as
amended from time to time.
---------------------------------------------------------
Amount of each monthly investment (minimum $75/Quarter)
Name of Fund
---------------------------------------------------------
Amount of each monthly investment (minimum $75/Quarter)
Name of Fund
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Authorized Signature (as shown on bank records)
---------------------------------------------------------
Authorized Signature (if joint bank account both sign)
- --------------------------------------------------------------------------------
See "How To Buy Shares" or "How To Sell Shares" in the
Prospectus
8. FOR TELEPHONE PURCHASE/REDEMPTION, THIS SECTION MUST BE COMPLETED
[_The]Commerce Funds and its agent is hereby authorized
to honor telephone, telegraphic, or other
instructions, without SIGNATURE GUARANTEE, from any
person for the redemption of shares for the above
account, without an obligation on behalf of The
Commerce Funds or its agent, to verify that such
person is the shareowner of record or authorized to
give purchase/redemption instructions, provided
proceeds are sent by federal wire (minimum $1,000) or
electronic funds transfer to/from the bank account
indicated on your voided check or deposit slip or
mailed to the account registration address. Neither a
Fund nor its agent shall be liable for telephone
purchases or redemptions or for payments made to any
unauthorized account for instructions reasonably
believed to be genuine. The Commerce Funds will employ
reasonable procedures to confirm that such
instructions given are genuine.
(ATTACH VOIDED CHECK OR DEPOSIT SLIP)
- --------------------------------------------------------------------------------
See "Can I Exchange My Investment From One Commerce Fund
9. TELEPHONE EXCHANGE To Another?" in the Prospectus
Exchange Privilege (you will have this privilege unless
declined)
[_] I/We DO NOT wish to authorize telephone exchanges.
- --------------------------------------------------------------------------------
10. AUTOMATIC EXCHANGES
See "Can I Have Exchanges Made Automatically?" in the
Prospectus
The originating Fund's balance must be at least $1,000
after the exchange and the receiving Fund's minimum
investment must be met. Exchanges will take place each
month after such exchanges commence until terminated.
I/We hereby authorize automatic exchanges of $____ (exact
dollars--$250 minimum) into my/our identically
registered account:
Exchange __________________________________ (Name of
from Fund)
to __________________________________ (Name of
Account No. (if known) _____________________ Fund)
Please make exchanges on the day beginning the month
of .
------------------------- ---------------------------
Bank Name Account Number [/R]
---------------------------------------------------------
Bank Street AddressCityStateZip Code
------------------------- -------------------------
ABA Routing Number Name on Account [/R]
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11. DUPLICATE MAILINGS[_Check]the box if you would like duplicate
confirmations/statements sent to another address:
-------------------------------------------------
Name
-------------------------------------------------
Street Address City State Zip
<PAGE>
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Minimum account balance must be $5,000. Withdrawal
minimum is $100.^
12. AUTOMATIC WITHDRAWAL PLAN
Check One: [_] Monthly [_] Quarterly [_] Semi-
Annual [_] Annual
Please make payments via (check one) [_] check [_] ACH
(Bank must be ACH affiliated. Attach voided check).
Payments made via check are withdrawn from your account
on or about the 1st or 15th of a month for monthly
withdrawals or the 15th of the month for
quarterly/semi-annual/annual withdrawals. (I understand
that I may change the date of redemption, via ACH, or
the amount at any time in writing to the Fund at the
address stated above.)
If withdrawal payments are to be made via ACH (attach
voided check/deposit slip)
Please withdraw $ from my account on the
of the month.
Complete this section ONLY if check is to be made
payable to person(s) other than the registered owner.
SIGNATURE GUARANTEE required. (See Section 13 of this
Form.)
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Name of check recipient Address CityStateZip
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13. TAXPAYER ID CERTIFICATION AND SIGNATUREAUTHORIZATION
1) The number shown on this Account Application Form is
my/our correct Taxpayer Identification number, and 2)
I/we am/are not subject to backup withholding because
(a) I/we am/are exempt from backup withholding, or (b)
I/we have not been notified by the Internal Revenue
Service (IRS) that I/we am/are subject to backup
withholding as a result of a failure to report all
interest or dividends, or (c) the IRS has notified
me/us that I/we am/are no longer subject to backup
withholding.
You must cross out item (2) above if you have been
notified by the IRS that you are currently subject to
federal backup withholding because of under reporting
interest or dividends on your federal tax return or if
you have not been notified by the IRS that you are no
longer subject to backup withholding.
I/we further certify that I/we am/are neither a citizen
nor a resident of the United States for the purpose of
the Internal Revenue Code. I/we am/are a resident of ___
NOTE: FAILURE TO COMPLETE THIS SECTION MAY RESULT IN
BACKUP WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO
YOU.
By checking only the appropriate box and signing below,
I/we certify under penalties of perjury that:
[_] I/we do not have a taxpayer identification
number, but I/we have applied for or intend to
apply for one. I/we understand that the required
31% withholding may apply before I/we provide such
number and certifications, which should be provided
within 60 days.
or [_] I/we am/are an exempt recipient.
or [_] I/we am/are neither a citizen nor a resident of
the United States for the purpose of the Internal
Revenue Code. I/we am/are a resident of ________ .
Permanent Foreign Address:______________________________
________________________________________________________
________________________________________________________
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SIGNATURE AUTHORIZATION
By the execution of this Account Application Form, the
undersigned represents and warrants that it has the
full right, power and authority to make the investment
applied for pursuant to this Form and is acting for
itself or in some fiduciary capacity in making such
investment.
THE UNDERSIGNED AFFIRMS THAT I/WE HAVE RECEIVED A
CURRENT PROSPECTUS FOR THE FUND AND HAS REVIEWED THE
SAME.
Sign Here:
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Signature Name (print) and Title
--------------------------------------------------------
Signature Name (print) and Title
SIGNATURE GUARANTEE REQUIRED ONLY IF A SPECIAL
PAYEE/ADDRESS IS DESIGNATED UNDER ITEM #'S 4 AND 12.
SEE "HOW TO SELL SHARES" IN THE PROSPECTUS.
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SIGNATURE GUARANTEE (IF REQUIRED)
SIGNATURE GUARANTEE
<PAGE>
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14. FOR DEALER ONLY Investment dealer's signature is required for Automatic
Withdrawal Plan or Letter of Intent. If an Automatic
Withdrawal Plan is being opened, we believe that the
amount to be withdrawn is reasonable in light of the
investor's circumstances and we recommend establishment
of the account.
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Branch Office Location Branch Number/Branch Phone
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Reg. Rep. NumberReg. Rep.'s Name
--------------------------------------------------------
Authorized Signature State Zip
THE COMMERCE FUNDS DISCLOSURE STATEMENT (YOU MUST SIGN)
The account owner acknowledges that the account owner has read this disclosure
statement and has been told and understands that:
. shares of the Funds are not bank deposits or obligations of, or guaranteed,
endorsed or otherwise supported by Commerce Bank, N.A. (St. Louis), Commerce
Bank, N.A. (Kansas City), their parent company or its affiliates, or any
other bank
. are not federally insured or guaranteed by the U.S. Government, Federal
Deposit Insurance Corporation (FDIC), the Federal Reserve Board, or any
other government agency
. investment in the Funds involves investment risks, including possible loss
of the principal amount invested
. Commerce Bank, N.A. (St. Louis) and Commerce Bank, N.A. (Kansas City) serve
as the investment advisor to the Funds and receive compensation for such
services as disclosed in the current prospectus
. sales charges may apply.
Dated: _________________ --------------------------
Signature
--------------------------
Signature
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF ADDITIONAL INFORMATION
SHORT-TERM GOVERNMENT FUND
BOND FUND
BALANCED FUND
GROWTH FUND
AGGRESSIVE GROWTH FUND
INTERNATIONAL EQUITY FUND
NATIONAL TAX-FREE BOND FUND
MISSOURI TAX-FREE BOND FUND
FEBRUARY 29, 1996
--
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
<S> <C>
Investment Objectives, Policies and Risk Factors.. 2
Net Asset Value................................... 31
Additional Purchase and Redemption Information.... 32
Description of Shares............................. 34
Additional Information Concerning Taxes........... 37
Management of The Commerce Funds.................. 40
Independent Auditors.............................. 49
Counsel........................................... 49
Additional Information on Performance............. 50
Miscellaneous..................................... 55
Financial Statements.............................. FS-1
Appendix A........................................ A-1
Appendix B........................................ B-1
</TABLE>
This Statement of Additional Information, is meant to be read in conjunction
with The Commerce Funds' Prospectuses dated February 29, 1996, for the
Commerce Short-Term Government, Bond, Balanced, Growth, Aggressive Growth,
International Equity, National Tax-Free Bond and Missouri Tax-Free Bond Funds
(each, a "Fund" and collectively, the "Funds"). This Statement of Additional
Information is incorporated by reference in its entirety into the Prospectuses.
Because this Statement of Additional Information is not itself a prospectus, no
investment in the Funds should be made solely upon the information contained
herein. Copies of the Prospectuses may be obtained by calling 1-800-305-2140.
Capitalized terms used but not defined herein have the same meanings as in the
Prospectuses.
<PAGE>
INVESTMENT OBJECTIVES, POLICIES AND RISK FACTORS
The following policies supplement the discussion of the Funds'
respective investment objectives and policies as set forth in the Prospectuses.
PORTFOLIO TRANSACTIONS
- ----------------------
The annualized portfolio turnover rate for each Fund is calculated by
dividing the lesser of purchases or sales of portfolio securities for the year
by the monthly average value of the portfolio securities. The calculation
excludes all securities, including options, whose maturities or expiration dates
at the time of acquisition are one year or less. Fund turnover may vary greatly
from year to year as well as within a particular year, and may be affected by
cash requirements for redemption of shares and by requirements which enable the
Fund to receive favorable tax treatment. Fund turnover will not be a limiting
factor in making portfolio decisions, and each Fund may engage in short-term
trading to achieve its investment objective.
Transactions on U.S. stock exchanges involve the payment of negotiated
brokerage commissions. On exchanges on which commissions are negotiated, the
cost of transactions may vary among different brokers. Transactions in the
over-the-counter market are generally principal transactions with dealers and
the costs of such transactions involve dealer spreads rather than brokerage
commissions. With respect to over-the-counter transactions, the Advisor will
normally deal directly with the dealers who make a market in the securities
involved except in those circumstances where better prices and execution are
available elsewhere or as described below. Unlike transactions on U.S. stock
exchanges which involve the payment of negotiated brokerage commissions,
transactions in foreign securities generally involve the payment of fixed
brokerage commissions, which are generally higher than those in the United
States.
Debt securities purchased and sold by the Funds are generally traded
in the over-the-counter market on a net basis (i.e., without commission) through
dealers, or otherwise involve transactions directly with the issuer of an
instrument. The cost of securities purchased from underwriters includes an
underwriting commission or concession, and the prices at which securities are
purchased from and sold to dealers include a dealer's mark-up or mark-down.
The Advisory Agreement for the Funds provides that, in executing
portfolio transactions and selecting brokers or dealers, the Advisor will use
reasonable efforts to seek the best overall terms available on behalf of each
Fund. In assessing the best overall terms available for any transaction, the
Advisor will consider all factors it deems relevant, including the breadth of
the market in the security, the price of the security,
<PAGE>
the financial condition and execution capability of the broker or dealer, and
the reasonableness of the commission, if any, both for the specific transaction
and on a continuing basis. In addition, the Agreement authorizes the Advisor,
subject to the prior approval of the Board of Trustees, to cause the Funds to
pay a broker-dealer furnishing brokerage and research services a higher
commission than that which might be charged by another broker-dealer for
effecting the same transaction, provided that they determine in good faith that
such commission is reasonable in relation to the value of the brokerage and
research services provided by such broker-dealer, viewed in terms of either that
particular transaction or the overall responsibilities of the Advisor to the
particular Fund and to The Commerce Funds. Such brokerage and research services
might consist of reports and statistics of specific companies or industries,
general summaries of groups of stocks or bonds and their comparative earnings
and yields, 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.
A Fund's portfolio securities will not be purchased from or sold to
(and savings deposits will not be made in and repurchase and reverse repurchase
agreements will not be entered into with) the Advisor, Sub-Advisor, Goldman,
Sachs & Co. or any affiliated person (as such term is defined in the 1940 Act)
thereof acting as principal or broker, except to the extent permitted by the
Securities and Exchange Commission. However, The Commerce Funds' Board of
Trustees has authorized the Advisor to allocate purchase and sale orders for
portfolio securities to broker/dealers and other financial institutions
including, in the case of agency transactions, institutions which are affiliated
with the Advisor, to take into account the sale of Fund shares if the Advisor
believes that the quality of the transaction and the amount of the commission
are comparable to what they would be with other qualified brokerage firms,
provided such transactions comply with the requirements of Rule 17e-1 under the
1940 Act. In addition, the Funds will not purchase securities during the
<PAGE>
existence of any underwriting or selling group relating thereto of which the
Advisor, Goldman, Sachs & Co., or any affiliated person thereof is a member,
except to the extent permitted by the Securities and Exchange Commission. Under
certain circumstances, the Funds may be at a disadvantage when compared to other
investment companies which have similar investment objectives but that are not
subject to such limitations.
Investment decisions for each Fund are made independently from those
made for the other Funds and from those made for other investment companies and
accounts advised or managed by the Advisor. Such other investment companies and
accounts may also 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 is required to identify any securities of its
"regular brokers or dealers" acquired by the Funds during the most recent fiscal
year. During the period December 12, 1994 (commencement of operations) through
October 31, 1995,the Bond and Balanced Funds acquired securities of Morgan
Stanley Group, Inc. and Smith Barney Holdings, Inc., each a regular
Broker/Dealer or Parent. At October 31, 1995, the Bond Fund's aggregate holdings
in these securities amounted to $1,998,180 and $2,012,320, respectively, and the
Balanced Fund's aggregate holdings in these securities amounted to $499,545 and
$503,080, respectively.
During the period from commencement of operations through October 31,
1995, the respective Funds entered into repurchase agreement transactions with
State Street Bank & Trust Company, which was one of the brokers or dealers which
engaged as principal in the largest dollar amount of portfolio transactions with
the Funds. At October 31, 1995, the value of each Fund's outstanding repurchase
agreement transactions with State Street Bank & Trust Company was as follows:
<TABLE>
<CAPTION>
<S> <C>
Short-Term Government Fund.......... $ 2,509,000
Bond Fund........................... 1,578,000
Balanced Fund....................... 3,768,000
Growth Fund......................... 12,059,000
Aggressive Growth Fund.............. 2,886,000
International Equity Fund........... 1,184,000
National Tax-Free Bond Fund......... 352,000
Missouri Tax-Free Bond Fund......... 103,000
</TABLE>
<PAGE>
For the period December 12, 1994 (commencement of operations) through
October 31, 1995, the Balanced, Growth, Aggressive Growth and International
Equity Funds paid brokerage commissions as follows:
<TABLE>
<CAPTION>
Total
Total Brokerage
Total Amount of Commissions
Brokerage Transactions Paid to
Total Commissions on Which Brokers
Brokerage Paid to Commissions Who
Commissions Affiliated Were Provided
Paid Persons Paid Research
----------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Balanced Fund $ 28,613 $ 660 $25,307,292 $ 6,355
-------- ------ ----------- -------
Growth Fund $123,720 $1,460 $85,947,095 $25,070
-------- ------ ----------- -------
Aggressive
Growth Fund $ 69,935 $ 300 $47,022,043 $15,970
-------- ------ ----------- -------
International
Equity Fund $ 37,119 $2,226 $14,456,331 $ 0
-------- ------ ----------- -------
</TABLE>
RATINGS OF SECURITIES
- ---------------------
The ratings of Moody's, S&P, Duff & Phelps Credit Rating Co., Fitch
Investors Service, Inc., Thomson Bank Watch and IBCA Inc., as NRSROs, represent
their opinions as to the quality of debt securities. It should be emphasized,
however, that ratings are general and are not absolute standards of quality, and
debt securities with the same maturity, interest rate and rating may have
different yields while debt securities of the same maturity and interest rate
with different ratings may have the same yield. Subsequent to its purchase by a
Fund, an issue of debt securities may cease to be rated or its rating may be
reduced below the minimum rating required for purchase by a Fund. The Advisor
will consider such an event in conjunction with the particular Fund's investment
policy when determining whether the Fund should continue to hold the obligation.
The payment of principal and interest on most securities purchased by
the Funds will depend upon the ability of the issuers to meet their obligations.
An issuer's obligations under its debt securities are subject to the provisions
of bankruptcy, insolvency, and other laws affecting the rights and remedies of
<PAGE>
creditors, such as the Federal Bankruptcy Code, and laws, if any, which may be
enacted by federal or state legislatures extending the time for payment of
principal or interest, or both, or imposing other constraints upon enforcement
of such obligations or, in the case of governmental entities, upon the ability
of such entities to levy taxes. The power or ability of an issuer to meet its
obligations for the payment of interest on and principal of its debt securities
may be materially adversely affected by litigation or other conditions.
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.
VARIABLE AND FLOATING RATE INSTRUMENTS
- --------------------------------------
The Funds may purchase variable rate and floating rate obligations as
described in the Prospectuses. Such instruments are frequently not rated by
credit rating agencies. However, in determining the creditworthiness of unrated
variable and floating rate instruments and their eligibility for purchase by the
Funds, the Advisor will consider the earning power, cash flows and other
liquidity ratios of the issuers and guarantors of such obligations and, if the
obligation is subject to a demand feature, will monitor their financial status
to meet payment on demand. In determining average weighted portfolio maturity,
an instrument will usually be deemed to have a maturity equal to the longer of
the period remaining to the next interest rate adjustment or the time a Fund can
recover payment of principal as specified in the instrument.
Variable and floating rate demand instruments acquired by the National
Tax-Free Bond and Missouri Tax-Free Bond Funds may include 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.
U.S. GOVERNMENT OBLIGATIONS
- ---------------------------
As stated in the Prospectuses, pursuant to their respective investment
objectives, the Funds may invest in U.S. Government Obligations. 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
<PAGE>
rates or demand or put features may nonetheless be deemed to have remaining
maturities of five years or less so as to be permissible investments as follows:
(a) a government security with a variable or floating rate of interest will be
deemed to have a maturity equal to the period remaining until the next
readjustment of the interest rate; (b) a government security with a demand or
put feature that entitles the holder to receive the principal amount of the
underlying security at the time of or sometime after the holder gives notice of
demand or exercise of the put will be deemed to have a maturity equal to the
period remaining until the principal amount can be recovered through demand or
exercise of the put; and (c) a government security with both a variable or
floating rate of interest as described in clause (a) and a demand or put feature
as described in clause (b) will be deemed to have a maturity equal to the
shorter of the period remaining until the next readjustment of the interest rate
or the period remaining until the principal amount can be recovered through
demand or exercise of the put.
MORTGAGE-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.
MORTGAGE-RELATED SECURITIES. There are a number of important
differences among the agencies and instrumentalities of the U.S. Government that
issue mortgage-related securities and among the securities that they issue.
Mortgage-related securities guaranteed by the Government National Mortgage
Association ("GNMA") include GNMA Mortgage Pass-Through Certificates (also known
as "Ginnie Maes") which are guaranteed as to the timely payment of principal and
interest by GNMA and such guarantee is backed by the full faith and credit of
the United States. GNMA is a wholly-owned U.S. Government corporation within
the Department of Housing and Urban Development. GNMA certificates also are
supported by the authority of GNMA to borrow funds from the U.S. Treasury to
make payments under its guarantee. Mortgage-related securities issued by the
Federal National Mortgage Association ("FNMA") include FNMA guaranteed Mortgage
Pass-Through Certificates (also known as "Fannie Maes") which are solely the
obligations of the FNMA, are not backed by or entitled to the full faith and
credit of the United States and are supported by the right of the issuer to
borrow from the Treasury. FNMA is a government-sponsored organization owned
entirely by private stockholders. Fannie Maes are guaranteed as to timely
payment of principal and interest by FNMA. Mortgage-related securities issued
by the Federal Home
<PAGE>
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.
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
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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 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
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deduction. FHLMC also guarantees timely payment of principal on certain Pcs,
referred to as "Gold Pcs."
ASSET-BACKED SECURITIES. Asset-backed securities are generally issued
as pass-through certificates, which represent undivided fractional ownership
interests in an underlying pool of assets, or as debt instruments, which are
also known as collateralized obligations, and are generally issued as the debt
of a special purpose entity organized solely for the purpose of owning such
assets and issuing such debt. Asset-backed securities are often backed by a
pool of assets representing the obligations of a number of different parties.
The yield characteristics of asset-backed securities differ from
traditional debt securities. A major difference is that the principal amount of
the obligations may be prepaid at any time because the underlying assets (i.e.,
loans) generally may be prepaid at any time. As a result, if an asset-backed
security is purchased at a premium, a prepayment rate that is faster than
expected may reduce yield to maturity, while a prepayment rate that is slower
than expected may have the opposite effect of increasing yield to maturity.
Conversely, if an asset-backed security is purchased at a discount, faster than
expected prepayments may increase, while slower than expected prepayments may
decrease, yield to maturity.
In general, the collateral supporting asset-backed securities is of
shorter maturity than mortgage-related securities. Like other fixed-income
securities, when interest rates rise the value of an asset-backed security
generally will decline; however, when interest rates decline, the value of an
asset-backed security with prepayment features may not increase as much as that
of other fixed-income securities.
OPTIONS TRADING
As stated in the Prospectuses, each of the Funds may purchase put and
call options listed on a national securities exchange and issued by the Options
Clearing Corporation. Such purchases would be in an amount not to exceed 5% of
a Fund's net assets. Such options relate to particular securities. This is a
highly specialized activity which entails greater than ordinary investment
risks. Regardless of how much the market price of the underlying security
increases or decreases, the option buyer's risk is limited to the amount of the
original investment for the purchase of the option. However, options may be
more volatile than the underlying securities, and therefore, on a percentage
basis, an investment in options may be subject to greater fluctuation than an
investment in the underlying securities themselves. A listed call option gives
the purchaser of the option the right to buy from a clearing corporation, and a
writer has the obligation to sell to the clearing corporation, the underlying
security at the stated exercise price at any time prior to the expiration of the
option, regardless of the market
<PAGE>
price of the security. The premium paid to the writer is in consideration for
undertaking the obligations under the option contract. A listed put option gives
the purchaser the right to sell to a clearing corporation the underlying
security at the stated exercise price at any time prior to the expiration date
of the option, regardless of the market price of the security. Put and call
options purchased by a Fund will be valued at the last sale price or, in the
absence of such a price, at the mean between bid and asked prices.
The Funds will write only "covered" call options on securities. The option
is "covered" if a Fund owns the security underlying the call or has an absolute
and immediate right to acquire that security without additional cash
consideration (or, if additional cash consideration is required, cash or cash
equivalents in such amount as are held in a segregated account by its custodian)
upon conversion or exchange of other securities held by it. A call option is
also covered if a Fund holds a call on the same security as the call written
where the exercise price of the call held is (i) equal to or less than the
exercise price of the call written, or (ii) greater than the exercise price of
the call written provided the difference is maintained by the Fund in cash or
cash equivalents in a segregated account with its custodian.
A Fund's obligation to sell a security subject to a covered call option
written by it, or to purchase a security subject to a secured put option written
by it, may be terminated prior to the expiration date of the option by the
Fund's executing a closing purchase transaction, which is effected by purchasing
on an exchange an option of the same series (i.e., the same underlying security,
exercise price and expiration date) as the option previously written. Such a
purchase does not result in the ownership of an option. A closing purchase
transaction will ordinarily be effected to realize a profit on an outstanding
option, to prevent an underlying security from being called, to permit the sale
of the underlying security or to permit the writing of a new option containing
different terms on such underlying security. The cost of such a liquidation
purchase plus transaction costs may be greater than the premium received upon
the original option, in which event the Fund will have incurred a loss in the
transaction. An option position may be closed out only on an exchange which
provides a secondary market for an option of the same series. There is no
assurance that a 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
<PAGE>
Fund to make a closing purchase transaction in order to close out its position.
When a Fund purchases a put or call option, the premium paid by it is
recorded as an asset of the Fund. When a Fund writes an option, an amount equal
to the net premium (the premium less the commission) received by the Fund is
included in the liability section of the Fund's statement of assets and
liabilities as a deferred credit. The amount of this asset or deferred credit
will be subsequently marked-to-market to reflect the current value of the option
purchased or written. The current value of the traded option is the last sale
price or, in the absence of a sale, the average of the closing bid and asked
prices. If an option purchased by a Fund expires unexercised, the Fund realizes
a loss equal to the premium paid. If a Fund enters into a closing sale
transaction on an option purchased by it, the Fund will realize a gain if the
premium received by the Fund on the closing transaction is more than the premium
paid to purchase the option, or a loss if it is less. If an option written by a
Fund expires on the stipulated expiration date or if a Fund enters into a
closing purchase transaction, it will realize a gain (or loss if the cost of a
closing purchase transaction exceeds the net premium received when the option is
sold) and the deferred credit related to such option will be eliminated. If an
option written by a Fund is exercised, the proceeds of the sale will be
increased by the net premium originally received and the Fund will realize a
gain or loss.
As noted previously, there are risks associated with transactions in
options on securities. For example, there are significant differences between
the securities and options markets that could result in an imperfect correlation
between these markets, causing a given transaction not to achieve its
objectives. In addition, a liquid secondary market for particular options,
whether traded over-the-counter or on a national securities exchange
("Exchange"), may be absent for reasons which include the following: there may
be insufficient trading interest in certain options; restrictions may be imposed
by an Exchange on opening transactions or closing transactions or both; trading
halts, suspensions or other restrictions may be imposed with respect to
particular classes or series of options or underlying securities; unusual or
unforeseen circumstances may interrupt normal operations on an Exchange; the
facilities of an Exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume; or one or more Exchanges
could, for economic or other reasons, decide or be compelled at some future date
to discontinue the trading of options (or a particular class or series of
options), in which event the secondary market on that Exchange (or in that class
or series of options) would cease to exist, although outstanding options that
had been issued by the Options Clearing Corporation as a result of trades on
that Exchange would continue to be exercisable in accordance with their terms. A
Fund will likely be unable to control losses by closing its position where a
<PAGE>
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.
FUTURES CONTRACTS AND RELATED OPTIONS
The Bond, Balanced, Growth, Aggressive Growth and International Equity
Funds may invest in futures contracts and options thereon (interest rate futures
contracts or index futures contracts, as applicable). Positions in futures
contracts may be closed out only on an exchange which provides a secondary
market for such futures. However, there can be no assurance that a liquid
secondary market will exist for any particular futures contract at any specific
time. Thus, it may not be possible to close a futures position. In the event of
adverse price movements, a Fund would continue to be required to make daily cash
payments to maintain its required margin. In such situations, if a Fund has
insufficient cash, it may have to sell portfolio securities to meet daily margin
requirements at a time when it may be disadvantageous to do so. In addition, a
Fund may be required to make delivery of the instruments underlying futures
contracts it holds. The inability to close options and futures positions also
could have an adverse impact on a Fund's ability to effectively hedge.
Successful use of futures by a Fund is also subject to the Advisor's
ability to correctly predict movements in the direction of the underlying
security or index. For example, if a Fund has hedged against the possibility of
a decline in the market adversely affecting securities held by it and securities
prices increase instead, the Fund will lose part or all of the benefit to the
increased value of its securities which it has hedged because it will have
approximately equal offsetting losses in its futures positions. In addition, in
some situations, if a Fund has insufficient cash, it may have to sell securities
to meet daily variation margin requirements. Such sales of securities may be,
but will not necessarily be, at increased prices which reflect the rising
market. A Fund may have to sell securities at a time when it may be
disadvantageous to do so.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if at the time
of purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit, before
<PAGE>
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.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movement during a particular trading day and therefore does not limit
potential losses, because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of futures positions and subjecting some futures
traders to substantial losses.
The trading of futures contracts is also subject to the risk of trading
halts, suspensions, exchange or clearing house equipment failures, government
intervention, insolvency of a brokerage firm or clearing house or other
disruptions of normal trading activity, which could at times make it difficult
or impossible to liquidate existing positions or to recover excess variation
margin payments.
HYBRID INSTRUMENTS
Hybrid instruments have been developed and combine the elements of futures
contracts or options with those of debt, preferred equity or 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 a interest
rates, currency exchange rates, commodity indices, and securities indices
(collectively, "Benchmarks"). Thus, Hybrid Instruments may take a variety of
forms, including, but not limited to, debt instruments with interest or
principal payments or redemption terms determined by reference to the value of a
currency or commodity or securities
<PAGE>
index at a future point in time, preferred stock with dividend rates determined
by reference to the value of a currency, or convertible securities with the
conversion terms related to a particular commodity.
Hybrid Instruments can be an efficient means of creating exposure to a
particular market, or segment of a market, with the objective of enhancing total
return. For example, a Fund may wish to take advantage of expected declines in
interest rates in several European countries, but avoid the transactions costs
associated with buying and currency-hedging the foreign bond positions. One
solution would be to purchase a U.S. dollar-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.
The risks of investing in Hybrid Instruments reflect a combination of the
risks of investing in securities, options, futures and currencies. Thus, an
investment in a Hybrid Instrument may entail significant risks that are not
associated with a similar investment in a traditional debt instrument that has a
fixed principal amount, is denominated in U.S. dollars or bears interest either
at a fixed rate or a floating rate determined by reference to a common,
nationally published Benchmark. The risks of a particular Hybrid Instrument
will, of course, depend upon the terms of the instrument, but may include,
without limitation, the possibility of significant changes in the Benchmarks or
the prices of Underlying Assets to which the instrument is linked. Such risks
generally depend upon factors which are unrelated to the operations or credit
quality of the issuer of the Hybrid Instrument and which may not be credit
quality of the issuer of the Hybrid Instrument and which may not be readily
foreseen by the purchaser, such as economic and political events, the supply and
demand of the Underlying Assets and interest rate movements. In recent years,
various Benchmarks and prices for Underlying Assets have been highly volatile,
and such volatility may be expected in the future. Reference is also made to the
discussion of futures, options, and forward contracts herein for a discussion of
the risks associated with such investments.
<PAGE>
Hybrid Instruments are potentially more volatile and carry greater market
risks than traditional debt instruments. Depending on the structure of the
particular Hybrid Instrument, changes in a Benchmark may be magnified by the
terms of the Hybrid Instrument and have an even more dramatic and substantial
effect upon the value of the Hybrid Instrument. Also, the prices of the Hybrid
Instrument and the Benchmark or Underlying Asset may not move in the same
direction or at the same time.
Hybrid Instruments may bear interest or pay preferred dividends at below
market (or even relatively nominal) rates. Alternatively, Hybrid Instruments may
bear interest at above market rates but bear an increased risk of principal loss
(or gain). The latter scenario may result if "leverage" is used to structure the
Hybrid Instrument. Leverage risk occurs when the Hybrid Instrument is structured
so that a given change in a Benchmark or Underlying Asset is multiplied to
produce a greater value change in the Hybrid Instrument, thereby magnifying the
risk of loss as well as the potential for gain.
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.
INTEREST RATE SWAPS, FLOORS AND CAPS
In order to hedge against fluctuations in interest rates, the Short-Term
Government, Bond, Balanced, National Tax-Free Bond and Missouri Tax-Free Bond
Funds may enter into interest rate and mortgage swaps and interest rate caps and
floors. A Fund typically uses interest rate and mortgage swaps to preserve a
return on a particular investment or portion of its portfolio or to shorten the
effective duration of its portfolio securities. Interest rate swaps involve the
exchange by 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
<PAGE>
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.
A Fund will enter into interest rate and mortgage swaps only on a net
basis, i.e., the two payment streams are netted out, with the Fund receiving or
paying, as the case may be, only the net amount of the two payments. Inasmuch as
these transactions are entered into for good faith hedging purposes, the 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 debt securities rated in one of the top three ratings
categories by S&P, Moody's or another NRSRO or if unrated by such rating
organizations, deemed by the Advisor to be of comparable quality ("High Grade
Debt Securities") having an aggregate net asset value at least equal to such
accrued excess, is maintained in a segregated account by the Fund's custodian.
A Fund does not enter into any interest rate or mortgage swap or interest
cap or floor transaction unless the unsecured commercial paper, senior debt or
the claims-paying ability of the other party thereto is rated either AA or A-1
or Aa or P-1 or better by S&P or Moody's or the equivalent rating of another
NRSRO or if unrated by such rating organizations, determined by the Advisor to
be of comparable credit quality. If there is a default by the other party to
such a transaction, 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 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
<PAGE>
position that swaps, caps and floors are illiquid for purposes of the Funds'
limitations on investments in illiquid securities.
RIGHTS OFFERINGS AND WARRANTS
As stated in their Prospectus, the Balanced, Growth, Aggressive Growth and
International Equity Funds may participate in rights offerings and may purchase
warrants, which are privileges issued by corporations enabling the owners to
subscribe to and purchase a specified number of shares of the corporation at a
specified price during a specified period of time. Subscription rights normally
have a short life span to expiration. The purchase of rights or warrants
involves the risk that a Fund could lose the purchase value of a right or
warrant if the right to subscribe to additional shares is not exercised prior to
the expiration of the rights and warrants. Also, the purchase of rights and/or
warrants involves the risk that the effective price paid for the right and/or
warrant added to the subscription price of the related security may exceed the
value of the subscribed security's market price such as when there is no
movement in the level of the underlying security. A Fund will not invest more
than 5% of its total assets, taken at market value, in warrants, or more than 2%
of its total assets, taken at market value, in warrants not listed on the New
York or American Stock Exchanges. Warrants acquired by a Fund in units or
attached to other securities are not subject to this restriction.
LENDING SECURITIES
Each Fund may lend its portfolio securities. Collateral for securities
loans may include cash, securities of the U.S. Government, its agencies or
instrumentalities, or an irrevocable letter of credit issued by a bank that
meets the investment standards stated under "Money Market Instruments" in the
Prospectus for the National Tax-Free Bond and Missouri Tax-Free Bond Funds or
those defined as "money market instruments" in "Temporary Instruments" in the
Prospectus for the Short-Term Government, Bond, Balanced, Growth, Aggressive
Growth and International Equity Funds, or any combination thereof. When a Fund
lends its securities, it continues to receive interest or dividends on the
securities loaned and may simultaneously earn interest on the investment of the
cash loan collateral which will be invested in readily marketable, high-quality,
short-term obligations. Although voting rights, or rights to consent, attendant
to securities on loan pass to the borrower, such loans may be called at any time
and will be called so that the securities may be voted by a Fund if a material
event affecting the investment is to occur.
REPURCHASE AGREEMENTS
The repurchase price under the repurchase agreements described in the
Funds' Prospectuses generally equals the price paid by a Fund plus interest
negotiated on the basis of current
<PAGE>
short-term rates (which may be more or less than the rate on the securities
underlying the repurchase agreement). Securities subject to repurchase
agreements are held by the Funds' Custodian (or sub-custodian) or in the Federal
Reserve/Treasury book-entry system. Repurchase agreements are considered to be
loans under the 1940 Act.
BANK OBLIGATIONS
For purposes of the Funds' investment policies with respect to bank
obligations, the assets of a bank or savings institution will be deemed to
include the assets of its domestic and foreign branches. Investments in
obligations issued by foreign banks and foreign branches of U.S. banks may
involve risks that are different from investments in obligations of domestic
branches of U.S. banks. These risks may include future unfavorable political and
economic developments, possible withholding taxes on interest income, seizure or
nationalization of foreign deposits, currency controls, interest limitations, or
other governmental restrictions which might affect the payment of principal or
interest on the securities held by the Fund. Additionally, these institutions
may be subject to less stringent reserve requirements and to different
accounting, auditing, reporting and recordkeeping requirements than those
applicable to domestic branches of U.S. banks.
Certificates of deposit issued by domestic branches of domestic banks do
not benefit materially, and certificates of deposit issued by foreign branches
of domestic banks do not benefit at all, from insurance from the Federal Deposit
Insurance Corporation.
Both domestic banks and foreign branches of domestic banks are subject to
extensive governmental regulations which may limit both the amount and types of
loans which may be made and interest rates which may be charged. In addition,
the profitability of the banking industry is dependent largely upon the
availability and costs of funds for the purpose of financing and lending
operations under prevailing money market conditions. General economic conditions
as well as exposure to credit losses arising from possible financial
difficulties of borrowers play an important part in the operations of this
industry.
STRIPPED GOVERNMENT OBLIGATIONS
The Federal Reserve has established an investment program known as "STRIPS"
or "Separate Trading of Registered Interest and Principal of Securities." The
Bond and Balanced Funds may purchase securities registered under this program.
This allows the Funds to be able to have their beneficial ownership of zero
coupon securities recorded directly in the book-entry record-keeping system in
lieu of having to hold certificates or other evidences of ownership of the
underlying U.S. Treasury securities. The Treasury Department has, within
<PAGE>
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 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.
The Prospectus discusses other types of stripped securities that may be
purchased by the Bond and Balanced Funds, including stripped mortgage-backed
securities.
MUNICIPAL OBLIGATIONS
Municipal Obligations include debt obligations issued by governmental
entities to obtain funds for various public purposes, including the construction
of a wide range of public facilities, the refunding of outstanding obligations,
the payment of general operating expenses and the extension of loans to public
institutions and facilities.
As described in the Prospectuses, the two principal classifications of
Municipal Obligations consist of "general obligation" and "revenue" issues, and
the respective portfolios may include "moral obligation" issues, which are
normally issued by special purpose authorities. There are, of course, variations
in the quality of Municipal Obligations both within a particular classification
and between classifications, and the yields on
<PAGE>
Municipal Obligations depend upon a variety of factors, including general money
market conditions, the financial condition of the issuer, general conditions of
the municipal bond market, the size of a particular offering, the maturity of
the obligation and the rating of the issue.
As stated in their Prospectus, the Bond and Balanced Funds may, when deemed
appropriate by the Advisor in light of the particular Fund's investment
objective, invest in obligations issued by state and local governmental issuers.
Dividends which are derived from the interest of Municipal Obligations would be
taxable to the Funds' shareowners for federal income tax purposes.
Although the National Tax-Free Bond and Missouri Tax-Free Bond Funds will
invest most of their assets, under normal circumstances, in intermediate-term
Municipal Obligations, the Funds may also purchase short-term Project Notes, Tax
Anticipation Notes, Bond Anticipation Notes, Revenue Anticipation Notes, Tax-
Exempt Commercial Paper, and other forms of short-term tax-exempt loans. Such
instruments are issued with a short-term maturity in anticipation of the receipt
of tax funds, the proceeds of bond placements or other revenues.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on Municipal Obligations. For example, under the federal tax
legislation enacted in 1986, interest on certain private activity bonds must be
included in an investor's alternative minimum taxable income, and corporate
investors must treat all tax-exempt interest as an item of tax preference. The
Commerce Funds cannot predict what legislation, if any, may be proposed or
enacted in the future regarding the federal tax status of interest on such
obligations or, with respect to the Missouri Tax-Free Bond Fund, what
legislation may be proposed in the Missouri Legislature relating to the status
of the Missouri income tax on interest on Missouri obligations. Such proposals,
whether pending or enacted, might materially and adversely affect the
availability of Municipal or Missouri Obligations for investment by 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
<PAGE>
changes in interest rates and other factors. The National Tax-Free Bond and
Missouri Tax-Free Bond Funds may, from time to time, invest more than 25% of
their assets in Municipal Obligations covered by insurance policies.
FOREIGN INVESTMENTS
As indicated in their Prospectus, the Bond, Growth, Aggressive Growth and
International Equity Funds may invest up to 20%, 10%, 10% and 100%,
respectively, of their total assets, and the Balanced Fund may invest up to 20%
and 10% of the fixed income and equity portions of its portfolio, respectively,
in securities issued by foreign issuers, including American Depository Receipts
("ADRs") and, in the case of the International Equity Fund, European Depository
Receipts ("EDRs"), wherever organized ("Foreign Securities"). In considering
whether to invest in the 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.
FOREIGN CURRENCY TRANSACTIONS
In order to protect against a possible loss on investments resulting from a
decline or appreciation in the value of a particular foreign currency against
the U.S. dollar or another foreign currency or for other reasons, the
International Equity Fund is authorized to enter into forward currency exchange
contracts. These contracts involve an obligation to purchase or sell a specified
currency at a future date at a price set at the time of the contract. Forward
currency contracts do not eliminate fluctuations in the values of portfolio
securities but rather may allow a Fund to establish a rate of exchange for a
future point in time.
The Fund may enter into forward foreign currency exchange contracts in
several circumstances. When entering into a contract for the purchase or sale of
a security, the Fund may enter into a contract for the amount of the purchase or
sale price to protect against variations, between the date the security is
purchased or sold and the date on which payment is made or received, in the
value of the foreign currency relative to the U.S. dollar or other foreign
currency.
When the Advisor anticipates that a particular foreign currency may decline
substantially relative to the U.S. dollar or other leading currencies, in order
to reduce risk, the Fund may enter into a forward contract to sell, for a fixed
amount, the amount of foreign currency approximating the value of some or all of
the Fund's securities denominated in such foreign currency. Similarly, when the
securities held by the Fund create a short
<PAGE>
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 liquid assets, such as cash, U.S.
Government securities or other liquid high grade debt obligations, equal to the
amount of the Fund's assets that could be required to consummate forward
contracts will be established with the Fund's Custodian except to the extent the
contracts are otherwise "covered." For the purpose of determining the adequacy
of the securities in the account, the deposited securities will be valued at
market or fair value. If the market or fair value of such securities declines,
additional cash or securities will be placed in the account daily so that the
value of the account will equal the amount of such commitments by the Fund. A
forward contract to sell a foreign currency is "covered" if the Fund owns the
currency (or securities denominated in the currency) underlying the contract, or
holds a forward contract (or call option) permitting the Fund to buy the same
currency at a price no higher than the Fund's price to sell the currency. A
forward contract to buy a foreign currency is "covered" if the Fund holds a
forward contract (or put option) permitting the Fund to sell the same currency
at a price as high as or higher than the Fund's price to buy the currency.
STAND-BY COMMITMENTS
The National Tax-Free Bond and Missouri Tax-Free Bond Funds may acquire
stand-by commitments with respect to Municipal Obligations held within their
respective portfolios. Under a stand-by commitment, a dealer or bank agrees to
purchase from a Fund, at the Fund's option, specified Municipal Obligations at
their amortized cost value to the Fund plus accrued interest, if any. Stand-by
commitments may be sold, transferred or assigned by a Fund only with the
underlying instrument.
The Funds expect that stand-by commitments will generally be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, a
<PAGE>
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.
REVERSE REPURCHASE AGREEMENTS
When a Fund enters into a reverse repurchase agreement (an agreement under
which the Fund sells portfolio securities and agrees to repurchase them at an
agreed-upon date and price), it will place in a segregated custodial account
liquid assets such as U.S. Government securities or other liquid high grade debt
securities having a value equal to or greater than the repurchase price
(including accrued interest) and will subsequently monitor the account to ensure
that such value is maintained. Reverse repurchase agreements involve the risk
that the market value of the securities sold by a Fund may decline below the
price of the securities it is obligated to repurchase. Reverse repurchase
agreements are considered to be borrowings under the 1940 Act.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS
Each Fund may purchase securities on a when-issued basis or enter into
forward commitment transactions. When a Fund agrees to purchase securities on a
when-issued basis or enters into a forward commitment to purchase securities,
the Custodian will set aside cash, U.S. government securities or other liquid
high grade debt obligations equal to the amount of the purchase or the
commitment in a separate account. Normally, the Custodian will set aside
portfolio securities to meet this requirement. The market value of the separate
account will be monitored and if such market value declines, the Fund will be
required subsequently to place additional assets in the separate account
<PAGE>
in order to ensure that the value of the account remains equal to the amount of
the Fund's commitments. Because a Fund will set aside cash or liquid high grade
debt securities in the manner described, the Fund's liquidity and ability to
manage its portfolio might be affected in the event its when-issued purchases or
forward commitments ever exceeded 25% of the value of its assets. In the case of
a forward commitment to sell portfolio securities, the Custodian will hold the
portfolio securities in a segregated account while the commitment is
outstanding.
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. 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.
CONVERTIBLE SECURITIES
As indicated in their Prospectus, the Bond, Balanced, Growth, Aggressive
Growth and International Equity Funds may invest in convertible securities.
Convertible securities entitle the holder to receive interest paid or accrued on
debt or the dividend paid on preferred stock until the convertible securities
mature or are redeemed, converted or exchanged. Prior to conversion, convertible
securities have characteristics similar to ordinary debt securities in that they
normally provide a stable stream of income with generally higher yields than
those of common stock of the same or similar issuers. Convertible securities
rank senior to common stock in the corporate capital
<PAGE>
structure and, therefore, generally entail less risk than the corporation's
common stock, although the extent to which such risk is reduced depends in large
measure upon the degree to which the convertible security sells above its value
as a fixed income security.
In selecting convertible securities, the Advisor will consider, among other
factors, their evaluation of the creditworthiness of the issuers of the
securities, the interest or dividend income generated by the securities, the
potential for capital appreciation of the securities and the underlying stocks,
the prices of the securities relative to other comparable securities and to the
underlying stocks, whether the securities are entitled to the benefits of
sinking funds or other protective conditions, the 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.
SPECIAL CONSIDERATIONS REGARDING INVESTMENT IN MISSOURI OBLIGATIONS
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.
<PAGE>
Missouri's population was 5,277,648 IN 1994 according to the 1994 United
States Bureau of Census, MISSOURI OFFICE OF ADMINISTRATION, which represented an
increase of 3.1% from the 1990 decennial census of 5,116,901 inhabitants. In
1992, St. Louis and the surrounding metropolitan area constituted the 17th
largest Metropolitan Statistical Area (MSA) in the nation with approximately
2.52 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 1992, Kansas City was the 25th largest MSA
nationally with approximately 1.62 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. FROM 1993 TO 1994 per capita personal income nationally
grew 4.3%.
The major sectors of the State's economy include agriculture,
manufacturing, trade, government and services. Farming has traditionally played
a dominant role in the economy and yielded a large portion of the State's
revenues. Although the concentration in farming remains above the national
average, with increasing urbanization, significant income-generating activity
has shifted from agriculture to manufacturing and services. Earnings and
employment are distributed among the manufacturing, trade and service sectors in
a close approximation of the average national distribution, thus lessening the
State's cyclical sensitivity to impact by any single sector. In 1992, services
represented the single most significant economic activity, with wholesale and
retail trade ranking second and manufacturing ranking third. In 1992, these
three economic sectors accounted for 67.5% of the State's nonagricultural
employment. Manufacturing, which accounts for approximately 17.7% of employment,
is concentrated in defense, transportation equipment and other durable goods. To
the extent that the economy suffers a recession, the manufacturing sector, in
particular, could be adversely affected.
Defense-related businesses play an important role in Missouri's economy. In
addition to the large number of civilians employed at the various military
installations and training bases in the State, aircraft production and defense
related businesses receive sizeable annual defense contract awards. Over the
past decade, Missouri annually ranked among the top six states in total military
contract awards. The continued decline in defense appropriations by the U.S.
Congress have had and will continue to have an impact on the State.
Limitations on State debt and bond issues are contained in Article III,
Section 37 of the Constitution of Missouri.
<PAGE>
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) or (2) upon the recommendation of the
Governor to incur a temporary liability by reason of unforeseen emergency or of
deficiency in revenue, in an amount not to exceed $1,000,000, the General
Assembly, or the people by initiative, may submit a proposition to incur
indebtedness to the voters of the State, and the bonds may be issued if approved
by a majority of those voting. Such bonds must be retired serially and by
installment within 25 years of issuance. Before any bonds which are so
authorized are issued, the General Assembly must make provisions for the payment
of principal and interest and may provide for an annual tax on all taxable
property in an amount sufficient for that purpose.
Certain water pollution bonds and State building bonds are also authorized
pursuant to Sections 37(b)-(e), inclusive. In 1971, Missouri voters approved a
constitutional amendment providing for the issuance of $150,000,000 of general
obligation bonds for the protection of the environment through the control of
water pollution. In 1979, voters approved a constitutional amendment authorizing
an additional $200 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 voter 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 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.
<PAGE>
Article X, Sections 16-24 of the Constitution of Missouri (the "Tax
Limitation Amendment") imposes a limit on the amount of taxes and other revenue
enhancement charges such as user fees which may be imposed by the State or a
political subdivision in any fiscal year. This limit is tied to total State
revenues for the fiscal year ended June 30, 1981, as defined in the Tax
Limitation Amendment, adjusted annually, in accordance with the formula set
forth in the amendment. Under that formula, the revenue limit (THE "revenue
limit") for any fixed year equals the product of the ratio of total state
revenues in fiscal year 1980-1981 divided by the aggregate personal income
received by persons in Missouri from all sources ("Personal Income of Missouri")
in calendar year 1979 multiplied by the Personal Income of Missouri in either
the calendar year prior to the calendar year in which appropriations for the
fiscal year for which the calculation is being made, or the average of Personal
Income of Missouri in the previous three calendar years, whichever is greater.
If the revenue limit is exceeded by 1% or more in any fiscal year, a refund of
the excess revenues collected by the State is required. If the excess revenues
collected are less than 1%, then 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 limitation 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 from
increasing taxes as fees in any fiscal year without approval 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 second previous fiscal year
prior to the general assembly action, whichever is less. The Tax Limit
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 for the fiscal year ended June 30, 1995
("FISCAL YEAR 1995") WERE $5,443.4 MILLION. Expenditures for Fiscal Year 1995
were $5,349.8 million. For the fiscal year ending June 30, 1996 ("Fiscal Year
1996"), general revenues are projected to be $5,681.4 million, excluding a $22.9
million estimated deduction in revenue due to sales tax reductions proposed by
Governor Carnahan. expenditures for fiscal year 1996 are projected at $5,882.0
million.
<PAGE>
INVESTMENT LIMITATIONS
Each Fund 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 shareowner approval. If a percentage limitation is satisfied
at the time of investment, a later increase or decrease in such percentage
resulting from a change in the value of a Fund's investments will not constitute
a violation of such limitation, except that any borrowing by a Fund that exceeds
the fundamental investment limitations stated above must be reduced to meet such
limitations within the period required by the 1940 Act (currently three days).
Otherwise, a Fund may continue to hold a security even though it causes the Fund
to exceed a percentage limitation because of the fluctuation in the value of the
Fund's assets.
As a matter of fundamental policy, no Fund may:
1. Purchase or sell real estate, except that a Fund may invest in
securities directly or indirectly secured by real estate or interests therein or
issued by companies which invest in real estate or interests therein and may
hold and sell real estate acquired by a Fund as a result of the ownership of
securities.
2. Make loans to other persons, except that the purchase of all or a
portion of an issue of securities or obligations of the type in which a Fund may
invest shall not be deemed to be the making of a loan, and except further that a
Fund may enter into repurchase agreements in accordance with its investment
objective and policies and may lend its portfolio securities in an amount not to
exceed 33-1/3% of the value of its total assets.
3. 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.
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.
<PAGE>
4. 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.
5. Underwrite securities of other issuers, except insofar as a Fund
technically may be deemed an underwriter under the Securities Act of 1933 in
purchasing and selling portfolio securities and except insofar as such
underwriting would comply with the limits set forth in the 1940 Act.
6. Purchase or sell commodities or contracts on commodities, except
to the extent a Fund may do so in accordance with applicable law and a Fund's
current prospectus and statement of additional information, as it may be amended
from time to time, and without registering as a commodity pool operator under
the Commodities Exchange Act.
As a matter of non-fundamental policy, no Fund may:
1. Purchase securities of other investment companies except (a)
purchases which are part of a plan of merger, consolidation, reorganization, or
acquisition, and (b) other purchases of the securities of investment companies
only if the purchases are of open-ended, no-load funds, are conditioned on the
waiver of management fees and further, if immediately thereafter (i) not more
than 3% of the total outstanding voting stock of such company is owned by the
Fund, (ii) not more than 5% of the Fund's total assets, taken at market value,
would be invested in 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 restricted securities that are not registered or are
offered in an exempt non-public offering under the Securities Act of 1933
(excluding Rule 144A Securities), if at the time of acquisition more than 5% of
its net assets would be invested in such securities.
<PAGE>
4. Invest in restricted securities (including Rule 144A Securities)
when aggregated with investments in securities of companies having a record
together with predecessors, of less than three years of continuous operation if
at the time of acquisition more than 15% of its total assets would be invested
in such securities.
5. Make investments for the purpose of exercising control or
management.
6. Invest in warrants if at the time of acquisition a Fund's
investment in warrants, valued at the lower of cost or market value, would
exceed 5% of the Fund's net assets; included within such limitation, but not to
exceed 2% of the Fund's net assets, are warrants which are not listed on the New
York Stock Exchange or American Stock Exchange or a major foreign exchange. For
purposes of this restriction, warrants acquired by a Fund in units or attached
to securities may be deemed to be without value.
7. Invest in securities of companies having a record together with
predecessors, of less than three years of continuous operation, if more than 5%
of a Fund's total assets would be invested in such securities. This restriction
shall not apply to mortgage-related securities, asset-backed securities or U.S.
Government Obligations.
8. Purchase or retain the securities of any issuer, if those
individual officers and Trustees of The Commerce Funds, the Advisor or any
subsidiary thereof each owning beneficially more than one half of one percent of
the securities of such issuer own in the aggregate more than 5% of the
securities of such issuer.
9. Invest in real estate limited partnership interests or interests
in oil, gas or other mineral leases, or exploration or development programs,
except that a Fund may invest in securities issued by companies that engage in
oil, gas or other mineral exploration of development activities.
10. Write, purchase or sell puts, calls, straddles, spreads or
combinations thereof with respect to more than 25% (5% with respect to the
National Tax-Free Bond and Missouri Tax-Free Bond Funds) of the value of its net
assets.
In addition, the fundamental investment limitations listed below are
summarized in each Prospectus and are set forth below in their entirety.
1. With regard to the Short-Term Government, Bond, Balanced, Growth,
Aggressive Growth and International Equity Funds:
<PAGE>
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 Bond and Missouri Tax-Free
Bond Funds:
Each Fund will limit its investments so that less than 25% of the
Fund's total assets will be invested in the securities of issuers in
any one industry. For the purposes of this restriction, state and
municipal governments and their agencies and instrumentalities are not
deemed to be industries in connection with the issuance of tax-exempt
securities. Thus, a Fund may invest 25% or more of the value of its
total assets in Municipal Obligations which are related in such a way
that an economic, business or political development or change
affecting one Municipal Obligation would also affect the other
Municipal Obligations. For example, a Fund may so invest in (a)
Municipal Obligations the interest on which is paid solely from
revenues of similar projects such as hospitals, electric utility
systems, multi-family housing, nursing homes, commercial facilities
(including hotels), steel companies or life care facilities, (b)
Municipal Obligations whose issuers are in the same state, or (c)
industrial development obligations. The Funds will not purchase
securities (except U.S. Government Obligations) if more than 5% of its
total assets will be invested in the securities of any one issuer,
except that up to 25% of the total assets of the National Tax-Free
Bond Fund, and up to 50% of the total assets of the Missouri Tax-Free
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.
<PAGE>
In order to permit the sale of a Fund's shares in certain states, The
Commerce Funds may agree to certain restrictions that may be stricter than the
investment policies and limitations described above. Should a Fund determine
that any such restriction is no longer in such Fund's best interest, it will
revoke its agreement by no longer selling Fund shares in the state involved.
NET ASSET VALUE
The net asset value per share for each Fund of The Commerce Funds is
calculated by adding the value of all portfolio securities and other assets
belonging to the Fund, subtracting the liabilities charged to the Fund, and
dividing the result by the number of shares of the Fund outstanding. Assets
which belong to the Fund consist of the consideration received upon the issuance
of shares of the Fund together with all income, earnings, profits and proceeds
derived from the investment thereof, including any proceeds from the sale of
such investments, any funds or payments derived from any reinvestment of such
proceeds, and a portion of any general assets of The Commerce Funds not
belonging to a particular investment portfolio. Assets belonging to a Fund are
charged with the direct liabilities of that Fund and with a share of the general
liabilities of The Commerce Funds which are normally allocated in proportion to
the relative net asset values of all of The Commerce Funds' investment
portfolios at the time of allocation.
As stated in their Prospectuses, a Fund's investments will be valued
at market value or, in the absence of a market value with respect to any
portfolio securities, at fair value as determined by or under the direction of
The Commerce Funds' Board of Trustees. A security that is primarily traded on a
domestic securities exchange (including securities traded through the National
Market System) is valued at the last sale price on that exchange or, if there
were no sales during the day, at the current quoted bid price. Securities
traded on only over-the-counter markets are valued on the basis of closing over-
the-counter bid prices. Securities for which there were no transactions are
valued at the average of the current bid and asked prices. 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.
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'
<PAGE>
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.
An illustration of the computation of the public offering price per
share of the Funds, based on the value of each Fund's total net assets and total
number of shares outstanding on October 31, 1995, is as follows:
TABLE
-----
<TABLE>
<CAPTION>
Inter- Missouri
Short-Term Aggressive national National Tax-Free
Govt. Bond Balanced Growth Growth Equity Tax-Free Bond
Fund Fund Fund Fund Fund Fund Fund Fund
----------- ----------- ----------- ------------ ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Assets............. $20,211,311 $98,504,278 $48,328,692 $141,735,136 $41,664,686 $21,013,772 $10,721,319 $8,889,138
Number of Shares
Outstanding.......... 1,073,509 5,024,288 2,186,454 5,742,595 1,647,083 1,127,182 578,220 483,038
Net Asset Value
Per Share............ $ 18.83 $ 19.61 $ 22.10 $ 24.68 $ 25.30 $ 18.64 $ 18.54 $ 18.40
Sales Charge, 3.50
percent of offering
price (3.63 percent
of net asset value
per share)........... $ 0.68 $ 0.71 $ 0.80 $ 0.90 $ 0.92 $ 0.68 $ 0.67 $ 0.67
----------- ----------- ----------- ------------ ----------- ----------- ----------- ----------
Offering Price to
Public............... $ 19.51 $ 20.32 $ 22.90 $ 25.58 $ 26.22 $ 19.32 $ 19.21 $ 19.07
=========== =========== =========== ============ =========== =========== =========== ==========
</TABLE>
Under the 1940 Act, a Fund may suspend the right of redemption or
postpone the date of payment for shares during any period when (a) trading on
the New York Stock Exchange is restricted by applicable rules and regulations of
the SEC; (b) the Exchange is closed for other than customary weekend and holiday
closing; (c) the SEC has by order permitted such suspension; or (d) an emergency
exists as determined by the SEC. (The
<PAGE>
Commerce Funds may also suspend or postpone the recordation of the transfer of
shares upon the occurrence of any of the foregoing conditions.)
In addition to the situations described in the Prospectuses under "How
To Sell Shares," The Commerce Funds may redeem shares involuntarily to reimburse
the Funds for any loss sustained by reason of the failure of a shareowner to
make full payment for shares purchased by the shareowner or to collect any
charge relating to a transaction effected for the benefit of a shareowner which
is applicable to shares of the Funds as provided in the Prospectuses.
In an exchange, the redemption of shares being exchanged will be made
at the per share net asset value of the shares to be redeemed next determined
after the exchange request is received. The shares of the Fund to be acquired
will be purchased at the per share net asset value of those shares (plus any
applicable sales charge) next determined after acceptance of the purchase order
by The Commerce Funds in accordance with its customary policies for accepting
investments.
A Fund may make payment for redemption in securities or other property
if it appears appropriate to do so in light of the Fund's responsibilities under
the 1940 Act. In the event shares are redeemed for securities or other
property, shareowners may incur additional costs in connection with the
conversion thereof to cash. Redemption in kind is not as liquid as a cash
redemption. Shareowners who receive a redemption in kind may receive less than
the redemption value of their shares upon sale of the securities or property
received, particularly where such securities are sold prior to maturity.
RETIREMENT PLANS
- ----------------
Profit-Sharing Plan. The Short-Term Government, Bond, Balanced,
Growth, Aggressive Growth and International Equity Funds have available a
profit-sharing plan (including a 401(k) option) (the "Profit-Sharing/401(k)
Plan") for use by both self-employed individuals (sole proprietorships and
partnerships) and corporations who wish to use shares of the Funds as a funding
medium for a retirement plan qualified under the Internal Revenue Code.
The Internal Revenue Code provides certain tax benefits for
contributions by a self-employed individual or corporation to the Profit-
Sharing/401(k) Plan. For example, contributions to the Plan are deductible
(subject to certain limits) and earnings on the contributions are not taxed
until distributed. However, distribution of amounts from the Profit-
Sharing/401(k) Plan to a participant before the participant attains age 59 1/2
will (with certain exceptions) result in an additional 10% tax on the amount
included in the participant's gross income.
Individual Retirement Account. The Short-Term Government, Bond,
Balanced, Growth, Aggressive Growth and International Equity Funds have
available a plan (the "IRA") for use by individuals with compensation for
services rendered (including earned
<PAGE>
income from self-employment) who wish to use shares of the Funds as a funding
medium for individual retirement saving. However, except for rollover
contributions, an individual who has attained, or will attain, age 70 1/2 before
the end of the taxable year may only contribute to an IRA for his or her
nonworking spouse under age 70 1/2.
The individual's IRA assets (and earnings thereon) may generally not
be withdrawn (without the individual's incurring an additional 10% tax on the
amount included in the individual's gross income) until age 59 1/2. Earnings on
amounts contributed to the IRA are not taxed until distributed.
In both of these Plans available through the Funds, distributions of
net investment income and capital gains will be automatically reinvested.
The foregoing brief descriptions are not complete or definitive
explanations of the Profit-Sharing/401(k) Plan or IRA available for investment
in the Funds. Any person who wishes to establish a retirement plan account may
do so by contacting The Commerce Funds directly. The complete Plan documents
and applications will be provided to existing or prospective shareowners upon
request, without obligation. The Commerce Funds recommends that investors
consult their attorneys or tax advisers to determine if the retirement programs
described herein are appropriate for their needs.
DESCRIPTION OF SHARES
The Commerce Funds is a Delaware business trust organized on February
7, 1994. Under the Funds' Trust Instrument, the beneficial interest in The
Commerce Funds shall be divided into such transferable shares of one or more
separate and distinct series or classes of a series, as the Trustees shall from
time to time create and establish. The Trustees may, from time to time and
without vote of the shareowners, issue shares to a party or parties and for such
amount and type of consideration and on such terms, subject to applicable law,
as the Trustees may deem appropriate. The Trustees may issue fractional shares
and shares held in the treasury. Also, the trustees may from time to time
divide or combine the shares into a greater or lesser number without thereby
changing the proportionate beneficial interests in The Commerce Funds. The
proceeds received by each Fund for each issue or sale of its shares, and all net
investment income, realized and unrealized gain and proceeds thereof, subject
only to the rights of creditors, will be specifically allocated to and
constitute the underlying assets of that Fund. The underlying assets of each
Fund will be segregated on the books of account.
The Trustees shall have full power and authority, in their sole
discretion, and without obtaining any prior authorization or vote of shareowners
of any series of The Commerce Funds, to establish and designate and to change in
any manner any such series of shares or any classes of initial or additional
series and to fix such relative preferences, voting powers, rights and
privileges of such series or classes thereof as the Trustees may from time to
time determine, to divide or combine the shares or any series or classes thereof
into a greater or lesser number, to classify or reclassify any issued shares or
any series or classes
<PAGE>
thereof into one or more series or classes of shares, and to take such other
action with respect to the shares as the trustees may deem desirable.
In the event of a liquidation or dissolution of The Commerce Funds or
an individual Fund, the Trustees may sell and convey all or substantially all of
the assets of The 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 power to vote only for the election of Trustees,
for the removal of Trustees and with respect to such additional matters relating
to The Commerce Funds as may be required by law, by the Trust Instrument, or as
the Trustees may consider desirable. The Trustees may also determine that a
matter affects only the interests of one or more classes of a series, in which
case any such matter shall be voted on by such class or classes. Each whole
share shall be entitled to one vote as to any matter on which it is entitled to
vote, and each fractional share shall be entitled to a proportionate fractional
vote. There shall be no cumulative voting in the election of Trustees. Shares
may be voted in person or by proxy or in any manner provided for in the By-laws.
A proxy may be given in writing, by telefax, or in any other manner provided for
in the By-laws.
Special meetings of the shareowners of any series may be called by the
Trustees and shall be called by the Trustees upon the written request of
shareowners owning at least 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
<PAGE>
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.
ADDITIONAL INFORMATION CONCERNING TAXES
The following summarizes certain additional tax considerations
generally affecting the Funds and their shareowners that are not described in
the Prospectuses. No attempt is made to present a detailed explanation of the
tax treatment of the Funds or their shareowners, and the discussion here and in
the Prospectuses is not intended as a substitute for careful tax planning.
Potential investors should consult their tax advisers with specific reference to
their own tax situations.
<PAGE>
FEDERAL - GENERAL INFORMATION
Each Fund will elect to be taxed separately as a regulated investment
company under Part I of Subchapter M of Subtitle A, Chapter 1 of the Internal
Revenue Code of 1986, as amended (the "Code"). As a regulated investment
company, each Fund is exempt from federal income tax on its net investment
income and realized capital gains that it distributes to shareowners, provided
that it distributes an amount equal to at least the sum of 90% of its tax-exempt
income and 90% of its investment company taxable income (net investment income
and the excess of net short-term capital gain over net long-term capital loss),
if any, for the year (the "Distribution Requirement") and satisfies certain
other requirements of the Code that are described below.
In addition to satisfaction of the Distribution Requirement, each Fund
must derive with respect to a taxable year at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans and gains
from the sale or other disposition of stock or securities or foreign currencies,
or from other income derived with respect to its business of investing in such
stock, securities, or currencies (the "Income Requirement") and derive less than
30% of its gross income from the sale or other disposition of securities and
certain other investments held for less than three months (the "Short-Short
Test"). Interest (including original issue discount and "accrued market
discount") received by a Fund at maturity or on disposition of a security held
for less than three months will not be treated as gross income derived from the
sale or disposition of such security within the meaning of this requirement.
However, any other income that is attributable to realized market appreciation
will be treated as gross income from the sale or other disposition of securities
for this purpose.
In addition to the foregoing requirements, at the close of each
quarter of its taxable year, at least 50% of the value of each Fund's assets
must consist of cash and cash items, U.S. Government securities, securities of
other regulated investment companies, and securities of other issuers (as to
which a Fund has not invested more than 5% of the value of its total assets in
securities of such issuer and as to which a Fund does not hold more than 10% of
the outstanding voting securities of such issuer) and no more than 25% of the
value of each Fund's total assets may be invested in the securities of any one
issuer (other than U.S. Government securities and securities of other regulated
investment companies) or in two or more issuers which such Fund controls and
which are engaged in the same or similar trades or businesses.
In the case of corporate shareowners, distributions of a Fund for any
taxable year generally qualify for the dividends received deduction to the
extent of the gross amount of "qualifying dividends" received by the Fund for
the year. A dividend usually will be treated as a "qualifying dividend" if it
has been received from a domestic corporation. A portion of the dividends paid
by the Balanced, Growth and Aggressive Growth Funds may constitute "qualifying
dividends." The other Funds, however, are not expected to pay qualifying
dividends.
<PAGE>
Ordinary income of individuals is taxable at a maximum nominal rate of
39.6%, but because of limitations on itemized deductions otherwise allowable and
the phase-out of personal exemptions, the maximum effective marginal rate of tax
for some taxpayers may be higher. An individual's long-term capital gains will
be taxable at a maximum nominal rate of 28%. For corporations, long-term
capital gains and ordinary income are both taxable at a maximum nominal rate of
35%.
If for any taxable year any Fund does not qualify as a regulated
investment company, all of its taxable income will be subject to tax at regular
corporate rates without any deduction for distributions to shareowners. In such
event, all distributions (whether or not derived from exempt-interest income)
would be taxable as ordinary income to the extent of such Fund's current and
accumulated earnings and profits and would be eligible for the dividends
received deduction in the case of corporate shareowners.
The Code imposes a non-deductible 4% excise tax on regulated
investment companies that fail currently to distribute an amount equal to
specified percentages of their ordinary taxable income and capital gain net
income (excess of capital gains over capital losses). Each Fund intends to make
sufficient distributions or deemed distributions of its ordinary taxable income
and capital gain net income each calendar year to avoid liability for this
excise tax.
The foregoing general discussion of federal income tax consequences is
based on the Code and the regulations issued thereunder as in effect on the date
of this Statement of Additional Information. Future legislative or
administrative changes or court decisions may significantly change the
conclusions expressed herein, and any such changes or decisions may have a
retroactive effect with respect to the transactions contemplated herein.
Although each Fund expects to qualify as a "regulated investment
company" and to be relieved of all or substantially all federal income taxes,
depending upon the extent of its activities in states and localities in which
its offices are maintained, in which its agents or independent contractors are
located or in which it is otherwise deemed to be conducting business, each Fund
may be subject to the tax laws of such states or localities.
See Appendix B -- "Accounting and Tax Treatment" -- for a general
discussion of the federal tax treatment of futures contracts, related options
thereon and other financial instruments, including their treatment under the
Short-Short Test.
FEDERAL - TAX-EXEMPT INFORMATION
As described in their Prospectus, the National Tax-Free Bond and
Missouri Tax-Free Bond Funds are designed to provide investors with tax-exempt
interest income. The Funds are not intended to constitute a balanced investment
program and are not designed for investors seeking capital appreciation or
maximum tax-exempt income irrespective of fluctuations in principal. Shares of
the Funds would not be suitable for tax-exempt institutions and may not be
suitable for retirement plans qualified under Section 401 of the Code, H.R. 10
plans and individual retirement accounts since such plans and accounts are
<PAGE>
generally tax-exempt and, therefore, would not gain any additional benefit from
the Funds' dividends being tax-exempt. In addition, the Funds may not be an
appropriate investment for persons or entities that are "substantial users" of
facilities financed by private activity bonds or "related persons" thereof.
"Substantial user" is defined under U.S. Treasury Regulations to include a non-
exempt person which regularly uses a part of such facilities in its trade or
business and whose gross revenues derived with respect to the facilities
financed by the issuance of bonds are more than 5% of the total revenues derived
by all users of such facilities, which occupies more than 5% of the usable area
of such facilities or for which such facilities or a part thereof were
specifically constructed, reconstructed or acquired. "Related persons" include
certain related natural persons, affiliated corporations, partnerships and its
partners and an S corporation and its shareowners.
In order for the Funds to pay federal exempt-interest dividends with
respect to any taxable year, at the close of each taxable quarter at least 50%
of the aggregate value of the Fund must consist of tax-exempt obligations. An
exempt-interest dividend is any dividend or part thereof (other than a capital
gain dividend) paid by a Fund and designated as an exempt-interest dividend in a
written notice mailed to shareowners not later than 60 days after the close of
the Fund's taxable year. However, the aggregate amount of dividends so
designated by a Fund cannot exceed the excess of the amount of interest exempt
from tax under Section 103 of the Code received by the Fund during the taxable
year over any amounts disallowed as deductions under Sections 265 and 171(a)(2)
of the Code. The percentage of total dividends paid by a Fund with respect to
any taxable year which qualifies as Federal exempt-interest dividends will be
the same for all shareowners receiving dividends from the Fund with respect to
such year.
Interest on indebtedness incurred by a shareowner to purchase or carry
Fund shares, generally is not deductible for federal income tax purposes. If a
shareowner holds Fund shares for six months or less, any loss on the sale or
exchange of those shares will be disallowed to the extent of the amount of
exempt-interest dividends earned with respect to the shares. The Treasury
Department, however, is authorized to issue regulations reducing the six-month
holding requirement to a period of not less than the greater of 31 days or the
period between regular distributions where the investment company regularly
distributes at least 90% of its net tax-exempt interest. No such regulations
had been issued as of the date of this Statement of Additional Information.
MANAGEMENT OF THE COMMERCE FUNDS
TRUSTEES AND OFFICERS OF THE TRUST
The Board of Trustees of the Trust is responsible for the management
of the business and affairs of the Trust. The Trustees and executive officers
of the Trust and their principal occupations for the last five years are set
forth below. Each Trustee has an address at c/o The Commerce Funds, 922 Walnut
Street, Kansas City, Missouri 64141.
<PAGE>
<TABLE>
<CAPTION>
Position(s)
Held with
Name, Address and Age the Trust Principal Occupation(s) During Past 5 Years
- ---------------------- ----------------------- -----------------------------------------------
<S> <C> <C>
John Eric Helsing Trustee and Chairman Retired. Former Professor and Chairman,
c/o The Commerce Funds Department of Business Administration and
922 Walnut Street Economics of William Jewell College since
Kansas City, MO 64141 September 1990. Lecturer at William Jewell
Age: 62 College since January 1989. Director, Valentine
Radford Communications and The Learning
Exchange and Trustee, Midwest Research Institute.
*Pleasant Voorhees Miller Trustee and President Retired.
c/o The Commerce Funds
922 Walnut Street
Kansas City, MO 64141
Age: 73
*Randall D. Barron Trustee and Treasurer Retired President, 140 Division Southwestern Bell
c/o The Commerce Funds Telephone Company since 1984. Former Director,
922 Walnut Street Commerce Bancshares, Inc.
Kansas City, MO 64141
Age: 66
David L. Bodde Trustee Vice President, Midwest Research Institute since
c/o The Commerce Funds January 1991. Executive Director, Commission on
922 Walnut Street Engineering, National Academy of Sciences from
Kansas City, MO 64141 April 1986 to January 1991; Director, Energy
Age: 53 Futures Coalition; Director, Missouri
Technological Corporation. Director, Kansas City
Power & Light Company since 1994.
John Joseph Holland Trustee Vice President, and Chief Financial Officer,
c/o The Commerce Funds Butler Manufacturing Company since January 1990 and
922 Walnut Street Vice President and Controller prior thereto.
Kansas City, MO 64141 Director, Allendale Insurance Company.
Age: 45
Paul Klug Vice President Vice President and Manager, Bank Proprietary
Goldman Sachs Asset Mutual Funds unit within the Institutional Funds
Management, 42nd Floor Group of Goldman Sachs Asset Management since
One New York Plaza 1994. Chief Operating Officer, Chase Manhattan's
New York, NY 10004 Vista Capital Management Group prior thereto.
Age: 44
Nancy L. Mucker Vice President Vice President, Goldman Sachs since April 1985.
Goldman Sachs Asset Manager of Funds Group Shareholder Services
Management of Goldman Sachs Asset Management since
4900 Sears Tower November 1989.
Chicago, IL 60606
Age: 46
Pauline Taylor Vice President Vice President, Goldman Sachs since June 1992.
Goldman Sachs Asset Consultant since 1989. Senior Vice President,
Management Fidelity Investments prior to 1989.
4900 Sears Tower
Chicago, IL 60606
Age: 49
W. Bruce McConnel, III Secretary Partner of the law firm Drinker Biddle & Reath,
Drinker Biddle & Reath Philadelphia, Pennsylvania.
1345 Chestnut Street
PNB Building
Philadelphia, PA 19107
Age: 53
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Scott M. Gilman Assistant Secretary Vice President, Goldman Sachs since March 1990.
Goldman Sachs & Co. Manager, Arthur Anderson & Co. prior thereto.
12th Floor
Legal Department
85 Broad Street
New York, NY 10004
Age: 36
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
Legal Department 1992. Associate General Counsel to Goldman
85 Broad Street Sachs Asset Management since February 1994.
New York, NY 10004 Formerly Partner, Hale and Dorr from September
Age: 35 1991 to June 1992. Attorney-at-law, Gaston &
Snow prior thereto.
Howard B. Surloff Assistant Secretary Counsel to Goldman Sachs and the Funds Group of
Goldman Sachs & Co. Goldman Sachs Asset Management since November
12th Floor 1993. Vice President of Goldman Sachs since May
Legal Department 1994. Formerly Associate of Shereff, Friedman,
85 Broad Street Hoffman & Goodman.
New York, NY 10004
Age: 30
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------------------
*Trustees who are "interested persons" of The Commerce Funds, as defined in
the 1940 Act.
<PAGE>
* * *
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 have been and are expected
to be in the ordinary course of business and the terms of such transactions,
including all loans and loan commitments by such persons, have been and are
expected to be substantially the same as the prevailing terms for comparable
transactions for other customers. Messrs. Gilman, Klug, Richman and Surloff and
Mmes. Mucker and Taylor hold similar positions with one or more investment
companies that are advised by Goldman Sachs.
Each Trustee receives an annual fee of $5,000. All Trustees are
reimbursed for out of pocket expenses incurred in connection with attendance at
meetings. Drinker Biddle & Reath, of which Mr. McConnel is a partner, receive
legal fees as counsel to the Trust. The following chart provides certain
information about the trustee fees paid by the Trust for the fiscal year ended
October 31, 1995:
<TABLE>
<CAPTION>
Pension or
Retirement Estimated Aggregate
Benefits Annual Compensation
Aggregate Accrued as Benefits from the
Name of Compensation Part of Fund upon Fund
Person/Position From the Trust Expenses Retirement Complex*
<S> <C> <C> <C> <C>
JOHN ERIC HELSING, $3,750 $0 $0 N/A
Trustee, Chairman
PLEASANT VOORHEES $3,750 $0 $0 N/A
MILLER, Trustee, President
RANDALL D. BARRON, $3,750 $0 $0 N/A
Trustee, Treasurer
DAVID L. BODDE, Trustee $3,750 $0 $0 N/A
JOHN JOSEPH HOLLAND, $3,750 $0 $0 N/A
Trustee
</TABLE>
- -------------------
* Fund Complex includes funds with a common investment adviser or an adviser
which is an affiliated person.
<PAGE>
INVESTMENT ADVISOR
Information about the Advisor and their duties and compensation as
Advisor is contained in the Prospectus. For the fiscal period from commencement
of operations through October 31, 1995, The Commerce Funds paid the Advisor fees
for advisory services (net of waivers) as follows:
<TABLE>
<CAPTION>
<S> <C>
Short-Term Government Fund (1) $ 47,091
Bond Fund (1) 386,076
Balanced Fund (1) 271,451
Growth Fund (1) 799,203
Aggressive Growth Fund (1) 166,159
International Equity Fund (1) 92,576
National Tax-Free Bond Fund (2) 24,040
Missouri Tax-Free Bond Fund (2) 11,654
--------
</TABLE>
(1) Commenced investment operations on December 12, 1994.
(2) Commenced investment operations on February 21, 1995.
For the period ended October 31, 1995, the Advisor voluntarily agreed
to waive a portion of its advisory fee for certain portfolios. During the
period, these waivers reduced advisory fees by $31,394, $90,484, $61,711, and
$7,769 for the Short-Term Government, Balanced, International Equity, and
Missouri Tax-Free Bond Funds, respectively.
In addition, during the period ended October 31, 1995, the Advisor
voluntarily agreed to reimburse expenses (excluding interest, taxes, and
extraordinary expenses) to the extent that TOTAL FEES AND expenses EXCEEDED,
on an annualized basis, .68%, .88%, 1.13%, 1.13%, .85% and .65% of the average
net assets of the Short-Term Government, Bond, Balanced, Growth, National Tax-
Free Bond, and Missouri Tax-Free Bond Funds, respectively. The effect of these
reimbursements, and certain reimbursements of the International Equity Fund's
expenses, during the period was to reduce expenses by $40,597, $305, $24,555,
$112,535, $50,284, and $49,431 for the Short-Term Government, Bond, Balanced,
International Equity, National Tax-Free Bond and Missouri Tax-Free Bond Funds,
respectively.
The Advisor's own investment portfolio may include bank certificates
of deposit, bankers' acceptances, and corporate debt obligations, any of which
may also be purchased by The Commerce Funds. Joint purchase of investments for
The Commerce Funds and for the Advisor's own investment portfolio will not be
made. The Advisor's Commercial Banking Department may have deposit, loan and
other commercial banking relationships with issuers of securities purchased by
The Commerce Funds, including outstanding loans to such issuers which may be
repaid in whole or in part with the proceeds of securities purchased by The
Commerce Funds.
The Advisor has agreed that it will reimburse The Commerce Funds such
portions of its fees as may be required to satisfy any expense limitations
imposed by state securities laws or
<PAGE>
other applicable laws. Restrictive limitations may be imposed on The Commerce
Funds as a result of changes in current state laws and regulations in those
states where The Commerce Funds has qualified its shares, or by a decision of
The Commerce Funds to qualify the shares in other states having restrictive
expense limitations. To The Commerce Funds' knowledge, of the expense
limitations in effect on the date of this Statement of Additional Information
none is more restrictive than two and one-half percent (2-1/2%) of the first $30
million of the portfolio's average annual net assets, two percent (2%) of the
next $70 million of the average annual net assets and one and one-half percent
(1-1/2%) of the remaining average annual net assets.
Under the terms of the Advisory Agreement, the Advisor is obligated to
manage the investment of the Funds' assets in accordance with applicable laws
and regulations, including, to the extent applicable, the regulations and
rulings of the U.S. Comptroller of the Currency relating to fiduciary powers of
national banks. These regulations provide, in general, that assets managed by a
national bank as fiduciary may not be invested in stock or obligations of, or
property acquired from, the bank, its affiliates or their directors, officers or
employees, and further provide that fiduciary assets may not be sold or
transferred, by loan or otherwise, to the bank or persons connected with the
bank as described above.
The Advisor will not accept The Commerce Funds' shares as collateral
for a loan which is for the purpose of purchasing The Commerce Funds' shares,
and will not make loans to The Commerce Funds. Inadvertent overdrafts of The
Commerce Funds' account with the Custodian occasioned by clerical error or by
failure of a shareowner to provide available funds in connection with the
purchase of shares will not be deemed to be the making of a loan to The Commerce
Funds by the Advisor.
Under the Advisory Agreement, the Advisor is not liable for any error
of judgment or mistake of law or for any loss suffered by The Commerce Fund in
connection with the performance of such Agreement, except a loss resulting from
a breach of fiduciary duty with respect to the receipt of compensation for
services or a loss resulting from willful misfeasance, bad faith or gross
negligence on the part of the Advisor in the performance of its duties or from
its reckless disregard of its duties and obligations under the Agreement.
INVESTMENT SUB-ADVISOR
Information about the Sub-Advisor and its duties and compensation as
Sub-Advisor is contained in the Prospectus. For the period December 12, 1994
(commencement of operations) through October 31, 1995, the Advisor paid the Sub-
Advisor sub-advisory fees of $77,144.
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.
<PAGE>
The Sub-Advisory Agreement also provides that Price-Fleming, its
directors, officers or employees will only be liable to the Fund for losses
resulting from bad faith, willful misconduct or gross negligence for losses
resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services.
Under the Sub-Advisory Agreement, Price-Fleming is permitted to
utilize the services or facilities of others to provide it or the Funds with
statistical and other factual information, advice regarding economic factors and
trends, advice as to occasional transactions in specific securities, and such
other information, advice or assistance as Price-Fleming may deem necessary,
appropriate, or convenient for the discharge of its obligations under the Sub-
Advisory Agreement or otherwise helpful to the Funds.
Price-Fleming has entered into separate letters of agreement with
Fleming Investment Management Limited ("FIM") and Jardine Fleming Investment
Holdings Limited ("JFIH"), wherein FIM and JFIH have agreed to render investment
research and administrative support to Price-Fleming. FIM is a wholly-owned
subsidiary of Robert Fleming Asset Management Limited which is a wholly-owned
subsidiary of Robert Fleming Holdings Limited ("Robert Fleming Holdings"). JFIH
is an indirect wholly-owned subsidiary of Jardine Fleming Group Limited. Under
the letters of agreement, these companies will provide Price-Fleming with
research material containing statistical and other factual information, advice
regarding economic factors and trends, advice on the allocation of investments
among countries and as between debt and equity classes of securities, and
research and occasional advice with respect to specific companies.
Robert Fleming Holdings personnel have extensive research resources
throughout the world. A strong emphasis is placed on direct contact with
companies in the research universe. Robert Fleming personnel, who frequently
speak the local language, have access to the full range of research products
available in the market place and are encouraged to produce independent works
dedicated solely to portfolio investment management, which adds value to that
generally available.
THE GLASS-STEAGALL ACT AND PROPOSED LEGISLATION
The Glass-Steagall Act, among other things, prohibits banks from
engaging in the business of underwriting securities, although national and
state-chartered banks generally are permitted to purchase and sell securities
upon the order and for the account of their customers. In 1971, the United
States Supreme Court held in Investment Company Institute v. Camp that the
Glass-Steagall Act prohibits a national bank from operating a fund for the
collective investment of managing agency accounts. Subsequently, the Board of
Governors of the Federal Reserve System (the "Board") issued a regulation and
interpretation to the effect that the Glass-Steagall Act and such decision
forbid a bank holding company registered under the Federal Bank Holding Company
Act of 1956 (the "Holding Company Act") or any non-bank affiliate thereof from
sponsoring, organizing or controlling a registered, open-end investment company
continuously engaged in the issuance of its shares, but do not prohibit such a
holding company or affiliate from acting as investment adviser, transfer agent
and custodian to such an investment company. In 1981, the United States Supreme
Court held in Board of Governors of the Federal Reserve System v. Investment
Company Institute that the Board did not exceed its authority under the Holding
Company Act when it adopted its
<PAGE>
regulation and interpretation authorizing bank holding companies and their non-
bank affiliates to act as investment advisers to registered closed-end
investment companies.
The Advisor believes that if the question were properly presented, a
court should hold that the Advisor may perform the services for the Funds
contemplated by the Advisory Agreement, the Prospectuses, and this Statement of
Additional Information without violation of the Glass-Steagall Act or other
applicable banking laws or regulations. It should be noted, however, that there
have been no cases deciding whether a national bank may perform services
comparable to those performed by the Advisor and that future changes in either
federal or state statutes and regulations relating to permissible activities of
banks or trust companies and their subsidiaries or affiliates, as well as
further judicial or administrative decisions or interpretations of present and
future statutes and regulations, could prevent the Advisor from continuing to
perform such services for the Funds or from continuing to purchase Fund shares
for the accounts of its customers. If the Advisor or their affiliates were
required to discontinue all or part of their shareowner servicing activities,
their customers would be permitted to remain the beneficial owners of Fund
shares and alternative means for continuing the servicing of such customers
would be sought. The Commerce Funds does not anticipate that investors would
suffer any adverse financial consequences as a result of these occurrences.
From time to time, legislation modifying the Glass-Steagall
restrictions have been introduced in Congress which, if enacted, would permit a
bank holding company to establish a non-bank subsidiary having the authority to
organize, sponsor and distribute shares of an investment company. If this or
similar legislation were enacted, The Commerce Funds expects that the Advisor's
parent bank holding company would consider the possibility of one of its non-
bank subsidiaries offering to perform some or all of the services now provided
by the Administrator/Distributor. It is not possible, of course, to predict
whether or in what form such legislation might be enacted or the terms upon
which the Advisor or such a non-bank affiliate might offer to provide services
for consideration by The Commerce Funds' Board of Trustees.
SHAREHOLDER ADMINISTRATIVE SERVICES PLAN
As stated in the Prospectuses, The Commerce Funds may enter into
Servicing Agreements with Service Organizations which may include the Adviser
and its affiliates. The Servicing Agreements provide that the Service
Organizations will render shareowner administrative support services to their
customers who are the beneficial owners of Fund shares 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 Funds' 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; (iii) arranging for bank wires; (iv) responding to customer
inquiries; (v) providing subaccounting with respect to shares beneficially owned
by customers or the information necessary for such subaccounting; (vi)
forwarding shareowner communications; (vii) processing share exchange and
redemption requests from customers; (viii) assisting customers in changing
dividend options, account designations and addresses; and (ix) other similar
services requested by the Commerce Funds. Banks acting as Service Organizations
are prohibited from engaging in any activity primarily
<PAGE>
intended to result in the sale of Fund shares. However, Service Organizations
other than banks may be requested to provide marketing assistance (e.g.,
forwarding sales literature and advertising to their customers) in connection
with the distribution of Fund shares.
The Board of Trustees reviews, at least quarterly, a written report of
the amounts expended in connection with The Commerce Funds' arrangements with
the Service Organizations and the purposes for which the expenditures were made.
In addition, such arrangements are approved annually by a majority of the
Trustees, including a majority of the Trustees who are not "interested persons"
of The Commerce Fund as defined in the 1940 Act and have no direct or indirect
financial interest in such arrangements (the "Disinterested Trustees").
Any material amendment to The Commerce Funds' arrangements with the
Service Organizations under the Servicing Agreements must be approved by a
majority of the Board of Trustees (including a majority of the Disinterested
Trustees). No fees were paid by the Funds pursuant to the Shareholder
Administrative Services Plan for the fiscal period ended October 31, 1995.
CUSTODIAN AND TRANSFER AGENT
State Street Bank serves as Custodian of each Fund's assets pursuant
to a Custody Agreement under which it has agreed, among other things, to (i)
maintain a separate account in the name of each Fund; (ii) hold and disburse
portfolio securities on account of each Fund; (iii) collect and receive all
income and other payments and distributions on account of each Fund's portfolio
investments; (iv) make periodic reports to The Commerce Funds concerning each
Fund's operations; and (v) provide various accounting services to The Commerce
Funds and to the Administrator for the benefit of The Commerce Funds. The
Custodian is authorized to select one or more banks or trust companies to serve
as sub-custodian on behalf of the Funds, provided that the Custodian shall
remain liable for the performance of all of its duties under its respective
Custody Agreement and will hold The Commerce Funds and Funds harmless from
losses caused by the negligence or willful misconduct of any bank or trust
company serving as sub-custodian.
As compensation for custodial services provided, The Commerce Funds
will pay the Custodian fees of 1/100th of 1% of a Fund's average monthly net
assets up to one billion, 1/133th of 1% of the next one billion of such assets
and 1/200th of 1% of such assets in excess of two billion based on the aggregate
average daily net assets of the Funds, plus a transaction charge for certain
transactions and out-of-pocket expenses.
For the fiscal period from commence of operations through October 31,
1995, the fees paid by the Funds for custodial services (and in the case of the
International Equity Fund, for foreign custodial services) were as follows:
<TABLE>
<CAPTION>
<S> <C>
Short-Term Government Fund (1) $ 24,500
Bond Fund (1) 26,600
Balanced Fund (1) 31,900
Growth Fund (1) 29,400
Aggressive Growth Fund (1) 31,500
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
International Equity Fund (1) 146,000
National Tax-Free Bond Fund (2) 20,600
Missouri Tax-Free Bond Fund (2) 19,900
</TABLE>
--------
(1) Commenced investment operations on December 12, 1994.
(2) Commenced investment operations on February 21, 1995.
State Street Bank also serves as the Funds' Transfer Agent and
dividend disbursing agent. State Street has appointed NFDS, an indirect
subsidiary, to act as the Funds' Transfer Agent, as permitted in the Transfer
Agency Agreement, provided that State Street Bank shall remain liable for the
performance of all of its duties and will hold The Commerce Funds and Fund or
Funds harmless from losses caused by the negligence or willful misconduct of any
appointee. Under the Transfer Agency Agreement, NFDS will, among other things,
(i) receive purchase orders and redemption requests for shares of the Funds;
(ii) issue and redeem shares of the Funds; (iii) effect transfers of shares of
the Funds; (iv) prepare and transmit payments for dividends and distributions
declared by the Funds; (v) maintain records of accounts for the Funds,
shareowners and advise each shareowner to the foregoing; (vi) record the
issuance of shares of each Fund and maintain a record of and provide the Fund on
a regular basis with the total number of shares of each Fund which are
authorized, issued and outstanding; (vii) perform the customary services of a
transfer agent, a dividend disbursing agent and custodian of certain retirement
plans and, as relevant, agent in connection with accumulation, open account or
similar plans; and (viii) provide a system enabling the Funds to monitor the
total number of shares sold in each State.
For the fiscal period from commencement of operations through October
31, 1995, the fees paid by the Funds for transfer agency services were as
follows:
<TABLE>
<CAPTION>
<S> <C>
Short-Term Government Fund (1) $16,900
Bond Fund (1) 20,900
Balanced Fund (1) 14,500
Growth Fund (1) 23,300
Aggressive Growth Fund (1) 18,200
International Equity Fund (1) 16,400
National Tax-Free Bond Fund (2) 11,400
Missouri Tax-Free Bond Fund (2) 12,200
</TABLE>
-------
(1) Commenced investment operations on December 12, 1994.
(2) Commenced investment operations on February 21, 1995.
DISTRIBUTOR
Goldman Sachs & Co., which acts under the Distribution Agreement as Distributor
for The Commerce Funds. Goldman, Sachs & Co. may receive a portion of the sales
load imposed on the sale of shares of the
<PAGE>
Funds and has advised The Commerce Funds that it has retained approximately
$19,000 for the period ended October 31, 1995.
ADMINISTRATOR
Information about GSAM and its duties and compensation as
Administrator is contained in the Prospectus. For the fiscal period from
commencement of operations through October 31, 1995, the fees paid by the Funds
for administration services were as follows:
<TABLE>
<CAPTION>
<S> <C>
Short-Term Government Fund (1) $ 23,546
Bond Fund (1) 115,823
Balanced Fund (1) 54,291
Growth Fund (1) 159,840
Aggressive Growth Fund (1) 33,231
International Equity Fund (1) 15,429
National Tax-Free Bond Fund (2) 7,212
Missouri Tax-Free Bond Fund (2) 5,826
</TABLE>
--------
(1) Commenced investment operations on December 12, 1994.
(2) Commenced investment operations on February 21, 1995.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP, 1000 Walnut Street, Suite 1600, Kansas City,
Missouri 64106, serves as independent auditors for The Commerce Funds.
COUNSEL
Drinker Biddle & Reath, (of which Mr. McConnel, Secretary of The
Commerce Funds, is a partner), 1345 Chestnut Street, Philadelphia, Pennsylvania
19107-3496, are counsel to The Commerce Funds.
ADDITIONAL INFORMATION ON PERFORMANCE
From time to time, yield and total return of the Funds for various
periods may be quoted in advertisements, shareowner reports or other
communications to shareowners.
Yield Calculations. A Fund's yield is calculated by dividing its net
investment income per share (as described below) earned during a 30-day period
by the maximum offering price per share on the last day of the period and
annualizing the result on a semi-annual basis by adding one to the quotient,
raising the sum to the power of six, subtracting one from the result and then
doubling the difference. A Fund's net investment income per share earned during
the period may be different than that determined for accounting purposes and is
based on the average daily
<PAGE>
number of shares outstanding during the period entitled to receive dividends and
includes dividends and interest earned during the period minus expenses accrued
for the period, net of reimbursements. This calculation can be expressed as
follows:
Yield = 2 [(a-b + 1]/6/ - 1
---
cd)
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends.
d = maximum offering price per share on the last day of
the period.
For the purpose of determining net investment income earned during the
period (variable "a" in the formula), dividend income on equity securities held
by a Fund is recognized by accruing 1/360 of the stated dividend rate of the
security each day that the 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.
<PAGE>
THE COMMERCE FUNDS DOES NOT CALCULATE A 30-DAY YIELD FOR THE BALANCED,
GROWTH, AGGRESSIVE GROWTH AND INTERNATIONAL EQUITY FUNDS. Based on the
foregoing calculations, for the 30 day period ended OCTOBER 31, 1995, the
yields for the Short-Term Government, Bond, National Tax-Free and Missouri Tax-
Free 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 5.13% 4.68%
Bond Fund 6.06% N/A
National Tax-Free
Bond Fund 3.88% 2.87%
Missouri Tax-Free
Bond Fund 4.30% 2.87%
</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, 1995, the Distribution Rate for the Short-Term
Government, Bond, National Tax-Free and Missouri Tax-Free Funds, were as
follows:
<TABLE>
<CAPTION>
Rate Assuming Rate Assuming Rate Assuming No Rate Assuming No
Maximum Sales Maximum Sales Sales Load and Sales Load and
Load and With Fee Load and Without With Fee Waivers Without Fee
Waivers and Fee Waivers and and Waivers and
Reimbursements Reimbursements Reimbursements Reimbursements
----------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Short-Term
Government
Fund 5.97% 5.52% 6.18% 5.72%
Bond Fund 5.85% N/A 6.06% N/A
National Tax-
Free Bond Fund 3.81% 2.80% 3.95% 2.90%
Missouri Tax-
Free Bond Fund 4.01% 2.59% 4.16% 2.68%
</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
<PAGE>
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,
1995 for the National Tax-Free Bond Fund and Missouri Tax-Free Bond Fund, with
and without fee waivers (assuming 39.6% federal tax rate for both Funds and a
6.0% Missouri tax rate for the Missouri Tax-Free Bond Fund) were as
follows:
<TABLE>
<CAPTION>
Yield Assuming
Yield Assuming Maximum Sales Load
Maximum Sales Load and Without Fee
and With Fee Waivers Waivers or
and Reimbursements Reimbursements
-------------------- ------------------
<S> <C> <C>
National Tax-Free
Bond Fund 6.42% 4.75%
Missouri Tax-Free
Bond Fund 7.57% 5.05%
</TABLE>
Total Return Calculations. Each Fund computes its "average annual
total return" by determining the average annual compounded rates of return
during specified periods that equate the initial amount invested to the ending
redeemable value of such investment. This is done by dividing the ending
redeemable value of a hypothetical $1,000 initial payment by $1,000 and raising
the quotient to a power equal to one divided by the number of years (or
fractional portion thereof) covered by the computation and subtracting one from
the result. This calculation can be expressed as follows:
T = [ERV(/1/n/) - 1
---
P]
Where: T = average annual total return.
ERV = ending redeemable value at the end of the period
covered by the computation of a hypothetical $1,000
payment made at the beginning of the period.
P = hypothetical initial payment of $1,000.
n = period covered by the computation, expressed in terms
of years.
The Funds compute their "aggregate total return" by determining the
aggregate rates of return during specified periods that likewise equate the
initial amount invested to the ending redeemable value of such investment. The
formula for calculating aggregate total return is as follows:
<PAGE>
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 shareowner accounts, assuming an account size equal to the Fund's
mean (or median) account size for any fees that vary with the size of the
account. The maximum sales load and other charges deducted from payments are
deducted from the initial $1,000 payment (variable "P" in the formula). The
ending redeemable value (variable "ERV" in each formula) is determined by
assuming complete redemption of the hypothetical investment and the deduction of
all nonrecurring charges at the end of the period covered by the computations.
Based on the foregoing calculations, for the period from the
respective commencement of operations to OCTOBER 31, 1995, 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 and No Sales Load and
Load and With Fee Load and Without With Fee Waivers Without Fee
Waivers and Fee Waivers and and Waivers and
Reimbursements Reimbursements Reimbursements Reimbursements
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Short-Term
Government
Fund 6.86% 6.43% 10.72% 10.27%
Bond Fund 11.56% N/A 15.59% N/A
Balanced Fund 21.74% 21.60% 26.14% 25.98%
Growth Fund 33.25% N/A 38.06% N/A
Aggressive
Growth Fund 35.66% N/A 40.56% N/A
International
Equity Fund 0.11% (1.38)% 3.73% 2.19%
National Tax-
Free Bond Fund 2.37% 1.63% 6.06% 5.30%
Missouri Tax-
Free Bond Fund 1.77% 0.74% 5.45% 4.38%
</TABLE>
The Funds may also from time to time include in advertisements, sales
literature, communications to shareowners and other materials ("Literature") a
total return figure in order to compare more accurately its performance with
other measures of investment return. For example, in comparing a Fund's total
return with data published by Lipper Analytical Services, Inc., CDA Investment
Technologies, Inc. or Weisenberger Investment Company Service, or with the
performance of an index, the Fund may calculate
<PAGE>
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 shareowner
reports (including the investment composition of the Fund), as well as the views
of the Advisor as to current market, economy, trade and interest rate trends,
legislative, regulatory and monetary developments, investment strategies and
related matters believed to be of relevance to the Fund. The Fund may also
include in Literature charts, graphs or drawings which compare the investment
objective, return potential, relative stability and/or growth possibilities of
the Fund and/or other mutual funds, or illustrate the potential risks and
rewards of investment in various investment vehicles, including but not limited
to, stocks, bonds, Treasury securities and shares of the Fund and/or other
mutual funds. Literature may include a discussion of certain attributes or
benefits to be derived by an investment in the Fund and/or other mutual funds,
shareowner profiles and hypothetical investor scenarios, timely information on
financial management, tax and retirement planning and investment alternatives to
certificates of deposit and other financial instruments. Such Literature may
include symbols, headlines or other material which highlight or summarize the
information discussed in more detail therein.
MISCELLANEOUS
As of FEBRUARY 8, 1996, the Advisor held of record 92% of the
outstanding shares in the Short-Term Government Fund; 91% of the outstanding
shares in
<PAGE>
the Bond Fund; 88% of the outstanding shares in the Balanced Fund; 85% of the
outstanding shares in the Growth Fund; 89% of the outstanding shares in the
Aggressive Growth Fund; 99% of the outstanding shares in the International
Equity Fund; 97% of the outstanding shares in the National Tax-Free Bond Fund;
and 97% of the outstanding shares in the Missouri Tax-Free Bond Fund, as
fiduciary or agent on behalf of its customers. Under the 1940 Act, the Advisor
may be deemed to be a controlling person of The Commerce Fund.
As of the same date, NO institutions owned of record 5% or more of the
Short-Term Government FUND'S OR THE Bond Fund's outstanding shares as fiduciary
or agent on behalf of their customers.
As of the same date, the following institutions also owned of record
5% or more of the Balanced Fund's outstanding shares as fiduciary or agent on
behalf of their customers: ST. LOUIS MUSIC PROFIT SHARING PLAN, C/O COMMERCE
BANK, 8000 FORSYTH BLVD., CLAYTON, MO, 7.8%, SUNNEN EMPLOYEES PROFIT SHARING
PLAN, C/O COMMERCE BANK, 8000 FORSYTH BLVD., CLAYTON, MO, 22% AND GEHA PENSION
PLAN, C/O COMMERCE BANK, 922 WALNUT STREET, KANSAS CITY, MO 64106, 20.5%.
As of the same date, the following institutions also owned of record
5% or more of the Growth Fund's outstanding shares as fiduciary or agent on
behalf of their customers: SUNNEN EMPLOYEES PROFIT SHARING PLAN, C/O COMMERCE
BANK, 8000 FORSYTH BLVD., CLAYTON, MO, 10% AND GEHA PENSION PLAN, C/O COMMERCE
BANK, 922 WALNUT STREET, KANSAS CITY, MO 64106, 6%.
As of the same date, the following institutions also owned of record
5% or more of the Aggressive Growth Fund's outstanding shares as fiduciary or
agent on behalf of their customers: SUNNEN EMPLOYEES PROFIT SHARING PLAN, C/O
COMMERCE BANK, 8000 FORSYTH BLVD., CLAYTON, MO, 17.6% AND ENTERPRISE LEASING
PROFIT SHARING PLAN, C/O COMMERCE BANK, 8000 FORSYTH BLVD., CLAYTON, MO, 5.7%.
As of the same date, the following institutions also owned of record
5% or more of the International Equity Fund's outstanding share as fiduciary or
agent on behalf of their customers: COMMERCE BANK RETIREMENT PLAN, C/O COMMERCE
BANK, 922 WALNUT STREET, KANSAS CITY, MO 64106, 6.8%.
As of the same date, the following institutions also owned of record
5% or more of the National Tax-Free Bond Fund's outstanding shares as fiduciary
or agent on behalf of their customers: HELEN JACOBSEN TRUSTEE, C/O COMMERCE
BANK, 8000 FORSYTH BLVD., CLAYTON, MO, 6.7%.
As of the same date, the following institutions also owned of record
5% or more of the Missouri Tax-Free Bond Fund's outstanding shares as fiduciary
or agent on behalf of their customers: HELEN JACOBSEN TRUSTEE, C/O COMMERCE
BANK, 8000 FORSYTH BLVD., CLAYTON, MO, 8.3% AND SONDRA FRANC TRUSTEE, C/O
COMMERCE BANK, 8000 FORSYTH BLVD., CLAYTON, MO, 5.4%.
<PAGE>
On the basis of information received from these institutions, the Fund
believes that substantially all of the shares owned of record were also
beneficially owned by these institutions because they possessed or shared voting
or investment power with respect to such shares on behalf of their underlying
accounts.
As used in the Statement of Additional Information and in the
Prospectuses of the same date, "assets belonging to a Fund" means the
consideration received by The Commerce Funds upon the issuance or sale of shares
in that 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 Fund. Assets belonging to a particular Fund are
charged with the direct liabilities in respect of that Fund and with a share of
the general liabilities of the Fund which are normally allocated in proportion
to the relative net asset levels of the respective 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 Fund are conclusive.
FINANCIAL STATEMENTS
--------------------
The Commerce Funds' Annual Report with respect to the Funds for the
fiscal period ended October 31, 1995 has been filed with the Securities and
Exchange Commission. The financial statements in such Annual Report (the
"Financial Statements") are incorporated into this Statement of Additional
Information by reference. The Financial Statements included in the Annual
Report for the Funds for the fiscal period ended October 31, 1995 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.
<PAGE>
APPENDIX A
----------
COMMERCIAL PAPER RATINGS
- ------------------------
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt considered short-term in the relevant
market. The following summarizes the rating categories used by Standard and
Poor's for commercial paper:
"A-1" - Issue's degree of safety regarding timely payment is strong.
Those issues determined to possess extremely strong safety characteristics are
denoted "A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory. However,
the relative degree of safety is not as high as for issues designated "A-1."
"A-3" - Issue has an adequate capacity for timely payment. It is,
however, somewhat more vulnerable to the adverse effects of changes and
circumstances than an obligation carrying a higher designation.
"B" - Issue has only a speculative capacity for timely payment.
"C" - Issue has a doubtful capacity for payment.
"D" - Issue is in payment default.
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually promissory obligations not having an original
maturity in excess of 9 months. The following summarizes the rating categories
used by Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions are considered
to have a superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics: leading market positions in well established industries; high
rates of return on funds employed; conservative capitalization structures with
moderate reliance on debt and ample asset protection; broad margins in earning
coverage of fixed financial charges and high internal cash generation; and well
established access to a range of financial markets and assured sources of
alternate liquidity.
"Prime-2" - Issuer or related supporting institutions are considered
to have a strong capacity for repayment of short-term promissory obligations.
This will normally be
A-1
<PAGE>
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternative liquidity is maintained.
"Prime-3" -- Issuer or related supporting institutions have an
acceptable capacity for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" -- Issuer does not fall within any of the Prime rating
categories.
The three rating categories of Duff & Phelps for investment grade
commercial paper 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 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.
"D-3" -- Debt possesses satisfactory liquidity, and other protection
factors qualify issue as investment grade. Risk factors are larger and subject
to more variation. Nevertheless, timely payment is expected.
"D-4" -- Debt possesses speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" -- Issuer has failed to meet scheduled principal and/or interest
payments.
A-2
<PAGE>
Fitch short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years. The following
summarizes the rating categories used by Fitch for short-term obligations:
"F-1+" -- Securities possess exceptionally strong credit quality.
Issues assigned this rating are regarded as having the strongest degree of
assurance for timely payment.
"F-1" -- Securities possess very strong credit quality. Issues
assigned this rating reflect an assurance of timely payment only slightly less
in degree than issues rated "F-1+."
"F-2" -- Securities possess good credit quality. Issues assigned this
rating have a satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as the "F-1+" and "F-1" categories.
"F-3" -- Securities possess fair credit quality. Issues assigned this
rating have characteristics suggesting that the degree of assurance for timely
payment is adequate; however, near-term adverse changes could cause these
securities to be rated below investment grade.
"F-S" -- Securities possess weak credit quality. Issues assigned this
rating have characteristics suggesting a minimal degree of assurance for timely
payment and are vulnerable to near-term adverse changes in financial and
economic conditions.
"D" -- Securities are in actual or imminent payment default.
Fitch may also use the symbol "LOC" with its short-term ratings to
indicate that the rating is based upon a letter of credit issued by a commercial
bank.
Thomson BankWatch short-term ratings assess the likelihood of an
untimely or incomplete payment of principal or interest of unsubordinated
instruments having a maturity of one year or less which is issued by United
States commercial banks, thrifts and non-bank banks; non-United States banks;
and broker-dealers. The following summarizes the ratings used by Thomson
BankWatch:
"TBW-1" -- This designation represents Thomson BankWatch's highest
rating category and indicates a very high degree of likelihood that principal
and interest will be paid on a timely basis.
A-3
<PAGE>
"TBW-2" - This designation indicates that while the degree of safety
regarding timely payment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents the lowest investment grade
category and indicates that while the debt is more susceptible to adverse
developments (both internal and external) than obligations with higher ratings,
capacity to service principal and interest in a timely fashion is considered
adequate.
"TBW-4" - This designation indicates that the debt is regarded as non-
investment grade and therefore speculative.
IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for short-term debt ratings:
"A1+" - Obligations supported by the highest capacity for timely
repayment.
"A1" - Obligations are supported by a strong capacity for timely
repayment.
"A2" - Obligations are supported by a satisfactory capacity for timely
repayment, although such capacity may be susceptible to adverse changes in
business, economic or financial conditions.
"A3" - Obligations are supported by a satisfactory capacity for timely
repayment. Such capacity is more susceptible to adverse changes in business,
economic or financial conditions than for obligations in higher categories.
"B" - Obligations for which the capacity for timely repayment is
susceptible to adverse changes in business, economic or financial conditions.
"C" - Obligations for which there is an inadequate capacity to ensure
timely repayment.
"D" - Obligations which have a high risk of default or which are
currently in default.
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
A-4
<PAGE>
"AAA" - This designation represents the highest rating assigned by
Standard & Poor's to a debt obligation and indicates an extremely strong
capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to pay
interest and repay principal and differs from AAA issues only in small degree.
"A" - Debt is considered to have a strong capacity to pay interest and
repay principal although such issues are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt in
higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
"BB" - Debt has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
"B" - Debt has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The "B" rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied "BB" or "BB-" rating.
"CCC" - Debt has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The "CCC" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"B" or "B-" rating.
A-5
<PAGE>
"CC" - This rating is typically applied to debt subordinated to senior
debt that is assigned an actual or implied "CCC" rating.
"C" - This rating is typically applied to debt subordinated to senior
debt which is assigned an actual or implied "CCC-" debt rating. The "C" rating
may be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
"CI" - This rating is reserved for income bonds on which no interest
is being paid.
"D" - Debt is in payment default. This rating is used when interest
payments or principal payments are not made on the date due, even if the
applicable grace period has not expired, unless S & P believes such payments
will be made during such grace period. "D" rating is also used upon the filing
of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid, and
certain other obligations that S & P believes may experience high volatility or
high variability in expected returns due to non-credit risks. Examples of such
obligations are: securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and options; and interest
only and principal only mortgage securities.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
"Aa" - Bonds are judged to be of high quality by all standards.
Together with the "Aaa" group they comprise what are generally known as high-
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in "Aaa"
securities.
A-6
<PAGE>
"A" - Bonds possess many favorable investment attributes and are to be
considered as upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds considered medium-grade obligations, i.e., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates some speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa" represents a poor standing; "Ca"
represents obligations which are speculative in a high degree; and "C"
represents the lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be in
default.
Con. (---) - Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction, (b) earnings
of projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
Moody's applies numerical modifiers 1, 2 and 3 in each generic
classification from "Aa" to "B" in its bond rating system. The modifier 1
indicates that the issuer ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issuer ranks at the lower end of its generic rating category.
The following summarizes the long-term debt ratings used by Duff &
Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered of high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
A-7
<PAGE>
"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 highest four ratings used by Fitch for
corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably foreseeable
events.
"AA" - Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA." Because bonds rated
in the "AAA" and "AA" categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is generally rated "F-1+."
"A" - Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
"BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D" - Bonds that possess
one of these ratings are considered by Fitch to be speculative investments. The
A-8
<PAGE>
ratings "BB" to "C" represent Fitch's assessment of the likelihood of timely
payment of principal and interest in accordance with the terms of obligation for
bond issues not in default. For defaulted bonds, the rating "DDD" to "D" is an
assessment of the ultimate recovery value through reorganization or liquidation.
To provide more detailed indications of credit quality, the Fitch
ratings from and including "AA" to "C" may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major rating
categories.
IBCA assesses the investment quality of unsecured debt with an
original maturity of more than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for long-term debt ratings:
"AAA" -- Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk substantially.
"AA" -- Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic or financial conditions may
increase investment risk albeit not very significantly.
"A" -- Obligations for which there is a low expectation of investment
risk. Capacity for timely repayment of principal and interest is strong,
although adverse changes in business, economic or financial conditions may lead
to increased investment risk.
"BBB" -- Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
adequate, although adverse changes in business, economic or financial conditions
are more likely to lead to increased investment risk than for obligations in
higher categories.
"BB," "B," "CCC," "CC," and "C" -- Obligations are assigned one of
these ratings where it is considered that speculative characteristics are
present. "BB" represents the lowest degree of speculation and indicates a
possibility of investment risk developing. "C" represents the highest degree of
speculation and indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating to
denote relative status within major rating categories.
A-9
<PAGE>
Thomson BankWatch assesses the likelihood of an untimely repayment of
principal or interest over the term to maturity of long term debt and preferred
stock which are issued by United States commercial banks, thrifts and non-bank
banks; non-United States banks; and broker-dealers. The following summarizes
the rating categories used by Thomson BankWatch for long-term debt ratings:
"AAA" -- This designation represents the highest category assigned by
Thomson BankWatch to long-term debt and indicates that the ability to repay
principal and interest on a timely basis is extremely high.
"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 Thomson BankWatch's lowest
investment grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BB," "B," "CCC," and "CC," -- These designations are assigned by
Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
"D" -- This designation indicates that the long-term debt is in
default.
PLUS (+) OR MINUS (-) -- The ratings from "AAA" through "CC" may
include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
MUNICIPAL NOTE RATINGS
- ----------------------
A Standard and Poor's rating reflects the liquidity concerns and
market access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's Ratings Group for municipal
notes:
A-10
<PAGE>
"SP-1" -- The issuers of these municipal notes exhibit very strong or
strong capacity to pay principal and interest. Those issues determined to
possess overwhelming safety characteristics are given a plus (+) designation.
"SP-2" -- The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest.
"SP-3" -- The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:
"MIG-1"/"VMIG-1" -- Loans bearing this designation are of the best
quality, enjoying strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
"MIG-2"/"VMIG-2" -- Loans bearing this designation are of high
quality, with margins of protection ample although not so large as in the
preceding group.
"MIG-3"/"VMIG-3" -- Loans bearing this designation are of favorable
quality, with all security elements accounted for but lacking the undeniable
strength of the preceding grades. Liquidity and cash flow protection may be
narrow and market access for refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" -- Loans bearing this designation are of adequate
quality, carrying specific risk but having protection commonly regarded as
required of an investment security and not distinctly or predominantly
speculative.
"SG" -- Loans bearing this designation are of speculative quality and
lack margins of protection.
Fitch and Duff & Phelps use the short-term ratings described under
Commercial Paper Ratings for municipal notes.
A-11
<PAGE>
APPENDIX B
As stated in their Prospectus, the Bond, Balanced, Growth, Aggressive
Growth, International Equity, National Tax-Free Bond and Missouri Tax-Free Bond
Funds may enter into futures contracts and options for hedging purposes. Such
transactions are described in this Appendix.
I. Interest Rate Futures Contracts
-------------------------------
Use of Interest Rate Futures Contracts. Bond prices are established
in both the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally within five business days after the trade. In the
futures market, only a contract is made to purchase or sell a bond in the future
for a set price on a certain date. Historically, the prices for bonds
established in the futures markets have tended to move generally in the
aggregate in concert with the cash market prices and have maintained fairly
predictable relationships. Accordingly, a Fund may use interest rate futures
contracts as a defense, or hedge, against anticipated interest rate changes and
not for speculation. As described below, this would include the use of futures
contract sales to protect against expected increases in interest rates and
futures contract purchases to offset the impact of interest rate declines.
A Fund presently could accomplish a similar result to that which it
hopes to achieve through the use of futures contracts by selling bonds with long
maturities and investing in bonds with short maturities when interest rates are
expected to increase, or conversely, selling short-term bonds and investing in
long-term bonds when interest rates are expected to decline. However, because
of the liquidity that is often available in the futures market, the protection
is more likely to be achieved, perhaps at a lower cost and without changing the
rate of interest being earned by the Fund, by using futures contracts.
Description of Interest Rate Futures Contracts. An interest rate
futures contract sale would create an obligation by a Fund, as seller, to
deliver the specific type of financial instrument called for in the contract at
a specific future time for a specified price. A futures contract purchase would
create an obligation by a Fund, as purchaser, to take delivery of the specific
type of financial instrument at a specific future time at a specific price. The
specific securities delivered or taken, respectively, at settlement date, would
not be determined until at or near that date. The determination would be in
accordance with the rules of the exchange on which the futures contract sale or
purchase was made.
Although interest rate futures contracts by their terms call for
actual delivery or acceptance of securities, in most cases the contracts are
closed out before the settlement date without the making or taking of delivery
of securities. Closing out a futures contract sale is effected by the Fund
entering into a futures contract purchase for the same aggregate
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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.
In addition, a Fund may utilize index futures contracts in
anticipation of changes in the composition of its portfolio holdings. For
example, in the event that a Fund expects to narrow the range of industry groups
represented in its holdings it may, prior to making purchases of the actual
securities, establish a long futures position based on a more restricted index,
such as an index comprised of securities of a particular industry group. A Fund
may also sell futures contracts in connection with this strategy, in order to
protect against the possibility that the value of the securities to be sold as
part of the restructuring of the portfolio will decline prior to the time of
sale.
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III. Futures Contracts on Foreign Currencies
---------------------------------------
The International Equity Fund may enter into futures contracts on
foreign currency. This futures contract is a binding obligation on one party to
deliver, and a corresponding obligation on another party to accept delivery of,
a stated quantity of foreign currency, for an amount fixed in U.S. dollars.
Foreign currency futures may be used by a Fund to hedge against exposure to
fluctuations in exchange rates between the U.S. dollar and other currencies
arising from multinational transactions.
IV. Margin Payments
---------------
Unlike purchase or sales of portfolio securities, no price is paid or
received by a Fund upon the purchase or sale of a futures contract. Initially,
a Fund will be required to deposit with the broker or in a segregated account
with the Custodian an amount of cash or cash equivalents, known as initial
margin, based on the value of the contract. The nature of initial margin in
futures transactions is different from that of margin in security transactions
in that futures contract margin does not involve the borrowing of funds by the
customer to finance the transactions. Rather, the initial margin is in the
nature of a performance bond or good faith deposit on the contract which is
returned to the Fund upon termination of the futures contract assuming all
contractual obligations have been satisfied. Subsequent payments, called
variation margin, to and from the broker, will be made on a daily basis as the
price of the underlying instruments fluctuates making the long and short
positions in the futures contract more or less valuable, a process known as
marking-to-the-market. For example, when a particular Fund has purchased a
futures contract and the price of the contract has risen in response to a rise
in the underlying instruments, that position will have increased in value and
the Fund will be entitled to receive from the broker a variation margin payment
equal to that increase in value. Conversely, where the Fund has purchased a
futures contract and the price of the future contract has declined in response
to a decrease in the underlying instruments, the position would be less valuable
and the Fund would be required to make a variation margin payment to the broker.
At any time prior to expiration of the futures contract, a Fund may elect to
close the position by taking an opposite position, subject to the availability
of a secondary market, which will operate to terminate the Fund's position in
the futures contract. A final determination of variation margin is then made,
additional cash is required to be paid by or released to the Fund, and the Fund
realizes a loss or gain.
V. Risks of Transactions in Futures Contracts
------------------------------------------
There are several risks in connection with the use of futures by a
Fund as a hedging device. One risk arises because of the imperfect correlation
between movements in the price of the futures and movements in the price of the
instruments which are the subject of the hedge. The price of the future may
move more than or less than the price of the instruments being hedged. If the
price of the futures moves less than the price of the instruments which are the
subject of the hedge, the hedge will not be fully effective but, if
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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 or take delivery, liquidity
in the futures market could be reduced thus producing distortions. Third, from
the point of view of speculators, the deposit requirements in the futures market
are less onerous than margin requirements in the securities market. Therefore,
increased participation by speculators in the futures market may also cause
temporary price distortions. Due to the possibility of price distortion in the
futures market, and because of the imperfect correlation between the movements
in the cash market and movements in the price of futures, a correct forecast of
general market trends or interest rate movements by the adviser may still not
result in a successful hedging transaction over a short time frame.
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Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although the Funds
intend to purchase or sell futures only on exchanges or boards of trade where
there appear to be active secondary markets, there is no assurance that a liquid
secondary market on any exchange or board of trade will exist for any particular
contract or at any particular time. In such event, it may not be possible to
close a futures investment position, and in the event of adverse price
movements, a Fund would continue to be required to make daily cash payments of
variation margin. However, in the event futures contracts have been used to
hedge portfolio securities, such securities will not be sold until the futures
contract can be terminated. In such circumstances, an increase in the price of
the securities, if any, may partially or completely offset losses on the futures
contract. However, as described above, there is no guarantee that the price of
the securities will in fact correlate with the price movements in the futures
contract and thus provide an offset on a futures contract.
Further, it should be noted that the liquidity of a secondary market
in a futures contract may be adversely affected by "daily price fluctuation
limits" established by commodity exchanges which limit the amount of fluctuation
in a futures contract price during a single trading day. Once the daily limit
has been reached in the contract, no trades may be entered into at a price
beyond the limit, thus preventing the liquidation of open futures positions.
The trading of futures contracts is also subject to the risk of trading halts,
suspensions, exchange or clearing house equipment failures, government
intervention, insolvency of a brokerage firm or clearing house or other
disruptions of normal activity, which could at times make it difficult or
impossible to liquidate existing positions or to recover excess variation margin
payments.
Successful use of futures by a Fund is also subject to The Commerce
Funds' ability to predict correctly movements in the direction of the market.
For example, if a particular Fund has hedged against the possibility of a
decline in the market adversely affecting securities held by it and securities
prices increase instead, the Fund will lose part or all of the benefit to the
increased value of its securities which it has hedged because it will have
offsetting losses in its futures positions. In addition, in such situations, if
the Fund has insufficient cash, it may have to sell securities to meet daily
variation margin requirements. Such sales of securities may be, but will not
necessarily be, at increased prices which reflect the rising market. A Fund may
have to sell securities at a time when it may be disadvantageous to do so.
VI. Options on Futures Contracts
----------------------------
A Fund may purchase and write options on the futures contracts
described above. A futures option gives the holder, in return for the premium
paid, the right to buy (call) from or sell (put) to the writer of the option a
futures contract at a specified price at any time during the period of the
option. Upon exercise, the writer of the option is obligated to pay the
difference between the cash value of the futures contract and the exercise
price. Like the buyer or seller of a futures contract, the holder, or writer,
of an option has the right
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<PAGE>
to terminate its position prior to the scheduled expiration of the option by
selling, or purchasing an option of the same series, at which time the person
entering into the closing transaction will realize a gain or loss. A Fund will
be required to deposit initial margin and variation margin with respect to put
and call options on futures contracts written by it pursuant to brokers'
requirements similar to those described above. Net option premiums received
will be included as initial margin deposits. In anticipation of a decline in
interest rates, a Fund may purchase call options on futures contracts as a
substitute for the purchase of futures contracts to hedge against a possible
increase in the price of securities which the Fund intends to purchase.
Similarly, if the value of the securities held by a Fund is expected to decline
as a result of an increase in interest rates, the Fund might purchase put
options or sell call options on futures contracts rather than sell futures
contracts.
Investments in futures options involve some of the same considerations
that are involved in connection with investments in futures contracts (for
example, the existence of a liquid secondary market). In addition, the purchase
or sale of an option also entails the risk that changes in the value of the
underlying futures contract will not correspond to changes in the value of the
option purchased. Depending on the pricing of the option compared to either the
futures contract upon which it is based, or upon the price of the securities
being hedged, an option may or may not be less risky than ownership of the
futures contract or such securities. In general, the market prices of options
can be expected to be more volatile than the market prices on the underlying
futures contract. Compared to the purchase or sale of futures contracts,
however, the purchase of call or put options on futures contracts may frequently
involve less potential risk to the Fund because the maximum amount at risk is
the premium paid for the options (plus transaction costs). The writing of an
option on a futures contract involves risks similar to those risks relating to
the sale of futures contracts.
ACCOUNTING AND TAX TREATMENT
- ----------------------------
Accounting for futures contracts and options will be in accordance
with generally accepted accounting principles.
Special rules govern the federal income tax treatment of financial
instruments that may be held by the Funds. These rules may have a particular
impact on the amount of income or gain that the Funds must distribute to their
respective shareowners to comply with the Distribution Requirement, on the
income or gain qualifying under the Income Requirement and on their ability to
comply with the Short-Short Test described above.
Generally, futures contracts held by a Fund at the close of the Fund's
taxable year will be treated for federal income tax purposes as sold for their
fair market value on the last business day of such year, a process known as
"mark-to-market." Forty percent of any gain or loss resulting from such
constructive sale will be treated as short-term capital gain or loss and 60% of
such gain or loss will be treated as long-term capital gain or loss without
regard to the length of time the Fund holds the futures contract ("the 40-60
rule"). The amount of any capital gain or loss actually realized by the Fund in
a subsequent sale or other
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disposition of those futures contracts will be adjusted to reflect any capital
gain or loss taken into account by the Fund in a prior year as a result of the
constructive sale of the contracts. With respect to futures contracts to sell,
which will be regarded as parts of a "mixed straddle" because their values
fluctuate inversely to the values of specific securities held by the Fund,
losses as to such contracts to sell will be subject to certain loss deferral
rules which limit the amount of loss currently deductible on either part of the
straddle to the amount thereof which exceeds the unrecognized gain (if any) with
respect to the other part of the straddle, and to certain wash sales
regulations. Under short sales rules, which will also be applicable, the holding
period of the securities forming part of the straddle will (if they have not
been held for the long-term holding period) be deemed not to begin prior to
termination of the straddle. With respect to certain futures contracts,
deductions for interest and carrying charges will not be allowed.
Notwithstanding the rules described above, with respect to futures contracts to
sell which are properly identified as such, the Fund may make an election which
will exempt (in whole or in part) those identified futures contracts from being
treated for federal income tax purposes as sold on the last business day of the
Fund's taxable year, but gains and losses will be subject to such short sales,
wash sales, loss deferral rules and the requirement to capitalize interest and
carrying charges. Under temporary regulations, the Fund would be allowed (in
lieu of the foregoing) to elect either (1) to offset gains or losses from
portions which are part of a mixed straddle by separately identifying each mixed
straddle to which such treatment applies, or (2) to establish a mixed straddle
account for which gains and losses would be recognized and offset on a periodic
basis during the taxable year. Under either election, the 40-60 rule will apply
to the net gain or loss attributable to the futures contracts, but in the case
of a mixed straddle account election, not more than 50% of any net gain may be
treated as long-term and no more than 40% of any net loss may be treated as
short-term. Options on futures contracts generally receive federal tax treatment
similar to that described above.
Certain foreign currency contracts entered into by a Fund may be
subject to the "mark-to-market" process, but gain or loss will be treated as
100% ordinary income or loss. To receive such federal income tax treatment, a
foreign currency contract must meet the following conditions: (1) the contract
must require delivery of a foreign currency of a type in which regulated futures
contracts are traded or upon which the settlement value of the contract depends;
(2) the contract must be entered into at arm's length at a price determined by
reference to the price in the interbank market; and (3) the contract must be
traded in the interbank market. The Treasury Department has broad authority to
issue regulations under the provisions respecting foreign currency contracts.
As of the date of this Statement of Additional Information, the Treasury has not
issued any such regulations. Foreign currency contracts entered into by the
Fund may result in the creation of one or more straddles for federal income tax
purposes, in which case certain loss deferral, short sales, and wash sales rules
and the requirement to capitalize interest and carrying charges may apply.
Some investments may be subject to special rules which govern the
federal income tax treatment of certain transactions denominated in terms of a
currency other than the U.S. dollar or determined by reference to the value of
one or more currencies other than
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the U.S. dollar. The types of transactions covered by the special rules include
the following: (i) the acquisition of, or becoming the obligor under, a bond or
other debt instrument (including, to the extent provided in Treasury
regulations, preferred stock); (ii) the accruing of certain trade receivables
and payables; and (iii) the entering into or acquisition of any forward
contract, futures contract, option and similar financial instrument. However,
regulated futures contracts and non-equity options are generally not subject to
the special currency rules if they are or would be treated as sold for their
fair market value at year-end under the "mark-to-market" rules, unless an
election is made to have such currency rules apply. The disposition of a
currency other than the U.S. dollar by a U.S. taxpayer is also treated as a
transaction subject to the special currency rules. With respect to transactions
covered by the special rules, foreign currency gain or loss is calculated
separately from any gain or loss on the underlying transaction and is normally
taxable as ordinary gain or loss. A taxpayer may elect to treat as capital gain
or loss foreign currency gain or loss arising from certain identified forward
contracts, futures contracts and options that are capital assets in the hands of
the taxpayer and which are not part of a straddle. In accordance with Treasury
regulations, certain transactions subject to the special currency rules that are
part of a "section 988 hedging transaction" (as defined in the Code and the
Treasury regulations) will be integrated and treated as a single transaction or
otherwise treated consistently for purposes of the Code. "Section 988 hedging
transactions" are not subject to the mark-to-market or loss deferral rules under
the Code. It is anticipated that some of the non-U.S. dollar denominated
investments and foreign currency contracts that the Fund may make or may enter
into will be subject to the special currency rules described above. Gain or
loss attributable to the foreign currency component of transactions engaged in
by the Fund which are not subject to special currency rules (such as foreign
equity investments other than certain preferred stocks) will be treated as
capital gain or loss and will not be segregated from the gain or loss on the
underlying transaction.
The Treasury Department may by regulation exclude from income that
meets the Income Requirement, foreign currency gains that are not directly
related to a Fund's principal business of investing in stock or securities, or
options and futures with respect to stock or securities. For purposes of the
Income Requirement, any income derived by a Fund from a partnership or trust is
treated as derived with respect to the Fund's business of investing in stock,
securities or currencies only to the extent that such income is attributable to
items of income which would have been qualifying income if realized by the Fund
in the same manner as by the partnership or trust.
With respect to futures contracts and other financial instruments
subject to the "mark-to-market" rules, the Internal Revenue Service has ruled in
private letter rulings that for purposes of the Short-Short Test, a gain
realized from such a futures contract or financial instrument will be treated as
being derived from a security held for three months or more (regardless of the
actual period for which the contract or instrument is held) if the gain arises
as a result of a constructive sale under the "mark-to-market" rules, and will be
treated as being derived from a security held for less than three months only if
the contract or instrument is terminated (or transferred) during the taxable
year (other than by reason of
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mark-to-market) and less than three months have elapsed between the date the
contract or instrument is acquired and the termination date. In determining
whether the 30% test is met for a taxable year, increases and decreases in the
value of the Fund's futures contracts and other investments that qualify as part
of a "designated hedge," as defined in the Code, may be netted.
If the International Equity Fund invests in certain "passive foreign
investment companies" ("PFICs") it would be subject to federal income tax (and
possibly additional interest charges) on a portion of any "excess distribution"
or gain from the disposition of such investments, even if it distributes the
income to its shareowners. If the International Equity Fund elects to treat the
PFIC as a "qualified electing fund" ("QEF") and the PFIC furnishes certain
financial information in the required form, the Fund instead would be required
to include in income each year its allocable share of the ordinary earnings and
net capital gains of the QEF, whether or not received, and such amounts would be
subject to the various distribution requirements described above.
Alternatively, if enacted as proposed, proposed Treasury regulations
would allow the International Equity Fund in the future to elect instead to
recognize any appreciation in the PFIC shares that it owns by marking them to
market as of the last business day of each taxable year (and on certain other
dates prescribed in the Code). Again, gain recognized under this "mark-to-
market" approach would be subject to the various distribution requirements
described above, even if no cash is received currently from the PFIC investment.
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PART C
OTHER INFORMATION
Item 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
(1) Included in Part A:
Financial Highlights for Registrant's Short-Term Government
Fund, Bond Fund, Balanced Fund, Growth Fund, Aggressive Growth
Fund and International Equity Fund for the period from December
12, 1994 (commencement of operations) through October 31, 1995,
and for Registrant's National Tax-Free Bond Fund and Missouri
Tax-Free Bond Fund for the period from February 21, 1995
(commencement of operations) through October 31, 1995.
(2) Included in Part B:
Financial Statements included in Registrant's Annual Report for
the fiscal period ended October 31, 1995, as previously filed
with the Commission, are incorporated herein by reference.
(b) Exhibits
(1) Trust Instrument dated February 7, 1994./1/
(2) Bylaws of Registrant./1/
(3) Not Applicable.
(4) Not Applicable.
(5) (a) Advisory Agreement among Registrant, Commerce Bank, N.A.
(St. Louis) and Commerce Bank, N.A. (Kansas City)./1/
(b) Sub-Advisory Agreement among Commerce Bank, N.A. (St.
Louis), Commerce Bank, N.A. (Kansas City) and Rowe Price-
Fleming International, Inc./1/
(6) Distribution Agreement between Registrant and Goldman, Sachs &
Co./1/
(7) Not Applicable.
(8) (a) Custodian Agreement between Registrant and State Street Bank
and Trust Company./1/
(b) Transfer Agency Agreement between Registrant and State
Street Bank and Trust Company./1/
- -----------------------------------
/1/ Filed electronically as an Exhibit and incorporated herein by reference to
Post-Effective Amendment No. 1 to Registration Statement on Form N-1A (File
Nos. 33-80966 and 811-8598) on June 30, 1995.
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(9) (a) Administration Agreement between Registrant and Goldman
Sachs Asset Management./1/
(b) Shareholder Administrative Services Plan and related form of
Servicing Agreement are filed herein.
(10) Opinion and Consent of Counsel./*/
(11) (a) Consent of Drinker Biddle & Reath is filed herein.
(b) Consent of Independent Auditors is filed herein.
(12) Not Applicable.
(13) (a) Purchase Agreement between Registrant and Initial
Trustee./1/
(b) Purchase Agreement between Registrant and Goldman, Sachs &
Co./1/
(c) Purchase Agreement between Registrant and Commerce Bank,
N.A. (Kansas City)./1/
(14) Not Applicable.
(15) Not Applicable.
(16) Schedule of Computation of Performance Quotations for the Short-
Term Government Fund, Bond Fund, Balanced Fund, Growth Fund,
Aggressive Growth Fund, International Equity Fund, National Tax-
Free Bond Fund and Missouri Tax-Free Bond Fund./1/
(17) Financial Data Schedules as of October 31, 1995 are filed
herein.
- ----------------------
/*/ Opinion and Consent of Counsel filed on November 15, 1995 under Rule 24f-2
as part of Registrant's Rule 24f-2 Notice.
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Item 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
-------------------------------------------------------------
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 26. NUMBER OF HOLDERS OF SECURITIES
-------------------------------
<TABLE>
<CAPTION>
Number of Record
Holders as of
Title of Series February 8, 1996
------------------------------------- ------------------
<S> <C>
Short-Term Government Fund........... 572
Bond Fund............................ 904
Balanced Fund........................ 741
Growth Fund.......................... 1,833
Aggressive Growth Fund............... 1,347
International Equity Fund............ 969
National Tax-Free Bond Fund.......... 149
Missouri Tax-Free Bond Fund.......... 146
</TABLE>
Item 27. 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 9(a) and 6, 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 1, provides for
indemnification of the Trustees and officers as follows:
Section 10.2 Indemnification. The Trust shall indemnify each of its
Trustees against all liabilities and expenses (including amounts paid
in satisfaction of judgments, in compromise, as fines and penalties,
and as counsel fees) reasonably incurred by him in connection with the
defense or disposition of any action, suit or other proceeding,
whether civil or criminal, in which he may be involved or with which
he may be threatened, while as a Trustee or thereafter, by reason of
his being or having been such a Trustee except with respect to any
matter as to which he shall have been adjudicated to have acted in bad
faith, willful misfeasance, gross negligence or reckless disregard of
his duties, provided that as to any matter disposed of by a compromise
payment by such person, pursuant to a consent decree or otherwise, no
indemnification either for said payment or for any other expenses
shall be provided unless the Trust shall have received a written
opinion from independent legal counsel approved by the Trustees to the
effect that if either the matter or willful misfeasance, gross
negligence or reckless disregard of duty, or the matter of bad faith
had been adjudicated, it would in the opinion of such counsel have
been adjudicated in favor of such person. The rights accruing to any
person under these provisions shall not exclude any other right to
which he may be lawfully entitled, provided that no person may satisfy
any right of indemnity or 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
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the indemnified person shall have given a written undertaking to
reimburse the Trust in the event it is subsequently determined that he
is not entitled to such indemnification.
The Trust shall indemnify officers, and shall have the power to
indemnify representatives and employees of the Trust, to the same
extent that Trustees are entitled to indemnification pursuant to this
Section 10.2.
Section 10.3 of Registrant's Trust Instrument provides for
indemnification of shareholders as follows:
Section 10.3 Shareholders. In case any Shareholder or former
Shareholder of any Series shall be held to be personally liable solely
by reason of his being or having been a Shareholder of such Series and
not because of his acts or omissions or for some other reason, the
Shareholder or former Shareholder (or his heirs, executors,
administrators or other legal representatives, or in the case of a
corporation or other entity, its corporate or other general successor)
shall be entitled out of the assets belonging to the applicable Series
to be held harmless from and indemnified against all loss and expense
arising from such liability. The Trust, on behalf of the affected
Series, shall, upon request by the Shareholder, assume the defense of
any claim made against the Shareholder for any act or obligation of
the Series and satisfy any judgment thereon from the assets of the
Series.
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to Trustees, officers and controlling persons of
Registrant pursuant to the foregoing provisions, or otherwise, Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by Registrant of expenses incurred or
paid by a Trustee, officer or controlling person of Registrant in the successful
defense of any action, suit or proceeding) is asserted by such Trustee, officer
or controlling person in connection with the securities being registered,
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
Item 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
----------------------------------------------------
(a) Commerce Bank, N.A. (St. Louis) and Commerce Bank, N.A. (Kansas
City), the Registrant's investment advisers, provide a comprehensive range of
financial services including investment management, trust, retail, commercial,
brokerage, and correspondent banking services.
Set forth below is a list of all of the directors and senior executive
officers of Commerce Bank, N.A. (Kansas City) and Commerce Bank, N.A. (St.
Louis) and, with respect to each such person, the name and business address of
the company or companies (if any) with which such person has been connected at
any time since November 1, 1993, 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. (KANSAS CITY) BUSINESS ADDRESS OF OTHER COMPANY CONNECTION WITH OTHER COMPANY
- --------------------------------- --------------------------------- -----------------------------
<S> <C> <C>
Mr. John O. Brown, Key Industries, Inc. Director
Vice Chairman of the Board 523 East Wall
Ft. Scott, KS 66701-1554
Mr. Jonathan M. Kemper, Tower Properties Company Director
Chairman and CEO 911 Main Street, Suite 100
Kansas City, MO 64106
Commerce Bancshares, Inc. Vice Chairman
1000 Walnut Street
Kansas City, MO
Commerce Bancshares, Inc. Vice President
Mr. Warren W. Weaver, Roddis Lumber Co. Chairman
Director 727 N. Cherry
P.O. Box 1446
San Antonio, TX 78295
Commerce Bancshares, Inc. Vice Chairman
Mr. Thomas M. Block, 830 W. 51st Street None
Director Kansas City, MO 64112
Mr. H.D. Cleberg, Farmland Industries, Inc. President
Director P.O. Box 7305
Kansas City, MO 64116
Mr. Stephen D. Dunn, J.E. Dunn Construction Co. Senior Vice President
Director 929 Holmes and Assistant Treasurer
Kansas City, MO 64106
Mr. Brian D. Everist, Intercontinental Engineering President
Director Manufacturing Corporation
P.O. Box 9055
Kansas City, MO 64168
Mrs. Anita B. Gorman, 917 N.E. Vivion Road Civic Leader
Director Kansas City, MO 64118
Mr. Richard C. Green, Jr., UtiliCorp United, Inc. President
Director P.O. Box 13287
Kansas City, MO 64199
Mr. C.L. William Haw, National Farms, Inc. President
Director 1600 Genessee, Suite 846
Kansas City, MO 64102
</TABLE>
C-5
<PAGE>
<TABLE>
<CAPTION>
NAME AND POSITION WITH NAME AND PRINCIPAL
COMMERCE BANK, N.A. (KANSAS CITY) BUSINESS ADDRESS OF OTHER COMPANY CONNECTION WITH OTHER COMPANY
- --------------------------------- --------------------------------- -----------------------------
<S> <C> <C>
Mr. William L. Johnson, Northern Pipeline Chief Executive
Director Construction Co. Officer
2901 East 85th Street
Kansas City, MO 64132
Mr. James M. Kemper, Jr., Tower Properties Company Chairman and President
Director 911 Main, Suite 100
Kansas City, MO 64106
Commerce Bank, N.A. (St. Louis) Director
8000 Forsyth Blvd.
Clayton, MO 63105
Commerce Bancshares, Inc. Director
Mr. John N. McConnell, Labconco Corporation Chairman and President
Director 8811 Prospect
Kansas City, MO 64132
Mr. Thomas R. McGee, 4900 Main, Suite 717 Consultant
Director Kansas City, MO 64112
Mr. Robert J. Reintjes, Sr., George P. Reintjes President and CEO
Director Company, Inc.
3800 Summit
P.O. Box 410856
Kansas City, MO 64141
Mr. Lamson Rheinfrank, Jr., BHA Group, Inc. Chairman
Director 8800 E. 63rd Street
Kansas City, MO 64133
Mr. Laidacker M. Seaberg, Midwest Grain Products, Inc. President and CEO
Director P.O. Box 130
Atchison, KS 66002-2666
Mr. Louis W. Smith, Ewing Marion Kauffman President and COO
Director Foundation
4900 Oak Street
Kansas City, MO 64112
Mr. Charles S. Sosland, Sosland Companies, Inc. President and CEO
Director 4800 Main Street, Suite 100
Kansas City, MO 64112
</TABLE>
C-6
<PAGE>
<TABLE>
<CAPTION>
NAME AND POSITION WITH NAME AND PRINCIPAL
COMMERCE BANK, N.A. (KANSAS CITY) BUSINESS ADDRESS OF OTHER COMPANY CONNECTION WITH OTHER COMPANY
- --------------------------------- --------------------------------- -----------------------------
<S> <C> <C>
Ms. Susan M. Stanton, Payless Cashways, Inc. President
Director 2300 Main
P.O. Box 419466
Kansas City, MO 64141-0466
Mr. Jack W. Steadman, Kansas City Chiefs Football Chairman of the Board
Director Club, Inc.
1528 Commerce Bank Bldg.
1000 Walnut Street
Kansas City, MO 64106
Mr. Heinz K. Wehner, None None
Director
Mr. Hugh J. Zimmer, The Zimmer Companies Chairman
Director 1220 Washington, #202
P.O. Box 411299
Kansas City, MO 64141
Mr. Stephen Melcher, Health Midwest, Inc. Director
Executive Vice President 2142 E. Meyer Blvd.
Kansas City, MO 64132-1199
Mr. John R. Owen, None None
Executive Vice President
Mr. Kenneth J. Ragan, None None
Executive Vice President
Mr. Marc J. Andreoli, None None
Senior Vice President &
Assistant Secretary
Mr. John S. Archer, Commerce Bancshares, Inc. Vice President
Senior Vice President
Mr. Kevin G. Barth, None None
Executive Vice President
Mr. Dennis R. Block None None
Senior Vice President
Mr. Dan Bolen, None None
Executive Vice President
Mr. Charles G. Buffum, III, LaCrosse Lumber Co. Director
Senior Vice President 200 N. Main
Louisiana, MO 63353
Mr. Norman B. Dawson, None None
Senior Vice President
Community President
</TABLE>
C-7
<PAGE>
<TABLE>
<CAPTION>
NAME AND POSITION WITH NAME AND PRINCIPAL
COMMERCE BANK, N.A. (KANSAS CITY) BUSINESS ADDRESS OF OTHER COMPANY CONNECTION WITH OTHER COMPANY
- --------------------------------- --------------------------------- -----------------------------
<S> <C> <C>
Mr. Hugh Graff, None None
Senior Vice President
Ms. Cathy L. Griffis, None None
Senior Vice President
Mr. David R. Goodman, None None
Senior Vice President
Community President
Mr. Stephen Kitts, None None
Senior Vice President
Mr. David H. Lindsey, None None
Senior Vice President
Mr. Steven C. Lynn, None None
Senior Vice President
Mr. Julius A. Madas, None None
Senior Vice President
Michael F. Marlow, None None
Senior Vice President
Mr. Robert J. Rauscher, None None
Senior Vice President
Mr. Edward Reardon, None None
President and Director
Mr. George T. Reichman, Broderson Manufacturing Co. Director
Senior Vice President P.O. Box 14770
14741 W. 106th St.
Lenexa, KS 66215-2015
Mr. Stanley E. Ricketts, None None
Senior Vice President
Ms. Teresa Rouse, None None
Senior Vice President
Mr. James R. Rucker, None None
Senior Vice President
Mr. Michael Sobba, None None
Senior Vice President
Mr. Michael S. Spafford, None None
Senior Vice President
Mr. Daniel J. Stinnett, None None
Senior Vice President, General
Counsel and Secretary
Thomas A. Wallingford, None Alwaco
Senior Vice President Kansas City, MO
Mr. Thomas E. Weiford, None Alwaco
Senior Vice President Kansas City, MO
</TABLE>
C-8
<PAGE>
<TABLE>
<CAPTION>
NAME AND POSITION WITH NAME AND PRINCIPAL
COMMERCE BANK, N.A. (ST. LOUIS) BUSINESS ADDRESS OF OTHER COMPANY CONNECTION WITH OTHER COMPANY
- ------------------------------- --------------------------------- -----------------------------
<S> <C> <C>
Mr. David W. Kemper, Tower Properties Company Director
Chairman of the Board/CEO 911 Main Street, Suite 100
Kansas City, MO 64106
Commerce Bancshares, Inc. Chairman, President and
Chief Executive Officer
Business Men's Assurance Company of Director
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, Inc.
10845 Olive Blvd.
St. Louis, MO 63146
Ralcorp Holdings, Inc.
901 Chouteau Avenue
St. Louis, MO 63102
Mr. Seth M. Leadbeater, None None
President and Director
Charles S. Betz None None
Executive Vice President
Jonathan Ford None None
Executive Vice President
Paul D. Kalslbeck None None
Executive Vice President
Charles G. Kim None None
Executive Vice President
Peter F. Mackie Commerce Bancshares, Inc. Vice President
Executive Vice President
Darrell J. Procter Commerce Bancshares, Inc. Executive Vice President
Executive Vice President
Robert Smith None None
Executive Vice President
</TABLE>
C-9
<PAGE>
<TABLE>
<CAPTION>
NAME AND POSITION WITH NAME AND PRINCIPAL
COMMERCE BANK, N.A. (ST. LOUIS) BUSINESS ADDRESS OF OTHER COMPANY CONNECTION WITH OTHER COMPANY
- ------------------------------- --------------------------------- -----------------------------
<S> <C> <C>
John J. Thiebauth Dotmar, Inc. d/b/a The Director
Executive Vice President Stange Company
2324 Walden Parkway
St. Louis, MO 63146
Norman T. Williams None None
Executive Vice President
Mr. Adrian N. Baker, II, Adrian Baker Reinsurance President
Director Intermediaries, Inc.
34 North Meramec Ave.
P.O. Box 66871
St. Louis, MO 63166-6871
Mr. William E. Ball, Ladue Building & Engineering Corp. President
Director 11543 Page Service Dr.
St. Louis, MO 63146
Mr. James K. Berthold, Sunnen Products Co. Chairman/President
Director 7910 Manchester
St. Louis, MO 63143
Mr. John R. Capps, Plaza Motor Company President
Director 755 N. New Dallas Rd.
St. Louis, MO 63141
Mr. William A. Christison, III, Husch & Eppenberger Attorney at Law
Director 101 Southwest Adams St.
Suite 800
Peoria, IL 61602
Mr. Joe Curtis, None None
Vice Chairman
Mr. Thomas P. Danis, Rollins Hudig Hall of Missouri, Inc. Chairman
Director 100 N. Broadway
Suite 1700
St. Louis, MO 63102
Mr. Ken J. Elkins, Pulitzer Broadcasting Company President and CEO
Director 101 South Hanley Rd.
Suite 1250
St. Louis, MO 63105-3428
Mr. James G. Forsyth, III, Moto, Inc. President
Director 721 W. Main St.
P.O. Box 122
Belleville, IL 62222
Mr. Harold L. Helmkampf, Harold F. Helmkampf General President
Director Contractor, Inc.
121 Hunter Avenue
St. Louis, MO 63124
</TABLE>
C-10
<PAGE>
<TABLE>
<CAPTION>
NAME AND POSITION WITH NAME AND PRINCIPAL
COMMERCE BANK, N.A. (ST. LOUIS) BUSINESS ADDRESS OF OTHER COMPANY CONNECTION WITH OTHER COMPANY
- ------------------------------- --------------------------------- -----------------------------
<S> <C> <C>
Mr. James M. Kemper, Jr., Tower Properties Company Chairman and President
Director 911 Main Street, Suite 100
Kansas City, MO 64106
Commerce Bank, N.A. (Kansas City) Director
1000 Walnut Street
Kansas City, MO 64106
Commerce Bancshares, Inc. Director
Mr. Alois J. Koller, Sr., Koller-Craft Plastic Products, Inc. Chairman
Director Drawer K
Fenton, MO 63026
Ms. Mary Ann Krey, Krey Distributing Company Chief Executive Officer
Director 150 Turner Blvd.
P.O. Box 1030
St. Peters, MO 63376-8030
Mr. Hal A. Kroeger, HALAK, Inc. President
Director P.O. Box 8440
St. Louis, MO 63132
Mr. Ronald K. Lohr, Lohr Distributing Co., Inc. President
Director 1100 S. 9th St.
St. Louis, MO 63104
Mr. John B. Morgan, Subsurface Constructors, Inc. President
Director 110 Angelica St.
St. Louis, MO 63147
Mr. Edward J. Nusrala, Famous Brand Shoes, Inc. President
Director 8620 Olive
St. Louis, MO 63132
Mr. Benjamin J. Rassieur, Paulo Products Co. President
Director 5711 West Park Avenue
St. Louis, MO 63110
Mr. Bruce G. Robert, Sr., Siegel-Robert, Inc. Chairman & CEO
Director 8645 S. Broadway
St. Louis, MO 63111
Mr. Jerome M. Rubenstein, Bryan, Cave Partner
Director One Metro Square
211 N. Broadway
St. Louis, MO 63102-2750
Mr. James E. Schiele, St. Louis Screw & Bolt Chairman and President
Director Co.
6900 N. Broadway
St. Louis, MO 63147
Mr. Jack O. Snyder, Snyder Development Co. President
Director 202 N. Prospect Road
Bloomington, IL 61704
</TABLE>
C-11
<PAGE>
<TABLE>
<CAPTION>
NAME AND POSITION WITH NAME AND PRINCIPAL
COMMERCE BANK, N.A. (ST. LOUIS) BUSINESS ADDRESS OF OTHER COMPANY CONNECTION WITH OTHER COMPANY
- ------------------------------- --------------------------------- -----------------------------
<S> <C> <C>
Mr. Gregory B. Vatterott, Charles J. Vatterott & Company President
Director 10449 St. Charles Rock Rd.
St. Ann, MO 63074
Mr. Earl E. Walker, Carr Lane Manufacturing Co. President
Director 4200 Carr Lane Court
St. Louis, MO 63119
Mr. Mahlon B. Wallace, III, Wallace Properties President & CEO
Director 2001 S. Hanley Rd.
St. Louis, MO 63144
Mr. Horace Wilkins, Jr., Missouri Southwestern Bell Telephone President
Director Company
100 N. Tucker
Rm. 118
St. Louis, MO 63101
</TABLE>
(b) The information required by this Item 28 with respect to each director and
officer of Rowe Price-Fleming International, Inc. is incorporated by reference
to Form ADV and Schedules A and D filed by Rowe Price-Fleming International,
Inc. with the Securities and Exchange Commission pursuant to the Securities
Exchange Act of 1934 (File No.801-14713).
Item 29. PRINCIPAL UNDERWRITER
---------------------
(a) Goldman, Sachs & Co., or an affiliate or a division thereof, currently
serves as investment adviser and distributor of the units or shares of Goldman
Sachs-Money Market Trust, Financial Square Trust, Goldman Sachs Trust, Goldman
Sachs Equity Portfolios, Inc., Trust for Credit Unions and Paragon Treasury
Money Market Fund, and as administrator and distributor for the units of The
Benchmark Funds and for the Shares of Paragon Portfolio.
(b) Set forth below is certain information pertaining to the general partners
of Goldman, Sachs & Co., distributor for Registrant. None of the Partners hold
positions or offices with the Registrant.
C-12
<PAGE>
GOLDMAN, SACHS & CO. GENERAL PARTNERS
-------------------------------------
Name and Principal Name and Principal
Business Address Business Address
- ------------------ ------------------
Jon S. Corzine, Chairman (1)(2) Gavyn Davies (7)
Henry M. Paulson, Jr. Chairman (1)(2) Dexter D. Earle (5)
Roy J. Zuckerberg (5) John Ehara (10)
David M. Silfen (5) J. Christopher Flowers (2)
Richard M. Hayden (7) Gary Gensler (2)
Robert J. Hurst (2) Charles T. Harris, III (2)
Howard C. Katz (2) Thomas J. Healey (2)
Peter K. Barker (9) Stephen Hendel (2)
Eric S. Dobkin (5) Robert E. Higgins (2)
Willard J. Overlock, Jr. (2) Ernest S. Liu (5)
Jonathon L. Cohen (2) Eff W. Martin (11)
Frederic B. Garonzik (7) Charles B. Mayer, Jr. (2)
Kevin W. Kennedy (2) Michael J. O'Brien (7)
William C. Landreth (8) Mark Schwartz (2)
Daniel M. Neidich (2) Stephen M. Semlitz (2)
Edward Spiegel (5) Robert K. Steel (5)
Robert F. Cummings, Jr. (2) John A. Thain (2)(7)
Angelo De Caro (2) John L. Thornton (7)
Steven G. Einhorn (5) Bracebridge H. Young, Jr. (10)
David B. Ford (5) Joseph R. Zimmel (2)
David M. Leuschen (2) Barry L. Zubrow (2)
Michael R. Lynch (2) Gary L. Zwerling (2)
Michael D. McCarthy (2) Jon R. Aisbitt (7)
Donald C. Opatrny, Jr. (2) Andrew M. Alper (2)
Thomas E. Tuft (5) William J. Buckley (5)
Robert J. Katz (1)(2) Frank L. Coulson, Jr. (2)
Michael P. Mortara (2) Connie Duckworth (8)
Llyod C. Blankfein (2) Richard A. Friedman (2)
John P. Curtin, Jr. (2) Alan R. Gillespie (7)
Scott M. Pinkus (2) Joseph H. Gleberman (2)
John J. Powers (2) Jacob D. Goldfield (2)
Stephen D. Quinn (2) Steven M. Heller (2)
Arthur J. Reimers, III (7) Ann F. Kaplan (2)
James P. Riley, Jr. (2) Robert S. Kaplan (2)
Richard A. Sapp (7) Peter D. Kiernan, III (2)
Donald F. Textor (5) John P. NcNulty (5)
Thomas B. Walker, III (2) T. Willem Mesdag (14)
Patrick J. Ward (7) Gaetano J. Muzio (11)
Jeffrey M. Weingarten (7) Robin Neustein (2)
Jon Winkelried (2) Timothy J. O'Neill (2)
Richard E. Witten (2) Suzanne M. Nora Johnson (9)
Gregory K. Palm (2)(7) Terence M. O'Toole (2)
Carlos A. Cordeiro (7) Carl G.E. Palmstierna (7)
John O. Downing (7) Michael G. Rantz (7)
Mark Evans (13) J. David Rogers (5)
Michael D. Fascitelli (2) Joseph Sassoon (7)
Sylvain M. Hefes (7) Peter Savitz (2)(7)
Reuben Jeffrey, III (7) Charles B. Seelig, Jr. (2)
Lawrence H. Linden (2) Ralph F. Severson (11)
Jun Makihara (10) Gene T. Sykes (9)
Masanori Mochida (10) Gary A. Syman (10)
Robert B. Morris, III (7)(11) Leslie C. Tortora (2)
Philip D. Murphy (14) John L. Townsend, III (2)
Lee G. Vance (7)
David A. Viniar (2)
John S. Weinberg (2)
C-13
<PAGE>
Name and Principal Name and Principal
Business Address Business Address
- ------------------ ------------------
Peter A. Weinberg (2) Kevin M. Kelly (2)
Laurence M. Weiss (2) John C. Kleinert (2)
George W. Wellde, Jr. (10) Jonathan L. Kolatch (2)
Jaime E. Yordan (2)(16) Peter S. Kraus (2)
Sharmin Mossavar-Rahmani (5) Robert Litterman (2)
Hideo Ishihara (10) Jonathan M. Lopatin (2)
Paul M. Achleitner (14) Thomas J. Macirowski (2)
Armen A. Avanessians (2) Peter G.C. Mallinson (13)
Joel S. Beckman (2) Oki Matsumoto (10)
David W. Blookd (7) E. Scott Mead (7)
Zachariah Cobrinik (10) Eric M. Mindich (5)
Gary D. Cohn (7) Steven T. Mnuchin (2)
Christopher A. Cole (2) Thomas K. Montag (2)
Henry Cornell (13) Edward A. Mule (2)
Robert V. Delaney (2) Kipp M. Nelson (7)
Joseph Della Rosa (5) Christopher K. Norton (2)
J. Michael Evans (7) Robert J. O'Shea (2)
Lawton W. Fitt (5) Wiet H. Pot (7)
Joseph D. Gatto (2) Jack L. Salzman (5)
Peter C. Gerhard (2) Eric S. Schwartz (5)
Nomi P. Ghez (5) Michael F. Schwerin (2)
David T. Hamamoto (2) Richard S. Sharp (7)
Walter H. Haydock (2)(15) Richard G. Sherlund (5)
David L. Henle (5) Michael S. Sherwood (7)
Francis J. Ingrassia (2) Cody J. Smith (2)
Scott B. Kapnick (7) Daniel W. Stanton (5)
Fredric E. Steck (2) Esta E. Stecher (2)
Byron D. Trott (8) Gary W. Williams (5)
Barry S. Volpert (2) Tracy R. Wolstencroft (4)
Peter S. Wheeler (13) Danny O. Yee (13)
Anthony G. Williams (7)
Michael J. Zamkow (2)
Mark A. Zurack (5)
Jim O'Neill (2)
Peter D. Sutherland (7)
- ------------------
(1) Management Committee
(2) 85 Broad Street, New York, NY 10004
(3) Mellon Bank Center, 1735 Market Street, 26th Floor,
Philadelphia, PA 19103
(4) 100 Crescent Court, Suite 1000, Dallas, TX 75201
(5) One New York Plaza, New York, NY 10004
(6) 1000 Louisiana Street, Suite 550, Houston, TX 77002
(7) Peterborough Court, 133 Fleet Street, London
EC4A 2BB, England
(8) 4900 Sears Tower, Chicago, IL 60606
C-14
<PAGE>
(9) 333 South Grand Avenue, Suite 1900, Los Angeles, CA 90071
(10) ARK Mori Bldg., 10th Floor, 12-32 Akasaka, 1-chome,
Minato-ku, Tokyo 107, Japan
(11) 555 California Street, 45th Floor, San Francisco, CA 94104
(12) Exchange Place, 53 State Street, 13th Floor,
Boston, MA 02109
(13) Asia Pacific Finance Tower, 37th Floor, Citibank Plaza,
3 Garden Road, Hong Kong
(14) Finanz GmbH, MesseTurm, 60308 Frankfurt am Main, Germany
(15) Munsterof 4, 8022, Zurich, Switzerland
(16) Casa de Bolsa, S.A. deC.U. Av. de las Palmas 405, Piso 18. Lomas
de Chapulte PEC, Mexico 11000, D.F.
(c) None.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
(1) Commerce Bank, N.A., 8000 Forsyth Boulevard, Clayton, Missouri and Commerce
Bank, N.A. (Kansas City), 1000 Walnut Street, Kansas City, Missouri
(records relating to their functions as investment adviser to each of
Registrant's investment portfolios).
(2) Rowe-Price Fleming International, Inc., 100 East Pratt Street, Baltimore,
Maryland (records relating to its function as sub-investment adviser to
Registrant's International Equity Fund).
(3) Goldman, Sachs & Co., 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, Philadelphia National Bank Building, 1345 Chestnut
Street, Philadelphia, Pennsylvania (Registrant's Trust Instrument, By-Laws
and minute books).
Item 31. Management Services
-------------------
Not Applicable.
Item 32. Undertakings
------------
(a) Registrant undertakes to provide its Annual Report upon request without
charge to any recipient of the Prospectuses for the Short-Term Government Fund,
Bond Fund, Balanced Fund, Growth Fund, Aggressive Growth Fund, International
Equity Fund, National Tax-Free Bond Fund and Missouri Tax-Free Bond Fund.
(b) Registrant undertakes to comply with the provisions of Section 16(c) of
the Investment Company Act of 1940 as though they were applicable to it.
C-15
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this Post-
Effective Amendment No. 2 to its Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Kansas
City, State of Missouri, on the 29th day of February, 1996.
THE COMMERCE FUNDS
Registrant
/s/ Pleasant Voorhees Miller
----------------------------
Pleasant Voorhees Miller
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
- ---------------------
Randall D. Barron Trustee, Treasurer February 29, 1996
/s/ David L. Bodde
- ------------------
David L. Bodde Trustee February 29, 1996
/s/ John Eric Helsing
- ---------------------
John Eric Helsing Trustee, Chairman February 29, 1996
/s/ John Joseph Holland
- -----------------------
John Joseph Holland Trustee February 29, 1996
/s/ Pleasant Voorhees Miller
- ----------------------------
Pleasant Voorhees Miller Trustee February 29, 1996
C-16
<PAGE>
COMMERCE FUNDS
--------------
EXHIBIT INDEX
-------------
Exhibits
--------
(9)(b) Administrative Services Plan and related form of Servicing
Agreement.
(11)(a) Consent of Drinker Biddle & Reath.
(11)(b) Consent of Independent Auditors.
(27) Financial Data Schedules as of October 31, 1995.
C-17
<PAGE>
Not to be used for Individual Retirement Accounts-- For an IRA application,
call Shareowner Services at 1-800-305-2140
Account # ______________________________
Order # ________________________________
ACCOUNT APPLICATION FORM LOGO
- --------------------------------------------------------------------------------
THIS ACCOUNT The Commerce Funds c/o Shareowner Services P.O. Box
APPLICATION FORM 16931 St. Louis, MO 63105
SHOULD BE For additional information call 1-800-305-2140
FORWARDED PROMPTLY Date: ___________
TO:
- --------------------------------------------------------------------------------
1. ACCOUNT REGISTRATION
Please Print
INDIVIDUAL
--------------------------------------- ---------------
First NameInitialLast Name(Birthdate) SS# or Tax ID#
JOINT TENANTS
The account will be registered as "Joint Tenants with
Right of Survivorship" unless otherwise specified.
--------------------------------------- ---------------
First NameInitialLast Name(Birthdate) SS# or Tax ID#
--------------------------------------- ---------------
First NameInitialLast Name(Birthdate) SS# or Tax ID#
GIFT TO MINORS
---------------------------------------------------------
Custodian's Name (Only one can be named)
--------------------------------------- ---------------
Minor's Name (Only one) SS#
Under the __ (State of Residence) Uniform Gift to
Minors Act
ADDITIONAL DOCUMENTATION
CORPORATION, TRUST, OR OTHER ENTITY
MAY BE REQUIRED --------------------------------------- ---------------
Name of Corporation, Trust or other Non-Person Entity
Tax ID#
---------------------------------------------------------
Attention
---------------------------------------------------------
Date of Trust Instrument:Name of Beneficiary (If to be
included in the registration)
---------------------------------------------------------
Name(s) of Trustee(s) (If to be included in the
registration)
- --------------------------------------------------------------------------------
2. MAILING ADDRESS ( )
----------------------------------- -------------------
Street Daytime Phone
---------------------------------------------------------
City State Zip Code
<PAGE>
- -------------------------------------------------------------------------------
3. TO PURCHASE SHARES Check appropriate boxes:
$2000 MINIMUM [_]Short Term $_______ [_]Aggressive $_______
(EXCEPT PURSUANT Government Amount Growth Amount
TO THE AUTOMATIC [_]Bond $_______ [_International$_______]
INVESTMENT PLAN-- Amount Equity Amount
MINIMUM IS $1000) [_]Balanced [_National]
(Employee Benefit Tax-Free
Plans only) Bond
$_______ $_______
Amount Amount
[_]Growth $_______ [_Missouri]
Amount Tax-Free
Bond
$_______
Amount
[_]A check (payable to "The Commerce Funds") for $___ is
enclosed.
[_I/we]certify that I/we am/are an entity exempt from
the sales charge according to the "How To Buy Shares"
section in the Prospectus and I/we am/are, therefore,
entitled to purchase Fund shares at net asset value.
By checking this box, the undersigned agrees that
I/we will notify Commerce Funds Shareowner Services
at or prior to purchase if I/we am/are no longer in
one of the categories of eligible investors.
Reason for exemption ________________________________.
- -------------------------------------------------------------------------------
4. DIVIDEND AND See "Dividend and Distribution Policies" in the
DISTRIBUTION Prospectus
OPTIONS Choose how you wish to receive dividends. If no boxes
are checked, Option A will be assigned.
A. [_] Reinvest all dividends and capital gains.
B. [_] Receive dividends in cash and reinvest capital
gains (Complete cash dividend section below.)
C. [_] Receive all dividends and capital gains in cash
(Complete cash dividend section below.)
D. [_] All dividends and capital gains reinvested in
another Commerce Fund account. (See Prospectus
regarding limitations on this privilege.)
Fund Name _________________ Account Number ____________
Please send cash dividends to:
[_] Account registration address. [_Deposit]to bank
(attach voided
check/deposit
slip)
[_] Check to special payee as follows: (SIGNATURE
GUARANTEE required. See Section 13 of this Form.)
Name of Payee ________________ Account No. (if
applicable) __________
Street Address _________________________________________
City _____________________________ State ____ Zip ______
- -------------------------------------------------------------------------------
5. RIGHT OF ACCUMULATION
See "How To Buy Shares" in the Prospectus
Cumulative quantity discounts are applicable if a
shareowner's current value of existing shares of a Fund
alone or in combination with shares of any other Fund
described in the Prospectus on which a sales charge was
paid, total the requisite amount for receiving a
discount ($100,000 minimum) as described in the
accompanying Prospectus. Below are listed all the
accounts (account name, Fund and number) which should
be aggregated for a right of accumulation.
Name _____________ Name _____________ Name _____________
Fund _____________ Fund _____________ Fund _____________
Acct No. _________ Acct No. _________ Acct No. _________
- -------------------------------------------------------------------------------
6. LETTER OF INTENT See "How To Buy Shares" in the Prospectus
Although not obligated to do so, it is the
undersigned's intention to invest, over a 13-month
period from this date, in shares of a Fund alone or in
combination with shares of any other Fund, on which a
sales charge was paid, described in the Prospectus
which qualify for a quantity discount as described in
the accompanying Prospectus, in an amount that will
equal or exceed:
[_] $100,000 [_] $250,000 [_] $500,000 [_] $1,000,000
I/we agree to the Letter of Intent and Escrow Agreement
described in the accompanying Prospectus under "How to
Buy Shares--Letter of Intent" and incorporated by
reference herein.
<PAGE>
- --------------------------------------------------------------------------------
7. AUTOMATIC INVESTMENT PLAN (ATTACH VOIDED CHECK OR DEPOSIT SLIP)
See "What is Dollar Cost Averaging and How Can I
Implement It?" in the Prospectus
Beginning on the day of these months: J F M A M J J
A S O N D (circle all months that apply), I/We authorize
State Street Bank (the custodian for a Fund) to debit
the amount requested below from my/our bank account for
investment in a Fund. I/We understand that my/our
participation in the Automatic Investment Plan is
subject to the terms and conditions of such plan as
amended from time to time.
---------------------------------------------------------
Amount of each monthly investment (minimum $100)
Name of Fund
---------------------------------------------------------
Amount of each monthly investment (minimum $100)
Name of Fund
---------------------------------------------------------
Authorized Signature (as shown on bank records)
---------------------------------------------------------
Authorized Signature (if joint bank account both sign)
- --------------------------------------------------------------------------------
8. TELEPHONE PURCHASE/See "How To Buy Shares" or "How To Sell Shares" in the
Prospectus
REDEMPTION (ATTACH VOIDED CHECK OR DEPOSIT SLIP)
[_The]Commerce Funds and its agent is hereby authorized
to honor telephone, telegraphic, or other
instructions, without signature guarantee, from any
person for the redemption of shares for the above
account, without an obligation on behalf of The
Commerce Funds or its agent, to verify that such
person is the shareowner of record or authorized to
give purchase/redemption instructions, provided
proceeds are sent by federal wire (minimum $1,000) or
electronic funds transfer to/from the bank account
indicated on your voided check or deposit slip or
mailed to the account registration address. Neither a
Fund nor its agent shall be liable for telephone
purchases or redemptions or for payments made to any
unauthorized account for instructions reasonably
believed to be genuine. The Commerce Funds will employ
reasonable procedures to confirm that such
instructions given are genuine.
- --------------------------------------------------------------------------------
9. TELEPHONE EXCHANGE See "Can I Exchange My Investment From One Commerce Fund
To Another?" in the Prospectus
Exchange Privilege (you will have this privilege unless
declined)
[_] I/We DO NOT wish to authorize telephone exchanges.
- --------------------------------------------------------------------------------
10. AUTOMATIC EXCHANGES
See "Can I Have Exchanges Made Automatically?" in the
Prospectus
The originating Fund's balance must be at least $2,000
after the exchange and the receiving Fund's minimum
investment must be met. Exchanges will take place each
month after such exchanges commence until terminated.
I/We hereby authorize automatic exchanges of $____ (exact
dollars--$250 minimum) into my/our identically
registered account:
Exchange __________________________________ (Name of
from Fund)
to __________________________________ (Name of
Account No. (if known) _____________________ Fund)
Please make exchanges on the day beginning the month
of .
- --------------------------------------------------------------------------------
[_Check]the box if you would like duplicate
11. DUPLICATE MAILINGS confirmations/statements sent to another address:
-------------------------------------------------
Name
-------------------------------------------------
Street Address City State Zip
<PAGE>
- -------------------------------------------------------------------------------
Minimum account balance must be $5,000. Withdrawal
minimum is $100.^
12. AUTOMATIC WITHDRAWAL PLAN
Check One: [_] Monthly [_] Quarterly [_] Semi-
Annual [_] Annual
Please make payments via (check one) [_] check [_] ACH
(Bank must be ACH affiliated. Attach voided check).
Payments made via check are withdrawn from your account
on or about the 1st or 15th of a month for monthly
withdrawals or the 15th of the month for
quarterly/semi-annual/annual withdrawals. (I understand
that I may change the date of redemption, via ACH, or
the amount at any time in writing to the Fund at the
address stated above.)
If withdrawal payments are to be made via ACH (attach
voided check/deposit slip)
Please withdraw $ from my account on the
of the month.
Complete this section ONLY if check is to be made
payable to person(s) other than the registered owner.
SIGNATURE GUARANTEE required. (See Section 13 of this
Form.)
--------------------------------------------------------
Name of check recipient Address CityStateZip
- -------------------------------------------------------------------------------
13. TAXPAYER ID CERTIFICATION AND SIGNATUREAUTHORIZATION
1) The number shown on this Account Application Form is
my/our correct Taxpayer Identification number, and 2)
I/we am/are not subject to backup withholding because
(a) I/we am/are exempt from backup withholding, or (b)
I/we have not been notified by the Internal Revenue
Service (IRS) that I/we am/are subject to backup
withholding as a result of a failure to report all
interest or dividends, or (c) the IRS has notified
me/us that I/we am/are no longer subject to backup
withholding.
You must cross out item (2) above if you have been
notified by the IRS that you are currently subject to
federal backup withholding because of under reporting
interest or dividends on your federal tax return or if
you have not been notified by the IRS that you are no
longer subject to backup withholding.
I/we further certify that I/we am/are neither a citizen
nor a resident of the United States for the purpose of
the Internal Revenue Code. I/we am/are a resident of ___
NOTE: FAILURE TO COMPLETE THIS SECTION MAY RESULT IN
BACKUP WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO
YOU.
By checking only the appropriate box and signing below,
I/we certify under penalties of perjury that:
[_] I/we do not have a taxpayer identification
number, but I/we have applied for or intend to
apply for one. I/we understand that the required
31% withholding may apply before I/we provide such
number and certifications, which should be provided
within 60 days.
or [_] I/we am/are an exempt recipient.
or [_] I/we am/are neither a citizen nor a resident of
the United States for the purpose of the Internal
Revenue Code. I/we am/are a resident of ________ .
Permanent Foreign Address:______________________________
________________________________________________________
________________________________________________________
---------------------------------------------------------
By the execution of this Account Application Form, the
undersigned represents and warrants that it has the
full right, power and authority to make the investment
applied for pursuant to this Form and is acting for
itself or in some fiduciary capacity in making such
investment.
THE UNDERSIGNED AFFIRMS THAT I/WE HAVE RECEIVED A
CURRENT PROSPECTUS FOR THE FUND AND HAS REVIEWED THE
SAME.
Sign Here:
--------------------------------------------------------
Signature Name (print) and Title
--------------------------------------------------------
Signature Name (print) and Title
SIGNATURE GUARANTEE REQUIRED ONLY IF A SPECIAL
PAYEE/ADDRESS IS DESIGNATED UNDER ITEM #'S 4 AND 12.
SEE "HOW TO SELL SHARES" IN THE PROSPECTUS.
--------------------------------------------------------
SIGNATURE GUARANTEE (IF REQUIRED)
<PAGE>
- -------------------------------------------------------------------------------
14. FOR DEALER ONLY Investment dealer's signature is required for Automatic
Withdrawal Plan or Letter of Intent. If an Automatic
Withdrawal Plan is being opened, we believe that the
amount to be withdrawn is reasonable in light of the
investor's circumstances and we recommend establishment
of the account.
--------------------------------------------------------
Branch Office Location Branch Number/Branch Phone
--------------------------------------------------------
Reg. Rep. NumberReg. Rep.'s Name
--------------------------------------------------------
Authorized Signature State Zip
THE COMMERCE FUNDS DISCLOSURE STATEMENT (YOU MUST SIGN)
The account owner acknowledges that the account owner has read this disclosure
statement and has been told and understands that:
. shares of the Funds are not bank deposits or obligations of, or guaranteed,
endorsed or otherwise supported by Commerce Bank, N.A. (St. Louis), Commerce
Bank, N.A. (Kansas City), their parent company or its affiliates, or any
other bank
. are not federally insured or guaranteed by the U.S. Government, Federal
Deposit Insurance Corporation (FDIC), the Federal Reserve Board, or any
other government agency
. investment in the Funds involves investment risks, including possible loss
of the principal amount invested
. Commerce Bank, N.A. (St. Louis) and Commerce Bank, N.A. (Kansas City) serve
as the investment advisor to the Funds and receive compensation for such
services as disclosed in the current prospectus
. sales charges may apply.
Dated: _________________ --------------------------
Signature
--------------------------
Signature
<PAGE>
THE COMMERCE FUNDS
SHAREHOLDER ADMINISTRATIVE SERVICES PLAN
Section 1. Upon the recommendation of Commerce Bank, N.A. (St. Louis) and
Commerce Bank, N.A. (Kansas City) the Trust's investment advisors (together, the
"Advisor"), any officer of The Commerce Funds (the "Trust") is authorized to
execute and deliver, in the name and on behalf of the Trust, written agreements
in substantially the form attached hereto or in any other form duly approved by
the Board of Trustees ("Servicing Agreements") with 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 shares of beneficial interest
("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 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 Shares of the Funds beneficially owned
by such clients. All expenses incurred by the Trust in connection with Servicing
Agreements for a particular Fund shall be allocated entirely to that Fund. The
fee allocated to each Fund shall be the several (and not joint or joint and
several) obligation of each such Fund.
Section 2. Goldman Sachs Asset Management ("GSAM"), as administrator,
shall monitor the arrangements pertaining to the Trust's Servicing Agreements
with the Service Organizations in accordance with the terms of their
Administration Agreement with the Trust with respect to the Shares. GSAM shall
not, however, be obliged by this Plan to recommend, and the Trust shall not be
obliged to execute, any Servicing Agreement with any qualifying Service
Organizations.
Section 3. So long as this Plan is in effect, the Service Organization
shall provide to the Trust's Board of Trustees, and the Trustees shall review,
at least quarterly, a written report of the amounts expended pursuant to this
Plan and the purposes for which such expenditures were made.
Section 4. This Plan shall become effective with respect to a particular
Fund upon the approval of the Plan (and the form of Servicing Agreement attached
hereto) by a majority of the Board of Trustees, including a majority of the
Trustees who
<PAGE>
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"), pursuant to a vote cast in
person at a meeting called for the purpose of voting on the approval of this
Plan (and form of Servicing Agreement); provided however, that such
effectiveness shall not occur prior to the effective date of the Trust's
Registration Statement under the Securities Act of 1933.
Section 5. Unless sooner terminated, this Plan shall continue in effect
for so long as its continuance is approved at least annually in the manner set
forth in Section 4.
Section 6. This Plan may be amended at any time by the Board of Trustees,
provided that any material amendments of the terms of this Plan shall become
effective only upon the approvals set forth in Section 4.
Section 7. This Plan is terminable at any time by vote of a majority of
the Disinterested Trustees.
Section 8. While this Plan is in effect, the selection and nomination of
those Trustees who are not "interested persons" (as defined in the Act) of the
Trust shall be committed to the discretion of the Disinterested Trustees.
Section 9. The Trust has adopted this Shareholder Administrative Services
Plan as of September 28, 1994, as amended November 3, 1995.
-2-
<PAGE>
THE COMMERCE FUNDS
SERVICING AGREEMENT
UNDER SHAREHOLDER ADMINISTRATIVE SERVICES PLAN
Ladies and Gentlemen:
The Commerce Funds (the "Trust") wishes to enter into this Servicing
Agreement with you concerning the provision of 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 shares of beneficial interest ("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 Shares of the Funds: (i) establishing and
maintaining Plan participant accounts and records relating to participants that
invest in 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 Shares of the Funds; (iii) aggregating and processing
purchase, redemption and exchange requests for 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 Shares of the Funds pursuant to specific
or pre-authorized instructions; (v) providing information periodically to Plan
participants concerning their positions in Shares of the Funds; (vi) arranging
for bank wires; (vii) responding to routine inquiries from Plan participants
concerning their investments in Shares of the Funds; (viii) if required by law,
forwarding shareholder communications
<PAGE>
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 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 Shares of
the Funds, and (2) redemption requests and redemption and exchange directions
with respect to 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 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.
-2-
<PAGE>
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 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 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 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 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 Shares except
those contained in the Trust's then current prospectuses and statements of
additional information for such Shares, copies of which will be supplied by the
Trust to you, or in such supplemental literature or advertising as may be
authorized by the Trust in writing. 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
-3-
<PAGE>
receipt of fees in connection with their beneficial ownership of 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 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 Shares or withdraw the sale of 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
-4-
<PAGE>
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 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 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 been duly and irrevocably authorized, and that this
-5-
<PAGE>
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.
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,
-6-
<PAGE>
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:
-----------------------
-7-
<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.
[_] Short-Term Government Fund
[_] Bond Fund
[_] Balanced Fund
[_] Growth Fund
[_] Aggressive Growth Fund
[_] International Equity Fund
[_] National Tax-Free Bond Fund
[_] Missouri Tax-Free Bond Fund
<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 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 SHAREHOLDER ADMINISTRATIVE SERVICES PLAN
Ladies and Gentlemen:
The Commerce Funds (the "Trust") wishes to enter into this Servicing
Agreement with you concerning the provision of administrative support services
to your clients ("Clients") who may from time to time beneficially own shares of
beneficial interest in one or more of the portfolios (the "Funds") which are
offered by the Trust which are listed on Appendix A ("Fund Shares").
The terms and conditions of this Servicing Agreement are as follows:
Section 1. You agree to provide the following support services to Clients
who may from time to time beneficially own Fund Shares: (i) establishing and
maintaining accounts and records relating to Clients that invest in Fund Shares;
(ii) aggregating and processing purchase, redemption and exchange requests for
Fund Shares from Clients and placing net purchase, redemption and exchange
orders with the Trust's distributor; (iii) providing Clients with a service that
invests the assets of their accounts in Fund Shares pursuant to specific or pre-
authorized instructions; (iv) processing dividend and distribution payments from
the Trust on behalf of Clients; (v) providing information periodically to
Clients showing their positions in Fund Shares; (vi) arranging for bank wires;
(vii) responding to routine inquiries from Clients concerning their investments
in Fund Shares; (viii) responding to Client inquiries relating to the services
performed by you; (ix) providing subaccounting with respect to Fund Shares
beneficially owned by Clients or the information to the Trust necessary for
subaccounting; (x) if required by law, forwarding shareholder communications
from the Trust (such as proxies, shareholder reports, annual and semi-annual
financial statements and dividend, distribution and tax notices) to Clients; and
(xi) assisting Clients in changing dividend options, account designations and
addresses; (xii) providing such other similar services as the Trust may
reasonably request to the extent you are permitted to do so under applicable
statutes, rules or regulations. You will provide to Clients a schedule of any
fees that you may charge to them relating to the investment of their assets in
Fund Shares.
Section 2. You will provide such office space and equipment, telephone
facilities and personnel (which may be any part of the space, equipment and
facilities currently used in
<PAGE>
your business, or any personnel employed by you) as may be reasonably necessary
or beneficial in order to provide the aforementioned services to Clients.
Section 3. Neither you nor any of your officers, employees or agents are
authorized to make any representations concerning the Trust or Fund Shares
except those contained in the Trust's then current prospectuses for such shares,
copies of which will be supplied by the Trust to you, or in such supplemental
literature or advertising as may be authorized by the Trust in writing.
Section 4. For all purposes of this Agreement you will be deemed to be an
independent contractor, and will have no authority to act as agent for the Trust
in any matter or in any respect. By your written acceptance of this Agreement,
you agree to and do release, indemnify and hold the Trust harmless from and
against any and all direct or indirect liabilities or losses resulting from
requests, directions, actions or inactions of or by you or your officers,
employees or agents regarding your responsibilities hereunder or the purchase,
redemption, transfer or registration of Fund Shares by or on behalf of Clients.
You and your employees will, upon request, be available during normal business
hours to consult with the Trust or its designees concerning the performance of
your responsibilities under this Agreement.
Section 5. In consideration of the services and facilities provided by you
hereunder, the Trust will pay to you, and you will accept as full payment
therefor, a fee at the annual rate of up to .25 of 1% of the average daily net
asset value of the Fund Shares held of record by you from time to time on behalf
of Clients (the "Clients' Fund Shares"), which fee will be computed daily and
payable monthly. For purposes of determining the fees payable under this Section
5, the average daily net asset value of the Clients' Fund Shares will be
computed in the manner specified in the Trust's registration statement (as the
same is in effect from time to time) in connection with the computation of the
net asset value of Fund Shares for purposes of purchases and redemptions. By
your written acceptance of this Agreement, you agree to and do waive such
portion of the fee payable under this Section 5 as is necessary to assure that
the amount of such fee together with any other expenses of the Funds which are
required to be accrued on any day with respect to your Clients does not exceed
the income to be accrued to your Clients' Fund Shares on that day. The fee rate
stated above may be prospectively increased or decreased by the Trust, in its
sole discretion, at any time upon notice to you. Further, the Trust may, in its
discretion and without notice, suspend or withdraw the sale of Fund Shares,
including the sale of such shares to you for the account of any Client or
Clients.
-2-
<PAGE>
Section 6. Any person authorized to direct the disposition of monies paid
or payable by the Trust pursuant to this Agreement will provide to the Trust's
Board of Trustees, and the Trustees will review, at least quarterly, a written
report of the amounts so expended and the purposes for which such expenditures
were made. In addition, you will furnish the Trust or its designees with such
information as the Trust or they may reasonably request (including, without
limitation, periodic certifications confirming the provision to Clients of the
services described herein), and will otherwise cooperate with the Trust and its
designees (including, without limitation, any auditors designated by the Trust),
in connection with the preparation of reports to the Trust's Board of Trustees
concerning this Agreement and the monies paid or payable by the Trust pursuant
hereto, as well as any other reports or filings that may be required by law.
Section 7. The Trust may enter into other similar Servicing Agreements
with any other person or persons without your consent.
Section 8. By your written acceptance of this Agreement, you represent,
warrant and agree that: (i) in no event will any of the services provided by you
hereunder be primarily intended to result in the sale of any shares issued by
the Trust; (ii) the compensation payable to you hereunder, together with any
other compensation you receive from Clients for services contemplated by this
Agreement, will not be excessive or unreasonable under the laws and instruments
governing your relationships with Clients; and (iii) in the event an issue
pertaining to the Trust's Shareholder Administrative Services Plan is submitted
for shareholder approval, you will vote any shares held for your own account in
the same proportion as the vote of those shares held for your Client's accounts.
Section 9. This Agreement will become effective on the date a fully
executed copy of this Agreement is received by the Trust or its designee. Unless
sooner terminated, this Agreement will continue until September 28, 1995, and
thereafter will continue automatically for successive annual periods ending on
September 28, provided such continuance is specifically approved at least
annually by the Trust in the manner described in Section 13 hereof. This
Agreement is terminable, without penalty, at any time by the Trust (which
termination may be by vote of a majority of the Trust's Disinterested Trustees
as defined in Section 13 hereof) or by you upon notice to the other party
hereto.
Section 10. All notices and other communications to either you or the
Trust will be duly given if mailed, telegraphed, telexed or transmitted by
similar telecommunications device to the appropriate address shown above.
-3-
<PAGE>
Section 11. This Agreement will be construed in accordance with the laws
of the State of Delaware and is non-assignable by the parties hereto.
Section 12. This Agreement has been approved by vote of a majority of (i)
the Trust's Board of Trustees and (ii) those Trustees who are not "interested
persons" (as defined in the Investment Company Act of 1940) of the Trust and
have no direct or indirect financial interest in the operation of the
Shareholder Administrative Services Plan adopted by the Trust regarding the
provision of support services to the beneficial owners of Fund Shares or in any
agreements related thereto ("Disinterested Trustees"), cast in person at a
meeting called for the purpose of voting on such approval.
Section 13. The Trust Instrument establishing the Trust, dated February 7,
1994 a copy of which is on file in the office of the Secretary of the State of
Delaware, provides that the term "Trustees of The Commerce Funds" refers to the
individual Trustees in their capacity as Trustees under the Trust Instrument and
no Trustee, when acting in such capacity, shall be personally liable to any
person other than the Trust or a beneficial owner for any act, omission or
obligation of the Trust or any Trustee. All persons extending credit to,
contracting with or having any claim against the Trust or the Trustees may
satisfy or enforce any debt, liability, obligation or expense incurred,
contracted for or otherwise existing with respect to the Trust from the assets
of the Trust only; and neither the shareholders nor Trustees nor any of their
agents, whether past, present or future, shall be personally liable for any
claim against the Trust or its Trustees.
If you agree to be legally bound by the provisions of this Agreement,
please sign a copy of this letter where indicated
-4-
<PAGE>
below and promptly return it to W. Bruce McConnel, III, Secretary of The
Commerce Funds, Philadelphia National Bank Building, 1345 Chestnut Street,
Philadelphia, PA 19107.
Very truly yours,
THE COMMERCE FUNDS
Date: By:
-------------------- -------------------------------
Authorized Officer
Accepted and Agreed to:
----------------------------------
Commerce Brokerage, Inc.
Date: By:
-------------------- -------------------------------
Authorized Officer
This Agreement is effective ________________________, 1995.
-5-
<PAGE>
APPENDIX A
----------
Please check the appropriate boxes to indicate the Series of The Commerce
Funds for which you wish to act as a Service Organization.
[_] Short-Term Government Fund
[_] Bond Fund
[_] Balanced Fund
[_] Growth Fund
[_] Aggressive Growth Fund
[_] International Equity Fund
[_] National Tax-Free Bond Fund
[_] Missouri Tax-Free Bond Fund
<PAGE>
CONSENT OF COUNSEL
------------------
We hereby consent to the use of our name and to the reference to our Firm
under the caption "Counsel" in the Statement of Additional Information that is
included in this Registration Statement on Form N-1A under the Securities Act of
1933 and the Investment Company Act of 1940, as amended, of The Commerce Funds.
This consent does not constitute a consent under section 7 of the Securities Act
of 1933, and in consenting to the use of our name and the references to our Firm
under such caption we have not certified any part of the Registration Statement
and do not otherwise come within the categories of persons whose consent is
required under said section 7 or the rules and regulations of the Securities and
Exchange Commission thereunder.
/s/Drinker Biddle & Reath
-------------------------
DRINKER BIDDLE & REATH
Philadelphia, Pennsylvania
February 29, 1996
<PAGE>
INDEPENDENT AUDITORS' CONSENT
- -----------------------------
The Board of Trustees
The Commerce Funds:
We consent to the use of our report dated December 8, 1995 incorporated herein
by reference and to the references to our Firm under the headings "FINANCIAL
HIGHLIGHTS" in Part A and "INDEPENDENT AUDITORS" in Part B of the Registration
Statement.
/s/KPMG Peat Marwick LLP
- ------------------------
KPMG Peat Marwick LLP
Kansas City, Missouri
February 26, 1996
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMMERCE
FUNDS ANNUAL REPORT DATED OCTOBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 1
<NAME> THE SHORT-TERM GOVERNMENT FUND
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> OCT-31-1995
<PERIOD-START> DEC-12-1994
<PERIOD-END> OCT-31-1995
<INVESTMENTS-AT-COST> 18,904,502
<INVESTMENTS-AT-VALUE> 19,437,226
<RECEIVABLES> 1,074,796
<ASSETS-OTHER> 54,197
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 20,566,219
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 354,908
<TOTAL-LIABILITIES> 354,908
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 19,432,565
<SHARES-COMMON-STOCK> 1,073,509
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 246,022
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 532,724
<NET-ASSETS> 20,211,311
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,107,676
<OTHER-INCOME> 0
<EXPENSES-NET> (106,740)
<NET-INVESTMENT-INCOME> 1,000,936
<REALIZED-GAINS-CURRENT> 246,022
<APPREC-INCREASE-CURRENT> 532,724
<NET-CHANGE-FROM-OPS> 1,779,682
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,000,936)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,615,040
<NUMBER-OF-SHARES-REDEEMED> (591,004)
<SHARES-REINVESTED> 49,473
<NET-CHANGE-IN-ASSETS> 20,211,311
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 78,485
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 178,731
<AVERAGE-NET-ASSETS> 17,574,864
<PER-SHARE-NAV-BEGIN> 18.00
<PER-SHARE-NII> 1.06
<PER-SHARE-GAIN-APPREC> 0.83
<PER-SHARE-DIVIDEND> (1.06)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 18.83
<EXPENSE-RATIO> 0.68
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMMERCE
FUNDS ANNUAL REPORT DATED OCTOBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 2
<NAME> THE BOND FUND
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> OCT-31-1995
<PERIOD-START> DEC-12-1994
<PERIOD-END> OCT-31-1995
<INVESTMENTS-AT-COST> 93,364,171
<INVESTMENTS-AT-VALUE> 99,292,282
<RECEIVABLES> 1,445,059
<ASSETS-OTHER> 58,219
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 100,795,560
<PAYABLE-FOR-SECURITIES> 1,980,525
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 310,757
<TOTAL-LIABILITIES> 2,291,282
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 91,184,423
<SHARES-COMMON-STOCK> 5,024,288
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,391,744
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 5,928,111
<NET-ASSETS> 98,504,278
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 5,805,924
<OTHER-INCOME> 0
<EXPENSES-NET> (679,494)
<NET-INVESTMENT-INCOME> 5,126,430
<REALIZED-GAINS-CURRENT> 1,391,744
<APPREC-INCREASE-CURRENT> 5,928,111
<NET-CHANGE-FROM-OPS> 12,446,285
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (5,126,430)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5,978,187
<NUMBER-OF-SHARES-REDEEMED> (1,217,095)
<SHARES-REINVESTED> 263,196
<NET-CHANGE-IN-ASSETS> 98,504,278
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 386,076
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 679,799
<AVERAGE-NET-ASSETS> 86,452,588
<PER-SHARE-NAV-BEGIN> 18.00
<PER-SHARE-NII> 1.12
<PER-SHARE-GAIN-APPREC> 1.61
<PER-SHARE-DIVIDEND> (1.12)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 19.61
<EXPENSE-RATIO> 0.88
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMMERCE
FUNDS ANNUAL REPORT DATED OCTOBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 3
<NAME> THE BALANCED FUND
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> OCT-31-1995
<PERIOD-START> DEC-12-1994
<PERIOD-END> OCT-31-1995
<INVESTMENTS-AT-COST> 41,806,837
<INVESTMENTS-AT-VALUE> 48,303,409
<RECEIVABLES> 388,054
<ASSETS-OTHER> 56,231
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 48,747,694
<PAYABLE-FOR-SECURITIES> 237,839
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 181,163
<TOTAL-LIABILITIES> 419,002
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 40,275,787
<SHARES-COMMON-STOCK> 2,186,454
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 94,794
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,461,539
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 6,496,572
<NET-ASSETS> 48,328,692
<DIVIDEND-INCOME> 247,295
<INTEREST-INCOME> 1,348,091
<OTHER-INCOME> 0
<EXPENSES-NET> (408,987)
<NET-INVESTMENT-INCOME> 1,186,399
<REALIZED-GAINS-CURRENT> 1,461,539
<APPREC-INCREASE-CURRENT> 6,496,572
<NET-CHANGE-FROM-OPS> 9,144,510
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,091,605)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,769,352
<NUMBER-OF-SHARES-REDEEMED> (636,363)
<SHARES-REINVESTED> 53,465
<NET-CHANGE-IN-ASSETS> 48,328,692
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 361,935
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 524,026
<AVERAGE-NET-ASSETS> 40,523,371
<PER-SHARE-NAV-BEGIN> 18.00
<PER-SHARE-NII> 0.59
<PER-SHARE-GAIN-APPREC> 4.06
<PER-SHARE-DIVIDEND> (0.55)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 22.10
<EXPENSE-RATIO> 1.13
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMMERCE
FUNDS ANNUAL REPORT DATED OCTOBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 4
<NAME> THE GROWTH FUND
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> OCT-31-1995
<PERIOD-START> DEC-12-1994
<PERIOD-END> OCT-31-1995
<INVESTMENTS-AT-COST> 112,656,883
<INVESTMENTS-AT-VALUE> 142,756,400
<RECEIVABLES> 544,147
<ASSETS-OTHER> 64,273
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 143,364,820
<PAYABLE-FOR-SECURITIES> 1,167,087
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 462,597
<TOTAL-LIABILITIES> 1,629,684
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 104,984,884
<SHARES-COMMON-STOCK> 5,742,595
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 23,409
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 6,627,326
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 30,099,517
<NET-ASSETS> 141,735,136
<DIVIDEND-INCOME> 1,598,013
<INTEREST-INCOME> 437,788
<OTHER-INCOME> 0
<EXPENSES-NET> (1,177,643)
<NET-INVESTMENT-INCOME> 858,158
<REALIZED-GAINS-CURRENT> 6,627,326
<APPREC-INCREASE-CURRENT> 30,099,517
<NET-CHANGE-FROM-OPS> 37,585,001
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (834,749)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 7,111,443
<NUMBER-OF-SHARES-REDEEMED> (1,406,517)
<SHARES-REINVESTED> 37,669
<NET-CHANGE-IN-ASSETS> 141,735,136
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 799,203
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,177,643
<AVERAGE-NET-ASSETS> 119,308,358
<PER-SHARE-NAV-BEGIN> 18.00
<PER-SHARE-NII> 0.15
<PER-SHARE-GAIN-APPREC> 6.68
<PER-SHARE-DIVIDEND> (0.15)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 24.68
<EXPENSE-RATIO> 1.11
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMMERCE
FUNDS ANNUAL REPORT DATED OCTOBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 5
<NAME> THE AGGRESSIVE GROWTH FUND
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> OCT-31-1995
<PERIOD-START> DEC-12-1994
<PERIOD-END> OCT-31-1995
<INVESTMENTS-AT-COST> 35,856,816
<INVESTMENTS-AT-VALUE> 41,848,441
<RECEIVABLES> 1,092,180
<ASSETS-OTHER> 53,481
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 42,994,102
<PAYABLE-FOR-SECURITIES> 1,124,800
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 204,616
<TOTAL-LIABILITIES> 1,329,416
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 34,408,088
<SHARES-COMMON-STOCK> 1,647,083
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,264,973
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 5,991,625
<NET-ASSETS> 41,664,686
<DIVIDEND-INCOME> 148,009
<INTEREST-INCOME> 80,099
<OTHER-INCOME> 0
<EXPENSES-NET> (292,590)
<NET-INVESTMENT-INCOME> (64,482)
<REALIZED-GAINS-CURRENT> 1,264,973
<APPREC-INCREASE-CURRENT> 5,991,625
<NET-CHANGE-FROM-OPS> 7,192,116
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,805,561
<NUMBER-OF-SHARES-REDEEMED> (158,478)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 41,664,686
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 166,159
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 292,590
<AVERAGE-NET-ASSETS> 24,805,276
<PER-SHARE-NAV-BEGIN> 18.00
<PER-SHARE-NII> (0.04)
<PER-SHARE-GAIN-APPREC> 7.34
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 25.30
<EXPENSE-RATIO> 1.32
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMMERCE
FUNDS ANNUAL REPORT DATED OCTOBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 6
<NAME> THE INTERNATIONAL EQUITY FUND
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> OCT-31-1995
<PERIOD-START> DEC-12-1994
<PERIOD-END> OCT-31-1995
<INVESTMENTS-AT-COST> 20,414,540
<INVESTMENTS-AT-VALUE> 20,803,384
<RECEIVABLES> 326,319
<ASSETS-OTHER> 114,214
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 21,243,917
<PAYABLE-FOR-SECURITIES> 129,499
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 100,646
<TOTAL-LIABILITIES> 230,145
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 20,493,670
<SHARES-COMMON-STOCK> 1,127,182
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 64,814
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 66,067
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 389,221
<NET-ASSETS> 21,013,772
<DIVIDEND-INCOME> 196,344
<INTEREST-INCOME> 98,700
<OTHER-INCOME> 0
<EXPENSES-NET> (186,170)
<NET-INVESTMENT-INCOME> 108,874
<REALIZED-GAINS-CURRENT> 29,839
<APPREC-INCREASE-CURRENT> 389,221
<NET-CHANGE-FROM-OPS> 527,934
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (7,832)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,301,494
<NUMBER-OF-SHARES-REDEEMED> (174,747)
<SHARES-REINVESTED> 435
<NET-CHANGE-IN-ASSETS> 21,013,772
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 154,287
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 360,416
<AVERAGE-NET-ASSETS> 11,516,297
<PER-SHARE-NAV-BEGIN> 18.00
<PER-SHARE-NII> 0.12
<PER-SHARE-GAIN-APPREC> 0.55
<PER-SHARE-DIVIDEND> (0.03)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 18.64
<EXPENSE-RATIO> 1.81
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMMERCE
FUNDS ANNUAL REPORT DATED OCTOBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 7
<NAME> THE NATIONAL TAX-FREE BOND FUND
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> OCT-31-1995
<PERIOD-START> FEB-21-1995
<PERIOD-END> OCT-31-1995
<INVESTMENTS-AT-COST> 9,895,266
<INVESTMENTS-AT-VALUE> 10,096,870
<RECEIVABLES> 628,974
<ASSETS-OTHER> 59,750
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 10,785,594
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 64,275
<TOTAL-LIABILITIES> 64,275
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 10,514,161
<SHARES-COMMON-STOCK> 578,220
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 5,554
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 201,604
<NET-ASSETS> 10,721,319
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 242,328
<OTHER-INCOME> 0
<EXPENSES-NET> (40,868)
<NET-INVESTMENT-INCOME> 201,460
<REALIZED-GAINS-CURRENT> 5,554
<APPREC-INCREASE-CURRENT> 201,604
<NET-CHANGE-FROM-OPS> 408,618
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (201,460)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 607,436
<NUMBER-OF-SHARES-REDEEMED> (29,679)
<SHARES-REINVESTED> 463
<NET-CHANGE-IN-ASSETS> 10,721,319
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 24,040
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 91,152
<AVERAGE-NET-ASSETS> 6,936,468
<PER-SHARE-NAV-BEGIN> 18.00
<PER-SHARE-NII> 0.54
<PER-SHARE-GAIN-APPREC> 0.54
<PER-SHARE-DIVIDEND> (0.54)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 18.54
<EXPENSE-RATIO> 0.85
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMMERCE
FUNDS ANNUAL REPORT DATED OCTOBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 8
<NAME> THE MISSOURI TAX-FREE BOND FUND
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> OCT-31-1995
<PERIOD-START> FEB-21-1995
<PERIOD-END> OCT-31-1995
<INVESTMENTS-AT-COST> 8,513,037
<INVESTMENTS-AT-VALUE> 8,636,606
<RECEIVABLES> 248,996
<ASSETS-OTHER> 59,048
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 8,944,650
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 55,512
<TOTAL-LIABILITIES> 55,512
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 8,770,716
<SHARES-COMMON-STOCK> 483,038
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (5,147)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 123,569
<NET-ASSETS> 8,889,138
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 196,710
<OTHER-INCOME> 0
<EXPENSES-NET> (25,249)
<NET-INVESTMENT-INCOME> 171,461
<REALIZED-GAINS-CURRENT> (5,147)
<APPREC-INCREASE-CURRENT> 123,569
<NET-CHANGE-FROM-OPS> 289,883
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (171,461)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 514,879
<NUMBER-OF-SHARES-REDEEMED> (32,774)
<SHARES-REINVESTED> 933
<NET-CHANGE-IN-ASSETS> 8,889,138
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 19,423
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 82,449
<AVERAGE-NET-ASSETS> 5,604,252
<PER-SHARE-NAV-BEGIN> 18.00
<PER-SHARE-NII> 0.57
<PER-SHARE-GAIN-APPREC> 0.40
<PER-SHARE-DIVIDEND> (0.57)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 18.40
<EXPENSE-RATIO> 0.65
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
