<PAGE>
As filed with the Securities and Exchange Commission on September 16, 1997
Securities Act File No. 33-80966
Investment Company Act File No. 811-8598
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [x]
Pre-Effective Amendment No. ____ [_]
Post-Effective Amendment No. 6 [x]
---
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [x]
Amendment No. 7 [x]
----
____________________________
The Commerce Funds
(Exact Name of Registrant as Specified in Charter)
4900 Sears Tower
Chicago, IL 60606
(Address of Principal Executive Offices)
Registrant's Telephone Number:
800-621-2550
W. Bruce McConnel, III
Drinker Biddle & Reath LLP
1100 Philadelphia National Bank Building
1345 Chestnut Street
Philadelphia, Pennsylvania 19107-3496
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box)
[x] immediately upon filing pursuant to paragraph (b)
[_] on (date) 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 INFINITE 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, 1996 WAS
FILED ON DECEMBER 17, 1996.
THE PURPOSE OF THIS POST-EFFECTIVE AMENDMENT IS TO FULFILL REGISTRANT'S
UNDERTAKING TO FILE UNAUDITED FINANCIAL STATEMENTS WITHIN FOUR TO SIX MONTHS OF
THE EFFECTIVE DATE OF ITS REGISTRATION STATEMENT WITH RESPECT TO THE SERVICE
CLASS AND THE INSTITUTIONAL CLASS OF THE GROWTH AND INCOME FUND, A PORTFOLIO OF
THE COMMERCE FUNDS, INC. FINANCIAL STATEMENTS HAVE BEEN PROVIDED FOR BOTH THE
SERVICE CLASS AND THE INSTITUTIONAL CLASS OF THE FUND. THE FUND COMMENCED
OPERATIONS ON MARCH 3, 1997.
<PAGE>
THE COMMERCE FUNDS
SERVICE SHARES OF THE
SHORT-TERM GOVERNMENT FUND
BOND FUND
BALANCED FUND
GROWTH FUND
MIDCAP FUND
AGGRESSIVE GROWTH FUND
GROWTH AND INCOME 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
- ---------------------------- ------------------
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
<PAGE>
CROSS REFERENCE SHEET
---------------------
SERVICE SHARES OF THE
SHORT-TERM GOVERNMENT FUND
BOND FUND
BALANCED FUND
GROWTH FUND
MIDCAP FUND
AGGRESSIVE GROWTH
GROWTH AND INCOME FUND
INTERNATIONAL EQUITY FUND
Statement of Additional
Form N-1A Part B Item Information Caption
- --------------------- ---------------------
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 the Fund........................ 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;
of Securities Being Offered Additional Purchase and
Redemption Information
20. Tax Status.................................... Additional Information
Concerning Taxes
21. Underwriters.................................. Not Applicable
22. Calculation of Performance Data............... Additional Information on
Performance
23. Financial Statements.......................... Report of Independent
Auditors Financial
Statements
<PAGE>
THE COMMERCE FUNDS
INSTITUTIONAL SHARES OF THE
SHORT-TERM GOVERNMENT FUND
BOND FUND
BALANCED FUND
GROWTH FUND
MIDCAP FUND
AGGRESSIVE GROWTH FUND
GROWTH AND INCOME 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
- ---------------------------- ------------------
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
<PAGE>
CROSS REFERENCE SHEET
---------------------
INSTITUTIONAL SHARES
OF THE
SHORT-TERM GOVERNMENT FUND
BOND FUND
BALANCED FUND
GROWTH FUND
MIDCAP FUND
AGGRESSIVE GROWTH
GROWTH AND INCOME FUND
INTERNATIONAL EQUITY FUND
NATIONAL TAX-FREE BOND FUND
MISSOURI TAX-FREE BOND FUND
Statement of Additional
Form N-1A Part B Item Information Caption
- --------------------- ---------------------
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 the Fund........................ 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;
of Securities Being Offered Additional Purchase and
Redemption Information
20. Tax Status.................................... Additional Information
Concerning Taxes
21. Underwriters.................................. Not Applicable
22. Calculation of Performance Data............... Additional Information on
Performance
23. Financial Statements.......................... Report of Independent
Auditors Financial
Statements
<PAGE>
COMMERCE FUNDS
THE SHORT-TERM GOVERNMENT FUND
THE BOND FUND
THE BALANCED FUND
THE GROWTH AND INCOME FUND
THE GROWTH FUND
THE MIDCAP FUND
THE INTERNATIONAL EQUITY FUND
SERVICE SHARES
----------------
SUPPLEMENT DATED SEPTEMBER 16, 1997 TO THE PROSPECTUS DATED MARCH 1, 1997
The following replaces the "FINANCIAL HIGHLIGHTS" in the accompanying
prospectus:
<PAGE>
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
SERVICE SHARES
The financial highlights presented below set forth certain information
concerning the investment results for the Institutional Shares of each Fund
outstanding during the fiscal year ended October 31, 1996 and during the
period ended October 31, 1995. Prior to January 2, 1997, the Funds offered
only one class of shares. On that date, the Funds began offering Institutional
Shares to institutional investors as described in a separate Prospectus and
Service Shares to retail investors as described in this Prospectus. The
information for the fiscal year ended October 31, 1996 and for the period
ended October 31, 1995 has been audited by KPMG Peat Marwick LLP, independent
accountants for the Funds, whose report thereon is contained in The Commerce
Funds' Annual Report. The following data with respect to Service Shares
outstanding during the period ended April 30, 1997 are unaudited. This
information should be read in conjunction with The Commerce Funds' Semi-Annual
Report and the financial statements and related notes incorporated by
reference and attached to the Statement of Additional Information. The
Statement of Additional Information and the Annual and Semi-Annual Reports to
Shareholders may be obtained free of charge by contacting The Commerce Funds
at the address or telephone number on page 31 of this Prospectus.
2
<PAGE>
THE COMMERCE FUNDS
SHORT-TERM GOVERNMENT FUND
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
INCOME FROM DISTRIBUTIONS TO
INVESTMENT OPERATIONS SHAREHOLDERS
--------------------- ----------------------
NET
REALIZED RATIO
AND NET RATIO OF NET
UNREALIZED FROM NET ASSET OF NET INVESTMENT
NET ASSET GAIN REALIZED VALUE, EXPENSES INCOME
VALUE, NET (LOSS) ON FROM NET GAIN END TO AVERAGE TO AVERAGE PORTFOLIO
BEGINNING INVESTMENT INVEST- INVESTMENT ON OF TOTAL NET NET TURNOVER
OF PERIOD INCOME MENTS(B) INCOME INVESTMENTS PERIOD RETURN(C) ASSETS ASSETS RATE
--------- ---------- ---------- ---------- ----------- ------ --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, 1997
(UNAUDITED)
- ---------------------------------------
Institutional
Shares $18.43 $0.56 $(0.25) $(0.56) -- $18.18 1.68% 0.68%(d) 6.12%(d) 25%
Service
Shares(a) 18.37 0.40 (0.19) (0.40) -- 18.18 1.14 0.93(d) 4.93(d) 25
FOR THE YEAR ENDED OCTOBER 31, 1996
- -----------------------------------
Institutional
Shares 18.83 1.09 (0.18) (1.09) (0.22) 18.43 5.02 0.68 5.90 12
FOR THE PERIOD DECEMBER 12, 1994 (COMMENCEMENT OF OPERATIONS) THROUGH OCTOBER
31, 1995
- -----------------------------------------------------------------------------
Institutional
Shares 18.00 1.06 0.83 (1.06) -- 18.83 10.72 0.68(d) 6.38(d) 158
<CAPTION>
RATIOS ASSUMING
NO WAIVER OF
INVESTMENT ADVISORY
FEES OR EXPENSE
REIMBURSEMENTS
----------------------
RATIO
OF NET
RATIO INVESTMENT
NET OF INCOME
ASSETS AT EXPENSES TO
END TO AVERAGE AVERAGE
OF PERIOD NET NET
(IN 000'S) ASSETS ASSETS
---------- ---------- -----------
<S> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, 1997
(UNAUDITED)
- ---------------------------------------
Institutional
Shares $39,098 1.13%(d) 5.67%(d)
Service
Shares(a) 35 1.38(d) 4.48(d)
FOR THE YEAR ENDED OCTOBER 31, 1996
- -----------------------------------
Institutional
Shares 33,839 1.11 5.47
FOR THE PERIOD DECEMBER 12, 1994 (COMMENCEMENT OF OPERATIONS) THROUGH OCTOBER
31, 1995
- -----------------------------------------------------------------------------
Institutional
Shares 20,211 1.14(d) 5.92(d)
</TABLE>
- ----
(a) Service share activity commenced on January 2, 1997.
(b) Includes the balancing effect of calculating per share amounts.
(c) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of the
investment at the net asset value at the end of the period and no sales
charges. Total return would be reduced if sales charges were taken into
account.
(d) Annualized.
3
<PAGE>
THE COMMERCE FUNDS
BOND FUND
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH FUND
<TABLE>
<CAPTION>
INCOME FROM DISTRIBUTIONS TO RATIO OF
INVESTMENT OPERATIONS SHAREHOLDERS NET RATIO OF
------------------------- ---------------------- NET EXPENSES NET
NET ASSET NET REALIZED FROM NET ASSET TO INVESTMENT
VALUE, NET AND UNREALIZED FROM NET REALIZED VALUE, AVERAGE INCOME TO PORTFOLIO
BEGINNING INVESTMENT GAIN (LOSS) ON INVESTMENT GAIN ON END OF TOTAL NET AVERAGE TURNOVER
OF PERIOD INCOME INVESTMENTS(B) INCOME INVESTMENTS PERIOD RETURN(C) ASSETS NET ASSETS RATE
--------- ---------- -------------- ---------- ----------- ------ --------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30,
1997 (UNAUDITED)
Institutional
Shares $19.07 $0.60 $(0.28) $(0.60) $(0.02) $18.77 1.69% 0.87%(d) 6.34%(d) 5%
Service
Shares(a) 19.00 0.39 (0.23) (0.39) -- 18.77 0.86 1.12(d) 5.82(d) 5
FOR THE YEAR ENDED OCTOBER
31, 1996
Institutional
Shares 19.61 1.16 (0.28) (1.16) (0.26) 19.07 4.71 0.84 6.10 31
FOR THE PERIOD DECEMBER 12, 1994 (COMMENCEMENT OF OPERATIONS) THROUGH
OCTOBER 31, 1995
Institutional
Shares 18.00 1.12 1.61 (1.12) -- 19.61 15.59 0.88(d) 6.64(d) 58
<CAPTION>
NET ASSETS
AT END OF
PERIOD
(IN 000'S)
----------
<S> <C>
FOR THE SIX MONTHS ENDED APRIL 30,
1997 (UNAUDITED)
Institutional
Shares $167,989
Service
Shares(a) 203
FOR THE YEAR ENDED OCTOBER
31, 1996
Institutional
Shares 151,205
FOR THE PERIOD DECEMBER 12, 1994 (COMMENCEMENT OF OPERATIONS) THROUGH
OCTOBER 31, 1995
Institutional
Shares 98,504
</TABLE>
- ----
(a) Service share activity commenced on January 2, 1997.
(b) Includes the balancing effect of calculating per share amounts.
(c) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no
sales charges. Total return would be reduced if sales charges were taken
into account.
(d) Annualized.
4
<PAGE>
THE COMMERCE FUNDS
BALANCED FUND
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
INCOME FROM DISTRIBUTIONS TO
INVESTMENT OPERATIONS SHAREHOLDERS
--------------------- ----------------------
NET
REALIZED
AND NET
UNREALIZED FROM NET ASSET
NET ASSET GAIN REALIZED VALUE,
VALUE, NET ON FROM NET GAIN END
BEGINNING INVESTMENT INVEST- INVESTMENT ON OF TOTAL
OF PERIOD INCOME MENTS(B) INCOME INVESTMENTS PERIOD RETURN(C)
--------- ---------- ---------- ---------- ----------- ------ ---------
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
- -------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Institutional Shares $24.00 $0.29 $0.94 $(0.29) $(1.26) $23.68 5.25%
Service Shares(a) 23.25 0.13 0.43 (0.13) -- 23.68 2.42
FOR THE YEAR ENDED OCTOBER 31, 1996
- ------------------
Institutional Shares 22.10 0.54 2.56 (0.54) (0.66) 24.00 14.45
FOR THE PERIOD DECEMBER 12, 1994 (COMMENCEMENT OF OPERATIONS) THROUGH OCTOBER
31, 1995
- ---------------------------------------------
Institutional Shares 18.00 0.59 4.06 (0.55) -- 22.10 26.14
</TABLE>
<TABLE>
<CAPTION>
RATIOS ASSUMING
NO WAIVER OF
INVESTMENT ADVISORY
FEES OR EXPENSE
REIMBURSEMENTS
---------------------
NET
RATIO RATIO ASSETS RATIO RATIO
OF NET OF NET AT OF OF NET
EXPENSES INVESTMENT END EXPENSES INVESTMENT
TO INCOME AVERAGE OF TO INCOME
AVERAGE TO AVERAGE PORTFOLIO COMMIS- PERIOD AVERAGE TO AVERAGE
TOTAL NET NET TURNOVER SION (IN NET NET
RETURN(C) ASSETS ASSETS RATE RATE 000'S) ASSETS ASSETS
--------- -------- ---------- --------- ------- ------- -------- ----------
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
- -------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Institutional Shares 5.25% 1.13%(d) 2.58%(d) 14% $0.0580 $81,040 1.52%(d) 2.19%(d)
Service Shares(a) 2.42 1.38(d) 2.49(d) 14 0.0580 521 1.77(d) 2.10(d)
FOR THE YEAR ENDED OCTOBER 31, 1996
- ------------------
Institutional Shares 14.45 1.13 2.47 58 0.0764 69,880 1.45 2.15
FOR THE PERIOD DECEMBER 12, 1994 (COMMENCEMENT OF OPERATIONS) THROUGH OCTOBER
31, 1995
- ---------------------------------------------
Institutional Shares 26.14 1.13(d) 3.28(d) 59 -- 48,329 1.45(d) 2.96(d)
</TABLE>
- ------
(a) Service share activity commenced on January 2, 1997.
(b) Includes the balancing effect of calculating per share amounts.
(c) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of the
investment at the net asset value at the end of the period and no sales
charges. Total return would be reduced if sales charges were taken into
account.
(d) Annualized.
5
<PAGE>
THE COMMERCE FUNDS
GROWTH AND INCOME FUND
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
INCOME FROM DISTRIBUTIONS TO
INVESTMENT OPERATIONS SHAREHOLDERS
--------------------- -------------------
NET
REALIZED FROM NET
AND NET ASSET
NET ASSET UNREALIZED REALIZED VALUE,
VALUE, NET LOSS ON FROM NET GAIN ON END
BEGINNING INVESTMENT INVEST- INVESTMENT INVEST- OF TOTAL
OF PERIOD INCOME MENTS(B) INCOME MENTS PERIOD RETURN(C)
--------- ---------- ---------- ---------- -------- ------ ---------
FOR THE PERIOD MARCH 3, 1997(A) THROUGH APRIL 30, 1997 (UNAUDITED)
- -------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Institutional Shares $18.00 $0.04 $(0.13) -- -- $17.91 (0.50)%
Service Shares 18.00 0.02 (0.12) -- -- 17.90 (0.56)
</TABLE>
<TABLE>
<CAPTION>
RATIOS ASSUMING
NO EXPENSE
REIMBURSEMENTS
---------------------
RATIO RATIO RATIO RATIO
OF NET OF NET OF NET OF NET
EXPENSES INVESTMENT NET EXPENSES INVESTMENT
TO INCOME ASSETS AT TO LOSS TO
AVERAGE TO AVERAGE PORTFOLIO AVERAGE END AVERAGE AVERAGE
TOTAL NET NET TURNOVER COMMISSION OF PERIOD NET NET
RETURN(C) ASSETS ASSETS RATE RATE (IN 000'S) ASSETS ASSETS
--------- -------- ---------- --------- ---------- ---------- -------- ----------
FOR THE PERIOD MARCH 3, 1997(A) THROUGH APRIL 30, 1997 (UNAUDITED)
- -------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Institutional Shares (0.50)% 1.20%(d) 1.76%(d) 1% $0.0794 $12,039 3.14%(d) (0.18)%(d)
Service Shares (0.56) 1.45(d) 1.46(d) 1 0.0794 369 3.39(d) (0.48)(d)
</TABLE>
- ------
(a) Commencement of operations.
(b) Includes the balancing effect of calculating per share amounts.
(c) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no sales
charges. Total return would be reduced if sales charges were taken into
account.
(d) Annualized.
6
<PAGE>
THE COMMERCE FUNDS
GROWTH FUND
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
INCOME FROM DISTRIBUTIONS TO
INVESTMENT OPERATIONS SHAREHOLDERS
--------------------- -------------------
NET RATIO
REALIZED NET RATIO OF NET
AND FROM NET ASSET OF NET INVESTMENT
NET ASSET UNREALIZED REALIZED VALUE, EXPENSES INCOME
VALUE, NET GAIN ON FROM NET GAIN ON END TO AVERAGE TO AVERAGE PORTFOLIO
BEGINNING INVESTMENT INVEST- INVESTMENT INVEST- OF TOTAL NET NET TURNOVER
OF PERIOD INCOME MENTS(B) INCOME MENTS PERIOD RETURN(C) ASSETS ASSETS RATE
--------- ---------- ---------- ---------- -------- ------ --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30,
1997 (UNAUDITED)
Institutional
Shares $28.95 $0.08 $3.13 $(0.08) $(1.92) $30.16 11.51% 1.10%(d) 0.56%(d) 19%(d)
Service
Shares(a) 28.26 0.03 1.89 (0.03) -- 30.15 6.79 1.35J(d) 0.33(d) 19
FOR THE YEAR ENDED OCTOBER 31, 1996
Institutional
Shares 24.68 0.19 5.40 (0.19) (1.13) 28.95 23.43 1.08 0.72 36
FOR THE PERIOD DECEMBER 12, 1994 (COMMENCEMENT OF OPERATIONS) THROUGH OCTO-
BER 31, 1995
Institutional
Shares 18.00 0.15 6.68 (0.15) -- 24.68 38.06 1.11(d) 0.81(d) 33
<CAPTION>
NET
ASSETS
AT
END
OF
AVERAGE PERIOD
COMMISSION (IN
RATE 000'S)
---------- --------
<S> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30,
1997 (UNAUDITED)
Institutional
Shares $0.0548 $266,031
Service
Shares(a) 0.0548 2,224
FOR THE YEAR ENDED OCTOBER 31, 1996
Institutional
Shares 0.0654 208,908
FOR THE PERIOD DECEMBER 12, 1994 (COMMENCEMENT OF OPERATIONS) THROUGH OCTO-
BER 31, 1995
Institutional
Shares -- 141,735
</TABLE>
- ----
(a) Service share activity commended on January 2, 1997.
(b) Includes the balancing effect of calculating per share amounts.
(c) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no
sales charges. Total return would be reduced if sales charges were taken
into account.
(d) Annualized.
7
<PAGE>
THE COMMERCE FUNDS MIDCAP FUND FINANCIAL HIGHLIGHTS SELECTED DATA FOR A SHARE
OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
INCOME FROM DISTRIBUTIONS TO
INVESTMENT OPERATIONS SHAREHOLDERS
---------------------- ----------------------
NET
REALIZED RATIO
AND RATIO OF NET
UNREALIZED NET OF NET INVESTMENT
NET ASSET GAIN (LOSS) FROM NET ASSET EXPENSES LOSS
VALUE, NET ON FROM NET REALIZED VALUE, TO AVERAGE TO AVERAGE PORTFOLIO
BEGINNING INVESTMENT INVEST- INVESTMENT GAIN ON END OF TOTAL NET NET TURNOVER
OF PERIOD LOSS MENTS(B) INCOME INVESTMENTS PERIOD RETURN(C) ASSETS ASSETS RATE
--------- ---------- ----------- ---------- ----------- ------ --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
- -----------------------------------------------------
Institutional
Shares $28.06 $(0.06) $(1.63) -- $(0.29) $26.08 (6.10)% 1.25(d) (0.57)%(d) 36%
Service
Shares(a) 28.64 (0.04) (2.53) -- -- 26.07 (8.97) 1.50(d) (0.80)(d) 36
FOR THE YEAR ENDED OCTOBER 31, 1996
- -----------------------------------------------------
Institutional
Shares 25.30 (0.07) 3.51 -- (0.68) 28.06 13.78 1.22 (0.37) 71
FOR THE PERIOD DECEMBER 12, 1994 (COMMENCEMENT OF OPERATIONS) THROUGH OCTOBER
31, 1995
- -------------------------------------------------------------------------------
Institutional
Shares 18.00 (0.04) 7.34 -- -- 25.30 40.56 1.32(d) (0.29)(d) 59
<CAPTION>
NET
ASSETS AT
AVERAGE END
COMMIS- OF PERIOD
SION RATE (IN 000'S)
--------- ----------
<S> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
- ------------------------------------------------------------
Institutional
Shares $0.0608 $77,067
Service
Shares(a) 0.0608 93
FOR THE YEAR ENDED OCTOBER 31, 1996
- ------------------------------------------------------------
Institutional
Shares 0.0692 74,641
FOR THE PERIOD DECEMBER 12, 1994 (COMMENCEMENT OF OPERATIONS) THROUGH OCTOBER
31, 1995
- -------------------------------------------------------------------------------
Institutional
Shares -- 41,665
</TABLE>
- ----
(a) Service share activity commenced on January 2, 1997.
(b) Includes the balancing effect of calculating per share amounts.
(c) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of the
investment at the net asset value at the end of the period and no sales
charges. Total return would be reduced if sales charges were taken into
account.
(d) Annualized.
8
<PAGE>
THE COMMERCE FUNDS
INTERNATIONAL EQUITY FUND
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
INCOME FROM DISTRIBUTIONS TO
INVESTMENT OPERATIONS SHAREHOLDERS
------------------------------- -----------------
NET
REALIZED
NET AND
REALIZED UNREALIZED
AND GAIN (LOSS) FROM NET NET
UNREALIZED ON FOREIGN FROM REALIZED ASSET
NET ASSET NET GAIN (LOSS) CURRENCY NET GAIN VALUE,
VALUE, INVEST- ON RELATED INVEST- ON END
BEGINNING MENT INVEST- TRANS- MENT INVEST- OF TOTAL
OF PERIOD INCOME MENTS(B) ACTIONS(B) INCOME MENTS PERIOD RETURN(C)
--------- ------- ----------- ----------- ------- -------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
Institutional Shares $20.96 $0.03 $2.54 $(1.43) $(0.10) $(0.24) $21.76 5.50%
Service Shares(a) 21.70 0.05 (0.01) 0.01 -- -- 21.75 0.23
FOR THE YEAR ENDED OCTOBER 31, 1996
Institutional Shares 18.64 0.11 3.02 (0.67) (0.07) (0.07) 20.96 13.25
FOR THE PERIOD DECEMBER 12, 1994 (COMMENCEMENT OF OPERATIONS) THROUGH OCTOBER 31, 1995
Institutional Shares 18.00 0.12 0.95 (0.40) (0.03) -- 18.64 3.73
</TABLE>
<TABLE>
<CAPTION>
RATIOS ASSUMING
NO WAIVER OF
INVESTMENT ADVISORY
FEES OR EXPENSE
REIMBURSEMENTS
--------------------
RATIO RATIO
RATIO OF NET NET RATIO OF OF NET
OF NET INVESTMENT ASSETS EXPENSES INVESTMENT
EXPENSES INCOME AVERAGE AT END TO (LOSS) TO
TO AVERAGE TO AVERAGE PORTFOLIO COM- OF AVERAGE AVERAGE
NET NET TURNOVER MISSION PERIOD NET NET
ASSETS ASSETS RATE RATE (IN 000'S) ASSETS ASSETS
---------- ---------- --------- ------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
Institutional Shares 1.72%(d) 0.31%(d) 11% $0.0009 $63,680 2.33%(d) (0.30)%(d)
Service Shares(a) 1.97(d) 2.09(d) 11 0.0009 68 2.58(d) 1.48(d)
FOR THE YEAR ENDED OCTOBER 31, 1996
Institutional Shares 1.72 0.74 21 0.0147 51,589 2.64 (0.18)
FOR THE PERIOD DECEMBER 12, 1994 (COMMENCEMENT OF OPERATIONS) THROUGH OCTOBER 31, 1995
Institutional Shares 1.81(d) 1.06(d) 25 -- 21,014 3.50(d) (0.63)(d)
</TABLE>
- ------
(a) Commencement of operations.
(b) Includes the balancing effect of calculating per share amounts.
(c) Assumes investment of the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of the
investment at the net asset value at the end of the period and no sales
charges. Total return would be reduced if a sales charge were taken into
account.
(d) Annualized.
9
<PAGE>
The following bullet point is added to page 33 under "When There Is No Sales
Charge":
. financial planners and their clients
10
<PAGE>
[LOGO OF COMMERCE FUNDS(TM)]
THE SHORT-TERM GOVERNMENT FUND
THE BOND FUND
THE BALANCED FUND
THE GROWTH AND INCOME FUND
THE GROWTH FUND
THE MIDCAP FUND
THE INTERNATIONAL EQUITY FUND
March 1, 1997
Service Shares
<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 nine investment portfolios, each of which has a separate
pool of assets with separate investment objectives and policies. However, this
Prospectus relates only to the offering of the Service Shares of the Short-
Term Government, Bond, Balanced, Growth and Income, Growth, MidCap and
International Equity Funds (individually, a "Fund" and collectively, the
"Funds"). 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 AND INCOME FUND seeks both capital appreciation and current
income. The Fund pursues this objective through investment in a diversified
portfolio of equity securities of companies which represent excellent value
relative to their current price and provide, on average, a current yield in
excess of the S&P 500 Stock Index.
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 MIDCAP FUND (formerly 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.
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 March 1, 1997) 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.
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.
MARCH 1, 1997
<PAGE>
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 describes Service Shares in each Fund. Service Shares are
offered primarily to individuals, corporations or other entities, purchasing
either for their own accounts or for the accounts of others, and to qualified
banks, savings and loan associations, and broker/dealers on behalf of their
customers.
The Commerce Funds is also authorized to issue an additional class of
shares, Institutional Shares, in each of the Short-Term Government Fund, Bond
Fund, Balanced Fund, Growth and Income Fund, Growth Fund, MidCap Fund and
International Equity Fund. Institutional Shares are offered through a separate
prospectus primarily to (i) investors maintaining qualified accounts at bank
and trust institutions, including institutions affiliated with Commerce
Bancshares, Inc. and its subsidiaries, (ii) participants in employer-sponsored
defined contribution plans, (iii) any investor who was a shareholder in The
Commerce Funds prior to January 1, 1997 and (iv) employees, directors,
advisory directors, officers and retirees (as well as their spouses and legal
dependents) of Commerce Bancshares, Inc., Goldman, Sachs & Co., State Street
Bank and Trust Company and National Financial Data Services, Inc. or their
subsidiaries or affiliates.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
SUMMARY OF EXPENSES......................................................... 4
FINANCIAL HIGHLIGHTS........................................................ 6
INVESTMENT OBJECTIVES AND POLICIES.......................................... 8
Short-Term Government Fund................................................ 8
Bond Fund................................................................. 9
Balanced Fund............................................................. 11
Growth and Income Fund.................................................... 13
Growth Fund............................................................... 14
MidCap Fund............................................................... 15
International Equity Fund................................................. 16
ADDITIONAL RISK CONSIDERATIONS.............................................. 18
OTHER INVESTMENT PRACTICES.................................................. 19
INVESTMENT RESTRICTIONS..................................................... 30
SHAREOWNER GUIDE............................................................ 31
HOW CAN I CONTACT THE COMMERCE FUNDS?..................................... 31
HOW TO BUY SERVICE SHARES................................................. 31
What Is The Minimum Investment For Each Fund?........................... 31
How Are Service Shares Priced?.......................................... 32
How Do I Buy Service Shares?............................................ 36
What Price Will I Receive When I Buy Service Shares?.................... 37
What Else Should I Know About Buying Service Shares?.................... 37
HOW TO SELL SERVICE SHARES................................................ 37
How Do I Sell My Service Shares?........................................ 37
What Price Will I Receive For Service Shares I Want To Sell?............ 39
How Quickly Can I Receive Proceeds From A Sale?......................... 39
What If I Want To Reinvest Sales Proceeds?.............................. 40
DIVIDEND AND DISTRIBUTION POLICIES........................................ 40
SHAREOWNER FEATURES AND PRIVILEGES........................................ 41
Can I Use The Funds In My Retirement Plan?.............................. 41
What Is Dollar Cost Averaging And How Can I Implement It?............... 42
Can I Exchange My Investment From One Commerce Fund To Another?......... 42
Can I Have Exchanges Made Automatically?................................ 43
Can I Reinvest Dividends From One Commerce Fund In Another?............. 43
How Do I Obtain Other Information About My Account?..................... 44
Can I Make Transactions By Telephone?................................... 44
Can I Arrange Automatic Withdrawals?.................................... 44
THE BUSINESS OF THE COMMERCE FUNDS.......................................... 45
Board of Trustees......................................................... 45
Service Providers......................................................... 45
Distribution Plan......................................................... 49
Shareholder Administrative Services Plan.................................. 49
Expenses.................................................................. 50
TAX INFORMATION............................................................. 50
HOW PERFORMANCE IS MEASURED................................................. 51
OTHER INFORMATION........................................................... 53
About The Commerce Funds.................................................. 53
Voting Rights............................................................. 53
Shareowner Reports........................................................ 54
Inquiries................................................................. 54
ACCOUNT APPLICATION FORM
</TABLE>
3
<PAGE>
SUMMARY OF EXPENSES
SERVICE SHARES
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
GOVERNMENT BOND BALANCED GROWTH AND GROWTH MIDCAP INTERNATIONAL
FUND FUND FUND INCOME FUND FUND FUND(1) EQUITY FUND
---------- ---- -------- ----------- ------ ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
SHAREOWNER TRANSACTION
EXPENSES
Maximum Sales Charge
Imposed on Purchases
(as a percentage of
offering price)(2).... 2.00% 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 None
Deferred Sales Charge
Imposed on
Redemptions........... None None None None None None None
Redemption Fees........ None None None None None None None
Exchange Fees(3)....... None None None None None None None
ANNUAL FUND OPERATING
EXPENSES
(as a percentage of
average daily net
assets)
Management Fees (after
fee waivers)(4)....... 0.30% 0.50% 0.75% 0.75% 0.75% 0.75% 0.83%
Rule 12b-1 Fees........ 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25%
Other Expenses (after
expense
reimbursements)(5).... 0.38% 0.34% 0.38% 0.45% 0.33% 0.47% 0.89%
---- ---- ---- ---- ---- ---- ----
Total Fund Operating
Expenses (after fee
waivers and expense
reimbursements)(6).... 0.93% 1.09% 1.38% 1.45% 1.33% 1.47% 1.97%
==== ==== ==== ==== ==== ==== ====
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............... $ 29 $ 46 $ 49 $ 49 $ 48 $ 49 $ 54
Three Years............ $ 49 $ 68 $ 77 $ 79 $ 76 $ 80 $ 95
Five Years............. $ 70 $ 93 $108 $111 $105 $112 $138
Ten Years.............. $132 $163 $195 $202 $190 $205 $257
</TABLE>
- --------
(1) Formerly the Aggressive Growth Fund.
(2) Certain investors may not be charged a sales charge. See "Shareowner
Guide--When There is No Sales Charge."
4
<PAGE>
(3) 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.
(4) 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. The Advisor reserves the right to reduce or
discontinue these fee waivers at any time. In the event that the "Total
Fund Operating Expenses" of the International Equity Fund fall below 1.97%
of average daily net assets, the Advisor will reduce its waiver of
investment advisory fees by the difference between the actual "Total Fund
Operating Expenses" and 1.97%.
(5) In addition to the fee waivers referred to in note 4, the Advisor intends
to voluntarily reimburse expenses during the current fiscal year to the
extent necessary for the Short-Term Government, Bond, Balanced, Growth and
Income, Growth and International Equity Funds to maintain an annual
expense ratio of not more than 0.93%, 1.13%, 1.38%, 1.45%, 1.38% and
1.97%, 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 customers who beneficially own Service Shares of the Funds in return
for a fee of up to 0.25% per annum of the value of such shares.
(6) Without such fee waivers and expense reimbursements described above, Other
Expenses (including Shareowner Servicing Fees) would be 0.61%, 0.45%,
1.13% and 1.14% and "Total Fund Operating Expenses" would be 1.36%, 1.70%,
2.13% and 2.89% of the average daily net assets of the Short-Term
Government, Balanced, Growth and Income and International Equity 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 Service
Shares of the Funds. The information with respect to the Funds reflects the
expenses the Funds expect to incur during the current fiscal year. The expense
information included in the table and the hypothetical example above relates
only to Service Shares (the class being offered by this Prospectus) and should
not be considered as representative of past or future expenses. Investors
should be aware that, due to the distribution fees, a long-term shareowner in
a Fund may pay over time more than the economic equivalent of the maximum
front-end sales charge permitted under the rules of the National Association
of Securities Dealers, Inc. The Commerce Funds also offer Institutional
Shares, which are subject to different fees and expenses (which affect
performance). Information regarding Institutional Shares may be obtained from
The Commerce Funds by calling 1-800-305-2140. In addition, Service
Organizations may charge their clients account fees for providing account
services in connection with their clients' investments in Service Shares of
The Commerce Funds, which are included in "Other Expenses." 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
Service 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 Service Shares" on page
31 of this Prospectus.
For more information about shareowner transaction expenses and The Commerce
Funds' operating expenses, see "Shareowner Guide" and "The Business of The
Commerce Funds."
- -------------------------------------------------------------------------------
THE EXAMPLES SHOWN ABOVE SHOULD NOT BE CONSIDERED REPRESENTATIONS OF FUTURE
INVESTMENT RETURN OR OPERATING EXPENSES. ACTUAL OPERATING EXPENSES AND
INVESTMENT RETURN MAY BE GREATER OR LESSER 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
PAGE OF THIS PROSPECTUS.
- -------------------------------------------------------------------------------
5
<PAGE>
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
INSTITUTIONAL SHARES
The financial highlights presented below set forth certain information
concerning the investment results for the Institutional Shares (of the Fund
specified) of each Fund outstanding during the periods indicated. Prior to
January 2, 1997, the Funds offered only one class of shares. On that date, the
Funds began offering Institutional Shares to institutional investors as
described in a separate Prospectus and Service Shares to retail investors as
described in this Prospectus. The information for the fiscal years ended
October 31, 1996 and 1995 has been audited by KPMG Peat Marwick LLP,
independent accountants for the Funds, whose report thereon is contained in
The Commerce Funds' Annual Report. This information should be read in
conjunction with the financial statements and related notes incorporated by
reference and attached to the Statement of Additional Information. These
reports also contain performance information and may be obtained free of
charge by contacting The Commerce Funds at the address or telephone number on
page 31 of this Prospectus. During the periods shown, the Funds did not offer
Service Shares and the Growth and Income Fund. Accordingly, there are no
financial highlights for Service Shares or for the Growth and Income Fund.
Actual investment results of the Service Shares will be different than the
results shown below.
<TABLE>
<CAPTION>
INCOME FROM DISTRIBUTIONS TO
INVESTMENT OPERATIONS SHAREHOLDERS
--------------------- -------------------------
NET
REALIZED
AND NET
UNREALIZED ASSET
NET ASSET GAIN VALUE,
VALUE, NET (LOSS) ON FROM NET FROM NET END
BEGINNING INVESTMENT INVEST- INVESTMENT REALIZED GAIN OF TOTAL
OF PERIOD INCOME MENTS(b) INCOME ON INVESTMENTS PERIOD RETURN(c)
--------- ---------- ---------- ---------- -------------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
SHORT-TERM GOVERNMENT FUND
- -------------------------------------------------------------------------------------------
Year ended:
10/31/96....... $18.83 $1.09 $(0.18) $(1.09) $(0.22) $18.43 5.02%
12/12/94(a) to
10/31/95....... 18.00 1.06 0.83 (1.06) -- 18.83 10.72
BOND FUND
- -------------------------------------------------------------------------------------------
Year ended:
10/31/96....... 19.61 1.16 (0.28) (1.16) (0.26) 19.07 4.71
12/12/94(a) to
10/31/95....... 18.00 1.12 1.61 (1.12) -- 19.61 15.59
BALANCED FUND
- -------------------------------------------------------------------------------------------
Year ended:
10/31/96....... 22.10 0.54 2.56 (0.54) (0.66) 24.00 14.45
12/12/94(a) to
10/31/95....... 18.00 0.59 4.06 (0.55) -- 22.10 26.14
</TABLE>
<TABLE>
<CAPTION>
RATIOS ASSUMING
NO WAIVER OF
INVESTMENT ADVISORY
FEES OR EXPENSE
REIMBURSEMENTS
--------------------------
RATIO RATIO
RATIO OF NET RATIO OF NET
OF NET INVESTMENT NET OF INVESTMENT
EXPENSES INCOME AVERAGE ASSETS AT EXPENSES INCOME TO
TO AVERAGE TO AVERAGE PORTFOLIO COMMIS- END TO AVERAGE AVERAGE
NET NET TURNOVER SION OF PERIOD NET NET
ASSETS ASSETS RATE RATE(e) (IN 000'S) ASSETS ASSETS
---------- ---------- --------- -------- ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
SHORT-TERM GOVERNMENT FUND
- -----------------------------------------------------------------------------------------------
Year ended:
10/31/96....... 0.68% 5.90% 12% -- $33,839 1.11% 5.47%
12/12/94(a) to
10/31/95....... 0.68(d) 6.38(d) 158 -- 20,211 1.14(d) 5.92(d)
BOND FUND
- -----------------------------------------------------------------------------------------------
Year ended:
10/31/96....... 0.84 6.10 31 -- 151,205 0.84 6.10
12/12/94(a) to
10/31/95....... 0.88(d) 6.64(d) 58 -- 98,504 0.88(d) 6.64(d)
BALANCED FUND
- -----------------------------------------------------------------------------------------------
Year ended:
10/31/96....... 1.13 2.47 58 $0.07640 69,880 1.45 2.15
12/12/94(a) to
10/31/95....... 1.13(d) 3.28(d) 59 -- 48,329 1.45(d) 2.96(d)
- ------
</TABLE>
(a) Commencement of operations.
(b) Includes the balancing effect of calculating per share amounts.
(c) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no sales
charges. Total return would be reduced if sales charges were taken into
account.
(d) Annualized.
(e) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate on security transactions
on which commissions are charged.This rate may vary due to various types of
transactions and number of security trades executed.
6
<PAGE>
<TABLE>
<CAPTION>
INCOME FROM DISTRIBUTIONS TO
INVESTMENT OPERATIONS SHAREHOLDERS
---------------------------------- -------------------------
NET
REALIZED AND
NET UNREALIZED
REALIZED LOSS ON NET
AND FOREIGN ASSET
NET ASSET NET UNREALIZED CURRENCY VALUE,
VALUE, INVESTMENT GAIN ON RELATED FROM NET FROM NET END
BEGINNING INCOME INVEST- TRANS- INVESTMENT REALIZED GAIN OF
OF PERIOD (LOSS) MENTS (b) ACTIONS (b) INCOME ON INVESTMENTS PERIOD
--------- ---------- ---------- ------------ ---------- -------------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
GROWTH FUND
- ----------------------------------------------------------------------------------------------
Year ended:
10/31/96....... $24.68 $0.19 $5.40 -- $(0.19) $(1.13) $28.95
12/12/94(a) to
10/31/95....... 18.00 0.15 6.68 -- (0.15) -- 24.68
MIDCAP FUND(F)
- ----------------------------------------------------------------------------------------------
Year ended:
10/31/96....... 25.30 (0.07) 3.51 -- -- (0.68) 28.06
12/12/94(a) to
10/31/95....... 18.00 (0.04) 7.34 -- -- -- 25.30
INTERNATIONAL EQUITY FUND
- ----------------------------------------------------------------------------------------------
Year ended:
10/31/96....... 18.64 0.11 3.02 (0.67) (0.07) (0.07) 20.96
12/12/94(a) to
10/31/95....... 18.00 0.12 0.95 (0.40) (0.03) -- 18.64
</TABLE>
<TABLE>
<CAPTION>
RATIOS ASSUMING
NO WAIVER OF
INVESTMENT ADVISORY
FEES OR EXPENSE
REIMBURSEMENTS
-----------------------
RATIO RATIO
RATIO OF NET RATIO OF NET
OF NET INVESTMENT NET OF INVESTMENT
EXPENSES INCOME AVERAGE ASSETS AT EXPENSES INCOME
TO AVERAGE (LOSS) PORTFOLIO COMMISS- END TO AVERAGE (LOSS) TO
TOTAL NET TO AVERAGE TURNOVER ION OF PERIOD NET AVERAGE
RETURN(c) ASSETS NET ASSETS RATE RATE(e) (IN 000'S) ASSETS NET ASSETS
--------- ---------- ---------- --------- -------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GROWTH FUND
- -------------------------------------------------------------------------------------------------------------
Year ended:
10/31/96....... 23.43% 1.08% 0.72% 36% $0.0654 $208,908 1.08% 0.72%
12/12/94(a) to
10/31/95....... 38.06 1.11(d) 0.81 (d) 33 -- 141,735 1.11 (d) 0.81 (d)
MIDCAP FUND(F)
- --------------------------------------------------------------------------------------------------------------
Year ended:
10/31/96....... 13.78 1.22 (0.37) 71 0.0692 74,641 1.22 (0.37)
12/12/94(a) to
10/31/95....... 40.56 1.32 (d) (0.29)(d) 59 -- 41,665 1.32 (d) (0.29)(d)
INTERNATIONAL EQUITY FUND
- --------------------------------------------------------------------------------------------------------------
Year ended:
10/31/96....... 13.25 1.72 0.74 21 0.0147 51,589 2.64 (0.18)
12/12/94(a) to
10/31/95....... 3.73 1.81 (d) 1.06 (d) 25 -- 21,014 3.50 (d) (0.63)(d)
</TABLE>
- ------
(a) Commencement of operations.
(b) Includes the balancing effect of calculating per share amounts.
(c) Assumes investment of the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no sales
charges. Total return would be reduced if a sales charge were taken into
account.
(d) Annualized.
(e) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate on security transactions
on which commissions are charged. This rate may vary due to various types
of transactions and number of security trades executed.
(f) Formerly the Aggressive Growth Fund.
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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 maturities of average lives in excess of five years in an amount not to
exceed 25% of its total assets. In addition, U.S. Government Obligations with
nominal maturities 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
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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 [PLUS/MINUS] 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 semi-annually and matures in five years will
have a duration of less than five years, which reflects the semi-annual cash
flows resulting from coupon payments. Duration also generally defines the
effect of interest rate changes on bond prices. Generally, if interest rates
increase by one percent, the value of a security having an effective duration
of five years would decrease in value by five percent.
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 AND INCOME FUND
INVESTMENT OBJECTIVE
THE INVESTMENT OBJECTIVE OF THE GROWTH AND INCOME FUND IS TO SEEK BOTH
CAPITAL APPRECIATION AND CURRENT INCOME. THE FUND PURSUES THIS OBJECTIVE
THROUGH INVESTMENT IN A DIVERSIFIED PORTFOLIO OF EQUITY SECURITIES OF
COMPANIES WHICH REPRESENT EXCELLENT VALUE RELATIVE TO THEIR CURRENT PRICE AND
PROVIDE, ON AVERAGE, A CURRENT YIELD IN EXCESS OF THE S&P 500 STOCK INDEX.
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
represent excellent value relative to their current price in that such
companies, in the aggregate, sell at a lower price-to-book value, a lower
price-to-earnings ratio, and a higher yield 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
"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 below 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.
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 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, as described under "Growth and Income Fund--Investment Strategy"
above.
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
"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
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.
MIDCAP FUND
INVESTMENT OBJECTIVE
THE INVESTMENT OBJECTIVE OF THE MIDCAP 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 less than that of the largest company in the S&P 400 Mid-Cap
Index. 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.
In selecting stocks for the MidCap Fund, the Advisor employs a "bottom-up"
security analysis, as described under "Growth and Income 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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<PAGE>
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 Income, Growth and MidCap 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 and Income, Growth, MidCap and International Equity
Funds may invest in ADRs, some of which may not be sponsored by the issuing
institution. A non-sponsored depository may not be required to disclose
material information that a sponsored depository would be required to provide
under its contractual relationship with the issuer. Accordingly, there may not
be a correlation between such information and the market value of such
securities.
Although a Fund may invest in securities denominated in foreign currencies,
its portfolio securities and other assets are valued in U.S. dollars. Currency
exchange rates may fluctuate significantly over short periods of time causing,
together with other factors, a Fund's net asset value to fluctuate as well.
Currency exchange rates generally are determined by the forces of supply and
demand in the foreign exchange markets and the relative merits of investments
in different countries, actual or anticipated changes in interest rates and
other complex factors, as seen from an international perspective. Currency
exchange rates also may be affected unpredictably by the intervention or the
failure to intervene by U.S. or foreign governments or central banks, or by
currency controls or political developments in the U.S. or abroad. To the
extent that a Fund's total assets, adjusted to reflect the Fund's net position
after giving effect to currency transactions, are denominated in the
currencies of foreign countries, the Fund will be more susceptible to the risk
of adverse economic and political developments within those countries. In
addition, the respective net currency positions of the International Equity
Fund may expose it to risks independent of its securities positions. Although
the net long and short foreign currency exposure of the International Equity
Fund will not exceed its total asset value, to the extent that the Fund is
fully invested in foreign securities while also maintaining currency
positions, it may be exposed to greater risk than it would have if it did not
maintain the currency positions. The Funds investing in foreign securities are
also subject to the possible imposition of exchange control regulations or
freezes on convertibility of currency.
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 assets, as permitted by
applicable law, 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
assets, as permitted by applicable law, 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 assets, as permitted by applicable law, 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 (e.g., 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 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 assets, as
permitted by applicable law, 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, as permitted by applicable law, 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.
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 in value at all times 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 and Income, Growth, MidCap 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 Income, Growth and MidCap 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.
27
<PAGE>
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 assets, as permitted by applicable law,
or will otherwise cover its position in accordance with applicable
requirements of the SEC.
CONVERTIBLE SECURITIES
The Bond, Balanced, Growth and Income, Growth, MidCap and International
Equity Funds may invest in convertible securities, including bonds, notes and
preferred stock, that may be converted into common stock either at a stated
price or within a specified period of time. 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.
28
<PAGE>
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.
29
<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. The Trust
expects that the Portfolio turnover rate will not exceed 100% for the Growth
and Income Fund for the current fiscal year. See "Financial Highlights" above
or "Portfolio Transactions" in the Statement of Additional Information for
historical portfolio turnover information for the other portfolios. Portfolio
turnover may result in the realization of short-term capital gains which are
taxable to shareowners as ordinary income.
OTHER INVESTMENT POLICIES AND RISK CONSIDERATIONS
Investment methods described in this prospectus are among those which one or
more of the Funds have the power to utilize. Some may be employed on a regular
basis; others may not be used at all. Accordingly, reference to any particular
method or technique carries no implication that it will be utilized or, if it
is, that it will be successful.
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.
30
<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 SERVICE 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.
31
<PAGE>
HOW ARE SERVICE SHARES PRICED?
SERVICE 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
CLASS CALCULATES ITS NET ASSET VALUE PER SHARE ("NAV") AS FOLLOWS:
NAV= (VALUE OF ASSETS ATTRIBUTABLE TO THE CLASS)--(LIABILITIES ATTRIBUTABLE TO
THE CLASS)
- ------------------------------------------------------------------------------
NUMBER OF OUTSTANDING SHARES OF THE CLASS
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 class of a 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 for each class of the International Equity
Fund. There may be variations in the net asset value per share of each class
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% for each Fund
(except the Short-Term Government Fund which is 2.00%) and may be less based
on the amount you invest, as shown in the following chart:
ALL FUNDS EXCEPT THE SHORT-TERM GOVERNMENT FUND:
<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.
32
<PAGE>
SHORT-TERM GOVERNMENT FUND:
<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 $500,000........................... 2.00% 2.04% 1.80%
$500,001 but less than $1,000,000............ 1.00% 1.01% 0.90%
$1,000,001 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 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.
WHEN THERE IS NO SALES CHARGE. There is no sales charge on Service Shares
purchased by the following types of investors or transactions:
. automatic reinvestments (and cross-reinvestments) of dividends and
capital gain distributions by existing shareowners;
. the Exchange Privilege described below on page 42;
. the Redemption Reinvestment Privilege described on page 40;
. 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., State Street Bank and Trust Company and National
Financial Data Services, Inc. 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);
33
<PAGE>
. 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;
. 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); and
. registered representatives of dealers who have entered into dealer
agreements with Goldman, Sachs & Co. to the extent permitted by such
firms.
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
Service 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 Service Shares in a Fund must
occur within five Business Days of the prior redemption and must be evidenced
by a confirmation of the redemption transaction. At the time of purchase, The
Commerce Funds must be notified that the purchase qualifies for a purchase
without a sales charge. Proceeds from the redemption of shares on which no
sales charges or commissions were paid would not qualify for the special net
asset value purchase program.
These sales charge exemptions are based on the type of investor and/or the
reduced sales effort that will be needed in obtaining Fund investments. In
order to take advantage of these exemptions, you must certify eligibility on
your account application.
RIGHTS OF ACCUMULATION. When you buy Service 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 Goldman
Sachs--Institutional Liquid Assets Prime Obligations Portfolio 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 Service Shares at a reduced sales charge under Rights of
Accumulation, you must indicate at the time of purchase that a quantity
discount is applicable. A reduction in sales charge is subject to a check of
appropriate records, after which you will receive the lowest applicable sales
charge.
34
<PAGE>
Example: Suppose you own Service 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 (except the Short-Term Government Fund), 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 Service Shares at a reduced sales charge
under a written Letter of Intent, a non-binding commitment to invest a total
of at least $100,000 in one or more Funds of The Commerce Funds within a
period of 13 months and under the terms and conditions of the Letter of
Intent. Service Shares you buy under a Letter of Intent will be eligible for
the same sales charge discount that would have been available had all of your
Service 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 of the relevant class 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 Service 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 Service Shares.
You may include the value of all Service 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 Service 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.
35
<PAGE>
HOW DO I BUY SERVICE SHARES?
You may purchase Service 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
31. Funds?" on page 31.
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 class of shares 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 31.
</TABLE>
36
<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 SERVICE SHARES?
Your Service 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 SERVICE 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 SERVICE SHARES
HOW DO I SELL MY SERVICE SHARES?
The Commerce Funds makes it easy to sell, or "redeem," all or part of your
Service Shares. The Commerce Funds does not charge you to sell Service Shares.
However, the value of the Service 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 Service Shares of The Commerce Funds:
37
<PAGE>
HOW TO SELL SERVICE 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 31.
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 39 with the
exception of redemptions sent to a shareowner
name/address of record in effect for no less
than 30 days.
In Person You are welcome to deliver your written request
signed by each owner, including each joint
owner, to a Commerce Bank branch office
location. A registered investment
representative can assist you.
By Telephone You may redeem Service 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 39).
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 31. 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 Service Shares must be signed by each shareowner,
including each joint owner.
38
<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.
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 SERVICE SHARES I WANT TO SELL?
The price you will receive when you sell your Service Shares is the net
asset value per share (as described on page 32) 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.
39
<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. Service
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, Growth and Income and Growth Funds declare and distribute
dividends quarterly. The MidCap 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 and Income, Growth, MidCap 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
Service Shares without a sales charge;
(2) receive dividend distributions in cash and reinvest capital gain
distributions in additional Service 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.
40
<PAGE>
If you do not select an option when you open an account, all distributions
will automatically be reinvested in additional Service Shares of the same Fund
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 Service Shares of the same Fund without a sales charge.
You may invest dividend or capital gain distributions from one Fund in
shares of the corresponding class of another Fund of The Commerce Funds or the
National Tax-Free Bond or Missouri Tax-Free Bond Fund. 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 Goldman Sachs--Institutional Liquid Assets
Prime Obligations Portfolio ("Money Market Fund") 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 Fund.
Your election to reinvest the distributions paid by a Fund in additional
Service 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 31.
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 31 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.
41
<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. Since
dollar cost averaging involves investment in securities regardless of
fluctuating price levels, you should consider your financial ability to
continue to purchase through periods of low price levels. You can invest
through Dollar Cost Averaging on your own or through the Automatic Investment
feature described above.
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 31.
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 Service Shares
for Service Shares of another Fund of The Commerce Funds that offers Service
Shares. Exchanges may also be made to or from the National Tax-Free Bond Fund,
the Missouri Tax-Free Bond Fund and the Goldman Sachs--Institutional Liquid
Assets Prime Obligations Portfolio. NO ADDITIONAL SALES CHARGE IS IMPOSED WHEN
EXCHANGING SERVICE SHARES OF A FUND FOR SERVICE SHARES OF ANOTHER FUND OFFERED
BY THE COMMERCE FUNDS.
You can exchange Service Shares of one Fund for Service 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 Service Shares" on page 38. 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.
42
<PAGE>
Fund shares being exchanged are subject to the minimum initial and
subsequent investment requirements as described on page 31. 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 31.
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 reserve 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 Service Shares at net asset value be automatically exchanged for Service
Shares of any other Fund of The Commerce Funds that offers Service Shares. 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 SERVICE SHARES OF ANY OTHER INVESTMENT PORTFOLIO OF THE COMMERCE
FUNDS THAT OFFERS SERVICE SHARES 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.
43
<PAGE>
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.
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 31.
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 Service 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 (e.g., because of unusual market
activity), you are urged to consider redeeming your Service 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, semi-annual 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.
44
<PAGE>
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.
45
<PAGE>
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. Commerce Bank, N.A. (St. Louis) and Commerce Bank, N.A.
(Kansas City), each (or its predecessor organizations) have provided
investment management services to The Commerce Funds since 1994, to private
and public pension funds, endowments and foundations since 1946 and to
individuals since 1906. As of December 31, 1996, the Advisor provided
investment management and advisory services for assets aggregating
approximately $5.4 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 $6.5 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 calculated as a
percentage of the Funds' average daily net assets as stated below:
<TABLE>
<CAPTION>
STATED
ANNUAL RATE
-----------
<S> <C>
Short-Term Government Fund.......................................... 0.50%
Bond Fund........................................................... 0.50%
Balanced Fund....................................................... 1.00%
Growth Fund......................................................... 0.75%
Growth and Income Fund.............................................. 0.75%
MidCap Fund......................................................... 0.75%
International Equity Fund........................................... 1.50%
</TABLE>
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
46
<PAGE>
over $50 million. However, should total fund expenses of the International
Equity Fund fall below 1.97% of average daily net assets, the Advisor will
reduce its waiver of investment advisory fees by the difference between the
actual total fund operating expenses and 1.97%. For the fiscal year ended
October 31, 1996, the Advisor received advisory fees (after fee waivers) at
the following effective annual rates:
<TABLE>
<S> <C>
Short-Term Government Fund................................................ .30%
Bond Fund................................................................. .50%
Balanced Fund............................................................. .75%
Growth and Income Fund (a)................................................ n/a
Growth Fund............................................................... .75%
MidCap Fund............................................................... .75%
International Equity Fund................................................. .83%
</TABLE>
- --------
(a) Fund not operational as of October 31, 1996.
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.
John Bartlett, CFA and Vice President and Senior Portfolio Manager, is the
person primarily responsible for the day-to-day management of the Growth and
Income Fund's investments. Mr. Bartlett joined Commerce Bank, N.A. (St. Louis)
in 1991. Prior to that time, Mr. Bartlett was Institutional Portfolio Manager
and Vice President of Boatmens' Trust Company in St. Louis, Missouri.
Joseph C. Williams III, CFA and Vice President, is the person primarily
responsible for the day-to-day management of the Growth Fund's investments.
Mr. Williams joined Commerce Bank, N.A. (Kansas City) in 1975 and became a
member of its Investment Management Group in 1977.
Joseph C. Williams III and Scott M. Colbert are the persons primarily
responsible for the day-to-day management of the equity and fixed-income
portions, respectively, of the Balanced Fund's investments.
Paul D. Cox, CFA, CIC and Vice President, is the person primarily
responsible for the day-to-day management of the MidCap 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").
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<PAGE>
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, Johannesburg, Bangkok,
Bombay, Jakarta, Singapore, Tokyo, Hong Kong, Manila, Kuala Lumpur, Seoul, and
Taipei. As of December 31, 1996, T. Rowe Price and its affiliates managed more
than $95 billion of assets and Flemings managed the U.S. equivalent of
approximately $25 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, Mark J. T. Edwards, John R. Ford,
James B. M. Seddon, Benedict R. F. Thomas and David J. L. Warren.
Martin Wade joined Price-Fleming in 1979 and has 28 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 22 years of experience managing multicurrency fixed
income portfolios.
Christopher Alderson joined Price-Fleming in 1988 and has ten years of
experience with the Fleming Group in research and portfolio management. Mark
Edwards joined Price-Fleming in 1986 and has 16 years of experience in
financial analysis. John Ford joined Price-Fleming in 1982 and has 17 years of
experience with Fleming Group in research and portfolio management. James
Seddon joined Price-Fleming in 1987 and has nine years of experience in
investment management. Benedict Thomas joined Price-Fleming in 1988 and has
eight years of portfolio management experience. David Warren joined Price-
Fleming in 1984 and has 17 years of experience in equity research, fixed
income research and portfolio management.
The Board of Trustees of The Commerce Funds has authorized Price-Fleming to
utilize affiliates of Flemings and Jardine Fleming in the capacity of broker
in connection with the execution of the Fund's portfolio transactions if
Price-Fleming believes that doing so would result in an economic advantage (in
the form of lower execution costs or otherwise) being obtained by the Fund.
For the services provided and expenses assumed under the Sub-Advisory
Agreement, the Advisor will pay the Sub-Advisor a monthly management fee at an
annual rate of 0.75% of the first $20 million of 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 fiscal year ended
October 31, 1996, Price-Fleming received advisory fees at the effective annual
rate of 0.68% of the International Equity Fund's average daily net assets.
48
<PAGE>
MORE ABOUT THE ADMINISTRATOR
Goldman Sachs Asset Management is the Administrator for the Funds. GSAM is a
separate operating division of Goldman, Sachs & Co., the Distributor of the
Funds. Under the Administration Agreement with The Commerce Funds, GSAM
administers the business affairs of The Commerce Funds, subject to the
supervision of the Board of Trustees, and in connection therewith, furnishes
The Commerce Funds with office facilities and is responsible for ordinary
clerical, recordkeeping and bookkeeping services required to be maintained by
The Commerce Funds (excluding those maintained by The Commerce Funds'
Custodian, Transfer Agent, Advisor and any Sub-Advisor), preparation and
filing of documents required to comply with federal and state securities laws,
supervising the activities of the Custodian and Transfer Agent, providing
assistance in connection with meetings of the Board of Trustees and
shareowners and other administrative services necessary to conduct the
business of The Commerce Funds. For these services and facilities, GSAM is
entitled to receive a monthly fee from each Fund at an annual rate of 0.15% of
its average daily net assets. For the fiscal year ended October 31, 1996, GSAM
received administration fees at the annual rate of 0.15% of the average daily
net assets of each Fund (except the Growth and Income Fund, which was not
operational during the fiscal year).
DISTRIBUTION PLAN
Under the Distribution Plan, the Funds may pay the Distributor for
distribution expenses primarily intended to result in the sale of a Fund's
Service Shares. Such distribution expenses include expenses incurred in
connection with advertising and marketing a Fund's Service Shares; payments to
securities dealers, brokers, financial institutions or other industry
professionals such as investment advisors, accountants and estate planning
firms ("Distribution Organizations") for assistance in connection with the
distribution of Service Shares; and expenses incurred in connection with
preparing, printing and distributing prospectuses for the Fund (except those
used for regulatory purposes, for solicitation or distribution to existing or
Institutional shareholders, or for distribution to existing Service
shareholders of the Fund, and in implementing and operating the Distribution
Plan).
Under the Distribution Plan, payments by the Fund for distribution expenses
may not exceed 0.25% (annualized), of the average daily net assets of a Fund's
Service Shares. This amount may be reduced pursuant to undertakings by the
Distributor. If the fee received by the Distributor exceeds its expenses, the
Distributor may realize a profit from these arrangements. The Plan will be
reviewed and is subject to approval annually by the Board of Trustees. The
aggregate compensation that may be received under the Plan for distribution
services, together with sales charges paid by shareowners, may not exceed the
limitations imposed by the Rules of Fair Practice of the NASD. Payments for
distribution expenses under the Distribution Plan are subject to Rule 12b-1
under the 1940 Act. During the fiscal year ended October 31, 1996, no Service
Shares were offered by the Trust.
SHAREHOLDER ADMINISTRATIVE SERVICES PLAN
Under the Administrative Services Plan, the Funds may enter into agreements
("Servicing Agreements") with securities dealers, financial institutions and
other industry professionals ("Service Organizations") that are shareholders
or dealers of record or which have a servicing relationship with the
beneficial owners of Service Shares of the Funds. Such Servicing Agreements
shall require the Servicing Organizations to provide support services to their
clients who beneficially own Shares in one or more of
49
<PAGE>
the Funds in consideration for a fee, computed daily and paid monthly in the
manner set forth in the Servicing Agreements, at the annual rate of up to
0.25% of the average daily net asset value of Service Shares of the Funds
beneficially owned by such clients. Administrative support services expenses
under the Shareholder Administrative Services Plan include, but are not
limited to, expenses incurred in connection with shareholder services provided
by the Distributor and payments to Service Organizations for the provision of
support services with respect to the beneficial owners of Service Shares, such
as assisting clients in processing exchange and redemption requests and in
changing dividend options and account descriptions; responding to client
inquiries concerning their investments; establishing and maintaining accounts
and records relating to their clients who invest in Service Shares, providing
information to the Funds necessary for accounting or sub-accounting, and
providing statements periodically to clients showing their position in Service
Shares.
For the fiscal year ended October 31, 1996, the Trust on behalf of
Institutional Shares of the Short-Term Government Fund, Bond Fund, Balanced
Fund, Growth Fund, MidCap Fund and International Equity Fund paid fees at the
annual rates of .02%, .01%, .01%, .02%, .01% and .01%, respectively, of each
Fund's average daily net assets attributable to Institutional Shares of the
Funds, to Service Organizations. For the fiscal year ended October 31, 1996,
no fees were paid on behalf of Institutional Shares of the Growth and Income
Fund to Service Organizations.
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 the advisory fees and/or reimburse expenses for the Short-
Term Government, Bond, Balanced, Growth and Income, 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.
50
<PAGE>
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 capital gain dividends are paid
in cash or reinvested in Fund shares.
If you are considering buying shares of a Fund on or just before the record
date of a dividend, you should be aware that the amount of the forthcoming
dividend payment, although in effect a return of capital, will be taxable to
you.
Any dividends declared in October, November or December with a record date
before the end of the year will be deemed for tax purposes to have been paid
by the Fund and received by you in that year, so long as the dividends are
actually paid on or before January 31 of the following year.
You will recognize a taxable capital gain or loss when redeeming or
exchanging your shares (or in using the Automatic Withdrawal feature to direct
reinvestments), to the extent of any difference between the price at which the
shares are sold or exchanged and the price or prices at which the shares were
originally purchased for cash or under the dividend reinvestment plan. If you
hold shares for six months or less and during that time receive a capital gain
dividend on those shares, any loss realized on the sale or exchange of those
shares will be treated as a long-term capital loss to the extent of the
capital gain dividend.
Dividends and certain interest income earned by the International Equity
Fund from foreign securities may be subject to foreign withholding taxes or
other income taxes. The International Equity Fund may elect, for U.S. federal
income tax purposes, to treat certain foreign taxes paid by it as paid by its
shareowners. Should the Fund make that election, a pro rata portion of such
foreign taxes paid by the Fund will constitute income to you (in addition to
taxable dividends actually received by you), and you may be entitled to claim
an offsetting tax credit or itemized deduction for that amount of foreign
taxes.
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
51
<PAGE>
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.
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 semi-annual basis.
Each Fund's total return and yield will be calculated separately for each
class of shares in existence. Because each class of shares may be subject to
different expenses, the total return and yield calculations with respect to
each class of shares for the same period will differ.
52
<PAGE>
OTHER INFORMATION
THE COMMERCE FUNDS IS A DELAWARE BUSINESS TRUST
THAT WAS ORGANIZED ON FEBRUARY 7, 1994.
ABOUT THE COMMERCE FUNDS
THE COMMERCE FUNDS' TRUST INSTRUMENT AUTHORIZES THE BOARD OF TRUSTEES TO
ISSUE AN UNLIMITED NUMBER OF FULL AND FRACTIONAL SHARES OF BENEFICIAL
INTEREST, WITHOUT PAR VALUE, OF ONE OR MORE SERIES OF SHARES (OR CLASSES
THEREOF) AS THE TRUSTEES MAY FROM TIME TO TIME CREATE AND ESTABLISH. PURSUANT
TO SUCH AUTHORITY, THE BOARD OF TRUSTEES HAS AUTHORIZED THE ISSUANCE OF AN
UNLIMITED NUMBER OF SHARES IN EACH SERIES, REPRESENTING INTERESTS IN NINE
DIFFERENT FUNDS: THE SHORT-TERM GOVERNMENT, BOND, BALANCED, GROWTH AND INCOME,
GROWTH, MIDCAP, INTERNATIONAL EQUITY, NATIONAL TAX-FREE BOND AND MISSOURI TAX-
FREE BOND FUNDS. EACH OF THE FOREGOING FUNDS, EXCEPT THE NATIONAL TAX-FREE
BOND AND MISSOURI TAX-FREE BOND FUNDS, OFFERS TWO CLASSES OF SHARES:
INSTITUTIONAL SHARES AND SERVICE SHARES. THE NATIONAL TAX-FREE BOND AND
MISSOURI TAX-FREE BOND FUNDS OFFER ONLY ONE CLASS OF SHARES. FOR INFORMATION
REGARDING THE FUNDS' INSTITUTIONAL SHARES AND THE NATIONAL TAX-FREE BOND AND
MISSOURI TAX-FREE BOND FUNDS, WHICH ARE OFFERED IN SEPARATE PROSPECTUSES,
CONTACT THE COMMERCE FUNDS AT 1-800-305-2140.
Shares of each class of a Fund bear their pro rata portion of all operating
expenses paid by the Fund except that Service Shares bear the payments made
under the Distribution Plan and Shareholder Administrative Services Plan
applicable only to Service Shares at annual rates not to exceed 0.25% and
0.25%, respectively, of the average daily net asset value of Service Shares of
the Short-Term Government, Bond, Balanced, Growth and Income, Growth, MidCap,
and International Equity Funds, and that Institutional Shares bear the
payments made under the Shareholder Administrative Services Plan applicable
only to Institutional Shares, at an annual rate not to exceed 0.25% of average
daily net assets of Institutional Shares of the Short-Term Government, Bond,
Balanced, Growth and Income, Growth, MidCap and International Equity Funds.
Institutional Shares are offered in separate prospectuses, primarily to
investors maintaining qualified accounts in the trust departments of
affiliates and correspondent banks of Commerce Bancshares, Inc., to
participants in employer-sponsored defined contribution plans administered by
Commerce Bancshares, Inc. and to shareholders who have existing accounts in
Institutional Shares on the date of this Prospectus. Service Shares are
offered primarily to retail investors. The differences in expenses paid by the
respective classes will affect their performance.
Fund shares have no preemptive rights and only such conversion and exchange
rights as the Board of Trustees may grant in its discretion. All shares issued
as described in this Prospectus will be fully paid and non-assessable.
Each share of a series shall represent an equal beneficial interest in the
net assets of such series. Each holder of shares of a series shall be entitled
to receive distributions of income and capital gains, if any, which are made
with respect to such series and which are attributable to such shares. Upon
redemption of shares, such shareowner shall be paid solely out of the funds
and property of such series of The Commerce Funds.
VOTING RIGHTS
SHAREOWNERS ARE ENTITLED TO ONE VOTE FOR EACH FULL SHARE HELD AND FRACTIONAL
VOTES FOR FRACTIONAL SHARES HELD. Additionally, except when required by the
1940 Act or when the Board of Trustees has
53
<PAGE>
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 7, 1997, the Advisor and their affiliates possessed, on
behalf of their underlying customer accounts, voting or investment power with
respect to 90%, 86%, 77%, 79%, 83% and 92% of the outstanding shares of the
Short-Term Government, Bond, Balanced, Growth, MidCap 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.
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 31.
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.
54
<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 OF COMMERCE FUNDS(TM)]
- --------------------------------------------------------------------------------
THIS ACCOUNT The Commerce Funds c/o Shareowner Services P.O. Box
APPLICATION FORM 16931 St. Louis, MO 63105
SHOULD BE FORWARDED For additional information call 1-800-305-2140
PROMPTLY TO:
Date: __________
- --------------------------------------------------------------------------------
1. ACCOUNT Please Print
REGISTRATION
INDIVIDUAL
---------------------------------------------------------
First Name Initial Last Name (Birthdate)
--------------
SS# or Tax ID#
JOINT TENANTS
The account will be registered as "Joint Tenants with
Right of Survivorship" unless otherwise specified.
---------------------------------------------------------
First Name Initial Last Name (Birthdate)
--------------
SS# or Tax ID#
---------------------------------------------------------
First Name Initial Last Name (Birthdate)
--------------
SS# or Tax ID#
TRANSFER ON DEATH
------------------------ ------------ --------------
Name Date 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
MAY BE REQUIRED
CORPORATION, TRUST, OR OTHER ENTITY
---------------------------------------- --------------
Name of Corporation, Trust or other Tax ID#
Non-Person Entity
--------------------------------------------------------
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 SERVICE SHARES
Check appropriate boxes:
$1000 MINIMUM PER [_]Short Term $_______ [_]Growth and $_______
FUND ($250 MINIMUM Government Amount Income Amount
FOR SUBSEQUENT #336 #
INVESTMENTS) [_]Bond $_______ [_]MidCap $_______
#333 Amount #339 Amount
[_]Balanced $_______ [_]International$_______
#338 Amount Equity Amount
[_]Growth $_______ #340
#337 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 Service 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 Service 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 Service 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
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)
- --------------------------------------------------------------------------------
8. FOR TELEPHONE See "How To Buy Service Shares" or "How To Sell Service
PURCHASE/REDEMPTION, Shares" in the Prospectus
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.
- --------------------------------------------------------------------------------
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 (ATTACH VOIDED CHECK OR DEPOSIT SLIP)
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
- --------------------------------------------------------------------------------
[_] Check the box if you would like duplicate
11. DUPLICATE MAILINGS confirmations/statements sent to another address:
--------------------------------------------------
Name
--------------------------------------------------
Street Address City State Zip
<PAGE>
- -------------------------------------------------------------------------------
12. AUTOMATIC WITHDRAWAL PLAN
Minimum account balance must be $5,000. Withdrawal
minimum is $100.
Check One: [_] Monthly [_] Quarterly [_] Semi-
Annual [_] Annual
Please make payments via (check one) [_] check [_] ACH
(Bank must be ACH affiliated. Attach voided check).
Payments made via check are withdrawn from your account
on or about the 1st or 15th of a month for monthly
withdrawals or the 15th of the month for
quarterly/semi-annual/annual withdrawals. (I understand
that I may change the date of redemption, via ACH, or
the amount at any time in writing to the Fund at the
address stated above.)
If withdrawal payments are to be made via ACH (attach
voided check/deposit slip)
Please withdraw $ from my account on the
of the month.
Complete this section ONLY if check is to be made
payable to person(s) other than the registered owner.
SIGNATURE GUARANTEE required. (See Section 13 of this
Form.)
--------------------------------------------------------
Name of check recipient Address 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 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>
[LOGO OF COMMERCE FUNDS(TM)]
<PAGE>
COMMERCE FUNDS
THE SHORT-TERM GOVERNMENT FUND
THE BOND FUND
THE BALANCED FUND
THE GROWTH AND INCOME FUND
THE GROWTH FUND
THE MIDCAP FUND
THE INTERNATIONAL EQUITY FUND
INSTITUTIONAL SHARES
----------------
SUPPLEMENT DATED SEPTEMBER 16, 1997 TO THE PROSPECTUS DATED MARCH 1, 1997
The following replaces the "FINANCIAL HIGHLIGHTS" in the accompanying
prospectus:
<PAGE>
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
INSTITUTIONAL SHARES
The financial highlights presented below set forth certain information
concerning the investment results for the Institutional Shares of each Fund
outstanding during the periods indicated. Prior to January 2, 1997, the Fund
offered only one class of shares. On that date, the Funds began offering
Institutional Shares to institutional investors as described in this
Prospectus and Service Shares to retail investors as described in a separate
Prospectus. The information for the fiscal year ended October 31, 1996 and the
period ended October 31, 1995 has been audited by KPMG Peat Marwick LLP,
independent accountants for the Funds, whose report thereon is contained in
The Commerce Funds' Annual Report. The following data with respect to
Institutional Shares outstanding during the period ended April 30, 1997 are
unaudited. This information should be read in conjunction with The Commerce
Funds' Semi-Annual Report and the financial statements and related notes
incorporated by reference and attached to the Statement of Additional
Information. The Statement of Additional Information and the Annual and Semi-
Annual Reports to Shareholders may be obtained free of charge by contacting
The Commerce Funds at the address or telephone number on page 31 of this
Prospectus.
2
<PAGE>
THE COMMERCE FUNDS
SHORT-TERM GOVERNMENT FUND
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
INCOME FROM DISTRIBUTIONS TO
INVESTMENT OPERATIONS SHAREHOLDERS
--------------------- ----------------------
NET
REALIZED RATIO
AND NET RATIO OF NET
UNREALIZED FROM NET ASSET OF NET INVESTMENT
NET ASSET GAIN REALIZED VALUE, EXPENSES INCOME
VALUE, NET (LOSS) ON FROM NET GAIN END TO AVERAGE TO AVERAGE PORTFOLIO
BEGINNING INVESTMENT INVEST- INVESTMENT ON OF TOTAL NET NET TURNOVER
OF PERIOD INCOME MENTS(B) INCOME INVESTMENTS PERIOD RETURN(C) ASSETS ASSETS RATE
--------- ---------- ---------- ---------- ----------- ------ --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, 1997
(UNAUDITED)
- ---------------------------------------
Institutional
Shares $18.43 $0.56 $(0.25) $(0.56) -- $18.18 1.68% 0.68%(d) 6.12%(d) 25%
Service
Shares(a) 18.37 0.40 (0.19) (0.40) -- 18.18 1.14 0.93(d) 4.93(d) 25
FOR THE YEAR ENDED OCTOBER 31, 1996
- -----------------------------------
Institutional
Shares 18.83 1.09 (0.18) (1.09) (0.22) 18.43 5.02 0.68 5.90 12
FOR THE PERIOD DECEMBER 12, 1994 (COMMENCEMENT OF OPERATIONS) THROUGH OCTOBER
31, 1995
- -----------------------------------------------------------------------------
Institutional
Shares 18.00 1.06 0.83 (1.06) -- 18.83 10.72 0.68(d) 6.38(d) 158
<CAPTION>
RATIOS ASSUMING
NO WAIVER OF
INVESTMENT ADVISORY
FEES OR EXPENSE
REIMBURSEMENTS
----------------------
RATIO
OF NET
RATIO INVESTMENT
NET OF INCOME
ASSETS AT EXPENSES TO
END TO AVERAGE AVERAGE
OF PERIOD NET NET
(IN 000'S) ASSETS ASSETS
---------- ---------- -----------
<S> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, 1997
(UNAUDITED)
- ---------------------------------------
Institutional
Shares $39,098 1.13%(d) 5.67%(d)
Service
Shares(a) 35 1.38(d) 4.48(d)
FOR THE YEAR ENDED OCTOBER 31, 1996
- -----------------------------------
Institutional
Shares 33,839 1.11 5.47
FOR THE PERIOD DECEMBER 12, 1994 (COMMENCEMENT OF OPERATIONS) THROUGH OCTOBER
31, 1995
- -----------------------------------------------------------------------------
Institutional
Shares 20,211 1.14(d) 5.92(d)
</TABLE>
- ----
(a) Service share activity commenced on January 2, 1997.
(b) Includes the balancing effect of calculating per share amounts.
(c) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of the
investment at the net asset value at the end of the period and no sales
charges. Total return would be reduced if sales charges were taken into
account.
(d) Annualized.
3
<PAGE>
THE COMMERCE FUNDS
BOND FUND
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH FUND
<TABLE>
<CAPTION>
INCOME FROM DISTRIBUTIONS TO RATIO OF
INVESTMENT OPERATIONS SHAREHOLDERS NET RATIO OF
------------------------- ---------------------- NET EXPENSES NET
NET ASSET NET REALIZED FROM NET ASSET TO INVESTMENT
VALUE, NET AND UNREALIZED FROM NET REALIZED VALUE, AVERAGE INCOME TO PORTFOLIO
BEGINNING INVESTMENT GAIN (LOSS) ON INVESTMENT GAIN ON END OF TOTAL NET AVERAGE TURNOVER
OF PERIOD INCOME INVESTMENTS(B) INCOME INVESTMENTS PERIOD RETURN(C) ASSETS NET ASSETS RATE
--------- ---------- -------------- ---------- ----------- ------ --------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30,
1997 (UNAUDITED)
Institutional
Shares $19.07 $0.60 $(0.28) $(0.60) $(0.02) $18.77 1.69% 0.87%(d) 6.34%(d) 5%
Service
Shares(a) 19.00 0.39 (0.23) (0.39) -- 18.77 0.86 1.12(d) 5.82(d) 5
FOR THE YEAR ENDED OCTOBER
31, 1996
Institutional
Shares 19.61 1.16 (0.28) (1.16) (0.26) 19.07 4.71 0.84 6.10 31
FOR THE PERIOD DECEMBER 12, 1994 (COMMENCEMENT OF OPERATIONS) THROUGH
OCTOBER 31, 1995
Institutional
Shares 18.00 1.12 1.61 (1.12) -- 19.61 15.59 0.88(d) 6.64(d) 58
<CAPTION>
NET ASSETS
AT END OF
PERIOD
(IN 000'S)
----------
<S> <C>
FOR THE SIX MONTHS ENDED APRIL 30,
1997 (UNAUDITED)
Institutional
Shares $167,989
Service
Shares(a) 203
FOR THE YEAR ENDED OCTOBER
31, 1996
Institutional
Shares 151,205
FOR THE PERIOD DECEMBER 12, 1994 (COMMENCEMENT OF OPERATIONS) THROUGH
OCTOBER 31, 1995
Institutional
Shares 98,504
</TABLE>
- ----
(a) Service share activity commenced on January 2, 1997.
(b) Includes the balancing effect of calculating per share amounts.
(c) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no
sales charges. Total return would be reduced if sales charges were taken
into account.
(d) Annualized.
4
<PAGE>
THE COMMERCE FUNDS
BALANCED FUND
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
INCOME FROM DISTRIBUTIONS TO
INVESTMENT OPERATIONS SHAREHOLDERS
--------------------- ----------------------
NET
REALIZED
AND NET
UNREALIZED FROM NET ASSET
NET ASSET GAIN REALIZED VALUE,
VALUE, NET ON FROM NET GAIN END
BEGINNING INVESTMENT INVEST- INVESTMENT ON OF TOTAL
OF PERIOD INCOME MENTS(B) INCOME INVESTMENTS PERIOD RETURN(C)
--------- ---------- ---------- ---------- ----------- ------ ---------
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
- -------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Institutional Shares $24.00 $0.29 $0.94 $(0.29) $(1.26) $23.68 5.25%
Service Shares(a) 23.25 0.13 0.43 (0.13) -- 23.68 2.42
FOR THE YEAR ENDED OCTOBER 31, 1996
- ------------------
Institutional Shares 22.10 0.54 2.56 (0.54) (0.66) 24.00 14.45
FOR THE PERIOD DECEMBER 12, 1994 (COMMENCEMENT OF OPERATIONS) THROUGH OCTOBER
31, 1995
- ---------------------------------------------
Institutional Shares 18.00 0.59 4.06 (0.55) -- 22.10 26.14
</TABLE>
<TABLE>
<CAPTION>
RATIOS ASSUMING
NO WAIVER OF
INVESTMENT ADVISORY
FEES OR EXPENSE
REIMBURSEMENTS
---------------------
NET
RATIO RATIO ASSETS RATIO RATIO
OF NET OF NET AT OF OF NET
EXPENSES INVESTMENT END EXPENSES INVESTMENT
TO INCOME AVERAGE OF TO INCOME
AVERAGE TO AVERAGE PORTFOLIO COMMIS- PERIOD AVERAGE TO AVERAGE
TOTAL NET NET TURNOVER SION (IN NET NET
RETURN(C) ASSETS ASSETS RATE RATE 000'S) ASSETS ASSETS
--------- -------- ---------- --------- ------- ------- -------- ----------
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
- -------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Institutional Shares 5.25% 1.13%(d) 2.58%(d) 14% $0.0580 $81,040 1.52%(d) 2.19%(d)
Service Shares(a) 2.42 1.38(d) 2.49(d) 14 0.0580 521 1.77(d) 2.10(d)
FOR THE YEAR ENDED OCTOBER 31, 1996
- ------------------
Institutional Shares 14.45 1.13 2.47 58 0.0764 69,880 1.45 2.15
FOR THE PERIOD DECEMBER 12, 1994 (COMMENCEMENT OF OPERATIONS) THROUGH OCTOBER
31, 1995
- ---------------------------------------------
Institutional Shares 26.14 1.13(d) 3.28(d) 59 -- 48,329 1.45(d) 2.96(d)
</TABLE>
- ------
(a) Service share activity commenced on January 2, 1997.
(b) Includes the balancing effect of calculating per share amounts.
(c) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no sales
charges. Total return would be reduced if sales charges were taken into
account.
(d) Annualized.
5
<PAGE>
THE COMMERCE FUNDS
GROWTH AND INCOME FUND
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
INCOME FROM DISTRIBUTIONS TO
INVESTMENT OPERATIONS SHAREHOLDERS
--------------------- -------------------
NET
REALIZED FROM NET
AND NET ASSET
NET ASSET UNREALIZED REALIZED VALUE,
VALUE, NET LOSS ON FROM NET GAIN ON END
BEGINNING INVESTMENT INVEST- INVESTMENT INVEST- OF TOTAL
OF PERIOD INCOME MENTS(B) INCOME MENTS PERIOD RETURN(C)
--------- ---------- ---------- ---------- -------- ------ ---------
FOR THE PERIOD MARCH 3, 1997(A) THROUGH APRIL 30, 1997 (UNAUDITED)
- -------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Institutional Shares $18.00 $0.04 $(0.13) -- -- $17.91 (0.50)%
Service Shares 18.00 0.02 (0.12) -- -- 17.90 (0.56)
</TABLE>
<TABLE>
<CAPTION>
RATIOS ASSUMING
NO EXPENSE
REIMBURSEMENTS
---------------------
RATIO RATIO RATIO RATIO
OF NET OF NET OF NET OF NET
EXPENSES INVESTMENT NET EXPENSES INVESTMENT
TO INCOME ASSETS AT TO LOSS TO
AVERAGE TO AVERAGE PORTFOLIO AVERAGE END AVERAGE AVERAGE
NET NET TURNOVER COMMISSION OF PERIOD NET NET
ASSETS ASSETS RATE RATE (IN 000'S) ASSETS ASSETS
-------- ---------- --------- ---------- ---------- -------- ----------
FOR THE PERIOD MARCH 3, 1997(A) THROUGH APRIL 30, 1997 (UNAUDITED)
- -------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Institutional Shares 1.20%(d) 1.76%(d) 1% $0.0794 $12,039 3.14%(d) (0.18)%(d)
Service Shares 1.45(d) 1.46(d) 1 0.0794 369 3.39(d) (0.48)(d)
</TABLE>
- ------
(a) Commencement of operations.
(b) Includes the balancing effect of calculating per share amounts.
(c) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no sales
charges. Total return would be reduced if sales charges were taken into
account.
(d) Annualized.
6
<PAGE>
THE COMMERCE FUNDS
GROWTH FUND
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
INCOME FROM DISTRIBUTIONS TO
INVESTMENT OPERATIONS SHAREHOLDERS
--------------------- -------------------
NET RATIO
REALIZED NET RATIO OF NET
AND FROM NET ASSET OF NET INVESTMENT
NET ASSET UNREALIZED REALIZED VALUE, EXPENSES INCOME
VALUE, NET GAIN ON FROM NET GAIN ON END TO AVERAGE TO AVERAGE PORTFOLIO
BEGINNING INVESTMENT INVEST- INVESTMENT INVEST- OF TOTAL NET NET TURNOVER
OF PERIOD INCOME MENTS(B) INCOME MENTS PERIOD RETURN(C) ASSETS ASSETS RATE
--------- ---------- ---------- ---------- -------- ------ --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30,
1997 (UNAUDITED)
Institutional
Shares $28.95 $0.08 $3.13 $(0.08) $(1.92) $30.16 11.51% 1.10%(d) 0.56%(d) 19%(d)
Service
Shares(a) 28.26 0.03 1.89 (0.03) -- 30.15 6.79 1.35J(d) 0.33(d) 19
FOR THE YEAR ENDED OCTOBER 31, 1996
Institutional
Shares 24.68 0.19 5.40 (0.19) (1.13) 28.95 23.43 1.08 0.72 36
FOR THE PERIOD DECEMBER 12, 1994 (COMMENCEMENT OF OPERATIONS) THROUGH OCTO-
BER 31, 1995
Institutional
Shares 18.00 0.15 6.68 (0.15) -- 24.68 38.06 1.11(d) 0.81(d) 33
<CAPTION>
NET
ASSETS
AT
END
OF
AVERAGE PERIOD
COMMISSION (IN
RATE 000'S)
---------- --------
<S> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30,
1997 (UNAUDITED)
Institutional
Shares $0.0548 $266,031
Service
Shares(a) 0.0548 2,224
FOR THE YEAR ENDED OCTOBER 31, 1996
Institutional
Shares 0.0654 208,908
FOR THE PERIOD DECEMBER 12, 1994 (COMMENCEMENT OF OPERATIONS) THROUGH OCTO-
BER 31, 1995
Institutional
Shares -- 141,735
</TABLE>
- ----
(a) Service share activity commended on January 2, 1997.
(b) Includes the balancing effect of calculating per share amounts.
(c) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no
sales charges. Total return would be reduced if sales charges were taken
into account.
(d) Annualized.
7
<PAGE>
THE COMMERCE FUNDS MIDCAP FUND FINANCIAL HIGHLIGHTS SELECTED DATA FOR A SHARE
OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
INCOME FROM DISTRIBUTIONS TO
INVESTMENT OPERATIONS SHAREHOLDERS
---------------------- ----------------------
NET
REALIZED RATIO
AND RATIO OF NET
UNREALIZED NET OF NET INVESTMENT
NET ASSET GAIN (LOSS) FROM NET ASSET EXPENSES LOSS
VALUE, NET ON FROM NET REALIZED VALUE, TO AVERAGE TO AVERAGE PORTFOLIO
BEGINNING INVESTMENT INVEST- INVESTMENT GAIN ON END OF TOTAL NET NET TURNOVER
OF PERIOD LOSS MENTS(B) INCOME INVESTMENTS PERIOD RETURN(C) ASSETS ASSETS RATE
--------- ---------- ----------- ---------- ----------- ------ --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
- -----------------------------------------------------
Institutional
Shares $28.06 $(0.06) $(1.63) -- $(0.29) $26.08 (6.10)% 1.25(d) (0.57)%(d) 36%
Service
Shares(a) 28.64 (0.04) (2.53) -- -- 26.07 (8.97) 1.50(d) (0.80)(d) 36
FOR THE YEAR ENDED OCTOBER 31, 1996
- -----------------------------------------------------
Institutional
Shares 25.30 (0.07) 3.51 -- (0.68) 28.06 13.78 1.22 (0.37) 71
FOR THE PERIOD DECEMBER 12, 1994 (COMMENCEMENT OF OPERATIONS) THROUGH OCTOBER
31, 1995
- -------------------------------------------------------------------------------
Institutional
Shares 18.00 (0.04) 7.34 -- -- 25.30 40.56 1.32(d) (0.29)(d) 59
<CAPTION>
NET
ASSETS AT
AVERAGE END
COMMIS- OF PERIOD
SION RATE (IN 000'S)
--------- ----------
<S> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
- ------------------------------------------------------------
Institutional
Shares $0.0608 $77,067
Service
Shares(a) 0.0608 93
FOR THE YEAR ENDED OCTOBER 31, 1996
- ------------------------------------------------------------
Institutional
Shares 0.0692 74,641
FOR THE PERIOD DECEMBER 12, 1994 (COMMENCEMENT OF OPERATIONS) THROUGH OCTOBER
31, 1995
- -------------------------------------------------------------------------------
Institutional
Shares -- 41,665
</TABLE>
- ----
(a) Service share activity commenced on January 2, 1997.
(b) Includes the balancing effect of calculating per share amounts.
(c) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of the
investment at the net asset value at the end of the period and no sales
charges. Total return would be reduced if sales charges were taken into
account.
(d) Annualized.
8
<PAGE>
THE COMMERCE FUNDS
INTERNATIONAL EQUITY FUND
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
INCOME FROM DISTRIBUTIONS TO
INVESTMENT OPERATIONS SHAREHOLDERS
------------------------------- -----------------
NET
REALIZED
NET AND
REALIZED UNREALIZED
AND GAIN (LOSS) FROM NET NET
UNREALIZED ON FOREIGN FROM REALIZED ASSET
NET ASSET NET GAIN (LOSS) CURRENCY NET GAIN VALUE,
VALUE, INVEST- ON RELATED INVEST- ON END
BEGINNING MENT INVEST- TRANS- MENT INVEST- OF TOTAL
OF PERIOD INCOME MENTS(B) ACTIONS(B) INCOME MENTS PERIOD RETURN(C)
--------- ------- ----------- ----------- ------- -------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
Institutional Shares $20.96 $0.03 $2.54 $(1.43) $(0.10) $(0.24) $21.76 5.50%
Service Shares(a) 21.70 0.05 (0.01) 0.01 -- -- 21.75 0.23
FOR THE YEAR ENDED OCTOBER 31, 1996
Institutional Shares 18.64 0.11 3.02 (0.67) (0.07) (0.07) 20.96 13.25
FOR THE PERIOD DECEMBER 12, 1994 (COMMENCEMENT OF OPERATIONS) THROUGH OCTOBER 31, 1995
Institutional Shares 18.00 0.12 0.95 (0.40) (0.03) -- 18.64 3.73
</TABLE>
<TABLE>
<CAPTION>
RATIOS ASSUMING
NO WAIVER OF
INVESTMENT ADVISORY
FEES OR EXPENSE
REIMBURSEMENTS
--------------------
RATIO RATIO
RATIO OF NET NET RATIO OF OF NET
OF NET INVESTMENT ASSETS EXPENSES INVESTMENT
EXPENSES INCOME AVERAGE AT END TO (LOSS) TO
TO AVERAGE TO AVERAGE PORTFOLIO COM- OF AVERAGE AVERAGE
NET NET TURNOVER MISSION PERIOD NET NET
ASSETS ASSETS RATE RATE (IN 000'S) ASSETS ASSETS
---------- ---------- --------- ------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED APRIL 30, 1997 (UNAUDITED)
Institutional Shares 1.72%(d) 0.31%(d) 11% $0.0009 $63,680 2.33%(d) (0.30)%(d)
Service Shares(a) 1.97(d) 2.09(d) 11 0.0009 68 2.58(d) 1.48(d)
FOR THE YEAR ENDED OCTOBER 31, 1996
Institutional Shares 1.72 0.74 21 0.0147 51,589 2.64 (0.18)
FOR THE PERIOD DECEMBER 12, 1994 (COMMENCEMENT OF OPERATIONS) THROUGH OCTOBER 31, 1995
Institutional Shares 1.81(d) 1.06(d) 25 -- 21,014 3.50(d) (0.63)(d)
</TABLE>
- ------
(a) Commencement of operations.
(b) Includes the balancing effect of calculating per share amounts.
(c) Assumes investment of the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no sales
charges. Total return would be reduced if a sales charge were taken into
account.
(d) Annualized.
9
<PAGE>
The following bullet point is added to page 33 under "When There Is No Sales
Charge":
. financial planners and their clients
10
<PAGE>
[LOGO] COMMERCE FUNDS(TM)
THE SHORT-TERM GOVERNMENT FUND
THE BOND FUND
THE BALANCED FUND
THE GROWTH AND INCOME FUND
THE GROWTH FUND
THE MIDCAP FUND
THE INTERNATIONAL EQUITY FUND
March 1, 1997
Institutional Shares
<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 nine investment portfolios, each of which has a separate
pool of assets with separate investment objectives and policies. However, this
Prospectus relates only to the offering of the Institutional Shares of the
Short-Term Government, Bond, Balanced, Growth and Income, Growth, MidCap and
International Equity Funds (individually, a "Fund" and collectively, the
"Funds"). 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 AND INCOME FUND seeks both capital appreciation and current
income. The Fund pursues these objectives through investment in a diversified
portfolio of equity securities of companies which represent excellent value
relative to their current price and provide, on average, a current yield in
excess of the S&P 500 Stock Index.
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 MIDCAP FUND (formerly 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.
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 March 1, 1997) 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.
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.
MARCH 1, 1997
<PAGE>
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 describes the Institutional Shares in each Fund.
Institutional Shares are offered primarily to (i) investors maintaining
qualified accounts at bank and trust institutions, including institutions
affiliated with Commerce Bancshares, Inc. and its subsidiaries, (ii)
participants in employer-sponsored defined contribution plans, (iii) any
investor who was a shareholder in The Commerce Funds prior to January 1, 1997
and (iv) employees, directors, advisory directors, officers and retirees (as
well as their spouses and legal dependents) of Commerce Bancshares, Inc.,
Goldman, Sachs & Co., State Street Bank and Trust Company and National
Financial Data Services, Inc. or their subsidiaries or affiliates.
The Commerce Funds is also authorized to issue an additional class of
shares, Service Shares, in each of the Short-Term Government Fund, Bond Fund,
Balanced Fund, Growth and Income Fund, Growth Fund, MidCap Fund and
International Equity Fund. Service Shares are offered under a separate
prospectus primarily to individuals, corporations or other entities,
purchasing either for their own accounts or for the accounts of others, and to
qualified banks, savings and loan associations, and broker/dealers on behalf
of their customers.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
SUMMARY OF EXPENSES......................................................... 4
FINANCIAL HIGHLIGHTS........................................................ 6
INVESTMENT OBJECTIVES AND POLICIES.......................................... 8
Short-Term Government Fund................................................ 8
Bond Fund................................................................. 9
Balanced Fund............................................................. 11
Growth and Income Fund.................................................... 13
Growth Fund............................................................... 14
MidCap Fund............................................................... 15
International Equity Fund................................................. 16
ADDITIONAL RISK CONSIDERATIONS.............................................. 18
OTHER INVESTMENT PRACTICES.................................................. 19
INVESTMENT RESTRICTIONS..................................................... 30
SHAREOWNER GUIDE............................................................ 31
HOW CAN I CONTACT THE COMMERCE FUNDS?..................................... 31
HOW TO BUY INSTITUTIONAL SHARES........................................... 31
What Is The Minimum Investment For Each Fund?........................... 31
How Are Institutional Shares Priced?.................................... 32
How Do I Buy Institutional Shares?...................................... 36
What Price Will I Receive When I Buy Institutional Shares?.............. 37
What Else Should I Know About Buying Institutional Shares?.............. 37
HOW TO SELL INSTITUTIONAL SHARES.......................................... 37
How Do I Sell My Institutional Shares?.................................. 37
What Price Will I Receive For Institutional Shares I Want To Sell?...... 39
How Quickly Can I Receive Proceeds From A Sale?......................... 39
What If I Want To Reinvest Sales Proceeds?.............................. 40
DIVIDEND AND DISTRIBUTION POLICIES........................................ 40
SHAREOWNER FEATURES AND PRIVILEGES........................................ 41
Can I Use The Funds In My Retirement Plan?.............................. 41
What Is Dollar Cost Averaging And How Can I Implement It?............... 42
Can I Exchange My Investment From One Commerce Fund To Another?......... 42
Can I Have Exchanges Made Automatically?................................ 43
Can I Reinvest Dividends From One Commerce Fund In Another?............. 43
How Do I Obtain Other Information About My Account?..................... 44
Can I Make Transactions By Telephone?................................... 44
Can I Arrange Automatic Withdrawals?.................................... 44
THE BUSINESS OF THE COMMERCE FUNDS.......................................... 45
Board of Trustees......................................................... 45
Service Providers......................................................... 45
Shareholder Administrative Services Plan.................................. 49
Expenses.................................................................. 50
TAX INFORMATION............................................................. 50
HOW PERFORMANCE IS MEASURED................................................. 51
OTHER INFORMATION........................................................... 52
About The Commerce Funds.................................................. 52
Voting Rights............................................................. 53
Shareowner Reports........................................................ 54
Inquiries................................................................. 54
ACCOUNT APPLICATION FORM
</TABLE>
3
<PAGE>
SUMMARY OF EXPENSES INSTITUTIONAL SHARES
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
GOVERNMENT BOND BALANCED GROWTH AND GROWTH MIDCAP INTERNATIONAL
FUND FUND FUND INCOME FUND FUND FUND(1) EQUITY FUND
---------- ---- -------- ----------- ------ ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
SHAREOWNER TRANSACTION
EXPENSES
Maximum Sales Charge
Imposed on Purchases
(as a percentage of
offering price)(2).... 2.00% 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 None
Deferred Sales Charge
Imposed on
Redemptions........... None None None None None None None
Redemption Fees........ None None None None None None None
Exchange Fees(3)....... None None None None None None None
ANNUAL FUND OPERATING
EXPENSES
(as a percentage of
average daily net
assets)
Management Fees (after
fee waivers)(4)....... 0.30% 0.50% 0.75% 0.75% 0.75% 0.75% 0.83%
Other Expenses (after
fee waivers and
expense
reimbursements)(5).... 0.38% 0.34% 0.38% 0.45% 0.33% 0.47% 0.89%
---- ---- ---- ---- ---- ---- ----
Total Fund Operating
Expenses (after fee
waivers and expense
reimbursements)(6).... 0.68% 0.84% 1.13% 1.20% 1.08% 1.22% 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............... $ 27 $ 43 $ 46 $ 47 $ 46 $ 47 $ 52
Three Years............ $ 41 $ 61 $ 70 $ 72 $ 68 $ 72 $ 87
Five Years............. $ 57 $ 80 $ 95 $ 99 $ 92 $100 $125
Ten Years.............. $102 $135 $168 $175 $162 $178 $231
</TABLE>
- --------
(1) Formerly the Aggressive Growth Fund.
(2) Certain investors may not be charged a sales charge. See "Shareowner
Guide--When There is No Sales Charge."
(3) 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.
4
<PAGE>
(4) 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. The Advisor reserves the right to reduce or
discontinue fee waivers at any time. In the event that the "Total Fund
Operating Expenses" of the International Equity Fund fall below 1.72%, the
Advisor will reduce its waiver of investment advisory fees by the
difference between actual "Total Fund Operating Expenses" and 1.72%.
(5) In addition to the advisory fee waivers referred to in note 4, during the
last fiscal year the Advisor voluntarily reimbursed expenses to the extent
necessary for the Short-Term Government, Balanced and International Equity
Funds to maintain annual expense ratios of not more than 0.68%, 1.13% and
1.72%, respectively, excluding interest, taxes and extraordinary expenses,
and the Advisor intends to voluntarily reimburse such expenses during the
current year to the extent necessary for the Short-Term Government, Bond,
Balanced, Growth and Income, Growth and International Equity Funds to
maintain an annual expense ratio of not more than 0.68%, 0.88%, 1.13%,
1.20%, 1.13% and 1.72%, respectively. No expense reimbursements or waivers
were necessary in the last fiscal year with respect to the Bond and Growth
Funds. 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.
(6) Without the fee waivers and expense reimbursements described above, "Other
Expenses" (including Shareowner Servicing Fees) would be 0.61%, 0.45%,
1.13%, and 1.14% and "Total Fund Operating Expenses" would be 1.11%,
1.45%, 1.88%, and 2.64% of the average daily net assets of the Short-Term
Government, Balanced, Growth and Income and International Equity 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 with respect to the Short-Term Government, Bond, Balanced, Growth,
MidCap and International Equity Funds is based on the expenses incurred by
those Funds during the last fiscal year. The information presented for the
Growth and Income Fund is based on expenses expected to be incurred in the
current fiscal year. The expense information included in the table and
hypothetical example above relates only to Institutional Shares (the class
being offered by this Prospectus) and should not be considered as
representative of past or future expenses, except as described above. The
Commerce Funds also offer Service Shares, which are subject to different fees
and expenses (which affect performance). Information regarding Service Shares
may be obtained from The Commerce Funds by calling 1-800-305-2140. 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, which are included in "Other Expenses." 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 Institutional Shares" on
page 31 of this Prospectus.
For more information about shareowner transaction expenses and The Commerce
Funds' operating expenses, see "Shareowner Guide" and "The Business of The
Commerce Funds."
- -------------------------------------------------------------------------------
THE EXAMPLES SHOWN ABOVE SHOULD NOT BE CONSIDERED REPRESENTATIONS OF FUTURE
INVESTMENT RETURN OR OPERATING EXPENSES. ACTUAL OPERATING EXPENSES AND
INVESTMENT RETURN MAY BE GREATER OR LESSER THAN THOSE INDICATED. INFORMATION
ABOUT THE ACTUAL PERFORMANCE OF THE FUNDS OR 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
PAGE OF THIS PROSPECTUS.
- -------------------------------------------------------------------------------
5
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights presented below set forth certain information
concerning the investment results for the Institutional Shares (of the Fund
specified) of each Fund outstanding during the periods indicated. Prior to
January 2, 1997, the Fund offered only one class of shares. On that date, the
Funds began offering Institutional Shares to institutional investors as
described in this Prospectus and Service Shares to retail investors as
described in a separate Prospectus. The information for the fiscal years ended
October 31, 1996 and 1995 has been audited by KPMG Peat Marwick LLP,
independent accountants for the Funds, whose report thereon is contained in
The Commerce Funds' Annual Report. This information should be read in
conjunction with the financial statements and related notes incorporated by
reference and attached to the Statement of Additional Information. These
reports also contain performance information and may be obtained free of
charge by contacting The Commerce Funds at the address or telephone number on
page 31 of this Prospectus. During the periods shown, the Growth and Income
Fund had not commenced operations. Accordingly, there are no financial
highlights for this Fund.
<TABLE>
<CAPTION>
INCOME FROM DISTRIBUTIONS TO
INVESTMENT OPERATIONS SHAREHOLDERS
--------------------- -------------------------
NET
REALIZED
AND NET
UNREALIZED ASSET
NET ASSET GAIN VALUE,
VALUE, NET (LOSS) ON FROM NET FROM NET END
BEGINNING INVESTMENT INVEST- INVESTMENT REALIZED GAIN OF TOTAL
OF PERIOD INCOME MENTS(b) INCOME ON INVESTMENTS PERIOD RETURN(c)
--------- ---------- ---------- ---------- -------------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
SHORT-TERM GOVERNMENT FUND
- -------------------------------------------------------------------------------------------
Year ended:
10/31/96....... $18.83 $1.09 $(0.18) $(1.09) $(0.22) $18.43 5.02%
12/12/94(a) to
10/31/95....... 18.00 1.06 0.83 (1.06) -- 18.83 10.72
BOND FUND
- -------------------------------------------------------------------------------------------
Year ended:
10/31/96....... 19.61 1.16 (0.28) (1.16) (0.26) 19.07 4.71
12/12/94(a) to
10/31/95....... 18.00 1.12 1.61 (1.12) -- 19.61 15.59
BALANCED FUND
- -------------------------------------------------------------------------------------------
Year ended:
10/31/96....... 22.10 0.54 2.56 (0.54) (0.66) 24.00 14.45
12/12/94(a) to
10/31/95....... 18.00 0.59 4.06 (0.55) -- 22.10 26.14
<CAPTION>
RATIOS ASSUMING
NO WAIVER OF
INVESTMENT ADVISORY
FEES OR EXPENSE
REIMBURSEMENTS
---------------------
RATIO RATIO
RATIO OF NET RATIO OF NET
OF NET INVESTMENT NET OF INVESTMENT
EXPENSES INCOME AVERAGE ASSETS AT EXPENSES INCOME TO
TO AVERAGE TO AVERAGE PORTFOLIO COMMIS- END TO AVERAGE AVERAGE
NET NET TURNOVER SION OF PERIOD NET NET
ASSETS ASSETS RATE RATE(e) (IN 000'S) ASSETS ASSETS
---------- ---------- --------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
SHORT-TERM GOVERNMENT FUND
- ------------------------------------------------------------------------------------------
Year ended:
10/31/96....... 0.68% 5.90% 12% -- $33,839 1.11% 5.47%
12/12/94(a) to
10/31/95....... 0.68(d) 6.38(d) 158 -- 20,211 1.14(d) 5.92(d)
BOND FUND
- ------------------------------------------------------------------------------------------
Year ended:
10/31/96....... 0.84 6.10 31 -- 151,205 0.84 6.10
12/12/94(a) to
10/31/95....... 0.88(d) 6.64(d) 58 -- 98,504 0.88(d) 6.64(d)
BALANCED FUND
- ------------------------------------------------------------------------------------------
Year ended:
10/31/96....... 1.13 2.47 58 $0.07640 69,880 1.45 2.15
12/12/94(a) to
10/31/95....... 1.13(d) 3.28(d) 59 -- 48,329 1.45(d) 2.96(d)
</TABLE>
- ------
(a) Commencement of operations.
(b) Includes the balancing effect of calculating per share amounts.
(c) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no sales
charges. Total return would be reduced if sales charges were taken into
account.
(d) Annualized.
(e) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate on security transactions
on which commissions are charged. This rate may vary due to various types
of transactions and number of security trades executed.
6
<PAGE>
<TABLE>
<CAPTION>
INCOME FROM DISTRIBUTIONS TO
INVESTMENT OPERATIONS SHAREHOLDERS
---------------------------------- -------------------------
NET
REALIZED AND
NET UNREALIZED
REALIZED LOSS ON NET
AND FOREIGN ASSET
NET ASSET NET UNREALIZED CURRENCY VALUE,
VALUE, INVESTMENT GAIN ON RELATED FROM NET FROM NET END
BEGINNING INCOME INVEST- TRANS- INVESTMENT REALIZED GAIN OF TOTAL
OF PERIOD (LOSS) MENTS(b) ACTIONS(b) INCOME ON INVESTMENTS PERIOD RETURN(c)
--------- ---------- ---------- ------------ ---------- -------------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GROWTH FUND
- --------------------------------------------------------------------------------------------------------
Year ended:
10/31/96....... $24.68 $0.19 $5.40 -- $(0.19) $(1.13) $28.95 23.43%
12/12/94(a) to
10/31/95....... 18.00 0.15 6.68 -- (0.15) -- 24.68 38.06
MIDCAP FUND(F)
- --------------------------------------------------------------------------------------------------------
Year ended:
10/31/96....... 25.30 (0.07) 3.51 -- -- (0.68) 28.06 13.78
12/12/94(a) to
10/31/95....... 18.00 (0.04) 7.34 -- -- -- 25.30 40.56
INTERNATIONAL EQUITY FUND
- --------------------------------------------------------------------------------------------------------
Year ended:
10/31/96....... 18.64 0.11 3.02 (0.67) (0.07) (0.07) 20.96 13.25
12/12/94(a) to
10/31/95....... 18.00 0.12 0.95 (0.40) (0.03) -- 18.64 3.73
<CAPTION>
RATIOS ASSUMING
NO WAIVER OF
INVESTMENT ADVISORY
FEES OR EXPENSE
REIMBURSEMENTS
---------------------
RATIO RATIO
RATIO OF NET RATIO OF NET
OF NET INVESTMENT NET OF INVESTMENT
EXPENSES INCOME AVERAGE ASSETS AT EXPENSES INCOME
TO AVERAGE (LOSS) PORTFOLIO COMMISS- END TO AVERAGE (LOSS) TO
NET TO AVERAGE TURNOVER ION OF PERIOD NET AVERAGE
ASSETS NET ASSETS RATE RATE(e) (IN 000'S) ASSETS NET ASSETS
---------- ---------- --------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
GROWTH FUND
- --------------------------------------------------------------------------------------------
Year ended:
10/31/96....... 1.08% 0.72% 36% $0.0654 $208,908 1.08% 0.72%
12/12/94(a) to
10/31/95....... 1.11(d) 0.81(d) 33 -- 141,735 1.11(d) 0.81(d)
MIDCAP FUND(F)
- --------------------------------------------------------------------------------------------
Year ended:
10/31/96....... 1.22 (0.37) 71 0.0692 74,641 1.22 (0.37)
12/12/94(a) to
10/31/95....... 1.32(d) (0.29)(d) 59 -- 41,665 1.32(d) (0.29)(d)
INTERNATIONAL EQUITY FUND
- --------------------------------------------------------------------------------------------
Year ended:
10/31/96....... 1.72 0.74 21 0.0147 51,589 2.64 (0.18)
12/12/94(a) to
10/31/95....... 1.81(d) 1.06(d) 25 -- 21,014 3.50(d) (0.63)(d)
</TABLE>
- ------
(a) Commencement of operations.
(b) Includes the balancing effect of calculating per share amounts.
(c) Assumes investment of the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no sales
charges. Total return would be reduced if a sales charge were taken into
account.
(d) Annualized.
(e) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate on security transactions
on which commissions are charged. This rate may vary due to various types
of transactions and number of security trades executed.
(f) Formerly the Aggressive Growth Fund.
7
<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 maturities of average lives in excess of five years in an amount not to
exceed 25% of its total assets. In addition, U.S. Government Obligations with
nominal maturities 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
8
<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
9
<PAGE>
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 [PLUS/MINUS] 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 semi-annually and matures in five years will
have a duration of less than five years, which reflects the semi-annual cash
flows resulting from coupon payments. Duration also generally defines the
effect of interest rate changes on bond prices. Generally, if interest rates
increase by one percent, the value of a security having an effective duration
of five years would decrease in value by five percent.
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 AND INCOME FUND
INVESTMENT OBJECTIVE
THE INVESTMENT OBJECTIVE OF THE GROWTH AND INCOME FUND IS TO SEEK BOTH
CAPITAL APPRECIATION AND CURRENT INCOME. THE FUND PURSUES THIS OBJECTIVE
THROUGH INVESTMENT IN A DIVERSIFIED PORTFOLIO OF EQUITY SECURITIES OF
COMPANIES WHICH REPRESENT EXCELLENT VALUE RELATIVE TO THEIR CURRENT PRICE AND
PROVIDE, ON AVERAGE, A CURRENT YIELD IN EXCESS OF THE S&P 500 STOCK INDEX.
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
represent excellent value relative to their current price in that such
companies, in the aggregate, sell at a lower price-to-book value, a lower
price-to-earnings ratio, and a higher yield 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 investment 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
"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
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.
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 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, as described under "Growth and Income Fund--Investment Strategy"
above.
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
"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
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.
MIDCAP FUND
INVESTMENT OBJECTIVE
THE INVESTMENT OBJECTIVE OF THE MIDCAP 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 less than that of the largest company in the S&P 400 Mid-Cap
Index. 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.
In selecting stocks for the MidCap Fund, the Advisor employs a "bottom-up"
security analysis, as described under "Growth and Income 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.
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
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.
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.
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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 Income, Growth and MidCap 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 and Income, Growth, MidCap and International Equity
Funds may invest in ADRs, some of which may not be sponsored by the issuing
institution. A non-sponsored depository may not be required to disclose
material information that a sponsored depository would be required to provide
under its contractual relationship with the issuer. Accordingly, there may not
be a correlation between such information and the market value of such
securities.
Although a Fund may invest in securities denominated in foreign currencies,
its portfolio securities and other assets are valued in U.S. dollars. Currency
exchange rates may fluctuate significantly over short periods of time causing,
together with other factors, a Fund's net asset value to fluctuate as well.
Currency exchange rates generally are determined by the forces of supply and
demand in the foreign exchange markets and the relative merits of investments
in different countries, actual or anticipated changes in interest rates and
other complex factors, as seen from an international perspective. Currency
exchange rates also may be affected unpredictably by the intervention or the
failure to intervene by U.S. or foreign governments or central banks, or by
currency controls or political developments in the U.S. or abroad. To the
extent that a Fund's total assets, adjusted to reflect the Fund's net position
after giving effect to currency transactions, are denominated in the
currencies of foreign countries, the Fund will be more susceptible to the risk
of adverse economic and political developments within those countries. In
addition, the respective net currency positions of the International Equity
Fund may expose it to risks independent of its securities positions. Although
the net long and short foreign currency exposure of the International Equity
Fund will not exceed its total asset value, to the extent that the Fund is
fully invested in foreign securities while also maintaining currency
positions, it may be exposed to greater risk than it would have if it did not
maintain the currency positions. The Funds investing in foreign securities are
also subject to the possible imposition of exchange control regulations or
freezes on convertibility of currency.
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 assets, as permitted by
applicable law, 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
assets, as permitted by applicable law, 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 assets, as permitted by applicable law, 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 (e.g., 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 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 assets, as
permitted by applicable law, 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, as permitted by applicable law, 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.
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 in value at all times 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 and Income, Growth, MidCap 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 Income, Growth and MidCap 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 assets, as permitted by applicable law,
or will otherwise cover its position in accordance with applicable
requirements of the SEC.
CONVERTIBLE SECURITIES
The Bond, Balanced, Growth and Income, Growth, MidCap and International
Equity Funds may invest in convertible securities, including bonds, notes and
preferred stock, that may be converted into common stock either at a stated
price or within a specified period of time. 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.
29
<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. The Trust
expects that the Portfolio turnover rate will not exceed 100% for the Growth
and Income Fund for the current fiscal year. See "Financial Highlights" above
or "Portfolio Transactions" in the Statement of Additional Information for
historical portfolio turnover information for the other portfolios. Portfolio
turnover may result in the realization of short-term capital gains which are
taxable to shareowners as ordinary income.
OTHER INVESTMENT POLICIES AND RISK CONSIDERATIONS
Investment methods described in this Prospectus are among those which one or
more of the Funds have the power to utilize. Some may be employed on a regular
basis; others may not be used at all. Accordingly, reference to any particular
method or technique carries no implication that it will be utilized or, if it
is, that it will be successful.
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.
30
<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 INSTITUTIONAL 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.
31
<PAGE>
HOW ARE INSTITUTIONAL SHARES PRICED?
INSTITUTIONAL 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 CLASS CALCULATES ITS NET ASSET VALUE PER SHARE ("NAV") AS FOLLOWS:
NAV= (VALUE OF ASSETS ATTRIBUTABLE TO THE CLASS)--(LIABILITIES ATTRIBUTABLE TO
THE CLASS)
- --------------------------------------------------------------------------------
NUMBER OF OUTSTANDING SHARES OF THE CLASS
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 Class of a 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 for each Class of the International Equity
Fund. There may be variations in the net asset value per share of each Class
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% for each Fund
(except the Short-Term Government Fund, which is 2.00%) and may be less based
on the amount you invest, as shown in the following chart:
ALL FUNDS EXCEPT THE SHORT-TERM GOVERNMENT FUND:
<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.
SHORT-TERM GOVERNMENT FUND:
<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 $500,000........................... 2.00 2.04 1.80
$500,001 but less than $1,000,000............ 1.00 1.01 0.90
$1,000,001 or more........................... 0.00 0.00 0.00
</TABLE>
- --------
*Dealer's reallowance may be changed periodically.
32
<PAGE>
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.
WHEN THERE IS NO SALES CHARGE. There is no sales charge on Institutional
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 42;
. the Redemption Reinvestment Privilege described on page 40;
. 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., State Street Bank and Trust Company and National
Financial Data Services, Inc. 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;
. 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); and
. registered representatives of dealers who have entered into dealer
agreements with Goldman, Sachs & Co. to the extent permitted by such
firms.
33
<PAGE>
The Distributor may periodically waive all or a portion of the sales charge
for all investors with respect to the sales of shares of the Funds. The
Distributor may also offer special concessions to enable investors to purchase
Institutional 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 Institutional
Shares in a Fund must occur within five Business Days of the prior redemption
and must be evidenced by a confirmation of the redemption transaction. At the
time of purchase, The Commerce Funds must be notified that the purchase
qualifies for a purchase without a sales charge. Proceeds from the redemption
of shares on which no sales charges or commissions were paid would not qualify
for the special net asset value purchase program.
These sales charge exemptions are based on the type of investor and/or the
reduced sales effort that will be needed in obtaining Fund investments. In
order to take advantage of these exemptions, you must certify eligibility on
your account application.
RIGHTS OF ACCUMULATION. When you buy Institutional 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 Goldman
Sachs--Institutional Liquid Assets Prime Obligations Portfolio 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 Institutional 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 Institutional 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 (except the Short-Term Government Fund), 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 Institutional 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. Institutional 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 Institutional 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
34
<PAGE>
to obtain the reduced sales charge. When you sign a Letter of Intent, The
Commerce Funds holds in escrow a sufficient number of shares of the relevant
Class 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 Institutional 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 Institutional Shares.
You may include the value of all Institutional 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 Institutional 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.
35
<PAGE>
HOW DO I BUY INSTITUTIONAL SHARES?
You may purchase Institutional 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
31. Funds?" on page 31.
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 Class of shares 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 31.
</TABLE>
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.
36
<PAGE>
WHAT PRICE WILL I RECEIVE WHEN I BUY INSTITUTIONAL SHARES?
Your Institutional 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 INSTITUTIONAL 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 INSTITUTIONAL SHARES
HOW DO I SELL MY INSTITUTIONAL SHARES?
The Commerce Funds makes it easy to sell, or "redeem," all or part of your
Institutional Shares. The Commerce Funds does not charge you to sell
Institutional Shares. However, the value of the Institutional 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 Institutional Shares of
The Commerce Funds:
37
<PAGE>
HOW TO SELL INSTITUTIONAL 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 31.
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 39 with the
exception of redemptions sent to a shareowner
name/address of record in effect for no less
than 30 days.
In Person You are welcome to deliver your written request
signed by each owner, including each joint
owner, to a Commerce Bank branch office
location. A registered investment
representative can assist you.
By Telephone You may redeem Institutional 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 39).
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 31. 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 Institutional Shares must be signed by each
shareowner, including each joint owner.
38
<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 INSTITUTIONAL SHARES I WANT TO SELL?
The price you will receive when you sell your Institutional Shares is the
net asset value per share (as described on page 32) 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.
39
<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.
Institutional 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, Growth and Income and Growth Funds declare and distribute
dividends quarterly. The MidCap 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 and Income, Growth, MidCap 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 Institutional Shares without a sales charge;
(2) receive dividend distributions in cash and reinvest capital gain
distributions in additional Institutional 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.
40
<PAGE>
If you do not select an option when you open an account, all distributions
will automatically be reinvested in additional Institutional Shares of the
same Fund 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 Institutional Shares of the same Fund without a sales charge.
You may invest dividend or capital gain distributions from one Fund in
Shares of the corresponding class of another Fund of The Commerce Funds or in
Shares of the National Tax-Free Bond or Missouri Tax-Free Bond 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 Goldman Sachs--Institutional
Liquid Assets Prime Obligations Portfolio ("Money Market Fund") 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 Fund.
Your election to reinvest the distributions paid by a Fund in additional
Institutional 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 31.
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 31 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.
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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. Since
dollar cost averaging involves investment in securities regardless of
fluctuating price levels, you should consider your financial ability to
continue to purchase through periods of low price levels. You can invest
through Dollar Cost Averaging on your own or through the Automatic Investment
feature described above.
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 31.
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
Institutional Shares of another Fund of The Commerce Funds that offers
Institutional Shares. Exchanges may also be made to or from the National Tax-
Free Bond Fund, the Missouri Tax-Free Bond Fund and the Goldman Sachs--
Institutional Liquid Assets Prime Obligations Portfolio. NO ADDITIONAL SALES
CHARGE IS IMPOSED WHEN EXCHANGING INSTITUTIONAL SHARES OF A FUND FOR
INSTITUTIONAL SHARES OF ANOTHER FUND OFFERED BY THE COMMERCE FUNDS.
You can exchange Institutional Shares of one Fund for Institutional 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 Institutional Shares" on page 38. 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.
Institutional Shares purchased by check may not be exchanged until the check
has cleared.
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Institutional Shares being exchanged are subject to the minimum initial and
subsequent investment requirements as described on page 31. 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 31.
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 reserve 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 Institutional Shares at net asset value be automatically exchanged for
Institutional Shares of any other Fund of The Commerce Funds that offers
Institutional Shares. 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 INSTITUTIONAL SHARES OF ANY OTHER INVESTMENT PORTFOLIO OF THE
COMMERCE FUNDS THAT OFFERS INSTITUTIONAL SHARES 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.
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 31.
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 Institutional 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 (e.g., because of unusual market
activity), you are urged to consider redeeming your Institutional 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, semi-annual 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. Commerce Bank, N.A. (St. Louis) and Commerce Bank, N.A.
(Kansas City) (or its predecessor organizations) have each provided investment
management services to The Commerce Funds since 1994, to private and public
pension funds, endowments and foundations since 1946 and to individuals since
1906. As of December 31, 1996, the Advisor provided investment management and
advisory services for assets aggregating approximately $5.4 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 $6.5 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 calculated as a
percentage of the Funds' average daily net assets as stated below:
<TABLE>
<CAPTION>
STATED
ANNUAL RATE
-----------
<S> <C>
Short-Term Government Fund.................................... 0.50%
Bond Fund..................................................... 0.50%
Balanced Fund................................................. 1.00%
Growth and Income Fund........................................ 0.75%
Growth Fund................................................... 0.75%
MidCap Fund................................................... 0.75%
International Equity Fund..................................... 1.50%
</TABLE>
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. However, should the total fund operating expenses of the
International Equity Fund fall below 1.72%, the Advisor will reduce its waiver
of investment advisory fees by the difference between actual total fund
operating expenses and 1.72%.
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For the fiscal year ended October 31, 1996, the Advisor received advisory
fees (after fee waivers) at the following effective annual rates:
<TABLE>
<S> <C>
Short-Term Government Fund........................................... .30%
Bond Fund............................................................ .50%
Balanced Fund........................................................ .75%
Growth and Income Fund (a)........................................... n/a
Growth Fund.......................................................... .75%
MidCap Fund.......................................................... .75%
International Equity Fund............................................ .83%
</TABLE>
- --------
(a) Fund not operational as of October 31, 1996
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.
John Bartlett, CFA and Vice President and Senior Portfolio Manager, is the
person primarily responsible for the day-to-day management of the Growth and
Income Fund's investments. Mr. Bartlett joined Commerce Bank, N.A. (St. Louis)
in 1991. Prior to that time, Mr. Bartlett was Institutional Portfolio Manager
and Vice President of Boatmens' Trust Company in St. Louis, Missouri.
Joseph C. Williams III, CFA and Vice President, is the person primarily
responsible for the day-to-day management of the Growth Fund's investments.
Mr. Williams joined Commerce Bank, N.A. (Kansas City) in 1975 and became a
member of its Investment Management Group in 1977.
Joseph C. Williams III and Scott M. Colbert are the persons primarily
responsible for the day-to-day management of the equity and fixed-income
portions, respectively, of the Balanced Fund's investments.
Paul D. Cox, CFA, CIC and Vice President, is the person primarily
responsible for the day-to-day management of the MidCap 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
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<PAGE>
United Kingdom as successor to the business founded by Robert Fleming in 1873.
Flemings is a diversified investment organization which participates in a
global network of regional investment offices in New York, London, Zurich,
Geneva, Johannesburg, Bangkok, Bombay, Jakarta, Singapore, Tokyo, Hong Kong,
Manila, Kuala Lumpur, Seoul, and Taipei. As of December 31, 1996, T. Rowe
Price and its affiliates managed more than $95 billion of assets and Flemings
managed the U.S. equivalent of approximately $25 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, Mark J. T. Edwards, John R. Ford,
James B. M. Seddon, Benedict R. F. Thomas and David J. L. Warren.
Martin Wade joined Price-Fleming in 1979 and has 28 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 22 years of experience managing multicurrency fixed
income portfolios.
Christopher Alderson joined Price-Fleming in 1988 and has ten years of
experience with the Fleming Group in research and portfolio management. Mark
Edwards joined Price-Fleming in 1986 and has 16 years of experience in
financial analysis. John Ford joined Price-Fleming in 1982 and has 17 years of
experience with Fleming Group in research and portfolio management. James
Seddon joined Price-Fleming in 1987 and has nine years of experience in
investment management. Benedict Thomas joined Price-Fleming in 1988 and has
eight years of portfolio management experience. David Warren joined Price-
Fleming in 1984 and has 17 years of experience in equity research, fixed
income research and portfolio management.
The Board of Trustees of The Commerce Funds has authorized Price-Fleming to
utilize affiliates of Flemings and Jardine Fleming in the capacity of broker
in connection with the execution of the Fund's portfolio transactions if
Price-Fleming believes that doing so would result in an economic advantage (in
the form of lower execution costs or otherwise) being obtained by the Fund.
For the services provided and expenses assumed under the Sub-Advisory
Agreement, the Advisor will pay the Sub-Advisor a monthly management fee at an
annual rate of 0.75% of the first $20 million of 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 fiscal year ended
October 31, 1996, Price-Fleming received advisory fees at the effective annual
rate of 0.68% of the International Equity Fund's average daily net assets.
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<PAGE>
MORE ABOUT THE ADMINISTRATOR
Goldman Sachs Asset Management is the Administrator for the Funds. GSAM is a
separate operating division of Goldman, Sachs & Co., the Distributor of the
Funds. Under the Administration Agreement with The Commerce Funds, GSAM
administers the business affairs of The Commerce Funds, subject to the
supervision of the Board of Trustees, and in connection therewith, furnishes
The Commerce Funds with office facilities and is responsible for ordinary
clerical, recordkeeping and bookkeeping services required to be maintained by
The Commerce Funds (excluding those maintained by The Commerce Funds'
Custodian, Transfer Agent, Advisor and any Sub-Advisor), preparation and
filing of documents required to comply with federal and state securities laws,
supervising the activities of the Custodian and Transfer Agent, providing
assistance in connection with meetings of the Board of Trustees and
shareowners and other administrative services necessary to conduct the
business of The Commerce Funds. For these services and facilities, GSAM is
entitled to receive a monthly fee from each Fund at an annual rate of 0.15% of
its average daily net assets. For the fiscal year ended October 31, 1996, GSAM
received administration fees at the annual rate of 0.15% of the average daily
net assets of each Fund (except the Growth and Income Fund, which was not
operational during fiscal year).
SHAREHOLDER ADMINISTRATIVE SERVICES PLAN
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
Institutional shares of the Funds. 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 Institutional 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 Institutional
shares.
For the fiscal year ended October 31, 1996, the Trust on behalf of the
Short-Term Government Fund, Bond Fund, Balanced Fund, Growth Fund, MidCap Fund
and International Equity Fund paid fees at the annual rates of .02%, .01%,
.01%, .02%, .01%, and .01%, respectively, of each Fund's average daily net
assets attributable to Institutional Shares of the Funds, to Service
Organizations. For the fiscal year ended October 31, 1996, no fees were paid
on behalf of the Growth and Income Fund to Service Organizations.
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
49
<PAGE>
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 the advisory fees and/or reimburse expenses for the Short-
Term Government, Bond, Balanced, Growth and Income, 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 capital gain dividends are paid
in cash or reinvested in Fund shares.
If you are considering buying shares of a Fund on or just before the record
date of a dividend, you should be aware that the amount of the forthcoming
dividend payment, although in effect a return of capital, will be taxable to
you.
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<PAGE>
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.
51
<PAGE>
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 semi-annual basis.
Each Fund's total return and yield will be calculated separately for each
class of shares in existence. Because each class of shares may be subject to
different expenses, the total return and yield calculations with respect to
each class of shares for the same period will differ.
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) AS THE TRUSTEES MAY FROM TIME TO TIME CREATE AND ESTABLISH. PURSUANT
TO SUCH AUTHORITY, THE BOARD OF TRUSTEES HAS AUTHORIZED THE ISSUANCE OF AN
UNLIMITED NUMBER OF SHARES IN EACH
52
<PAGE>
SERIES, REPRESENTING INTERESTS IN NINE DIFFERENT FUNDS: THE SHORT-TERM
GOVERNMENT, BOND, BALANCED, GROWTH AND INCOME, GROWTH, MIDCAP, INTERNATIONAL
EQUITY, NATIONAL TAX-FREE BOND AND MISSOURI TAX-FREE BOND FUNDS. EACH OF THE
FOREGOING FUNDS, EXCEPT THE NATIONAL TAX-FREE BOND AND MISSOURI TAX-FREE BOND
FUNDS, OFFERS TWO CLASSES OF SHARES: INSTITUTIONAL SHARES AND SERVICE SHARES.
THE NATIONAL TAX-FREE BOND AND MISSOURI TAX-FREE BOND FUNDS EACH OFFER ONLY
ONE CLASS OF SHARES. FOR INFORMATION REGARDING THE FUNDS' SERVICE SHARES AND
THE NATIONAL TAX-FREE BOND AND MISSOURI TAX-FREE BOND FUNDS, WHICH ARE OFFERED
IN SEPARATE PROSPECTUSES, CONTACT THE COMMERCE FUNDS AT 1-800-305-2140.
Shares of each class of a Fund bear their pro rata portion of all operating
expenses paid by the Fund except that Service Shares bear the payments made
under the Distribution Plan and Shareholder Administrative Services Plan
applicable only to Service Shares at annual rates not to exceed 0.25% and
0.25%, respectively, of the average daily net asset value of Service Shares of
the Short-Term Government, Bond, Balanced, Growth and Income, Growth, MidCap
and International Equity Funds, and that Institutional Shares bear the
payments made under the Shareholder Administrative Services Plan applicable
only to Institutional Shares, at an annual rate not to exceed 0.25% of average
daily net assets of Institutional Shares of the Short-Term Government, Bond,
Balanced, Growth and Income, Growth, MidCap and International Equity Funds.
Service Shares are sold primarily to retail investors. Institutional Shares
are offered primarily to investors maintaining qualified accounts in the trust
departments of affiliates and correspondent banks of Commerce Bancshares,
Inc., to participants in employer-sponsored defined contribution plans
administered by Commerce Bancshares, Inc. and to shareholders who have
existing accounts in Institutional Shares on the date of this Prospectus. The
differences in expenses paid by each class of shares will affect their
performance.
Fund shares have no preemptive rights and only such conversion and exchange
rights as the Board of Trustees may grant in its discretion. All shares issued
as described in this Prospectus will be fully paid and non-assessable.
Each share of a series shall represent an equal beneficial interest in the
net assets of such series. Each holder of shares of a series shall be entitled
to receive distributions of income and capital gains, if any, which are made
with respect to such series and which are attributable to such shares. Upon
redemption of shares, such shareowner shall be paid solely out of the funds
and property of such series of The Commerce Funds.
VOTING RIGHTS
SHAREOWNERS ARE ENTITLED TO ONE VOTE FOR EACH FULL SHARE HELD AND FRACTIONAL
VOTES FOR FRACTIONAL SHARES HELD. Additionally, except when required by the
1940 Act or when the Board of Trustees has determined 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'
53
<PAGE>
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 7, 1997, the Advisor and their affiliates possessed, on
behalf of their underlying customer accounts, voting or investment power with
respect to 90%, 86%, 77%, 79%, 83% and 92% of the outstanding shares of the
Short-Term Government, Bond, Balanced, Growth, MidCap 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.
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 31.
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.
54
<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] COMMERCE FUNDS(TM)
- --------------------------------------------------------------------------------
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
MAY BE REQUIRED
CORPORATION, TRUST, OR OTHER ENTITY
--------------------------------------- ---------------
Name of Corporation, Trust or other Tax ID#
Non-Person Entity
---------------------------------------------------------
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:
$1000 MINIMUM PER [_]Short Term $_______ [_]Growth and $_______
FUND ($250 MINIMUM Government Amount Income Amount
FOR SUBSEQUENT #336
INVESTMENTS) [_]Bond $_______ [_]MidCap $_______
#333 Amount #339 Amount
[_]Balanced $_______ [_]International$_______
#338 Amount Equity Amount
[_]Growth $_______ #340
#337 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 Name of Fund
(minimum $75/Quarter)
---------------------------------------------------------
Amount of each monthly investment Name of Fund
(minimum $75/Quarter)
---------------------------------------------------------
Authorized Signature (as shown on bank records)
---------------------------------------------------------
Authorized Signature (if joint bank account both sign)
- --------------------------------------------------------------------------------
8. FOR TELEPHONE
PURCHASE/REDEMPTION,
THIS SECTION MUST
BE COMPLETED
See "How To Buy Shares" or "How To Sell Shares" in the
Prospectus
[_] 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
(ATTACH VOIDED CHECK
OR DEPOSIT SLIP)
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>
- -------------------------------------------------------------------------------
12. AUTOMATIC WITHDRAWAL PLAN
Minimum account balance must be $5,000. Withdrawal
minimum is $100.
Check One: [_] Monthly [_] Quarterly [_] Semi-
Annual [_] Annual
Please make payments via (check one) [_] check [_] ACH
(Bank must be ACH affiliated. Attach voided check).
Payments made via check are withdrawn from your account
on or about the 1st or 15th of a month for monthly
withdrawals or the 15th of the month for
quarterly/semi-annual/annual withdrawals. (I understand
that I may change the date of redemption, via ACH, or
the amount at any time in writing to the Fund at the
address stated above.)
If withdrawal payments are to be made via ACH (attach
voided check/deposit slip)
Please withdraw $ from my account on the
of the month.
Complete this section ONLY if check is to be made
payable to person(s) other than the registered owner.
SIGNATURE GUARANTEE required. (See Section 13 of this
Form.)
--------------------------------------------------------
Name of check recipient Address 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 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>
[LOGO] COMMERCE FUNDS(TM)
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF ADDITIONAL INFORMATION
SERVICE SHARES
SHORT-TERM GOVERNMENT FUND
BOND FUND
BALANCED FUND
GROWTH AND INCOME FUND
GROWTH FUND
MIDCAP FUND
INTERNATIONAL EQUITY FUND
MARCH 1, 1997
AS SUPPLEMENTED SEPTEMBER 16, 1997
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
<S> <C>
Investment Objectives, Policies and Risk Factors.. 2
Net Asset Value................................... 28
Additional Purchase and Redemption Information.... 29
Description of Shares............................. 32
Additional Information Concerning Taxes........... 34
Management of The Commerce Funds.................. 36
Independent Auditors.............................. 48
Counsel........................................... 48
Additional Information on Performance............. 49
Miscellaneous..................................... 58
Financial Statements.............................. 61
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' Service Shares Prospectus dated March 1,
1997, as supplemented September 16, 1997, for the Short-Term Government, Bond,
Balanced, Growth and Income, Growth, MidCap (formerly the Aggressive Growth
Fund) and International Equity Funds (each, a "Fund" and collectively, the
"Funds"). This Statement of Additional Information is incorporated by reference
in its entirety into the Service Share Prospectus. 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
Service Share Prospectus may be obtained by calling 1-800-305-2140. Capitalized
terms used but not defined herein have the same meanings as in the Service Share
Prospectus.
1
<PAGE>
INVESTMENT OBJECTIVES, POLICIES AND RISK FACTORS
The following policies supplement the discussion of the Funds'
respective investment objectives and policies as set forth in the Service Share
Prospectus.
PORTFOLIO TRANSACTIONS
- ----------------------
The annualized portfolio turnover rate for each Fund is calculated by
dividing the lesser of purchases or sales of portfolio securities for the year
by the monthly average value of the portfolio securities. The calculation
excludes all securities, including options, whose maturities or expiration dates
at the time of acquisition are one year or less. Fund turnover may vary greatly
from year to year as well as within a particular year, and may be affected by
cash requirements for redemption of shares and by requirements which enable the
Fund to receive favorable tax treatment. Fund turnover will not be a limiting
factor in making portfolio decisions, and each Fund may engage in short-term
trading to achieve its investment objective.
Transactions on U.S. stock exchanges involve the payment of negotiated
brokerage commissions. On exchanges on which commissions are negotiated, the
cost of transactions may vary among different brokers. Transactions in the
over-the-counter market are generally principal transactions with dealers and
the costs of such transactions involve dealer spreads rather than brokerage
commissions. With respect to over-the-counter transactions, the Advisor will
normally deal directly with the dealers who make a market in the securities
involved except in those circumstances where better prices and execution are
available elsewhere or as described below. Unlike transactions on U.S. stock
exchanges which involve the payment of negotiated brokerage commissions,
transactions in foreign securities generally involve the payment of fixed
brokerage commissions, which are generally higher than those in the United
States.
Debt securities purchased and sold by the Funds are generally traded
in the over-the-counter market on a net basis (i.e., without commission) through
dealers, or otherwise involve transactions directly with the issuer of an
instrument. The cost of securities purchased from underwriters includes an
underwriting commission or concession, and the prices at which securities are
purchased from and sold to dealers include a dealer's mark-up or mark-down.
The Advisory Agreement for the Funds provides that, in executing
portfolio transactions and selecting brokers or dealers, the Advisor will use
reasonable efforts to seek the best overall terms available on behalf of each
Fund. In assessing the best overall terms available for any transaction, the
Advisor will consider all factors it deems relevant, including the breadth of
the market in the security, the price of the security, the financial condition
and execution capability of the broker or dealer, and the reasonableness of the
commission, if any, both for the specific transaction and on a continuing basis.
In addition,
2
<PAGE>
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 exer cised. 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 ("SEC"). However, The Commerce Funds' Board
of Trustees has authorized the Advisor to allocate purchase and sale orders for
portfolio securities to broker/dealers and other financial institutions
including, in the case of agency transactions, institutions which are affiliated
with the Advisor, to take into account the sale of Fund shares if the Advisor
believes that the quality of the transaction and the amount of the commission
are comparable to what they would be with other qualified brokerage firms,
provided such transactions comply with the requirements of Rule 17e-1 under the
1940 Act. In addition, the Funds will not purchase securities during the
existence of any underwriting or selling group relating thereto of which the
Advisor, Goldman, Sachs & Co., or any affiliated person thereof is a member,
except to the extent permitted by the SEC. Under certain circumstances, the
Funds may be at a disadvantage when compared to other investment companies which
have similar investment objectives but that are not subject to such limitations.
Investment decisions for each Fund are made independently from those
made for the other Funds and from those made for other investment companies and
accounts
3
<PAGE>
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 Prospectus) and
allocated as to amount in a manner which the Advisor believes to be equitable
and consistent with its fiduciary obligations to the Fund involved and such
other investment company or account. In some instances, this investment
procedure may adversely affect the price paid or received by a Fund or the size
of the position obtained by a Fund.
The Commerce Funds are required to identify any securities of its
"regular brokers or dealers" acquired by the Funds during the most recent fiscal
year. During the fiscal year ended October 31, 1996, the Bond Fund acquired
securities of Smith Barney, Inc., Morgan Stanley Group, Inc. and Merrill Lynch &
Co., Inc., each a regular broker/dealer or parent. At October 31, 1996, the
Bond Fund's aggregate holdings in these securities amounted to $2,011,360,
$1,969,860 and $6,986,704, respectively. During the fiscal year ended October
31, 1996, the Balanced Fund acquired securities of Smith Barney, Inc. and Morgan
Stanley Group, Inc. At October 31, 1996, the Balanced Fund's aggregate holdings
in these securities amounted to $502,840 and $492,465, respectively.
During the fiscal year ended October 31, 1996, the Funds entered into
repurchase agreement transactions with State Street Bank and 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,
1996, the value of each Fund's outstanding repurchase agreement transactions
with State Street Bank and Trust Company was as follows:
<TABLE>
<CAPTION>
<S> <C>
Short-Term Government Fund $ 716,000
Bond Fund 2,131,000
Balanced Fund 3,001,000
Growth and Income Fund/1/ N/A
Growth Fund 14,610,000
MidCap Fund 2,148,000
International Equity Fund 2,193,000
-----------
</TABLE>
/1/ Not operational during the period.
4
<PAGE>
For the fiscal year ended October 31, 1996 and for the period December
12, 1994 (commencement of operations of Institutional Shares) through October
31, 1995, the Balanced, Growth, MidCap and International Equity Funds paid
brokerage commissions as follows:
Total
Total Total Brokerage
Brokerage Amount of Commissions
Total Commissions Transactions Paid to
Brokerage Paid to on Which Brokers Who
Commissions Affiliated Commissions Provided
Paid Persons Were Paid Research
----------- ----------- ------------ -----------
Fiscal year ended October 31, 1996:
Balanced Fund $ 58,679 -- $ 30,457,201 $14,261
Growth Fund 161,450 -- 101,777,048 44,688
MidCap Fund 107,348 -- 46,977,298 25,314
International Equity 92,250 $5,447 30,494,870 --
Fund
For the period December 12, 1994/(1)/ through October 31, 1995:
Balanced Fund $ 28,613 $ 660 $25,307,292 $ 6,355
Growth Fund $123,720 $1,460 $85,947,095 $25,070
MidCap Fund $ 69,935 $ 300 $47,022,043 $15,970
International Equity $ 37,119 $2,226 $14,456,331 $ 0
Fund
______________
/(1)/ Commencement of operations.
5
<PAGE>
For the fiscal year ended October 31, 1996, the following affiliated
persons received brokerage commissions on behalf of Institutional Shares of the
International Equity Fund.
<TABLE>
<CAPTION>
Total Amount of
Transactions on % of Total Amount
Which Commissions of Transactions on
Commissions Paid % of Total Were Paid to Which Commissions
Broker Name to Commissions Paid Affiliated Persons Were Paid
- ---------------------- Affiliated Persons
<S> <C> <C> <C> <C>
Flemings Securities, $ 49 0.05% $ 24,232 0.08%
Ltd.
Flemings $ 42 0.05% $ 21,282 0.07%
Goldman, Sachs & $3,131 3.39% $1,465,591 4.81%
Co.
Goldman Sachs $ 38 0.04% $ 18,893 0.06%
International, Ltd.
Jardine Fleming $ 874 0.95% $ 320,909 1.05%
Jardine Fleming $ 223 0.24% $ 47,118 0.15%
Hong Kong
Robert Fleming & $ 601 0.65% $ 264,973 0.87%
Co., London
Robert Fleming $ 440 0.48% $ 214,493 0.70%
Securities, Ltd.
Robert Fleming $ 49 0.05% $ 24,703 0.08%
Securities, Inc.
$5,447 5.90% $2,402,194 7.87%
</TABLE>
Flemings Securities, Ltd., Flemings, Jardine Fleming, Jardine Fleming
Hong Kong, Robert Fleming & Co., London, Robert Fleming Securities, Ltd. and
Robert Fleming Securities, Inc. are affiliates of the Sub-Advisor to The
International Equity Fund. Goldman, Sachs & Co. is the Distributor for The
Commerce Funds. Goldman Sachs International, Ltd. is an affiliate of the
Distributor.
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
6
<PAGE>
reduced below the minimum rating required for purchase by a Fund. The Advisor
will consider such an event in conjunction with the particular Fund's investment
policy when determining whether the Fund should continue to hold the obligation.
The payment of principal and interest on most securities purchased by
the Funds will depend upon the ability of the issuers to meet their obligations.
An issuer's obligations under its debt securities are subject to the provisions
of bankruptcy, insolvency, and other laws affecting the rights and remedies of
creditors, such as the Federal Bankruptcy Code, and laws, if any, which may be
enacted by federal or state legislatures extending the time for payment of
principal or interest, or both, or imposing other constraints upon enforcement
of such obligations or, in the case of governmental entities, upon the ability
of such entities to levy taxes. The power or ability of an issuer to meet its
obligations for the payment of interest on and principal of its debt securities
may be materially adversely affected by litigation or other conditions.
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 Prospectus. 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.
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.
7
<PAGE>
U.S. GOVERNMENT OBLIGATIONS
- ---------------------------
As stated in the Prospectus, 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 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
8
<PAGE>
as to timely payment of principal and interest by FNMA. Mortgage-related
securities issued by the Federal Home Loan Mortgage Corporation ("FHLMC")
include FHLMC Mortgage Participation Certificates (also known as "Freddie Macs"
or "Pcs"). FHLMC is a corporate instrumentality of the United States, created
pursuant to an Act of Congress, which is owned entirely by Federal Home Loan
Banks. Freddie Macs are not guaranteed by the United States or by any Federal
Home Loan Banks and do not constitute a debt or obligation of the United States
or of any Federal Home Loan Bank. Freddie Macs entitle the holder to timely
payment of interest, which is guaranteed by the FHLMC. FHLMC guarantees either
ultimate collection or timely payment of all principal payments on the
underlying mortgage loans. When FHLMC does not guarantee timely payment of
principal, FHLMC may remit the amount due on account of its guarantee of
ultimate payment of principal at any time after default on an underlying
mortgage, but in no event later than one year after it becomes payable.
A Fund may invest in multiple class pass-through securities, including
collateralized mortgage obligations ("CMOs") and real estate mortgage investment
conduit ("REMIC") pass-through or participation certificates ("REMIC
Certificates"). These multiple class securities may be issued by U.S.
Government agencies or instrumentalities, including FNMA and FHLMC, or by trusts
formed by private originators of, or investors in, mortgage loans. In general,
CMOs and REMICs are debt obligations of a legal entity that are collateralized
by, and multiple class pass-through securities represent direct ownership
interests in, a pool of residential mortgage loans or mortgage pass-through
securities (the "Mortgage Assets"), the payments on which are used to make
payments on the CMOs or multiple pass-through securities. Investors may
purchase beneficial interests in REMICs, which are known as "regular" interests
or "residual" interests. The Funds do not intend to purchase residual
interests.
Each class of CMOs or REMIC Certificates, often referred to as a
"tranche," is issued at a specific adjustable or fixed interest rate and must be
fully retired no later than its final distribution date. Principal prepayments
on the Mortgage Assets underlying the CMOs or REMIC Certificates may cause some
or all of the classes of CMOs or REMIC Certificates to be retired substantially
earlier than their final distribution dates. Generally, interest is paid or
accrues on all classes of CMOs or REMIC Certificates on a monthly basis.
The principal of and interest on the Mortgage Assets may be allocated
among the several classes of CMOs or REMIC Certificates in various ways. In
certain structures (known as "sequential pay" CMOs or REMIC Certificates),
payments of principal, including any principal prepayments, on the Mortgage
Assets generally are applied to the classes of CMOs or REMIC Certificates in the
order of their respective final distribution dates. Thus no payment of
principal will be made on any class of sequential pay CMOs or REMIC Certificates
until all other classes having an earlier final distribution date have been paid
in full.
9
<PAGE>
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 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
10
<PAGE>
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 Prospectus, each of the Funds may purchase put and
call options listed on a national securities exchange and issued by the Options
Clearing Corporation. Such purchases would be in an amount not to exceed 5% of
a Fund's net assets. Such options relate to particular securities. This is a
highly specialized activity which entails greater than ordinary investment
risks. Regardless of how much the market price of the underlying security
increases or decreases, the option buyer's risk is limited to the amount of the
original investment for the purchase of the option. However, options may be
more volatile than the underlying securities, and therefore, on a percentage
basis, an investment in options may be subject to greater fluctuation than an
investment in the underlying securities themselves. A listed call option gives
the purchaser of the option the right to buy from a clearing corporation, and a
writer has the obligation to sell to the clearing corporation, the underlying
security at the stated exercise price at any time prior to the expiration of the
option, regardless of the market price of the security. The premium paid to the
writer is in consideration for undertaking the obligations under the option
contract. A listed put option gives the purchaser the right to sell to a
clearing corporation the underlying security at the stated exercise price at any
time prior to the expiration date of the option, regardless of the market price
of the security. Put and call options purchased by a Fund will be valued at the
last sale price or, in the absence of such a price, at the mean between bid and
asked prices.
The Funds will write only "covered" call options on securities. The
option is "covered" if a Fund owns the security underlying the call or has an
absolute and immediate right to acquire that security without additional cash
consideration (or, if additional cash consideration is required, cash or cash
equivalents in such amount as are held in a segregated
11
<PAGE>
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 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
12
<PAGE>
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
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 and Income, Growth, MidCap and
International Equity Funds may invest in futures contracts and options thereon
(interest rate futures contracts or index futures contracts, as applicable).
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
13
<PAGE>
affecting securities held by it and securities prices increase instead, the Fund
will lose part or all of the benefit to the increased value of its securities
which it has hedged because it will have approximately equal offsetting losses
in its futures positions. In addition, in some situations, if a Fund has
insufficient cash, it may have to sell securities to meet daily variation margin
requirements. Such sales of securities may be, but will not necessarily be, at
increased prices which reflect the rising market. A Fund may have to sell
securities at a time when it may be disadvantageous to do so.
The risk of loss in trading futures contracts in some strategies can
be substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if at the time
of purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit, before any deduction for the
transaction costs, if the contract were closed out. Thus, a purchase or sale of
a futures contract may result in losses in excess of the amount invested in the
contract.
Utilization of futures transactions by a Fund involves the risk of
loss by a Fund of margin deposits in the event of bankruptcy of a broker with
whom the Fund has an open position in a futures contract or related option.
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.
14
<PAGE>
HYBRID INSTRUMENTS
- ------------------
Hybrid instruments have been developed and combine the elements of
futures contracts or options with those of debt, preferred equity or depository
instruments (hereinafter "Hybrid Instruments"). Generally, a Hybrid Instrument
will be a debt security, preferred stock, depository share, trust certificate,
certificate of deposit or other evidence of indebtedness on which a portion of
or all interest payments, and/or the principal or stated amount payable at
maturity, redemption or retirement, is determined by reference to prices,
changes in prices, or differences between prices of securities, currencies,
intangibles, goods, articles or commodities (collectively, "Underlying Assets")
or by another objective index, economic factor or other measure, such as
interest rates, currency exchange rates, commodity indices, and securities
indices (collectively, "Benchmarks"). Thus, Hybrid Instruments may take a
variety of forms, including, but not limited to, debt instruments with interest
or principal payments or redemption terms determined by reference to the value
of a currency or commodity or securities index at a future point in time,
preferred stock with dividend rates determined by reference to the value of a
currency, or convertible securities with the conversion terms related to a
particular commodity.
Hybrid Instruments can be an efficient means of creating exposure to a
particular market, or segment of a market, with the objective of enhancing total
return. For example, a 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
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<PAGE>
which the instrument is linked. Such risks generally depend upon factors which
are unrelated to the operations or credit quality of the issuer of the Hybrid
Instrument and which may not be credit quality of the issuer of the Hybrid
Instrument and which may not be readily foreseen by the purchaser, such as
economic and political events, the supply and demand of the Underlying Assets
and interest rate movements. In recent years, various Benchmarks and prices for
Underlying Assets have been highly volatile, and such volatility may be expected
in the future. Reference is also made to the discussion of futures, options,
and forward contracts herein for a discussion of the risks associated with such
investments.
Hybrid Instruments are potentially more volatile and carry greater
market risks than traditional debt instruments. Depending on the structure of
the particular Hybrid Instrument, changes in a Benchmark may be magnified by the
terms of the Hybrid Instrument and have an even more dramatic and substantial
effect upon the value of the Hybrid Instrument. Also, the prices of the Hybrid
Instrument and the Benchmark or Underlying Asset may not move in the same
direction or at the same time.
Hybrid Instruments may bear interest or pay preferred dividends at
below market (or even relatively nominal) rates. Alternatively, Hybrid
Instruments may bear interest at above market rates but bear an increased risk
of principal loss (or gain). The latter scenario may result if "leverage" is
used to structure the Hybrid Instrument. Leverage risk occurs when the Hybrid
Instrument is structured so that a given change in a Benchmark or Underlying
Asset is multiplied to produce a greater value change in the Hybrid Instrument,
thereby magnifying the risk of loss as well as the potential for gain.
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 and Balanced 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
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<PAGE>
effective duration of its portfolio securities. Interest rate swaps involve the
exchange by a Fund with another party of their respective commitments to pay or
receive interest, such as an exchange of fixed rate payments for floating rate
payments. Mortgage swaps are similar to interest rate swaps in that they
represent commitments to pay and receive interest. The notional principal
amount, however, is tied to a reference pool or pools of mortgages. The
purchase of an interest rate floor or cap entitles the purchaser to receive
payments of interest on a notional principal amount from the seller, to the
extent that a specified index falls below (floor) or exceeds (cap) a
predetermined interest rate. In a typical cap or floor arrangement, one party
agrees to make payments only under specified circumstances, usually in return
for payment of a fee by the other party. For example, the buyer of an interest
rate cap obtains the right to receive payments to the extent that a specified
interest rate exceeds an agreed upon level, while the seller of an interest rate
floor is obligated to make payments to the extent that a specified interest rate
falls below an agreed upon level. Since interest rate swaps, mortgage swaps and
interest rate caps and floors are individually negotiated, a Fund expects to
achieve an acceptable degree of correlation between its portfolio investments
and its interest rate swaps, mortgage swaps and interest rate caps and floors
positions.
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 position that
swaps, caps and floors are illiquid for purposes of the Funds' limitations on
investments in illiquid securities.
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<PAGE>
RIGHTS OFFERINGS AND WARRANTS
- -----------------------------
As stated in their Prospectus, the Balanced, Growth and Income,
Growth, MidCap and International Equity Funds may participate in rights
offerings and may purchase warrants, which are privileges issued by corporations
enabling the owners to subscribe to and purchase a specified number of shares of
the corporation at a specified price during a specified period of time.
Subscription rights normally have a short life span to expiration. The purchase
of rights or warrants involves the risk that a Fund could lose the purchase
value of a right or warrant if the right to subscribe to additional shares is
not exercised prior to the expiration of the rights and warrants. Also, the
purchase of rights and/or warrants involves the risk that the effective price
paid for the right and/or warrant added to the subscription price of the related
security may exceed the value of the subscribed security's market price such as
when there is no movement in the level of the underlying security. A Fund will
not invest more than 5% of its total assets, taken at market value, in warrants,
or more than 2% of its total assets, taken at market value, in warrants not
listed on the New York or American Stock Exchanges. 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 those securities defined as "money market
instruments" in "Temporary Instruments" in the Prospectus for the Short-Term
Government, Bond, Balanced, Growth and Income, Growth, MidCap 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' Prospectus generally equals the price paid by a Fund plus interest
negotiated on the basis of current short-term rates (which may be more or less
than the rate on the securities underlying the repurchase agreement).
Securities subject to repurchase agreements are held by the Funds' Custodian (or
sub-custodian) or in the Federal Reserve/Treasury book-entry system. Repurchase
agreements are considered to be loans under the 1940 Act.
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<PAGE>
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 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
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<PAGE>
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 Prospectus, 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 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.
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
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<PAGE>
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. Such proposals, whether
pending or enacted, might materially and adversely affect the availability of
Municipal Obligations for investment by a particular Fund and the liquidity and
value of its respective portfolio. In such an event, the Fund would re-evaluate
its investment objective and policies and consider possible changes in its
structure or possible dissolution.
Certain of the Municipal Obligations held by a Fund may be insured as
to the timely payment of principal and interest. The insurance policies will
usually be obtained by the issuer of the Municipal Obligation at the time of its
original issuance. In the event that the issuer defaults on interest or
principal payment, the insurer will be notified and will be required to make
payment to the bondholders. There is, however, no guarantee that the insurer
will meet its obligations. In addition, such insurance will not protect against
market fluctuations caused by changes in interest rates and other factors.
FOREIGN INVESTMENTS
- -------------------
As indicated in their Prospectus, the Bond, Growth and Income, Growth,
MidCap 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
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<PAGE>
against variations, between the date the security is purchased or sold and the
date on which payment is made or received, in the value of the foreign currency
relative to the U.S. dollar or other foreign currency.
When the Advisor anticipates that a particular foreign currency may
decline substantially relative to the U.S. dollar or other leading currencies,
in order to reduce risk, the Fund may enter into a forward contract to sell, for
a fixed amount, the amount of foreign currency approximating the value of some
or all of the Fund's securities denominated in such foreign currency.
Similarly, when the securities held by the Fund create a short position in a
foreign currency, the Fund may enter into a forward contract to buy, for a fixed
amount, an amount of foreign currency approximating the short position. With
respect to any forward foreign currency contract, it will generally not be
possible to precisely match the amount covered by that contract and the value of
the securities involved due to the changes in the values of such securities
resulting from market movements between the date the forward contract is entered
into and the date it matures. While forward contracts may offer protection from
losses resulting from declines or appreciation in the value of a particular
foreign currency, they also limit potential gains which might result from
changes in the value of such currency. The Fund will also incur costs in
connection with forward foreign currency exchange contracts and conversions of
foreign currencies and U.S. dollars. In addition, the Advisor may purchase or
sell forward foreign currency exchange contracts for the Fund for non-hedging
purposes when the Advisor anticipates that the foreign currency will appreciate
or depreciate in value.
A separate account consisting of 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.
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 assets, as
permitted by applicable law, having a value
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<PAGE>
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
assets, as permitted by applicable law, equal to the amount of the purchase or
the commitment in a separate account. Normally, the Custodian will set aside
portfolio securities to meet this requirement. The market value of the separate
account will be monitored and if such market value declines, the Fund will be
required subsequently to place additional assets in the separate account in
order to ensure that the value of the account remains equal to the amount of the
Fund's commitments. Because a Fund will set aside cash or liquid assets, as
permitted by applicable law, in the manner described, the Fund's liquidity and
ability to manage its portfolio might be affected in the event its when-issued
purchases or forward commitments ever exceeded 25% of the value of its assets.
In the case of a forward commitment to sell portfolio securities, the Custodian
will hold the portfolio securities in a segregated account while the commitment
is outstanding.
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
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<PAGE>
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 and
Income, Growth, MidCap and International Equity Funds may invest in convertible
securities. Convertible securities entitle the holder to receive interest paid
or accrued on debt or the dividend paid on preferred stock until the convertible
securities mature or are redeemed, converted or exchanged. Prior to conversion,
convertible securities have characteristics similar to ordinary debt securities
in that they normally provide a stable stream of income with generally higher
yields than those of common stock of the same or similar issuers. Convertible
securities rank senior to common stock in the corporate capital structure and,
therefore, generally entail less risk than the corporation's common stock,
although the extent to which such risk is reduced depends in large measure upon
the degree to which the convertible security sells above its value as a fixed
income security.
In selecting convertible securities, the Advisor will consider, among
other factors, their evaluation of the creditworthiness of the issuers of the
securities, the interest or dividend income generated by the securities, the
potential for capital appreciation of the securities and the underlying stocks,
the prices of the securities relative to other comparable securities and to the
underlying stocks, whether the securities are entitled to the benefits of
sinking funds or other protective conditions, the 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.
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<PAGE>
INVESTMENT LIMITATIONS
- ----------------------
Each Fund is subject to the investment limitations enumerated below,
which may not be changed with respect to a Fund without the approval of the
lesser of (1) 67% of the Fund's shares present at a meeting of shareowners if
the holders of more than 50% of the outstanding shares are present in person or
by proxy or (2) more than 50% of the Fund's outstanding shares. Other
restrictions in the form of non-fundamental policies are subject to change by
The Commerce Funds' Board of Trustees without 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.
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
25
<PAGE>
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.
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.
26
<PAGE>
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% of the value of its net
assets.
In addition, the fundamental investment limitation listed below is
summarized in the Prospectus and is set forth below in it's entirety.
1. With regard to the Short-Term Government, Bond, Balanced, Growth
and Income, Growth, MidCap and International Equity Funds:
Each Fund will limit its investments so that, with respect to 75% of a
Fund's total assets: (i) not more than 5% of a Fund's total assets
will be invested in the securities or any one issuer; (ii) not more
than 25% of a Fund's total assets will be invested in the securities
of issuers in any one industry; and (iii) not more than 10% of the
outstanding voting securities of any one issuer will be held by a
Fund. Securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities and repurchase agreements collateralized
by such securities are excepted from these limitations. Each Fund may
borrow money from banks for temporary or emergency purposes or to meet
redemption requests and may enter into reverse repurchase agreements,
provided that the Fund maintains asset coverage of at least 300% for
all such borrowings.
27
<PAGE>
NET ASSET VALUE
The net asset value per share for each Fund of The Commerce Funds is
calculated separately for Institutional Shares and Service Shares by adding the
value of all portfolio securities and other assets belonging to the Fund that
are allocable to a particular class, subtracting the liabilities charged to that
class, and dividing the result by the number of outstanding shares of the class.
Assets which belong to the Fund consist of the consideration received upon the
issuance of shares of the Fund together with all income, earnings, profits and
proceeds derived from the investment thereof, including any proceeds from the
sale of such investments, any funds or payments derived from any reinvestment of
such proceeds, and a portion of any general assets of The Commerce Funds not
belonging to a particular investment portfolio. Assets belonging to a
particular class of a Fund are charged with the direct liabilities of that class
and with a share of the general liabilities of The Commerce Funds which are
normally allocated in proportion to the relative net asset values of all of The
Commerce Funds' investment portfolios at the time of allocation. Payments under
The Commerce Funds' Distribution Plan and the Service Plan for Service Shares,
however, are applicable only to the Service Shares of the Funds.
As stated in their Prospectus, 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' 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
28
<PAGE>
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 Service Shares of the Funds, based on the value of the total
net assets and total number of Service Shares outstanding as of April 30, 1997
would be as follows:
TABLE
-----
<TABLE>
<CAPTION>
Bond Balanced Growth and MidCap International
Fund Fund Income Fund Growth Fund Fund Equity Fund
-------- -------- ----------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net Assets............ $202,681 $521,208 $369,631 $2,225,080 $93,449 $67,949
Number of Shares
Outstanding.......... 10,798 22,009 20,640 73,771 3,583 3,123
Net Asset Value
Per Share............ $ 18.77 $ 23.68 $ 17.90 $ 30.15 $ 26.07 $ 21.75
Sales Charge, 3.50
percent of offering
price (3.63 percent
of net asset value
per share)........... $ 0.68 $ 0.86 $ 0.65 $ 1.09 $ 0.95 $ 0.79
Offering Price to
Public............... $ 19.45 $ 24.54 $ 18.55 $ 31.24 $ 27.02 $ 22.54
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
Short-Term
Government
Fund
----
<S> <C>
Net Assets............. $34,956
Number of Shares
Outstanding.......... 1,923
Net Asset Value
Per Share............ $ 18.18
Sales Charge, 2.00
percent of offering
price (2.04 percent
of net asset value
per share)........... $ 0.37
Offering Price to
Public............... $ 18.55
- -------------------
</TABLE>
The Commerce Funds began offering Service Shares on January 2, 1997
for the Bond, Balanced, Growth, MidCap and International Equity Funds. The
Commerce Funds began offering Service Shares of the Growth and Income Funds on
March 1, 1997. The information in the foregoing table is based on the net
assets and number of shares outstanding of The Commerce Funds' Service Shares as
of April 30, 1997.
Under the 1940 Act, a Fund may suspend the right of redemption or
postpone the date of payment for shares during any period when (a) trading on
the New York Stock Exchange is restricted by applicable rules and regulations of
the SEC; (b) the Exchange is closed for other than customary weekend and holiday
closing; (c) the SEC has by order permitted such suspension; or (d) an emergency
exists as determined by the SEC. (The Commerce Funds may also suspend or
postpone the recordation of the transfer of shares upon the occurrence of any of
the foregoing conditions.)
In addition to the situations described in the Prospectus 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 Prospectus.
In an exchange, the redemption of Service Shares being exchanged will
be made at the per share net asset value of the Service Shares to be redeemed
next determined after the exchange request is received. The Service Shares of
the Fund to be acquired will be purchased at the per share net asset value of
those Service 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.
30
<PAGE>
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 and Income, Growth, MidCap 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 and Income, Growth, MidCap and International Equity Funds have
available a plan (the "IRA") for use by individuals with compensation for
services rendered (including earned income from self-employment) who wish to use
shares of the Funds as a funding medium for individual 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.
31
<PAGE>
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 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.
32
<PAGE>
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 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
33
<PAGE>
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 Prospectus 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 Prospectus. 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
Prospectus is not intended as a substitute for careful tax planning. Potential
investors should consult their tax advisers with specific reference to their own
tax situations.
FEDERAL - GENERAL INFORMATION
Each Fund will elect to be taxed separately as a regulated investment
company under Part I of Subchapter M of Subtitle A, Chapter 1 of the Internal
Revenue Code of 1986, as amended (the "Code"). As a regulated investment
company, each Fund is exempt from federal income tax on its net investment
income and realized capital gains that it distributes to shareowners, provided
that it distributes an amount equal to at least the sum of 90% of its tax-exempt
income and 90% of its investment company taxable income (net investment income
and the excess of net short-term capital gain over net long-term capital loss),
if any, for the year (the "Distribution Requirement") and satisfies certain
other requirements of the Code that are described below.
34
<PAGE>
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 Income, Growth and MidCap Funds may constitute
"qualifying dividends." The other Funds, however, are not expected to pay
qualifying dividends.
Ordinary income of individuals is taxable at a maximum marginal 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 rate of 28%. For corporations, long-term capital
gains and ordinary income are both taxable at a maximum nominal rate of 35%.
35
<PAGE>
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.
MANAGEMENT OF THE COMMERCE FUNDS
TRUSTEES AND OFFICERS OF THE TRUST
The Board of Trustees of the Trust is responsible for the management
of the business and affairs of the Trust. The Trustees and executive officers
of the Trust and their principal occupations for the last five years are set
forth below. Each Trustee has an address c/o The Commerce Funds, 922 Walnut
Street, Kansas City, Missouri 64141.
36
<PAGE>
<TABLE>
<CAPTION>
Name, Address and Age Position(s) Held Principal Occupation(s) During Past 5 Years
with
the Trust
<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: 63 College since January 1989. Director, Valentine
Radford Communications and Trustee, Midwest
Research Institute.
*Warren W. Weaver Trustee and President Retired. Former Vice Chairman, Commerce
c/o The Commerce Funds Bancshares, Inc. and Commerce Bank, N.A.
922 Walnut Street
Kansas City, MO 64141
Age: 66
*Randall D. Barron Trustee and Treasurer Retired. President, MO. Division Southwestern
c/o The Commerce Funds Bell Telephone Company since 1984. Former
922 Walnut Street Director, Commerce Bancshares, Inc.
Kansas City, MO 64141
Age: 67
David L. Bodde Trustee Charles N. Kimball Professor of Technology and
c/o The Commerce Funds Innovation, University of Missouri, Kansas City
922 Walnut Street since 1996. Vice President, Midwest Research
Kansas City, MO 64141 Institute since January 1991. Executive Director,
Age: 54 Commission on Engineering, National Academy of
Sciences from April 1986 to January 1991;
Director, Missouri Technological Corporation.
Director, Kansas City Power & Light Company
since 1994.
John Joseph Holland Trustee Vice President, and Chief Financial Officer,
c/o The Commerce Funds Butler
922 Walnut Street Manufacturing Company since January 1990 and
Kansas City, MO 64141 Vice President and Controller prior thereto.
Age: 46 Director, Allendale Insurance Company.
Paul Klug Vice President Vice President and Manager, Bank Proprietary
Goldman Sachs Asset Mutual Funds unit within the Institutional Funds
Management, 41st 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: 45
Nancy L. Mucker Vice President Vice President, Goldman Sachs since April 1985.
Goldman Sachs Asset Manager of Shareholder Services for Goldman
Management Sachs Asset Management Funds Group since
4900 Sears Tower November 1989.
Chicago, IL 60606
Age: 47
</TABLE>
37
<PAGE>
<TABLE>
<S> <C> <C>
Pauline Taylor Vice President Vice President, Goldman Sachs since June 1992.
Goldman Sachs Asset Consultant 1989 to June 1992.
Management
4900 Sears Tower
Chicago, IL 60606
Age: 50
W. Bruce McConnel, III Secretary Partner of the law firm Drinker Biddle & Reath LLP,
Drinker Biddle & Reath Philadelphia, Pennsylvania.
1345 Chestnut Street
PNB Building
Philadelphia, PA 19107
Age: 54
Scott M. Gilman Assistant Secretary Director Mutual Funds Administration, Goldman
Goldman Sachs Asset Sachs Asset Management since April 1994.
Management Assistant Treasurer of Goldman Sachs Funds
One New York Plaza Management, Inc. since March 1993. Vice
New York, NY 10004 President, Goldman Sachs since March 1990.
Age: 37
John Perlowski Assistant Secretary Vice President, Goldman, Sachs & Co., since July
Goldman Sachs Asset 1995. Director/Fund Accounting & Custody,
Management Investors Bank & Trust Co., November 1993 to
One New York Plaza July 1995. Formerly, Manager, Audit Division,
New York, NY 10004 Arthur Andersen, September 1986 to November
Age: 32 1993.
Michael J. Richman, Esq. Assistant Secretary Vice President and Assistant General Counsel of
Goldman Sachs & Co. Goldman Sachs and Counsel to the Funds Group of
12th Floor Goldman Sachs Asset Management since June
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: 36 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. Assistant General Counsel since November
Legal Department 1995 and Vice President of Goldman Sachs since
85 Broad Street May 1994. Formerly Associate of Shereff,
New York, NY 10004 Friedman, Hoffman & Goodman.
Age: 31
======================================================================================================
</TABLE>
38
<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, Perlowski, 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, receives
legal fees as counsel to the Trust. The following chart provides certain
information about the trustee fees paid by the Trust for the fiscal year ended
October 31, 1996:
<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, $5,000 $0 $0 N/A
Trustee, Chairman
WARREN W. WEAVER, $3,750 $0 $0 N/A
Trustee, President
PLEASANT VOORHEES $1,250 $0 $0 N/A
MILLER**, Trustee,
President
RANDALL D. BARRON, $5,000 $0 $0 N/A
Trustee, Treasurer
DAVID L. BODDE, Trustee $5,000 $0 $0 N/A
JOHN JOSEPH HOLLAND, $5,000 $0 $0 N/A
Trustee
- -------------------------------------------------------------------------------------
</TABLE>
* Fund Complex includes funds with a common investment adviser or an adviser
which is an affiliated person.
39
<PAGE>
** Effective March 14, 1996, Pleasant Voorhees Miller is no longer a Trustee
of The Commerce Funds.
INVESTMENT ADVISOR
Information about the Advisor and their duties and compensation as
Advisor is contained in the Prospectus. For the fiscal year ended October 31,
1996 and from commencement of operations through October 31, 1995, The Commerce
Funds paid the Advisor fees for advisory services (net of waivers) with respect
to Institutional Shares of the Funds as follows:
<TABLE>
<CAPTION>
Fiscal year ended Commencement of
October 31, 1996 operations
----------------- through October 31, 1995
<S> <C> <C>
Short-Term Government Fund /(1)/ $ 82,030 $ 47,091
Bond Fund /(1)/ 600,758 386,076
Balanced Fund /(1)/ 438,474 271,451
Growth and Income Fund /(2)/ N/A 0
Growth Fund /(1)/ 1,262,077 799,203
MidCap Fund /(1)/ 453,655 166,159
International Equity Fund /(1)/ 315,480 92,576
</TABLE>
_________
/(1)/ Commenced investment operations on December 12, 1994.
/(2)/ Not operational for the periods indicated.
For the fiscal year ended October 31, 1996, and from commencement of
operations through October 31, 1995, the Advisor voluntarily agreed to waive a
portion of its advisory fee for certain portfolios. During the periods stated,
these waivers reduced advisory fees on Institutional Shares of the Funds by the
following:
<TABLE>
<CAPTION>
Fiscal year ended Commencement of
October 31, 1996 operations
----------------- through October 31, 1995
<S> <C> <C>
Short-Term Government Fund/(1)/ $ 54,686 $31,394
Balanced Fund/(1)/ 146,158 90,484
International Equity Fund/(1)/ 255,695 61,711
</TABLE>
___________
/(1)/ Commenced investment operations on December 12, 1994.
40
<PAGE>
In addition, for the fiscal year ended October 31, 1996, and during
the period ended October 31, 1995, the Advisor voluntarily agreed to reimburse
the expenses listed below (excluding interest, taxes, and extraordinary
expenses) to the extent that total fees and expenses exceeded, on an annualized
basis, the average net assets of the Institutional Shares as follows:
<TABLE>
<CAPTION>
Fiscal year ended Commencement of Operations
October 31, 1996 through October 31, 1995
------------------
<S> <C> <C>
Short-Term Government Fund/(1)/ 0.68% 0.68%
Bond Fund/(1)/ 0.88% 0.88%
Balanced Fund/(1)/ 1.13% 1.13%
Growth Fund/(1)/ 1.13% 1.13%
International Equity Fund/(1)/ 1.72% 1.72%
</TABLE>
___________________
/(1)/ Commenced investment operations on December 12, 1994.
The effect of these reimbursements, and certain reimbursements of the
International Equity Fund's expenses, during the period was to reduce expenses
on Institutional Shares of the following Funds as follows:
<TABLE>
<CAPTION>
Fiscal year ended Commencement of
October 31, 1996 Operations
----------------- through October 31, 1995
<S> <C> <C>
Short-Term Government Fund/(1)/ $63,161 $ 40,597
Bond Fund/(1)/ -- 305
Balanced Fund/(1)/ 43,556 24,555
Growth Fund/(1)/ -- --
International Equity Fund/(1)/ 96,415 112,535
</TABLE>
___________________
/(1)/ Commenced investment operation on December 12, 1994.
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
41
<PAGE>
by The Commerce Funds, including outstanding loans to such issuers which may be
repaid in whole or in part with the proceeds of securities purchased by The
Commerce Funds.
The Advisor has agreed that it will reimburse The Commerce Funds such
portions of its fees as may be required to satisfy any expense limitations
imposed by state securities laws or other applicable laws. Restrictive
limitations may be imposed on The Commerce Funds as a result of changes in
current state laws and regulations in those states 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 fiscal year ended October
31, 1996 and for the period December 12, 1994 (commencement of operations)
through October 31, 1995, the Advisor paid the Sub-Advisor sub-advisory fees of
$259,923 and $77,144, respectively.
42
<PAGE>
Under the Sub Advisory Agreement, Price Fleming provides the
International Equity Fund with investment advisory services. Specifically,
Price-Fleming is responsible for supervising and directing the investments of
the Fund in accordance with the Fund's investment objective, policies and
restrictions as provided in the Prospectus and this Statement of Additional
Information. Price-Fleming is also responsible for effecting all security
transactions on behalf of the Fund, including the negotiation of commissions and
the allocation of principal business and portfolio brokerage.
The Sub-Advisory Agreement also provides that Price-Fleming, its
directors, officers or employees will only be liable to the Fund for losses
resulting from bad faith, willful misconduct or gross negligence for losses
resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services.
Under the Sub-Advisory Agreement, Price-Fleming is permitted to
utilize the services or facilities of others to provide it or the Funds with
statistical and other factual information, advice regarding economic factors and
trends, advice as to occasional transactions in specific securities, and such
other information, advice or assistance as Price-Fleming may deem necessary,
appropriate, or convenient for the discharge of its obligations under the Sub-
Advisory Agreement or otherwise helpful to the Funds.
Price-Fleming has entered into separate letters of agreement with
Fleming Investment Management Limited ("FIM") and Jardine Fleming Investment
Holdings Limited ("JFIH"), wherein FIM and JFIH have agreed to render investment
research and administrative support to Price-Fleming. 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
43
<PAGE>
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 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.
THE DISTRIBUTION PLAN AND THE SHAREHOLDER ADMINISTRATIVE SERVICES PLAN
- ----------------------------------------------------------------------
The Distributor is entitled to payment from the Trust for distribution
expenses pursuant to the Distribution Plan (the "12b-1 Plan") adopted on behalf
of the Service Shares. Under the 12b-1 Plan, the Trust may pay the Distributor
for: (i) direct out-of-pocket promotional expenses
44
<PAGE>
incurred by the Distributor in advertising and marketing Service Shares; (ii)
expenses incurred in connection with preparing, printing, mailing, and
distributing or publishing advertisements and sales literature for Service
Shares; (iii) expenses incurred in connection with printing and mailing
prospectuses and statements of additional information to other than current
Service Class shareholders; (iv) periodic payments or commissions to one or more
securities dealers, brokers, financial institutions or other industry
professionals, such as investment advisors, accountants, and estate planning
firms (severally, a "Distribution Organization") with respect to a Fund's
Service Shares beneficially owned by customers for whom the Distribution
Organization is the record or holder of record of such Service Shares; or (v)
for such other services as may be construed, by any court or governmental agency
or commission, including the Securities and Exchange Commission, to constitute
distribution services under the 1940 Act or rules and regulations thereunder.
Payment for distribution expenses under the 12b-1 Plan are subject to
Rule 12b-1 (the "Rule") under the 1940 Act. The Rule defines distribution
expenses to include the cost of "any activity which is primarily intended to
result in the sale of Service shares." The Rule provides, among other things,
that an investment company may bear such expenses only pursuant to a plan
adopted in accordance with the Rule. In accordance with the Rule, the 12b-1
Plan provides that a written report of the amounts expended under the 12b-1
Plan, and the purposes for which such expenditures were incurred, will be made
to the Board of Trustees for its review at least quarterly. In addition, the
Plan provides that it may not be amended to increase materially the costs which
a Fund may bear for distribution pursuant to the 12b-1 Plan without shareholder
approval and that other material amendments of the 12b-1 Plan must be approved
by a majority of the Board of Trustees, and by a majority of the Trustees who
are neither "interested persons" (as defined in the 1940 Act) of the Trust nor
have any direct or indirect financial interest in the operation with the 12b-1
Plan, or in any agreements entered into in connection with the 12b-1 Plan, by
vote cast in person at a meeting called for the purpose of considering such
amendments (the "Non-Interested Plan Trustees"). The selection and nomination
of the Trustees of the Trust who are not "interested persons" of the Trust have
been committed to the discretion of the Non-Interested Plan Trustees.
Pursuant to the Shareholder Administrative Services Plan (the
"Services Plan"), the Trust may also pay securities dealers, brokers, financial
institutions or other industry professionals ("Service Organizations") for
administrative support services provided with respect to their clients' Service
Shares. Administrative support services provided by a Service Organization may
include some or all of the following: (i) processing dividend and distribution
payments from a Fund on behalf of its clients; (ii) providing information
periodically to its clients showing their positions in Service Shares; (iii)
arranging for bank wires; (iv) responding to routine client inquiries concerning
their investment in Service Shares; (v) providing the information to the Funds
necessary for accounting or sub-accounting; (vi) if required by law, forwarding
shareholder communications from a Fund (such as proxies, shareholder reports,
annual and semi-annual financial statements and dividend, distribution and tax
notices) to its clients; (vii) aggregating and processing purchase, exchange,
and redemption requests from its clients and placing net purchase, exchange, and
redemption orders for its clients; (viii) providing clients with a service that
invests the assets of their accounts in Service Shares pursuant to specific or
pre-authorized instructions; (ix) establishing and maintaining accounts and
records relating to clients that invest in Service Shares; (x) assisting clients
45
<PAGE>
in changing dividend options, account designations and addresses; (xi)
responding to client inquiries relating to services performed by the
Distribution and Service Organizations; or (xii) other similar services if
requested by the Trust.
The 12b-1 Plan provides that the Distributor is entitled to receive
payments on a monthly basis at an annual rate not exceeding 0.25% of the average
daily net assets during such month of a Fund's outstanding Service Shares. The
Shareholder Administrative Services Plan (the "Services Plan") provides that up
to 0.25% of average daily net assets of a Fund's Services Shares may be used to
compensate Service Organizations for administrative support services provided to
holders of Service Shares.
Payments made out of or charged against the assets of a particular
class of shares of a particular Fund must be in payment for expenses incurred on
behalf of that class.
The Services Plan is subject to annual reapproval by a majority of the
Trust's Board of Trustees, including a majority of the Non-Interested Plan
Trustees and is terminable without penalty at any time with respect to any Fund
by a vote of a majority of the Non-Interested Plan Trustees or by vote of the
holders of a majority of the outstanding Services Shares of the Fund involved.
Any agreement entered into pursuant to the Services Plan with a Service
Organization is terminable with respect to any Fund without penalty, at any
time, by vote of a majority of the Non-Interested Plan Trustees, by vote of the
holders of a majority of the outstanding Service Shares of such Fund, or by the
Service Organizations. Each agreement will also terminate automatically in the
event of its assignment.
The Trust's Board of Trustees has concluded that there is a reasonable
likelihood that both the 12b-1 Plan and the Services Plan will benefit the Funds
and their Service Class shareholders.
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, 1/133rd
46
<PAGE>
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 year ended October 31, 1996 and for the period from
commencement 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) on Institutional Shares were as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended Commencement of Operations
October 31, 1996 through October 31, 1995
---------------- ----------------------------
<S> <C> <C>
Short-Term Government Fund /(1)/ $ 38,372 $ 24,500
Bond Fund /(1)/ 43,619 26,600
Balanced Fund /(1)/ 58,181 31,900
Growth and Income Fund /(2)/ N/A N/A
Growth Fund /(1)/ 44,699 29,400
MidCap Fund /(1)/ 50,517 31,500
International Equity Fund /(1)/ 278,118 146,000
-------- --------
</TABLE>
/ (1)/ Commenced investment operations on December 12, 1994.
/ (2)/ Not operational for the periods indicated.
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 year ended October 31, 1996 and for the period from
commencement of operations through October 31, 1995, the fees paid by the
Institutional Shares of the Funds for transfer agency services were as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended Commencement of Operations
October 31, 1996 through October 31, 1995
----------------- --------------------------
<S> <C> <C>
Short-Term Government Fund /(1)/ $36,910 $16,900
Bond Fund /(1)/ 50,108 20,900
</TABLE>
47
<PAGE>
<TABLE>
<S> <C> <C>
Balanced Fund /(1)/ 42,501 14,500
Growth and Income Fund /(2)/ N/A N/A
Growth Fund /(1)/ 76,258 23,300
MidCap Fund /(1)/ 63,422 18,200
International Equity Fund /(1)/ 39,159 16,400
------- -------
</TABLE>
--------------------
/ (1)/ Commenced investment operations on December 12, 1994.
/ (2)/ Not operational for the periods indicated.
48
<PAGE>
DISTRIBUTOR
The Commerce Funds' Service Shares are offered on a continuous basis
through Goldman Sachs & Co., which acts under the Distribution Agreement as
Distributor for The Commerce Funds. Goldman, Sachs & Co. may receive a portion
of the sales load imposed on the sale of Service Shares of the Funds and has
advised The Commerce Funds that it has retained approximately $31,000 and
$19,000 for the fiscal year ended October 31, 1996 and for the period from
commencement of operations through October 31, 1995, respectively.
ADMINISTRATOR
Information about GSAM and its duties and compensation as
Administrator is contained in the Prospectus. For the fiscal year ended October
31, 1996 and for the period from commencement of operations through October 31,
1995, the fees paid by the Funds for administration services were as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended Commencement of Operations
October 31, 1996 through October 31, 1995
----------------- --------------------------
<S> <C> <C>
Short-Term Government Fund /(1)/ $ 41,015 $ 23,546
Bond Fund /(1)/ 180,227 115,823
Balanced Fund /(1)/ 87,695 54,291
Growth and Income Fund /(2)/ N/A N/A
Growth Fund /(1)/ 252,415 159,840
MidCap Fund /(1)/ 90,731 33,231
International Equity Fund /(1)/ 57,118 15,429
-------- --------
</TABLE>
---------------
/(1)/ Commenced investment operations on December 12, 1994.
/(2)/ Not operational for the periods indicated.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP, 1000 Walnut Street, Suite 1600, Kansas City,
Missouri 64106, serves as independent auditors for The Commerce Funds.
49
<PAGE>
COUNSEL
Drinker Biddle & Reath LLP (of which Mr. McConnel, Secretary of The
Commerce Funds, is a partner), 1345 Chestnut Street, Philadelphia, Pennsylvania
19107-3496, are counsel to The Commerce Funds.
50
<PAGE>
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 and total return are calculated separately
for each class of shares in existence of each Fund. Each class of shares of
each Fund is subject to different fees and expenses and may have different
returns for the same period. As of the date hereof, no Service Shares of any
Fund were outstanding.
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 applicable to the relevant class on the
last day of the period and annualizing the result on a semi-annual basis by
adding one to the quotient, raising the sum to the power of six, subtracting one
from the result and then doubling the difference. A Fund's net investment
income per share earned during the period may be different than that determined
for accounting purposes and is based on the average daily number of shares
applicable to the relevant class outstanding during the period entitled to
receive dividends and includes dividends and interest earned during the period
minus expenses accrued for the period, net of reimbursements. This calculation
can be expressed as follows:
Yield = 2 [(a-b + 1]To the 6th power- 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
51
<PAGE>
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.
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.
Total Return Calculations. Each Fund computes its "average annual total
-------------------------
return" for the separate share classes by determining the average annual
compounded rates of return during specified periods that equate the initial
amount invested in a particular shares class to the ending redeemable value of
such investment in such class. 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 To the nth power) - 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.
52
<PAGE>
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 in a particular class to the ending redeemable value of
such investment in such class. The formula for calculating aggregate total
return is as follows:
T = (ERV - 1
---
P)
The calculations of average annual total return and aggregate total
return assume the reinvestment of all dividends and capital gain distributions
on the reinvestment dates during the period and include all recurring fees
charged to all 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, the fiscal year ended October 31,
1996 for the period from commencement of operations through October 31, 1996 and
for the period from commencement of operations through April 30, 1997, the
average annual total returns for the 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
------------------ ----------------- ----------------- -----------------
Average Annual Total Returns for the fiscal year ended October 31, 1996.
<S> <C> <C> <C> <C>
Short-Term 2.95% 2.51 5.02% 4.57%
Government
Fund
Bond Fund 1.06% N/A 4.71% N/A
Balanced Fund 10.46% 10.11% 14.45% 14.09%
</TABLE>
53
<PAGE>
<TABLE>
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>
Growth and N/A N/A N/A N/A
Income Fund/(2)/
Growth Fund 19.10% N/A 23.43% N/A
MidCap Fund 9.80% N/A 13.78% N/A
International 9.28% 8.25% 13.25% 12.19%
Equity Fund
</TABLE>
/(2)/ Not operational during the period indicated.
<TABLE>
<CAPTION>
Rate Assuming Rate Assuming Rate Assuming No Rate Assuming No
Maximum Sales Load Maximum Sales Load Sales Load and With Sales Load and Without
and With Fee Waivers and Without Fee Fee Waivers and Fee Waivers and
and Reimbursements Waivers and Reimbursements Reimbursements
Reimbursements
Average Annual Total Returns from commencement of operations for the fiscal year ended October 31, 1996
<S> <C> <C> <C> <C>
Short-Term 7.15% 6.68% 8.31% 7.84%
Government
Fund/(1)/
Bond Fund/(1)/ 8.58% N/A 10.64% N/A
Balanced 19.20% 18.52% 21.46% 21.18%
Fund/(1)/
Growth and
Income
Fund/(2)/ N/A N/A N/A N/A
Growth 30.15% N/A 32.61% N/A
Fund/(1)/
MidCap 25.84% N/A 28.22% N/A
Fund/(1)/
International 8.91% 7.51%
Equity 6.89% 5.51%
Fund/(1)/
</TABLE>
<TABLE>
<CAPTION>
Rate Assuming Rate Assuming Rate Assuming No Rate Assuming No
Maximum Sales Load Maximum Sales Load Sales Load and With Sales Load and Without
and With Fee Waivers and Without Fee Fee Waivers and Fee Waivers and
and Reimbursements Waivers and Reimbursements Reimbursements
Reimbursements
<S> <C> <C> <C> <C>
</TABLE>
/(1)/ Commenced operations December 12, 1994.
/(2)/ Not operational during the period indicated.
54
<PAGE>
Based on the foregoing calculations, for the period from commencement
of operations of Shares through the period ended April 30, 1997 and for the
period from commencement of operations to April 30, 1997, the average total
returns for the 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
-------------------- ------------------ ------------------- ------------------
Average Annual Total Returns from commencement of operations through the period ended April 30, 1997.
<S> <C> <C> <C> <C>
Short-Term 6.43% N/A 7.34% N/A
Government
Fund
Bond Fund 7.47% N/A 9.08% N/A
Balanced Fund 17.41% N/A 19.17% N/A
Growth and (4.02)% N/A (0.56)% N/A
Income Fund/(1)/
Growth Fund 28.93% N/A 30.87% N/A
MidCap Fund 16.82% N/A 18.57% N/A
International 7.79% N/A 9.40% N/A
Equity Fund
</TABLE>
/(1)/ Commenced operations March 3, 1997 (Aggregate total return).
55
<PAGE>
<TABLE>
<CAPTION>
Rate Assuming Rate Assuming Rate Assuming No Rate Assuming
Maximum Sales Maximum Sales Sales Load and No
Load and With Fee Load and Without With Fee Waivers Sales Load and
Waivers and Fee Waivers and and Without Fee
Reimbursements Reimbursements Reimbursements Waivers and
---------------------- Reimbursements
Average Annual Total Returns for the one year ending April 30, 1997.
<S> <C> <C> <C> <C>
Short-Term 3.44% N/A 5.52% N/A
Government Fund
Bond Fund 2.74% N/A 6.46% N/A
Balanced Fund 7.83% N/A 11.74% N/A
Growth and Income N/A N/A N/A N/A
Fund
Growth Fund 18.82% N/A 23.11% N/A
MidCap Fund (9.87)% NA (6.61)% N/A
International Equity 2.51% N/A 6.21% N/A
Fund
</TABLE>
56
<PAGE>
Based on the foregoing calculations, for the period from commencement
of operations to April 30, 1997 and for the period from commencement of
operations to October 31, 1996, the aggregate total return of the Funds were as
follows:
<TABLE>
<CAPTION>
Rate Assuming Rate Assuming Rate Assuming No Rate Assuming
Maximum Sales Maximum Sales Sales Load and No
Load and With Fee Load and Without With Fee Waivers Sales Load and
Waivers and Fee Waivers and and Without Fee
Reimbursements Reimbursements Reimbursements Waivers and
Reimbursements
Aggregate Total Return from commencement of operations to April 30, 1997.
<S> <C> <C> <C> <C>
Short-Term 16.04% N/A 18.42% N/A
Government
Fund
Bond Fund 18.75% N/A 23.04% N/A
Balanced Fund 46.66% N/A 51.96% N/A
Growth and (4.02%)% N/A (.50)% N/A
Income Fund
Growth Fund/(1)/ 83.39% N/A 90.01% N/A
MidCap Fund 44.93% N/A 50.16% N/A
International 19.60% N/A 23.92% N/A
Equity Fund
</TABLE>
/(1)/ Commencement March 3, 1997.
57
<PAGE>
<TABLE>
<CAPTION>
Rate Assuming Rate Assuming Rate Assuming No Rate Assuming No
Maximum Sales Maximum Sales Sales Load and Sales Load and
Load and With Fee Load and Without With Fee Waivers Without Fee
Waivers and Fee Waivers and and Waivers and
Reimbursements Reimbursements Reimbursements Reimbursements
------------------ ----------------- ----------------- -----------------
For the period from commencement of operations to October 31, 1996.
<S> <C> <C> <C> <C>
Short-Term 13.95% 13.01% 16.29% 15.33%
Government
Fund/(1)/
Bond Fund/(1)/ 16.84% N/A 21.06% N/A
Balanced Fund/(1)/ 39.38% 38.77% 44.42% 43.78%
Growth and N/A N/A N/A N/A
Income Fund/(2)/
Growth Fund/(1)/ 64.57% N/A 70.51% N/A
MidCap Fund/(1)/ 54.41% N/A 59.99% N/A
International 13.42% 10.68% 17.52% 14.68%
Equity Fund/(1)/
</TABLE>
/(1)/ Commenced operations December 12, 1994.
/(2)/ Not operational during the periods indicated.
The performance information presented above is for each class of the
Fund since the commencement of operations of that Fund, rather than the date
such class was introduced. Performance information for each class introduced
after the commencement of operations of the related Fund is therefore based on
the performance history of a predecessor class. The average annual total return
and aggregate total return information presented in the foregoing Tables for the
periods then ended has been restated to reflect the effect of the maximum sales
charge of 2.00% on purchases of Service Shares of the Short-Term Government Fund
and 3.50% on purchases of Service Shares of the Bond, Balanced, Growth, Growth
and Income, MidCap and International Equity Funds. Additional information is
presented which does not reflect the deduction of sales charges. Historical
expenses reflected in performance information are based upon the distribution,
shareholder servicing and processing fees and other expenses actually incurred
during the periods presented and have not been restated, in cases in which the
performance information for a particular class includes the performance history
of a predecessor class, to reflect the ongoing expenses currently borne by a
particular class. The ongoing fees borne by Service Shares are greater than
those borne by Institutional Shares.
58
<PAGE>
The average annual total returns and aggregate total returns reflected
above in all Tables prior to the introduction of Service Shares do not include
the maximum payments under the Shareholder Administrative Services Plan
applicable to Service Shares and for distribution expenses pursuant to the 12b-1
Plan applicable to Service Shares. Performance information presented assumes
the reinvestment of dividends and distributions. The average annual total
returns and aggregate total returns also do not include fees that may be imposed
by institutions upon their customers. If the foregoing expenses and fees had
been included in the average annual total returns and aggregate total returns
reported above, performance of these Funds would have been lower. Accordingly,
the performance information may be used in assessing the Funds' performance
history but does not reflect how the Service Class would have performed prior to
the introduction of the class, which would require an adjustment to ongoing
expenses.
The Funds may also from time to time include in advertisements, sales
literature, communications to shareowners and other materials ("Literature") a
total return figure in order to compare more accurately its performance with
other measures of investment return. For example, in comparing a Fund's total
return with data published by Lipper Analytical Services, Inc., CDA Investment
Technologies, Inc. or Weisenberger Investment Company Service, or with the
performance of an index, the Fund may calculate its total return for the period
of time specified in the advertisement or communication by assuming the
investment of $10,000 in shares and assuming the value on the reinvestment date.
Percentage increases are determined by subtracting the initial value of the
investment from the ending value and by dividing the remainder by the beginning
value. The Fund does not, for these purposes, deduct from the initial value
invested any amount representing sales charges. The Fund will, however,
disclose the maximum sales charge and will also disclose that the performance
data do not reflect sales charges and that inclusion of sale charges would
reduce the performance quoted.
The Funds may also from time to time include discussions or
illustrations of the effects of compounding in Literature. "Compounding" refers
to the fact that, if dividends or other distributions on a Fund investment are
reinvested by being paid in additional Fund shares, any future income or capital
appreciation of the Fund would increase the value, not only of the original Fund
investment, but also of the additional Fund shares received through
reinvestment. As a result, the value of the Fund investment would increase more
quickly than if dividends or other distributions had been paid in cash.
In addition, the Funds may also include in Literature discussions
and/or illustrations of the potential investment goals of a prospective
investor, investment management strategies, techniques, policies or investment
suitability of the Fund (such as value investing, market timing, dollar cost
averaging, asset allocation, constant ratio transfer, automatic accounting
rebalancing, the advantages and disadvantages of investing in tax-deferred and
taxable investments), economic conditions, the relationship between sectors of
the economy and the economy as a whole, various securities markets, the effects
of inflation
59
<PAGE>
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 September 5, 1997, the Advisor held of record 95% of the
outstanding shares in the Short-Term Government Fund; 94% of the outstanding
shares in the Bond Fund; 73% of the outstanding shares in the Balanced Fund; 82%
of the outstanding shares in the Growth Fund; 73% of the outstanding shares in
the MidCap Fund; 96% of the outstanding shares in the International Equity Fund;
98% of the outstanding shares in the Growth & Income Fund; 99% of the
outstanding shares in the National Tax-Free Bond Fund; and 89% 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 shareholder owned of record 5% or more of the
Bond Fund's outstanding Institutional Shares; the Growth and Income Fund's
outstanding Institutional Shares or the Short-Term Government Fund's outstanding
Institutional Shares.
As of the same date, the following shareholders owned of record 5% or
more of the Balanced Fund's outstanding Institutional Shares as fiduciary or
agent on behalf of their customers: CarQuest 401(k) Plan, c/o Commerce Bank,
922 Walnut Street, Kansas City, MO, 5.9%; Sunnen Employees Profit Sharing Plan,
c/o Commerce Bank, 8000 Forsyth Blvd., Clayton, MO, 14.0%; Blackwell Sanders
Retirement Plan, c/o Commerce Bank, 922 Walnut Street, Kansas City, MO, 5.3% and
GEHA Pension Plan, c/o Commerce Bank, 922 Walnut Street, Kansas City, MO, 12.3%.
60
<PAGE>
As of the same date, the following shareholder owned of record 5% or
more of the Growth Fund's outstanding Institutional Shares as fiduciary or agent
on behalf of their customers: Sunnen Employees Profit Sharing Plan, c/o Commerce
Bank, 8000 Forsyth Blvd., Clayton, MO, 10.1%.
As of the same date, the following shareholder owned of record 5% or
more of the International Equity Fund's outstanding Institutional Shares as
fiduciary or agent on behalf of their customers: Commerce Retirement Plan, c/o
Commerce Bank, 922 Walnut Street, Kansas City, MO, 6.8%.
As of the same date, the following shareholders owned of record 5% or
more of the MidCap Fund's outstanding Institutional Shares as fiduciary or agent
on behalf of their customers: Enterprise Leasing Retirement Plan, c/o Commerce
Bank, 8000 Forsyth Blvd., Clayton, MO, 7.3%; and Sunnen Employees Profit Sharing
Plan, c/o Commerce Bank, 922 Walnut Street, Kansas City, MO, 7.0%.
As of the same date, the following shareholder 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 Pierson Trust, c/o Commerce Bank, 922
Walnut Street, Kansas City, MO, 6.6%.
As of the same date, the following shareholder 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: Ronald D. Limpus Trust, c/o Commerce Bank,
922 Walnut Street, Kansas City, MO, 6.8%.
On the basis of information received from these shareholders, the Fund
believes that substantially all of the shares owned of record were also
beneficially owned by these shareholders because they possessed or shared voting
or investment power with respect to such shares on behalf of their underlying
accounts.
As of September 5, 1997, no person owned of record 5% or more of the
Balanced Fund's outstanding Service Shares.
As of the same date, the following persons owned 5% or more of the
Bond Fund's outstanding Service Shares: James C. and Barbara F. Norris, P.O.
Box 204, Bixby, MO, 10.7%; Donald D. Dixon and Wilma I. Dixon, 34 Flora Drive,
Festus, MO, 5.6%; and Fred J. Harvey, 202 Massot Road, Festus, MO, 5.5%.
As of the same date, the following persons owned 5% or more of the
Growth and Income Fund's outstanding Service Shares: Deborah J. Groves, 1568
Parksite Drive, Cape Girardeau, MO, 12.8%; and Jane M. Bodine Rev. Living Trust,
3016 Aspen, Cape Girardeau, MO, 7.4%.
As of the same date, the following person owned 5% or more of the
Short-Term Government Fund's outstanding Service Shares: Wilma J. Buchanan,
1699 Irish Sea, High Ridge, MO, 6.8%.
61
<PAGE>
As of the same date, the following persons owned 5% or more of the
Growth Fund's outstanding Services Shares: Barbara Ann Tester, 5246 Stirling
Way, Springfield, MO, 5.7%; Donald H. Lenauer and Mary J. Lenauer, 1005
Commercial Drive, Owensville, MO, 5.9%; and Joseph J. Miceli, 14897 Clayton
Road, Chesterfield, MO, 7.0%.
As of the same date, the following persons owned 5% or more of the
International Equity Fund's outstanding Service Shares: Carol A. Liesman, 3 N
260 W. Mary Lane, St. Charles, IL, 5.4%; Judith A. Voepel Rev. Trust, 1724
Lakeshore Drive, Cape Girardeau, MO, 5.8%; Chris and Robin Lenauer, Route 2 Box
286D, Owensville, MO, 9.4%; Franklin E. Liesman, 3 N 260 W. Mary Lane, St.
Charles, IL, 6.3%; and Janice M. and Tod Terry Huber, 6801 N. Shadywood Dr.,
Ozark, MO, 6.5%.
As of the same date, the following persons owned 5% or more of the
MidCap Fund's outstanding Service Shares: John H. Steele, II, 3621 E. Fruitwood
Ln, Springfield, MO, 8.4%; and John D. Muller, 4739 Belleview, Kansas City, MO,
37.2%.
As used in the Statement of Additional Information and in the
Prospectuses of the same date, "assets belonging to a particular series of a
Fund" means the consideration received by The Commerce Funds upon the issuance
or sale of shares in that particular series of the Fund, together with all
income, earnings, profits and proceeds derived from the investment thereof,
including any proceeds from the sale, exchange or liquidation of such
investments, any funds or payments derived from any reinvestments of such
proceeds, and a portion of any general assets of the Fund not belonging to a
particular series of the Fund. Assets belonging to a particular series of the
Fund are charged with the direct liabilities in respect of that particular
series of the Fund and with a share of the general liabilities of the particular
series of the Fund which are normally allocated in proportion to the relative
net asset levels of the respective series and Funds. Determinations by the
Board of Trustees as to the direct and allocable liabilities, and allocable
portion of any general assets, with respect to a particular series or Fund are
conclusive.
As used in the Statement of Additional Information and in the
Prospectus of the same date, "assets belonging to a series of a Fund" means the
consideration received by The Commerce Funds upon the issuance or sale of shares
in that series, together with all income, earnings, profits and proceeds derived
from the investment thereof, including any proceeds from the sale, exchange or
liquidation of such investments, any funds or payments derived from any
reinvestments of such proceeds, and a portion of any general assets of the Fund
not belonging to a particular series of the Fund. Assets belonging to a
particular series of a Fund are charged with the direct liabilities in respect
of that series and with a share of the general liabilities of the series which
are normally allocated in proportion to the relative net asset levels of the
respective series of the Funds. Certain payments under The Commerce Funds'
Distribution and Services Plan, however, are applicable only to Service
62
<PAGE>
Shares of the Funds. Determinations by the Board of Trustees as to the direct
and allocable liabilities, and allocable portion of any general assets, with
respect to a particular series of a Fund are conclusive.
FINANCIAL STATEMENTS
The Commerce Funds' Annual Report with respect to the Funds for the
fiscal period ended October 31, 1996 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, 1996 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. Unaudited financial statements
for each Fund for the six months ended April 30, 1997 are attached hereto and
incorporated by reference into this Statement of Additional Information.
63
<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" - The highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus sign (+)
designation.
"A-2" - Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1."
"A-3" - Issues carrying this designation have 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" - Issues are regarded as having only a speculative capacity for
timely payment.
"C" - This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.
"D" - Issues are 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" - Issuers 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
A-1
<PAGE>
well established access to a range of financial markets and assured sources of
alternate liquidity.
"Prime-2" - Issuers or related supporting institutions are considered
to have a strong capacity for repayment of short-term promissory obligations.
This will normally be evidenced by many of the characteristics cited above but
to a lesser degree. Earnings trends and coverage ratios, while sound, 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" - Issuers 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" - Issuers do not fall within any of the Prime rating
categories.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff & Phelps
employs three designations, "D-1+," "D-1" and "D-1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper:
"D-1+" - Debt possesses 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.
A-2
<PAGE>
"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.
Fitch short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally 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" ratings.
"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:
A-3
<PAGE>
"TBW-1" - This designation represents Thomson BankWatch's highest
rating category and indicates a very high degree of likelihood that principal
and interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of safety
regarding timely payment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1."
"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 which possess a particularly strong credit feature
are supported by the highest capacity for timely repayment.
"A1" - Obligations are supported by the highest capacity for timely
repayment.
"A2" - Obligations are supported by a good capacity for timely
repayment.
A3" - Obligations are supported by a satisfactory capacity for timely
repayment.
"B" - Obligations for which there is an uncertainty as to the capacity
to ensure timely repayment.
"C" - Obligations for which there is a high risk of default or which
are currently in default.
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
- ----------------------------------------------
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
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.
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"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 absence of an "r" symbol should
not be taken as an indication that an obligation will exhibit no volatility or
variability in total return.
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.
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"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.
(P) . . . - When applied to forward delivery bonds, indicates that the
rating is provisional pending delivery of the bonds. The rating may be revised
prior to delivery if changes occur in the legal documents or the underlying
credit quality of the bonds.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are designated by the
symbols, Aa1, A1, Ba1 and B1.
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.
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"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD" and "DP" - Debt that possesses one of these
ratings is considered to be below investment grade. Although below investment
grade, debt rated "BB" is deemed likely to meet obligations when due. Debt
rated "B" possesses the risk that obligations will not be met when due. Debt
rated "CCC" is well below investment grade and has considerable uncertainty as
to timely payment of principal, interest or preferred dividends. Debt rated
"DD" is a defaulted debt obligation, and the rating "DP" represents preferred
stock with dividend arrearages.
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.
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To provide more detailed indications of credit quality, the Fitch
ratings from and including "AA" to "BBB" 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 such that 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
other 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 below
"AAA" to denote relative status within major rating categories.
Thomson BankWatch assesses the likelihood of an untimely repayment of
principal or interest over the term to maturity of long term debt and preferred
stock which are issued by United States commercial banks, thrifts and non-bank
banks; non-United States banks; and broker-dealers. The following summarizes
the rating categories used by Thomson BankWatch for long-term debt ratings:
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"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:
"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.
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"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.
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APPENDIX B
As stated in their Prospectus, the Bond, Balanced, Growth, MidCap, and
International Equity Funds may enter into futures contracts and options for
hedging purposes. Such transactions are described in this Appendix.
I. Interest Rate Futures Contracts
-------------------------------
Use of Interest Rate Futures Contracts. Bond prices are established
--------------------------------------
in both the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally within five business days after the trade. In the
futures market, only a contract is made to purchase or sell a bond in the future
for a set price on a certain date. Historically, the prices for bonds
established in the futures markets have tended to move generally in the
aggregate in concert with the cash market prices and have maintained fairly
predictable relationships. Accordingly, a Fund may use interest rate futures
contracts as a defense, or hedge, against anticipated interest rate changes and
not for speculation. As described below, this would include the use of futures
contract sales to protect against expected increases in interest rates and
futures contract purchases to offset the impact of interest rate declines.
A Fund presently could accomplish a similar result to that which it
hopes to achieve through the use of futures contracts by selling bonds with long
maturities and investing in bonds with short maturities when interest rates are
expected to increase, or conversely, selling short-term bonds and investing in
long-term bonds when interest rates are expected to decline. However, because
of the liquidity that is often available in the futures market, the protection
is more likely to be achieved, perhaps at a lower cost and without changing the
rate of interest being earned by the Fund, by using futures contracts.
Description of Interest Rate Futures Contracts. An interest rate
----------------------------------------------
futures contract sale would create an obligation by a Fund, as seller, to
deliver the specific type of financial instrument called for in the contract at
a specific future time for a specified price. A futures contract purchase would
create an obligation by a Fund, as purchaser, to take delivery of the specific
type of financial instrument at a specific future time at a specific price. The
specific securities delivered or taken, respectively, at settlement date, would
not be determined until at or near that date. The determination would be in
accordance with the rules of the exchange on which the futures contract sale or
purchase was made.
Although interest rate futures contracts by their terms call for
actual delivery or acceptance of securities, in most cases the contracts are
closed out before the settlement date without the making or taking of delivery
of securities. Closing out a futures contract sale is effected by the Fund
entering into a futures contract purchase for the same aggregate amount 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
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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.
III. Futures Contracts on Foreign Currencies
---------------------------------------
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The International Equity Fund may enter into futures contracts on
foreign currency. This futures contract is a binding obligation on one party to
deliver, and a corresponding obligation on another party to accept delivery of,
a stated quantity of foreign currency, for an amount fixed in U.S. dollars.
Foreign currency futures may be used by a Fund to hedge against exposure to
fluctuations in exchange rates between the U.S. dollar and other currencies
arising from multinational transactions.
IV. Margin Payments
---------------
Unlike purchase or sales of portfolio securities, no price is paid or
received by a Fund upon the purchase or sale of a futures contract. Initially,
a Fund will be required to deposit with the broker or in a segregated account
with the Custodian an amount of cash or cash equivalents, known as initial
margin, based on the value of the contract. The nature of initial margin in
futures transactions is different from that of margin in security transactions
in that futures contract margin does not involve the borrowing of funds by the
customer to finance the transactions. Rather, the initial margin is in the
nature of a performance bond or good faith deposit on the contract which is
returned to the Fund upon termination of the futures contract assuming all
contractual obligations have been satisfied. Subsequent payments, called
variation margin, to and from the broker, will be made on a daily basis as the
price of the underlying instruments fluctuates making the long and short
positions in the futures contract more or less valuable, a process known as
marking-to-the-market. For example, when a particular Fund has purchased a
futures contract and the price of the contract has risen in response to a rise
in the underlying instruments, that position will have increased in value and
the Fund will be entitled to receive from the broker a variation margin payment
equal to that increase in value. Conversely, where the Fund has purchased a
futures contract and the price of the future contract has declined in response
to a decrease in the underlying instruments, the position would be less valuable
and the Fund would be required to make a variation margin payment to the broker.
At any time prior to expiration of the futures contract, a Fund may elect to
close the position by taking an opposite position, subject to the availability
of a secondary market, which will operate to terminate the Fund's position in
the futures contract. A final determination of variation margin is then made,
additional cash is required to be paid by or released to the Fund, and the Fund
realizes a loss or gain.
V. Risks of Transactions in Futures Contracts
------------------------------------------
There are several risks in connection with the use of futures by a
Fund as a hedging device. One risk arises because of the imperfect correlation
between movements in the price of the futures and movements in the price of the
instruments which are the subject of the hedge. The price of the future may
move more than or less than the price of the instruments being hedged. If the
price of the futures moves less than the price of the instruments which are the
subject of the hedge, the hedge will not be fully effective but, if the price of
the instruments being hedged has moved in an unfavorable direction, the Fund
would be in a better position than if it had not hedged at all. If the price of
the instruments
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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.
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
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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 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
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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 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.
B-6
<PAGE>
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 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
B-7
<PAGE>
(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 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
B-8
<PAGE>
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.
B-9
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
SHORT-TERM GOVERNMENT FUND
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- ------------ --------- ----------- ---------------
<S> <C> <C> <C>
Collateralized Mortgage Obligations--22.3%
Federal Home Loan Mortgage Corp.
Series 180, Class G
$ 958,613 8.00% 09/15/21 $ 964,901
Federal Home Loan Mortgage Corp.
Series 1255, Class G
455,000 7.50 07/15/21 456,988
Federal Home Loan Mortgage Corp.
Series 1727, Class E
660,000 6.50 04/15/18 653,809
Federal National Mortgage Assn.
Series 1993-29, Class FA
281,000 6.50 03/25/20 274,413
Federal National Mortgage Assn.
Series 1993-130, Class H
510,000 6.30 09/25/18 497,250
Federal National Mortgage Assn.
Series 1993-139, Class KB
1,000,000 7.00 11/25/00 1,002,810
Federal National Mortgage Assn.
Series 1993-140, Class D
1,160,000 5.50 08/25/07 1,147,675
Prudential Home Mortgage Securities
Series 1993-43, Class A1
1,042,129 5.40 10/25/23 1,026,820
Residential Funding Mortgage Securities
Series 1993-S49, Class A2
1,000,000 6.00 12/25/08 982,180
Westam Mortgage Financial Corp.
Series 7, Class F
1,675,818 9.30 10/01/15 1,721,366
---------------
Total Collateralized
Mortgage Obligations
(cost $8,762,344) ........ $ 8,728,212
---------------
Mortgage-Backed Pass-Through Obligations--9.1%
Federal Home Loan Mortgage Corp.
$ 46,630 8.75% 02/01/01 $ 47,985
96,236 8.75 04/01/01 100,145
622,796 8.25 08/01/01 638,560
972,529 7.00 05/01/26 946,388
Federal National Mortgage Assn.
495,893 6.50% 02/01/12 481,636
447,085 9.00 07/01/24 469,021
Government National Mortgage Assn.
303,025 8.00 10/15/16 311,640
555,185 8.00 07/15/17 570,136
---------------
Total Mortgage-Backed
Pass-Through Obligations
(cost $3,537,325) ....... $ 3,565,511
---------------
U.S. Government Agency Obligations--52.9%
Federal Agriculture Mortgage Corp.
$ 500,000 6.69% 02/10/00 $ 501,430
Federal Farm Credit Bank
1,000,000 7.17 04/03/00 1,014,690
1,000,000 6.10 11/19/01 975,160
Federal Home Loan Bank
530,000 7.13 03/27/00 537,452
1,000,000 7.44 08/10/01 1,025,620
1,000,000 6.53 08/28/01 992,970
1,000,000 6.63 08/28/01 995,290
965,000 7.56 02/27/02 997,414
Federal Home Loan Mortgage Corp.
1,000,000 7.93 01/20/98 1,013,440
1,000,000 7.82 01/27/98 1,012,970
500,000 7.90 01/27/00 516,485
1,000,000 6.52 08/25/00 997,500
500,000 6.70 07/25/01 499,685
Federal National Mortgage Assn.
1,000,000 6.36 08/16/00 993,910
1,000,000 9.20 09/11/00 1,077,810
250,000 6.18 03/15/01 246,055
500,000 6.63 04/18/01 498,830
700,000 6.38 08/14/01 690,592
Israel Aid Series 5A
2,000,000 7.75 11/15/99 2,054,060
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
SHORT-TERM GOVERNMENT FUND--(Continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- --------------- --------- ------------ -----------
<S> <C> <C> <C>
U.S. Government Agency Obligations--Continued
Tennessee Valley Authority 1989,
Series D
$2,000,000 8.38% 10/01/99 $ 2,080,620
575,000 6.00 11/01/00 563,500
U.S. Department of Housing & Urban
Development Series 1994-A
100,000 6.44 08/01/02 97,235
U.S. Department of Housing & Urban
Development Series 1995-A
1,250,000 8.15 08/01/00 1,302,500
-----------
Total U.S. Government
Agency Obligations
(cost $20,752,777) ....... $20,685,218
-----------
Short-Term Obligations--14.0%
Federal Farm Credit Bank
$3,000,000 5.37% 05/15/97 $ 2,993,758
Federal National Mortgage Assn.
2,500,000 5.44 05/01/97 2,500,000
-----------
Total Short-Term
Obligations
(cost $5,493,758) ........ $ 5,493,758
-----------
Repurchase Agreements--2.1%
State Street Bank & Trust Company,
dated 04/30/97, repurchase price
$818,117 (U.S. Treasury Bonds:
$834,847, 8.13%, 08/15/21)
$ 818,000 5.15% 05/01/97 $ 818,000
-----------
Total Repurchase
Agreements
(cost $818,000) .......... $ 818,000
-----------
Total Investments
(cost $39,364,204/(a)/)... $39,290,699
===========
- ----------------------------------------------------------------
Federal Income Tax Information:
Gross unrealized gain for
investments in which value
exceeds cost ........................... $ 256,271
Gross unrealized loss for
investments in which cost
exceeds value .......................... (329,776)
-----------
Net unrealized loss ..................... $ (73,505)
===========
- ----------------------------------------------------------------
</TABLE>
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
/(a)/The cost stated also represents aggregate cost for income tax purposes.
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
BOND FUND
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- ------------------ ----------- ------------- ---------------
<S> <C> <C> <C>
Asset-Backed Securities--26.5%
AUTO--1.2%
NationsBank Auto Owner Trust
Series 1996-A, Class A4
$ 2,000,000 6.63% 12/15/00 $ 2,005,620
---------------
CREDIT CARD--10.8%
American Express Master Trust
Series 1994-3, Class A
$ 2,000,000 7.85% 08/15/05 $ 2,091,860
Chemical Master Credit Card Trust 1
Series 1995-3, Class A
2,000,000 6.23 04/15/05 1,943,740
Choice Credit Card Master Trust
Series 1992, Class 2B
2,000,000 7.20 04/15/99 2,019,520
Discover Card Master Trust
Series 1993-3, Class A
2,000,000 6.20 05/16/06 1,922,500
Discover Card Trust
Series 1991-F, Class B
2,000,000 8.35 11/21/00 2,043,740
MBNA Master Credit Card Trust
Series 1995-C, Class A
2,000,000 6.45 02/15/08 1,936,860
Standard Credit Card Master Trust
Series 1993-2, Class A
2,000,000 5.95 10/07/04 1,900,380
Standard Credit Card Master Trust
Series 1995-1, Class A
2,000,000 8.25 01/07/07 2,137,840
Standard Credit Card Master Trust
Series 1995-1, Class B
2,000,000 8.45 01/07/07 2,142,860
---------------
$ 18,139,300
---------------
HOME EQUITY--2.5%
Advanta Mortgage Loan Trust
Series 1994-4, Class A2
$ 4,000,000 8.92% 01/25/26 $ 4,225,160
---------------
MANUFACTURED HOUSING--12.0%
Associates Manufactured Housing
Series 1986-1, Class A5
$ 4,000,000 7.60% 03/15/27 $ 4,030,000
Green Tree Financial Corp. Series
1993-4, Class A4
2,000,000 6.60 01/15/19 1,966,860
Green Tree Financial Corp. Series
1993-4, Class A5
4,000,000 7.05 01/15/19 3,903,720
Green Tree Financial Corp. Series
1994-2, Class A4
4,000,000 7.90 05/15/19 4,138,720
Green Tree Financial Corp. Series
1996-4, Class A7
4,000,000 7.90 06/15/27 4,080,000
Green Tree Financial Corp. Series
1996-8, Class M1
2,000,000 7.85 10/15/27 2,036,240
---------------
$ 20,155,540
---------------
Total Asset-Backed Securities
(cost $43,547,427) .......... $ 44,525,620
---------------
Collateralized Mortgage Obligations--5.8%
Federal Home Loan Mortgage Corp.
Series 60, Class H
$ 7,000,000 9.00% 07/15/20 $ 6,884,010
Federal National Mortgage Assn.
Series 1993-130, Class H
1,000,000 6.30 09/25/18 975,000
PNC Mortgage Securities Corp.
Series 1996-1, Class A1
1,916,207 7.50 09/25/09 1,928,183
---------------
Total Collateralized
Mortgage Obligations
(cost $9,958,807) ........... $ 9,787,193
---------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
BOND FUND--(Continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- ------------------ ----------- ------------- ----------------
<S> <C> <C> <C>
Corporate Obligations--15.2%
FINANCIAL--11.7%
American Express Credit Corp.
$ 2,000,000 6.13% 11/15/01 $ 1,937,800
BankAmerica Corp.
2,000,000 6.88 06/01/03 1,974,800
Chemical Bank
2,000,000 6.70 08/15/08 1,888,260
Chubb Capital Corp.
2,000,000 6.00 02/01/98 1,996,740
Ford Motor Company Credit Corp.
2,000,000 6.63 06/30/03 1,949,440
General Motors Acceptance Corp.
2,000,000 6.63 10/15/05 1,909,680
Morgan Stanley Group, Inc.
2,000,000 6.75 03/04/03 1,965,600
NationsBank Corp.
1,000,000 7.75 08/15/15 1,005,260
1,000,000 7.80 09/15/16 997,470
PNC Bank N.A.
2,000,000 7.88 04/15/05 2,055,140
Smith Barney Holdings, Inc.
2,000,000 6.63 06/01/00 1,988,120
---------------
$ 19,668,310
---------------
INDUSTRIAL--2.3%
Hanson Overseas BV
$ 2,000,000 6.75% 09/15/05 $ 1,933,200
Shell Oil Co.
1,000,000 6.95 12/15/98 1,007,110
Union Pacific Railroad Corp.
1,000,000 6.44 01/15/98 1,001,070
---------------
$ 3,941,380
---------------
UTILITIES--1.2%
Duke Power Corp.
$ 1,000,000 7.37% 02/02/04 $ 1,003,460
Union Electric Co.
1,000,000 6.75% 10/15/99 $ 998,820
---------------
$ 2,002,280
---------------
Total Corporate Obligations
(cost $25,051,832) .......... $ 25,611,970
---------------
Foreign Bonds--0.6%
Hydro Quebec Note
$ 1,000,000 7.96% 12/17/01 $ 1,035,450
---------------
Total Foreign Bonds
(cost $971,660) ............... $ 1,035,450
---------------
Mortgage-Backed Pass-Through Obligations--28.9%
Federal Home Loan Mortgage Corp.
$ 2,383,543 8.50% 02/01/19 $ 2,487,442
2,716,750 8.50 03/01/21 2,835,581
11,670,350 7.00 05/01/26 11,356,652
Federal National Mortgage Assn.
1,188,820 7.19 07/01/06 1,183,061
3,859,054 7.00 07/01/09 3,837,328
991,786 6.50 02/01/12 963,272
1,683,711 6.50 07/01/14 1,619,073
1,995,813 9.00 11/01/21 2,113,765
1,318,112 9.00 02/01/25 1,398,293
Government National Mortgage Assn.
3,933,802 8.00 02/15/22 4,013,658
4,932,532 7.00 09/15/23 4,803,053
2,298,054 7.50 08/20/25 2,271,466
9,851,656 7.50 07/20/26 9,725,358
---------------
Total Mortgage-Backed
Pass-Through Obligations
(cost $47,353,228) .......... $ 48,608,002
---------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
BOND FUND--(Continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
----------- ---------- ---------- ------------
<S> <C> <C> <C>
U.S. Government Agency Obligations--1.2%
Federal Home Loan Bank
$ 1,000,000 6.32% 02/01/00 $ 993,670
Federal Home Loan Mortgage Corp.
1,000,000 6.20 04/15/03 969,840
------------
Total U.S. Government
Agency Obligations
(cost $1,863,696) ........... $ 1,963,510
------------
U.S. Treasury Obligations--15.5%
United States Treasury Bonds
$ 6,000,000 7.25% 05/15/16 $ 6,141,540
6,000,000 7.50 11/15/16 6,292,500
United States Treasury Notes
4,000,000 5.75 10/31/00 3,909,360
5,000,000 5.88 11/15/05 4,721,100
5,000,000 7.00 07/15/06 5,084,350
------------
Total U.S. Treasury
Obligations
(cost $26,571,328) .......... $ 26,148,850
------------
Short-Term Obligations--3.6%
Banc One Corp. Commercial Paper
$ 3,000,000 5.53% 05/15/97 $ 2,993,583
Merrill Lynch & Co., Inc. Commercial Paper
3,000,000 5.55 05/01/97 3,000,000
------------
Total Short-Term
Obligations
(cost $5,993,583) ........... $ 5,993,583
------------
Repurchase Agreements--1.8%
State Street Bank & Trust Company,
dated 4/30/97, repurchase price
$3,019,432 (U.S. Treasury Note:
$3,080,961, 6.38%, 04/30/99)
$ 3,019,000 5.15% 05/01/97 $ 3,019,000
------------
Total Repurchase
Agreements
(cost $3,019,000) ........... $ 3,019,000
------------
Total Investments
(cost $164,330,561/(a)/) $166,693,178
------------
- -------------------------------------------------------------------------------
Federal Income Tax Information:
Gross unrealized gain for
investments in which value
exceeds cost ................................ $ 3,792,407
Gross unrealized loss for
investments in which cost
exceeds value ............................... (1,429,790)
------------
Net unrealized gain .................... $ 2,362,617
============
</TABLE>
- -------------------------------------------------------------------------------
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
/(a)/ The cost stated also represents aggregate cost for federal income tax
purposes.
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
BALANCED FUND
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Description Value
- ----------- ------------- -------
<S> <C> <C>
Common Stocks--54.1%
AEROSPACE/DEFENSE--1.1%
9,900 Lockheed Martin Corp. $ 886,050
------------
AUTOMOTIVE PRODUCTS--1.4%
39,100 Chrysler Corp. $ 1,173,000
------------
BASIC INDUSTRIES--1.0%
11,600 Aluminum Company of America $ 810,550
------------
BIOTECHNOLOGY--0.9%
12,400 Amgen, Inc./(a)/ $ 730,050
------------
BUSINESS SERVICES--3.2%
24,600 Equifax, Inc. $ 707,250
17,000 First Data Corp. 586,500
7,600 Omnicom Group 402,800
10,000 Personnel Group of America, Inc./(a)/ 240,000
32,300 Reynolds & Reynolds Co. 670,225
------------
$ 2,606,775
------------
CHEMICAL PRODUCTS--1.3%
6,000 Du Pont (E.I.) de Nemours & Co. $ 636,750
10,500 OM Group, Inc. 292,688
5,000 Thermo Instrument Systems, Inc./(a)/ 156,875
------------
$ 1,086,313
------------
COMPUTER SERVICES/SOFTWARE--3.5%
10,000 American Management Systems, Inc./(a)/ $ 247,500
8,000 Cadence Design Systems, Inc./(a)/ 256,000
8,800 Cisco Systems, Inc./(a)/ 455,400
12,000 Cognos, Inc./(a)/ 304,500
4,100 Gateway 2000, Inc./(a)/ 224,987
7,500 McAfee Associates, Inc./(a)/ 418,125
3,500 Microsoft Corp./(a)/ 425,250
10,400 Network General Corp./(a)/ 143,000
8,800 Parametric Technology Corp./(a)/ 398,200
------------
$ 2,872,962
------------
CONSUMER GOODS--0.8%
12,400 Nike, Inc. $ 697,500
------------
DIVERSIFIED MANUFACTURING--4.8%
11,400 Allied Signal, Inc. $ 823,650
12,800 Dover Corp. 678,400
10,000 DT Industries, Inc. 260,000
28,000 Federal Signal Corp. 682,500
15,900 Illinois Tool Works, Inc. 1,452,863
------------
$ 3,897,413
------------
ELECTRICAL SERVICES--0.8%
17,500 Union Electric Co. $ 623,438
------------
ELECTRONICS & OTHER ELECTRICAL EQUIPMENT--8.6%
20,600 Adaptec, Inc./(a)/ $ 762,200
13,200 ADC Telecommunications, Inc./(a)/ 344,850
14,000 Belden, Inc. 430,500
5,000 Emerson Electric Co. 253,750
13,900 General Electric Co. 1,541,162
6,300 Intel Corp. 964,688
11,400 Linear Technology Corp. 572,850
10,000 Logicon, Inc./(b)/ 397,500
12,000 Symbol Technologies, Inc. 388,500
7,000 Texas Instruments, Inc. 624,750
14,800 Xilinx, Inc./(a)/ 725,200
------------
$ 7,005,950
------------
FINANCIAL SERVICES--8.0%
8,100 BankAmerica Corp. $ 946,687
14,000 Fair Isaac & Co., Inc. 442,750
25,400 Federal National Mortgage Assn. 1,044,575
14,550 Franklin Resources, Inc. 860,269
17,400 Green Tree Financial Corp. 515,475
5,400 Morgan Stanley Group, Inc. 340,875
15,400 Norwest Corp. 768,075
26,775 Synovus Financial Corp. 649,294
18,000 Travelers Group, Inc. 996,750
------------
$ 6,564,750
------------
HEALTH & MEDICAL SERVICES--3.9%
9,100 Abbott Laboratories $ 555,100
24,000 Ballard Medical Products 456,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
BALANCED FUND--(Continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Description Value
- ----------- ------------- -------
<S> <C> <C>
Common Stocks--Continued
HEALTH & MEDICAL SERVICES--CONTINUED
9,400 Dentsply International, Inc. $ 465,300
5,000 Guidant Corp. 341,250
16,100 Johnson & Johnson 986,125
3,600 McKesson Corp. 260,550
8,000 Medic Computer Systems, Inc./(a)/ 125,000
------------
$ 3,189,325
------------
HOUSEHOLD PRODUCTS--0.4%
3,500 Gillette Co. $ 297,500
------------
INDUSTRIAL MACHINERY--2.4%
14,100 Caterpillar, Inc. $ 1,254,900
7,500 Lindsay Manufacturing Co. 213,750
10,000 Sealed Air Corp./(a)/ 462,500
------------
$ 1,931,150
------------
INSURANCE SERVICES--4.1%
10,500 Allied Group, Inc. $ 388,500
10,000 American Bankers Insurance Group, Inc. 528,750
20,800 Conseco, Inc. 860,600
8,500 Orion Capital Corp. 532,313
5,000 Protective Life Corp./(b)/ 221,250
17,600 SunAmerica, Inc. 809,600
------------
$ 3,341,013
------------
OIL & GAS--3.6%
10,000 BJ Services Co./(a)/ $ 471,250
11,400 Mobil Corp. 1,482,000
5,400 Royal Dutch Petroleum ADR 973,350
------------
$ 2,926,600
------------
PHARMACEUTICALS--1.1%
10,100 Merck & Co. $ 914,050
------------
RETAIL TRADE--2.2%
20,025 Consolidated Stores Corp./(a)/ $ 801,000
20,000 Gap, Inc. 637,500
7,900 Walgreen Co. 363,400
------------
$ 1,801,900
------------
TEXTILES--0.3%
8,000 G & K Services, Inc. $ 232,000
------------
TRANSPORTATION/STORAGE--0.7%
16,000 Air Express International Corp. $ 548,000
------------
Total Common Stocks
(cost $33,613,919) ............ $44,136,289
------------
<CAPTION>
Principal Interest Maturity
Amount Rate Date
- ----------- ------------- ----------
<S> <C> <C> <C>
Asset-Backed Securities--9.3%
AUTO--0.6%
NationsBank Auto Owner Trust
Series 1996-A, Class A4
$ 500,000 6.63% 12/15/00 $ 501,405
------------
CREDIT CARD--5.0%
American Express Master Trust
Series 1994-3, Class A
$ 500,000 7.85% 08/15/05 $ 522,965
Choice Credit Card Master Trust
Series 1992, Class 2B
500,000 7.20 04/15/99 504,880
Discover Card Master Trust
Series 1993-3, Class A
500,000 6.20 05/16/06 480,625
J.C. Penney Master Credit Card Trust
Series B, Class A
500,000 8.95 10/15/01 524,350
MBNA Master Credit Card Trust
Series 1995-C, Class A
500,000 6.45 02/15/08 484,215
Standard Credit Card Master Trust
Series 1991-6, Class B
500,000 8.35 01/07/99 512,030
Standard Credit Card Master Trust
Series 1993-2, Class A
500,000 5.95 10/07/04 475,095
Standard Credit Card Master Trust
Series 1995-1, Class B
500,000 8.45 01/07/07 535,715
------------
$ 4,039,875
------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
BALANCED FUND--(Continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- ----------- ------------- ---------- -------
<S> <C> <C> <C>
Asset-Backed Securities--Continued
HOME EQUITY--0.6%
Advanta Mortgage Loan Trust Series
1994-4, Class A2
$ 500,000 8.92% 01/25/26 $ 528,145
------------
MANUFACTURED HOUSING--3.1%
Green Tree Financial Corp. Series
1993-4, Class A4
$ 500,000 6.60% 01/15/19 $ 491,715
Green Tree Financial Corp. Series
1993-4, Class A5
500,000 7.05 01/15/19 487,965
Green Tree Financial Corp. Series
1994-2, Class A4
500,000 7.90 05/15/19 517,340
Green Tree Financial Corp. Series
1996-4, Class A7
500,000 7.90 06/15/27 510,000
Green Tree Financial Corp. Series
1996-5, Class A6
500,000 7.75 07/15/27 515,155
------------
$ 2,522,175
------------
Total Asset-Backed Securities
(cost $7,447,283) ................ $ 7,591,600
------------
Collateralized Mortgage Obligations--2.4%
Federal Home Loan Mortgage Corp.
Series 60, Class H
$1,000,000 9.00% 07/15/20 $ 983,430
Federal National Mortgage Assn.
Series 1993-130, Class H
500,000 6.30 09/25/18 487,500
Residential Funding Mortgage Securities
Corp. Series 1995, Class A4
500,000 8.00 04/25/10 503,905
------------
Total Collateralized Mortgage
Obligations (cost $2,011,641) .... $ 1,974,835
------------
Corporate Obligations--6.7%
FINANCIAL--4.9%
BankAmerica Corp.
$ 500,000 6.88% 06/01/03 $ 493,700
Chemical Bank
500,000 6.70 08/15/08 472,065
Ford Motor Company Credit Corp.
500,000 6.63 06/30/03 487,360
General Electric Capital Corp.
500,000 8.30 09/20/09 549,680
Morgan Stanley Group, Inc.
500,000 6.75 03/04/03 491,400
NationsBank Corp.
500,000 7.80 09/15/16 498,735
PNC Bank N.A.
500,000 7.88 04/15/05 513,785
Smith Barney Holdings, Inc.
500,000 6.63 06/01/00 497,030
------------
$ 4,003,755
------------
INDUSTRIAL--1.2%
Gannett, Inc.
$ 500,000 5.25% 03/01/98 $ 496,350
Hanson Overseas BV
500,000 6.75 09/15/05 483,300
------------
$ 979,650
------------
UTILITIES--0.6%
AT& T Corp.
$ 500,000 7.13% 01/15/02 $ 505,085
------------
Total Corporate Obligations
(cost $5,269,223) ................ $ 5,488,490
------------
Mortgage-Backed Pass-Through Obligations--11.5%
Federal Home Loan Mortgage Corp.
$1,945,058 7.00% 05/01/26 $ 1,892,775
Federal National Mortgage Assn.
1,543,622 7.00 07/01/09 1,534,931
495,893 6.50 02/01/12 481,636
</TABLE>
The accompanying notes are an integral part of these financial statements.
12
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
BALANCED FUND--(Continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- ----------- ------------- ---------- ------------
<S> <C> <C> <C>
Mortgage-Backed Pass-Through Obligations--Continued
Government National Mortgage Assn.
$ 983,450 8.00% 02/15/22 $ 1,003,414
1,620,331 7.00 09/15/23 1,577,798
919,222 7.50 08/20/25 908,586
1,970,331 7.50 07/20/26 1,945,071
------------
Total Mortgage-Backed Pass-Through
Obligations (cost $9,114,398) ..... $ 9,344,211
------------
U.S. Government Agency Obligations--0.9%
Federal Home Loan Bank
$ 750,000 6.63% 08/28/01 $ 746,467
------------
Total U.S. Government Agency
Obligations (cost $695,325) ....... $ 746,467
------------
U.S. Treasury Obligations--4.9%
United States Treasury Bonds
$1,000,000 7.25% 05/15/16 $ 1,023,590
1,000,000 7.50 11/15/16 1,048,750
United States Treasury Notes
1,000,000 5.88 11/15/05 944,220
1,000,000 7.00 07/15/06 1,016,870
------------
Total U.S. Treasury Obligations
(cost $4,106,563) ................. $ 4,033,430
------------
Repurchase Agreements--9.9%
State Street Bank & Trust Company, dated
04/30/97, repurchase price $8,061,153
(U.S. Treasury Note: $8,225,607, 5.50%,
04/15/00)
$8,060,000 5.15% 05/01/97 $ 8,060,000
------------
Total Repurchase Agreements
(cost $8,060,000) ................. $ 8,060,000
------------
Total Investments
(cost $70,318,352/(c)/) ........... $81,375,322
============
- -------------------------------------------------------------------------------
Federal Income Tax Information:
Gross unrealized gain for investments in which
value exceeds cost ..........................
$11,715,975
Gross unrealized loss for investments in which
cost exceeds value .......................... (698,693)
------------
Net unrealized gain ........................... $11,017,282
============
</TABLE>
- -------------------------------------------------------------------------------
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
/(a)/Non-income producing security.
/(b)/There are common stock rights attached to these securities.
/(c)/The aggregate cost for federal income tax purposes is $70,358,040.
- -------------------------------------------------------------------------------
Investment Abbreviations:
ADR--American Depository Receipts
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
13
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
GROWTH AND INCOME FUND
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Description Value
- ------------ ---------------- -----------------
<S> <C> <C>
Common Stocks--94.0%
AEROSPACE/DEFENSE--3.1%
3,000 General Dynamics Corp. $ 213,750
2,100 Northrop Grumman Corp. 175,350
-----------------
$ 389,100
-----------------
AUTOMOTIVE PRODUCTS--3.9%
3,000 Borg-Warner Automotive, Inc. $ 126,000
4,600 Ford Motor Co. 159,850
3,500 General Motors Corp. 202,562
-----------------
$ 488,412
-----------------
BUILDING MATERIALS & CONSTRUCTION--1.5%
5,000 Centex Corp. $ 180,000
-----------------
BUSINESS SERVICES--0.7%
6,000 Safety Kleen Corp. $ 89,250
-----------------
CHEMICAL PRODUCTS--4.6%
4,000 BF Goodrich Co. $ 159,500
6,000 Dexter Corp. 179,250
6,000 Hanna M.A. Co. 125,250
5,800 Schulman, Inc. 110,200
-----------------
$ 574,200
-----------------
COMMUNICATIONS--0.5%
3,600 News Corp, Ltd. ADR $ 66,600
-----------------
COMPUTER SERVICES/SOFTWARE--0.9%
3,500 Sterling Software, Inc./(a)/ $ 106,750
-----------------
ELECTRICAL SERVICES--1.2%
4,000 Union Electric Co. $ 142,500
-----------------
ELECTRONICS & OTHER ELECTRICAL EQUIPMENT--3.9%
4,500 Arrow Electronics, Inc./(a)/ $ 250,312
12,000 VLSI Technology, Inc./(a)/ 238,500
-----------------
$ 488,812
-----------------
FINANCIAL SERVICES--16.3%
2,800 A. G. Edwards, Inc. $ 98,000
2,000 BankAmerica Corp. 233,750
5,000 Bankers Trust Corp. 406,875
6,000 Bear Stearns Companies, Inc. 183,000
7,500 Equitable Companies, Inc. 219,375
2,500 JP Morgan & Co, Inc. 254,688
5,000 Lehman Brothers Holdings, Inc. 169,375
4,000 Morgan Stanley Group, Inc. 252,500
4,000 Salomon Brothers, Inc. 200,000
-----------------
$ 2,017,563
-----------------
INDUSTRIAL MACHINERY--2.1%
2,000 Ingersoll-Rand Co. $ 98,250
3,600 Springs Industries, Inc. 168,300
-----------------
$ 266,550
-----------------
INSURANCE SERVICES--15.6%
3,500 Ace, Ltd. $ 210,000
3,500 AMBAC, Inc. 226,625
3,000 Berkley W R Corp. 147,750
1,000 Cigna Corp. 150,375
2,200 Cincinnati Financial Corp. 153,450
6,000 Financial Securities Assurance Holdings,
Ltd. 194,250
4,000 Lincoln National Corp. 224,000
2,500 MBIA, Inc./(b)/ 243,438
6,000 Old Rep International Corp. 169,500
3,500 Orion Capital Corp. 219,188
-----------------
$ 1,938,576
-----------------
MINING - METALS/MINERALS--1.6%
3,000 AK Steel Holding Corp. $ 108,750
7,000 LTV Corp. 91,875
-----------------
$ 200,625
-----------------
OFFICE & BUSINESS EQUIPMENT--1.4%
4,400 Stratus Computer, Inc./(a)/ $ 171,050
-----------------
OIL & GAS--10.8%
1,300 Atlantic Richfield Co. $ 176,962
4,000 Helmerich & Payne, Inc. 191,000
5,000 Imperial Oil, Ltd. 228,125
5,000 Phillips Petroleum Co. 196,875
15,000 Quaker State Corp. 225,000
17,000 Ranger Oil, Ltd. 170,000
5,500 YPF Sociedad Anonima ADR 151,938
-----------------
$ 1,339,900
-----------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
14
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
GROWTH AND INCOME FUND--(Continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Description Value
- ------------ ----------------- -----------------
<S> <C> <C>
Common Stocks--Continued
PAPER & FOREST PRODUCTS--1.0%
4,300 James River Corp. $ 128,462
-----------------
PHARMACEUTICALS--1.7%
18,000 Perrigo Co./(a)/ $ 211,500
-----------------
RETAIL TRADE--4.0%
4,000 Dayton Hudson Corp. $ 180,000
5,000 Great Atlantic & Pacific Tea Co., Inc. 124,375
4,000 JC Penney, Inc. 191,000
-----------------
$ 495,375
-----------------
TEXTILES--2.3%
3,000 Liz Claiborne, Inc. $ 135,750
2,000 VF Corp. 144,250
-----------------
$ 280,000
-----------------
TOBACCO--1.4%
6,000 Universal Corp. $ 168,000
-----------------
TRANSPORTATION/STORAGE--1.7%
2,300 Norfolk Southern Corp. $ 206,713
-----------------
UTILITIES--13.8%
2,500 Allegheny Power Systems, Inc. $ 65,625
7,000 Consolidated Edison Co. of New York, Inc. 194,250
1,300 Consolidated Natural Gas Co. 65,487
2,600 Duke Power Co. 114,075
6,000 Florida Progress Corp./(b)/ 184,500
3,000 FPL Group, Inc. 133,875
2,200 GPU, Inc. 70,950
2,500 Ipalco Enterprises, Inc./(b)/ 76,250
1,800 National Fuel Gas Co. of New Jersey 74,925
1,400 Northern States Power Co. of Minnesota 63,700
3,200 Northwest Natural Gas Co. 77,600
4,500 Peoples Energy Corp 151,875
7,000 Washington Gas Co. 161,000
2,200 Wicor, Inc. 77,275
2,000 Public Service Co. of Colorado 77,500
3,000 Telefonos de Mexico SA ADR 123,750
-----------------
$ 1,712,637
-----------------
Total Common Stocks
(cost $11,653,904) ............ $ 11,662,575
-----------------
<CAPTION>
Principal Interest Maturity
Amount Rate Date
- ----------------- ----------- ------------
<S> <C> <C> <C>
Repurchase Agreements--9.9%
State Street Bank & Trust Company, dated 04/30/97,
repurchase price $1,234,177 (U.S. Treasury
Bond: $1,263,209, 9.25%, 02/15/16)
$ 1,234,000 5.15% 05/01/97 $ 1,234,000
-----------------
Total Repurchase Agreements
(cost $1,234,000) ............. $ 1,234,000
-----------------
Total Investments
(cost $12,887,904/(c)/) ....... $ 12,896,575
=================
- -------------------------------------------------------------------------------
Federal Income Tax Information:
Gross unrealized gain for investments in which
value exceeds cost ........................... $ 285,733
Gross unrealized loss for investments in which
cost exceeds value ........................... (277,062)
----------------
Net unrealized gain .............................. $ 8,671
=================
</TABLE>
- -------------------------------------------------------------------------------
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
/(a)/Non-income producing security.
/(b)/There are common stock rights attached to these securities.
/(c)/The cost stated also represents aggregate cost for federal income tax
purposes.
- -------------------------------------------------------------------------------
Investment Abbreviations:
ADR--American Depository Receipts
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
15
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
GROWTH FUND
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Description Value
- -------------- ---------------- -------------------
<S> <C> <C>
Common Stocks--87.7%
AEROSPACE/DEFENSE--2.4%
73,000 Lockheed Martin Corp. $ 6,533,500
-------------------
AUTOMOTIVE PRODUCTS--2.8%
250,000 Chrysler Corp. $ 7,500,000
-------------------
BASIC INDUSTRIES--1.9%
74,000 Aluminum Company of America $ 5,170,750
-------------------
BIOTECHNOLOGY--1.9%
84,400 Amgen, Inc./(a)/ $ 4,969,050
-------------------
BUSINESS SERVICES--5.4%
170,000 Equifax, Inc. $ 4,887,500
118,000 First Data Corp. 4,071,000
269,000 Reynolds & Reynolds Co. 5,581,750
-------------------
$ 14,540,250
-------------------
CHEMICAL PRODUCTS--2.0%
50,000 Du Pont (E.I.) de Nemours & Co. $ 5,306,250
-------------------
COMPUTER SERVICES/SOFTWARE--3.6%
70,000 Cisco Systems, Inc./(a)/ $ 3,622,500
25,500 Microsoft Corp./(a)/ 3,098,250
63,000 Parametric Technology Corp./(a)/ 2,850,750
-------------------
$ 9,571,500
-------------------
CONSUMER GOODS--2.0%
96,500 Nike, Inc. $ 5,428,125
-------------------
DIVERSIFIED MANUFACTURING--9.4%
80,000 Allied Signal, Inc. $ 5,780,000
84,000 Dover Corp. 4,452,000
180,000 Federal Signal Corp. 4,387,500
117,000 Illinois Tool Works, Inc. 10,690,875
-------------------
$ 25,310,375
-------------------
ELECTRICAL SERVICES--1.8%
136,000 Union Electric Co. $ 4,845,000
-------------------
ELECTRONICS & OTHER ELECTRICAL EQUIPMENT--13.6%
147,000 Adaptec, Inc./(a)/ $ 5,439,000
20,000 Emerson Electric Co. 1,015,000
95,000 General Electric Co. 10,533,125
40,200 Intel Corp. 6,155,625
75,000 Linear Technology Corp. 3,768,750
55,100 Texas Instruments, Inc. 4,917,675
97,000 Xilinx, Inc./(a)/ 4,753,000
-------------------
$ 36,582,175
-------------------
FINANCIAL SERVICES--14.7%
54,400 BankAmerica Corp. $ 6,358,000
180,000 Federal National Mortgage Assn. 7,402,500
113,700 Franklin Resources, Inc. 6,722,513
156,000 Green Tree Financial Corp. 4,621,500
40,000 Morgan Stanley Group, Inc. 2,525,000
108,000 Norwest Corp. 5,386,500
115,000 Travelers Group, Inc. 6,368,125
-------------------
$ 39,384,138
-------------------
HEALTH & MEDICAL SERVICES--4.1%
70,000 Abbott Laboratories $ 4,270,000
110,000 Johnson & Johnson 6,737,500
-------------------
$ 11,007,500
-------------------
HOUSEHOLD PRODUCTS--0.9%
28,200 Gillette Co. $ 2,397,000
-------------------
INDUSTRIAL MACHINERY--2.2%
65,000 Caterpillar, Inc. $ 5,785,000
-------------------
INSURANCE SERVICES--4.5%
152,000 Conseco, Inc. $ 6,289,000
127,000 SunAmerica, Inc. 5,842,000
-------------------
$ 12,131,000
-------------------
OIL & GAS--6.7%
82,600 Mobil Corp. $ 10,738,000
40,000 Royal Dutch Petroleum ADR 7,210,000
-------------------
$ 17,948,000
-------------------
PHARMACEUTICALS--2.5%
73,000 Merck & Co. $ 6,606,500
-------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
16
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
GROWTH FUND--(Continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Description Value
- -------------- ---------------- -------------------
<S> <C> <C>
Common Stocks--Continued
RETAIL TRADE--5.3%
150,000 Consolidated Stores Corp./(a)/ $ 6,000,000
170,000 Gap, Inc. 5,418,750
60,800 Walgreen Co. 2,796,800
-------------------
$ 14,215,550
-------------------
Total Common Stocks
(cost $169,734,999) ......... $ 235,231,663
-------------------
</TABLE>
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date
- ----------------- ----------- ------------
<S> <C> <C>
Repurchase Agreements--13.6%
State Street Bank & Trust Company, dated 04/30/97,
repurchase price $36,482,218 (U.S. Treasury
Note: $37,210,532, 9.13%, 05/15/18)
$ 36,477,000 5.15% 05/01/97 $ 36,477,000
-------------------
Total Repurchase Agreements
(cost $36,477,000) .......... $ 36,477,000
-------------------
Total Investments
(cost $206,211,999/(b)/) .... $ 271,708,663
===================
</TABLE>
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
Federal Income Tax Information:
Gross unrealized gain for investments in which
value exceeds cost ......................... $ 67,256,446
Gross unrealized loss for investments in which
cost exceeds value ......................... (1,759,782)
-------------------
Net unrealized gain ............................ $ 65,496,664
===================
- -------------------------------------------------------------------------------
</TABLE>
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
/(a)/Non-income producing security.
/(b)/The cost stated also represents aggregate cost for federal income tax
purposes.
- -------------------------------------------------------------------------------
Investment Abbreviations:
ADR--American Depository Receipts
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
17
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
MIDCAP FUND
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Description Value
- ------------ ---------------- -----------------
Common Stocks--98.3%
<S> <C> <C>
BIOTECHNOLOGY--3.0%
24,600 Biogen, Inc. $ 787,200
45,000 Elan Corp. PLC ADR/(a)/ 1,530,000
-----------------
$ 2,317,200
-----------------
BUSINESS SERVICES--8.9%
48,400 Devry, Inc./(a)/ $ 1,064,800
19,000 Omnicom Group 1,007,000
22,100 Paychex, Inc. 1,034,556
78,000 Personnel Group of America, Inc./(a)/ 1,872,000
40,200 Reynolds & Reynolds Co. 834,150
40,000 Wallace Computer Services, Inc./(b)/ 1,070,000
-----------------
$ 6,882,506
-----------------
CHEMICAL PRODUCTS--2.4%
39,250 OM Group, Inc. $ 1,094,094
25,000 Thermo Instruments Systems, Inc./(a)/ 784,375
-----------------
$ 1,878,469
-----------------
COMPUTER SERVICES/SOFTWARE--13.1%
52,000 American Management Systems, Inc./(a)/ $ 1,287,000
24,000 BMC Software, Inc./(a)/ 1,038,000
29,000 CACI International, Inc. 496,625
42,000 Cadence Design Systems, Inc./(a)/ 1,344,000
45,700 Cognos, Inc./(a)/ 1,159,637
19,800 Gateway 2000, Inc./(a)/ 1,086,525
22,250 McAfee Associates, Inc./(a)/ 1,240,437
35,800 Network General Corp./(a)/ 492,250
22,400 Parametric Technology Corp./(a)/ 1,013,600
21,770 SunGuard Data Systems, Inc./(a)/ 966,044
-----------------
$ 10,124,118
-----------------
DIVERSIFIED MANUFACTURING--4.6%
30,800 Danaher Corp. $ 1,389,850
24,000 Helix Technology Corp. 729,000
26,000 Precision Castparts Corp./(b)/ 1,391,000
-----------------
$ 3,509,850
-----------------
ELECTRONICS & OTHER ELECTRICAL EQUIPMENT--13.8%
33,400 Adaptec, Inc./(a)/ $ 1,235,800
35,800 ADC Telecommunications, Inc./(a)/ 935,275
39,000 Andrew Corp./(a)/ 965,250
33,900 Belden, Inc. 1,042,425
32,100 Charter Power Systems, Inc. 914,850
22,000 Lattice Semiconductor Corp./(a)/ 1,229,250
35,500 Logicon, Inc./(b)/ 1,411,125
29,200 Maxim Integrated Products, Inc./(a)/ 1,543,950
43,200 Symbol Technologies, Inc. 1,398,600
-----------------
$ 10,676,525
-----------------
FINANCIAL SERVICES--12.5%
42,000 A. G. Edwards, Inc. $ 1,470,000
40,000 Concord EFS, Inc./(a)/ 790,000
43,000 Fair Isaac & Co., Inc. 1,359,875
19,800 Franklin Resources, Inc. 1,170,675
21,000 Provident Bancorp Inc 819,000
80,400 Synovus Financial Corp. 1,949,700
33,000 TCF Financial Corp. 1,348,875
31,000 United Asset Management Corp. 759,500
-----------------
$ 9,667,625
-----------------
HEALTH & MEDICAL SERVICES--7.5%
62,000 Ballard Medical Products $ 1,178,000
21,600 Dentsply International, Inc. 1,069,200
14,700 Guidant Corp. 1,003,275
29,400 HCIA, Inc./(a)/ 606,375
10,900 McKesson Corp. 788,888
20,100 Medic Computer Systems, Inc./(a)/ 314,063
24,800 Pediatrix Medical Group, Inc./(a)/ 818,400
-----------------
$ 5,778,201
-----------------
INDUSTRIAL MACHINERY--3.8%
37,000 DT Industries, Inc. $ 962,000
40,150 Lindsay Manufacturing Co. 1,144,275
17,500 Sealed Air Corp./(a)/ 809,375
-----------------
$ 2,915,650
-----------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
18
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
MIDCAP FUND--(Continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Description Value
- ------------ ---------------- -----------------
<S> <C> <C>
Common Stocks--Continued
INSURANCE SERVICES--11.7%
42,500 Allied Group, Inc. $ 1,572,500
29,000 American Bankers Insurance
Group, Inc. 1,533,375
17,000 Equitable of Iowa Companies 830,875
24,875 Orion Capital Corp. 1,557,797
30,000 Protective Life Corp./(b)/ 1,327,500
20,000 SunAmerica, Inc. 920,000
15,800 Transatlantic Holdings, Inc. 1,307,450
-----------------
$ 9,049,497
-----------------
OIL & GAS--4.3%
22,000 BJ Services Co./(a)/ $ 1,036,750
58,000 Nabors Industries, Inc./(a)/ 1,087,500
26,000 Newpark Resources, Inc./(a)/ 1,166,750
-----------------
$ 3,291,000
-----------------
PHARMACEUTICALS--1.3%
28,000 Jones Medical Industries, Inc. $ 987,000
-----------------
RECREATIONAL SERVICES--1.1%
33,800 K2, Inc. $ 883,025
-----------------
RETAIL TRADE--3.0%
59,000 Central Garden & Pet Company/(a)/ $ 1,176,312
41,000 Lands' End, Inc. 1,096,750
-----------------
$ 2,273,062
-----------------
TEXTILES--3.4%
42,400 G & K Services, Inc. $ 1,229,600
33,000 Jones Apparel Group, Inc./(a)/ 1,377,750
-----------------
$ 2,607,350
-----------------
TRANSPORTATION/STORAGE--3.9%
38,300 Air Express International Corp. $ 1,311,775
25,300 Tidewater, Inc./(b)/ 1,015,163
20,800 United Waste Systems, Inc./(a)/ 702,000
-----------------
$ 3,028,938
-----------------
Total Common Stocks
(cost $66,583,388) ............ $ 75,870,016
=================
</TABLE>
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- ---------------- ----------- ------------- ------------------
<S> <C> <C> <C>
Repurchase Agreements--4.2%
State Street Bank & Trust Company,
dated 04/30/97, repurchase price
$3,230,462 (U.S. Treasury Bond:
$3,299,903, 8.13%, 08/15/21)
$3,230,000 5.15% 05/01/97 $ 3,230,000
-----------------
Total Repurchase
Agreements
(cost $3,230,000) ............. $ 3,230,000
-----------------
Total Investments
(cost $69,813,388/(c)/) ....... $ 79,100,016
=================
- -------------------------------------------------------------------------------
Federal Income Tax Information:
Gross unrealized gain for investments in which
value exceeds cost ........................... $ 12,142,551
Gross unrealized loss for investments
in which cost exceeds value .................. (2,855,923)
-----------------
Net unrealized gain .............................. $ 9,286,628
=================
- -------------------------------------------------------------------------------
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
/(a)/Non-income producing security.
/(b)/There are common stock rights attached to these securities.
/(c)/The cost stated also represents aggregate cost for federal income tax purposes.
- -------------------------------------------------------------------------------
Investment Abbreviations:
ADR--American Depository Receipts
- -------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
19
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
INTERNATIONAL EQUITY FUND
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Description Value
- ------------------ ---------------- -----------------
<S> <C> <C>
Common Stocks--94.3%
ARGENTINE PESO--0.9%
2,039 Banco de Galicia Buenos Aires SA ADR
(Financial Services) $ 49,605
2,614 Banco Frances del Rio de la Plata ADR
(Financial Services) 79,400
15,725 Perez Compac SA (Diversified
Industrial Manufacturing) 127,543
360 Sociedad Comercial del Plata ADR 144A
/(a)(b)/ (Oil & Gas) 10,983
2,230 Telecom Argentina (Utilities) 11,040
170 Telecom Argentina ADR (Utilities) 8,500
4,040 Telefonica de Argentina ADR
(Utilities) 134,330
400 Transportadora de Gas del Sur ADR
(Utilities) 5,000
4,628 YPF Sociedad Anonima ADR (Oil & Gas) 127,849
-----------------
$ 554,250
-----------------
AUSTRALIAN DOLLAR--1.7%
8,000 Australia & New Zealand Bank Group
(Financial Services) $ 51,096
21,150 Australian Gas Light Co. (Utilities) 121,229
11,000 Boral Ltd. (Construction) 32,426
8,294 Broken Hill Proprietary Co. (Mining -
Metals/Minerals) 116,943
1,200 Coca-Cola Amatil (Beverages/Tobacco) 13,718
8,700 Commonwealth Instalments Receipt
(Financial Services) 65,133
14,000 Fosters Brewing Group (Beverages/
Tobacco) 28,823
3,051 Lend Lease Corp. (Building Materials &
Construction) 58,388
5,189 National Australia Bank (Financial
Services) 71,018
19,000 National Mutual Holdings (Insurance
Services) 28,153
19,433 News Corp. Ltd. (Broadcast Media) 89,565
14,000 Publishing & Broadcasting, Ltd.
(Broadcast Media) 73,914
10,000 St George Bank Ltd (Financial
Services) 61,452
14,000 Tab Corp. Holdings, Ltd. (Recreational
Services) 69,165
11,500 Western Mining Corp. Holdings, Ltd.
(Mining - Metals/Minerals) 68,159
10,000 Westpac Banking Corp. (Financial
Services) 53,888
11,000 Woodside Petroleum, Ltd. (Oil & Gas) 87,499
-----------------
$ 1,090,569
-----------------
AUSTRIAN SCHILLING--0.0%
84 EVN Energie Versorgung Neider
(Utilities) $ 10,391
280 Flughafen Wien AG (Transportation/
Storage) 11,607
-----------------
$ 21,998
-----------------
BELGIAN FRANC--1.2%
294 Dexia (Financial Services) $ 29,194
368 Generale Banque (Financial Services) 152,604
33 Generale De Banque (Financial
Services) 16
1,140 Kredietbank (Financial Services) 444,042
39 UCB (Chemical Products) 107,018
-----------------
$ 732,874
-----------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
20
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
INTERNATIONAL EQUITY FUND--(Continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Description Value
- ------------------ ---------------- -----------------
<S> <C> <C>
Common Stocks--Continued
BRAZILIAN REAL--4.2%
10,595,488 Banco Bradesco SA (Financial Services) $ 87,673
175,959 Brahma Companhia Cerevejaria (Food/
Grocery Products) 119,705
130,400 Brasmotor SA (Automobiles & Automobile
Parts) 31,267
3,200 Brazil Fund, Inc. (Financial Services) 81,600
500 Cemig - CIA Energetica Minas Gerais
ADR 144A/(b)/ (Utilities) 22,563
4,947 Cemig - CIA Energetica Minas Gerais
ADR (Non-Voting) (Utilities) 223,233
118,176 Cim Port Itau (Cia) (Utilities) 41,670
2,070 Companhia Brasileira (Utilities) 40,106
330 Companhia Energetica de Sao Paolo ADS
144A/(a)(b)/ (Utilities) 5,239
370 Companhia Energetica de Sao Paolo ADR
/(a)/ (Non-Voting) (Utilities) 5,897
1,100,736 Companhia Siderurgica Nacional (Mining
- Metals/ Minerals) 39,320
94,000 Coteminas (Textiles) 39,421
4,285 Electrobas-Centrais Eletricas
Brasileiras ADR (Utilities) 96,494
1,680 Electrobas-Centrais Eletricas
Brasileiras ADR (B Shares)
(Utilities) 39,254
77,000 Itaubanco (Financial Services) 41,631
1,352,000 Lojas Americanas SA/(a)/ (Retail
Trade) 19,196
475,000 Petroleo Brasileiros - Petrobras (Oil
& Gas) 99,824
1,568,226 Telebras (Broadcast Media) 179,885
278,000 Telecom de Rio de Janeiro Telerj
(Utilities) 46,268
8,103 Telecomunicacoes Brasileiras ADR
(Broadcast Media) 929,819
304,000 Telemig - Tele de Minas Gerais SA
(Utilities) 48,423
602,623 Telesp (Utilities) 171,126
2,700,000 Unibanco Uniao de Bancos Brasileirs
(Financial Services) 99,749
8,530 Usinas Siderurgicas de Minas ADR
(Building Materials &
Construction) 100,254
11,587 White Martins SA (Chemical Products) 39,440
-----------------
$ 2,649,057
-----------------
BRITISH POUND STERLING--15.8%
28,000 Abbey National (Financial Services) $ 390,276
25,800 Argos (Retail Trade) 269,708
90,000 Asda Group (Retail Trade) 167,747
19,000 BG (Energy) 54,814
18,000 British Petroleum (Oil & Gas) 206,548
51,000 Cable & Wireless (Utilities) 392,729
28,744 Cadbury Schweppes (Food/Grocery
Products) 238,524
54,000 Caradon (Building Materials &
Construction) 216,175
19,000 Centrica/(a)/ (Energy) 17,399
13,000 Coats Viyella (Textiles) 27,391
17,000 Compass Group (Recreational Services) 186,256
15,000 Electrocomponents (Electronics and
Other Electrical Equipment) 96,029
3,000 GKN (Automobiles & Automobile Parts) 46,288
31,000 Glaxo Wellcome (Health/Personal Care) 609,449
</TABLE>
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
INTERNATIONAL EQUITY FUND--(Continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Description Value
- ------------------ ---------------- -----------------
<S> <C> <C>
Common Stocks--Continued
BRITISH POUND STERLING--CONTINUED
60,000 Grand Metropolitan (Beverages/
Tobacco) $ 500,810
47,000 Guinness (Beverages/Tobacco) 388,493
4,000 Heywood Williams Group (Building
Materials & Construction) 15,916
15,000 Hillsdown Holdings (Food/Grocery
Products) 44,246
48,000 Kingfisher (Retail Trade) 519,676
23,000 Ladbroke Group (Recreational Services) 85,737
11,000 Laing (John) (Building Materials &
Construction) 65,430
80,400 National Westminster Bank (Financial
Services) 951,248
26,500 Rank Organisation (Recreational
Services) 182,536
41,000 Reed International (Publishing) 755,543
11,000 Rolls-Royce (Aerospace/Defense) 43,323
21,000 RTZ Corp. (Mining - Metals/Minerals) 333,549
38,000 Safeway (Retail Trade) 210,632
9,000 Sears Holdings (Retail Trade) 11,232
36,500 Shell Transport & Trading Co. (Oil &
Gas) 645,405
22,000 Smith (David S.) Holdings (Textiles) 79,870
75,000 SmithKline Beecham/S'Kline Beckman
(Health/Personal Care) 1,205,227
30,000 T & N (Automobiles & Automobile Parts) 66,126
33,000 Tesco (Retail Trade) 191,475
104,500 Tomkins (Diversified Industrial
Manufacturing) 450,519
34,000 United News & Media (Broadcast Media) 415,494
-----------------
$ 10,081,820
-----------------
CANADIAN DOLLAR--0.3%
3,850 Alcan Aluminum, Ltd. (Mining - Metals/
Minerals) $ 130,630
1,540 Royal Bank of Canada (Financial
Services) 61,402
-----------------
$ 192,032
-----------------
CHILEAN PESO--0.6%
123 AFP Providia ADR (Financial Services) $ 2,214
590 Cervecerias Unidas (CCU) ADR
(Beverages/Tobacco) 13,128
1,580 Chile Fund, Inc. (Financial Services) 38,315
550 Chilectra SA ADR (Utilities) 33,313
749 Chilgener SA ADR (Utilities) 21,347
1,661 Cia de Telecomunicaciones Chile
(Utilities) 53,775
2,312 Empresa Nacional de Electricidad SA
ADR (Utilities) 44,506
1,551 Enersis SA ADR (Utilities) 48,857
11,110 Five Arrows Chile Investment Trust
(Financial Services) 35,941
1,160 Genesis Chile Fund (Financial
Services) 53,360
1,151 Santa Isabel ADR (Retail Trade) 28,343
-----------------
$ 373,099
-----------------
CHINESE YUAN--0.4%
6,900 Huaneng Power International, Inc.
ADR/(a)/(Energy) $ 167,325
</TABLE>
The accompanying notes are an integral part of these financial statements.
22
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
INTERNATIONAL EQUITY FUND--(Continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Description Value
- ------------------ ---------------- -----------------
<S> <C> <C>
Common Stocks--Continued
CHINESE YUAN--CONTINUED
258,000 Shanghai Petrochemical (Chemical
Products)/(a)/ $ 63,946
186,000 Yizheng Chemical Fibre (Chemical
Products)/(a)/ 36,496
-----------------
$ 267,767
-----------------
CZECH KORUNA--0.0%
190 SPT Telecom/(a)/(Utilities) $ 20,079
-----------------
DANISH KRONE--0.2%
825 Den Danske Bank AB (Financial
Services) $ 71,351
290 Teledanmark (Utilities) 13,948
690 Unidanmark (Financial Services) 34,130
-----------------
$ 119,429
-----------------
DEUTSCHEMARK--4.0%
1,270 Allianz AG Holdings (Insurance
Services) $ 242,003
30 Altana (Health/Personal Care) 23,213
8,868 Bayer AG (Chemical Products) 352,815
4,288 Bayerische Hypo Und Wechsel Bank
(Financial Services) 133,706
1,500 Bilfinger & Berger Bauag (Building
Materials & Construction) 55,780
102 Buderus AG (Industrial Machinery) 47,825
2,330 Commerzbank AG (Financial Services) 62,495
3,581 Deutsche Bank AG (Financial Services) 188,996
3,177 Deutsche Telekom AG (Utilities) 68,941
464 Fielmann AG (Health/Personal Care) 11,950
7,351 Gehe AG (Health/Personal Care) 488,991
1,340 Hoechst AG (Chemical Products) 52,616
200 Hornbach Baumarkt (Retail Trade) 6,352
630 Hornbach Holdings AG (Retail Trade) 40,380
240 Mannesmann AG (Engineering) 94,376
503 Praktiker Bau Und Heimwerker Markte
(Retail Trade) 8,074
1,002 Rhoen-Klinikum AG (Health/Personal
Care) 129,604
310 Sap AG (Computer Services/Software) 56,440
540 Schering AG (Chemical Products) 51,761
6,778 Veba AG (Utilities) 349,115
130 Veba AG - Warrants/(a)/(Utilities) 37,683
116 Volkswagen AG (Automobiles &
Automobile Parts) 73,748
-----------------
$ 2,576,864
-----------------
FINNISH MARKKA--0.2%
2,290 Nokia (AB) OY (Electronics & Other
Electrical Equipment) $ 142,850
-----------------
FRENCH FRANC--8.0%
425 Accor (Recreational Services) $ 60,948
1,740 Alcatel Alsthom (Cie Gen El)
(Electronics & Other Electrical
Equipment) 193,482
</TABLE>
The accompanying notes are an integral part of these financial statements.
23
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
INTERNATIONAL EQUITY FUND--(Continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Description Value
- ------------------ ---------------- -----------------
<S> <C> <C>
Common Stocks--Continued
FRENCH FRANC--CONTINUED
1,070 Assurances Generales de France
(Insurance Services) $ 34,814
954 Axa (Diversified Holding Companies) 58,696
580 Canal Plus (Broadcast Media) 104,741
897 Carrefour (Retail Trade) 560,039
360 Chargeurs (Diversified Industrial
Manufacturing) 21,280
580 Clf Dexia France (Financial Services) 53,662
268 Credit Local de France (Financial
Services) 24,796
5,930 Eaux (Cie Generale Des) (Utilities) 826,024
2,210 Elf Aquitaine (Energy) 214,317
490 GTM Entrepose (Building Materials &
Construction) 29,510
697 Guilbert SA (Business Services) 108,673
410 Havas SA (Broadcast Media) 30,698
205 L'Oreal (Health/Personal Care) 72,741
1,160 Lapeyre (Building Materials &
Construction) 69,960
455 Legrand (Electronics & Other
Electrical Equipment) 76,788
1,579 LVMH Moet-Hennessy Louis Vuitton
(Beverages/Tobacco) 385,518
360 Pathe (Broadcast Media) 84,071
876 Pinault Printemps Redoute (Retail
Trade) 368,471
780 Primagaz (Cie Des Gaz Petrole) (Oil &
Gas) 76,443
182 Rexel (Retail Trade) 48,490
1,720 Saint Gobain (Chemical Products) 230,453
1,959 Sanofi (Health/Personal Care) 182,927
3,540 Schneider SA (Electronics & Other
Electrical Equipment) 199,548
240 Societe Generale (Financial Services) 26,893
690 Sodexho (Food/Grocery Products) 316,834
1,410 Television Francaise (Broadcast Media) 136,011
5,794 Total (Oil & Gas) 480,476
-----------------
$ 5,077,304
-----------------
HONG KONG DOLLAR--3.9%
69,000 Cathay Pacific Air (Transportation/
Storage) $ 107,332
39,000 Dao Heng Bank Group (Financial
Services) 185,271
136,573 First Pacific Co. (Financial Services) 163,080
40,000 Guoco Group (Financial Services) 190,021
134,380 Hong Kong Land Holdings (Real Estate) 279,510
240,000 Hopewell Holdings (Real Estate) 124,701
59,000 Hutchison Whampoa (Diversified) 437,940
74,262 New World Development Co. (Real
Estate) 428,518
35,000 Swire Pacific Ltd. (Transportation/
Storage) 269,961
79,000 Wharf Holdings (Diversified Holding
Companies) 298,806
-----------------
$ 2,485,140
-----------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
INTERNATIONAL EQUITY FUND--(Continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Description Value
- ------------------ ---------------- -----------------
<S> <C> <C>
Common Stocks--Continued
ITALIAN LIRA--2.3%
15,000 Banca Commercial Italiana (Financial
Services) $ 32,196
24,680 Banca Fideuram (Financial Services) 61,982
43,526 Credito Italiano Spa (Financial
Services) 61,012
30,000 ENI (Ente Nazionale Idrocarburi) (Oil
& Gas) 152,262
849 Gucci Group NV (Textiles) 58,899
10,840 IMI Spa (Financial Services) 92,340
2,226 Industrie Natuzzi Spa (Household
Durables) 49,529
13,000 Instituto National Assicurazioni
(Insurance Services) 17,425
12,000 Italgas (Societa Italiana II Gas) Spa
(Utilities) 41,036
5,150 Mediolanum (Insurance Services) 49,329
3,000 Rinascente (Retail Trade) 15,997
16,000 Seat Spa/(a)/ (Business Services) 3,168
44,000 Seat Spa Di Risp Shares/(a)/ (Business
Services) 13,466
49,000 STET (Utilities) 231,667
16,000 STET (Di Risp Shares) (Utilities) 59,340
119,443 Telecom Italia Mobile (Utilities) 375,663
15,887 Telecom Italia Mobile (Di Risp Shares)
(Utilities) 29,368
42,013 Telecom Italia Spa (Utilities) 110,543
-----------------
$ 1,455,222
-----------------
JAPANESE YEN--21.1%
1,210 Advantest (Electronics & Other
Electrical Equipment) $ 67,204
7,000 Alps Electric Co. (Electronics & Other
Electrical Equipment) 81,617
16,000 Amada Co, Ltd. (Industrial Machinery) 119,620
30,000 Canon, Inc. (Electronics and Other
Electrical Equipment) 711,388
10,000 Citizen Watch Co. (Electronics and
Other Electrical Equipment) 71,927
13,000 Dai Nippon Screen Manufacturing
(Electronics & Other Electrical
Equipment) 103,439
3,000 Daifuku Co., Ltd. (Industrial
Machinery) 34,506
17,000 Daiichi Pharmaceutical Co. (Health/
Personal Care) 273,211
23,000 Daiwa House Industry Co. (Building
Materials & Construction) 257,297
33 DDI Corp. (Utilities) 219,159
52 East Japan Railway (Transportation/
Storage) 224,903
4,000 Fanuc Co., Ltd. (Electronics & Other
Electrical Equipment) 136,448
30,000 Hitachi (Electronics & Other
Electrical Equipment) 271,793
22,000 Hitachi Zosen Corp. (Heavy
Engineering) 76,433
2,000 Honda Motor Co., Ltd. (Automobiles &
Automobile Parts) 62,079
7,000 Inax Corp. (Building Materials &
Construction) 43,455
6,000 Ishihara Sangyo Kaisha/(a)/ (Chemical
Products) 15,079
7,000 Ito-Yokado Co. (Retail Trade) 335,841
</TABLE>
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
INTERNATIONAL EQUITY FUND--(Continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Description Value
- ------------------ ---------------- -----------------
<S> <C> <C>
Common Stocks--Continued
JAPANESE YEN--CONTINUED
13,000 Kao Corp. (Cosmetics) $ 151,574
8,000 Kokuyo Co., Ltd. (Computers/
Communication) 173,947
22,000 Komatsu, Ltd. (Industrial Machinery) 160,838
6,000 Komori Corp. (Industrial Machinery) 128,097
14,000 Kumagai Gumi Co. (Building Materials &
Construction) 18,750
19,000 Kuraray Co. (Chemical Products) 167,645
8,000 Kyocera Corp. (Electronics and Other
Electrical Equipment) 478,985
12,000 Makita Corp. (Industrial Machinery) 164,494
16,000 Marui Co., Ltd. (Retail Trade) 263,442
29,000 Matsushita Electric Industrial Co.
(Household Durables) 463,781
14,000 Mitsubishi Corp. (Wholesale Trade) 131,248
78,000 Mitsubishi Heavy Industries Ltd.
(Aerospace/Defense) 514,941
9,000 Mitsubishi Paper Mills, Ltd. (Paper &
Forest Products) 28,645
40,000 Mitsui Fudosan Co. (Real Estate) 456,927
6,000 Mitsui Petrochemical Industries (Oil &
Gas) 28,219
8,000 Murata Manufacturing Co. (Electronics
& Other Electrical Equipment) 294,954
4,000 National House Industrial (Building
Materials & Construction) 47,268
54,000 NEC Corp. (Electronics & Other
Electrical Equipment) 659,393
4,000 Nippon Hodo (Building Materials &
Construction) 28,266
106,000 Nippon Steel Corp. (Mining - Metals/
Minerals) 302,296
23 Nippon Telephone & Telegraph Corp.
(Utilities) 162,170
27,000 Nippondenso Co. (Transportation/
Storage) 614,724
24,000 Nomura Securities Co., Ltd. (Financial
Services) 268,484
10,000 Pioneer Electronic Corp. (Household
Durables) 178,832
2,000 Sangetsu Co., Ltd. (Building Materials
& Construction) 33,718
17,000 Sankyo Co. (Health/ Personal Care) 455,351
2,700 SEGA Enterprises (Diversified
Industrial Manufacturing) 71,044
26,000 Sekisui Chemical Co., Ltd. (Building
Materials & Construction) 249,892
16,000 Sekisui House (Building Materials &
Construction) 142,435
3,000 Seven Eleven Japan Co., Ltd. (Retail
Trade) 190,255
25,000 Sharp Corp. (Household Durables) 324,969
16,000 Shinetsu Chemical Co., Ltd. (Chemical
Products) 322,685
4,000 Shiseido Co. (Health/ Personal Care) 57,352
6,500 Sony Corp. (Household Durables) 473,156
33,000 Sumitomo Corp. (Wholesale Trade) 222,019
</TABLE>
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
INTERNATIONAL EQUITY FUND--(Continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Description Value
- ------------------ ---------------- -----------
<S> <C> <C>
Common Stocks--Continued
JAPANESE YEN--CONTINUED
42,000 Sumitomo Electric Industries, Ltd.
(Electronics and Other Electrical
Equipment) $ 569,110
9,000 Sumitomo Forestry Co., Ltd. (Paper &
Forest Products) 91,464
7,000 TDK Corp. (Household Durables) 504,589
39,000 Teijin (Chemical Products) 157,616
7,000 Tokio Marine & Fire Insurance Co.
(Insurance Services) 68,381
3,300 Tokyo Electron (Electronics and Other
Electrical Equipment) 127,388
8,000 Tokyo Steel Manufacturing (Mining -
Metals/Minerals) 85,713
14,000 Toppan Printing Co. (Broadcast Media) 180,880
7,000 Uny Co. (Retail Trade) 122,976
3,000 Yurtec Corp. (Building Materials &
Construction) 28,834
------------
$13,473,146
------------
KOREAN WON--0.6%
6,000 Cho Hung Bank (Insurance Services) $ 32,422
4,200 Korea Electric Power Corp. ADR
(Utilities) 125,247
429 Korea Fund, Inc. (Financial Services) 5,523
1,060 Samsung Electronics (Electronics &
Other Electrical Equipment) 87,136
650 Samsung Electronics, Ltd. GDS 144A/(b)/
(Electronics & Other Electrical
Equipment) 31,038
2,240 Shinhan Bank (Financial Services) $ 33,188
------------
$ 314,554
------------
MALAYSIAN RINGGIT--2.4%
56,000 Affin Holdings Berhad (Financial
Services) $ 134,937
32,000 Berjaya Sports Toto Berhad (Business
Services) 152,939
18,000 Commerce Asset Holdings Berhad
(Financial Services) 107,535
60,000 MBF Capital Berhad (Financial
Services) 88,896
70,000 Multi-Purpose Holding (Financial
Services) 114,306
58,000 Multi-Purpose Holdings 3% ICULS
13/01/02 (Financial Services) 21,599
113,000 Renong Berhad (Diversified Industrial
Manufacturing) 154,819
11,200 Renong Berhad 4% ICULS 21/05/01
(Diversified Industrial
Manufacturing) 40
20,000 Resorts World Berhad (Recreational
Services) 73,682
44,000 Tanjong (Mining - Metals/Minerals) 159,471
26,000 Technology Resources Industries
(Business Services) 47,634
27,000 Time Engineering Berhad (Industrial
Machinery) 49,466
58,000 United Engineers Malaysia (Industrial
Machinery) 411,184
------------
$ 1,516,508
------------
MEXICAN PESO--1.8%
14,062 Cemex SA (Building Materials &
Construction) $ 46,009
</TABLE>
The accompanying notes are an integral part of these financial statements.
27
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
INTERNATIONAL EQUITY FUND--(Continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Description Value
- ------------------ ---------------- -----------------
<S> <C> <C>
Common Stocks--Continued
MEXICAN PESO--CONTINUED
9,860 Cemex SA (B Shares) (Building
Materials & Construction) $ 36,107
7,860 Cemex SA ADR (Building Materials &
Construction) 52,976
83,641 CIFRA SA de CV (Retail Trade) 125,043
6,752 Fomento Economico Mexicano SA
(Beverages/ Tobacco) 31,863
18,158 Groupo Financiero Banamex-Accivl (B
Shares)/(a)/ (Financial Services) 38,891
499 Groupo Financiero Banamex-Accivl (L
Shares)/(a)/ (Financial Services) 998
16,324 Gruma SA /(a)/ (Diversified Holding
Companies) 78,677
3,485 Gruma SA ADS 144A/(a)(b)/ (Diversified
Holding Companies) 67,958
37,450 Grupo Industrial Maseca SA (Household
Durables) 36,571
7,058 Grupo Modelo SA (Beverages/ Tobacco) 42,811
722 Grupo Televisa GDR (Broadcast Media) 16,696
23,739 Kimberly Clark de Mexico (Health/
Personal Care) 88,127
6,040 Panamerica Beverages ADR (Beverages/
Tobacco) 175,160
8,145 Telefonos de Mexico SA ADR (Utilities) 335,981
-----------------
$ 1,173,868
-----------------
NETHERLANDS GUILDER--9.7%
5,537 ABN AMRO Holdings NV (Financial
Services) $ 380,539
3,987 Ahold NV (Retail Trade) 272,171
498 Akzo Nobel NV (Chemical Products) 64,157
1,330 Baan Co, Inc. (Business Services) 71,321
5,063 CSM CVA (Food/ Grocery Products) 290,792
57,813 Elsevier NV (Broadcast Media) 925,815
4,975 Fortis AMEV NV (Insurance Services) 187,683
1,110 Hagemeyer (Wholesale Trade) 96,569
16,352 ING Groep NV (Financial Services) 642,061
5,924 ING Groep NV - Warrants/(a)/ (Financial
Services) 53,727
1,678 Koninklijke Ptt Nederland (Utilities) 59,599
790 Nutricia (Verenigde Bedrijven) NV
(Food/ Grocery Products) 119,860
950 Otra NV (Electronics & Other
Electrical Equipment) 15,116
7,437 Polygram (Recreational Services) 364,540
7,090 Royal Dutch Petroleum Co. (Oil & Gas) 1,267,124
2,170 Unilever NV (Food/ Grocery Products) 422,016
8,246 Wolters Kluwer (Publishing) 977,263
-----------------
$ 6,210,353
-----------------
NEW ZEALAND DOLLAR--0.5%
21,909 Air New Zealand, Ltd. (Transportation/
Storage) $ 63,335
11,200 Carter Holt Harvey (Paper & Forest
Products) 24,846
7,000 Fernz Corp. (Chemical Products)
23,536
</TABLE>
The accompanying notes are an integral part of these financial statements.
28
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
INTERNATIONAL EQUITY FUND--(Continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Description Value
- ------------------ ---------------- ----------------
<S> <C> <C>
Common Stocks--Continued
NEW ZEALAND DOLLAR--CONTINUED
17,950 Fletcher Challenge Building (Building
Materials & Construction) 50,397
1,750 Fletcher Challenge Energy (Oil & Gas) 5,083
41,095 Fletcher Challenge Forest Division
(Paper & Forest Products) 56,693
12,500 Fletcher Challenge Paper (Paper & 27,730
Forest Products)
16,000 New Zealand Telecom (Utilities) 71,764
-----------------
$ 323,384
-----------------
NORWEGIAN KRONE--1.7%
1,170 Bergesen D-Y ASA (Transportation/
Storage) $ 24,152
9,730 Norsk Hydro (Energy) 474,121
6,560 Orkla AS (Diversified Industrial
Manufacturing) 549,952
1,390 Saga Petroleum (Oil & Gas) 22,447
-----------------
$ 1,070,672
-----------------
PANAMANIAN BALBOA--0.0%
567 Banco Latino Americano De Export E
Shares (Financial Services) $ 26,011
-----------------
PERUVIAN SOL--0.1%
1,320 Credicorp Ltd (Financial Services) $ 27,720
1,906 Telefonica del Peru SA ADS (Utilities) 45,744
-----------------
$ 73,464
-----------------
PORTUGUESE ESCUDO--0.5%
5,139 Jeronimo Martins SGPS (Food/ Grocery
Products) $ 307,424
428 Jeronimo Martins SGPS- Warrants/(a)/
(Food/ Grocery Products) 5,416
-----------------
$ 312,840
-----------------
RUSSIAN RUBLE--0.0%
840 Rao Gazprom ADS (Energy) $ 13,104
-----------------
SINGAPORE DOLLAR--2.1%
9,000 City Developments (Real Estate) $ 72,746
27,000 DBS Land (Real Estate) 87,295
6,000 Development Bank of Singapore
(Financial Services) 71,295
9,600 Fraser & Neave (Beverages/ Tobacco) 69,637
2,500 Keppel Corp./(a)/ (Transportation/
Storage) 10,881
4,000 Overseas Chinese Banking Corp-Alien
Market (Financial Services) 46,701
35,000 Overseas Union Bank - Foreign
(Financial Services) 229,706
33,000 Singapore Land (Real Estate) 153,886
12,200 Singapore Press Holdings (Broadcast
Media) 225,879
32,000 United Industrial Corp. (Real Estate) 24,097
26,800 United Overseas Bank (Financial
Services) 251,800
3,200 United Overseas Bank - Warrants/(a)/
(Financial Services) 11,009
20,000 Wing Tai Holdings (Textiles) 51,675
-----------------
$ 1,306,607
-----------------
SPANISH PESETA--2.2%
14 Aguas de Barcelona (Utilities) $ 535
1,579 Argentaria (Financial Services) 70,415
1,020 Banco Bilbao Vizcaya (Financial 68,649
Services)
</TABLE>
The accompanying notes are an integral part of these financial statements.
29
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
INTERNATIONAL EQUITY FUND--(Continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Description Value
- ------------------ ---------------- ----------------
<S> <C> <C>
Common Stocks--Continued
SPANISH PESETA--CONTINUED
2,979 Banco de Santander SA (Financial
Services) $ 224,131
690 Banco Popular (Commercial Banks) 146,301
2,011 Centros Comerciales Pryca (Retail
Trade) 34,937
2,606 Empresa Nacional de Endesa (Utilities) 182,164
1,160 Gas Natural Sdg SA (Utilities) 246,353
12,450 Iberdrola SA (Utilities) 140,505
3,927 Repsol SA (Oil & Gas) 164,649
5,350 Telefonica de Espana (Utilities) 137,039
-----------------
$ 1,415,678
-----------------
SWEDISH KRONA--2.3%
8,600 Abb AB (Electronics & Other Electrical
Equipment) $ 104,695
14,060 Astra AB (Health/Personal Care) 558,299
4,930 Atlas Copco AB (Industrial Machinery) 122,233
3,710 Electrolux Co. (Household Durables) 212,819
670 Esselte (Broadcast Media) 15,288
1,850 Hennes & Mauritz AB (Retail Trade) 267,665
860 Sandvik AB (Industrial Machinery) 21,213
6,640 Sandvik AB (B Shares) (Industrial
Machinery) 163,361
660 Scribona AB (Broadcast Media) 8,203
-----------------
$ 1,473,776
-----------------
SWISS FRANC--5.3%
889 Adia SA (Commercial Services) $ 296,715
400 BBC AG Brown, Boveri & Cie
(Electronics & Other Electrical
Equipment) 484,363
648 Ciba Spezialitatenchemi (Chemical
Products) 55,828
880 CS Holdings (Financial Services) 99,098
495 Nestle SA (Food/Grocery Products) 601,079
738 Novartis AG (Chemical Products ) 972,252
83 Roche Holdings AG (Health/Personal
Care) 701,004
890 Schweizerischer Bankverein/(a)/
(Financial Services) 194,410
-----------------
$ 3,404,749
-----------------
THAI BAHT--0.2%
2,900 Advanced Information Services
(Computers/Communication) $ 19,317
5,450 Bangkok Bank (Financial Services) 50,489
600 Siam Cement Public Co. (Building
Materials & Construction) 16,078
5,900 Thai Farmers Bank Public-Alien Market
(Financial Services) 35,686
-----------------
$ 121,570
-----------------
UNITED STATES DOLLAR--0.0%
190 Enron Global Power & Pipelines, LLC.
(Energy) $ 5,605
-----------------
VENEZUELAN BOLIVAR--0.1%
1,160 Cia Anonima Nacional Tele Venezuela
ADS/(a)/ (Utilities) $ 34,800
-----------------
Total Common Stocks
(cost $54,771,258) ............ $ 60,111,043
-----------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
30
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
INTERNATIONAL EQUITY FUND--(Continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Description Value
- ------------------ ---------------- -----------------
Preferred Stocks--0.2%
<S> <C> <C>
AUSTRALIAN DOLLAR--0.1%
26,000 Sydney Harbour Casino /(a)/
(Recreational Services) $ 43,796
-----------------
DEUTSCHEMARK--0.1%
60 Krones AG (Industrial Machinery) $ 23,213
340 Sap AG (Non Voting) (Computer
Services/ Software) 62,609
-----------------
$ 85,822
-----------------
Total Preferred Stocks
(cost $110,406) ............... $ 129,618
-----------------
</TABLE>
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date
- ----------------- ----------- ------------
Corporate Obligations--0.0%
<S> <C> <C>
BELGIAN FRANC--0.0%
Kredietbank
$ 1,000 5.75% 11/30/03 $ 3,865
-----------------
Total Corporate Obligations
(cost $2,557) ................. $ 3,865
-----------------
Repurchase Agreements--4.8%
State Street Bank & Trust Company, dated
04/30/97, repurchase price $3,030,433 (U.S.
Treasury Bond: $3,091,000, 8.13%, 8/21/21)
$ 3,030,000 5.15% 05/01/97 $ 3,030,000
-----------------
Total Repurchase Agreements
(cost $3,030,000) ............. $ 3,030,000
-----------------
Total Investments
(cost $57,914,221/(c)/) ....... $ 63,274,526
=================
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Federal Income Tax Information:
Gross unrealized gain for investments in which
value exceeds cost ........................... $ 8,040,987
Gross unrealized loss for investments in which
cost exceeds value ........................... (2,732,073)
-----------------
Net unrealized gain .............................. $ 5,308,914
=================
</TABLE>
- -------------------------------------------------------------------------------
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
/(a)/Non-income producing security.
/(b)/Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration normally to qualified institutional investors.
/(c)/The aggregate cost for federal income tax purposes is $57,965,612.
- -------------------------------------------------------------------------------
Investment Abbreviations:
ADR--American Depository Receipts
ADS--American Depository Shares
GDS--Global Depository Shares
ICULS--Irredeemable Convertible Unsecured Loan Stock
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
31
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
INTERNATIONAL EQUITY FUND--(Continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Common and Preferred Stock Industry Concentrations
- -------------------------------------------------------------------------------
<S> <C>
Financial Services 11.9%
Utilities 10.2%
Electronics & Other Electrical Equipment 7.9%
Health/ Personal Care 7.6%
Retail Trade 6.4%
Oil & Gas 5.3%
Chemical Products 4.3%
Broadcast Media 3.9%
Food/ Grocery Products 3.9%
Household Durables 3.5%
Publishing 2.7%
Building Materials & Construction 2.6%
Beverages/ Tobacco 2.6%
Real Estate 2.5%
Industrial Machinery 2.3%
Diversified Industrial Manufacturing 2.2%
Transportation/ Storage 2.1%
Mining - Metals/ Minerals 1.9%
Recreational Services 1.7%
Energy 1.5%
Insurance Services 1.0%
Aerospace/Defense 0.8%
Diversified Holding Companies 0.8%
Wholesale Trade 0.7%
Diversified 0.7%
Business Services 0.6%
Commercial Services 0.5%
Automobiles & Automobile Parts 0.4%
Textiles 0.4%
Paper & Forest Products 0.4%
Computers/Communication 0.3%
Cosmetics 0.2%
Commercial Banks 0.2%
Computer Services/ Software 0.2%
Engineering 0.1%
Heavy Engineering 0.1%
Aerospace/ Defense 0.1%
- -------------------------------------------------------------------------------
Total Common and Preferred Stocks 94.5%
- -------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
32
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
NATIONAL TAX-FREE BOND FUND
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- --------- -------- -------- -----------
<S> <C> <C> <C>
Municipal Bond Obligations--98.0%
ALABAMA--1.5%
Phenix City Industrial Development Revenue Bonds (Toronto
Dominion Bank LOC) (AA/A-1+/ NR)
$300,000 4.00%/(a)/ 06/01/28 $ 300,000
-----------
ARIZONA--2.5%
Salt River Project Arizona Agricultural Improvements Revenue
Bonds Series C (AA/Aa)
$500,000 4.50% 01/01/04 $ 489,835
-----------
FLORIDA--2.2%
Florida State Board of Education Capital Outlay GO Bonds
Series A (AA+/Aa2)
$200,000 5.25% 01/01/04 $ 202,786
Florida State Board of Education Capital Outlay GO Bonds
Series D (AA+/Aa2)
250,000 5.00 06/01/12 236,070
-----------
$ 438,856
-----------
GEORGIA--1.5%
Fulton County Residential Care Facilities Lenbrook Square
Foundation Revenue Bonds (AAA/A-1+/ NR) (Rabobank
Nederland LOC)
$100,000 4.10%/(a)/ 01/01/18 $ 100,000
Georgia State GO Bonds Series D (AA+/Aaa)
200,000 5.40 11/01/10 203,064
-----------
$ 303,064
-----------
ILLINOIS--6.1%
Chicago Metropolitan Water Reclamation GO Bonds (AA/Aa)
$500,000 4.90% 12/01/01 $ 502,215
450,000 5.60 12/01/09 460,179
Evanston GO Bonds (NR/Aaa)
$250,000 5.30% 12/01/99 $ 255,222
-----------
$1,217,616
-----------
INDIANA--1.2%
Purdue University Revenue Bonds (AMBAC) (AAA/Aaa)
$250,000 5.25% 07/01/10 $ 244,183
-----------
IOWA--3.8%
Bettendorf GO Bonds Series A (AMBAC) (NR/Aaa)
$250,000 4.70% 06/01/03 $ 249,730
Iowa City Sewer Revenue Bonds (AMBAC) (AAA/Aaa)
250,000 6.00 07/01/08 258,692
Polk County GO Bonds (FGIC) (AAA/Aaa)
250,000 5.50 12/01/10 256,030
-----------
$ 764,452
-----------
KENTUCKY--1.0%
Louisville Water Works Board Water System Revenue Bonds(AA/Aa)
$200,000 5.63% 11/15/06 $ 206,846
-----------
MARYLAND--2.5%
Washington Suburban Sanitation District GO Revenue Bonds
(AA/Aa1)
$500,000 4.75% 06/01/02 $ 499,755
-----------
MASSACHUSETTS--0.5%
Massachusetts State GO Bonds (ABN AMRO Bank N.V. LOC)
(AA/A-1+/ Aa1/VMIG1)
$100,000 3.85%/(a)/ 12/01/97 $ 100,000
-----------
MICHIGAN--1.0%
Greenville Public Schools GO Bonds (MBIA) (AAA/Aaa)
$200,000 5.75% 05/01/07 $ 206,800
-----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
33
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
NATIONAL TAX-FREE BOND FUND--(Continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- --------- -------- -------- -----------
<S> <C> <C> <C>
Municipal Bond Obligations--Continued
MINNESOTA--6.5%
Minneapolis GO Bonds (AAA/Aaa)
$500,000 5.30% 10/01/98 $ 509,325
Minnesota State Housing and Finance Agency Series D (AA+/Aa)
390,000 5.35 01/01/05 395,101
St. Paul Independent School District #625 GO Bonds Series C
(AA/Aa)
400,000 5.20 02/01/07 396,952
-----------
$1,301,378
-----------
NEBRASKA--4.8%
Nebraska Public Power District Revenue Bonds Series A (A+/A1)
$250,000 5.10% 01/01/06 $ 248,427
200,000 6.00 01/01/06 209,002
Omaha Public Power Revenue Bonds Series A (AA/Aa)
500,000 5.00 02/01/01 505,905
-----------
$ 963,334
-----------
NEVADA--1.0%
Clark County School District GO Bonds Series B (FGIC)(AAA/Aaa)
$200,000 5.30% 05/01/04 $ 203,028
-----------
NORTH DAKOTA--1.3%
Fargo Water Revenue Bonds (MBIA) (AAA/Aaa)
$250,000 4.90% 01/01/03 $ 250,227
-----------
OHIO--4.1%
Columbus GO Bonds Series A (AAA/Aaa)
$250,000 4.50% 07/01/01 $ 249,050
Euclid GO Bonds (NR/Aa)
415,000 4.40 12/01/01 410,925
Ohio State Infrastructure Improvement GO Bonds (AA+/Aa1)
150,000 5.20 08/01/10 148,011
-----------
$ 807,986
-----------
OREGON--2.5%
Oregon State Housing & Community Services Department Revenue
Bonds Series D (NR/Aa)
$500,000 5.55% 07/01/06 $ 502,095
-----------
PENNSYLVANIA--2.5%
Pennsylvania State GO Bonds (AA-/A1)
$500,000 5.25% 06/15/06 $ 505,380
-----------
SOUTH CAROLINA--1.3%
South Carolina State Capital Improvement GO Bonds Series A
(AA+/Aaa)
$250,000 5.00% 03/01/05 $ 250,303
-----------
TENNESSEE--2.6%
Shelby County GO Bonds Series A (AA+/Aa)
$500,000 5.63% 06/01/08 $ 516,285
-----------
TEXAS--16.7%
Channelview Independent School District GO Bonds (PSFG)
(NR/Aaa)
$250,000 4.75% 08/15/05 $ 246,285
Collin County GO Bonds (AA-/Aa)
400,000 5.40 02/15/09 397,212
Grapevine Industrial Development Revenue Bonds (Morgan
Guarantee Trust Co. LOC) (NR/Aa1/P-1)
200,000 3.95/(a)/ 12/01/24 200,000
200,000 3.95/(a)/ 12/01/24 200,000
700,000 3.95/(a)/ 12/01/24 700,000
Houston Independent School District GO Bonds (AA+/Aa)
250,000 4.40 07/15/01 247,252
Lone Star Airport Improvement Authority Revenue Bonds (Royal
Bank of Canada LOC) (NR/VMIG1)
200,000 3.95/(a)/ 12/01/14 200,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
34
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
NATIONAL TAX-FREE BOND FUND--(Continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- --------- -------- -------- -----------
<S> <C> <C> <C>
Municipal Bond Obligations--Continued
TEXAS--CONTINUED
San Antonio GO Bonds (AA/Aa)
$200,000 5.20% 08/01/02 $ 203,004
Tarrant County GO Bonds (AA+/Aa1)
400,000 4.80 07/15/06 386,972
Tarrant County Water Control & Improvement Revenue Bonds (AAA/Aaa)
140,000 5.00 03/01/09 135,261
Texas A&M University Revenue Bonds (AA/Aa)
200,000 5.55 05/15/01 206,760
Texas State GO Bonds Series A (AA/Aa)
200,000 5.65 10/01/08 205,762
-----------
$3,328,508
-----------
UTAH--2.6%
Alpine School District GO Bonds (FGIC-TCRS) (AAA/Aaa)
$250,000 5.40% 03/15/05 $ 253,390
Salt Lake City School District Revenue Bonds Series A (NR/Aaa)
250,000 5.80 03/01/07 260,005
-----------
$ 513,395
-----------
VIRGINIA--3.5%
Virginia Beach GO Bonds (AA/Aa)
$200,000 5.20% 07/15/06 $ 202,904
Virginia State Public School Authority Revenue Bonds (AA/Aa)
500,000 4.50 01/01/00 499,475
-----------
$ 702,379
-----------
WASHINGTON--15.1%
King & Snohomish Counties School District (AA-/Aa)
$280,000 5.20% 06/15/08 $ 278,351
King County GO Bonds Series D (AA+/Aa1)
500,000 6.20% 12/01/00 522,370
King County School District #412 GO Bonds (MBIA)(AAA/Aaa)
250,000 5.75 06/01/08 257,630
Pierce County Sewer Improvements Revenue Bonds (A+/A1)
290,000 5.45 02/01/08 290,821
Port Seattle Revenue Bonds Series A (AMBAC) (AAA/Aaa)
500,000 6.00 02/01/99 511,945
Seattle GO Bonds Series A (AA+/Aa1)
150,000 5.30 08/01/13 145,538
Seattle Municipal Light & Power Revenue Bonds Series A (AA/Aa)
250,000 5.75 08/01/09 254,563
Snohomish County GO Bonds (MBIA) (AAA/Aaa)
250,000 5.75 12/01/10 250,443
Vancouver Water & Sewer Revenue Bonds (FGIC)(AAA/Aaa)
250,000 4.70 06/01/01 249,440
Washington State GO Bonds Series DD-12 & CC-9 (AA/Aa)
250,000 5.38 03/01/08 253,980
-----------
$3,015,081
-----------
WISCONSIN--9.7%
Appleton Wisconsin Area School District GO Bonds (NR/Aa)
$500,000 5.00% 04/01/11 $ 477,765
Green Bay Public School District GO Bonds (NR/Aa)
500,000 4.90 04/01/05 497,710
Milwaukee GO Bonds Series E (AA+/Aa1)
250,000 5.50 06/15/10 251,227
</TABLE>
The accompanying notes are an integral part of these financial statements.
35
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
NATIONAL TAX-FREE BOND FUND--(Continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- --------- ------- -------- -----------
<S> <C> <C> <C>
Municipal Bond Obligations--Continued
WISCONSIN--CONTINUED
Waukesha County GO Bonds
(NR/Aaa)
$500,000 4.40% 12/01/98 $ 503,080
Wisconsin State GO Bonds
Series 3 (AA/Aa)
200,000 5.25 11/01/02 203,910
-----------
$1,933,692
-----------
Total Municipal Bond
Obligations
(cost $19,471,913).............. $19,564,478
-----------
Total Investments
(cost
$19,471,913/(b)/) .............. $19,564,478
===========
- --------------------------------------------------------------------------------
Federal Income Tax Information:
Gross unrealized gain for
investments in which value
exceeds cost ............................ $ 165,115
Gross unrealized loss for
investments in which cost
exceeds value ........................... (72,550)
-----------
Net unrealized gain ....................... $ 92,565
===========
- --------------------------------------------------------------------------------
</TABLE>
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Investment Abbreviations:
<S> <C>
AMBAC -- Insured by American Municipal Bond Assurance Corp.
FGIC -- Insured by Financial Guaranty Insurance Co.
GO -- General Obligation
LOC -- Letter of Credit
MBIA -- Insured by Municipal Bond Investors Assurance Corp.
NR -- Not Rated
PSFG -- Permanent School Fund Guaranteed
TCRS -- Transferable Custodial Receipts
- --------------------------------------------------------------------------------
</TABLE>
/(a)/ Variable rate security. Coupon rate disclosed is that which is in effect
at April 30, 1997.
/(b)/ The cost stated also represents aggregate cost for income tax purposes.
The accompanying notes are an integral part of these financial statements.
36
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
MISSOURI TAX-FREE BOND FUND
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- --------- -------- -------- ---------
<S> <C> <C> <C>
Missouri Municipal Bond Obligations--97.1%
Benton County School District GO
Bonds (AA/NR)
$300,000 4.90% 03/01/04 $ 296,046
Cass County School District #R-2
GO Bonds (AA/NR)
725,000 4.80 03/01/02 719,410
Cass County School District #R-9
GO Bonds (NR/A)
200,000 6.25 03/01/00 204,984
Cass County School District GO
Bonds (AA/NR)
400,000 4.75 03/01/03 393,388
Chesterfield GO Bonds (NR/Aa2)
500,000 5.20 02/15/12 490,860
Columbia School District GO Bonds
(AA/Aa)
375,000 4.75 03/01/05 372,315
Columbia Water & Electricity
Revenue Bonds Series A (AA/A1)
300,000 5.40 10/01/02 310,197
Fort Zumwalt School District (AA/NR)
100,000 5.25 03/01/11 99,313
Hazelwood School District GO
Bonds (NR/Aa)
150,000 5.15 03/01/04 152,053
Jackson County Longview
Recreation Project (NR/A1)
350,000 8.00 11/01/07 363,657
Jackson County School District GO
Bonds (NR/A1)
250,000 5.60 03/01/08 255,827
Jasper County School District #R-9
GO Bonds (AA/NR)
500,000 5.00 09/01/03 503,195
Kansas City Chouteau Bridge
Project Series B (AA/Aa3)
380,000 5.00 05/01/11 366,289
Kansas City GO Bonds (AA/Aa)
200,000 4.50 06/01/04 195,492
Kansas City Sewer Special
Assessment GO Bonds Series A
(AA/Aa)
410,000 7.40% 05/15/99 433,604
Kansas City Water Revenue Bonds
Series A (AA/Aa)
750,000 4.85 12/01/06 740,933
Lafayette County School District GO
Bonds (AA/NR)
350,000 5.20 03/01/07 346,262
Lees Summit GO Bonds Series B
(AMBAC) (AAA/Aaa)
400,000 4.20 04/01/04 377,912
Missouri State Economic
Development Export &
Infrastructure Board Revenue
Bonds (A/NR)
200,000 5.38/(a)/ 05/01/03 200,462
Missouri State Environmental
Improvement & Energy
Resources Authority Pollution
Control Revenue Bonds (AA/A1)
500,000 4.25 12/01/98 501,040
250,000 5.50 12/01/04 259,222
Missouri State Environmental
Improvement & Energy
Resources Authority Water
Pollution Control Revenue Bonds
Series A (AA/NR)
150,000 5.25 07/01/02 153,865
Missouri State Environmental
Improvement & Energy
Resources Authority Water
Pollution Control Revenue Bonds
Series C (NR/Aa)
205,000 4.75 01/01/01 206,490
500,000 4.90 01/01/02 504,520
</TABLE>
The accompanying notes are an integral part of these financial statements.
37
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
MISSOURI TAX-FREE BOND FUND--(Continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
----------- ---------- ---------- -----------
<S> <C> <C> <C>
Missouri Municipal Bond Obligations--Continued
Missouri State Environmental
Improvement & Energy
Resources Authority Water
Pollution Control Revenue Bonds
Series D (NR/Aa)
$400,000 5.50% 01/01/08 $ 408,376
Missouri State Environmental
Improvement & Energy
Resources Authority Water
Pollution Control Revenue Bonds
Series E (NR/Aa)
390,000 4.38 07/01/00 390,491
Missouri State Fourth State Building
GO Bonds Series A (AAA/Aaa)
150,000 5.30 08/01/08 151,955
500,000 5.40 08/01/09 508,320
Missouri State GO Bonds Series A (AAA/Aaa)
500,000 4.50 08/01/02 494,910
Missouri State Health &
Educational Facility Jefferson
Memorial Hospital Revenue
Bonds (NR/Baa)
500,000 4.10/(a)/ 06/01/26 500,000
Missouri State Health & Educational
Facility Revenue Bonds (Barnes-
Jewish, Inc.) (AA/Aa)
150,000 6.00 05/15/11 156,516
Missouri State Health & Educational
Facility Revenue Bonds
(prerefunded to 06/01/01) (MBIA)
(AAA/Aaa)
300,000 6.63 06/01/11 326,130
Missouri State Health & Educational
Facility Revenue Bonds Series B
(Health Midwest) (MBIA)
(AAA/Aaa)
150,000 6.10 06/01/11 157,007
Missouri State Health & Educational
Facility Washington University
Revenue Bonds Series A
(NR/Aa1)
800,000 4.75% 08/15/05 784,920
Missouri State Housing
Development Community
Mortgage Revenue Bonds
(GNMA/FNMA) (AAA/Aaa)
205,000 5.40 03/01/06 205,554
Missouri State Housing
Development Community
Revenue Bonds Series B
(GNMA/FNMA) (AAA/NR)
245,000 5.50 03/01/06 248,224
Missouri State Housing
Development Community
Revenue Bonds Series C
(GNMA/FNMA) (AAA/NR)
245,000 4.80 09/01/01 245,742
Missouri State Water Pollution
Control GO Bonds Series A
(AAA/Aaa)
300,000 5.60 08/01/10 307,140
Platte County Missouri School
District Park Hill GO Bond
(Student Aid Direct Deposit)
(AA/Aa2)
500,000 5.20 03/01/09 494,310
Platte County School District #R-3
GO Bonds (AA/NR)
265,000 4.90 03/01/05 260,090
Springfield GO Bonds (NR/Aa)
220,000 4.30 03/01/00 219,179
St. Charles School District GO
Bonds Series A (AMBAC)
(AAA/Aaa)
150,000 5.75 03/01/11 151,744
</TABLE>
The accompanying notes are an integral part of these financial statements.
38
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
MISSOURI TAX-FREE BOND FUND--(Continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- --------- ------- -------- -----------
<S> <C> <C> <C>
Missouri Municipal Bond Obligations--Continued
St. Francois County School District
GO Bonds (CGIC) (AAA/Aaa)
$280,000 4.80% 03/01/04 $ 277,572
St. Louis County GO Bonds Series B
(NR/Aa1)
200,000 5.25 02/01/07 200,768
750,000 5.30 02/01/08 752,873
St. Louis County Rockwood School
District #R-6 GO Bonds (NR/Aaa)
300,000 5.80 02/01/99 307,185
St. Louis County School District GO
Bonds Lindbergh (NR/Aa)
715,000 6.60 02/15/03 776,197
200,000 5.40 02/15/10 199,252
St. Louis County School District GO
Bonds Parkway (NR/Aa)
300,000 7.00 02/01/00 319,254
St. Louis School District GO Bonds
(FGIC) (AAA/Aaa)
200,000 5.40 04/01/03 205,786
St. Peters GO Bonds (NR/A1)
150,000 5.80 01/01/10 153,389
University of Missouri Health
Facilities Revenue Bonds Series
A (AMBAC) (AAA/Aaa)
150,000 5.20 11/01/10 146,309
University of Missouri Systems
Facilities Revenue Bonds
(AA+/Aa2)
250,000 4.60 11/01/00 250,798
-----------
Total Missouri Municipal
Bond Obligations
(cost $18,091,923).... $18,047,327
-----------
Repurchase Agreements--1.4%
State Street Bank & Trust Company,
dated 04/30/97, repurchase price
$259,037 (U.S. Treasury Note:
$264,544, 5.88%, 04/30/98)
$259,000 5.15% 05/01/97 $ 259,000
-----------
Total Repurchase
Agreements
(cost $259,000) ..... $ 259,000
-----------
Total Investments
(cost $18,350,923/(b)/) $18,306,327
===========
- ------------------------------------------------
Federal Income Tax Information:
Gross unrealized gain for
investments in which value
exceeds cost ............... $ 77,840
Gross unrealized loss for
investments in which cost
exceeds value .............. (122,436)
===========
Net unrealized loss .......... $ (44,596)
===========
</TABLE>
- -----------------------------------------------------------------------------
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
- -----------------------------------------------------------------------------
Investment Abbreviations:
AMBAC -- Insured by American Municipal Bond Assurance Corp.
CGIC -- Insured by Capital Guaranty Insurance Corp.
FGIC -- Insured by Financial Guaranty Insurance Co.
FNMA -- Federal National Mortgage Assn.
GNMA -- Government National Mortgage Assn.
GO -- General Obligation
MBIA -- Insured by Municipal Bond Investors Assurance Corp.
NR -- Not Rated
- -----------------------------------------------------------------------------
/(a)/ Variable rate security. Coupon rate disclosed is that which is in effect
at April 30, 1997.
/(b)/ The cost stated also represents aggregate cost for income tax purposes.
The accompanying notes are an integral part of these financial statements.
39
<PAGE>
THE COMMERCE FUNDS
STATEMENTS OF ASSETS AND LIABILITIES
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Short-Term
Government Bond
Fund Fund
--------------- ----------------
<S> <C> <C>
ASSETS:
Investments in securities, at value
(cost $39,364,204, $164,330,561, $70,318,352, $12,887,904, $206,211,999,
$69,813,388, $57,914,221, $19,471,913, and $18,350,923, respectively) .......... $ 39,290,699 $ 166,693,178
Cash .............................................................................. 926 221
Receivables:
Investment securities sold ...................................................... -- --
Interest ........................................................................ 518,023 1,974,180
Dividends ....................................................................... -- --
Fund shares sold ................................................................ 152,489 324,548
Deferred organization expenses, net ............................................... 26,023 27,614
Other ............................................................................. 11,068 2,917
-------------- ----------------
Total assets .................................................................. 39,999,228 169,022,658
-------------- ----------------
LIABILITIES:
Payables:
Investment securities purchased ................................................. 468,685 --
Fund shares redeemed ............................................................ 296,677 517,996
Dividends and distributions ..................................................... 73,340 172,088
Advisory fees ................................................................... 9,581 68,078
Administration fees ............................................................. 4,791 20,424
Distribution Fees ............................................................... 7 76
Accrued expenses and other liabilities ............................................ 13,155 52,375
-------------- ----------------
Total liabilities ............................................................. 866,236 831,037
-------------- ----------------
NET ASSETS:
Paid-in capital ................................................................... 39,321,444 165,777,093
Accumulated undistributed net investment income (loss) ............................ 16,269 76,707
Accumulated net realized gain (loss) on investment transactions ................... (131,216) (24,796)
Accumulated net realized loss on foreign currency related transactions ............ -- --
Net unrealized gain (loss) on investments ......................................... (73,505) 2,362,617
Net unrealized loss on translation of assets and liabilities denominated in
foreign currencies ............................................................. -- --
-------------- ----------------
Net assets .................................................................... $39,132,992 $ 168,191,621
============== ================
SHARES OUTSTANDING:
Total shares outstanding, no par value (unlimited number of shares authorized):
Institutional Shares ............................................................ 2,150,847 8,949,730
============== ================
Service Shares .................................................................. 1,923 10,798
============== ================
Institutional Shares: Net asset value per share (net assets/shares outstanding).... $18.18 $18.77
============== ================
Maximum public offering price per share /(a)/.................................... $18.55 $19.45
============== ================
Service Shares: Net asset value per share (net assets/shares outstanding).......... $18.18 $18.77
============== ================
Maximum public offering price per share /(a)/.................................... $18.55 $19.45
============== ================
</TABLE>
- -------------
/(a)/For the Short-Term Government Fund, the maximum public offering price per
share is calculated as (NAV per share x 1.0204). For all other Funds, the
maximum public offering price per share is calculated as (NAV per share x
1.0363).
/(b)/For the National Tax-Free Bond and Missouri Tax-Free Bond Funds, shares
outstanding are designated as neither Institutional Shares nor Service
Shares.
The accompanying notes are an integral part of these financial statements.
40
<PAGE>
<TABLE>
<CAPTION>
Growth and
Balanced Income
Fund Fund
-------------- ---------------
<S> <C> <C>
ASSETS:
Investments in securities, at value
(cost $39,364,204, $164,330,561, $70,318,352, $12,887,904, $206,211,999,
$69,813,388, $57,914,221, $19,471,913, and $18,350,923, respectively) ......... $ 81,375,322 $ 12,896,575
Cash ............................................................................. 263 956
Receivables:
Investment securities sold ..................................................... 262,497 --
Interest ....................................................................... 374,924 176
Dividends ...................................................................... 17,168 16,774
Fund shares sold ............................................................... 195,690 197,663
Deferred organization expenses, net .............................................. 26,599 19,353
Other ............................................................................ 28,799 31,102
-------------- ---------------
Total assets ................................................................. 82,281,262 13,162,599
-------------- ---------------
LIABILITIES:
Payables:
Investment securities purchased ................................................ 363,543 697,561
Fund shares redeemed ........................................................... 257,273 --
Dividends and distributions .................................................... -- --
Advisory fees .................................................................. 48,843 6,642
Administration fees ............................................................ 9,769 1,328
Distribution Fees .............................................................. 174 79
Accrued expenses and other liabilities ........................................... 40,606 49,444
-------------- ---------------
Total liabilities ............................................................ 720,208 755,054
-------------- ---------------
NET ASSETS:
Paid-in capital .................................................................. 69,240,717 12,376,605
Accumulated undistributed net investment income (loss) ........................... 188,057 27,668
Accumulated net realized gain (loss) on investment transactions .................. 1,075,310 (5,399)
Accumulated net realized loss on foreign currency related transactions ........... -- --
Net unrealized gain (loss) on investments ........................................ 11,056,970 8,671
Net unrealized loss on translation of assets and liabilities denominated in
foreign currencies ............................................................ -- --
-------------- ---------------
Net assets ................................................................... $ 81,561,054 $ 12,407,545
============== ===============
SHARES OUTSTANDING:
Total shares outstanding, no par value (unlimited number of shares authorized):
Institutional Shares ........................................................... 3,422,064 672,190
============== ===============
Service Shares ................................................................. 22,009 20,640
============== ===============
Institutional Shares: Net asset value per share (net assets/shares outstanding)... $23.68 $17.91
============== ===============
Maximum public offering price per share /(a)/................................... $24.54 $18.56
============== ===============
Service Shares: Net asset value per share (net assets/shares outstanding)......... $23.68 $17.90
============== ===============
Maximum public offering price per share /(a)/................................... $24.54 $18.55
============== ===============
<CAPTION>
International
Growth MidCap Equity
Fund Fund Fund
--------------- -------------- ---------------
<S> <C> <C> <C>
ASSETS:
Investments in securities, at value
(cost $39,364,204, $164,330,561, $70,318,352, $12,887,904, $206,211,999,
$69,813,388, $57,914,221, $19,471,913, and $18,350,923, respectively) ....... $ 271,708,663 $ 79,100,016 $ 63,274,526
Cash ........................................................................... 935 122 177,774
Receivables:
Investment securities sold ................................................... 928,155 290,059 187,299
Interest ..................................................................... 5,218 462 601
Dividends .................................................................... 113,023 10,389 334,772
Fund shares sold ............................................................. 848,742 175,420 94,727
Deferred organization expenses, net ............................................ 28,205 25,870 25,694
Other .......................................................................... 5,176 1,486 1,138
--------------- -------------- --------------
Total assets ............................................................... 273,638,117 79,603,824 64,096,531
--------------- -------------- --------------
LIABILITIES:
Payables:
Investment securities purchased .............................................. 4,946,375 2,244,946 134,695
Fund shares redeemed ......................................................... 188,326 109,798 53,167
Dividends and distributions .................................................. -- -- --
Advisory fees ................................................................ 156,947 46,860 70,097
Administration fees .......................................................... 31,389 9,372 7,648
Distribution Fees ............................................................ 954 40 20
Accrued expenses and other liabilities ......................................... 59,492 32,637 83,194
--------------- -------------- --------------
Total liabilities .......................................................... 5,383,483 2,443,653 348,821
--------------- -------------- --------------
NET ASSETS:
Paid-in capital ................................................................ 192,857,677 69,542,948 57,254,787
Accumulated undistributed net investment income (loss) ......................... 64,871 (221,409) 66,141
Accumulated net realized gain (loss) on investment transactions ................ 9,835,422 (1,447,996) 1,336,983
Accumulated net realized loss on foreign currency related transactions ......... -- -- (261,786)
Net unrealized gain (loss) on investments ...................................... 65,496,664 9,286,628 10,196,894
Net unrealized loss on translation of assets and liabilities denominated in
foreign currencies .......................................................... -- -- (4,845,309)
--------------- -------------- --------------
Net assets ................................................................. $ 268,254,634 $ 77,160,171 $ 63,747,710
=============== ============== ==============
SHARES OUTSTANDING:
Total shares outstanding, no par value (unlimited number of shares authorized):
Institutional Shares ......................................................... 8,820,029 2,954,868 2,926,766
=============== ============== ==============
Service Shares ............................................................... 73,771 3,583 3,123
=============== ============== ==============
Institutional Shares: Net asset value per share (net assets/shares outstanding). $30.16 $26.08 $21.76
=============== ============== ==============
Maximum public offering price per share /(a)/................................. $31.25 $27.03 $22.55
=============== ============== ==============
Service Shares: Net asset value per share (net assets/shares outstanding)....... $30.15 $26.07 $21.75
=============== ============== ==============
Maximum public offering price per share /(a)/................................. $31.24 $27.02 $22.54
=============== ============== ==============
<CAPTION>
National Missouri
Tax-Free Tax-Free
Bond Fund/(b)/ Bond Fund/(b)/
--------------- -----------------
<S> <C> <C>
ASSETS:
Investments in securities, at value
(cost $39,364,204, $164,330,561, $70,318,352, $12,887,904, $206,211,999,
$69,813,388, $57,914,221, $19,471,913, and $18,350,923, respectively) ........... $ 19,564,478 $ 18,306,327
Cash ............................................................................... 24,026 764
Receivables:
Investment securities sold ....................................................... -- 200,000
Interest ......................................................................... 300,144 245,656
Dividends ........................................................................ -- --
Fund shares sold ................................................................. 130,000 120,000
Deferred organization expenses, net ................................................ 30,048 29,981
Other .............................................................................. 6,804 9,891
-------------- --------------
Total assets ................................................................... 20,055,500 18,912,619
-------------- --------------
LIABILITIES:
Payables:
Investment securities purchased .................................................. -- 249,600
Fund shares redeemed ............................................................. 5,000 5,000
Dividends and distributions ...................................................... 50,783 51,792
Advisory fees .................................................................... 7,986 4,523
Administration fees .............................................................. 2,396 2,260
Distribution Fees ................................................................ -- --
Accrued expenses and other liabilities ............................................. 16,331 11,757
-------------- --------------
Total liabilities .............................................................. 82,496 324,932
-------------- --------------
NET ASSETS:
Paid-in capital .................................................................... 19,871,277 18,603,024
Accumulated undistributed net investment income (loss) ............................. 9,525 10,626
Accumulated net realized gain (loss) on investment transactions .................... (363) 18,633
Accumulated net realized loss on foreign currency related transactions ............. -- --
Net unrealized gain (loss) on investments .......................................... 92,565 (44,596)
Net unrealized loss on translation of assets and liabilities denominated in
foreign currencies .............................................................. -- --
-------------- --------------
Net assets ..................................................................... $ 19,973,004 $ 18,587,687
============== ==============
SHARES OUTSTANDING:
Total shares outstanding, no par value (unlimited number of shares authorized):
Institutional Shares ............................................................. 1,086,149 1,023,419
============== ==============
Service Shares ...................................................................
Institutional Shares: Net asset value per share (net assets/shares outstanding)..... $18.39 $18.16
============== ==============
Maximum public offering price per share /(a)/..................................... $19.06 $18.82
============== ==============
Service Shares: Net asset value per share (net assets/shares outstanding)...........
Maximum public offering price per share /(a)/.....................................
</TABLE>
<PAGE>
THE COMMERCE FUNDS
STATEMENTS OF OPERATIONS
For the Six Months Ended April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Short-Term
Government Bond
Fund Fund
-------------- ------------
<S> <C> <C>
INVESTMENT INCOME:
Interest .............................................................................. $ 1,245,951 $ 5,697,117
Dividends/(b)/......................................................................... -- --
------------ ------------
Total investment income ............................................................. 1,245,951 5,697,117
------------ ------------
EXPENSES:
Advisory fees ......................................................................... 91,642 395,051
Administration fees ................................................................... 27,491 118,515
Transfer agent fees ................................................................... 19,780 27,013
Custodian fees ........................................................................ 25,983 28,404
Professional fees ..................................................................... 7,886 28,464
Trustee fees .......................................................................... 763 2,951
Registration fees ..................................................................... 15,688 21,325
Amortization of deferred organization expenses ........................................ 4,944 5,245
Other ................................................................................. 12,000 61,710
------------ ------------
Total expenses ...................................................................... 206,177 688,678
Less -- Investment advisory fees waived and expense reimbursements .................... (81,553) --
------------ ------------
Net expenses ........................................................................ 124,624 688,678
Distribution fees ................................................................... 7 76
------------ ------------
Total expenses and distribution fees ............................................. 124,631 688,754
------------ ------------
Net investment income (loss)......................................................... 1,121,320 5,008,363
------------ ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT AND FOREIGN
CURRENCY TRANSACTIONS:
Net realized gain (loss) on investment transactions ................................... (122,632) (24,727)
Net realized loss on foreign currency related transactions ............................ -- --
Net change in unrealized gain (loss) on investments ................................... (386,991) (2,351,246)
Net change in unrealized loss on translation of assets and liabilities denominated in
foreign currencies ................................................................. -- --
------------ ------------
Net realized and unrealized gain (loss) on investments and foreign currency
transactions .................................................................. (509,623) (2,375,973)
============ ============
Net increase (decrease) in net assets resulting from operations .................. $ 611,697 $ 2,632,390
============ ============
</TABLE>
- --------------------
/(a)/The Growth and Income Fund commenced operations on March 3, 1997.
/(b)/For the Growth and Income Fund and the International Equity Fund, amount
is net of $229 and $66,924 in foreign withholding taxes, respectively.
The accompanying notes are an integral part of these financial statements.
42
<PAGE>
<TABLE>
<CAPTION>
Growth and
Balanced Income
Fund Fund/(a)/
------------- -------------
<S> <C> <C>
INVESTMENT INCOME:
Interest .............................................................................. $ 1,147,247 $ 36,184
Dividends/(b)/......................................................................... 245,589 10,408
------------- -------------
Total investment income ............................................................. 1,392,836 46,592
------------- -------------
EXPENSES:
Advisory fees ......................................................................... 375,270 11,779
Administration fees ................................................................... 56,292 2,356
Transfer agent fees ................................................................... 19,675 8,069
Custodian fees ........................................................................ 32,882 9,882
Professional fees ..................................................................... 16,587 3,646
Trustee fees .......................................................................... 1,711 319
Registration fees ..................................................................... 17,926 10,690
Amortization of deferred organization expenses ........................................ 5,052 646
Other ................................................................................. 43,966 2,131
------------- -------------
Total expenses ...................................................................... 569,361 49,518
Less -- Investment advisory fees waived and expense reimbursements .................... (145,296) (30,673)
------------- -------------
Net expenses ........................................................................ 424,065 18,845
Distribution fees ................................................................... 174 79
------------- -------------
Total expenses and distribution fees ............................................. 424,239 18,924
------------- -------------
Net investment income (loss)......................................................... 968,597 27,668
------------- -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT AND FOREIGN
CURRENCY TRANSACTIONS:
Net realized gain (loss) on investment transactions ................................... 1,165,750 (5,399)
Net realized loss on foreign currency related transactions ............................ -- --
Net change in unrealized gain (loss) on investments ................................... 1,581,144 8,671
Net change in unrealized loss on translation of assets and liabilities denominated in
foreign currencies ................................................................. -- --
------------- -------------
Net realized and unrealized gain (loss) on investments and foreign currency
transactions .................................................................. 2,746,894 3,272
------------- -------------
Net increase (decrease) in net assets resulting from operations .................. $ 3,715,491 $ 30,940
============= =============
<CAPTION>
Growth MidCap
Fund Fund
-------------- -------------
<S> <C> <C>
INVESTMENT INCOME:
Interest .............................................................................. $ 500,777 $ 40,154
Dividends/(b)/......................................................................... 1,489,528 221,218
-------------- -------------
Total investment income ............................................................. 1,990,305 261,372
-------------- -------------
EXPENSES:
Advisory fees ......................................................................... 903,827 290,667
Administration fees ................................................................... 180,765 58,134
Transfer agent fees ................................................................... 38,225 29,517
Custodian fees ........................................................................ 31,476 28,080
Professional fees ..................................................................... 41,881 17,183
Trustee fees .......................................................................... 4,426 1,760
Registration fees ..................................................................... 30,394 15,658
Amortization of deferred organization expenses ........................................ 5,356 4,912
Other ................................................................................. 83,751 36,830
-------------- -------------
Total expenses ...................................................................... 1,320,101 482,741
Less -- Investment advisory fees waived and expense reimbursements .................... -- --
-------------- -------------
Net expenses ........................................................................ 1,320,101 482,741
Distribution fees ................................................................... 954 40
-------------- -------------
Total expenses and distribution fees ............................................. 1,321,055 482,781
-------------- -------------
Net investment income (loss)......................................................... 669,250 (221,409)
-------------- -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT AND FOREIGN
CURRENCY TRANSACTIONS:
Net realized gain (loss) on investment transactions ................................... 9,835,665 (1,249,377)
Net realized loss on foreign currency related transactions ............................ -- --
Net change in unrealized gain (loss) on investments ................................... 14,983,478 (3,574,861)
Net change in unrealized loss on translation of assets and liabilities denominated in
foreign currencies ................................................................. -- --
-------------- -------------
Net realized and unrealized gain (loss) on investments and foreign currency
transactions .................................................................. 24,819,143 (4,824,238)
-------------- -------------
Net increase (decrease) in net assets resulting from operations .................. $ 25,488,393 $ (5,045,647)
============== =============
<CAPTION>
International National
Equity Tax-Free
Fund Bond Fund
------------- ------------
<S> <C> <C>
INVESTMENT INCOME:
Interest .............................................................................. $ 67,913 $ 445,703
Dividends/(b)/......................................................................... 518,769 --
------------- -----------
Total investment income ............................................................. 586,682 445,703
------------- -----------
EXPENSES:
Advisory fees ......................................................................... 433,698 46,160
Administration fees ................................................................... 43,385 13,848
Transfer agent fees ................................................................... 25,660 15,228
Custodian fees ........................................................................ 121,731 19,734
Professional fees ..................................................................... 10,932 3,044
Trustee fees .......................................................................... 1,141 425
Registration fees ..................................................................... 15,359 1,875
Amortization of deferred organization expenses ........................................ 4,880 5,300
Other ................................................................................. 16,330 4,031
------------- -----------
Total expenses ...................................................................... 673,116 109,645
Less -- Investment advisory fees waived and expense reimbursements .................... (175,639) (31,173)
------------- -----------
Net expenses ........................................................................ 497,477 78,472
Distribution fees ................................................................... 20 --
------------- -----------
Total expenses and distribution fees ............................................. 497,497 78,472
------------- -----------
Net investment income (loss)......................................................... 89,185 367,231
------------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT AND FOREIGN
CURRENCY TRANSACTIONS:
Net realized gain (loss) on investment transactions ................................... 1,367,085 5,614
Net realized loss on foreign currency related transactions ............................ (224,293) --
Net change in unrealized gain (loss) on investments ................................... 5,228,799 (83,100)
Net change in unrealized loss on translation of assets and liabilities denominated in
foreign currencies ................................................................. (3,491,860) --
------------- -----------
Net realized and unrealized gain (loss) on investments and foreign currency
transactions .................................................................. 2,879,731 (77,486)
------------- -----------
Net increase (decrease) in net assets resulting from operations .................. $ 2,968,916 $ 289,745
============= ===========
<CAPTION>
Missouri
Tax-Free
Bond Fund
-------------
<S> <C>
INVESTMENT INCOME:
Interest .............................................................................. $ 430,660
Dividends/(b)/......................................................................... --
-----------
Total investment income ............................................................. 430,660
-----------
EXPENSES:
Advisory fees ......................................................................... 44,187
Administration fees ................................................................... 13,256
Transfer agent fees ................................................................... 15,008
Custodian fees ........................................................................ 21,933
Professional fees ..................................................................... 3,276
Trustee fees .......................................................................... 427
Registration fees ..................................................................... 1,640
Amortization of deferred organization expenses ........................................ 5,289
Other ................................................................................. 3,995
-----------
Total expenses ...................................................................... 109,011
Less -- Investment advisory fees waived and expense reimbursements .................... (51,568)
-----------
Net expenses ........................................................................ 57,443
Distribution fees ................................................................... --
-----------
Total expenses and distribution fees ............................................. 57,443
-----------
Net investment income (loss)......................................................... 373,217
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT AND FOREIGN
CURRENCY TRANSACTIONS:
Net realized gain (loss) on investment transactions ................................... 18,627
Net realized loss on foreign currency related transactions ............................ --
Net change in unrealized gain (loss) on investments ................................... (113,456)
Net change in unrealized loss on translation of assets and liabilities denominated in
foreign currencies ................................................................. --
-----------
Net realized and unrealized gain (loss) on investments and foreign currency
transactions .................................................................. (94,829)
-----------
Net increase (decrease) in net assets resulting from operations .................. $ 278,388
===========
</TABLE>
43
<PAGE>
THE COMMERCE FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
For the Six Months Ended April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Short-Term
Government Bond
Fund Fund
----------- ------------
<S> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ......................................................... $ 1,121,320 $ 5,008,363
Net realized gain (loss) on investment transactions .................................. (122,632) (24,727)
Net realized loss from foreign currency related transactions ......................... -- --
Net change in unrealized gain (loss) on investments .................................. (386,991) (2,351,246)
Net change in unrealized loss on translation of assets and liabilities denominated in
foreign currencies ................................................................. -- --
----------- ------------
Net increase (decrease) in net assets resulting from operations .................... 611,697 2,632,390
----------- ------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income
Institutional Shares ............................................................... (1,121,182) (5,006,590)
Service Shares ..................................................................... (138) (1,773)
From net realized gain on investment transactions
Institutional Shares ............................................................... -- (184,700)
----------- ------------
Total distributions to shareholders ............................................. (1,121,320) (5,193,063)
----------- ------------
FROM SHARE TRANSACTIONS:
Net proceeds from sale of shares
Institutional Shares ............................................................... 15,071,926 36,118,854
Service Shares ..................................................................... 34,724 201,718
Reinvestment of dividends and distributions
Institutional Shares ............................................................... 684,572 4,106,064
Service Shares ..................................................................... 138 1,103
Cost of shares redeemed
Institutional Shares ............................................................... (9,987,256) (20,880,161)
Service Shares ..................................................................... -- --
----------- ------------
Net increase in net assets resulting from share transactions .................... 5,804,104 19,547,578
----------- ------------
Total increase .................................................................. 5,294,481 16,986,905
NET ASSETS:
Beginning of period .................................................................. 33,838,511 151,204,716
----------- ------------
End of period ........................................................................ $39,132,992 $168,191,621
=========== ============
ACCUMULATED UNDISTRIBUTED NET INVESTMENT INCOME (LOSS) .................................... $ 16,269 $ 76,707
=========== ============
SUMMARY OF SHARE TRANSACTIONS:
Institutional Shares
Sold ................................................................................. 823,703 1,906,380
Issued on reinvestment of dividends and distributions ................................ 37,422 217,003
Redeemed ............................................................................. (546,009) (1,103,351)
----------- -----------
Increase in shares outstanding ..................................................... 315,116 1,020,032
=========== ===========
Service Shares
Sold ................................................................................. 1,915 10,739
Issued on reinvestment of dividends and distributions ................................ 8 59
Redeemed ............................................................................. -- --
----------- -----------
Increase in shares outstanding ..................................................... 1,923 10,798
=========== ===========
</TABLE>
- -------------
/(a)/The Growth and Income Fund commenced operations on March 3, 1997.
The accompanying notes are an integral part of these financial statements.
44
<PAGE>
<TABLE>
<CAPTION>
Growth and
Balanced Income
Fund Fund /(a)/
----------- -----------
<S> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ........................................................ $ 968,597 $ 27,668
Net realized gain (loss) on investment transactions ................................. 1,165,750 (5,399)
Net realized loss from foreign currency related transactions ........................ -- --
Net change in unrealized gain (loss) on investments ................................. 1,581,144 8,671
Net change in unrealized loss on translation of assets and liabilities denominated in
foreign currencies ............................................................... -- --
----------- -----------
Net increase (decrease) in net assets resulting from operations .................... 3,715,491 30,940
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income
Institutional Shares ............................................................... (921,215) --
Service Shares ..................................................................... (1,773) --
From net realized gain on investment transactions
Institutional Shares ............................................................... (3,708,474) --
----------- -----------
Total distributions to shareholders ............................................. (4,631,462) --
----------- -----------
FROM SHARE TRANSACTIONS:
Net proceeds from sale of shares
Institutional Shares ............................................................... 20,447,067 12,088,351
Service Shares ..................................................................... 519,507 366,523
Reinvestment of dividends and distributions
Institutional Shares ............................................................... 4,562,408 --
Service Shares ..................................................................... 1,816 --
Cost of shares redeemed
Institutional Shares ............................................................... (12,934,021) (78,269)
Service Shares ..................................................................... -- --
------------ -----------
Net increase in net assets resulting from share transactions .................... 12,596,777 12,376,605
----------- -----------
Total increase .................................................................. 11,680,806 12,407,545
NET ASSETS:
Beginning of period .................................................................. 69,880,248 --
----------- -----------
End of period ........................................................................ $81,561,054 $12,407,545
=========== ===========
ACCUMULATED UNDISTRIBUTED NET INVESTMENT INCOME (LOSS) .................................... $ 188,057 $ 27,668
=========== ===========
SUMMARY OF SHARE TRANSACTIONS:
Institutional Shares
Sold ................................................................................. 863,455 676,660
Issued on reinvestment of dividends and distributions ................................ 194,600 --
Redeemed ............................................................................. (547,418) (4,470)
----------- -----------
Increase in shares outstanding ..................................................... 510,637 672,190
=========== ===========
Service Shares
Sold ................................................................................. 21,931 20,640
Issued on reinvestment of dividends and distributions ................................ 78 --
Redeemed ............................................................................. -- --
----------- -----------
Increase in shares outstanding ..................................................... 22,009 20,640
=========== ===========
<CAPTION>
Growth MidCap
Fund Fund
--------------- ----------------
<S> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ......................................................... $ 669,250 $ (221,409)
Net realized gain (loss) on investment transactions .................................. 9,835,665 (1,249,377)
Net realized loss from foreign currency related transactions ......................... -- --
Net change in unrealized gain (loss) on investments .................................. 14,983,478 (3,574,861)
Net change in unrealized loss on translation of assets and liabilities denominated in
foreign currencies ................................................................ -- --
------------ ------------
Net increase (decrease) in net assets resulting from operations .................... 25,488,393 (5,045,647)
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income
Institutional Shares ............................................................... (619,199) --
Service Shares ..................................................................... (1,524) --
From net realized gain on investment transactions
Institutional Shares ............................................................... (14,172,190) (781,830)
------------ ------------
Total distributions to shareholders ............................................. (14,792,913) (781,830)
------------ ------------
FROM SHARE TRANSACTIONS:
Net proceeds from sale of shares
Institutional Shares ............................................................... 65,388,431 18,498,948
Service Shares ..................................................................... 2,199,304 100,316
Reinvestment of dividends and distributions
Institutional Shares ............................................................... 13,311,135 678,633
Service Shares ..................................................................... 1,514 --
Cost of shares redeemed
Institutional Shares ............................................................... (32,249,005) (10,931,689)
Service Shares ..................................................................... (10) --
------------ ------------
Net increase in net assets resulting from share transactions .................... 48,651,369 8,346,208
------------ ------------
Total increase .................................................................. 59,346,849 2,518,731
NET ASSETS:
Beginning of period .................................................................. 208,907,785 74,641,440
------------ ------------
End of period ........................................................................ $268,254,634 $ 77,160,171
============ ============
ACCUMULATED UNDISTRIBUTED NET INVESTMENT INCOME (LOSS) .................................... $ 64,871 $ (221,409)
============ ============
SUMMARY OF SHARE TRANSACTIONS:
Institutional Shares
Sold ................................................................................. 2,220,179 660,467
Issued on reinvestment of dividends and distributions ................................ 468,764 23,870
Redeemed ............................................................................. (1,086,112) (389,568)
------------ ------------
Increase in shares outstanding ..................................................... 1,602,831 294,769
============ ============
Service Shares
Sold ................................................................................. 73,720 3,583
Issued on reinvestment of dividends and distributions ................................ 51 --
Redeemed ............................................................................. -- --
------------ ------------
Increase in shares outstanding ..................................................... 73,771 3,583
============ ============
<CAPTION>
International National
Equity Tax-Free
Fund Bond Fund
--------------- --------------
<S> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ......................................................... $ 89,185 $ 367,231
Net realized gain (loss) on investment transactions .................................. 1,367,085 5,614
Net realized loss from foreign currency related transactions ......................... (224,293) --
Net change in unrealized gain (loss) on investments .................................. 5,228,799 (83,100)
Net change in unrealized loss on translation of assets and liabilities denominated in
foreign currencies ................................................................ (3,491,860) --
----------- -----------
Net increase (decrease) in net assets resulting from operations .................... 2,968,916 289,745
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income
Institutional Shares ............................................................... (268,546) (367,231)
Service Shares ..................................................................... -- --
From net realized gain on investment transactions
Institutional Shares ............................................................... (598,118) --
----------- -----------
Total distributions to shareholders ............................................. (866,664) (367,231)
----------- -----------
FROM SHARE TRANSACTIONS:
Net proceeds from sale of shares
Institutional Shares ............................................................... 15,098,968 4,204,062
Service Shares ..................................................................... 67,611 --
Reinvestment of dividends and distributions
Institutional Shares ............................................................... 679,367 56,832
Service Shares ..................................................................... -- --
Cost of shares redeemed
Institutional Shares ............................................................... (5,789,514) (1,823,689)
Service Shares ..................................................................... -- --
----------- -----------
Net increase in net assets resulting from share transactions .................... 10,056,432 2,437,205
----------- -----------
Total increase .................................................................. 12,158,684 2,359,719
NET ASSETS:
Beginning of period .................................................................. 51,589,026 17,613,285
----------- -----------
End of period ........................................................................ $63,747,710 $19,973,004
=========== ===========
ACCUMULATED UNDISTRIBUTED NET INVESTMENT INCOME (LOSS) .................................... $ 66,141 $ 9,525
=========== ===========
SUMMARY OF SHARE TRANSACTIONS:
Institutional Shares
Sold ................................................................................. 701,413 227,284
Issued on reinvestment of dividends and distributions ................................ 31,993 3,071
Redeemed ............................................................................. (268,013) (98,407)
---------- -----------
Increase in shares outstanding ..................................................... 465,393 131,948
========== ===========
Service Shares
Sold ................................................................................. 3,123
Issued on reinvestment of dividends and distributions ................................ --
Redeemed ............................................................................. --
----------
Increase in shares outstanding ..................................................... 3,123
==========
<CAPTION>
Missouri
Tax-Free
Bond
Fund
--------------
<S> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ......................................................... $ 373,217
Net realized gain (loss) on investment transactions .................................. 18,627
Net realized loss from foreign currency related transactions ......................... --
Net change in unrealized gain (loss) on investments .................................. (113,456)
Net change in unrealized loss on translation of assets and liabilities denominated in
foreign currencies ................................................................ --
-----------
Net increase (decrease) in net assets resulting from operations .................... 278,388
-----------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income
Institutional Shares ............................................................... (373,217)
Service Shares ..................................................................... --
From net realized gain on investment transactions
Institutional Shares ............................................................... (14,681)
-----------
Total distributions to shareholders ............................................. (387,898)
-----------
FROM SHARE TRANSACTIONS:
Net proceeds from sale of shares
Institutional Shares ............................................................... 3,597,640
Service Shares ..................................................................... --
Reinvestment of dividends and distributions
Institutional Shares ............................................................... 64,758
Service Shares ..................................................................... --
Cost of shares redeemed
Institutional Shares ............................................................... (1,999,615)
Service Shares ..................................................................... --
-----------
Net increase in net assets resulting from share transactions .................... 1,662,783
-----------
Total increase .................................................................. 1,553,273
NET ASSETS:
Beginning of period .................................................................. $17,034,414
-----------
End of period ........................................................................ $18,587,687
===========
ACCUMULATED UNDISTRIBUTED NET INVESTMENT INCOME (LOSS) .................................... $ 10,626
===========
SUMMARY OF SHARE TRANSACTIONS:
Institutional Shares
Sold ................................................................................. 196,918
Issued on reinvestment of dividends and distributions ................................ 3,541
Redeemed ............................................................................. (109,692)
-----------
Increase in shares outstanding ..................................................... 90,767
===========
Service Shares
Sold .................................................................................
Issued on reinvestment of dividends and distributions ................................
Redeemed .............................................................................
Increase in shares outstanding .....................................................
</TABLE>
45
<PAGE>
THE COMMERCE FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
For the Year Ended October 31, 1996
<TABLE>
<CAPTION>
Short-Term
Government Bond
Fund Fund
----------- ------------
<S> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ....................................................... $ 1,614,004 $ 7,329,409
Net realized gain (loss) on investment transactions ................................ (2,446) 250,806
Net realized loss from foreign currency related transactions ....................... -- --
Net change in unrealized gain (loss) on investments ................................ (219,238) (1,214,248)
Net change in unrealized loss on translation of assets and liabilities denominated
in foreign currencies ........................................................... -- --
----------- ------------
Net increase in net assets resulting from operations ............................. 1,392,320 6,365,967
----------- ------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income ......................................................... (1,614,004) (7,329,409)
From net realized gain on investment transactions .................................. (246,010) (1,391,915)
----------- ------------
Total distributions to shareholders .............................................. (1,860,014) (8,721,324)
----------- ------------
FROM SHARE TRANSACTIONS:
Net proceeds from sale of shares ................................................... 24,924,994 78,675,112
Reinvestment of dividends and distributions ........................................ 1,295,008 7,491,166
Cost of shares redeemed ............................................................ (12,125,108) (31,110,483)
----------- ------------
Net increase in net assets resulting from share transactions ..................... 14,094,894 55,055,795
----------- ------------
Total increase ................................................................ 13,627,200 52,700,438
NET ASSETS:
Beginning of year .................................................................. 20,211,311 98,504,278
----------- ------------
End of year......................................................................... $33,838,511 $151,204,716
=========== ============
ACCUMULATED UNDISTRIBUTED
NET INVESTMENT INCOME ............................................................... $ 16,269 $ 76,707
=========== ============
SUMMARY OF SHARE TRANSACTIONS:
Sold ............................................................................... 1,348,707 4,132,922
Issued on reinvestment of dividends and distributions .............................. 70,101 391,702
Redeemed ........................................................................... (656,586) (1,619,214)
----------- ------------
Increase in shares outstanding ................................................... 762,222 2,905,410
=========== ============
</TABLE>
- --------------
The above information relates to Institutional Shares.
The accompanying notes are an integral part of these financial statements.
46
<PAGE>
<TABLE>
<CAPTION>
Balanced Growth
Fund Fund
----------- ------------
<S> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ....................................................... $ 1,444,493 $ 1,215,945
Net realized gain (loss) on investment transactions ................................ 3,633,059 14,171,671
Net realized loss from foreign currency related transactions ....................... -- --
Net change in unrealized gain (loss) on investments ................................ 2,979,254 20,413,669
Net change in unrealized loss on translation of assets and liabilities denominated
in foreign currencies ........................................................... -- --
----------- ------------
Net increase in net assets resulting from operations ............................. 8,056,806 35,801,285
----------- ------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income ......................................................... (1,422,102) (1,233,937)
From net realized gain on investment transactions .................................. (1,461,563) (6,627,050)
----------- ------------
Total distributions to shareholders .............................................. (2,883,665) (7,860,987)
----------- ------------
FROM SHARE TRANSACTIONS:
Net proceeds from sale of shares ................................................... 29,373,815 93,709,847
Reinvestment of dividends and distributions ........................................ 2,865,066 7,452,682
Cost of shares redeemed ............................................................ (15,860,466) (61,930,178)
----------- ------------
Net increase in net assets resulting from share transactions ..................... 16,378,415 39,232,351
----------- ------------
Total increase ................................................................ 21,551,556 67,172,649
NET ASSETS:
Beginning of year .................................................................. 48,328,692 141,735,136
----------- ------------
End of year......................................................................... $69,880,248 $208,907,785
============ ============
ACCUMULATED UNDISTRIBUTED
NET INVESTMENT INCOME ............................................................... $ 142,448 $ 16,344
=========== ============
SUMMARY OF SHARE TRANSACTIONS:
Sold ............................................................................... 1,297,097 3,571,900
Issued on reinvestment of dividends and distributions .............................. 126,879 296,637
Redeemed ........................................................................... (699,003) (2,393,934)
----------- ------------
Increase in shares outstanding ................................................... 724,973 1,474,603
=========== ============
<CAPTION>
International
MidCap Equity
Fund Fund
----------- -----------
<S> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ....................................................... $ (225,170) $ 282,561
Net realized gain (loss) on investment transactions ................................ 583,211 606,179
Net realized loss from foreign currency related transactions ....................... -- (60,783)
Net change in unrealized gain (loss) on investments ................................ 6,869,864 4,232,406
Net change in unrealized loss on translation of assets and liabilities denominated
in foreign currencies ........................................................... -- (1,006,981)
----------- -----------
Net increase in net assets resulting from operations ............................. 7,227,905 4,053,382
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income ......................................................... -- (107,021)
From net realized gain on investment transactions .................................. (1,205,033) (85,792)
----------- -----------
Total distributions to shareholders .............................................. (1,205,033) (192,813)
----------- -----------
FROM SHARE TRANSACTIONS:
Net proceeds from sale of shares ................................................... 41,229,162 33,783,562
Reinvestment of dividends and distributions ........................................ 1,073,165 156,566
Cost of shares redeemed ............................................................ (15,348,445) (7,225,443)
----------- -----------
Net increase in net assets resulting from share transactions ..................... 26,953,882 26,714,685
----------- -----------
Total increase ................................................................ 32,976,754 30,575,254
NET ASSETS:
Beginning of year .................................................................. 41,664,686 21,013,772
----------- -----------
End of year......................................................................... $74,641,440 $51,589,026
=========== ===========
ACCUMULATED UNDISTRIBUTED
NET INVESTMENT INCOME ............................................................... -- $ 245,502
=========== ===========
SUMMARY OF SHARE TRANSACTIONS:
Sold ............................................................................... 1,537,748 1,685,034
Issued on reinvestment of dividends and distributions .............................. 41,581 8,234
Redeemed ........................................................................... (566,313) (359,077)
----------- -----------
Increase in shares outstanding ................................................... 1,013,016 1,334,191
=========== ===========
<CAPTION>
National Missouri
Tax-Free Tax-Free
Bond Fund Bond Fund
----------- -----------
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ....................................................... $ 539,768 $ 506,160
Net realized gain (loss) on investment transactions ................................ (5,961) 20,856
Net realized loss from foreign currency related transactions ....................... -- --
Net change in unrealized gain (loss) on investments ................................ (25,939) (54,709)
Net change in unrealized loss on translation of assets and liabilities denominated
in foreign currencies ........................................................... -- --
----------- -----------
Net increase in net assets resulting from operations ............................. 507,868 472,307
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income ......................................................... (539,768) (506,160)
From net realized gain on investment transactions .................................. (5,570) --
----------- -----------
Total distributions to shareholders .............................................. (545,338) (506,160)
----------- -----------
FROM SHARE TRANSACTIONS:
Net proceeds from sale of shares ................................................... 10,518,564 10,435,951
Reinvestment of dividends and distributions ........................................ 54,574 71,819
Cost of shares redeemed ............................................................ (3,643,702) (2,328,641)
----------- -----------
Net increase in net assets resulting from share transactions ..................... 6,929,436 8,179,129
----------- -----------
Total increase ................................................................ 6,891,966 8,145,276
NET ASSETS:
Beginning of year .................................................................. 10,721,319 8,889,138
----------- -----------
End of year......................................................................... $17,613,285 $17,034,414
=========== ===========
ACCUMULATED UNDISTRIBUTED
NET INVESTMENT INCOME ............................................................... $ 9,525 $ 10,626
============ ===========
SUMMARY OF SHARE TRANSACTIONS:
Sold ............................................................................... 570,941 572,789
Issued on reinvestment of dividends and distributions .............................. 2,968 3,935
Redeemed ........................................................................... (197,928) (127,110)
----------- -----------
Increase in shares outstanding ................................................... 375,981 449,614
=========== ===========
</TABLE>
47
<PAGE>
THE COMMERCE FUNDS
SHORT-TERM GOVERNMENT FUND
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
Income from Distributions to
investment operations shareholders
--------------------------------- ---------------------------------
Net
realized
and
unrealized
Net asset gain
value, Net (loss) on From net From net
beginning investment invest- investment realized gain
of period income ments/(b)/ income on investments
-------------- ------------- ----------------- ------------ -------------------
For the Six Months Ended April 30, 1997 (unaudited)
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Institutional Shares $18.43 $0.56 $(0.25) $(0.56) --
Service Shares/(a)/ 18.37 0.40 (0.19) (0.40) --
For the Year Ended October 31, 1996
- ---------------------------------------------------
Institutional Shares 18.83 1.09 (0.18) (1.09) (0.22)
For the Period December 12, 1994 (commencement of operations) through October 31, 1995
- ----------------------------------------------------------------------------------------------------------------------------
Institutional Shares 18.00 1.06 0.83 (1.06) --
</TABLE>
<TABLE>
<CAPTION>
Ratio
Net Ratio of net
asset of net investment Net
value, expenses income assets at
end to average to average Portfolio end
of Total net net turnover of period
period return/(c)/ assets assets rate (in 000's)
-------- ------------- -------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30, 1997 (unaudited)
- ----------------------------------------------------------------------
Institutional Shares $18.18 1.68% 0.68%/(d)/ 6.12%/(d)/ 25% $ 39,098
Service Shares/(a)/ 18.18 1.14 0.93/(d)/ 4.93/(d)/ 25 35
For the Year Ended October 31, 1996
- --------------------------------------------
Institutional Shares 18.43 5.02 0.68 5.90 12 33,839
For the Period December 12, 1994 (commencement of operations) through October 31, 1995
- ----------------------------------------------------------------------------------------------------------------------------
Institutional Shares 18.83 10.72 0.68/(d)/ 6.38/(d)/ 158 20,211
</TABLE>
<TABLE>
<CAPTION>
Ratios assuming
no waiver of
investment advisory
fees or expense
reimbursements
--------------------------------
Ratio
of net
Ratio investment
of income
expenses to
to average average
net net
assets assets
--------------- ---------------
<S> <C> <C>
For the Six Months Ended April 30, 1997 (unaudited)
- -----------------------------------------------------
Institutional Shares 1.13%/(d)/ 5.67%/(d)/
Service Shares/(a)/ 1.38/(d)/ 4.48/(d)/
For the Year Ended October 31, 1996
- --------------------------------------------
Institutional Shares 1.11 5.47
For the Period December 12, 1994 (commencement of operations) through October 31, 1995
- ---------------------------------------------------------------------------------------
Institutional Shares 1.14/(d)/ 5.92/(d)/
</TABLE>
- --------------------
/(a)/ Service share activity commenced on January 2, 1997.
/(b)/ Includes the balancing effect of calculating per share amounts.
/(c)/ Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no
sales charges. Total return would be reduced if sales charges were taken
into account.
/(d)/ Annualized.
The accompanying notes are an integral part of these financial statements.
48
<PAGE>
THE COMMERCE FUNDS
BOND FUND
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
Income from
investment operations
----------------------------------
Net
realized
and
unrealized
Net asset gain
value, Net (loss) on
beginning investment invest-
of period income ments/(b)/
----------------- --------------- ---------------
<S> <C> <C> <C>
For the Six Months Ended April 30, 1997 (unaudited)
- ---------------------------------------------------
Institutional Shares $19.07 $0.60 $(0.28)
Service Shares/(a)/ 19.00 0.39 (0.23)
For the Year Ended October 31, 1996
- -----------------------------------
Institutional Shares 19.61 1.16 (0.28)
For the Period December 12, 1994
(commencement of operations) through October 31, 1995
- -----------------------------------------------------
Institutional Shares 18.00 1.12 1.61
<CAPTION>
Distributions to
shareholders
---------------------------------
Net
asset
value,
From net From net end
investment realized gain of Total
income on investments period return/(c)/
-------------- ----------------- ---------- ------------
<S> <C> <C> <C> <C>
For the Six Months Ended April 30, 1997 (unaudited)
- ---------------------------------------------------
Institutional Shares $(0.60) $(0.02) $18.77 1.69%
Service Shares/(a)/ (0.39) -- 18.77 0.86
For the Year Ended October 31, 1996
- -----------------------------------
Institutional Shares (1.16) (0.26) 19.07 4.71
For the Period December 12, 1994 (commencement of operations)
through October 31, 1995
- -------------------------------------------------------------
Institutional Shares (1.12) -- 19.61 15.59
<CAPTION>
Ratio
Ratio of net
of net investment Net
expenses income assets at
to average to average Portfolio end
net net turnover of period
assets assets rate (in 000's)
-------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
For the Six Months Ended April 30, 1997 (unaudited)
- ---------------------------------------------------
Institutional Shares 0.87%/(d)/ 6.34%/(d)/ 5% $ 167,989
Service Shares/(a)/ 1.12/(d)/ 5.82/(d)/ 5 203
For the Year Ended October 31, 1996
- -----------------------------------
Institutional Shares 0.84 6.10 31 151,205
For the Period December 12, 1994
(commencement of operations) through October 31, 1995
- -----------------------------------------------------
Institutional Shares 0.88/(d)/ 6.64/(d)/ 58 98,504
</TABLE>
- --------------------
/(a)/ Service share activity commenced on January 2, 1997.
/(b)/ Includes the balancing effect of calculating per share amounts.
/(c)/ Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no
sales charges. Total return would be reduced if sales charges were taken
into account.
/(d)/ Annualized.
The accompanying notes are an integral part of these financial statements.
49
<PAGE>
THE COMMERCE FUNDS
BALANCED FUND
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
Income from Distributions to
investment operations shareholders
---------------------------- --------------------------------
Net
realized
and Net
unrealized asset
Net asset gain value,
value, Net on From net From net end
beginning investment invest- investment realized gain of Total
of period income ments/(b)/ income on investments period return/(c)/
------------ ------------ ------------ ----------- ---------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30, 1997 (unaudited)
- ---------------------------------------------------
Institutional Shares $24.00 $0.29 $0.94 $(0.29) $(1.26) $23.68 5.25%
Service Shares/(a)/ 23.25 0.13 0.43 (0.13) -- 23.68 2.42
For the Year Ended October 31, 1996
- -----------------------------------
Institutional Shares 22.10 0.54 2.56 (0.54) (0.66) 24.00 14.45
For the Period December 12, 1994 (commencement of operations) through October 31, 1995
- --------------------------------------------------------------------------------------
Institutional Shares 18.00 0.59 4.06 (0.55) -- 22.10 26.14
<CAPTION>
Ratios assuming
no waiver of
investment advisory
fees or expense
reimbursements
------------------------
Ratio Ratio
Ratio of net Ratio of net
of net investment Net of investment
expenses income Average assets at expenses income
to average to average Portfolio commis- end to average to average
net net turnover sion of period net net
assets assets rate rate (in 000's) assets assets
------------ ------------ ------------ ----------- ---------------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30, 1997 (unaudited)
- ---------------------------------------------------
Institutional Shares 1.13%/(d)/ 2.58%/(d)/ 14% $0.0580 $81,040 1.52%/(d)/ 2.19%/(d)/
Service Shares/(a)/ 1.38/(d)/ 2.49/(d)/ 14 0.0580 521 1.77/(d)/ 2.10/(d)/
For the Year Ended October 31, 1996
- -----------------------------------
Institutional Shares 1.13 2.47 58 0.0764 69,880 1.45 2.15
For the Period December 12, 1994 (commencement of operations) through October 31, 1995
- --------------------------------------------------------------------------------------
Institutional Shares 1.13/(d)/ 3.28/(d)/ 59 -- 48,329 1.45/(d)/ 2.96/(d)/
</TABLE>
- --------------------
/(a)/ Service share activity commenced on January 2, 1997.
/(b)/ Includes the balancing effect of calculating per share amounts.
/(c)/ Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no
sales charges. Total return would be reduced if sales charges were taken
into account.
/(d)/ Annualized.
The accompanying notes are an integral part of these financial statements.
50
<PAGE>
THE COMMERCE FUNDS
GROWTH AND INCOME FUND
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
Income from Distributions to
investment operations shareholders
------------------------------ -------------------------------
Net
realized Net
and asset
Net asset unrealized value,
value, Net loss on From net From net end
beginning investment invest- investment realized gain of
of period income ments /(b)/ income on investments period
----------- ------------ ------------ ------------ ---------------- --------
For the Period March 3, 1997 /(a)/ through April 30, 1997 (unaudited)
- ---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Institutional Shares $18.00 $0.04 $(0.13) -- -- $17.91
Service Shares 18.00 0.02 (0.12) -- -- 17.90
<CAPTION>
Ratio
Ratio of net
of net investment Net
expenses income assets at
to average to average Portfolio Average end
Total net net turnover commission of period
return /(c)/ assets assets rate Rate (in 000's)
-------------------------------------------------------------------------------
For the Period March 3, 1997 /(a)/ through April 30, 1997 (unaudited)
- ---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Institutional Shares (0.50)% 1.20%/(d)/ 1.76%/(d)/ 1% $ 0.0794 $12,039
Service Shares (0.56) 1.45/(d)/ 1.46/(d)/ 1 0.0794 369
<CAPTION>
Ratios assuming
no expense
reimbursements
--------------------------------
Ratio
Ratio of net
of net investment
expenses loss to
to average average
net net
assets assets
--------------------------------
For the Period March 3, 1997 /(a)/ through April 30, 1997 (unaudited)
- ---------------------------------------------------------------------
<S> <C> <C>
Institutional Shares 3.14%/(d)/ (0.18)%/(d)/
Service Shares 3.39/(d)/ (0.48)/(d)/
</TABLE>
- --------------------
/(a)/ Commencement of operations.
/(b)/ Includes the balancing effect of calculating per share amounts.
/(c)/ Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no
sales charges. Total return would be reduced if sales charges were taken
into account.
/(d)/ Annualized.
The accompanying notes are an integral part of these financial statements.
51
<PAGE>
THE COMMERCE FUNDS
GROWTH FUND
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
Income from Distributions to
investment operations shareholders
------------------------------ --------------------------------
Net
realized
and
Net asset unrealized
value, Net gain on From net From net
beginning investment invest- investment realized gain
of period income ments (b) income on investments
------------- ------------- ------------- ------------ -----------------
<S> <C> <C> <C> <C> <C>
For the Six Months Ended April 30, 1997 (unaudited)
- ---------------------------------------------------
Institutional Shares $28.95 $0.08 $3.13 $(0.08) $(1.92)
Service Shares(a) 28.26 0.03 1.89 (0.03) --
For the Year Ended October 31, 1996
- -----------------------------------
Institutional Shares 24.68 0.19 5.40 (0.19) (1.13)
For the Period December 12, 1994 (commencement of operations) through October 31, 1995
- --------------------------------------------------------------------------------------
Institutional Shares 18.00 0.15 6.68 (0.15) --
<CAPTION>
Ratio
Net Ratio of net
asset of net investment
value, expenses income
end to average to average Portfolio
of Total net net turnover
period return/(c)/ assets assets rate
--------- ------------- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
For the Six Months Ended April 30, 1997 (unaudited)
- ---------------------------------------------------
Institutional Shares $30.16 11.51% 1.10%/(d)/ 0.56%/(d)/ 19%
Service Shares(a) 30.15 6.79 1.35/(d)/ 0.33/(d)/ 19
For the Year Ended October 31, 1996
- -----------------------------------
Institutional Shares 28.95 23.43 1.08 0.72 36
For the Period December 12, 1994 (commencement of operations) through October 31, 1995
- --------------------------------------------------------------------------------------
Institutional Shares 24.68 38.06 1.11/(d)/ 0.81/(d)/ 33
<CAPTION>
Net
Average assets at
commis- end
sion of period
rate (in 000's)
------------ -------------
<S> <C> <C>
For the Six Months Ended April 30, 1997 (unaudited)
- ---------------------------------------------------
Institutional Shares $0.0548 $266,031
Service Shares/(a)/ 0.0548 2,224
For the Year Ended October 31, 1996
- -----------------------------------
Institutional Shares 0.0654 208,908
For the Period December 12, 1994 (commencement of operations) through October 31, 1995
- --------------------------------------------------------------------------------------
Institutional Shares -- 141,735
</TABLE>
- --------------------
/(a)/ Service share activity commenced on January 2, 1997.
/(b)/ Includes the balancing effect of calculating per share amounts.
/(c)/ Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no
sales charges. Total return would be reduced if sales charges were taken
into account.
/(d)/ Annualized.
The accompanying notes are an integral part of these financial statements
52
<PAGE>
THE COMMERCE FUNDS
MIDCAP FUND
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
Income from Distributions to
investment operations shareholders
--------------------------- ----------------------------
Net
realized
and Net
unrealized asset
Net asset gain value,
value, Net (loss) on From net From net end
beginning investment invest- investment realized gain of
of period loss ments/(b)/ income on investments period
----------- ------------- ------------- ------------ --------------- ---------
<S> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30, 1997 (unaudited)
- ---------------------------------------------------
Institutional Shares $28.06 $(0.06) $(1.63) -- $(0.29) $26.08
Service Shares/(a)/ 28.64 (0.04) (2.53) -- -- 26.07
For the Year Ended October 31, 1996
- -------------------------------------------
Institutional Shares 25.30 (0.07) 3.51 -- (0.68) 28.06
For the Period December 12, 1994 (commencement of operations) through October 31, 1995
- --------------------------------------------------------------------------------------
Institutional Shares 18.00 (0.04) 7.34 -- -- 25.30
<CAPTION>
Ratio
Ratio of net
of net investment Net
expenses loss Average assets at
to average to average Portfolio commis- end
Total net net turnover sion of period
return/(c)/ assets assets rate rate (in 000's)
------------- ----------- ------------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30, 1997 (unaudited)
- ---------------------------------------------------
Institutional Shares (6.10)% 1.25%/(d)/ (0.57)%/(d)/ 36% $0.0608 $77,067
Service Shares/(a)/ (8.97) 1.50/(d)/ (0.80)/(d)/ 36 0.0608 93
For the Year Ended October 31, 1996
- -------------------------------------------
Institutional Shares 13.78 1.22 (0.37) 71 0.0692 74,641
For the Period December 12, 1994 (commencement
of operations) through October 31, 1995
- ------------------------------------------------ 40.56 1.32/(d)/ (0.29)/(d)/ 59 -- 41,665
Institutional Shares
</TABLE>
- ------------------
/(a)/ Service share activity commenced on January 2, 1997.
/(b)/ Includes the balancing effect of calculating per share amounts.
/(c)/ Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no
sales charges. Total return would be reduced if sales charges were taken
into account.
/(d)/ Annualized.
The accompanying notes are an integral part of these financial statements.
53
<PAGE>
THE COMMERCE FUNDS
INTERNATIONAL EQUITY FUND
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
Income from Distributions to
investment operations shareholders
------------------------------------ ---------------------------
Net
Net realized and
realized unrealized
and gain (loss) Net Ratio
unrealized on foreign asset of net
Net asset gain currency value, expenses
value, Net (loss) on related From net From net end to average
beginning investment invest- trans- investment realized gain of Total net
of period income ments/(b)/ actions/(b)/ income on investments period return/(c)/ assets
----------- ------------ ---------- ------------ ----------- --------------- -------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30, 1997 (unaudited)
- ---------------------------------------------------
Institutional Shares $20.96 $0.03 $2.54 $(1.43) $(0.10) $(0.24) $21.76 5.50% 1.72%/(d)/
Service Shares/(a)/ 21.70 0.05 (0.01) 0.01 -- -- 21.75 0.23 1.97/(d)/
For the Year Ended October 31, 1996
- -----------------------------------
Institutional Shares 18.64 0.11 3.02 (0.67) (0.07) (0.07) 20.96 13.25 1.72
For the Period December 12, 1994 (commencement of operations) through October 31, 1995
- --------------------------------------------------------------------------------------
Institutional Shares 18.00 0.12 0.95 (0.40) (0.03) -- 18.64 3.73 1.81/(d)/
<CAPTION>
Ratios assuming
no waiver of
investment advisory
fees or expense
reimbursements
------------------------
Ratio
Ratio of net
of net Net Ratio investment
investment Average assets at of income
income Portfolio commis- end expenses (loss) to
to average turnover sion of period to average average
net assets rate rate (in 000's) net assets net assets
----------- --------- --------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30, 1997 (unaudited)
- ---------------------------------------------------
Institutional Shares 0.31%/(d)/ 11% $0.0009 $63,680 2.33%/(d)/ (0.30)%/(d)/
Service Shares/(a)/ 2.09/(d)/ 11 0.0009 68 2.58/(d)/ 1.48/(d)/
For the Year Ended October 31, 1996
- -----------------------------------
Institutional Shares 0.74 21 0.0147 51,589 2.64 (0.18)
For the Period December 12, 1994 (commencement of operations) through October 31, 1995
- --------------------------------------------------------------------------------------
Institutional Shares 1.06/(d)/ 25 -- 21,014 3.50/(d)/ (0.63)/(d)/
</TABLE>
- -----------------
/(a)/ Commencement of operations.
/(b)/ Includes the balancing effect of calculating per share amounts.
/(c)/ Assumes investment of the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no
sales charges. Total return would be reduced if a sales charge were taken
into account.
/(d)/ Annualized.
The accompanying notes are an integral part of these financial statements.
54
<PAGE>
THE COMMERCE FUNDS
NATIONAL TAX-FREE BOND FUND
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
Income from Distributions to
investment operations shareholders
------------------------- ---------------------------
Net
realized
and Net
unrealized asset
Net asset gain value,
value, Net (loss) on From net From net end
beginning investment invest- investment realized gain of Total
of period income ments (b) income on investments period return /(c)/
----------- ----------- ----------- ----------- -------------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30, 1997 (unaudited)
- ---------------------------------------------------
$18.46 $0.37 $(0.07) $(0.37) $ -- $18.39 1.60%
For the Year Ended October 31, 1996
- -----------------------------------
18.54 0.73 (0.07) (0.73) (0.01) 18.46 3.60
For the Period February 21, 1995 /(a)/ through October 31, 1995
- ---------------------------------------------------------------
18.00 0.54 0.54 (0.54) -- 18.54 6.06
<CAPTION>
Ratios assuming
no expense
reimbursements
---------------------------
Ratio Ratio Ratio
of net of net Net Ratio of net
expenses investment assets at of investment
to average income Portfolio end expenses income
net to average turnover of period to average to average
assets net assets rate (in 000's) net assets net assets
---------- ------------ --------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30, 1997 (unaudited)
- ---------------------------------------------------
0.85%/(d)/ 3.98%/(d)/ 21% $19,973 1.19%/(d)/ 3.64%/(d)/
For the Year Ended October 31, 1996
- -----------------------------------
0.85 3.93 34 17,613 1.55 3.23
For the Period February 21, 1995 /(a)/ through October 31, 1995
- ---------------------------------------------------------------
0.85/(d)/ 4.19/(d)/ 19 10,721 1.90/(d)/ 3.14/(d)/
</TABLE>
- -----------------
/(a)/ Commencement of operations.
/(b)/ Includes the balancing effect of calculating per share amounts.
/(c)/ Assumes investment at the beginning of the period, reinvestment of all
dividends and distributions, a complete redemption of the investment at
the net asset value at the end of the period and no sales charges. Total
return would be reduced if a sales charge were taken into account.
/(d)/ Annualized.
The accompanying notes are an integral part of these financial statements.
55
<PAGE>
THE COMMERCE FUNDS
MISSOURI TAX-FREE BOND FUND
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
Income from Distributions to
investment operations shareholders
-------------------------- ----------------------------
Net
realized
and Net
unrealized asset
Net asset gain value,
value, Net (loss) on From net From net end
beginning investment invest- investment realized gain of Total
of period income ments /b/ income on investments period return /c/
----------- ------------ ------------ ----------- ---------------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30, 1997 (unaudited)
- ---------------------------------------------------
$18.26 $0.38 $(0.08) $(0.38) $(0.02) $18.16 1.64%
For the Year Ended October 31, 1996
- -----------------------------------
18.40 0.76 (0.14) (0.76) -- 18.26 3.43
For the Period February 21, 1995 /a/ through October 31, 1995
- -------------------------------------------------------------
18.00 0.57 0.40 (0.57) -- 18.40 5.45
<CAPTION>
Ratios assuming
no waiver of
investment advisory fees
or expense reimbursements
-------------------------
Ratio Ratio Ratio
of net of net Net Ratio of net
expenses investment assets at of investment
to average income Portfolio end expenses income
net to average turnover of period to average to average
assets net assets rate (in 000's) net assets net assets
------------ ------------ --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30, 1997 (unaudited)
- ---------------------------------------------------
0.65%/d/ 4.22%/d/ 23% $18,588 1.23%/d/ 3.64%/d/
For the Year Ended October 31, 1996
- ------------------------------------
0.65 4.14 49 17,034 1.58 3.21
For the Period February 21, 1995 /a/ through October 31, 1995
- -------------------------------------------------------------
0.65/d/ 4.41/d/ 52 8,889 2.12/d/ 2.94/d/
</TABLE>
- -------------------
/a/ Commencement of operations.
/b/ Includes the balancing effect of calculating per share amounts.
/c/ Assumes investment at the beginning of the period, reinvestment of all
dividends and distributions, a complete redemption of the investment at the
net asset value at the end of the period and no sales charges. Total return
would be reduced if a sales charge were taken into account.
/d/ Annualized.
The accompanying notes are an integral part of these financial statements.
56
<PAGE>
THE COMMERCE FUNDS
NOTES TO FINANCIAL STATEMENTS
April 30, 1997
(Unaudited)
1. ORGANIZATION
The Commerce Funds (the "Trust") is a Delaware business trust registered
under the Investment Company Act of 1940, as amended (the "1940 Act"), as an
open-end, management investment company. The Trust consists of nine portfolios
(individually, a "Fund" and collectively, the "Funds"): Short-Term Government
Fund, Bond Fund, Balanced Fund, Growth and Income Fund, Growth Fund, MidCap Fund
(formerly Aggressive Growth Fund), International Equity Fund, National Tax-Free
Bond Fund and Missouri Tax-Free Bond Fund. Each of the Funds (except National
Tax-Free Bond Fund and Missouri Tax-Free Bond Fund) offers two classes of
shares, Institutional Shares and Service Shares. The Growth and Income Fund
commenced investment operations on March 3, 1997 with both Institutional and
Service Shares. All other Service Shares commenced investment operations on
January 2, 1997. Each Fund is registered as a diversified management investment
company under the 1940 Act, other than the Missouri Tax-Free Bond Fund, which is
registered as non-diversified under the 1940 Act.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Funds which are in conformity with those generally accepted in
the investment company industry.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that may affect the reported amounts.
A. Investment Valuation
Investments in securities traded on a U.S. exchange or the NASDAQ system
are valued at their last sale or closing price on the principal exchange on
which they are traded or NASDAQ, on the valuation day; if no sale occurs,
securities traded on a U.S. exchange or NASDAQ are valued at the mean between
the closing bid and asked prices. The value of a Fund's portfolio securities
that are traded on stock exchanges outside the U.S. are based upon the price on
the exchange as of the close of business of the exchange immediately preceding
the time of valuation, except when an occurrence subsequent to the time a value
was so established is likely to have changed such value; then the fair value of
those securities will be determined through consideration of other factors by or
under the direction of the Board of Trustees. Unlisted equity and debt
securities for which market quotations are available are valued at the mean
between the most recent bid and asked prices. Fixed-income securities are valued
at prices supplied by an independent pricing service, which reflect
broker/dealer-supplied valuations and matrix pricing systems. Short-term debt
obligations maturing in sixty days or less are valued at amortized cost.
Restricted securities, and other securities for which quotations are not
available, are valued at fair value using methods approved by the Board of
Trustees.
B. Securities Transactions and Investment Income
Securities transactions are recorded on the trade date. Realized gains and
losses on sales of investments are calculated on the identified cost basis.
Dividend income is recorded on the ex-dividend date and interest income is
recorded on the accrual basis.
57
<PAGE>
THE COMMERCE FUNDS
NOTES TO FINANCIAL STATEMENTS--(Continued)
April 30, 1997
(Unaudited)
2. SIGNIFICANT ACCOUNTING POLICIES--(Continued)
C. Premiums and Discounts on Debt Securities Owned
The National Tax-Free Bond and the Missouri Tax-Free Bond Funds amortize
premiums on debt securities on the effective yield basis, and do not accrete
market discounts on debt securities. The Growth, MidCap and International Equity
Funds accrete market discounts and amortize premiums on a yield to maturity
basis. The Short-Term Government, Bond, Balanced and Growth and Income Funds do
not accrete market discounts or amortize premiums on long-term debt securities.
The Short-Term Government, Bond and Balanced Funds invest in mortgage-backed
securities. Certain mortgage security paydown gains and losses are taxable as
ordinary income. Such paydown gains and losses increase or decrease taxable
ordinary income available for distributions and are included in interest income
in the accompanying Statements of Operations. For all Funds, original issue
discount on debt securities is amortized to interest income over the life of the
security with a corresponding increase in the cost basis of that security.
D. Foreign Currency Translations
The books and records of the Funds are maintained in U.S. dollars.
Amounts denominated in foreign currencies are translated into U.S. dollars on
the following basis: (i) investment valuations, other assets and liabilities
initially expressed in foreign currencies are converted each business day into
U.S. dollars based on current exchange rates; and (ii) purchases and sales of
foreign investments, income and expenses are converted into U.S. dollars based
upon currency exchange rates prevailing on the respective dates of such
transactions.
Net realized gain (loss) on foreign currency transactions represent: (i)
foreign exchange gains and losses from the sale of foreign currencies and
investments; (ii) foreign exchange gains and losses between trade date and
settlement date on investment securities transactions and foreign exchange
contracts; and (iii) foreign exchange gains and losses from the difference
between amounts of dividends and interest recorded and the amounts actually
received. Net unrealized gain (loss) on translation of assets and liabilities
denominated in foreign currencies arises from changes in the value of assets and
liabilities, including investments in securities, resulting from changes in the
exchange rate.
E. Forward Foreign Currency Exchange Contracts
The International Equity Fund is authorized to enter into forward foreign
currency exchange contracts for the purchase of a specific foreign currency at a
fixed price on a future date as a hedge or cross-hedge against either specific
transactions or portfolio positions as a means to manage its foreign exchange
rate risk. All commitments are "marked-to-market" daily at the applicable
exchange rates and any resulting unrealized gains or losses are recorded in the
Fund's financial statements. The Fund records realized gains and losses at the
time the forward contract is offset by entry into a closing transaction or
extinguished by delivery of the currency. Risks may arise upon entering these
contracts as a result of the potential inability of counterparties to meet the
terms of their contracts and unanticipated movements in the value of a foreign
currency relative to the U.S. dollar.
F. Federal Taxes
Each Fund intends to comply with the requirements of the Internal Revenue
Code of 1986, as amended, applicable to regulated investment companies and to
distribute each year substantially all of its investment company taxable and
tax-exempt income to its shareholders. Accordingly, no federal income tax
provisions are required. The characterization of distributions to shareholders
for financial reporting purposes is determined in accordance with income tax
rules.
58
<PAGE>
THE COMMERCE FUNDS
NOTES TO FINANCIAL STATEMENTS--(Continued)
April 30, 1997
(Unaudited)
2. SIGNIFICANT ACCOUNTING POLICIES--(Continued)
As of the Trust's most recent tax year-end, the following Funds had
capital loss carryforwards for U.S. federal income tax purposes:
<TABLE>
<CAPTION>
Fund Amount Year of Expiration
------------------------------- --------------------------- -----------------------------
<S> <C> <C>
Short-Term Government Fund $8,584 2004
National Tax-Free Bond Fund $5,961 2004
</TABLE>
These amounts are available to be carried forward to offset future capital
gains of the Funds to the extent permitted by applicable laws or regulations.
G. Deferred Organization Expenses
Organization-related costs are being amortized on a straight-line basis
over a period of five years beginning with the commencement of each of the
Fund's operations. If any or all of the shares held by The Goldman Sachs Funds
Group, L.P. representing initial capital of the Funds are redeemed during the
amortization period, the redemption proceeds will be reduced by the pro rata
portion of the unamortized organizational cost balance.
H. Expenses
Expenses incurred by the Funds which do not specifically relate to an
individual Fund are allocated to the Funds based on each Fund's relative average
net assets for the period. Service Class shareholders bear all expenses and fees
relating to the Distribution Plan.
I. Repurchase Agreements
During the term of a repurchase agreement, the market value of the
underlying collateral, including accrued interest, is required to equal or
exceed the value of the repurchase agreement. The underlying collateral for all
repurchase agreements is held in safekeeping in the customer-only account of
State Street Bank & Trust Company, the Funds' custodian, or at sub-custodians.
The market value of the underlying collateral is monitored by daily pricing.
In connection with transactions in repurchase agreements, if the seller
defaults and the value of the security declines, or if the seller enters an
insolvency proceeding, realization of the collateral by the Trust may be delayed
or limited.
J. Dividends and Distributions to Shareholders
Dividends from net investment income are declared daily and paid monthly
by the Short-Term Government, Bond, National Tax-Free Bond and Missouri Tax-Free
Bond Funds; declared and paid quarterly by the Balanced, Growth and Income and
Growth Funds; and declared and paid annually by the MidCap and International
Equity Funds. Each Fund's net realized capital gains (including net short-term
capital gains), if any, are declared and distributed at least annually.
Distributions to shareholders are recorded on the ex-dividend date.
59
<PAGE>
THE COMMERCE FUNDS
NOTES TO FINANCIAL STATEMENTS--(Continued)
April 30, 1997
(Unaudited)
3. AGREEMENTS
The Funds have entered into an Advisory Agreement with Commerce Bank, N.A.
(St. Louis) and Commerce Bank, N.A. (Kansas City) (the "Advisor"). Pursuant to
the terms of the Advisory Agreement, the Advisor is responsible for managing the
investments and making investment decisions for each of the Funds. For these
services and for assuming related expenses, the Advisor is entitled to a fee,
computed daily and payable monthly, at the following annual rate of the
corresponding Fund's average daily net assets:
<TABLE>
<S> <C>
Short-Term Government Fund................................... .50%
Bond Fund.................................................... .50%
Balanced Fund................................................ 1.00%
Growth and Income Fund....................................... .75%
Growth Fund.................................................. .75%
MidCap Fund.................................................. .75%
International Equity Fund.................................... 1.50%
National Tax-Free Bond Fund.................................. .50%
Missouri Tax-Free Bond Fund.................................. .50%
</TABLE>
As authorized by the Advisory Agreement, the Advisor has entered into a
Sub-Advisory Agreement with Rowe-Price Fleming International, Inc. (the
"Sub-Advisor") whereby the Sub-Advisor manages the investment assets of the
International Equity Fund. As compensation for services rendered under the
Sub-Advisory Agreement, the Sub-Advisor is entitled to a fee from the Advisor at
the following annual rate:
<TABLE>
<CAPTION>
Average Daily Net Assets Annual Rate
------------------------ -----------
<S> <C>
First $20 million......................................... .75%
Next $30 million.......................................... .60%
Over $50 million.......................................... .50%
</TABLE>
For the period ended April 30, 1997, the Advisor has voluntarily agreed to
waive a portion of its advisory fee for certain portfolios. The resulting
advisory fees are .30% for the Short-Term Government Fund, .75% for the Balanced
Fund, .89% for the International Equity Fund and .30% for the Missouri Tax-Free
Bond Fund. The effect of these waivers by the Advisor for the period ended April
30, 1997 was to reduce advisory fees by $36,661, $93,811, $175,639 and $17,675
for the Short-Term Government, Balanced, International Equity and Missouri
Tax-Free Bond Funds, respectively.
In addition, for the period ended April 30, 1997, the Advisor has
voluntarily agreed to reimburse expenses (excluding interest, taxes,
distribution expenses and extraordinary expenses) to the extent that such
expenses exceed, on an annualized basis, .68%, .88%, 1.13%, 1.20%, 1.13%, 1.72%,
.85% and .65% of average net assets of the Short-Term Government, Bond,
Balanced, Growth and Income, Growth, International Equity, National Tax-Free
Bond and Missouri Tax-Free Bond Funds, respectively. The effect of these
reimbursements by the Advisor for the period ended April 30, 1997 was to reduce
expenses by $44,892, $51,485, $30,673, $31,173 and $33,893 for the Short-Term
Government, Balanced, Growth and Income, National Tax-Free Bond and Missouri
Tax-Free Bond Funds, respectively. The amount reimbursable to the Short-Term
Government, Balanced, Growth and Income, National Tax-Free Bond and Missouri
Tax-Free Bond Funds at April 30, 1997 was approximately $10,400, $27,200,
$30,700, $6,400 and $9,600, respectively, and are reflected in "Other Assets" in
the accompanying Statements of Assets and Liabilities.
60
<PAGE>
THE COMMERCE FUNDS
NOTES TO FINANCIAL STATEMENTS--(Continued)
April 30, 1997
(Unaudited)
3. AGREEMENTS--(Continued)
Included in "Accrued expenses and other liabilities" in the accompanying
Statements of Assets and Liabilities of the Bond Fund and International Equity
Fund are approximately $500 and $5,200, respectively, related to excess
reimbursements payable to the Advisor.
Goldman Sachs Asset Management ("GSAM"), a separate operating division of
Goldman, Sachs & Co., serves as the Trust's administrator, pursuant to an
Administration Agreement. Under the Administration Agreement, GSAM administers
the Trust's business affairs. As compensation for the services rendered under
the Administration Agreement and its assumption of related expenses, GSAM is
entitled to a fee, computed daily and payable monthly, at an annual rate of .15%
of the average daily net assets of each Fund.
Goldman, Sachs & Co. serves as Distributor of shares of the Funds pursuant
to a Distribution Agreement and may receive a portion of the sales load imposed
on the sale of shares of the Funds. The maximum sales load imposed on sale of
shares of the Short-Term Government Fund is 2.00%; for all other Funds, the
maximum sales load imposed on the sale of shares of the Funds is 3.50%. Goldman
Sachs has advised the Trust that it has retained approximately $21,000 for the
period ended April 30, 1997.
The Trust, on behalf of each Fund (except National Tax-Free Bond Fund and
Missouri Tax-Free Bond Fund), has adopted a Distribution Plan for the Service
Shares pursuant to Rule 12b-1. Under the distribution plan, payments by each
Fund for distribution expenses may not exceed .25% (annualized) of the average
daily net assets of the Fund's Service Shares.
Pursuant to a Shareholder Administrative Services Plan adopted by its
Board of Trustees, the Funds may enter into agreements with service
organizations such as banks and financial institutions, which may include the
Advisor and its affiliates ("Service Organizations"), under which they will
render shareholder administration support services. For these services, the
Service Organizations are entitled to receive fees from a Fund at an annual rate
of up to .25% of the average daily net asset value of Fund shares beneficially
owned by clients of such Service Organizations. The Shareholder Servicing
expense for the period ended April 30, 1997 was approximately $4,900, $20,500,
$14,200, $38,800, $9,000 and $4,200 for the Short-Term Government, Bond,
Balanced, Growth, MidCap and International Equity Funds, respectively, and are
reflected in "Other Expenses" in the accompanying Statements of Operations.
4. CONCENTRATION OF CREDIT RISK
The Missouri Tax-Free Bond Fund invests substantially all of its assets in
debt obligations of issuers located in the State of Missouri. The issuers'
abilities to meet their obligations may be affected by Missouri economic or
political developments.
61
<PAGE>
THE COMMERCE FUNDS
NOTES TO FINANCIAL STATEMENTS--(Continued)
April 30, 1997
(Unaudited)
5. INVESTMENT TRANSACTIONS
Purchases and proceeds from sales or maturities of long-term securities
for the period ended April 30, 1997 were as follows:
<TABLE>
Short-Term Government Fund
<S> <C>
Purchases (excluding U.S. Government securities)......................................................... $ 2,150,729
Sales (excluding U.S. Government securities)............................................................. 288,788
Purchases of U.S. Government securities.................................................................. 10,477,706
Sales of U.S. Government securities...................................................................... 8,703,352
Bond Fund
Purchases (excluding U.S. Government securities)......................................................... $ 4,044,630
Sales (excluding U.S. Government securities)............................................................. 1,030,781
Purchases of U.S. Government securities.................................................................. 27,317,138
Sales of U.S. Government securities...................................................................... 6,523,536
Balanced Fund
Purchases (excluding U.S. Government securities)......................................................... $ 11,602,418
Sales (excluding U.S. Government securities)............................................................. 7,603,759
Purchases of U.S. Government securities.................................................................. 4,118,126
Sales of U.S. Government securities...................................................................... 2,319,879
Growth and Income Fund
Purchases (excluding U.S. Government securities)......................................................... $ 11,768,634
Sales (excluding U.S. Government securities)............................................................. 109,331
Purchases of U.S. Government securities.................................................................. --
Sales of U.S. Government securities...................................................................... --
Growth Fund
Purchases (excluding U.S. Government securities)......................................................... $ 59,462,929
Sales (excluding U.S. Government securities)............................................................. 42,811,447
Purchases of U.S. Government securities.................................................................. --
Sales of U.S. Government securities...................................................................... --
MidCap Fund
Purchases (excluding U.S. Government securities)......................................................... $ 33,744,032
Sales (excluding U.S. Government securities)............................................................. 27,210,488
Purchases of U.S. Government securities.................................................................. --
Sales of U.S. Government securities...................................................................... --
International Equity Fund
Purchases (excluding U.S. Government securities)......................................................... $ 14,666,892
Sales (excluding U.S. Government securities)............................................................. 6,345,592
Purchases of U.S. Government securities.................................................................. --
Sales of U.S. Government securities...................................................................... --
National Tax-Free Bond Fund
Purchases (excluding U.S. Government securities)......................................................... $ 5,752,211
Sales (excluding U.S. Government securities)............................................................. 3,814,822
Purchases of U.S. Government securities.................................................................. --
Sales of U.S. Government securities...................................................................... --
Missouri Tax-Free Bond Fund
Purchases (excluding U.S. Government securities)......................................................... $ 5,520,689
Sales (excluding U.S. Government securities)............................................................. 4,027,204
Purchases of U.S. Government securities.................................................................. --
Sales of U.S. Government securities...................................................................... --
</TABLE>
62
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF ADDITIONAL INFORMATION
INSTITUTIONAL SHARES
SHORT-TERM GOVERNMENT FUND
BOND FUND
BALANCED FUND
GROWTH AND INCOME FUND
GROWTH FUND
MIDCAP FUND
INTERNATIONAL EQUITY FUND
* * *
SHARES
NATIONAL TAX-FREE BOND FUND
MISSOURI TAX-FREE BOND FUND
MARCH 1, 1997
AS SUPPLEMENTED SEPTEMBER 16, 1997
TABLE OF CONTENTS
-----------------
Investment Objectives, Policies and Risk Factors.. 2
Net Asset Value................................... 32
Additional Purchase and Redemption Information.... 33
Description of Shares............................. 36
Additional Information Concerning Taxes........... 39
Management of The Commerce Funds.................. 43
Independent Auditors.............................. 55
Counsel........................................... 55
Additional Information on Performance............. 55
Miscellaneous..................................... 65
Financial Statements.............................. 67
Appendix A........................................ A-1
Appendix B........................................ B-1
This Statement of Additional Information, is meant to be read in
conjunction with The Commerce Funds' Institutional Share Prospectus dated March
1, 1997 as supplemented September 16, 1997, for the Commerce Short-Term
Government, Bond, Balanced, Growth and Income, Growth, MidCap (formerly the
Aggressive Growth Fund) and International Equity Funds, and the Prospectus dated
March 1, 1997 for the 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, 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,
2
<PAGE>
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 exer cised. 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 ("SEC"). However, The Commerce Funds' Board
of Trustees has authorized the Advisor to allocate purchase and sale orders for
portfolio securities to broker/dealers and other financial institutions
including, in the case of agency transactions, institutions which are affiliated
with the Advisor, to take into account the sale of Fund shares if the Advisor
believes that the quality of the transaction and the amount of the commission
are comparable to what they would be with other qualified brokerage firms,
provided such transactions comply with the requirements of Rule 17e-1 under the
1940 Act. In addition, the Funds will not purchase securities during the
existence of any underwriting or selling group relating thereto of which the
Advisor, Goldman, Sachs & Co., or any affiliated person thereof is a member,
except to the extent permitted by the SEC. Under certain circumstances, the
Funds may be at a disadvantage when compared to other investment companies which
have similar investment objectives but that are not subject to such limitations.
Investment decisions for each Fund are made independently from those
made for the other Funds and from those made for other investment companies and
accounts
3
<PAGE>
advised or managed by the Advisor. Such other investment companies and accounts
may also invest in the same securities as the Funds. When a purchase or sale of
the same security is made at substantially the same time on behalf of any Fund
and another investment company or account, that transaction will be aggregated
(where not inconsistent with the policies set forth in the Prospectuses) and
allocated as to amount in a manner which the Advisor believes to be equitable
and consistent with its fiduciary obligations to the Fund involved and such
other investment company or account. In some instances, this investment
procedure may adversely affect the price paid or received by a Fund or the size
of the position obtained by a Fund.
The Commerce Funds are required to identify any securities of its
"regular brokers or dealers" acquired by the Funds during the most recent fiscal
year. During the fiscal year ended October 31, 1996, the Bond Fund acquired
securities of Smith Barney, Inc., Morgan Stanley Group, Inc. and Merrill Lynch &
Co., Inc., each a regular broker/dealer or parent. At October 31, 1996, the
Bond Fund's aggregate holdings in these securities amounted to $2,011,360,
$1,969,860 and $6,986,704, respectively. During the fiscal year ended October
31, 1996, the Balanced Fund acquired securities of Smith Barney, Inc. and Morgan
Stanley Group, Inc. At October 31, 1996, the Balanced Fund's aggregate holdings
in these securities amounted to $502,840 and $492,465, respectively.
During the fiscal year ended October 31, 1996, the Funds entered into
repurchase agreement transactions with State Street Bank and Trust Company,
which was one of the brokers or dealers that engaged as principal in the largest
dollar amount of portfolio transactions with the Funds. At October 31, 1996,
the value of each Fund's outstanding repurchase agreement transactions with
State Street Bank and Trust Company was as follows:
Short-Term Government Fund $ 716,000
Bond Fund 2,131,000
Balanced Fund 3,001,000
Growth and Income Fund/1/ N/A
Growth Fund 14,610,000
MidCap Fund 2,148,000
International Equity Fund 2,193,000
National Tax-Free Bond Fund -0-
Missouri Tax-Free Bond Fund 136,000
__________
/1/ Not operational during the period.
4
<PAGE>
For the fiscal year ended October 31, 1996 and for the period December
12, 1994 (commencement of operations) through October 31, 1995, the Balanced,
Growth, MidCap and International Equity Funds paid brokerage commissions as
follows:
Total
Total Total Brokerage
Brokerage Amount of Commissions
Total Commissions Transactions Paid to
Brokerage Paid to on Which Brokers Who
Commissions Affiliated Commissions Provided
Paid Persons Were Paid Research
----------- ----------- ------------ -----------
Fiscal year ended October 31, 1996:
Balanced Fund $ 58,679 -- $ 30,457,207 $14,261
Growth Fund 161,450 -- 101,777,048 44,688
MidCap Fund 107,348 -- 46,977,298 25,374
International Equity 92,250 5,447 30,494,870 --
Fund
For the period December 12, 1994/(1)/ through October 31, 1995:
Balanced Fund $ 28,613 $ 660 $25,307,292 $ 6,355
Growth Fund $123,720 $1,460 $85,947,095 $25,070
MidCap Fund $ 69,935 $ 300 $47,022,043 $15,970
International Equity $ 37,119 $2,226 $14,456,331 $ 0
Fund
__________
/(1)/ Commencement of operations.
5
<PAGE>
For the fiscal year ended October 31, 1996, the following affiliated
persons received brokerage commissions on behalf of Institutional Shares of the
International Equity Fund.
<TABLE>
<CAPTION>
Total Amount of % of Total Amount
Transactions on of Transactions on
Commissions Paid % of Total Which Commissions Which Commissions
to Commissions Paid to Were Paid to Were Paid to
Broker Name Affiliated Persons Affiliated Persons Affiliated Persons Affiliated Persons
- ----------- ------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Flemings Securities, $ 49 0.05% $ 24,232 0.08%
Ltd.
Flemings $ 42 0.05% $ 21,282 0.07%
Goldman, Sachs & $3,131 3.39% $1,465,591 4.81%
Co.
Goldman Sachs $ 38 0.04% $ 18,893 0.06%
International, Ltd.
Jardine Fleming $ 874 0.95% $ 320,909 1.05%
Jardine Fleming $ 223 0.24% $ 47,118 0.15%
Hong Kong
Robert Fleming & $ 601 0.65% $ 264,973 0.87%
Co., London
Robert Fleming $ 440 0.48% $ 214,493 0.70%
Securities, Ltd.
Robert Fleming $ 49 0.05% $ 24,703 0.08%
Securities, Inc.
$5,447 5.90% $2,402,194 7.87%
</TABLE>
Flemings Securities, Ltd., Flemings, Jardine Fleming, Jardine Fleming
Hong Kong, Robert Fleming & Co., London, Robert Fleming Securities, Ltd. and
Robert Fleming Securities, Inc. are affiliates of the Sub-Advisor to The
International Equity Fund. Goldman, Sachs & Co. is the Distributor for The
Commerce Funds. Goldman Sachs International, Ltd. is an affiliate of the
Distributor.
6
<PAGE>
RATINGS OF SECURITIES
- ---------------------
The ratings of Moody's, S&P, Duff & Phelps Credit Rating Co., Fitch
Investors Service, Inc., Thomson Bank Watch and IBCA Inc., as NRSROs, represent
their opinions as to the quality of debt securities. It should be emphasized,
however, that ratings are general and are not absolute standards of quality, and
debt securities with the same maturity, interest rate and rating may have
different yields while debt securities of the same maturity and interest rate
with different ratings may have the same yield. Subsequent to its purchase by a
Fund, an issue of debt securities may cease to be rated or its rating may be
reduced below the minimum rating required for purchase by a Fund. The Advisor
will consider such an event in conjunction with the particular Fund's investment
policy when determining whether the Fund should continue to hold the obligation.
The payment of principal and interest on most securities purchased by
the Funds will depend upon the ability of the issuers to meet their obligations.
An issuer's obligations under its debt securities are subject to the provisions
of bankruptcy, insolvency, and other laws affecting the rights and remedies of
creditors, such as the Federal Bankruptcy Code, and laws, if any, which may be
enacted by federal or state legislatures extending the time for payment of
principal or interest, or both, or imposing other constraints upon enforcement
of such obligations or, in the case of governmental entities, upon the ability
of such entities to levy taxes. The power or ability of an issuer to meet its
obligations for the payment of interest on and principal of its debt securities
may be materially adversely affected by litigation or other conditions.
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
7
<PAGE>
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 maturi ties in excess of five years that have variable or floating
interest rates or demand or put features may nonetheless be deemed to have
remaining maturities of five years or less so as to be permissible investments
as follows: (a) a government security with a variable or floating rate of
interest will be deemed to have a maturity equal to the period remaining until
the next readjustment of the interest rate; (b) a government security with a
demand or put feature that entitles the holder to receive the principal amount
of the underlying security at the time of or sometime after the holder gives
notice of demand or exercise of the put will be deemed to have a maturity equal
to the period remaining until the principal amount can be recovered through
demand or exercise of the put; and (c) a government security with both a
variable or floating rate of interest as described in clause (a) and a demand or
put feature as described in clause (b) will be deemed to have a maturity 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
8
<PAGE>
payment of principal and interest by GNMA and such guarantee is backed by the
full faith and credit of the United States. GNMA is a wholly-owned U.S.
Government corporation within the Department of Housing and Urban Development.
GNMA certificates also are supported by the authority of GNMA to borrow funds
from the U.S. Treasury to make payments under its guarantee. Mortgage-related
securities issued by the Federal National Mortgage Association ("FNMA") include
FNMA guaranteed Mortgage Pass-Through Certificates (also known as "Fannie Maes")
which are solely the obligations of the FNMA, are not backed by or entitled to
the full faith and credit of the United States and are supported by the right of
the issuer to borrow from the Treasury. FNMA is a government-sponsored
organization owned entirely by private stockholders. Fannie Maes are guaranteed
as to timely payment of principal and interest by FNMA. Mortgage-related
securities issued by the Federal Home Loan Mortgage Corporation ("FHLMC")
include FHLMC Mortgage Participation Certificates (also known as "Freddie Macs"
or "Pcs"). FHLMC is a corporate instrumentality of the United States, created
pursuant to an Act of Congress, which is owned entirely by Federal Home Loan
Banks. Freddie Macs are not guaranteed by the United States or by any Federal
Home Loan Banks and do not constitute a debt or obligation of the United States
or of any Federal Home Loan Bank. Freddie Macs entitle the holder to timely
payment of interest, which is guaranteed by the FHLMC. FHLMC guarantees either
ultimate collection or timely payment of all principal payments on the
underlying mortgage loans. When FHLMC does not guarantee timely payment of
principal, FHLMC may remit the amount due on account of its guarantee of
ultimate payment of principal at any time after default on an underlying
mortgage, but in no event later than one year after it becomes payable.
A Fund may invest in multiple class pass-through securities, including
collateralized mortgage obligations ("CMOs") and real estate mortgage investment
conduit ("REMIC") pass-through or participation certificates ("REMIC
Certificates"). These multiple class securities may be issued by U.S.
Government agencies or instrumentalities, including FNMA and FHLMC, or by trusts
formed by private originators of, or investors in, mortgage loans. In general,
CMOs and REMICs are debt obligations of a legal entity that are collateralized
by, and multiple class pass-through securities represent direct ownership
interests in, a pool of residential mortgage loans or mortgage pass-through
securities (the "Mortgage Assets"), the payments on which are used to make
payments on the CMOs or multiple pass-through securities. Investors may
purchase beneficial interests in REMICs, which are known as "regular" interests
or "residual" interests. The Funds do not intend to purchase residual
interests.
Each class of CMOs or REMIC Certificates, often referred to as a
"tranche," is issued at a specific adjustable or fixed interest rate and must be
fully retired no later than its final distribution date. Principal prepayments
on the Mortgage Assets underlying the CMOs or REMIC Certificates may cause some
or all of the classes of CMOs or REMIC Certificates to be retired substantially
earlier than their final distribution dates. Generally, interest is paid or
accrues on all classes of CMOs or REMIC Certificates on a monthly basis.
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<PAGE>
The principal of and interest on the Mortgage Assets may be allocated
among the several classes of CMOs or REMIC Certificates in various ways. In
certain structures (known as "sequential pay" CMOs or REMIC Certificates),
payments of principal, including any principal prepayments, on the Mortgage
Assets generally are applied to the classes of CMOs or REMIC Certificates in the
order of their respective final distribution dates. Thus no payment of
principal will be made on any class of sequential pay CMOs or REMIC Certificates
until all other classes having an earlier final distribution date have been paid
in full.
Additional structures of CMOs or REMIC Certificates include, among
others, "parallel pay" CMOs and REMIC Certificates. Parallel pay CMOs or REMIC
Certificates are those which are structured to apply principal payments and
prepayments of the Mortgage Assets to two or more classes concurrently on a
proportionate or disproportionate basis. These simultaneous payments are taken
into account in calculating the final distribution date of each class.
A wide variety of REMIC Certificates may be issued in the parallel pay
or sequential pay structures. These securities include accrual certificates
(also known as "Z-Bonds"), which only accrue interest at a specified rate until
all other certificates having an earlier final distribution date have been
retired and are converted thereafter to an interest-paying security, and planned
amortization class ("PAC") certificates, which are parallel pay REMIC
Certificates which generally require that specified amounts of principal be
applied on each payment date to one or more classes of REMIC Certificates (the
"PAC Certificates"), even though all other principal payments and prepayments of
the Mortgage Assets are then required to be applied to one or more other classes
of the Certificates. The scheduled principal payments for the PAC Certificates
generally have the highest priority on each payment date after interest due has
been paid to all classes entitled to receive interest currently. Shortfalls, if
any, are added to the amount payable on the next payment date. The PAC
Certificate payment schedule is taken into account in calculating the final
distribution date of each class of PAC. In order to create PAC tranches, one or
more tranches generally must be created that absorb most of the volatility in
the underlying Mortgage Assets. These tranches tend to have market prices and
yields that are much more volatile than the PAC classes.
FNMA REMIC Certificates are issued and guaranteed as to timely
distribution of principal and interest by FNMA. In addition, FNMA will be
obligated to distribute on a timely basis to holders of FNMA REMIC Certificates
required installments of principal and interest and to distribute the principal
balance of each class of REMIC Certificates in full, whether or not sufficient
funds are otherwise available.
For FHLMC REMIC Certificates, FHLMC guarantees the timely payment of
interest, and also guarantees the ultimate payment of principal as payments are
required to be made on the underlying mortgage participation certificates
("PCs"). PCs represent undivided interests in specified level payment,
residential mortgages or participation therein purchased
10
<PAGE>
by FHLMC and placed in a PC pool. With respect to principal payments on PCs,
FHLMC generally guarantees ultimate collection of all principal of the related
mortgage loans without offset or deduction. FHLMC also guarantees timely
payment of principal on certain PCs, referred to as "Gold PCs."
ASSET-BACKED SECURITIES. Asset-backed securities are generally issued
as pass-through certificates, which represent undivided fractional ownership
interests in an underlying pool of assets, or as debt instruments, which are
also known as collateralized obligations, and are generally issued as the debt
of a special purpose entity organized solely for the purpose of owning such
assets and issuing such debt. Asset-backed securities are often backed by a
pool of assets representing the obligations of a number of different parties.
The yield characteristics of asset-backed securities differ from
traditional debt securities. A major difference is that the principal amount of
the obligations may be prepaid at any time because the underlying assets (i.e.,
----
loans) generally may be prepaid at any time. As a result, if an asset-backed
security is purchased at a premium, a prepayment rate that is faster than
expected may reduce yield to maturity, while a prepayment rate that is slower
than expected may have the opposite effect of increasing yield to maturity.
Conversely, if an asset-backed security is purchased at a discount, faster than
expected prepayments may increase, while slower than expected prepayments may
decrease, yield to maturity.
In general, the collateral supporting asset-backed securities is of
shorter maturity than mortgage-related securities. Like other fixed-income
securities, when interest rates rise the value of an asset-backed security
generally will decline; however, when interest rates decline, the value of an
asset-backed security with prepayment features may not increase as much as that
of other fixed-income securities.
OPTIONS TRADING
- ---------------
As stated in the Prospectuses, each of the Funds may purchase put and
call options listed on a national securities exchange and issued by the Options
Clearing Corporation. Such purchases would be in an amount not to exceed 5% of
a Fund's net assets. Such options relate to particular securities. This is a
highly specialized activity which entails greater than ordinary investment
risks. Regardless of how much the market price of the underlying security
increases or decreases, the option buyer's risk is limited to the amount of the
original investment for the purchase of the option. However, options may be
more volatile than the underlying securities, and therefore, on a percentage
basis, an investment in options may be subject to greater fluctuation than an
investment in the underlying securities themselves. A listed call option gives
the purchaser of the option the right to buy from a clearing corporation, and a
writer has the obligation to sell to the clearing corporation, the underlying
security at the stated exercise price at any time prior to the expiration of the
option, regardless of the market price of the security. The premium paid to the
writer is in consideration for undertaking the obligations under the option
contract. A listed put option gives the purchaser the right to sell to a
clearing corporation
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<PAGE>
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 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
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<PAGE>
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
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 and Income, Growth, MidCap and
International Equity Funds may invest in futures contracts and options thereon
(interest rate futures contracts or index futures contracts, as applicable).
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
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<PAGE>
a Fund has insufficient cash, it may have to sell portfolio securities to meet
daily margin requirements at a time when it may be disadvantageous to do so. In
addition, a Fund may be required to make delivery of the instruments underlying
futures contracts it holds. The inability to close options and futures
positions also could have an adverse impact on a Fund's ability to effectively
hedge.
Successful use of futures by a Fund is also subject to the Advisor's
ability to correctly predict movements in the direction of the underlying
security or index. For example, if a Fund has hedged against the possibility of
a decline in the market adversely affecting securities held by it and securities
prices increase instead, the Fund will lose part or all of the benefit to the
increased value of its securities which it has hedged because it will have
approximately equal offsetting losses in its futures positions. In addition, in
some situations, if a Fund has insufficient cash, it may have to sell securities
to meet daily variation margin requirements. Such sales of securities may be,
but will not necessarily be, at increased prices which reflect the rising
market. A Fund may have to sell securities at a time when it may be
disadvantageous to do so.
The risk of loss in trading futures contracts in some strategies can
be substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if at the time
of purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit, before any deduction for the
transaction costs, if the contract were closed out. Thus, a purchase or sale of
a futures contract may result in losses in excess of the amount invested in the
contract.
Utilization of futures transactions by a Fund involves the risk of
loss by a Fund of margin deposits in the event of bankruptcy of a broker with
whom the Fund has an open position in a futures contract or related option.
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.
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<PAGE>
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 as
interest rates, currency exchange rates, commodity indices, and securities
indices (collectively, "Benchmarks"). Thus, Hybrid Instruments may take a
variety of forms, including, but not limited to, debt instruments with interest
or principal payments or redemption terms determined by reference to the value
of a currency or commodity or securities index at a future point in time,
preferred stock with dividend rates determined by reference to the value of a
currency, or convertible securities with the conversion terms related to a
particular commodity.
Hybrid Instruments can be an efficient means of creating exposure to a
particular market, or segment of a market, with the objective of enhancing total
return. For example, a 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
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<PAGE>
Instrument may entail significant risks that are not associated with a similar
investment in a traditional debt instrument that has a fixed principal amount,
is denominated in U.S. dollars or bears interest either at a fixed rate or a
floating rate determined by reference to a common, nationally published
Benchmark. The risks of a particular Hybrid Instrument will, of course, depend
upon the terms of the instrument, but may include, without limitation, the
possibility of significant changes in the Benchmarks or the prices of Underlying
Assets to which the instrument is linked. Such risks generally depend upon
factors which are unrelated to the operations or credit quality of the issuer of
the Hybrid Instrument and which may not be credit quality of the issuer of the
Hybrid Instrument and which may not be readily foreseen by the purchaser, such
as economic and political events, the supply and demand of the Underlying Assets
and interest rate movements. In recent years, various Benchmarks and prices for
Underlying Assets have been highly volatile, and such volatility may be expected
in the future. Reference is also made to the discussion of futures, options,
and forward contracts herein for a discussion of the risks associated with such
investments.
Hybrid Instruments are potentially more volatile and carry greater
market risks than traditional debt instruments. Depending on the structure of
the particular Hybrid Instrument, changes in a Benchmark may be magnified by the
terms of the Hybrid Instrument and have an even more dramatic and substantial
effect upon the value of the Hybrid Instrument. Also, the prices of the Hybrid
Instrument and the Benchmark or Underlying Asset may not move in the same
direction or at the same time.
Hybrid Instruments may bear interest or pay preferred dividends at
below market (or even relatively nominal) rates. Alternatively, Hybrid
Instruments may bear interest at above market rates but bear an increased risk
of principal loss (or gain). The latter scenario may result if "leverage" is
used to structure the Hybrid Instrument. Leverage risk occurs when the Hybrid
Instrument is structured so that a given change in a Benchmark or Underlying
Asset is multiplied to produce a greater value change in the Hybrid Instrument,
thereby magnifying the risk of loss as well as the potential for gain.
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.
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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 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
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<PAGE>
substantially in recent years with a large number of banks and investment
banking firms acting both as principals and as agents utilizing standardized
swap documentation. As a result, the swap market has become relatively liquid
in comparison with the markets for other similar instruments which are traded in
the relevant market. However, the staff of the SEC takes the position that
swaps, caps and floors are illiquid for purposes of the Funds' limitations on
investments in illiquid securities.
RIGHTS OFFERINGS AND WARRANTS
- -----------------------------
As stated in their Prospectus, the Balanced, Growth and Income,
Growth, MidCap and International Equity Funds may participate in rights
offerings and may purchase warrants, which are privileges issued by corporations
enabling the owners to subscribe to and purchase a specified number of shares of
the corporation at a specified price during a specified period of time.
Subscription rights normally have a short life span to expiration. The purchase
of rights or warrants involves the risk that a Fund could lose the purchase
value of a right or warrant if the right to subscribe to additional shares is
not exercised prior to the expiration of the rights and warrants. Also, the
purchase of rights and/or warrants involves the risk that the effective price
paid for the right and/or warrant added to the subscription price of the related
security may exceed the value of the subscribed security's market price such as
when there is no movement in the level of the underlying security. A Fund will
not invest more than 5% of its total assets, taken at market value, in warrants,
or more than 2% of its total assets, taken at market value, in warrants not
listed on the New York or American Stock Exchanges. 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, Growth
and Income, MidCap 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.
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REPURCHASE AGREEMENTS
- ---------------------
The repurchase price under the repurchase agreements described in the
Funds' Prospectuses generally equals the price paid by a Fund plus interest
negotiated on the basis of current short-term rates (which may be more or less
than the rate on the securities underlying the repurchase agreement).
Securities subject to repurchase agreements are held by the Funds' Custodian (or
sub-custodian) or in the Federal Reserve/Treasury book-entry system. Repurchase
agreements are considered to be loans under the 1940 Act.
BANK OBLIGATIONS
- ----------------
For purposes of the Funds' investment policies with respect to bank
obligations, the assets of a bank or savings institution will be deemed to
include the assets of its domestic and foreign branches. Investments in
obligations issued by foreign banks and foreign branches of U.S. banks may
involve risks that are different from investments in obligations of domestic
branches of U.S. banks. These risks may include future unfavorable political
and economic developments, possible withholding taxes on interest income,
seizure or nationalization of foreign deposits, currency controls, interest
limitations, or other governmental restrictions which might affect the payment
of principal or interest on the securities held by the Fund. Additionally,
these institutions may be subject to less stringent reserve requirements and to
different accounting, auditing, reporting and recordkeeping requirements than
those applicable to domestic branches of U.S. banks.
Certificates of deposit issued by domestic branches of domestic banks
do not benefit materially, and certificates of deposit issued by foreign
branches of domestic banks do not benefit at all, from insurance from the
Federal Deposit Insurance Corporation.
Both domestic banks and foreign branches of domestic banks are subject
to extensive governmental regulations which may limit both the amount and types
of loans which may be made and interest rates which may be charged. In
addition, the profitability of the banking industry is dependent largely upon
the availability and costs of funds for the purpose of financing and lending
operations under prevailing money market conditions. General economic
conditions as well as exposure to credit losses arising from possible financial
difficulties of borrowers play an important part in the operations of this
industry.
STRIPPED GOVERNMENT OBLIGATIONS
- -------------------------------
The Federal Reserve has established an investment program known as
"STRIPS" or "Separate Trading of Registered Interest and Principal of
Securities." The Bond and Balanced Funds may purchase securities registered
under this program. This allows the Funds to be able to have their beneficial
ownership of zero coupon securities recorded directly in the book-entry record-
keeping system in lieu of having to hold certificates or other evidences of
ownership of the underlying U.S. Treasury securities. The Treasury Department
has, within the past several years, facilitated transfers of such securities
19
<PAGE>
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 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.
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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 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 and Income, Growth,
MidCap and International Equity Funds may invest up to 20%, 10%, 10%, 10% and
100%, respectively, of their total assets, and the Balanced Fund may invest up
to 20% and 10% of
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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 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.
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A separate account consisting of liquid assets, such as cash, U.S.
Government securities or other liquid high grade debt obligations, equal to the
amount of the Fund's assets that could be required to consummate forward
contracts will be established with the Fund's Custodian except to the extent the
contracts are otherwise "covered." For the purpose of determining the adequacy
of the securities in the account, the deposited securities will be valued at
market or fair value. If the market or fair value of such securities declines,
additional cash or securities will be placed in the account daily so that the
value of the account will equal the amount of such commitments by the Fund. A
forward contract to sell a foreign currency is "covered" if the Fund owns the
currency (or securities denominated in the currency) underlying the contract, or
holds a forward contract (or call option) permitting the Fund to buy the same
currency at a price no higher than the Fund's price to sell the currency. A
forward contract to buy a foreign currency is "covered" if the Fund holds a
forward contract (or put option) permitting the Fund to sell the same currency
at a price as high as or higher than the Fund's price to buy the currency.
STAND-BY COMMITMENTS
- --------------------
The National Tax-Free Bond and Missouri Tax-Free Bond Funds may
acquire stand-by commitments with respect to Municipal Obligations held within
their respective portfolios. Under a stand-by commitment, a dealer or bank
agrees to purchase from a Fund, at the Fund's option, specified Municipal
Obligations at their amortized cost value to the Fund plus accrued interest, if
any. Stand-by commitments may be sold, transferred or assigned by a Fund only
with the underlying instrument.
The Funds expect that stand-by commitments will generally be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, a Fund may pay for a stand-by commitment either
separately in cash or by paying a higher price for portfolio securities which
are acquired subject to the commitment (thus reducing the yield to maturity
otherwise available for the same securities). Where a Fund paid any
consideration directly or indirectly for a stand-by commitment, its cost would
be re flected 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.
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<PAGE>
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, as permitted by applicable law, 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
assets, as permitted by applicable law, equal to the amount of the purchase or
the commitment in a separate account. Normally, the Custodian will set aside
portfolio securities to meet this requirement. The market value of the separate
account will be monitored and if such market value declines, the Fund will be
required subsequently to place additional assets in the separate account in
order to ensure that the value of the account remains equal to the amount of the
Fund's commitments. Because a Fund will set aside cash or liquid assets, as
permitted by applicable law, in the manner described, the Fund's liquidity and
ability to manage its portfolio might be affected in the event its when-issued
purchases or forward commitments ever exceeded 25% of the value of its assets.
In the case of a forward commitment to sell portfolio securities, the Custodian
will hold the portfolio securities in a segregated account while the commitment
is outstanding.
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.
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<PAGE>
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 and
Income, Growth, MidCap and International Equity Funds may invest in convertible
securities. Convertible securities entitle the holder to receive interest paid
or accrued on debt or the dividend paid on preferred stock until the convertible
securities mature or are redeemed, converted or exchanged. Prior to conversion,
convertible securities have characteristics similar to ordinary debt securities
in that they normally provide a stable stream of income with generally higher
yields than those of common stock of the same or similar issuers. Convertible
securities rank senior to common stock in the corporate capital structure and,
therefore, generally entail less risk than the corporation's common stock,
although the extent to which such risk is reduced depends in large measure upon
the degree to which the convertible security sells above its value as a fixed
income security.
In selecting convertible securities, the Advisor will consider, among
other factors, their evaluation of the creditworthiness of the issuers of the
securities, the interest or dividend income generated by the securities, the
potential for capital appreciation of the securities and the underlying stocks,
the prices of the securities relative to other comparable securities and to the
underlying stocks, whether the securities are entitled to the benefits of
sinking funds or other protective conditions, the 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
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<PAGE>
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.
Missouri's population was 5,323,523 in 1995 according to the 1995
United States Bureau of Census, Missouri Office of Administration, which
represented an increase of 4.0% from the 1990 decennial census of 5,116,901
inhabitants. In 1994, St. Louis and the surrounding metropolitan area
constituted the 17th largest Metropolitan Statistical Area (MSA) in the nation
with approximately 2.54 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 1994, Kansas
City was the 24th largest MSA nationally with approximately 1.65 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 1994 to 1995,
Missouri's per capita personal income grew 4.2%, and its average unemployment
rate dropped to 4.8%.
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 1995, services
represented the single most significant economic activity, with wholesale and
retail trade ranking second and manufacturing ranking third. In 1995, these
three economic sectors accounted for 68.0% of the State's nonagricultural
employment. Manufacturing, which accounts for approximately 17.0% of
employment, is concentrated in defense, transportation equipment and other
durable goods. To the extent that the economy suffers a recession, the
manufacturing sector, in particular, could be adversely affected.
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<PAGE>
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. Pursuant to this section, (1)
the General Assembly may issue general obligation bonds solely to refund
outstanding bonds (provided that the refunding bonds must mature within 25 years
of issuance); (2) the General Assembly upon the recommendation of the Governor
to incur a temporary liability by reason of unforeseen emergency or of
deficiency in revenue, may issue bonds in an amount not to exceed $1,000,000 for
any one year (must be paid within 5 years of issuance); and (3) the General
Assembly, or the people by initiative, may submit a proposition to incur
temporary indebtedness greater than $1,000,000 by reason of unforeseen emergency
or of deficiency in revenue, and the bonds may be issued if approved by a
majority of those voting (such bonds must be retired serially and by installment
within 25 years of issuance). Before any bonds are issued pursuant to Section
37, the General Assembly must make provisions for the payment of principal and
interest and may provide for an annual tax on all taxable property in an amount
sufficient for that purpose.
Certain water pollution bonds and State building bonds are also
authorized pursuant to Sections 37(b)-(f), inclusive. In 1971, Missouri voters
approved a constitutional amendment providing for the issuance of $150,000,000
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 voters approved a
constitutional amendment authorizing the issuance of $250 million Fourth State
Building Bonds. Proceeds from the Fourth State Building Bonds fund the
rebuilding of institutions of higher education, land acquisition, construction
and purchase of buildings, and planning, furnishing, equipping and landscaping
such improvements and buildings.
Article III, Section 36 of the Constitution of Missouri requires that
the General Assembly appropriate the annual principal and interest requirements
for outstanding general obligation bonds before any other appropriations are
made. Such amounts must be
27
<PAGE>
transferred from the General Revenue Fund to bond interest and sinking funds.
Authorization for these transfers, as well as the actual payments of principal
and interest, are provided in the first appropriation bill of each fiscal year.
In addition to general obligation bonds, the Missouri legislature has
established numerous entities as bodies corporate and politic, which are
authorized to issue bonds to carry out their corporate purposes.
Article X, Sections 16-24 of the Constitution of Missouri (the "Tax
Limitation Amendment") imposes a limit on the amount of taxes and other revenue
enhancement charges such as user fees which may be imposed by the State or a
political subdivision in any fiscal year. This limit is tied to total State
revenues for the fiscal year ended June 30, 1981, as defined in the Tax
Limitation Amendment, and adjusted annually, in accordance with the formula set
forth in the amendment. Under that formula, the revenue limit (the "Revenue
Limit") for any fixed year equals the product obtained by multiplying (i) the
ratio of total state revenues in fiscal year 1980-1981 divided by the aggregate
personal income received by persons in Missouri from all sources ("Personal
Income of Missouri") in calendar year 1979 times (ii) the Personal Income of
Missouri in either the calendar year prior to the calendar year in which
appropriations for the fiscal year for which the calculation is being made, or
the average of Personal Income of Missouri in the previous three calendar years,
whichever is greater. If the Revenue Limit is exceeded by 1% or more in any
fiscal year, a refund of the excess revenues collected by the State is required.
If the excess revenues collected are less than 1%, then the excess is not
refunded but is transferred to the General Revenue Fund. The details of the Tax
Limitation Amendment are complex and clarification from subsequent legislation
and judicial decisions may be necessary for the Tax Limitation Amendment to be
fully implemented. The Revenue Limit can be exceeded only if the General
Assembly approves by a two-thirds vote of each house an emergency declaration as
requested by the Governor. The Revenue Limit does not apply to taxes imposed
for payment of principal and interest on bonds that have been approved by the
voters, as authorized by the Missouri Constitution.
In addition to the Revenue Limit, the General Assembly is prohibited
without voter approval from increasing taxes as fees in any fiscal year that in
total produces new annual revenues greater than $50 million, adjusted annually
by the percentage change in the personal income of Missouri for the second
previous fiscal year, or 1% of total state revenue for the second previous
fiscal year prior to the General Assembly action, whichever is less. The Tax
Limitation Amendment could adversely affect the repayment capabilities of
certain non-general obligation issues if payment is dependent upon increases in
taxes or appropriations by the State's General Assembly.
Total revenues available for the fiscal year ended June 30, 1996
("Fiscal Year 1996") were $6,286.2 million. Expenditures for Fiscal Year 1996
were $5,946.9 million. For the fiscal year ending June 30, 1997 ("Fiscal Year
1997"), general revenues are
28
<PAGE>
projected to be $6,645.5 million. Expenditures for Fiscal Year 1997 are
projected at $6,426.2 million.
INVESTMENT LIMITATIONS
- ----------------------
Each Fund is subject to the investment limitations enumerated below,
which may not be changed with respect to a Fund without the approval of the
lesser of (1) 67% of the Fund's shares present at a meeting of shareowners if
the holders of more than 50% of the outstanding shares are present in person or
by proxy or (2) more than 50% of the Fund's outstanding shares. Other
restrictions in the form of non-fundamental policies are subject to change by
The Commerce Funds' Board of Trustees without 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.
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
29
<PAGE>
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.
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.
30
<PAGE>
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
and Income, Growth, MidCap and International Equity Funds:
Each Fund will limit its investments so that, with respect to 75% of a
Fund's total assets: (i) not more than 5% of a Fund's total assets
will be invested in the securities or any one issuer; (ii) not more
than 25% of a Fund's total assets will be invested in the securities
of issuers in any one industry; and (iii) not more than 10% of the
outstanding voting securities of any one issuer will be held by a
Fund. Securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities and repurchase agreements collateralized
by such securities are excepted from these limitations. Each Fund may
borrow money from banks for temporary or emergency purposes or to meet
redemption
31
<PAGE>
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.
NET ASSET VALUE
The net asset value per share for each Fund of The Commerce Funds is
calculated separately for Institutional and Service Shares and the Shares of the
National Tax-Free Bond Fund and Missouri Tax-Free Bond Fund by adding the value
of all portfolio securities and other assets belonging to the Fund that are
allocable to a particular class, subtracting the liabilities charged to such
class of the Fund, and dividing the result by the number of shares of such class
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 particular class of a
32
<PAGE>
Fund are charged with the direct liabilities of that class and with a share of
the general liabilities of The Commerce Funds which are normally allocated in
proportion to the relative net asset values of all of The Commerce Funds'
investment portfolios at the time of allocation. Payments under The Commerce
Funds' Service Plan for Institutional Shares, however, are applicable only to
Institutional Shares of the Short-Term Government, Bond, Balanced, Growth and
Income, Growth, MidCap, International Equity and Shares of the National Tax-Free
Bond Fund and the Missouri Tax-Free Bond Fund Funds.
As stated in their Prospectuses, a Fund's investments will be valued
at market value or, in the absence of a market value with respect to any
portfolio securities, at fair value as determined by or under the direction of
The Commerce Funds' Board of Trustees. A security that is primarily traded on a
domestic securities exchange (including securities traded through the National
Market System) is valued at the last sale price on that exchange or, if there
were no sales during the day, at the current quoted bid price. Securities
traded on only over-the-counter markets are valued on the basis of closing over-
the-counter bid prices. Securities for which there were no transactions are
valued at the average of the current bid and asked prices. Restricted
securities and securities for which market quotations are not readily available
are valued at fair value as determined in good faith by the Board of Trustees.
The value of a Fund's portfolio securities that are traded on stock
exchanges outside the United States are based upon the price on the exchange as
of the close of business of the exchange immediately preceding the time of
valuation, except when an occurrence subsequent to the time a value was so
established is likely to have changed such value; then the fair value of those
securities will be determined through consideration of other factors by or under
the direction of The Commerce Funds' Board of Trustees. Securities trading in
over-the-counter markets in European and Pacific Basin countries is normally
completed well before 4:00 P.M. Eastern time. In addition, European and Pacific
Basin securities trading may not take place on all Business Days. Furthermore,
trading takes place in Japanese markets on certain Saturdays and in various
foreign markets on days which are not considered to be Business Days. The
calculation of the net asset value of the Fund may not take place
contemporaneously with the determination of the prices of portfolio securities
used in such calculation. Events affecting the values of portfolio securities
that occur between the time their prices are determined and 4:00 P.M. Eastern
time, and at other times may not be reflected in the calculation of net asset
value of the Fund.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares of the Funds are offered and sold on a continuous basis by The
Commerce Funds' Distributor, Goldman, Sachs & Co., acting as agent for The
Commerce Funds.
An illustration of the computation of the public offering price per
share of the Institutional Shares of the Short Term Government, Bond, Balanced,
Growth and Income,
33
<PAGE>
Growth, MidCap and International Equity Funds and the Shares of the National
Tax-Free Bond Fund and the Missouri Tax-Free Bond Funds, based on the value of
the total net assets and total number of shares outstanding on April 30, 1997,
is as follows:
TABLE
-----
<TABLE>
<CAPTION>
Growth Inter- Missouri National
and national Tax-Free Tax-Free
Bond Balanced Income Growth MidCap Equity Bond Bond
Fund Fund Fund/(1)/ Fund Fund Fund Fund Fund
------------ ----------- ----------- ------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Assets............. $167,988,940 $81,039,846 12,037,914 $266,029,554 $77,066,722 $63,679,761 $18,587,687 $19,973,004
Number of Shares
Outstanding.......... 8,949,730 3,422,064 672,190 8,820,029 2,954,868 2,926,766 1,023,419 1,086,149
Net Asset Value
Per Share............ $ 18.77 $ 23.68 $ 17.91 $ 30.16 $ 26.08 $ 21.76 $ 18.16 $ 18.39
Sales Charge, 3.50
percent of offering
price (3.63 percent
of net asset value
per share)........... $ 0.68 $ 0.86 $ 0.65 $ 1.09 $ 0.95 $ 0.79 $ 0.66 $ 0.67
Offering Price to
Public............... $ 19.45 $ 24.54 $ 18.56 $ 31.25 $ 27.03 $ 22.55 $ 18.82 $ 19.06
</TABLE>
__________
/(1)/ Commenced operations on March 1, 1997.
<TABLE>
<CAPTION>
Short Term
Govt Fund
-----------
<S> <C>
Net Assets.................. $39,098,036
Number of Outstanding
Shares...................... 2,150,847
Net Asset Value Per Share... $ 18.18
Sales Charge, 2.00 percent
of offering price (2.04
percent of net asset
value per share)............ $ 0.37
Offering Price to Public.... $ 18.55
</TABLE>
34
<PAGE>
Under the 1940 Act, a Fund may suspend the right of redemption or
postpone the date of payment for shares during any period when (a) trading on
the New York Stock Exchange is restricted by applicable rules and regulations of
the SEC; (b) the Exchange is closed for other than customary weekend and holiday
closing; (c) the SEC has by order permitted such suspension; or (d) an emergency
exists as determined by the SEC. (The Commerce Funds may also suspend or
postpone the recordation of the transfer of shares upon the occurrence of any of
the foregoing conditions.)
In addition to the situations described in the Prospectuses under "How
To Sell Shares," The Commerce Funds may redeem shares involuntarily to reimburse
the Funds for any loss sustained by reason of the failure of a shareowner to
make full payment for shares purchased by the shareowner or to collect any
charge relating to a transaction effected for the 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 and Income, Growth, MidCap 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
35
<PAGE>
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, MidCap and International Equity Funds have available a plan
(the "IRA") for use by individuals with compensation for services rendered
(including earned income from self-employment) who wish to use shares of the
Funds as a funding medium for individual 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.
36
<PAGE>
The Trustees shall have full power and authority, in their sole
discretion, and without obtaining any prior authorization or vote of shareowners
of any series of The Commerce Funds, to establish and designate and to change in
any manner any such series of shares or any classes of initial or additional
series and to fix such relative preferences, voting powers, rights and
privileges of such series or classes thereof as the Trustees may from time to
time determine, to divide or combine the shares or any series or classes thereof
into a greater or lesser number, to classify or reclassify any issued shares or
any series or classes thereof into one or more series or classes of shares, and
to take such other action with respect to the shares as the trustees may deem
desirable.
In the event of a liquidation or dissolution of The Commerce Funds or
an individual Fund, the Trustees may sell and convey all or substantially all of
the assets of The Commerce Funds or any series to another entity or to a
separate series of shares thereof, for adequate consideration. The sale or
conveyance may include the assumption of all outstanding obligations, taxes and
other liabilities and may include shares of beneficial interest, stock or other
ownership interests. In the alternative, the Trustees may sell and convert into
money all of the assets of The Commerce Funds or any series. After such
actions, the Trustees will distribute the remaining proceeds or assets (as the
case may be) of each series (or class) ratably among the holders of shares of
those series then outstanding.
Rule 18f-2 under the 1940 Act provides that any matter required by the
provisions of the 1940 Act or applicable state law, or otherwise, to be
submitted to the holders of the outstanding voting securities of an investment
company shall not be deemed to have been effectively acted upon unless approved
by the holders of a majority of the outstanding shares of each investment
portfolio affected by such matter. Rule 18f-2 further provides that an
investment portfolio shall be deemed to be affected by a matter unless the
interests of each investment portfolio in the matter are substantially identical
or the matter does not affect any interest of the investment portfolio. Under
the Rule, the approval of an investment advisory agreement or any change in a
fundamental investment policy would be effectively acted upon with respect to an
investment portfolio only if approved by a majority of the outstanding shares of
such investment portfolio. However, the Rule also provides that the
ratification of the appointment of independent accountants, the approval of
principal underwriting contracts and the election of Trustees may be effectively
acted upon by shareowners of The Commerce Funds voting together in the aggregate
without regard to a particular investment portfolio.
The shareowners have 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
37
<PAGE>
person or by proxy or in any manner provided for in the By-laws. A proxy may be
given in writing, by telefax, or in any other manner provided for in the By-
laws.
Special meetings of the shareowners of any series may be called by the
Trustees and shall be called by the Trustees upon the written request of
shareowners owning at least 10% of the outstanding shares entitled to vote.
Whenever ten or more shareowners meeting the qualifications set forth in Section
16(c) of the 1940 Act seek the opportunity of furnishing materials to the other
shareowners with a view to obtaining signatures on such a request for a meeting,
the Trustees shall provide shareowners access to The Commerce Funds' list of
record shareowners or the mailing of such materials to such record shareowners,
subject to the applicable provisions of the 1940 Act. Notice shall be sent by
mail or such other means as determined by the Trustees at least 15 days prior to
any such meeting. One-third of the shares entitled to vote in person or by
proxy shall be a quorum for the transaction of business at a shareowners'
meeting, except that where any provision of law or of the Trust Instrument
permits or requires that holders of any series shall vote as a series (or that
holders of a class shall vote as a class), then one-third of the aggregate
number of shares of that series (or that class) entitled to vote shall be
necessary to constitute a quorum for the transaction of business by that series
(or that class). Any action which may be taken by the shareowners of The
Commerce Funds or of a series may be taken without a meeting if shareowners
holding more than a majority of the shares entitled to vote, except when a
larger vote is required by law or by any provision of the Trust Instrument,
shall consent to the action in writing, provided that such action by written
consent is approved by the Board of Trustees.
When used in the Prospectuses or in this Statement of Additional
Information, a "majority" of shareowners of The Commerce Funds or a particular
Fund means, with respect to the approval of an investment advisory agreement or
a change in an investment objective or a fundamental investment policy, the vote
of the lesser of (1) 67% of the shares of The Commerce Funds or the Fund present
at a meeting if the holders of more than 50% of the outstanding shares are
present in person or by proxy, or (2) more than 50% of the outstanding shares of
The Commerce Funds or the Fund.
The Trust Instrument provides that the Trustees, when acting in their
capacity, will not be personally liable to any person other than The Commerce
Funds or a beneficial owner for any act, omission or obligation of The Commerce
Funds or any Trustee. A Trustee shall not be liable for any act or omission in
his capacity as Trustee, or for any act or omission of any officer or employee
of The Commerce Funds or of any other person or party, provided that nothing
contained in the Trust Instrument or in the Delaware Business Trust law shall
protect any Trustee against any liability to The Commerce Funds or to
shareowners to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of the office of Trustee.
38
<PAGE>
ADDITIONAL INFORMATION CONCERNING TAXES
The following summarizes certain additional tax considerations
generally affecting the Funds and their shareowners that are not described in
the Prospectuses. No attempt is made to present a detailed explanation of the
tax treatment of the Funds or their shareowners, and the discussion here and in
the Prospectuses is not intended as a substitute for careful tax planning.
Potential investors should consult their tax advisers with specific reference to
their own tax situations.
FEDERAL - GENERAL INFORMATION
Each Fund will elect to be taxed separately as a regulated investment
company under Part I of Subchapter M of Subtitle A, Chapter 1 of the Internal
Revenue Code of 1986, as amended (the "Code"). As a regulated investment
company, each Fund is exempt from federal income tax on its net investment
income and realized capital gains that it distributes to shareowners, provided
that it distributes an amount equal to at least the sum of 90% of its tax-exempt
income and 90% of its investment company taxable income (net investment income
and the excess of net short-term capital gain over net long-term capital loss),
if any, for the year (the "Distribution Requirement") and satisfies certain
other requirements of the Code that are described below.
In addition to satisfaction of the Distribution Requirement, each Fund
must derive with respect to a taxable year at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans and gains
from the sale or other disposition of stock or securities or foreign currencies,
or from other income derived with respect to its business of investing in such
stock, securities, or currencies (the "Income Requirement") and derive less than
30% of its gross income from the sale or other disposition of securities and
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
39
<PAGE>
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 Income, Growth and MidCap Funds may constitute
"qualifying dividends." The other Funds, however, are not expected to pay
qualifying dividends.
Ordinary income of individuals is taxable at a maximum marginal 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 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.
40
<PAGE>
See Appendix B -- "Accounting and Tax Treatment" -- for a general
discussion of the federal tax treatment of futures contracts, related options
thereon and other financial instruments, including their treatment under the
Short-Short Test.
FEDERAL - TAX-EXEMPT INFORMATION
As described in their Prospectus, the National Tax-Free Bond and
Missouri Tax-Free Bond Funds are designed to provide investors with tax-exempt
interest income. The Funds are not intended to constitute a balanced investment
program and are not designed for investors seeking capital appreciation or
maximum tax-exempt income irrespective of fluctuations in principal. Shares of
the Funds would not be suitable for tax-exempt institutions and may not be
suitable for retirement plans qualified under Section 401 of the Code, H.R. 10
plans and individual retirement accounts since such plans and accounts are
generally tax-exempt and, therefore, would not gain any additional benefit from
the Funds' dividends being tax-exempt. In addition, the Funds may not be an
appropriate investment for persons or entities that are "substantial users" of
facilities financed by private activity bonds or "related persons" thereof.
"Substantial user" is defined under U.S. Treasury Regulations to include a non-
exempt person which regularly uses a part of such facilities in its trade or
business and whose gross revenues derived with respect to the facilities
financed by the issuance of bonds are more than 5% of the total revenues derived
by all users of such facilities, 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
41
<PAGE>
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.
42
<PAGE>
MANAGEMENT OF THE COMMERCE FUNDS
TRUSTEES AND OFFICERS OF THE TRUST
The Board of Trustees of the Trust is responsible for the management
of the business and affairs of the Trust. The Trustees and executive officers
of the Trust and their principal occupations for the last five years are set
forth below. Each Trustee has an address c/o The Commerce Funds, 922 Walnut
Street, Kansas City, Missouri 64141.
<TABLE>
<CAPTION>
Name, Address and Age Position(s) Held Principal Occupation(s) During Past 5 Years
with
the Trust
- ---------------------------------------------------------------------------------------------------
<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: 63 College since January 1989. Director, Valentine
Radford Communications and Trustee, Midwest
Research Institute.
*Warren W. Weaver Trustee and President Retired. Former Vice Chairman, Commerce
c/o The Commerce Funds Bancshares, Inc. and Commerce Bank, N.A.
922 Walnut Street
Kansas City, MO 64141
Age: 66
*Randall D. Barron Trustee and Treasurer Retired. President, MO. Division Southwestern
c/o The Commerce Funds Bell Telephone Company since 1984. Former
922 Walnut Street Director, Commerce Bancshares, Inc.
Kansas City, MO 64141
Age: 67
David L. Bodde Trustee Charles N. Kimball Professor of Technology and
c/o The Commerce Funds Innovation, University of Missouri, Kansas City
922 Walnut Street since July 1976. Vice President, Midwest
Kansas City, MO 64141 Research Institute since January 1991. Executive
Age: 54 Director, Commission on Engineering, National
Academy of Sciences from April 1986 to January
1991; Director, Missouri Technological
Corporation. Director, Kansas City Power &
Light Company since 1994.
John Joseph Holland Trustee Vice President, and Chief Financial Officer,
c/o The Commerce Funds Butler
922 Walnut Street Manufacturing Company since January 1990 and
Kansas City, MO 64141 Vice President and Controller prior thereto.
Age: 46 Director, Allendale Insurance Company.
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
Name, Address and Age Position(s) Held Principal Occupation(s) During Past 5 Years
with
the Trust
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Paul Klug Vice President Vice President and Manager, Bank Proprietary
Goldman Sachs Asset Mutual Funds unit within the Institutional Funds
Management, 41st 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: 45
Nancy L. Mucker Vice President Vice President, Goldman Sachs since April 1985.
Goldman Sachs Asset Manager of Shareholder Services for Goldman
Management Sachs Asset Management Funds Group since
4900 Sears Tower November 1989.
Chicago, IL 60606
Age: 47
Pauline Taylor Vice President Vice President, Goldman Sachs since June 1992.
Goldman Sachs Asset Consultant 1989 to June 1992.
Management
4900 Sears Tower
Chicago, IL 60606
Age: 50
W. Bruce McConnel, III Secretary Partner of the law firm Drinker Biddle & Reath LLP,
Drinker Biddle & Reath Philadelphia, Pennsylvania.
1345 Chestnut Street
PNB Building
Philadelphia, PA 19107
Age: 54
Scott M. Gilman Assistant Secretary Director Mutual Funds Administration, Goldman
Goldman Sachs Asset Sachs Asset Management since April 1994.
Management Assistant Treasurer of Goldman Sachs Funds
One New York Plaza Management, Inc. since March 1993. Vice
New York, NY 10004 President, Goldman Sachs since March 1990.
Age: 37
John Perlowski Assistant Secretary Vice President, Goldman, Sachs & Co., since July
Goldman, Sachs & Co. 1995. Director/Fund Accounting & Custody,
One New York Plaza Investors Bank & Trust Co., November 1993 to
New York, NY 10004 July 1995. Formerly, Manager, Audit Division,
Age: 32 Arthur Andersen, September 1986 to November
1993.
Michael J. Richman, Esq. Assistant Secretary Vice President and Assistant General Counsel of
Goldman Sachs & Co. Goldman Sachs and Counsel to the Funds Group of
12th Floor Goldman Sachs Asset Management since June
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: 36 1991 to June 1992. Attorney-at-law, Gaston &
Snow prior thereto.
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
Name, Address and Age Position(s) Held Principal Occupation(s) During Past 5 Years
with
the Trust
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
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. Assistant General Counsel since November
Legal Department 1995 and Vice President of Goldman Sachs since
85 Broad Street May 1994. Formerly Associate of Shereff,
New York, NY 10004 Friedman, Hoffman & Goodman.
Age: 31
</TABLE>
45
<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, Perlowski, 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, receives
legal fees as counsel to the Trust. The following chart provides certain
information about the trustee fees paid by the Trust for the fiscal year ended
October 31, 1996:
<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, $5,000 $0 $0 N/A
Trustee, Chairman
WARREN W. WEAVER, $3,750 $0 $0 N/A
Trustee, President
PLEASANT VOORHEES $1,250 $0 $0 N/A
MILLER**, Trustee,
President
RANDALL D. BARRON, $5,000 $0 $0 N/A
Trustee, Treasurer
DAVID L. BODDE, Trustee $5,000 $0 $0 N/A
JOHN JOSEPH HOLLAND, $5,000 $0 $0 N/A
Trustee
- -------------------------------------------------------------------------------------
</TABLE>
* Fund Complex includes funds with a common investment adviser or an adviser
which is an affiliated person.
** Effective March 14, 1996, Pleasant Voorhees Miller is no longer a Trustee
of the Commerce Funds.
46
<PAGE>
INVESTMENT ADVISOR
Information about the Advisor and their duties and compensation as
Advisor is contained in the Prospectuses. For the fiscal year ended October 31,
1996 and 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> Commencement of
Fiscal year ended operations
October 31, 1996 through October 31, 1995
----------------- ------------------------
<S> <C> <C>
Short-Term Government Fund /(1)/ $ 82,030 $ 47,091
Bond Fund /(1)/ 600,758 386,076
Balanced Fund /(1)/ 438,474 271,451
Growth and Income Fund /(2)/ N/A N/A
Growth Fund /(1)/ 1,262,077 799,203
MidCap Fund /(1)/ 453,655 166,159
International Equity Fund /(1)/ 315,480 92,576
National Tax-Free Bond Fund /(3)/ 68,740 24,040
Missouri Tax-Free Bond Fund /(3)/ 36,710 11,654
</TABLE>
_________
/(1)/ Commenced investment operations on December 12, 1994.
/(2)/ Not operational for the periods indicated.
/(3)/ Commenced investment operations on February 21, 1995.
For the fiscal year ended October 31, 1996, and from commencement of
operations through October 31, 1995, the Advisor voluntarily agreed to waive a
portion of its advisory fee for certain portfolios. During the periods stated,
these waivers reduced advisory fees by the following:
<TABLE>
<CAPTION> Commencement of
Fiscal year ended operations
October 31, 1996 through October 31, 1995
----------------- ------------------------
<S> <C> <C>
Short-Term Government Fund/(1)/ $ 54,686 $31,394
Balanced Fund/(1)/ 146,158 90,484
International Equity Fund/(1)/ 255,695 61,711
Missouri Tax-Free Bond/(2)/ 24,474 7,769
</TABLE>
___________
(1) Commenced investment operations on December 12, 1994.
47
<PAGE>
(2) Commenced investment operations on February 21, 1995.
In addition, for the fiscal year ended October 31, 1996, and from
commencement of operations through October 31, 1995, the Advisor voluntarily
agreed to reimburse the expenses listed below (excluding interest, taxes, and
extraordinary expenses) to the extent that total fees and expenses exceeded, on
an annualized basis, the average net assets as follows:
<TABLE>
<CAPTION>
Fiscal year ended Commencement of Operations
October 31, 1996 through October 31, 1995
------------------ ---------------------------
<S> <C> <C>
Short-Term Government Fund/(1)/ 0.68% 0.68%
Bond Fund/(1)/ 0.88% 0.88%
Balanced Fund/(1)/ 1.13% 1.13%
Growth Fund/(1)/ 1.13% 1.13%
International Equity Fund/(1)/ 1.72% 1.72%
National Tax-Free Bond Fund/(2)/ 0.85% 0.85%
Missouri Tax-Free Bond Fund/(2)/ 0.65% 0.65%
</TABLE>
___________________
/(1)/ Commenced investment operations on December 12, 1994.
/(2)/ Commenced investment operations on February 21, 1995.
The effect of these reimbursements during the period was to reduce expenses as
follows:
<TABLE>
<CAPTION> Commencement of
Fiscal year ended Operations
October 31, 1996 through October 31, 1995
----------------- ------------------------
<S> <C> <C>
Short-Term Government Fund/(1)/ $63,161 $ 40,597
Bond Fund/(1)/ -- 305
Balanced Fund/(1)/ 43,556 24,555
Growth Fund /(1)/ -- --
International Equity Fund/(1)/ 96,415 112,535
National Tax-Free Bond Fund/(2)/ 95,722 50,284
Missouri Tax-Free Bond Fund/(2)/ 89,907 49,431
</TABLE>
___________________
/(1)/ Commenced investment operations on December 12, 1994.
/(2)/ Commenced investment operations on February 21, 1995.
48
<PAGE>
The Advisor's own investment portfolio may include bank certificates
of deposit, bankers' acceptances, and corporate debt obligations, any of which
may also be purchased by The Commerce Funds. Joint purchase of investments for
The Commerce Funds and for the Advisor's own investment portfolio will not be
made. The Advisor's Commercial Banking Department may have deposit, loan and
other commercial banking relationships with issuers of securities purchased by
The Commerce Funds, including outstanding loans to such issuers which may be
repaid in whole or in part with the proceeds of securities purchased by The
Commerce Funds.
The Advisor has agreed that it will reimburse The Commerce Funds such
portions of its fees as may be required to satisfy any expense limitations
imposed by state securities laws or other applicable laws. Restrictive
limitations may be imposed on The Commerce Funds as a result of changes in
current state laws and regulations in those states 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
49
<PAGE>
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 of the International Equity Fund.
For the fiscal year ended October 31, 1996 and for the period December 12, 1994
(commencement of operations) through October 31, 1995, the Advisor paid the Sub-
Advisor sub-advisory fees of $259,923 and $77,144, respectively.
Under the Sub Advisory Agreement, Price Fleming provides the
International Equity Fund with investment advisory services. Specifically,
Price-Fleming is responsible for supervising and directing the investments of
the Fund in accordance with the Fund's investment objective, policies and
restrictions as provided in the Prospectus and this Statement of Additional
Information. Price-Fleming is also responsible for effecting all security
transactions on behalf of the Fund, including the negotiation of commissions and
the allocation of principal business and portfolio brokerage.
The Sub-Advisory Agreement also provides that Price-Fleming, its
directors, officers or employees will only be liable to the Fund for losses
resulting from bad faith, willful misconduct or gross negligence for losses
resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services.
Under the Sub-Advisory Agreement, Price-Fleming is permitted to
utilize the services or facilities of others to provide it or the Funds with
statistical and other factual information, advice regarding economic factors and
trends, advice as to occasional transactions in specific securities, and such
other information, advice or assistance as Price-Fleming may deem necessary,
appropriate, or convenient for the discharge of its obligations under the Sub-
Advisory Agreement or otherwise helpful to the Funds.
Price-Fleming has entered into separate letters of agreement with
Fleming Investment Management Limited ("FIM") and Jardine Fleming Investment
Holdings Limited ("JFIH"), wherein FIM and JFIH have agreed to render investment
research and administrative support to Price-Fleming. 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.
50
<PAGE>
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 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.
51
<PAGE>
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 pursuant to the Shareowner Administrative Services Plan (the
"Services Plan"). The Servicing Agreements provide that the Service
Organizations will render shareowner administrative support services to their
customers who are the beneficial owners of Institutional Shares of the Short-
Term Government, Bond, Balanced, Growth, Growth and Income, MidCap and
International Equity Funds and Shares of the National Tax-Free Bond and Missouri
Tax-Free Bond Funds in consideration for a Fund's payment of up to 0.25% (on an
annualized basis) of the average daily net asset value of the shares of the Fund
beneficially owned by such customers and held by the Service Organizations. At
The Commerce 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 in Institutional Shares; (iii) arranging
for bank wires; (iv) responding to customer inquiries concerning their
investments in shares; (v) providing subaccounting with respect to shares
beneficially owned by customers or the information necessary for such
subaccounting; (vi) if required by law, forwarding shareowner communications;
(vii) processing share exchange and redemption requests from customers; (viii)
assisting customers in changing dividend options, account designations and
addresses; (ix) establishing and maintaining accounts and records relating to
customers that invest in shares; (x) responding to customer inquiries relating
to the services performed by the Service Organization; and (xi) other similar
services requested by the Commerce Funds. Banks acting as Service Organizations
are prohibited from engaging in any activity primarily intended to result in the
sale of Fund shares. However, Service Organizations other than banks may be
requested to provide marketing assistance (e.g., forwarding sales literature and
advertising to their customers) in connection with the distribution of Fund
shares. For the fiscal year ended October 31, 1996, $62,300 in fees were accrued
under the Services Plan.
Payments made out of or charged against the assets of a particular
class of shares of a particular Fund must be in payment for expenses incurred on
behalf of that class.
52
<PAGE>
The Services Plan is subject to annual reapproval by a majority of the
Trust's Board of Trustees, including a majority of the Non-Interested Plan
Trustees and is terminable without penalty at any time with respect to any Fund
by a vote of a majority of the Non-Interested Plan Trustees or by vote of the
holders of a majority of the outstanding shares of each Class of the Fund
involved. Any agreement entered into pursuant to the Services Plan with a
Service Organization is terminable with respect to any Fund without penalty, at
any time, by vote of a majority of the Non-Interested Plan Trustees, by vote of
the holders of a majority of the outstanding shares of each Class of such Fund,
or by the Service Organizations. Each agreement will also terminate
automatically in the event of its assignment.
The Trust's Board of Trustees has concluded that there is a reasonable
likelihood that the Services Plan will benefit the Funds and their shareholders.
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, 1/133rd of 1% of the next one billion of such assets
and 1/200th of 1% of such assets in excess of two billion based on the aggregate
average daily net assets of the Funds, plus a transaction charge for certain
transactions and out-of-pocket expenses.
For the fiscal year ended October 31, 1996 and for the period from the
respective commencements 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:
53
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended Commencement of
Operations
October 31, 1996 through October 31, 1995
---------------- ------------------------
<S> <C> <C>
Short-Term Government Fund /(1)/ $ 38,372 $ 24,500
Bond Fund /(1)/ 43,619 26,600
Balanced Fund /(1)/ 58,181 31,900
Growth and Income Fund /(2)/ N/A N/A
Growth Fund /(1)/ 44,699 29,400
MidCap Fund /(1)/ 50,517 31,500
International Equity Fund /(1)/ 278,118 146,000
National Tax-Free Bond Fund /(3)/ 42,777 20,600
Missouri Tax-Free Bond Fund /(3)/ 38,790 19,900
-------- --------
</TABLE>
/ (1)/ Commenced investment operations on December 12, 1994.
/ (2)/ Not operational for the periods indicated.
/ (3)/ 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 year ended October 31, 1996 and for the period from the
respective commencements of operations through October 31, 1995, the fees paid
by the Funds for transfer agency services were as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended Commencement of
Operations
October 31, 1996 through October 31, 1995
----------------- ------------------------
<S> <C> <C>
Short-Term Government Fund /(1)/ $36,910 $16,900
Bond Fund /(1)/ 50,108 20,900
Balanced Fund /(1)/ 42,501 14,500
Growth and Income Fund /(2)/ N/A N/A
Growth Fund /(1)/ 76,258 23,300
MidCap Fund /(1)/ 63,422 18,200
International Equity Fund /(1)/ 39,159 16,400
</TABLE>
54
<PAGE>
<TABLE>
<S> <C> <C>
National Tax-Free Bond Fund /(3)/ 27,419 11,400
Missouri Tax-Free Bond Fund /(3)/ 26,011 12,200
------- -------
</TABLE>
/ (1)/ Commenced investment operations on December 12, 1994.
/ (2)/ Not operational for the periods indicated.
/ (3)/ Commenced investment operations on February 21, 1995.
DISTRIBUTOR
The Commerce Funds' shares are offered on a continuous basis through
Goldman Sachs & Co., which acts under the Distribution Agreement as Distributor
for The Commerce Funds. Goldman, Sachs & Co. may receive a portion of the sales
load imposed on the sale of shares of the Funds and has advised The Commerce
Funds that it has retained approximately $31,000 and $19,000 for the fiscal year
ended October 31, 1996 and for the period from the respective commencements of
operations through October 31, 1995, respectively.
55
<PAGE>
ADMINISTRATOR
Information about GSAM and its duties and compensation as
Administrator is contained in the Prospectuses. For the fiscal year ended
October 31, 1996 and for the period from commencement of operations through
October 31, 1995, the fees paid by the Funds for administration services were as
follows:
<TABLE>
<CAPTION>
Fiscal Year Ended Commencement of Operations
October 31, 1996 through October 31, 1995
----------------- --------------------------
<S> <C> <C>
Short-Term Government Fund /(1)/ $ 41,015 $ 23,546
Bond Fund /(1)/ 180,227 115,823
Balanced Fund /(1)/ 87,695 54,291
Growth and Income Fund /(2)/ N/A N/A
Growth Fund /(1)/ 252,415 159,840
MidCap Fund /(1)/ 90,731 33,231
International Equity Fund /(1)/ 57,118 15,429
National Tax-Free Bond Fund /(3)/ 20,622 7,212
Missouri Tax-Free Bond Fund /(3)/ 18,355 5,826
-------- --------
</TABLE>
/ (1)/ Commenced investment operations on December 12, 1994.
/ (2)/ Not operational for the periods indicated.
/ (3)/ 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 LLP, (of which Mr. McConnel, Secretary of The
Commerce Funds, is a partner), 1345 Chestnut Street, Philadelphia, Pennsylvania
19107-3496, are counsel to The Commerce Funds.
ADDITIONAL INFORMATION ON PERFORMANCE
From time to time, yield and total return of the Funds for various
periods may be quoted in advertisements, 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
56
<PAGE>
share earned during the period may be different than that determined for
accounting purposes and is based on the average daily number of shares
outstanding during the period entitled to receive dividends and includes
dividends and interest earned during the period minus expenses accrued for the
period, net of reimbursements. This calculation can be expressed as follows:
Yield = 2 [(a-b + 1]To the 6th power - 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
57
<PAGE>
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.
The Commerce Funds do not calculate a 30-day yield for the Balanced,
Growth and Income, Growth, MidCap and International Equity Funds. Based on the
foregoing calculations, for the 30 day period ended April 30, 1997, 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 5.82% N/A
Government Fund
Bond Fund 6.28% N/A
National Tax-Free 3.95% N/A
Bond Fund
Missouri Tax-Free 4.20% N/A
Bond Fund
</TABLE>
The yields presented in the foregoing Table are based on the yields of
Institutional Shares of the Short-Term Government and Bond Funds and Shares of
the National Tax-Free Bond and Missouri Tax-Free Bond Funds during the period
indicated, as adjusted to reflect the effect of the maximum sales charge of
2.00% on purchases of Institutional Shares of the Short-Term Government Fund and
3.50% on purchases of Institutional Shares of the Bond Fund and Shares of the
National Tax-Free Bond and Missouri Tax-Free Bond Funds. The yields reflected
above do not include the maximum payments under the Shareholder Administrative
Services Plan applicable to Institutional Shares and Shares. In addition, the
yield calculations do not include fees that may be imposed by institutions on
their customers. If the foregoing expenses and fees had been included in the
yields reported above, performance of these Funds would have been lower.
58
<PAGE>
The Distribution Rate for a specified period is calculated by dividing
the total distribution per unit by the maximum offering price or net asset value
on the last day of the period and then annualizing such amount. For the 30 day
period ended April 30, 1997, 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 Rate Assuming No 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 N/A N/A 6.10% N/A
Government
Fund
Bond Fund N/A N/A 6.39% N/A
National Tax- N/A N/A 4.06% N/A
Free Bond Fund
Missouri Tax- N/A N/A 4.31% N/A
Free Bond Fund
</TABLE>
The Distribution Rates presented in the foregoing Table are based on
Distribution Rates of Institutional Shares of the Short-Term Government and Bond
Funds and Shares of the National Tax-Free Bond and Missouri Tax-Free Bond Funds
during the periods indicated, as adjusted to reflect the effect of the maximum
sales charge of 2.00% on purchases of Institutional Shares of the Short-Term
Government Fund and 3.50% on purchases of Institutional Shares of the Bond Fund
and Shares of the National Tax-Free Bond and Missouri Tax-Free Bond Funds. The
Distribution Rates reflected above do not include the maximum payments under the
Shareholder Administrative Services Plan applicable to Institutional Shares and
Shares. The Distribution Rates also do not include fees that may be imposed by
institutions on their customers. If the foregoing expenses and fees had been
included in the Distribution Rates reported above, performance of these Funds
would have been lower.
A tax-exempt Fund's "tax-equivalent" yield is computed as follows:
(a) by dividing the portion of the Fund's yield (calculated as above) that is
exempt from both federal and state income taxes by one minus a stated combined
federal and state income tax rate; (b) dividing the portion of the Fund's yield
(calculated as above) that is exempt from federal income tax by one minus a
stated federal income tax rate; and (c) adding the quotient to that portion, if
any, of the Fund's yield that is not exempt from federal income tax.
The tax-equivalent yields for the 30-day period ended October 31, 1996
for the National Tax-Free Bond Fund and Missouri Tax-Free Bond Fund, with and
without fee
59
<PAGE>
waivers (assuming a 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 6.32% 5.67%
Bond Fund
Missouri Tax-Free 7.02% 6.08%
Bond Fund
</TABLE>
The tax-equivalent yields in the foregoing Table are based on the tax-
equivalent yields of Shares of the National Tax-Free Bond and Missouri Tax-Free
Bond Funds during the period indicated, as adjusted to reflect the effect of the
maximum sales charge on purchases of Shares of such Funds of 3.50%. The tax-
equivalent yields reflected above do not include the maximum payments under the
Shareholder Administrative Services Plan applicable to the Shares. In addition,
the tax-equivalent yield calculations do not include fees that may be imposed by
institutions on their customers. If the foregoing expenses and fees had been
included in the tax-equivalent yields reported above, performance of these Funds
would have been lower.
Total Return Calculations. Each Fund computes its "average annual
-------------------------
total return" by determining the average annual compounded rates of return
during specified periods that equate the initial amount invested to the ending
redeemable value of such investment. This is done by dividing the ending
redeemable value of a hypothetical $1,000 initial payment by $1,000 and raising
the quotient to a power equal to one divided by the number of years (or
fractional portion thereof) covered by the computation and subtracting one from
the result. This calculation can be expressed as follows:
T = [ERV(/1/To the nth power) - 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.
60
<PAGE>
n = period covered by the computation, expressed in terms
of years.
The Funds compute their "aggregate total return" by determining the
aggregate rates of return during specified periods that likewise equate the
initial amount invested to the ending redeemable value of such investment. The
formula for calculating aggregate total return is as follows:
T = (ERV - 1
---
P)
The calculations of average annual total return and aggregate total
return assume the reinvestment of all dividends and capital gain distributions
on the reinvestment 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.
61
<PAGE>
Based on the foregoing calculations, the average annual 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
------------------ ----------------- ------------------ ---------------------
<CAPTION>
Average Annual Total Returns since inception through April 30, 1997.
<S> <C> <C> <C> <C>
Short-Term 6.37% N/A 7.28% N/A
Government
Fund
Bond Fund 7.49% N/A 9.10% N/A
Balanced Fund 17.42% N/A 19.18% N/A
Growth and (3.97)%/*/ N/A (.50)%/*/ N/A
Income Fund/(1)/
Growth Fund 28.97% N/A 30.90% N/A
MidCap Fund 16.84% N/A 18.59% N/A
International 7.81% N/A 9.42% N/A
Equity Fund
</TABLE>
- --------------------------------
/(1)/ Commenced operations March 3, 1997.
/ */ Aggregate total return.
62
<PAGE>
<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>
</TABLE>
Average Annual Return for the one-year period ended April 30, 1997.
<TABLE>
<S> <C> <C> <C> <C>
Short-Term 3.28% N/A 5.37% N/A
Government
Fund
Bond Fund 2.79% N/A 6.51% N/A
Balanced Fund 7.86% N/A 11.77% N/A
Growth and N/A/*/ N/A N/A N/A
Income Fund/(1)/
Growth Fund 18.90% N/A 23.20% N/A
MidCap Fund (-9.83)% N/A (-6.57)% N/A
International 2.56% N/A 6.26% N/A
Equity Fund
</TABLE>
(1) Commenced operations March 3, 1997.
63
<PAGE>
<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>
</TABLE>
Average Annual Total Returns for the fiscal year ended October 31, 1996:
<TABLE>
<S> <C> <C> <C> <C>
Short-Term 2.95% 2.51% 5.02% 4.57%
Government
Fund
Bond Fund 1.06% N/A 4.71% N/A
Balanced Fund 10.46% 10.11% 14.45% 14.09%
Growth and N/A N/A N/A N/A
Income Fund/(2)/
Growth Fund 19.10% N/A 23.43% N/A
MidCap Fund 9.80% N/A 13.78% N/A
International 9.28% 8.25% 13.25% 12.19%
Equity Fund
National Tax- (.01)% (.71)% 3.60% 2.87%
Free Bond Fund
Missouri Tax- (.20)% (1.16)% 3.43% 2.44%
Free Bond Fund
</TABLE>
/(2)/ Not operational during the period indicated.
64
<PAGE>
<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>
</TABLE>
Average Annual Total Returns since inception through the fiscal year ended
October 31, 1996:
<TABLE>
<S> <C> <C> <C> <C>
Short-Term 7.15% 6.68% 8.31% 7.84%
Government
Fund/(1)/
Bond Fund/(1)/ 8.58% N/A 10.64% N/A
Balanced Fund/(1)/ 19.20% 18.92% 21.46% 21.18%
Growth and N/A N/A N/A N/A
Income Fund/(2)/
Growth Fund/(1)/ 30.15% N/A 32.61% N/A
MidCap Fund/(1)/ 25.84% N/A 28.22% N/A
International 6.89% 5.51% 8.91% 7.51%
Equity Fund/(1)/
National Tax- 3.53% 2.66% 5.72% 4.83%
Free Bond Fund/(3)/
Missouri Tax- 3.07% 1.88% 5.25% 4.03%
Free Bond Fund/(3)/
</TABLE>
----------------------
/(1)/ Commenced investment operations on December 12, 1994.
/(2)/ Not operational during the period indicated.
/(3)/ Commenced investment operations on February 21, 1995.
Based on the foregoing calculations, the aggregate total returns for
the Funds were as follows:
65
<PAGE>
<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>
</TABLE>
Aggregate total returns for the period from commencement of operations through
April 30, 1997:
<TABLE>
<S> <C> <C> <C> <C>
Short-Term 15.87% N/A 18.25% N/A
Government
Fund
Bond Fund 18.81% N/A 23.10% N/A
Balanced Fund 46.70% N/A 52.00% N/A
Growth and (3.97)% N/A (0.50)% N/A
Income Fund/(1)/
Growth Fund 83.52% N/A 90.14% N/A
MidCap Fund 44.99% N/A 50.22% N/A
International 19.65% N/A 23.97% N/A
Equity Fund
</TABLE>
____________________
/(1)/ Commenced operations on March 3, 1997.
66
<PAGE>
<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>
</TABLE>
Aggregate total returns for the period from commencement of operations through
October 31, 1996:
<TABLE>
<S> <C> <C> <C> <C>
Short-Term 13.95% 13.01% 16.29% 15.33%
Government
Fund
Bond Fund/(1)/ 16.84% N/A 21.06% N/A
Balanced Fund/(1)/ 39.38% 38.77% 44.42% 43.78%
Growth and N/A N/A N/A N/A
Income Fund/(2)/
Growth Fund/(1)/ 64.57% N/A 70.51% N/A
MidCap Fund/(1)/ 54.41% N/A 59.99% N/A
International 13.42% 10.68% 17.52% 14.68%
Equity Fund/(1)/
National Tax- 6.06% 4.56% 9.89% 8.33%
Free Bond Fund/(3)/
Missouri Tax- 5.27% 3.20% 9.07% 6.93%
Free Bond Fund/(3)/
</TABLE>
____________________
/(1)/ Commenced investment operations on December 12, 1994.
/(2)/ Not operational during the periods indicated.
/(3)/ Commenced investment operations on February 21, 1995.
The average annual total return and aggregate total return information
presented for the Funds in the foregoing Tables is based on average annual total
return and aggregate total return, respectively, of Institutional Shares of the
Short-Term Government, Bond, Balanced, Growth, MidCap and International Equity
Funds and Shares of the National Tax-Free Bond and Missouri Tax-Free Bond Funds
during the periods indicated, as adjusted to reflect the effect of the maximum
sales charge of 2.00% on purchases of Institutional Shares of the Short-Term
Government Fund and 3.50% on purchases of Institutional Shares of the Bond,
Balanced, Growth, MidCap and International Equity Funds and Shares of the
National Tax-Free Bond and Missouri Tax-Free Bond Funds. The average annual
total returns and aggregate total returns reflected above do not include the
maximum payments under the Shareholder Administrative Services Plan applicable
to Institutional Shares and
67
<PAGE>
Shares. The average annual total returns and aggregate total returns also do not
include fees that may be imposed by institutions upon their customers. If the
foregoing expenses and fees had been included in the average annual total
returns and aggregate total returns reported above, performance of these Funds
would have been lower.
The Funds may also from time to time include in advertisements, sales
literature, communications to shareowners and other materials ("Literature") a
total return figure in order to compare more accurately its performance with
other measures of investment return. For example, in comparing a Fund's total
return with data published by Lipper Analytical Services, Inc., CDA Investment
Technologies, Inc. or Weisenberger Investment Company Service, or with the
performance of an index, the Fund may calculate its total return for the period
of time specified in the advertisement or communication by assuming the
investment of $10,000 in shares and assuming the value on the reinvestment date.
Percentage increases are determined by subtracting the initial value of the
investment from the ending value and by dividing the remainder by the beginning
value. The Fund does not, for these purposes, deduct from the initial value
invested any amount representing sales charges. The Fund will, however,
disclose the maximum sales charge and will also disclose that the performance
data do not reflect sales charges and that inclusion of sale charges would
reduce the performance quoted.
The Funds may also from time to time include discussions or
illustrations of the effects of compounding in Literature. "Compounding" refers
to the fact that, if dividends or other distributions on a Fund investment are
reinvested by being paid in additional Fund shares, any future income or capital
appreciation of the Fund would increase the value, not only of the original Fund
investment, but also of the additional Fund shares received through
reinvestment. As a result, the value of the Fund investment would increase more
quickly than if dividends or other distributions had been paid in cash.
In addition, the Funds may also include in Literature discussions
and/or illustrations of the potential investment goals of a prospective
investor, investment management strategies, techniques, policies or investment
suitability of the Fund (such as value investing, market timing, dollar cost
averaging, asset allocation, constant ratio transfer, automatic accounting
rebalancing, the advantages and disadvantages of investing in tax-deferred and
taxable investments), economic conditions, the relationship between sectors of
the economy and the economy as a whole, various securities markets, the effects
of inflation and historical performance of various asset classes, including but
not limited to, stocks, bonds and Treasury securities. From time to time,
Literature may summarize the substance of information contained in 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,
68
<PAGE>
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 September 5, 1997, the Advisor held of record 95% of the
outstanding shares in the Short-Term Government Fund; 94% of the outstanding
shares in the Bond Fund; 73% of the outstanding shares in the Balanced Fund; 82%
of the outstanding shares in the Growth Fund; 73% of the outstanding shares in
the MidCap Fund; 96% of the outstanding shares in the International Equity Fund;
98% of the outstanding shares in the Growth & Income Fund; 99% of the
outstanding Shares in the National Tax-Free Bond Fund; and 89% of the
outstanding shares in the Missouri Tax-Free Bond Fund, as fiduciary or agent on
behalf of its customers. As of the same date, the Advisor did not hold any of
the outstanding Institutional Shares of the Funds. Under the 1940 Act, the
Advisor may be deemed to be a controlling person of The Commerce Fund.
As of the same date, no shareholder owned of record 5% or more of the
Bond Fund's outstanding Institutional Shares; the Growth and Income Fund's
outstanding Institutional Shares or the Short-Term Government Fund's outstanding
Institutional Shares.
As of the same date, the following shareholders owned of record 5% or
more of the Balanced Fund's outstanding Institutional Shares as fiduciary or
agent on behalf of their customers: CarQuest 401(k) Plan, c/o Commerce Bank,
922 Walnut Street, Kansas City, MO, 5.9%; Sunnen Employees Profit Sharing Plan,
c/o Commerce Bank, 8000 Forsyth Blvd., Clayton, MO, 14.0%; Blackwell Sanders
Retirement Plan, c/o Commerce Bank, 922 Walnut Street, Kansas City, MO, 5.3% and
GEHA Pension Plan, c/o Commerce Bank, 922 Walnut Street, Kansas City, MO, 12.3%.
As of the same date, the following shareholder owned of record 5% or
more of the Growth Fund's outstanding Institutional Shares as fiduciary or agent
on behalf of their customers: Sunnen Employees Profit Sharing Plan, c/o
Commerce Bank, 8000 Forsyth Blvd., Clayton, MO, 10.1%.
As of the same date, the following shareholder owned of record 5% or
more of the International Equity Fund's outstanding Institutional Shares as
fiduciary or agent
69
<PAGE>
on behalf of their customers: Commerce Retirement Plan, c/o Commerce Bank, 922
Walnut Street, Kansas City, MO, 6.8%.
As of the same date, the following shareholders owned of record 5% or
more of the MidCap Fund's outstanding Institutional Shares as fiduciary or agent
on behalf of their customers: Enterprise Leasing Retirement Plan, c/o Commerce
Bank, 8000 Forsyth Blvd., Clayton, MO, 7.3%; and Sunnen Employees Profit Sharing
Plan, c/o Commerce Bank, 922 Walnut Street, Kansas City, MO, 7.0%.
As of the same date, the following shareholder 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 Pierson Trust, c/o Commerce Bank, 922
Walnut Street, Kansas City, MO, 6.6%.
As of the same date, the following shareholder 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: Ronald D. Limpus Trust, c/o Commerce Bank,
922 Walnut Street, Kansas City, MO, 6.8%.
On the basis of information received from these shareholders, the Fund
believes that substantially all of the shares owned of record were also
beneficially owned by these shareholders because they possessed or shared voting
or investment power with respect to such shares on behalf of their underlying
accounts.
As of September 5, 1997, no person owned of record 5% or more of the
Balanced Fund's outstanding Institutional Shares.
As of the same date, the following persons owned 5% or more of the
Bond Fund's outstanding Institutional Shares: James C. and Barbara F. Norris,
P.O. Box 204, Bixby, MO, 10.7%; Donald D. Dixon and Wilma I. Dixon, 34 Flora
Drive, Festus, MO, 5.6%; and Fred J. Harvey, 202 Massot Road, Festus, MO, 5.5%.
As of the same date, the following persons owned 5% or more of the
Growth and Income Fund's outstanding Institutional Shares: Deborah J. Groves,
1568 Parksite Drive, Cape Girardeau, MO, 12.8%; and Jane M. Bodine Rev. Living
Trust, 3016 Aspen, Cap Girardeau, MO, 7.4%.
As of the same date, the following person owned 5% or more of the
Short-Term Government Fund's outstanding Institutional Shares: Wilma J.
Buchanan, 1699 Irish Sea, High Ridge, MO, 6.8%.
As of the same date, the following persons owned 5% or more of the
Growth Fund's outstanding Services Shares: Barbara Ann Tester, 5246 Stirling
Way, Springfield, MO, 5.7%; Donald H. Lenauer and Mary J. Lenauer, 1005
Commercial Drive, Owensville, MO, 5.9%; and Joseph J. Miceli, 14897 Clayton
Road, Chesterfield, MO, 7.0%.
70
<PAGE>
As of the same date, the following persons owned 5% or more of the
International Equity Fund's outstanding Institutional Shares: Carol A. Liesman,
3 N 260 W. Mary Lane, St. Charles, IL, 5.4%; Judith A. Voepel Rev. Trust, 1724
Lakeshore Drive, Cape Girardeau, MO, 5.8%; Chris and Robin Lenauer, Route 2 Box
286D, Owensville, MO, 9.4%; Franklin E. Liesman, 3 N 260 W. Mary Lane, St.
Charles, IL, 6.3%; and Janice M. and Tod Terry Huber, 6801 N. Shadywood Dr.,
Ozark, MO, 6.5%.
As of the same date, the following persons owned 5% or more of the
MidCap Fund's outstanding Institutional Shares: John H. Steele, II, 3621 E.
Fruitwood Ln, Springfield, MO, 8.4%; and John D. Muller, 4739 Belleview, Kansas
City, MO, 37.2%.
As used in the Statement of Additional Information and in the
Prospectuses of the same date, "assets belonging to a particular series of a
Fund" means the consideration received by The Commerce Funds upon the issuance
or sale of shares in that particular series of the Fund, together with all
income, earnings, profits and proceeds derived from the investment thereof,
including any proceeds from the sale, exchange or liquidation of such
investments, any funds or payments derived from any reinvestments of such
proceeds, and a portion of any general assets of the Fund not belonging to a
particular series of the Fund. Assets belonging to a particular series of the
Fund are charged with the direct liabilities in respect of that particular
series of the Fund and with a share of the general liabilities of the particular
series of the Fund which are normally allocated in proportion to the relative
net asset levels of the respective series and Funds. Determinations by the
Board of Trustees as to the direct and allocable liabilities, and allocable
portion of any general assets, with respect to a particular series or Fund are
conclusive.
FINANCIAL STATEMENTS
The Commerce Funds' Annual Report with respect to the Funds for the
fiscal period ended October 31, 1996 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, 1996 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. Unaudited financial statements
for each Fund for the six months ended April 30, 1997 are attached hereto and
incorporated herein by reference into this Statement of Additional Information.
71
<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" - The highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus sign (+)
designation.
"A-2" - Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1."
"A-3" - Issues carrying this designation have 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" - Issues are regarded as having only a speculative capacity for
timely payment.
"C" - This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.
"D" - Issues are 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" - Issuers 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
A-1
<PAGE>
well established access to a range of financial markets and assured sources of
alternate liquidity.
"Prime-2" - Issuers or related supporting institutions are considered
to have a strong capacity for repayment of short-term promissory obligations.
This will normally be evidenced by many of the characteristics cited above but
to a lesser degree. Earnings trends and coverage ratios, while sound, 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" - Issuers 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" - Issuers do not fall within any of the Prime rating
categories.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff & Phelps
employs three designations, "D-1+," "D-1" and "D-1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper:
"D-1+" - Debt possesses 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.
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"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.
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" ratings.
"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:
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"TBW-1" - This designation represents Thomson BankWatch's highest
rating category and indicates a very high degree of likelihood that principal
and interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of safety
regarding timely payment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1."
"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 good 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.
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CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
- ----------------------------------------------
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
"AAA" - This designation represents the highest rating assigned by
Standard & Poor's to a debt obligation and indicates an extremely strong
capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to pay
interest and repay principal and differs from AAA issues only in small degree.
"A" - 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
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or economic conditions, it is not likely to have the capacity to pay interest
and repay principal. The "CCC" rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied "B" or "B-"
rating.
"CC" - 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
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may be other elements present which make the long-term risks appear somewhat
larger than in "Aaa" securities.
"A" - Bonds possess many favorable investment attributes and are to be
considered as upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds considered medium-grade obligations, i.e., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates some speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa" 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.
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"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of these
ratings is considered to be below investment grade. Although below investment
grade, debt rated "BB" is deemed likely to meet obligations when due. Debt
rated "B" possesses the risk that obligations will not be met when due. Debt
rated "CCC" is well below investment grade and has considerable uncertainty as
to timely payment of principal, interest or preferred dividends. Debt rated
"DD" is a defaulted debt obligation, and the rating "DP" represents preferred
stock with dividend arrearages.
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.
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<PAGE>
"BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D" - Bonds that possess
one of these ratings are considered by Fitch to be speculative investments. The
ratings "BB" to "C" represent Fitch's assessment of the likelihood of timely
payment of principal and interest in accordance with the terms of obligation for
bond issues not in default. For defaulted bonds, the rating "DDD" to "D" is an
assessment of the ultimate recovery value through reorganization or liquidation.
To provide more detailed indications of credit quality, the Fitch
ratings from and including "AA" to "C" may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major rating
categories.
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 below
"AAA" to denote relative status within major rating categories.
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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:
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"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.
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APPENDIX B
As stated in their Prospectus, the Bond, Balanced, Growth, MidCap,
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.
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.
B-3
<PAGE>
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
B-4
<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
B-5
<PAGE>
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
B-6
<PAGE>
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
B-7
<PAGE>
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.
B-8
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
SHORT-TERM GOVERNMENT FUND
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- ------------ --------- ----------- ---------------
<S> <C> <C> <C>
Collateralized Mortgage Obligations--22.3%
Federal Home Loan Mortgage Corp.
Series 180, Class G
$ 958,613 8.00% 09/15/21 $ 964,901
Federal Home Loan Mortgage Corp.
Series 1255, Class G
455,000 7.50 07/15/21 456,988
Federal Home Loan Mortgage Corp.
Series 1727, Class E
660,000 6.50 04/15/18 653,809
Federal National Mortgage Assn.
Series 1993-29, Class FA
281,000 6.50 03/25/20 274,413
Federal National Mortgage Assn.
Series 1993-130, Class H
510,000 6.30 09/25/18 497,250
Federal National Mortgage Assn.
Series 1993-139, Class KB
1,000,000 7.00 11/25/00 1,002,810
Federal National Mortgage Assn.
Series 1993-140, Class D
1,160,000 5.50 08/25/07 1,147,675
Prudential Home Mortgage Securities
Series 1993-43, Class A1
1,042,129 5.40 10/25/23 1,026,820
Residential Funding Mortgage Securities
Series 1993-S49, Class A2
1,000,000 6.00 12/25/08 982,180
Westam Mortgage Financial Corp.
Series 7, Class F
1,675,818 9.30 10/01/15 1,721,366
---------------
Total Collateralized
Mortgage Obligations
(cost $8,762,344) ........ $ 8,728,212
---------------
Mortgage-Backed Pass-Through Obligations--9.1%
Federal Home Loan Mortgage Corp.
$ 46,630 8.75% 02/01/01 $ 47,985
96,236 8.75 04/01/01 100,145
622,796 8.25 08/01/01 638,560
972,529 7.00 05/01/26 946,388
Federal National Mortgage Assn.
495,893 6.50% 02/01/12 481,636
447,085 9.00 07/01/24 469,021
Government National Mortgage Assn.
303,025 8.00 10/15/16 311,640
555,185 8.00 07/15/17 570,136
---------------
Total Mortgage-Backed
Pass-Through Obligations
(cost $3,537,325) ....... $ 3,565,511
---------------
U.S. Government Agency Obligations--52.9%
Federal Agriculture Mortgage Corp.
$ 500,000 6.69% 02/10/00 $ 501,430
Federal Farm Credit Bank
1,000,000 7.17 04/03/00 1,014,690
1,000,000 6.10 11/19/01 975,160
Federal Home Loan Bank
530,000 7.13 03/27/00 537,452
1,000,000 7.44 08/10/01 1,025,620
1,000,000 6.53 08/28/01 992,970
1,000,000 6.63 08/28/01 995,290
965,000 7.56 02/27/02 997,414
Federal Home Loan Mortgage Corp.
1,000,000 7.93 01/20/98 1,013,440
1,000,000 7.82 01/27/98 1,012,970
500,000 7.90 01/27/00 516,485
1,000,000 6.52 08/25/00 997,500
500,000 6.70 07/25/01 499,685
Federal National Mortgage Assn.
1,000,000 6.36 08/16/00 993,910
1,000,000 9.20 09/11/00 1,077,810
250,000 6.18 03/15/01 246,055
500,000 6.63 04/18/01 498,830
700,000 6.38 08/14/01 690,592
Israel Aid Series 5A
2,000,000 7.75 11/15/99 2,054,060
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
SHORT-TERM GOVERNMENT FUND--(Continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- --------------- --------- ------------ -----------
<S> <C> <C> <C>
U.S. Government Agency Obligations--Continued
Tennessee Valley Authority 1989,
Series D
$2,000,000 8.38% 10/01/99 $ 2,080,620
575,000 6.00 11/01/00 563,500
U.S. Department of Housing & Urban
Development Series 1994-A
100,000 6.44 08/01/02 97,235
U.S. Department of Housing & Urban
Development Series 1995-A
1,250,000 8.15 08/01/00 1,302,500
-----------
Total U.S. Government
Agency Obligations
(cost $20,752,777) ....... $20,685,218
-----------
Short-Term Obligations--14.0%
Federal Farm Credit Bank
$3,000,000 5.37% 05/15/97 $ 2,993,758
Federal National Mortgage Assn.
2,500,000 5.44 05/01/97 2,500,000
-----------
Total Short-Term
Obligations
(cost $5,493,758) ........ $ 5,493,758
-----------
Repurchase Agreements--2.1%
State Street Bank & Trust Company,
dated 04/30/97, repurchase price
$818,117 (U.S. Treasury Bonds:
$834,847, 8.13%, 08/15/21)
$ 818,000 5.15% 05/01/97 $ 818,000
-----------
Total Repurchase
Agreements
(cost $818,000) .......... $ 818,000
-----------
Total Investments
(cost $39,364,204/(a)/)... $39,290,699
===========
- ----------------------------------------------------------------
Federal Income Tax Information:
Gross unrealized gain for
investments in which value
exceeds cost ........................... $ 256,271
Gross unrealized loss for
investments in which cost
exceeds value .......................... (329,776)
-----------
Net unrealized loss ..................... $ (73,505)
===========
- ----------------------------------------------------------------
</TABLE>
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
/(a)/The cost stated also represents aggregate cost for income tax purposes.
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
BOND FUND
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- ------------------ ----------- ------------- ---------------
<S> <C> <C> <C>
Asset-Backed Securities--26.5%
AUTO--1.2%
NationsBank Auto Owner Trust
Series 1996-A, Class A4
$ 2,000,000 6.63% 12/15/00 $ 2,005,620
---------------
CREDIT CARD--10.8%
American Express Master Trust
Series 1994-3, Class A
$ 2,000,000 7.85% 08/15/05 $ 2,091,860
Chemical Master Credit Card Trust 1
Series 1995-3, Class A
2,000,000 6.23 04/15/05 1,943,740
Choice Credit Card Master Trust
Series 1992, Class 2B
2,000,000 7.20 04/15/99 2,019,520
Discover Card Master Trust
Series 1993-3, Class A
2,000,000 6.20 05/16/06 1,922,500
Discover Card Trust
Series 1991-F, Class B
2,000,000 8.35 11/21/00 2,043,740
MBNA Master Credit Card Trust
Series 1995-C, Class A
2,000,000 6.45 02/15/08 1,936,860
Standard Credit Card Master Trust
Series 1993-2, Class A
2,000,000 5.95 10/07/04 1,900,380
Standard Credit Card Master Trust
Series 1995-1, Class A
2,000,000 8.25 01/07/07 2,137,840
Standard Credit Card Master Trust
Series 1995-1, Class B
2,000,000 8.45 01/07/07 2,142,860
---------------
$ 18,139,300
---------------
HOME EQUITY--2.5%
Advanta Mortgage Loan Trust
Series 1994-4, Class A2
$ 4,000,000 8.92% 01/25/26 $ 4,225,160
---------------
MANUFACTURED HOUSING--12.0%
Associates Manufactured Housing
Series 1986-1, Class A5
$ 4,000,000 7.60% 03/15/27 $ 4,030,000
Green Tree Financial Corp. Series
1993-4, Class A4
2,000,000 6.60 01/15/19 1,966,860
Green Tree Financial Corp. Series
1993-4, Class A5
4,000,000 7.05 01/15/19 3,903,720
Green Tree Financial Corp. Series
1994-2, Class A4
4,000,000 7.90 05/15/19 4,138,720
Green Tree Financial Corp. Series
1996-4, Class A7
4,000,000 7.90 06/15/27 4,080,000
Green Tree Financial Corp. Series
1996-8, Class M1
2,000,000 7.85 10/15/27 2,036,240
---------------
$ 20,155,540
---------------
Total Asset-Backed Securities
(cost $43,547,427) .......... $ 44,525,620
---------------
Collateralized Mortgage Obligations--5.8%
Federal Home Loan Mortgage Corp.
Series 60, Class H
$ 7,000,000 9.00% 07/15/20 $ 6,884,010
Federal National Mortgage Assn.
Series 1993-130, Class H
1,000,000 6.30 09/25/18 975,000
PNC Mortgage Securities Corp.
Series 1996-1, Class A1
1,916,207 7.50 09/25/09 1,928,183
---------------
Total Collateralized
Mortgage Obligations
(cost $9,958,807) ........... $ 9,787,193
---------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
BOND FUND--(Continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- ------------------ ----------- ------------- ----------------
<S> <C> <C> <C>
Corporate Obligations--15.2%
FINANCIAL--11.7%
American Express Credit Corp.
$ 2,000,000 6.13% 11/15/01 $ 1,937,800
BankAmerica Corp.
2,000,000 6.88 06/01/03 1,974,800
Chemical Bank
2,000,000 6.70 08/15/08 1,888,260
Chubb Capital Corp.
2,000,000 6.00 02/01/98 1,996,740
Ford Motor Company Credit Corp.
2,000,000 6.63 06/30/03 1,949,440
General Motors Acceptance Corp.
2,000,000 6.63 10/15/05 1,909,680
Morgan Stanley Group, Inc.
2,000,000 6.75 03/04/03 1,965,600
NationsBank Corp.
1,000,000 7.75 08/15/15 1,005,260
1,000,000 7.80 09/15/16 997,470
PNC Bank N.A.
2,000,000 7.88 04/15/05 2,055,140
Smith Barney Holdings, Inc.
2,000,000 6.63 06/01/00 1,988,120
---------------
$ 19,668,310
---------------
INDUSTRIAL--2.3%
Hanson Overseas BV
$ 2,000,000 6.75% 09/15/05 $ 1,933,200
Shell Oil Co.
1,000,000 6.95 12/15/98 1,007,110
Union Pacific Railroad Corp.
1,000,000 6.44 01/15/98 1,001,070
---------------
$ 3,941,380
---------------
UTILITIES--1.2%
Duke Power Corp.
$ 1,000,000 7.37% 02/02/04 $ 1,003,460
Union Electric Co.
1,000,000 6.75% 10/15/99 $ 998,820
---------------
$ 2,002,280
---------------
Total Corporate Obligations
(cost $25,051,832) .......... $ 25,611,970
---------------
Foreign Bonds--0.6%
Hydro Quebec Note
$ 1,000,000 7.96% 12/17/01 $ 1,035,450
---------------
Total Foreign Bonds
(cost $971,660) ............... $ 1,035,450
---------------
Mortgage-Backed Pass-Through Obligations--28.9%
Federal Home Loan Mortgage Corp.
$ 2,383,543 8.50% 02/01/19 $ 2,487,442
2,716,750 8.50 03/01/21 2,835,581
11,670,350 7.00 05/01/26 11,356,652
Federal National Mortgage Assn.
1,188,820 7.19 07/01/06 1,183,061
3,859,054 7.00 07/01/09 3,837,328
991,786 6.50 02/01/12 963,272
1,683,711 6.50 07/01/14 1,619,073
1,995,813 9.00 11/01/21 2,113,765
1,318,112 9.00 02/01/25 1,398,293
Government National Mortgage Assn.
3,933,802 8.00 02/15/22 4,013,658
4,932,532 7.00 09/15/23 4,803,053
2,298,054 7.50 08/20/25 2,271,466
9,851,656 7.50 07/20/26 9,725,358
---------------
Total Mortgage-Backed
Pass-Through Obligations
(cost $47,353,228) .......... $ 48,608,002
---------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
BOND FUND--(Continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
----------- ---------- ---------- ------------
<S> <C> <C> <C>
U.S. Government Agency Obligations--1.2%
Federal Home Loan Bank
$ 1,000,000 6.32% 02/01/00 $ 993,670
Federal Home Loan Mortgage Corp.
1,000,000 6.20 04/15/03 969,840
------------
Total U.S. Government
Agency Obligations
(cost $1,863,696) ........... $ 1,963,510
------------
U.S. Treasury Obligations--15.5%
United States Treasury Bonds
$ 6,000,000 7.25% 05/15/16 $ 6,141,540
6,000,000 7.50 11/15/16 6,292,500
United States Treasury Notes
4,000,000 5.75 10/31/00 3,909,360
5,000,000 5.88 11/15/05 4,721,100
5,000,000 7.00 07/15/06 5,084,350
------------
Total U.S. Treasury
Obligations
(cost $26,571,328) .......... $ 26,148,850
------------
Short-Term Obligations--3.6%
Banc One Corp. Commercial Paper
$ 3,000,000 5.53% 05/15/97 $ 2,993,583
Merrill Lynch & Co., Inc. Commercial Paper
3,000,000 5.55 05/01/97 3,000,000
------------
Total Short-Term
Obligations
(cost $5,993,583) ........... $ 5,993,583
------------
Repurchase Agreements--1.8%
State Street Bank & Trust Company,
dated 4/30/97, repurchase price
$3,019,432 (U.S. Treasury Note:
$3,080,961, 6.38%, 04/30/99)
$ 3,019,000 5.15% 05/01/97 $ 3,019,000
------------
Total Repurchase
Agreements
(cost $3,019,000) ........... $ 3,019,000
------------
Total Investments
(cost $164,330,561/(a)/) $166,693,178
------------
- -------------------------------------------------------------------------------
Federal Income Tax Information:
Gross unrealized gain for
investments in which value
exceeds cost ................................ $ 3,792,407
Gross unrealized loss for
investments in which cost
exceeds value ............................... (1,429,790)
------------
Net unrealized gain .................... $ 2,362,617
============
</TABLE>
- -------------------------------------------------------------------------------
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
/(a)/ The cost stated also represents aggregate cost for federal income tax
purposes.
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
BALANCED FUND
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Description Value
- ----------- ------------- -------
<S> <C> <C>
Common Stocks--54.1%
AEROSPACE/DEFENSE--1.1%
9,900 Lockheed Martin Corp. $ 886,050
------------
AUTOMOTIVE PRODUCTS--1.4%
39,100 Chrysler Corp. $ 1,173,000
------------
BASIC INDUSTRIES--1.0%
11,600 Aluminum Company of America $ 810,550
------------
BIOTECHNOLOGY--0.9%
12,400 Amgen, Inc./(a)/ $ 730,050
------------
BUSINESS SERVICES--3.2%
24,600 Equifax, Inc. $ 707,250
17,000 First Data Corp. 586,500
7,600 Omnicom Group 402,800
10,000 Personnel Group of America, Inc./(a)/ 240,000
32,300 Reynolds & Reynolds Co. 670,225
------------
$ 2,606,775
------------
CHEMICAL PRODUCTS--1.3%
6,000 Du Pont (E.I.) de Nemours & Co. $ 636,750
10,500 OM Group, Inc. 292,688
5,000 Thermo Instrument Systems, Inc./(a)/ 156,875
------------
$ 1,086,313
------------
COMPUTER SERVICES/SOFTWARE--3.5%
10,000 American Management Systems, Inc./(a)/ $ 247,500
8,000 Cadence Design Systems, Inc./(a)/ 256,000
8,800 Cisco Systems, Inc./(a)/ 455,400
12,000 Cognos, Inc./(a)/ 304,500
4,100 Gateway 2000, Inc./(a)/ 224,987
7,500 McAfee Associates, Inc./(a)/ 418,125
3,500 Microsoft Corp./(a)/ 425,250
10,400 Network General Corp./(a)/ 143,000
8,800 Parametric Technology Corp./(a)/ 398,200
------------
$ 2,872,962
------------
CONSUMER GOODS--0.8%
12,400 Nike, Inc. $ 697,500
------------
DIVERSIFIED MANUFACTURING--4.8%
11,400 Allied Signal, Inc. $ 823,650
12,800 Dover Corp. 678,400
10,000 DT Industries, Inc. 260,000
28,000 Federal Signal Corp. 682,500
15,900 Illinois Tool Works, Inc. 1,452,863
------------
$ 3,897,413
------------
ELECTRICAL SERVICES--0.8%
17,500 Union Electric Co. $ 623,438
------------
ELECTRONICS & OTHER ELECTRICAL EQUIPMENT--8.6%
20,600 Adaptec, Inc./(a)/ $ 762,200
13,200 ADC Telecommunications, Inc./(a)/ 344,850
14,000 Belden, Inc. 430,500
5,000 Emerson Electric Co. 253,750
13,900 General Electric Co. 1,541,162
6,300 Intel Corp. 964,688
11,400 Linear Technology Corp. 572,850
10,000 Logicon, Inc./(b)/ 397,500
12,000 Symbol Technologies, Inc. 388,500
7,000 Texas Instruments, Inc. 624,750
14,800 Xilinx, Inc./(a)/ 725,200
------------
$ 7,005,950
------------
FINANCIAL SERVICES--8.0%
8,100 BankAmerica Corp. $ 946,687
14,000 Fair Isaac & Co., Inc. 442,750
25,400 Federal National Mortgage Assn. 1,044,575
14,550 Franklin Resources, Inc. 860,269
17,400 Green Tree Financial Corp. 515,475
5,400 Morgan Stanley Group, Inc. 340,875
15,400 Norwest Corp. 768,075
26,775 Synovus Financial Corp. 649,294
18,000 Travelers Group, Inc. 996,750
------------
$ 6,564,750
------------
HEALTH & MEDICAL SERVICES--3.9%
9,100 Abbott Laboratories $ 555,100
24,000 Ballard Medical Products 456,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
BALANCED FUND--(Continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Description Value
- ----------- ------------- -------
<S> <C> <C>
Common Stocks--Continued
HEALTH & MEDICAL SERVICES--CONTINUED
9,400 Dentsply International, Inc. $ 465,300
5,000 Guidant Corp. 341,250
16,100 Johnson & Johnson 986,125
3,600 McKesson Corp. 260,550
8,000 Medic Computer Systems, Inc./(a)/ 125,000
------------
$ 3,189,325
------------
HOUSEHOLD PRODUCTS--0.4%
3,500 Gillette Co. $ 297,500
------------
INDUSTRIAL MACHINERY--2.4%
14,100 Caterpillar, Inc. $ 1,254,900
7,500 Lindsay Manufacturing Co. 213,750
10,000 Sealed Air Corp./(a)/ 462,500
------------
$ 1,931,150
------------
INSURANCE SERVICES--4.1%
10,500 Allied Group, Inc. $ 388,500
10,000 American Bankers Insurance Group, Inc. 528,750
20,800 Conseco, Inc. 860,600
8,500 Orion Capital Corp. 532,313
5,000 Protective Life Corp./(b)/ 221,250
17,600 SunAmerica, Inc. 809,600
------------
$ 3,341,013
------------
OIL & GAS--3.6%
10,000 BJ Services Co./(a)/ $ 471,250
11,400 Mobil Corp. 1,482,000
5,400 Royal Dutch Petroleum ADR 973,350
------------
$ 2,926,600
------------
PHARMACEUTICALS--1.1%
10,100 Merck & Co. $ 914,050
------------
RETAIL TRADE--2.2%
20,025 Consolidated Stores Corp./(a)/ $ 801,000
20,000 Gap, Inc. 637,500
7,900 Walgreen Co. 363,400
------------
$ 1,801,900
------------
TEXTILES--0.3%
8,000 G & K Services, Inc. $ 232,000
------------
TRANSPORTATION/STORAGE--0.7%
16,000 Air Express International Corp. $ 548,000
------------
Total Common Stocks
(cost $33,613,919) ............ $44,136,289
------------
<CAPTION>
Principal Interest Maturity
Amount Rate Date
- ----------- ------------- ----------
<S> <C> <C> <C>
Asset-Backed Securities--9.3%
AUTO--0.6%
NationsBank Auto Owner Trust
Series 1996-A, Class A4
$ 500,000 6.63% 12/15/00 $ 501,405
------------
CREDIT CARD--5.0%
American Express Master Trust
Series 1994-3, Class A
$ 500,000 7.85% 08/15/05 $ 522,965
Choice Credit Card Master Trust
Series 1992, Class 2B
500,000 7.20 04/15/99 504,880
Discover Card Master Trust
Series 1993-3, Class A
500,000 6.20 05/16/06 480,625
J.C. Penney Master Credit Card Trust
Series B, Class A
500,000 8.95 10/15/01 524,350
MBNA Master Credit Card Trust
Series 1995-C, Class A
500,000 6.45 02/15/08 484,215
Standard Credit Card Master Trust
Series 1991-6, Class B
500,000 8.35 01/07/99 512,030
Standard Credit Card Master Trust
Series 1993-2, Class A
500,000 5.95 10/07/04 475,095
Standard Credit Card Master Trust
Series 1995-1, Class B
500,000 8.45 01/07/07 535,715
------------
$ 4,039,875
------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
BALANCED FUND--(Continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- ----------- ------------- ---------- -------
<S> <C> <C> <C>
Asset-Backed Securities--Continued
HOME EQUITY--0.6%
Advanta Mortgage Loan Trust Series
1994-4, Class A2
$ 500,000 8.92% 01/25/26 $ 528,145
------------
MANUFACTURED HOUSING--3.1%
Green Tree Financial Corp. Series
1993-4, Class A4
$ 500,000 6.60% 01/15/19 $ 491,715
Green Tree Financial Corp. Series
1993-4, Class A5
500,000 7.05 01/15/19 487,965
Green Tree Financial Corp. Series
1994-2, Class A4
500,000 7.90 05/15/19 517,340
Green Tree Financial Corp. Series
1996-4, Class A7
500,000 7.90 06/15/27 510,000
Green Tree Financial Corp. Series
1996-5, Class A6
500,000 7.75 07/15/27 515,155
------------
$ 2,522,175
------------
Total Asset-Backed Securities
(cost $7,447,283) ................ $ 7,591,600
------------
Collateralized Mortgage Obligations--2.4%
Federal Home Loan Mortgage Corp.
Series 60, Class H
$1,000,000 9.00% 07/15/20 $ 983,430
Federal National Mortgage Assn.
Series 1993-130, Class H
500,000 6.30 09/25/18 487,500
Residential Funding Mortgage Securities
Corp. Series 1995, Class A4
500,000 8.00 04/25/10 503,905
------------
Total Collateralized Mortgage
Obligations (cost $2,011,641) .... $ 1,974,835
------------
Corporate Obligations--6.7%
FINANCIAL--4.9%
BankAmerica Corp.
$ 500,000 6.88% 06/01/03 $ 493,700
Chemical Bank
500,000 6.70 08/15/08 472,065
Ford Motor Company Credit Corp.
500,000 6.63 06/30/03 487,360
General Electric Capital Corp.
500,000 8.30 09/20/09 549,680
Morgan Stanley Group, Inc.
500,000 6.75 03/04/03 491,400
NationsBank Corp.
500,000 7.80 09/15/16 498,735
PNC Bank N.A.
500,000 7.88 04/15/05 513,785
Smith Barney Holdings, Inc.
500,000 6.63 06/01/00 497,030
------------
$ 4,003,755
------------
INDUSTRIAL--1.2%
Gannett, Inc.
$ 500,000 5.25% 03/01/98 $ 496,350
Hanson Overseas BV
500,000 6.75 09/15/05 483,300
------------
$ 979,650
------------
UTILITIES--0.6%
AT& T Corp.
$ 500,000 7.13% 01/15/02 $ 505,085
------------
Total Corporate Obligations
(cost $5,269,223) ................ $ 5,488,490
------------
Mortgage-Backed Pass-Through Obligations--11.5%
Federal Home Loan Mortgage Corp.
$1,945,058 7.00% 05/01/26 $ 1,892,775
Federal National Mortgage Assn.
1,543,622 7.00 07/01/09 1,534,931
495,893 6.50 02/01/12 481,636
</TABLE>
The accompanying notes are an integral part of these financial statements.
12
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
BALANCED FUND--(Continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- ----------- ------------- ---------- ------------
<S> <C> <C> <C>
Mortgage-Backed Pass-Through Obligations--Continued
Government National Mortgage Assn.
$ 983,450 8.00% 02/15/22 $ 1,003,414
1,620,331 7.00 09/15/23 1,577,798
919,222 7.50 08/20/25 908,586
1,970,331 7.50 07/20/26 1,945,071
------------
Total Mortgage-Backed Pass-Through
Obligations (cost $9,114,398) ..... $ 9,344,211
------------
U.S. Government Agency Obligations--0.9%
Federal Home Loan Bank
$ 750,000 6.63% 08/28/01 $ 746,467
------------
Total U.S. Government Agency
Obligations (cost $695,325) ....... $ 746,467
------------
U.S. Treasury Obligations--4.9%
United States Treasury Bonds
$1,000,000 7.25% 05/15/16 $ 1,023,590
1,000,000 7.50 11/15/16 1,048,750
United States Treasury Notes
1,000,000 5.88 11/15/05 944,220
1,000,000 7.00 07/15/06 1,016,870
------------
Total U.S. Treasury Obligations
(cost $4,106,563) ................. $ 4,033,430
------------
Repurchase Agreements--9.9%
State Street Bank & Trust Company, dated
04/30/97, repurchase price $8,061,153
(U.S. Treasury Note: $8,225,607, 5.50%,
04/15/00)
$8,060,000 5.15% 05/01/97 $ 8,060,000
------------
Total Repurchase Agreements
(cost $8,060,000) ................. $ 8,060,000
------------
Total Investments
(cost $70,318,352/(c)/) ........... $81,375,322
============
- -------------------------------------------------------------------------------
Federal Income Tax Information:
Gross unrealized gain for investments in which
value exceeds cost ..........................
$11,715,975
Gross unrealized loss for investments in which
cost exceeds value .......................... (698,693)
------------
Net unrealized gain ........................... $11,017,282
============
</TABLE>
- -------------------------------------------------------------------------------
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
/(a)/Non-income producing security.
/(b)/There are common stock rights attached to these securities.
/(c)/The aggregate cost for federal income tax purposes is $70,358,040.
- -------------------------------------------------------------------------------
Investment Abbreviations:
ADR--American Depository Receipts
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
13
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
GROWTH AND INCOME FUND
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Description Value
- ------------ ---------------- -----------------
<S> <C> <C>
Common Stocks--94.0%
AEROSPACE/DEFENSE--3.1%
3,000 General Dynamics Corp. $ 213,750
2,100 Northrop Grumman Corp. 175,350
-----------------
$ 389,100
-----------------
AUTOMOTIVE PRODUCTS--3.9%
3,000 Borg-Warner Automotive, Inc. $ 126,000
4,600 Ford Motor Co. 159,850
3,500 General Motors Corp. 202,562
-----------------
$ 488,412
-----------------
BUILDING MATERIALS & CONSTRUCTION--1.5%
5,000 Centex Corp. $ 180,000
-----------------
BUSINESS SERVICES--0.7%
6,000 Safety Kleen Corp. $ 89,250
-----------------
CHEMICAL PRODUCTS--4.6%
4,000 BF Goodrich Co. $ 159,500
6,000 Dexter Corp. 179,250
6,000 Hanna M.A. Co. 125,250
5,800 Schulman, Inc. 110,200
-----------------
$ 574,200
-----------------
COMMUNICATIONS--0.5%
3,600 News Corp, Ltd. ADR $ 66,600
-----------------
COMPUTER SERVICES/SOFTWARE--0.9%
3,500 Sterling Software, Inc./(a)/ $ 106,750
-----------------
ELECTRICAL SERVICES--1.2%
4,000 Union Electric Co. $ 142,500
-----------------
ELECTRONICS & OTHER ELECTRICAL EQUIPMENT--3.9%
4,500 Arrow Electronics, Inc./(a)/ $ 250,312
12,000 VLSI Technology, Inc./(a)/ 238,500
-----------------
$ 488,812
-----------------
FINANCIAL SERVICES--16.3%
2,800 A. G. Edwards, Inc. $ 98,000
2,000 BankAmerica Corp. 233,750
5,000 Bankers Trust Corp. 406,875
6,000 Bear Stearns Companies, Inc. 183,000
7,500 Equitable Companies, Inc. 219,375
2,500 JP Morgan & Co, Inc. 254,688
5,000 Lehman Brothers Holdings, Inc. 169,375
4,000 Morgan Stanley Group, Inc. 252,500
4,000 Salomon Brothers, Inc. 200,000
-----------------
$ 2,017,563
-----------------
INDUSTRIAL MACHINERY--2.1%
2,000 Ingersoll-Rand Co. $ 98,250
3,600 Springs Industries, Inc. 168,300
-----------------
$ 266,550
-----------------
INSURANCE SERVICES--15.6%
3,500 Ace, Ltd. $ 210,000
3,500 AMBAC, Inc. 226,625
3,000 Berkley W R Corp. 147,750
1,000 Cigna Corp. 150,375
2,200 Cincinnati Financial Corp. 153,450
6,000 Financial Securities Assurance Holdings,
Ltd. 194,250
4,000 Lincoln National Corp. 224,000
2,500 MBIA, Inc./(b)/ 243,438
6,000 Old Rep International Corp. 169,500
3,500 Orion Capital Corp. 219,188
-----------------
$ 1,938,576
-----------------
MINING - METALS/MINERALS--1.6%
3,000 AK Steel Holding Corp. $ 108,750
7,000 LTV Corp. 91,875
-----------------
$ 200,625
-----------------
OFFICE & BUSINESS EQUIPMENT--1.4%
4,400 Stratus Computer, Inc./(a)/ $ 171,050
-----------------
OIL & GAS--10.8%
1,300 Atlantic Richfield Co. $ 176,962
4,000 Helmerich & Payne, Inc. 191,000
5,000 Imperial Oil, Ltd. 228,125
5,000 Phillips Petroleum Co. 196,875
15,000 Quaker State Corp. 225,000
17,000 Ranger Oil, Ltd. 170,000
5,500 YPF Sociedad Anonima ADR 151,938
-----------------
$ 1,339,900
-----------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
14
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
GROWTH AND INCOME FUND--(Continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Description Value
- ------------ ----------------- -----------------
<S> <C> <C>
Common Stocks--Continued
PAPER & FOREST PRODUCTS--1.0%
4,300 James River Corp. $ 128,462
-----------------
PHARMACEUTICALS--1.7%
18,000 Perrigo Co./(a)/ $ 211,500
-----------------
RETAIL TRADE--4.0%
4,000 Dayton Hudson Corp. $ 180,000
5,000 Great Atlantic & Pacific Tea Co., Inc. 124,375
4,000 JC Penney, Inc. 191,000
-----------------
$ 495,375
-----------------
TEXTILES--2.3%
3,000 Liz Claiborne, Inc. $ 135,750
2,000 VF Corp. 144,250
-----------------
$ 280,000
-----------------
TOBACCO--1.4%
6,000 Universal Corp. $ 168,000
-----------------
TRANSPORTATION/STORAGE--1.7%
2,300 Norfolk Southern Corp. $ 206,713
-----------------
UTILITIES--13.8%
2,500 Allegheny Power Systems, Inc. $ 65,625
7,000 Consolidated Edison Co. of New York, Inc. 194,250
1,300 Consolidated Natural Gas Co. 65,487
2,600 Duke Power Co. 114,075
6,000 Florida Progress Corp./(b)/ 184,500
3,000 FPL Group, Inc. 133,875
2,200 GPU, Inc. 70,950
2,500 Ipalco Enterprises, Inc./(b)/ 76,250
1,800 National Fuel Gas Co. of New Jersey 74,925
1,400 Northern States Power Co. of Minnesota 63,700
3,200 Northwest Natural Gas Co. 77,600
4,500 Peoples Energy Corp 151,875
7,000 Washington Gas Co. 161,000
2,200 Wicor, Inc. 77,275
2,000 Public Service Co. of Colorado 77,500
3,000 Telefonos de Mexico SA ADR 123,750
-----------------
$ 1,712,637
-----------------
Total Common Stocks
(cost $11,653,904) ............ $ 11,662,575
-----------------
<CAPTION>
Principal Interest Maturity
Amount Rate Date
- ----------------- ----------- ------------
<S> <C> <C> <C>
Repurchase Agreements--9.9%
State Street Bank & Trust Company, dated 04/30/97,
repurchase price $1,234,177 (U.S. Treasury
Bond: $1,263,209, 9.25%, 02/15/16)
$ 1,234,000 5.15% 05/01/97 $ 1,234,000
-----------------
Total Repurchase Agreements
(cost $1,234,000) ............. $ 1,234,000
-----------------
Total Investments
(cost $12,887,904/(c)/) ....... $ 12,896,575
=================
- -------------------------------------------------------------------------------
Federal Income Tax Information:
Gross unrealized gain for investments in which
value exceeds cost ........................... $ 285,733
Gross unrealized loss for investments in which
cost exceeds value ........................... (277,062)
----------------
Net unrealized gain .............................. $ 8,671
=================
</TABLE>
- -------------------------------------------------------------------------------
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
/(a)/Non-income producing security.
/(b)/There are common stock rights attached to these securities.
/(c)/The cost stated also represents aggregate cost for federal income tax
purposes.
- -------------------------------------------------------------------------------
Investment Abbreviations:
ADR--American Depository Receipts
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
15
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
GROWTH FUND
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Description Value
- -------------- ---------------- -------------------
<S> <C> <C>
Common Stocks--87.7%
AEROSPACE/DEFENSE--2.4%
73,000 Lockheed Martin Corp. $ 6,533,500
-------------------
AUTOMOTIVE PRODUCTS--2.8%
250,000 Chrysler Corp. $ 7,500,000
-------------------
BASIC INDUSTRIES--1.9%
74,000 Aluminum Company of America $ 5,170,750
-------------------
BIOTECHNOLOGY--1.9%
84,400 Amgen, Inc./(a)/ $ 4,969,050
-------------------
BUSINESS SERVICES--5.4%
170,000 Equifax, Inc. $ 4,887,500
118,000 First Data Corp. 4,071,000
269,000 Reynolds & Reynolds Co. 5,581,750
-------------------
$ 14,540,250
-------------------
CHEMICAL PRODUCTS--2.0%
50,000 Du Pont (E.I.) de Nemours & Co. $ 5,306,250
-------------------
COMPUTER SERVICES/SOFTWARE--3.6%
70,000 Cisco Systems, Inc./(a)/ $ 3,622,500
25,500 Microsoft Corp./(a)/ 3,098,250
63,000 Parametric Technology Corp./(a)/ 2,850,750
-------------------
$ 9,571,500
-------------------
CONSUMER GOODS--2.0%
96,500 Nike, Inc. $ 5,428,125
-------------------
DIVERSIFIED MANUFACTURING--9.4%
80,000 Allied Signal, Inc. $ 5,780,000
84,000 Dover Corp. 4,452,000
180,000 Federal Signal Corp. 4,387,500
117,000 Illinois Tool Works, Inc. 10,690,875
-------------------
$ 25,310,375
-------------------
ELECTRICAL SERVICES--1.8%
136,000 Union Electric Co. $ 4,845,000
-------------------
ELECTRONICS & OTHER ELECTRICAL EQUIPMENT--13.6%
147,000 Adaptec, Inc./(a)/ $ 5,439,000
20,000 Emerson Electric Co. 1,015,000
95,000 General Electric Co. 10,533,125
40,200 Intel Corp. 6,155,625
75,000 Linear Technology Corp. 3,768,750
55,100 Texas Instruments, Inc. 4,917,675
97,000 Xilinx, Inc./(a)/ 4,753,000
-------------------
$ 36,582,175
-------------------
FINANCIAL SERVICES--14.7%
54,400 BankAmerica Corp. $ 6,358,000
180,000 Federal National Mortgage Assn. 7,402,500
113,700 Franklin Resources, Inc. 6,722,513
156,000 Green Tree Financial Corp. 4,621,500
40,000 Morgan Stanley Group, Inc. 2,525,000
108,000 Norwest Corp. 5,386,500
115,000 Travelers Group, Inc. 6,368,125
-------------------
$ 39,384,138
-------------------
HEALTH & MEDICAL SERVICES--4.1%
70,000 Abbott Laboratories $ 4,270,000
110,000 Johnson & Johnson 6,737,500
-------------------
$ 11,007,500
-------------------
HOUSEHOLD PRODUCTS--0.9%
28,200 Gillette Co. $ 2,397,000
-------------------
INDUSTRIAL MACHINERY--2.2%
65,000 Caterpillar, Inc. $ 5,785,000
-------------------
INSURANCE SERVICES--4.5%
152,000 Conseco, Inc. $ 6,289,000
127,000 SunAmerica, Inc. 5,842,000
-------------------
$ 12,131,000
-------------------
OIL & GAS--6.7%
82,600 Mobil Corp. $ 10,738,000
40,000 Royal Dutch Petroleum ADR 7,210,000
-------------------
$ 17,948,000
-------------------
PHARMACEUTICALS--2.5%
73,000 Merck & Co. $ 6,606,500
-------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
16
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
GROWTH FUND--(Continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Description Value
- -------------- ---------------- -------------------
<S> <C> <C>
Common Stocks--Continued
RETAIL TRADE--5.3%
150,000 Consolidated Stores Corp./(a)/ $ 6,000,000
170,000 Gap, Inc. 5,418,750
60,800 Walgreen Co. 2,796,800
-------------------
$ 14,215,550
-------------------
Total Common Stocks
(cost $169,734,999) ......... $ 235,231,663
-------------------
</TABLE>
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date
- ----------------- ----------- ------------
<S> <C> <C>
Repurchase Agreements--13.6%
State Street Bank & Trust Company, dated 04/30/97,
repurchase price $36,482,218 (U.S. Treasury
Note: $37,210,532, 9.13%, 05/15/18)
$ 36,477,000 5.15% 05/01/97 $ 36,477,000
-------------------
Total Repurchase Agreements
(cost $36,477,000) .......... $ 36,477,000
-------------------
Total Investments
(cost $206,211,999/(b)/) .... $ 271,708,663
===================
</TABLE>
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
Federal Income Tax Information:
Gross unrealized gain for investments in which
value exceeds cost ......................... $ 67,256,446
Gross unrealized loss for investments in which
cost exceeds value ......................... (1,759,782)
-------------------
Net unrealized gain ............................ $ 65,496,664
===================
- -------------------------------------------------------------------------------
</TABLE>
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
/(a)/Non-income producing security.
/(b)/The cost stated also represents aggregate cost for federal income tax
purposes.
- -------------------------------------------------------------------------------
Investment Abbreviations:
ADR--American Depository Receipts
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
17
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
MIDCAP FUND
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Description Value
- ------------ ---------------- -----------------
Common Stocks--98.3%
<S> <C> <C>
BIOTECHNOLOGY--3.0%
24,600 Biogen, Inc. $ 787,200
45,000 Elan Corp. PLC ADR/(a)/ 1,530,000
-----------------
$ 2,317,200
-----------------
BUSINESS SERVICES--8.9%
48,400 Devry, Inc./(a)/ $ 1,064,800
19,000 Omnicom Group 1,007,000
22,100 Paychex, Inc. 1,034,556
78,000 Personnel Group of America, Inc./(a)/ 1,872,000
40,200 Reynolds & Reynolds Co. 834,150
40,000 Wallace Computer Services, Inc./(b)/ 1,070,000
-----------------
$ 6,882,506
-----------------
CHEMICAL PRODUCTS--2.4%
39,250 OM Group, Inc. $ 1,094,094
25,000 Thermo Instruments Systems, Inc./(a)/ 784,375
-----------------
$ 1,878,469
-----------------
COMPUTER SERVICES/SOFTWARE--13.1%
52,000 American Management Systems, Inc./(a)/ $ 1,287,000
24,000 BMC Software, Inc./(a)/ 1,038,000
29,000 CACI International, Inc. 496,625
42,000 Cadence Design Systems, Inc./(a)/ 1,344,000
45,700 Cognos, Inc./(a)/ 1,159,637
19,800 Gateway 2000, Inc./(a)/ 1,086,525
22,250 McAfee Associates, Inc./(a)/ 1,240,437
35,800 Network General Corp./(a)/ 492,250
22,400 Parametric Technology Corp./(a)/ 1,013,600
21,770 SunGuard Data Systems, Inc./(a)/ 966,044
-----------------
$ 10,124,118
-----------------
DIVERSIFIED MANUFACTURING--4.6%
30,800 Danaher Corp. $ 1,389,850
24,000 Helix Technology Corp. 729,000
26,000 Precision Castparts Corp./(b)/ 1,391,000
-----------------
$ 3,509,850
-----------------
ELECTRONICS & OTHER ELECTRICAL EQUIPMENT--13.8%
33,400 Adaptec, Inc./(a)/ $ 1,235,800
35,800 ADC Telecommunications, Inc./(a)/ 935,275
39,000 Andrew Corp./(a)/ 965,250
33,900 Belden, Inc. 1,042,425
32,100 Charter Power Systems, Inc. 914,850
22,000 Lattice Semiconductor Corp./(a)/ 1,229,250
35,500 Logicon, Inc./(b)/ 1,411,125
29,200 Maxim Integrated Products, Inc./(a)/ 1,543,950
43,200 Symbol Technologies, Inc. 1,398,600
-----------------
$ 10,676,525
-----------------
FINANCIAL SERVICES--12.5%
42,000 A. G. Edwards, Inc. $ 1,470,000
40,000 Concord EFS, Inc./(a)/ 790,000
43,000 Fair Isaac & Co., Inc. 1,359,875
19,800 Franklin Resources, Inc. 1,170,675
21,000 Provident Bancorp Inc 819,000
80,400 Synovus Financial Corp. 1,949,700
33,000 TCF Financial Corp. 1,348,875
31,000 United Asset Management Corp. 759,500
-----------------
$ 9,667,625
-----------------
HEALTH & MEDICAL SERVICES--7.5%
62,000 Ballard Medical Products $ 1,178,000
21,600 Dentsply International, Inc. 1,069,200
14,700 Guidant Corp. 1,003,275
29,400 HCIA, Inc./(a)/ 606,375
10,900 McKesson Corp. 788,888
20,100 Medic Computer Systems, Inc./(a)/ 314,063
24,800 Pediatrix Medical Group, Inc./(a)/ 818,400
-----------------
$ 5,778,201
-----------------
INDUSTRIAL MACHINERY--3.8%
37,000 DT Industries, Inc. $ 962,000
40,150 Lindsay Manufacturing Co. 1,144,275
17,500 Sealed Air Corp./(a)/ 809,375
-----------------
$ 2,915,650
-----------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
18
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
MIDCAP FUND--(Continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Description Value
- ------------ ---------------- -----------------
<S> <C> <C>
Common Stocks--Continued
INSURANCE SERVICES--11.7%
42,500 Allied Group, Inc. $ 1,572,500
29,000 American Bankers Insurance
Group, Inc. 1,533,375
17,000 Equitable of Iowa Companies 830,875
24,875 Orion Capital Corp. 1,557,797
30,000 Protective Life Corp./(b)/ 1,327,500
20,000 SunAmerica, Inc. 920,000
15,800 Transatlantic Holdings, Inc. 1,307,450
-----------------
$ 9,049,497
-----------------
OIL & GAS--4.3%
22,000 BJ Services Co./(a)/ $ 1,036,750
58,000 Nabors Industries, Inc./(a)/ 1,087,500
26,000 Newpark Resources, Inc./(a)/ 1,166,750
-----------------
$ 3,291,000
-----------------
PHARMACEUTICALS--1.3%
28,000 Jones Medical Industries, Inc. $ 987,000
-----------------
RECREATIONAL SERVICES--1.1%
33,800 K2, Inc. $ 883,025
-----------------
RETAIL TRADE--3.0%
59,000 Central Garden & Pet Company/(a)/ $ 1,176,312
41,000 Lands' End, Inc. 1,096,750
-----------------
$ 2,273,062
-----------------
TEXTILES--3.4%
42,400 G & K Services, Inc. $ 1,229,600
33,000 Jones Apparel Group, Inc./(a)/ 1,377,750
-----------------
$ 2,607,350
-----------------
TRANSPORTATION/STORAGE--3.9%
38,300 Air Express International Corp. $ 1,311,775
25,300 Tidewater, Inc./(b)/ 1,015,163
20,800 United Waste Systems, Inc./(a)/ 702,000
-----------------
$ 3,028,938
-----------------
Total Common Stocks
(cost $66,583,388) ............ $ 75,870,016
=================
</TABLE>
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- ---------------- ----------- ------------- ------------------
<S> <C> <C> <C>
Repurchase Agreements--4.2%
State Street Bank & Trust Company,
dated 04/30/97, repurchase price
$3,230,462 (U.S. Treasury Bond:
$3,299,903, 8.13%, 08/15/21)
$3,230,000 5.15% 05/01/97 $ 3,230,000
-----------------
Total Repurchase
Agreements
(cost $3,230,000) ............. $ 3,230,000
-----------------
Total Investments
(cost $69,813,388/(c)/) ....... $ 79,100,016
=================
- -------------------------------------------------------------------------------
Federal Income Tax Information:
Gross unrealized gain for investments in which
value exceeds cost ........................... $ 12,142,551
Gross unrealized loss for investments
in which cost exceeds value .................. (2,855,923)
-----------------
Net unrealized gain .............................. $ 9,286,628
=================
- -------------------------------------------------------------------------------
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
/(a)/Non-income producing security.
/(b)/There are common stock rights attached to these securities.
/(c)/The cost stated also represents aggregate cost for federal income tax purposes.
- -------------------------------------------------------------------------------
Investment Abbreviations:
ADR--American Depository Receipts
- -------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
19
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
INTERNATIONAL EQUITY FUND
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Description Value
- ------------------ ---------------- -----------------
<S> <C> <C>
Common Stocks--94.3%
ARGENTINE PESO--0.9%
2,039 Banco de Galicia Buenos Aires SA ADR
(Financial Services) $ 49,605
2,614 Banco Frances del Rio de la Plata ADR
(Financial Services) 79,400
15,725 Perez Compac SA (Diversified
Industrial Manufacturing) 127,543
360 Sociedad Comercial del Plata ADR 144A
/(a)(b)/ (Oil & Gas) 10,983
2,230 Telecom Argentina (Utilities) 11,040
170 Telecom Argentina ADR (Utilities) 8,500
4,040 Telefonica de Argentina ADR
(Utilities) 134,330
400 Transportadora de Gas del Sur ADR
(Utilities) 5,000
4,628 YPF Sociedad Anonima ADR (Oil & Gas) 127,849
-----------------
$ 554,250
-----------------
AUSTRALIAN DOLLAR--1.7%
8,000 Australia & New Zealand Bank Group
(Financial Services) $ 51,096
21,150 Australian Gas Light Co. (Utilities) 121,229
11,000 Boral Ltd. (Construction) 32,426
8,294 Broken Hill Proprietary Co. (Mining -
Metals/Minerals) 116,943
1,200 Coca-Cola Amatil (Beverages/Tobacco) 13,718
8,700 Commonwealth Instalments Receipt
(Financial Services) 65,133
14,000 Fosters Brewing Group (Beverages/
Tobacco) 28,823
3,051 Lend Lease Corp. (Building Materials &
Construction) 58,388
5,189 National Australia Bank (Financial
Services) 71,018
19,000 National Mutual Holdings (Insurance
Services) 28,153
19,433 News Corp. Ltd. (Broadcast Media) 89,565
14,000 Publishing & Broadcasting, Ltd.
(Broadcast Media) 73,914
10,000 St George Bank Ltd (Financial
Services) 61,452
14,000 Tab Corp. Holdings, Ltd. (Recreational
Services) 69,165
11,500 Western Mining Corp. Holdings, Ltd.
(Mining - Metals/Minerals) 68,159
10,000 Westpac Banking Corp. (Financial
Services) 53,888
11,000 Woodside Petroleum, Ltd. (Oil & Gas) 87,499
-----------------
$ 1,090,569
-----------------
AUSTRIAN SCHILLING--0.0%
84 EVN Energie Versorgung Neider
(Utilities) $ 10,391
280 Flughafen Wien AG (Transportation/
Storage) 11,607
-----------------
$ 21,998
-----------------
BELGIAN FRANC--1.2%
294 Dexia (Financial Services) $ 29,194
368 Generale Banque (Financial Services) 152,604
33 Generale De Banque (Financial
Services) 16
1,140 Kredietbank (Financial Services) 444,042
39 UCB (Chemical Products) 107,018
-----------------
$ 732,874
-----------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
20
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
INTERNATIONAL EQUITY FUND--(Continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Description Value
- ------------------ ---------------- -----------------
<S> <C> <C>
Common Stocks--Continued
BRAZILIAN REAL--4.2%
10,595,488 Banco Bradesco SA (Financial Services) $ 87,673
175,959 Brahma Companhia Cerevejaria (Food/
Grocery Products) 119,705
130,400 Brasmotor SA (Automobiles & Automobile
Parts) 31,267
3,200 Brazil Fund, Inc. (Financial Services) 81,600
500 Cemig - CIA Energetica Minas Gerais
ADR 144A/(b)/ (Utilities) 22,563
4,947 Cemig - CIA Energetica Minas Gerais
ADR (Non-Voting) (Utilities) 223,233
118,176 Cim Port Itau (Cia) (Utilities) 41,670
2,070 Companhia Brasileira (Utilities) 40,106
330 Companhia Energetica de Sao Paolo ADS
144A/(a)(b)/ (Utilities) 5,239
370 Companhia Energetica de Sao Paolo ADR
/(a)/ (Non-Voting) (Utilities) 5,897
1,100,736 Companhia Siderurgica Nacional (Mining
- Metals/ Minerals) 39,320
94,000 Coteminas (Textiles) 39,421
4,285 Electrobas-Centrais Eletricas
Brasileiras ADR (Utilities) 96,494
1,680 Electrobas-Centrais Eletricas
Brasileiras ADR (B Shares)
(Utilities) 39,254
77,000 Itaubanco (Financial Services) 41,631
1,352,000 Lojas Americanas SA/(a)/ (Retail
Trade) 19,196
475,000 Petroleo Brasileiros - Petrobras (Oil
& Gas) 99,824
1,568,226 Telebras (Broadcast Media) 179,885
278,000 Telecom de Rio de Janeiro Telerj
(Utilities) 46,268
8,103 Telecomunicacoes Brasileiras ADR
(Broadcast Media) 929,819
304,000 Telemig - Tele de Minas Gerais SA
(Utilities) 48,423
602,623 Telesp (Utilities) 171,126
2,700,000 Unibanco Uniao de Bancos Brasileirs
(Financial Services) 99,749
8,530 Usinas Siderurgicas de Minas ADR
(Building Materials &
Construction) 100,254
11,587 White Martins SA (Chemical Products) 39,440
-----------------
$ 2,649,057
-----------------
BRITISH POUND STERLING--15.8%
28,000 Abbey National (Financial Services) $ 390,276
25,800 Argos (Retail Trade) 269,708
90,000 Asda Group (Retail Trade) 167,747
19,000 BG (Energy) 54,814
18,000 British Petroleum (Oil & Gas) 206,548
51,000 Cable & Wireless (Utilities) 392,729
28,744 Cadbury Schweppes (Food/Grocery
Products) 238,524
54,000 Caradon (Building Materials &
Construction) 216,175
19,000 Centrica/(a)/ (Energy) 17,399
13,000 Coats Viyella (Textiles) 27,391
17,000 Compass Group (Recreational Services) 186,256
15,000 Electrocomponents (Electronics and
Other Electrical Equipment) 96,029
3,000 GKN (Automobiles & Automobile Parts) 46,288
31,000 Glaxo Wellcome (Health/Personal Care) 609,449
</TABLE>
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
INTERNATIONAL EQUITY FUND--(Continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Description Value
- ------------------ ---------------- -----------------
<S> <C> <C>
Common Stocks--Continued
BRITISH POUND STERLING--CONTINUED
60,000 Grand Metropolitan (Beverages/
Tobacco) $ 500,810
47,000 Guinness (Beverages/Tobacco) 388,493
4,000 Heywood Williams Group (Building
Materials & Construction) 15,916
15,000 Hillsdown Holdings (Food/Grocery
Products) 44,246
48,000 Kingfisher (Retail Trade) 519,676
23,000 Ladbroke Group (Recreational Services) 85,737
11,000 Laing (John) (Building Materials &
Construction) 65,430
80,400 National Westminster Bank (Financial
Services) 951,248
26,500 Rank Organisation (Recreational
Services) 182,536
41,000 Reed International (Publishing) 755,543
11,000 Rolls-Royce (Aerospace/Defense) 43,323
21,000 RTZ Corp. (Mining - Metals/Minerals) 333,549
38,000 Safeway (Retail Trade) 210,632
9,000 Sears Holdings (Retail Trade) 11,232
36,500 Shell Transport & Trading Co. (Oil &
Gas) 645,405
22,000 Smith (David S.) Holdings (Textiles) 79,870
75,000 SmithKline Beecham/S'Kline Beckman
(Health/Personal Care) 1,205,227
30,000 T & N (Automobiles & Automobile Parts) 66,126
33,000 Tesco (Retail Trade) 191,475
104,500 Tomkins (Diversified Industrial
Manufacturing) 450,519
34,000 United News & Media (Broadcast Media) 415,494
-----------------
$ 10,081,820
-----------------
CANADIAN DOLLAR--0.3%
3,850 Alcan Aluminum, Ltd. (Mining - Metals/
Minerals) $ 130,630
1,540 Royal Bank of Canada (Financial
Services) 61,402
-----------------
$ 192,032
-----------------
CHILEAN PESO--0.6%
123 AFP Providia ADR (Financial Services) $ 2,214
590 Cervecerias Unidas (CCU) ADR
(Beverages/Tobacco) 13,128
1,580 Chile Fund, Inc. (Financial Services) 38,315
550 Chilectra SA ADR (Utilities) 33,313
749 Chilgener SA ADR (Utilities) 21,347
1,661 Cia de Telecomunicaciones Chile
(Utilities) 53,775
2,312 Empresa Nacional de Electricidad SA
ADR (Utilities) 44,506
1,551 Enersis SA ADR (Utilities) 48,857
11,110 Five Arrows Chile Investment Trust
(Financial Services) 35,941
1,160 Genesis Chile Fund (Financial
Services) 53,360
1,151 Santa Isabel ADR (Retail Trade) 28,343
-----------------
$ 373,099
-----------------
CHINESE YUAN--0.4%
6,900 Huaneng Power International, Inc.
ADR/(a)/(Energy) $ 167,325
</TABLE>
The accompanying notes are an integral part of these financial statements.
22
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
INTERNATIONAL EQUITY FUND--(Continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Description Value
- ------------------ ---------------- -----------------
<S> <C> <C>
Common Stocks--Continued
CHINESE YUAN--CONTINUED
258,000 Shanghai Petrochemical (Chemical
Products)/(a)/ $ 63,946
186,000 Yizheng Chemical Fibre (Chemical
Products)/(a)/ 36,496
-----------------
$ 267,767
-----------------
CZECH KORUNA--0.0%
190 SPT Telecom/(a)/(Utilities) $ 20,079
-----------------
DANISH KRONE--0.2%
825 Den Danske Bank AB (Financial
Services) $ 71,351
290 Teledanmark (Utilities) 13,948
690 Unidanmark (Financial Services) 34,130
-----------------
$ 119,429
-----------------
DEUTSCHEMARK--4.0%
1,270 Allianz AG Holdings (Insurance
Services) $ 242,003
30 Altana (Health/Personal Care) 23,213
8,868 Bayer AG (Chemical Products) 352,815
4,288 Bayerische Hypo Und Wechsel Bank
(Financial Services) 133,706
1,500 Bilfinger & Berger Bauag (Building
Materials & Construction) 55,780
102 Buderus AG (Industrial Machinery) 47,825
2,330 Commerzbank AG (Financial Services) 62,495
3,581 Deutsche Bank AG (Financial Services) 188,996
3,177 Deutsche Telekom AG (Utilities) 68,941
464 Fielmann AG (Health/Personal Care) 11,950
7,351 Gehe AG (Health/Personal Care) 488,991
1,340 Hoechst AG (Chemical Products) 52,616
200 Hornbach Baumarkt (Retail Trade) 6,352
630 Hornbach Holdings AG (Retail Trade) 40,380
240 Mannesmann AG (Engineering) 94,376
503 Praktiker Bau Und Heimwerker Markte
(Retail Trade) 8,074
1,002 Rhoen-Klinikum AG (Health/Personal
Care) 129,604
310 Sap AG (Computer Services/Software) 56,440
540 Schering AG (Chemical Products) 51,761
6,778 Veba AG (Utilities) 349,115
130 Veba AG - Warrants/(a)/(Utilities) 37,683
116 Volkswagen AG (Automobiles &
Automobile Parts) 73,748
-----------------
$ 2,576,864
-----------------
FINNISH MARKKA--0.2%
2,290 Nokia (AB) OY (Electronics & Other
Electrical Equipment) $ 142,850
-----------------
FRENCH FRANC--8.0%
425 Accor (Recreational Services) $ 60,948
1,740 Alcatel Alsthom (Cie Gen El)
(Electronics & Other Electrical
Equipment) 193,482
</TABLE>
The accompanying notes are an integral part of these financial statements.
23
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
INTERNATIONAL EQUITY FUND--(Continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Description Value
- ------------------ ---------------- -----------------
<S> <C> <C>
Common Stocks--Continued
FRENCH FRANC--CONTINUED
1,070 Assurances Generales de France
(Insurance Services) $ 34,814
954 Axa (Diversified Holding Companies) 58,696
580 Canal Plus (Broadcast Media) 104,741
897 Carrefour (Retail Trade) 560,039
360 Chargeurs (Diversified Industrial
Manufacturing) 21,280
580 Clf Dexia France (Financial Services) 53,662
268 Credit Local de France (Financial
Services) 24,796
5,930 Eaux (Cie Generale Des) (Utilities) 826,024
2,210 Elf Aquitaine (Energy) 214,317
490 GTM Entrepose (Building Materials &
Construction) 29,510
697 Guilbert SA (Business Services) 108,673
410 Havas SA (Broadcast Media) 30,698
205 L'Oreal (Health/Personal Care) 72,741
1,160 Lapeyre (Building Materials &
Construction) 69,960
455 Legrand (Electronics & Other
Electrical Equipment) 76,788
1,579 LVMH Moet-Hennessy Louis Vuitton
(Beverages/Tobacco) 385,518
360 Pathe (Broadcast Media) 84,071
876 Pinault Printemps Redoute (Retail
Trade) 368,471
780 Primagaz (Cie Des Gaz Petrole) (Oil &
Gas) 76,443
182 Rexel (Retail Trade) 48,490
1,720 Saint Gobain (Chemical Products) 230,453
1,959 Sanofi (Health/Personal Care) 182,927
3,540 Schneider SA (Electronics & Other
Electrical Equipment) 199,548
240 Societe Generale (Financial Services) 26,893
690 Sodexho (Food/Grocery Products) 316,834
1,410 Television Francaise (Broadcast Media) 136,011
5,794 Total (Oil & Gas) 480,476
-----------------
$ 5,077,304
-----------------
HONG KONG DOLLAR--3.9%
69,000 Cathay Pacific Air (Transportation/
Storage) $ 107,332
39,000 Dao Heng Bank Group (Financial
Services) 185,271
136,573 First Pacific Co. (Financial Services) 163,080
40,000 Guoco Group (Financial Services) 190,021
134,380 Hong Kong Land Holdings (Real Estate) 279,510
240,000 Hopewell Holdings (Real Estate) 124,701
59,000 Hutchison Whampoa (Diversified) 437,940
74,262 New World Development Co. (Real
Estate) 428,518
35,000 Swire Pacific Ltd. (Transportation/
Storage) 269,961
79,000 Wharf Holdings (Diversified Holding
Companies) 298,806
-----------------
$ 2,485,140
-----------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
INTERNATIONAL EQUITY FUND--(Continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Description Value
- ------------------ ---------------- -----------------
<S> <C> <C>
Common Stocks--Continued
ITALIAN LIRA--2.3%
15,000 Banca Commercial Italiana (Financial
Services) $ 32,196
24,680 Banca Fideuram (Financial Services) 61,982
43,526 Credito Italiano Spa (Financial
Services) 61,012
30,000 ENI (Ente Nazionale Idrocarburi) (Oil
& Gas) 152,262
849 Gucci Group NV (Textiles) 58,899
10,840 IMI Spa (Financial Services) 92,340
2,226 Industrie Natuzzi Spa (Household
Durables) 49,529
13,000 Instituto National Assicurazioni
(Insurance Services) 17,425
12,000 Italgas (Societa Italiana II Gas) Spa
(Utilities) 41,036
5,150 Mediolanum (Insurance Services) 49,329
3,000 Rinascente (Retail Trade) 15,997
16,000 Seat Spa/(a)/ (Business Services) 3,168
44,000 Seat Spa Di Risp Shares/(a)/ (Business
Services) 13,466
49,000 STET (Utilities) 231,667
16,000 STET (Di Risp Shares) (Utilities) 59,340
119,443 Telecom Italia Mobile (Utilities) 375,663
15,887 Telecom Italia Mobile (Di Risp Shares)
(Utilities) 29,368
42,013 Telecom Italia Spa (Utilities) 110,543
-----------------
$ 1,455,222
-----------------
JAPANESE YEN--21.1%
1,210 Advantest (Electronics & Other
Electrical Equipment) $ 67,204
7,000 Alps Electric Co. (Electronics & Other
Electrical Equipment) 81,617
16,000 Amada Co, Ltd. (Industrial Machinery) 119,620
30,000 Canon, Inc. (Electronics and Other
Electrical Equipment) 711,388
10,000 Citizen Watch Co. (Electronics and
Other Electrical Equipment) 71,927
13,000 Dai Nippon Screen Manufacturing
(Electronics & Other Electrical
Equipment) 103,439
3,000 Daifuku Co., Ltd. (Industrial
Machinery) 34,506
17,000 Daiichi Pharmaceutical Co. (Health/
Personal Care) 273,211
23,000 Daiwa House Industry Co. (Building
Materials & Construction) 257,297
33 DDI Corp. (Utilities) 219,159
52 East Japan Railway (Transportation/
Storage) 224,903
4,000 Fanuc Co., Ltd. (Electronics & Other
Electrical Equipment) 136,448
30,000 Hitachi (Electronics & Other
Electrical Equipment) 271,793
22,000 Hitachi Zosen Corp. (Heavy
Engineering) 76,433
2,000 Honda Motor Co., Ltd. (Automobiles &
Automobile Parts) 62,079
7,000 Inax Corp. (Building Materials &
Construction) 43,455
6,000 Ishihara Sangyo Kaisha/(a)/ (Chemical
Products) 15,079
7,000 Ito-Yokado Co. (Retail Trade) 335,841
</TABLE>
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
INTERNATIONAL EQUITY FUND--(Continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Description Value
- ------------------ ---------------- -----------------
<S> <C> <C>
Common Stocks--Continued
JAPANESE YEN--CONTINUED
13,000 Kao Corp. (Cosmetics) $ 151,574
8,000 Kokuyo Co., Ltd. (Computers/
Communication) 173,947
22,000 Komatsu, Ltd. (Industrial Machinery) 160,838
6,000 Komori Corp. (Industrial Machinery) 128,097
14,000 Kumagai Gumi Co. (Building Materials &
Construction) 18,750
19,000 Kuraray Co. (Chemical Products) 167,645
8,000 Kyocera Corp. (Electronics and Other
Electrical Equipment) 478,985
12,000 Makita Corp. (Industrial Machinery) 164,494
16,000 Marui Co., Ltd. (Retail Trade) 263,442
29,000 Matsushita Electric Industrial Co.
(Household Durables) 463,781
14,000 Mitsubishi Corp. (Wholesale Trade) 131,248
78,000 Mitsubishi Heavy Industries Ltd.
(Aerospace/Defense) 514,941
9,000 Mitsubishi Paper Mills, Ltd. (Paper &
Forest Products) 28,645
40,000 Mitsui Fudosan Co. (Real Estate) 456,927
6,000 Mitsui Petrochemical Industries (Oil &
Gas) 28,219
8,000 Murata Manufacturing Co. (Electronics
& Other Electrical Equipment) 294,954
4,000 National House Industrial (Building
Materials & Construction) 47,268
54,000 NEC Corp. (Electronics & Other
Electrical Equipment) 659,393
4,000 Nippon Hodo (Building Materials &
Construction) 28,266
106,000 Nippon Steel Corp. (Mining - Metals/
Minerals) 302,296
23 Nippon Telephone & Telegraph Corp.
(Utilities) 162,170
27,000 Nippondenso Co. (Transportation/
Storage) 614,724
24,000 Nomura Securities Co., Ltd. (Financial
Services) 268,484
10,000 Pioneer Electronic Corp. (Household
Durables) 178,832
2,000 Sangetsu Co., Ltd. (Building Materials
& Construction) 33,718
17,000 Sankyo Co. (Health/ Personal Care) 455,351
2,700 SEGA Enterprises (Diversified
Industrial Manufacturing) 71,044
26,000 Sekisui Chemical Co., Ltd. (Building
Materials & Construction) 249,892
16,000 Sekisui House (Building Materials &
Construction) 142,435
3,000 Seven Eleven Japan Co., Ltd. (Retail
Trade) 190,255
25,000 Sharp Corp. (Household Durables) 324,969
16,000 Shinetsu Chemical Co., Ltd. (Chemical
Products) 322,685
4,000 Shiseido Co. (Health/ Personal Care) 57,352
6,500 Sony Corp. (Household Durables) 473,156
33,000 Sumitomo Corp. (Wholesale Trade) 222,019
</TABLE>
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
INTERNATIONAL EQUITY FUND--(Continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Description Value
- ------------------ ---------------- -----------
<S> <C> <C>
Common Stocks--Continued
JAPANESE YEN--CONTINUED
42,000 Sumitomo Electric Industries, Ltd.
(Electronics and Other Electrical
Equipment) $ 569,110
9,000 Sumitomo Forestry Co., Ltd. (Paper &
Forest Products) 91,464
7,000 TDK Corp. (Household Durables) 504,589
39,000 Teijin (Chemical Products) 157,616
7,000 Tokio Marine & Fire Insurance Co.
(Insurance Services) 68,381
3,300 Tokyo Electron (Electronics and Other
Electrical Equipment) 127,388
8,000 Tokyo Steel Manufacturing (Mining -
Metals/Minerals) 85,713
14,000 Toppan Printing Co. (Broadcast Media) 180,880
7,000 Uny Co. (Retail Trade) 122,976
3,000 Yurtec Corp. (Building Materials &
Construction) 28,834
------------
$13,473,146
------------
KOREAN WON--0.6%
6,000 Cho Hung Bank (Insurance Services) $ 32,422
4,200 Korea Electric Power Corp. ADR
(Utilities) 125,247
429 Korea Fund, Inc. (Financial Services) 5,523
1,060 Samsung Electronics (Electronics &
Other Electrical Equipment) 87,136
650 Samsung Electronics, Ltd. GDS 144A/(b)/
(Electronics & Other Electrical
Equipment) 31,038
2,240 Shinhan Bank (Financial Services) $ 33,188
------------
$ 314,554
------------
MALAYSIAN RINGGIT--2.4%
56,000 Affin Holdings Berhad (Financial
Services) $ 134,937
32,000 Berjaya Sports Toto Berhad (Business
Services) 152,939
18,000 Commerce Asset Holdings Berhad
(Financial Services) 107,535
60,000 MBF Capital Berhad (Financial
Services) 88,896
70,000 Multi-Purpose Holding (Financial
Services) 114,306
58,000 Multi-Purpose Holdings 3% ICULS
13/01/02 (Financial Services) 21,599
113,000 Renong Berhad (Diversified Industrial
Manufacturing) 154,819
11,200 Renong Berhad 4% ICULS 21/05/01
(Diversified Industrial
Manufacturing) 40
20,000 Resorts World Berhad (Recreational
Services) 73,682
44,000 Tanjong (Mining - Metals/Minerals) 159,471
26,000 Technology Resources Industries
(Business Services) 47,634
27,000 Time Engineering Berhad (Industrial
Machinery) 49,466
58,000 United Engineers Malaysia (Industrial
Machinery) 411,184
------------
$ 1,516,508
------------
MEXICAN PESO--1.8%
14,062 Cemex SA (Building Materials &
Construction) $ 46,009
</TABLE>
The accompanying notes are an integral part of these financial statements.
27
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
INTERNATIONAL EQUITY FUND--(Continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Description Value
- ------------------ ---------------- -----------------
<S> <C> <C>
Common Stocks--Continued
MEXICAN PESO--CONTINUED
9,860 Cemex SA (B Shares) (Building
Materials & Construction) $ 36,107
7,860 Cemex SA ADR (Building Materials &
Construction) 52,976
83,641 CIFRA SA de CV (Retail Trade) 125,043
6,752 Fomento Economico Mexicano SA
(Beverages/ Tobacco) 31,863
18,158 Groupo Financiero Banamex-Accivl (B
Shares)/(a)/ (Financial Services) 38,891
499 Groupo Financiero Banamex-Accivl (L
Shares)/(a)/ (Financial Services) 998
16,324 Gruma SA /(a)/ (Diversified Holding
Companies) 78,677
3,485 Gruma SA ADS 144A/(a)(b)/ (Diversified
Holding Companies) 67,958
37,450 Grupo Industrial Maseca SA (Household
Durables) 36,571
7,058 Grupo Modelo SA (Beverages/ Tobacco) 42,811
722 Grupo Televisa GDR (Broadcast Media) 16,696
23,739 Kimberly Clark de Mexico (Health/
Personal Care) 88,127
6,040 Panamerica Beverages ADR (Beverages/
Tobacco) 175,160
8,145 Telefonos de Mexico SA ADR (Utilities) 335,981
-----------------
$ 1,173,868
-----------------
NETHERLANDS GUILDER--9.7%
5,537 ABN AMRO Holdings NV (Financial
Services) $ 380,539
3,987 Ahold NV (Retail Trade) 272,171
498 Akzo Nobel NV (Chemical Products) 64,157
1,330 Baan Co, Inc. (Business Services) 71,321
5,063 CSM CVA (Food/ Grocery Products) 290,792
57,813 Elsevier NV (Broadcast Media) 925,815
4,975 Fortis AMEV NV (Insurance Services) 187,683
1,110 Hagemeyer (Wholesale Trade) 96,569
16,352 ING Groep NV (Financial Services) 642,061
5,924 ING Groep NV - Warrants/(a)/ (Financial
Services) 53,727
1,678 Koninklijke Ptt Nederland (Utilities) 59,599
790 Nutricia (Verenigde Bedrijven) NV
(Food/ Grocery Products) 119,860
950 Otra NV (Electronics & Other
Electrical Equipment) 15,116
7,437 Polygram (Recreational Services) 364,540
7,090 Royal Dutch Petroleum Co. (Oil & Gas) 1,267,124
2,170 Unilever NV (Food/ Grocery Products) 422,016
8,246 Wolters Kluwer (Publishing) 977,263
-----------------
$ 6,210,353
-----------------
NEW ZEALAND DOLLAR--0.5%
21,909 Air New Zealand, Ltd. (Transportation/
Storage) $ 63,335
11,200 Carter Holt Harvey (Paper & Forest
Products) 24,846
7,000 Fernz Corp. (Chemical Products)
23,536
</TABLE>
The accompanying notes are an integral part of these financial statements.
28
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
INTERNATIONAL EQUITY FUND--(Continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Description Value
- ------------------ ---------------- ----------------
<S> <C> <C>
Common Stocks--Continued
NEW ZEALAND DOLLAR--CONTINUED
17,950 Fletcher Challenge Building (Building
Materials & Construction) 50,397
1,750 Fletcher Challenge Energy (Oil & Gas) 5,083
41,095 Fletcher Challenge Forest Division
(Paper & Forest Products) 56,693
12,500 Fletcher Challenge Paper (Paper & 27,730
Forest Products)
16,000 New Zealand Telecom (Utilities) 71,764
-----------------
$ 323,384
-----------------
NORWEGIAN KRONE--1.7%
1,170 Bergesen D-Y ASA (Transportation/
Storage) $ 24,152
9,730 Norsk Hydro (Energy) 474,121
6,560 Orkla AS (Diversified Industrial
Manufacturing) 549,952
1,390 Saga Petroleum (Oil & Gas) 22,447
-----------------
$ 1,070,672
-----------------
PANAMANIAN BALBOA--0.0%
567 Banco Latino Americano De Export E
Shares (Financial Services) $ 26,011
-----------------
PERUVIAN SOL--0.1%
1,320 Credicorp Ltd (Financial Services) $ 27,720
1,906 Telefonica del Peru SA ADS (Utilities) 45,744
-----------------
$ 73,464
-----------------
PORTUGUESE ESCUDO--0.5%
5,139 Jeronimo Martins SGPS (Food/ Grocery
Products) $ 307,424
428 Jeronimo Martins SGPS- Warrants/(a)/
(Food/ Grocery Products) 5,416
-----------------
$ 312,840
-----------------
RUSSIAN RUBLE--0.0%
840 Rao Gazprom ADS (Energy) $ 13,104
-----------------
SINGAPORE DOLLAR--2.1%
9,000 City Developments (Real Estate) $ 72,746
27,000 DBS Land (Real Estate) 87,295
6,000 Development Bank of Singapore
(Financial Services) 71,295
9,600 Fraser & Neave (Beverages/ Tobacco) 69,637
2,500 Keppel Corp./(a)/ (Transportation/
Storage) 10,881
4,000 Overseas Chinese Banking Corp-Alien
Market (Financial Services) 46,701
35,000 Overseas Union Bank - Foreign
(Financial Services) 229,706
33,000 Singapore Land (Real Estate) 153,886
12,200 Singapore Press Holdings (Broadcast
Media) 225,879
32,000 United Industrial Corp. (Real Estate) 24,097
26,800 United Overseas Bank (Financial
Services) 251,800
3,200 United Overseas Bank - Warrants/(a)/
(Financial Services) 11,009
20,000 Wing Tai Holdings (Textiles) 51,675
-----------------
$ 1,306,607
-----------------
SPANISH PESETA--2.2%
14 Aguas de Barcelona (Utilities) $ 535
1,579 Argentaria (Financial Services) 70,415
1,020 Banco Bilbao Vizcaya (Financial 68,649
Services)
</TABLE>
The accompanying notes are an integral part of these financial statements.
29
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
INTERNATIONAL EQUITY FUND--(Continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Description Value
- ------------------ ---------------- ----------------
<S> <C> <C>
Common Stocks--Continued
SPANISH PESETA--CONTINUED
2,979 Banco de Santander SA (Financial
Services) $ 224,131
690 Banco Popular (Commercial Banks) 146,301
2,011 Centros Comerciales Pryca (Retail
Trade) 34,937
2,606 Empresa Nacional de Endesa (Utilities) 182,164
1,160 Gas Natural Sdg SA (Utilities) 246,353
12,450 Iberdrola SA (Utilities) 140,505
3,927 Repsol SA (Oil & Gas) 164,649
5,350 Telefonica de Espana (Utilities) 137,039
-----------------
$ 1,415,678
-----------------
SWEDISH KRONA--2.3%
8,600 Abb AB (Electronics & Other Electrical
Equipment) $ 104,695
14,060 Astra AB (Health/Personal Care) 558,299
4,930 Atlas Copco AB (Industrial Machinery) 122,233
3,710 Electrolux Co. (Household Durables) 212,819
670 Esselte (Broadcast Media) 15,288
1,850 Hennes & Mauritz AB (Retail Trade) 267,665
860 Sandvik AB (Industrial Machinery) 21,213
6,640 Sandvik AB (B Shares) (Industrial
Machinery) 163,361
660 Scribona AB (Broadcast Media) 8,203
-----------------
$ 1,473,776
-----------------
SWISS FRANC--5.3%
889 Adia SA (Commercial Services) $ 296,715
400 BBC AG Brown, Boveri & Cie
(Electronics & Other Electrical
Equipment) 484,363
648 Ciba Spezialitatenchemi (Chemical
Products) 55,828
880 CS Holdings (Financial Services) 99,098
495 Nestle SA (Food/Grocery Products) 601,079
738 Novartis AG (Chemical Products ) 972,252
83 Roche Holdings AG (Health/Personal
Care) 701,004
890 Schweizerischer Bankverein/(a)/
(Financial Services) 194,410
-----------------
$ 3,404,749
-----------------
THAI BAHT--0.2%
2,900 Advanced Information Services
(Computers/Communication) $ 19,317
5,450 Bangkok Bank (Financial Services) 50,489
600 Siam Cement Public Co. (Building
Materials & Construction) 16,078
5,900 Thai Farmers Bank Public-Alien Market
(Financial Services) 35,686
-----------------
$ 121,570
-----------------
UNITED STATES DOLLAR--0.0%
190 Enron Global Power & Pipelines, LLC.
(Energy) $ 5,605
-----------------
VENEZUELAN BOLIVAR--0.1%
1,160 Cia Anonima Nacional Tele Venezuela
ADS/(a)/ (Utilities) $ 34,800
-----------------
Total Common Stocks
(cost $54,771,258) ............ $ 60,111,043
-----------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
30
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
INTERNATIONAL EQUITY FUND--(Continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Shares Description Value
- ------------------ ---------------- -----------------
Preferred Stocks--0.2%
<S> <C> <C>
AUSTRALIAN DOLLAR--0.1%
26,000 Sydney Harbour Casino /(a)/
(Recreational Services) $ 43,796
-----------------
DEUTSCHEMARK--0.1%
60 Krones AG (Industrial Machinery) $ 23,213
340 Sap AG (Non Voting) (Computer
Services/ Software) 62,609
-----------------
$ 85,822
-----------------
Total Preferred Stocks
(cost $110,406) ............... $ 129,618
-----------------
</TABLE>
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date
- ----------------- ----------- ------------
Corporate Obligations--0.0%
<S> <C> <C>
BELGIAN FRANC--0.0%
Kredietbank
$ 1,000 5.75% 11/30/03 $ 3,865
-----------------
Total Corporate Obligations
(cost $2,557) ................. $ 3,865
-----------------
Repurchase Agreements--4.8%
State Street Bank & Trust Company, dated
04/30/97, repurchase price $3,030,433 (U.S.
Treasury Bond: $3,091,000, 8.13%, 8/21/21)
$ 3,030,000 5.15% 05/01/97 $ 3,030,000
-----------------
Total Repurchase Agreements
(cost $3,030,000) ............. $ 3,030,000
-----------------
Total Investments
(cost $57,914,221/(c)/) ....... $ 63,274,526
=================
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Federal Income Tax Information:
Gross unrealized gain for investments in which
value exceeds cost ........................... $ 8,040,987
Gross unrealized loss for investments in which
cost exceeds value ........................... (2,732,073)
-----------------
Net unrealized gain .............................. $ 5,308,914
=================
</TABLE>
- -------------------------------------------------------------------------------
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
/(a)/Non-income producing security.
/(b)/Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration normally to qualified institutional investors.
/(c)/The aggregate cost for federal income tax purposes is $57,965,612.
- -------------------------------------------------------------------------------
Investment Abbreviations:
ADR--American Depository Receipts
ADS--American Depository Shares
GDS--Global Depository Shares
ICULS--Irredeemable Convertible Unsecured Loan Stock
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
31
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
INTERNATIONAL EQUITY FUND--(Continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Common and Preferred Stock Industry Concentrations
- -------------------------------------------------------------------------------
<S> <C>
Financial Services 11.9%
Utilities 10.2%
Electronics & Other Electrical Equipment 7.9%
Health/ Personal Care 7.6%
Retail Trade 6.4%
Oil & Gas 5.3%
Chemical Products 4.3%
Broadcast Media 3.9%
Food/ Grocery Products 3.9%
Household Durables 3.5%
Publishing 2.7%
Building Materials & Construction 2.6%
Beverages/ Tobacco 2.6%
Real Estate 2.5%
Industrial Machinery 2.3%
Diversified Industrial Manufacturing 2.2%
Transportation/ Storage 2.1%
Mining - Metals/ Minerals 1.9%
Recreational Services 1.7%
Energy 1.5%
Insurance Services 1.0%
Aerospace/Defense 0.8%
Diversified Holding Companies 0.8%
Wholesale Trade 0.7%
Diversified 0.7%
Business Services 0.6%
Commercial Services 0.5%
Automobiles & Automobile Parts 0.4%
Textiles 0.4%
Paper & Forest Products 0.4%
Computers/Communication 0.3%
Cosmetics 0.2%
Commercial Banks 0.2%
Computer Services/ Software 0.2%
Engineering 0.1%
Heavy Engineering 0.1%
Aerospace/ Defense 0.1%
- -------------------------------------------------------------------------------
Total Common and Preferred Stocks 94.5%
- -------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
32
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
NATIONAL TAX-FREE BOND FUND
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- --------- -------- -------- -----------
<S> <C> <C> <C>
Municipal Bond Obligations--98.0%
ALABAMA--1.5%
Phenix City Industrial Development Revenue Bonds (Toronto
Dominion Bank LOC) (AA/A-1+/ NR)
$300,000 4.00%/(a)/ 06/01/28 $ 300,000
-----------
ARIZONA--2.5%
Salt River Project Arizona Agricultural Improvements Revenue
Bonds Series C (AA/Aa)
$500,000 4.50% 01/01/04 $ 489,835
-----------
FLORIDA--2.2%
Florida State Board of Education Capital Outlay GO Bonds
Series A (AA+/Aa2)
$200,000 5.25% 01/01/04 $ 202,786
Florida State Board of Education Capital Outlay GO Bonds
Series D (AA+/Aa2)
250,000 5.00 06/01/12 236,070
-----------
$ 438,856
-----------
GEORGIA--1.5%
Fulton County Residential Care Facilities Lenbrook Square
Foundation Revenue Bonds (AAA/A-1+/ NR) (Rabobank
Nederland LOC)
$100,000 4.10%/(a)/ 01/01/18 $ 100,000
Georgia State GO Bonds Series D (AA+/Aaa)
200,000 5.40 11/01/10 203,064
-----------
$ 303,064
-----------
ILLINOIS--6.1%
Chicago Metropolitan Water Reclamation GO Bonds (AA/Aa)
$500,000 4.90% 12/01/01 $ 502,215
450,000 5.60 12/01/09 460,179
Evanston GO Bonds (NR/Aaa)
$250,000 5.30% 12/01/99 $ 255,222
-----------
$1,217,616
-----------
INDIANA--1.2%
Purdue University Revenue Bonds (AMBAC) (AAA/Aaa)
$250,000 5.25% 07/01/10 $ 244,183
-----------
IOWA--3.8%
Bettendorf GO Bonds Series A (AMBAC) (NR/Aaa)
$250,000 4.70% 06/01/03 $ 249,730
Iowa City Sewer Revenue Bonds (AMBAC) (AAA/Aaa)
250,000 6.00 07/01/08 258,692
Polk County GO Bonds (FGIC) (AAA/Aaa)
250,000 5.50 12/01/10 256,030
-----------
$ 764,452
-----------
KENTUCKY--1.0%
Louisville Water Works Board Water System Revenue Bonds(AA/Aa)
$200,000 5.63% 11/15/06 $ 206,846
-----------
MARYLAND--2.5%
Washington Suburban Sanitation District GO Revenue Bonds
(AA/Aa1)
$500,000 4.75% 06/01/02 $ 499,755
-----------
MASSACHUSETTS--0.5%
Massachusetts State GO Bonds (ABN AMRO Bank N.V. LOC)
(AA/A-1+/ Aa1/VMIG1)
$100,000 3.85%/(a)/ 12/01/97 $ 100,000
-----------
MICHIGAN--1.0%
Greenville Public Schools GO Bonds (MBIA) (AAA/Aaa)
$200,000 5.75% 05/01/07 $ 206,800
-----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
33
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
NATIONAL TAX-FREE BOND FUND--(Continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- --------- -------- -------- -----------
<S> <C> <C> <C>
Municipal Bond Obligations--Continued
MINNESOTA--6.5%
Minneapolis GO Bonds (AAA/Aaa)
$500,000 5.30% 10/01/98 $ 509,325
Minnesota State Housing and Finance Agency Series D (AA+/Aa)
390,000 5.35 01/01/05 395,101
St. Paul Independent School District #625 GO Bonds Series C
(AA/Aa)
400,000 5.20 02/01/07 396,952
-----------
$1,301,378
-----------
NEBRASKA--4.8%
Nebraska Public Power District Revenue Bonds Series A (A+/A1)
$250,000 5.10% 01/01/06 $ 248,427
200,000 6.00 01/01/06 209,002
Omaha Public Power Revenue Bonds Series A (AA/Aa)
500,000 5.00 02/01/01 505,905
-----------
$ 963,334
-----------
NEVADA--1.0%
Clark County School District GO Bonds Series B (FGIC)(AAA/Aaa)
$200,000 5.30% 05/01/04 $ 203,028
-----------
NORTH DAKOTA--1.3%
Fargo Water Revenue Bonds (MBIA) (AAA/Aaa)
$250,000 4.90% 01/01/03 $ 250,227
-----------
OHIO--4.1%
Columbus GO Bonds Series A (AAA/Aaa)
$250,000 4.50% 07/01/01 $ 249,050
Euclid GO Bonds (NR/Aa)
415,000 4.40 12/01/01 410,925
Ohio State Infrastructure Improvement GO Bonds (AA+/Aa1)
150,000 5.20 08/01/10 148,011
-----------
$ 807,986
-----------
OREGON--2.5%
Oregon State Housing & Community Services Department Revenue
Bonds Series D (NR/Aa)
$500,000 5.55% 07/01/06 $ 502,095
-----------
PENNSYLVANIA--2.5%
Pennsylvania State GO Bonds (AA-/A1)
$500,000 5.25% 06/15/06 $ 505,380
-----------
SOUTH CAROLINA--1.3%
South Carolina State Capital Improvement GO Bonds Series A
(AA+/Aaa)
$250,000 5.00% 03/01/05 $ 250,303
-----------
TENNESSEE--2.6%
Shelby County GO Bonds Series A (AA+/Aa)
$500,000 5.63% 06/01/08 $ 516,285
-----------
TEXAS--16.7%
Channelview Independent School District GO Bonds (PSFG)
(NR/Aaa)
$250,000 4.75% 08/15/05 $ 246,285
Collin County GO Bonds (AA-/Aa)
400,000 5.40 02/15/09 397,212
Grapevine Industrial Development Revenue Bonds (Morgan
Guarantee Trust Co. LOC) (NR/Aa1/P-1)
200,000 3.95/(a)/ 12/01/24 200,000
200,000 3.95/(a)/ 12/01/24 200,000
700,000 3.95/(a)/ 12/01/24 700,000
Houston Independent School District GO Bonds (AA+/Aa)
250,000 4.40 07/15/01 247,252
Lone Star Airport Improvement Authority Revenue Bonds (Royal
Bank of Canada LOC) (NR/VMIG1)
200,000 3.95/(a)/ 12/01/14 200,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
34
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
NATIONAL TAX-FREE BOND FUND--(Continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- --------- -------- -------- -----------
<S> <C> <C> <C>
Municipal Bond Obligations--Continued
TEXAS--CONTINUED
San Antonio GO Bonds (AA/Aa)
$200,000 5.20% 08/01/02 $ 203,004
Tarrant County GO Bonds (AA+/Aa1)
400,000 4.80 07/15/06 386,972
Tarrant County Water Control & Improvement Revenue Bonds (AAA/Aaa)
140,000 5.00 03/01/09 135,261
Texas A&M University Revenue Bonds (AA/Aa)
200,000 5.55 05/15/01 206,760
Texas State GO Bonds Series A (AA/Aa)
200,000 5.65 10/01/08 205,762
-----------
$3,328,508
-----------
UTAH--2.6%
Alpine School District GO Bonds (FGIC-TCRS) (AAA/Aaa)
$250,000 5.40% 03/15/05 $ 253,390
Salt Lake City School District Revenue Bonds Series A (NR/Aaa)
250,000 5.80 03/01/07 260,005
-----------
$ 513,395
-----------
VIRGINIA--3.5%
Virginia Beach GO Bonds (AA/Aa)
$200,000 5.20% 07/15/06 $ 202,904
Virginia State Public School Authority Revenue Bonds (AA/Aa)
500,000 4.50 01/01/00 499,475
-----------
$ 702,379
-----------
WASHINGTON--15.1%
King & Snohomish Counties School District (AA-/Aa)
$280,000 5.20% 06/15/08 $ 278,351
King County GO Bonds Series D (AA+/Aa1)
500,000 6.20% 12/01/00 522,370
King County School District #412 GO Bonds (MBIA)(AAA/Aaa)
250,000 5.75 06/01/08 257,630
Pierce County Sewer Improvements Revenue Bonds (A+/A1)
290,000 5.45 02/01/08 290,821
Port Seattle Revenue Bonds Series A (AMBAC) (AAA/Aaa)
500,000 6.00 02/01/99 511,945
Seattle GO Bonds Series A (AA+/Aa1)
150,000 5.30 08/01/13 145,538
Seattle Municipal Light & Power Revenue Bonds Series A (AA/Aa)
250,000 5.75 08/01/09 254,563
Snohomish County GO Bonds (MBIA) (AAA/Aaa)
250,000 5.75 12/01/10 250,443
Vancouver Water & Sewer Revenue Bonds (FGIC)(AAA/Aaa)
250,000 4.70 06/01/01 249,440
Washington State GO Bonds Series DD-12 & CC-9 (AA/Aa)
250,000 5.38 03/01/08 253,980
-----------
$3,015,081
-----------
WISCONSIN--9.7%
Appleton Wisconsin Area School District GO Bonds (NR/Aa)
$500,000 5.00% 04/01/11 $ 477,765
Green Bay Public School District GO Bonds (NR/Aa)
500,000 4.90 04/01/05 497,710
Milwaukee GO Bonds Series E (AA+/Aa1)
250,000 5.50 06/15/10 251,227
</TABLE>
The accompanying notes are an integral part of these financial statements.
35
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
NATIONAL TAX-FREE BOND FUND--(Continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- --------- ------- -------- -----------
<S> <C> <C> <C>
Municipal Bond Obligations--Continued
WISCONSIN--CONTINUED
Waukesha County GO Bonds
(NR/Aaa)
$500,000 4.40% 12/01/98 $ 503,080
Wisconsin State GO Bonds
Series 3 (AA/Aa)
200,000 5.25 11/01/02 203,910
-----------
$1,933,692
-----------
Total Municipal Bond
Obligations
(cost $19,471,913).............. $19,564,478
-----------
Total Investments
(cost
$19,471,913/(b)/) .............. $19,564,478
===========
- --------------------------------------------------------------------------------
Federal Income Tax Information:
Gross unrealized gain for
investments in which value
exceeds cost ............................ $ 165,115
Gross unrealized loss for
investments in which cost
exceeds value ........................... (72,550)
-----------
Net unrealized gain ....................... $ 92,565
===========
- --------------------------------------------------------------------------------
</TABLE>
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Investment Abbreviations:
<S> <C>
AMBAC -- Insured by American Municipal Bond Assurance Corp.
FGIC -- Insured by Financial Guaranty Insurance Co.
GO -- General Obligation
LOC -- Letter of Credit
MBIA -- Insured by Municipal Bond Investors Assurance Corp.
NR -- Not Rated
PSFG -- Permanent School Fund Guaranteed
TCRS -- Transferable Custodial Receipts
- --------------------------------------------------------------------------------
</TABLE>
/(a)/ Variable rate security. Coupon rate disclosed is that which is in effect
at April 30, 1997.
/(b)/ The cost stated also represents aggregate cost for income tax purposes.
The accompanying notes are an integral part of these financial statements.
36
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
MISSOURI TAX-FREE BOND FUND
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- --------- -------- -------- ---------
<S> <C> <C> <C>
Missouri Municipal Bond Obligations--97.1%
Benton County School District GO
Bonds (AA/NR)
$300,000 4.90% 03/01/04 $ 296,046
Cass County School District #R-2
GO Bonds (AA/NR)
725,000 4.80 03/01/02 719,410
Cass County School District #R-9
GO Bonds (NR/A)
200,000 6.25 03/01/00 204,984
Cass County School District GO
Bonds (AA/NR)
400,000 4.75 03/01/03 393,388
Chesterfield GO Bonds (NR/Aa2)
500,000 5.20 02/15/12 490,860
Columbia School District GO Bonds
(AA/Aa)
375,000 4.75 03/01/05 372,315
Columbia Water & Electricity
Revenue Bonds Series A (AA/A1)
300,000 5.40 10/01/02 310,197
Fort Zumwalt School District (AA/NR)
100,000 5.25 03/01/11 99,313
Hazelwood School District GO
Bonds (NR/Aa)
150,000 5.15 03/01/04 152,053
Jackson County Longview
Recreation Project (NR/A1)
350,000 8.00 11/01/07 363,657
Jackson County School District GO
Bonds (NR/A1)
250,000 5.60 03/01/08 255,827
Jasper County School District #R-9
GO Bonds (AA/NR)
500,000 5.00 09/01/03 503,195
Kansas City Chouteau Bridge
Project Series B (AA/Aa3)
380,000 5.00 05/01/11 366,289
Kansas City GO Bonds (AA/Aa)
200,000 4.50 06/01/04 195,492
Kansas City Sewer Special
Assessment GO Bonds Series A
(AA/Aa)
410,000 7.40% 05/15/99 433,604
Kansas City Water Revenue Bonds
Series A (AA/Aa)
750,000 4.85 12/01/06 740,933
Lafayette County School District GO
Bonds (AA/NR)
350,000 5.20 03/01/07 346,262
Lees Summit GO Bonds Series B
(AMBAC) (AAA/Aaa)
400,000 4.20 04/01/04 377,912
Missouri State Economic
Development Export &
Infrastructure Board Revenue
Bonds (A/NR)
200,000 5.38/(a)/ 05/01/03 200,462
Missouri State Environmental
Improvement & Energy
Resources Authority Pollution
Control Revenue Bonds (AA/A1)
500,000 4.25 12/01/98 501,040
250,000 5.50 12/01/04 259,222
Missouri State Environmental
Improvement & Energy
Resources Authority Water
Pollution Control Revenue Bonds
Series A (AA/NR)
150,000 5.25 07/01/02 153,865
Missouri State Environmental
Improvement & Energy
Resources Authority Water
Pollution Control Revenue Bonds
Series C (NR/Aa)
205,000 4.75 01/01/01 206,490
500,000 4.90 01/01/02 504,520
</TABLE>
The accompanying notes are an integral part of these financial statements.
37
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
MISSOURI TAX-FREE BOND FUND--(Continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
----------- ---------- ---------- -----------
<S> <C> <C> <C>
Missouri Municipal Bond Obligations--Continued
Missouri State Environmental
Improvement & Energy
Resources Authority Water
Pollution Control Revenue Bonds
Series D (NR/Aa)
$400,000 5.50% 01/01/08 $ 408,376
Missouri State Environmental
Improvement & Energy
Resources Authority Water
Pollution Control Revenue Bonds
Series E (NR/Aa)
390,000 4.38 07/01/00 390,491
Missouri State Fourth State Building
GO Bonds Series A (AAA/Aaa)
150,000 5.30 08/01/08 151,955
500,000 5.40 08/01/09 508,320
Missouri State GO Bonds Series A (AAA/Aaa)
500,000 4.50 08/01/02 494,910
Missouri State Health &
Educational Facility Jefferson
Memorial Hospital Revenue
Bonds (NR/Baa)
500,000 4.10/(a)/ 06/01/26 500,000
Missouri State Health & Educational
Facility Revenue Bonds (Barnes-
Jewish, Inc.) (AA/Aa)
150,000 6.00 05/15/11 156,516
Missouri State Health & Educational
Facility Revenue Bonds
(prerefunded to 06/01/01) (MBIA)
(AAA/Aaa)
300,000 6.63 06/01/11 326,130
Missouri State Health & Educational
Facility Revenue Bonds Series B
(Health Midwest) (MBIA)
(AAA/Aaa)
150,000 6.10 06/01/11 157,007
Missouri State Health & Educational
Facility Washington University
Revenue Bonds Series A
(NR/Aa1)
800,000 4.75% 08/15/05 784,920
Missouri State Housing
Development Community
Mortgage Revenue Bonds
(GNMA/FNMA) (AAA/Aaa)
205,000 5.40 03/01/06 205,554
Missouri State Housing
Development Community
Revenue Bonds Series B
(GNMA/FNMA) (AAA/NR)
245,000 5.50 03/01/06 248,224
Missouri State Housing
Development Community
Revenue Bonds Series C
(GNMA/FNMA) (AAA/NR)
245,000 4.80 09/01/01 245,742
Missouri State Water Pollution
Control GO Bonds Series A
(AAA/Aaa)
300,000 5.60 08/01/10 307,140
Platte County Missouri School
District Park Hill GO Bond
(Student Aid Direct Deposit)
(AA/Aa2)
500,000 5.20 03/01/09 494,310
Platte County School District #R-3
GO Bonds (AA/NR)
265,000 4.90 03/01/05 260,090
Springfield GO Bonds (NR/Aa)
220,000 4.30 03/01/00 219,179
St. Charles School District GO
Bonds Series A (AMBAC)
(AAA/Aaa)
150,000 5.75 03/01/11 151,744
</TABLE>
The accompanying notes are an integral part of these financial statements.
38
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF INVESTMENTS
MISSOURI TAX-FREE BOND FUND--(Continued)
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Principal Interest Maturity
Amount Rate Date Value
- --------- ------- -------- -----------
<S> <C> <C> <C>
Missouri Municipal Bond Obligations--Continued
St. Francois County School District
GO Bonds (CGIC) (AAA/Aaa)
$280,000 4.80% 03/01/04 $ 277,572
St. Louis County GO Bonds Series B
(NR/Aa1)
200,000 5.25 02/01/07 200,768
750,000 5.30 02/01/08 752,873
St. Louis County Rockwood School
District #R-6 GO Bonds (NR/Aaa)
300,000 5.80 02/01/99 307,185
St. Louis County School District GO
Bonds Lindbergh (NR/Aa)
715,000 6.60 02/15/03 776,197
200,000 5.40 02/15/10 199,252
St. Louis County School District GO
Bonds Parkway (NR/Aa)
300,000 7.00 02/01/00 319,254
St. Louis School District GO Bonds
(FGIC) (AAA/Aaa)
200,000 5.40 04/01/03 205,786
St. Peters GO Bonds (NR/A1)
150,000 5.80 01/01/10 153,389
University of Missouri Health
Facilities Revenue Bonds Series
A (AMBAC) (AAA/Aaa)
150,000 5.20 11/01/10 146,309
University of Missouri Systems
Facilities Revenue Bonds
(AA+/Aa2)
250,000 4.60 11/01/00 250,798
-----------
Total Missouri Municipal
Bond Obligations
(cost $18,091,923).... $18,047,327
-----------
Repurchase Agreements--1.4%
State Street Bank & Trust Company,
dated 04/30/97, repurchase price
$259,037 (U.S. Treasury Note:
$264,544, 5.88%, 04/30/98)
$259,000 5.15% 05/01/97 $ 259,000
-----------
Total Repurchase
Agreements
(cost $259,000) ..... $ 259,000
-----------
Total Investments
(cost $18,350,923/(b)/) $18,306,327
===========
- ------------------------------------------------
Federal Income Tax Information:
Gross unrealized gain for
investments in which value
exceeds cost ............... $ 77,840
Gross unrealized loss for
investments in which cost
exceeds value .............. (122,436)
===========
Net unrealized loss .......... $ (44,596)
===========
</TABLE>
- -----------------------------------------------------------------------------
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
- -----------------------------------------------------------------------------
Investment Abbreviations:
AMBAC -- Insured by American Municipal Bond Assurance Corp.
CGIC -- Insured by Capital Guaranty Insurance Corp.
FGIC -- Insured by Financial Guaranty Insurance Co.
FNMA -- Federal National Mortgage Assn.
GNMA -- Government National Mortgage Assn.
GO -- General Obligation
MBIA -- Insured by Municipal Bond Investors Assurance Corp.
NR -- Not Rated
- -----------------------------------------------------------------------------
/(a)/ Variable rate security. Coupon rate disclosed is that which is in effect
at April 30, 1997.
/(b)/ The cost stated also represents aggregate cost for income tax purposes.
The accompanying notes are an integral part of these financial statements.
39
<PAGE>
THE COMMERCE FUNDS
STATEMENTS OF ASSETS AND LIABILITIES
April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Short-Term
Government Bond
Fund Fund
--------------- ----------------
<S> <C> <C>
ASSETS:
Investments in securities, at value
(cost $39,364,204, $164,330,561, $70,318,352, $12,887,904, $206,211,999,
$69,813,388, $57,914,221, $19,471,913, and $18,350,923, respectively) .......... $ 39,290,699 $ 166,693,178
Cash .............................................................................. 926 221
Receivables:
Investment securities sold ...................................................... -- --
Interest ........................................................................ 518,023 1,974,180
Dividends ....................................................................... -- --
Fund shares sold ................................................................ 152,489 324,548
Deferred organization expenses, net ............................................... 26,023 27,614
Other ............................................................................. 11,068 2,917
-------------- ----------------
Total assets .................................................................. 39,999,228 169,022,658
-------------- ----------------
LIABILITIES:
Payables:
Investment securities purchased ................................................. 468,685 --
Fund shares redeemed ............................................................ 296,677 517,996
Dividends and distributions ..................................................... 73,340 172,088
Advisory fees ................................................................... 9,581 68,078
Administration fees ............................................................. 4,791 20,424
Distribution Fees ............................................................... 7 76
Accrued expenses and other liabilities ............................................ 13,155 52,375
-------------- ----------------
Total liabilities ............................................................. 866,236 831,037
-------------- ----------------
NET ASSETS:
Paid-in capital ................................................................... 39,321,444 165,777,093
Accumulated undistributed net investment income (loss) ............................ 16,269 76,707
Accumulated net realized gain (loss) on investment transactions ................... (131,216) (24,796)
Accumulated net realized loss on foreign currency related transactions ............ -- --
Net unrealized gain (loss) on investments ......................................... (73,505) 2,362,617
Net unrealized loss on translation of assets and liabilities denominated in
foreign currencies ............................................................. -- --
-------------- ----------------
Net assets .................................................................... $39,132,992 $ 168,191,621
============== ================
SHARES OUTSTANDING:
Total shares outstanding, no par value (unlimited number of shares authorized):
Institutional Shares ............................................................ 2,150,847 8,949,730
============== ================
Service Shares .................................................................. 1,923 10,798
============== ================
Institutional Shares: Net asset value per share (net assets/shares outstanding).... $18.18 $18.77
============== ================
Maximum public offering price per share /(a)/.................................... $18.55 $19.45
============== ================
Service Shares: Net asset value per share (net assets/shares outstanding).......... $18.18 $18.77
============== ================
Maximum public offering price per share /(a)/.................................... $18.55 $19.45
============== ================
</TABLE>
- -------------
/(a)/For the Short-Term Government Fund, the maximum public offering price per
share is calculated as (NAV per share x 1.0204). For all other Funds, the
maximum public offering price per share is calculated as (NAV per share x
1.0363).
/(b)/For the National Tax-Free Bond and Missouri Tax-Free Bond Funds, shares
outstanding are designated as neither Institutional Shares nor Service
Shares.
The accompanying notes are an integral part of these financial statements.
40
<PAGE>
<TABLE>
<CAPTION>
Growth and
Balanced Income
Fund Fund
-------------- ---------------
<S> <C> <C>
ASSETS:
Investments in securities, at value
(cost $39,364,204, $164,330,561, $70,318,352, $12,887,904, $206,211,999,
$69,813,388, $57,914,221, $19,471,913, and $18,350,923, respectively) ......... $ 81,375,322 $ 12,896,575
Cash ............................................................................. 263 956
Receivables:
Investment securities sold ..................................................... 262,497 --
Interest ....................................................................... 374,924 176
Dividends ...................................................................... 17,168 16,774
Fund shares sold ............................................................... 195,690 197,663
Deferred organization expenses, net .............................................. 26,599 19,353
Other ............................................................................ 28,799 31,102
-------------- ---------------
Total assets ................................................................. 82,281,262 13,162,599
-------------- ---------------
LIABILITIES:
Payables:
Investment securities purchased ................................................ 363,543 697,561
Fund shares redeemed ........................................................... 257,273 --
Dividends and distributions .................................................... -- --
Advisory fees .................................................................. 48,843 6,642
Administration fees ............................................................ 9,769 1,328
Distribution Fees .............................................................. 174 79
Accrued expenses and other liabilities ........................................... 40,606 49,444
-------------- ---------------
Total liabilities ............................................................ 720,208 755,054
-------------- ---------------
NET ASSETS:
Paid-in capital .................................................................. 69,240,717 12,376,605
Accumulated undistributed net investment income (loss) ........................... 188,057 27,668
Accumulated net realized gain (loss) on investment transactions .................. 1,075,310 (5,399)
Accumulated net realized loss on foreign currency related transactions ........... -- --
Net unrealized gain (loss) on investments ........................................ 11,056,970 8,671
Net unrealized loss on translation of assets and liabilities denominated in
foreign currencies ............................................................ -- --
-------------- ---------------
Net assets ................................................................... $ 81,561,054 $ 12,407,545
============== ===============
SHARES OUTSTANDING:
Total shares outstanding, no par value (unlimited number of shares authorized):
Institutional Shares ........................................................... 3,422,064 672,190
============== ===============
Service Shares ................................................................. 22,009 20,640
============== ===============
Institutional Shares: Net asset value per share (net assets/shares outstanding)... $23.68 $17.91
============== ===============
Maximum public offering price per share /(a)/................................... $24.54 $18.56
============== ===============
Service Shares: Net asset value per share (net assets/shares outstanding)......... $23.68 $17.90
============== ===============
Maximum public offering price per share /(a)/................................... $24.54 $18.55
============== ===============
<CAPTION>
International
Growth MidCap Equity
Fund Fund Fund
--------------- -------------- ---------------
<S> <C> <C> <C>
ASSETS:
Investments in securities, at value
(cost $39,364,204, $164,330,561, $70,318,352, $12,887,904, $206,211,999,
$69,813,388, $57,914,221, $19,471,913, and $18,350,923, respectively) ....... $ 271,708,663 $ 79,100,016 $ 63,274,526
Cash ........................................................................... 935 122 177,774
Receivables:
Investment securities sold ................................................... 928,155 290,059 187,299
Interest ..................................................................... 5,218 462 601
Dividends .................................................................... 113,023 10,389 334,772
Fund shares sold ............................................................. 848,742 175,420 94,727
Deferred organization expenses, net ............................................ 28,205 25,870 25,694
Other .......................................................................... 5,176 1,486 1,138
--------------- -------------- --------------
Total assets ............................................................... 273,638,117 79,603,824 64,096,531
--------------- -------------- --------------
LIABILITIES:
Payables:
Investment securities purchased .............................................. 4,946,375 2,244,946 134,695
Fund shares redeemed ......................................................... 188,326 109,798 53,167
Dividends and distributions .................................................. -- -- --
Advisory fees ................................................................ 156,947 46,860 70,097
Administration fees .......................................................... 31,389 9,372 7,648
Distribution Fees ............................................................ 954 40 20
Accrued expenses and other liabilities ......................................... 59,492 32,637 83,194
--------------- -------------- --------------
Total liabilities .......................................................... 5,383,483 2,443,653 348,821
--------------- -------------- --------------
NET ASSETS:
Paid-in capital ................................................................ 192,857,677 69,542,948 57,254,787
Accumulated undistributed net investment income (loss) ......................... 64,871 (221,409) 66,141
Accumulated net realized gain (loss) on investment transactions ................ 9,835,422 (1,447,996) 1,336,983
Accumulated net realized loss on foreign currency related transactions ......... -- -- (261,786)
Net unrealized gain (loss) on investments ...................................... 65,496,664 9,286,628 10,196,894
Net unrealized loss on translation of assets and liabilities denominated in
foreign currencies .......................................................... -- -- (4,845,309)
--------------- -------------- --------------
Net assets ................................................................. $ 268,254,634 $ 77,160,171 $ 63,747,710
=============== ============== ==============
SHARES OUTSTANDING:
Total shares outstanding, no par value (unlimited number of shares authorized):
Institutional Shares ......................................................... 8,820,029 2,954,868 2,926,766
=============== ============== ==============
Service Shares ............................................................... 73,771 3,583 3,123
=============== ============== ==============
Institutional Shares: Net asset value per share (net assets/shares outstanding). $30.16 $26.08 $21.76
=============== ============== ==============
Maximum public offering price per share /(a)/................................. $31.25 $27.03 $22.55
=============== ============== ==============
Service Shares: Net asset value per share (net assets/shares outstanding)....... $30.15 $26.07 $21.75
=============== ============== ==============
Maximum public offering price per share /(a)/................................. $31.24 $27.02 $22.54
=============== ============== ==============
<CAPTION>
National Missouri
Tax-Free Tax-Free
Bond Fund/(b)/ Bond Fund/(b)/
--------------- -----------------
<S> <C> <C>
ASSETS:
Investments in securities, at value
(cost $39,364,204, $164,330,561, $70,318,352, $12,887,904, $206,211,999,
$69,813,388, $57,914,221, $19,471,913, and $18,350,923, respectively) ........... $ 19,564,478 $ 18,306,327
Cash ............................................................................... 24,026 764
Receivables:
Investment securities sold ....................................................... -- 200,000
Interest ......................................................................... 300,144 245,656
Dividends ........................................................................ -- --
Fund shares sold ................................................................. 130,000 120,000
Deferred organization expenses, net ................................................ 30,048 29,981
Other .............................................................................. 6,804 9,891
-------------- --------------
Total assets ................................................................... 20,055,500 18,912,619
-------------- --------------
LIABILITIES:
Payables:
Investment securities purchased .................................................. -- 249,600
Fund shares redeemed ............................................................. 5,000 5,000
Dividends and distributions ...................................................... 50,783 51,792
Advisory fees .................................................................... 7,986 4,523
Administration fees .............................................................. 2,396 2,260
Distribution Fees ................................................................ -- --
Accrued expenses and other liabilities ............................................. 16,331 11,757
-------------- --------------
Total liabilities .............................................................. 82,496 324,932
-------------- --------------
NET ASSETS:
Paid-in capital .................................................................... 19,871,277 18,603,024
Accumulated undistributed net investment income (loss) ............................. 9,525 10,626
Accumulated net realized gain (loss) on investment transactions .................... (363) 18,633
Accumulated net realized loss on foreign currency related transactions ............. -- --
Net unrealized gain (loss) on investments .......................................... 92,565 (44,596)
Net unrealized loss on translation of assets and liabilities denominated in
foreign currencies .............................................................. -- --
-------------- --------------
Net assets ..................................................................... $ 19,973,004 $ 18,587,687
============== ==============
SHARES OUTSTANDING:
Total shares outstanding, no par value (unlimited number of shares authorized):
Institutional Shares ............................................................. 1,086,149 1,023,419
============== ==============
Service Shares ...................................................................
Institutional Shares: Net asset value per share (net assets/shares outstanding)..... $18.39 $18.16
============== ==============
Maximum public offering price per share /(a)/..................................... $19.06 $18.82
============== ==============
Service Shares: Net asset value per share (net assets/shares outstanding)...........
Maximum public offering price per share /(a)/.....................................
</TABLE>
<PAGE>
THE COMMERCE FUNDS
STATEMENTS OF OPERATIONS
For the Six Months Ended April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Short-Term
Government Bond
Fund Fund
-------------- ------------
<S> <C> <C>
INVESTMENT INCOME:
Interest .............................................................................. $ 1,245,951 $ 5,697,117
Dividends/(b)/......................................................................... -- --
------------ ------------
Total investment income ............................................................. 1,245,951 5,697,117
------------ ------------
EXPENSES:
Advisory fees ......................................................................... 91,642 395,051
Administration fees ................................................................... 27,491 118,515
Transfer agent fees ................................................................... 19,780 27,013
Custodian fees ........................................................................ 25,983 28,404
Professional fees ..................................................................... 7,886 28,464
Trustee fees .......................................................................... 763 2,951
Registration fees ..................................................................... 15,688 21,325
Amortization of deferred organization expenses ........................................ 4,944 5,245
Other ................................................................................. 12,000 61,710
------------ ------------
Total expenses ...................................................................... 206,177 688,678
Less -- Investment advisory fees waived and expense reimbursements .................... (81,553) --
------------ ------------
Net expenses ........................................................................ 124,624 688,678
Distribution fees ................................................................... 7 76
------------ ------------
Total expenses and distribution fees ............................................. 124,631 688,754
------------ ------------
Net investment income (loss)......................................................... 1,121,320 5,008,363
------------ ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT AND FOREIGN
CURRENCY TRANSACTIONS:
Net realized gain (loss) on investment transactions ................................... (122,632) (24,727)
Net realized loss on foreign currency related transactions ............................ -- --
Net change in unrealized gain (loss) on investments ................................... (386,991) (2,351,246)
Net change in unrealized loss on translation of assets and liabilities denominated in
foreign currencies ................................................................. -- --
------------ ------------
Net realized and unrealized gain (loss) on investments and foreign currency
transactions .................................................................. (509,623) (2,375,973)
============ ============
Net increase (decrease) in net assets resulting from operations .................. $ 611,697 $ 2,632,390
============ ============
</TABLE>
- --------------------
/(a)/The Growth and Income Fund commenced operations on March 3, 1997.
/(b)/For the Growth and Income Fund and the International Equity Fund, amount
is net of $229 and $66,924 in foreign withholding taxes, respectively.
The accompanying notes are an integral part of these financial statements.
42
<PAGE>
<TABLE>
<CAPTION>
Growth and
Balanced Income
Fund Fund/(a)/
------------- -------------
<S> <C> <C>
INVESTMENT INCOME:
Interest .............................................................................. $ 1,147,247 $ 36,184
Dividends/(b)/......................................................................... 245,589 10,408
------------- -------------
Total investment income ............................................................. 1,392,836 46,592
------------- -------------
EXPENSES:
Advisory fees ......................................................................... 375,270 11,779
Administration fees ................................................................... 56,292 2,356
Transfer agent fees ................................................................... 19,675 8,069
Custodian fees ........................................................................ 32,882 9,882
Professional fees ..................................................................... 16,587 3,646
Trustee fees .......................................................................... 1,711 319
Registration fees ..................................................................... 17,926 10,690
Amortization of deferred organization expenses ........................................ 5,052 646
Other ................................................................................. 43,966 2,131
------------- -------------
Total expenses ...................................................................... 569,361 49,518
Less -- Investment advisory fees waived and expense reimbursements .................... (145,296) (30,673)
------------- -------------
Net expenses ........................................................................ 424,065 18,845
Distribution fees ................................................................... 174 79
------------- -------------
Total expenses and distribution fees ............................................. 424,239 18,924
------------- -------------
Net investment income (loss)......................................................... 968,597 27,668
------------- -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT AND FOREIGN
CURRENCY TRANSACTIONS:
Net realized gain (loss) on investment transactions ................................... 1,165,750 (5,399)
Net realized loss on foreign currency related transactions ............................ -- --
Net change in unrealized gain (loss) on investments ................................... 1,581,144 8,671
Net change in unrealized loss on translation of assets and liabilities denominated in
foreign currencies ................................................................. -- --
------------- -------------
Net realized and unrealized gain (loss) on investments and foreign currency
transactions .................................................................. 2,746,894 3,272
------------- -------------
Net increase (decrease) in net assets resulting from operations .................. $ 3,715,491 $ 30,940
============= =============
<CAPTION>
Growth MidCap
Fund Fund
-------------- -------------
<S> <C> <C>
INVESTMENT INCOME:
Interest .............................................................................. $ 500,777 $ 40,154
Dividends/(b)/......................................................................... 1,489,528 221,218
-------------- -------------
Total investment income ............................................................. 1,990,305 261,372
-------------- -------------
EXPENSES:
Advisory fees ......................................................................... 903,827 290,667
Administration fees ................................................................... 180,765 58,134
Transfer agent fees ................................................................... 38,225 29,517
Custodian fees ........................................................................ 31,476 28,080
Professional fees ..................................................................... 41,881 17,183
Trustee fees .......................................................................... 4,426 1,760
Registration fees ..................................................................... 30,394 15,658
Amortization of deferred organization expenses ........................................ 5,356 4,912
Other ................................................................................. 83,751 36,830
-------------- -------------
Total expenses ...................................................................... 1,320,101 482,741
Less -- Investment advisory fees waived and expense reimbursements .................... -- --
-------------- -------------
Net expenses ........................................................................ 1,320,101 482,741
Distribution fees ................................................................... 954 40
-------------- -------------
Total expenses and distribution fees ............................................. 1,321,055 482,781
-------------- -------------
Net investment income (loss)......................................................... 669,250 (221,409)
-------------- -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT AND FOREIGN
CURRENCY TRANSACTIONS:
Net realized gain (loss) on investment transactions ................................... 9,835,665 (1,249,377)
Net realized loss on foreign currency related transactions ............................ -- --
Net change in unrealized gain (loss) on investments ................................... 14,983,478 (3,574,861)
Net change in unrealized loss on translation of assets and liabilities denominated in
foreign currencies ................................................................. -- --
-------------- -------------
Net realized and unrealized gain (loss) on investments and foreign currency
transactions .................................................................. 24,819,143 (4,824,238)
-------------- -------------
Net increase (decrease) in net assets resulting from operations .................. $ 25,488,393 $ (5,045,647)
============== =============
<CAPTION>
International National
Equity Tax-Free
Fund Bond Fund
------------- ------------
<S> <C> <C>
INVESTMENT INCOME:
Interest .............................................................................. $ 67,913 $ 445,703
Dividends/(b)/......................................................................... 518,769 --
------------- -----------
Total investment income ............................................................. 586,682 445,703
------------- -----------
EXPENSES:
Advisory fees ......................................................................... 433,698 46,160
Administration fees ................................................................... 43,385 13,848
Transfer agent fees ................................................................... 25,660 15,228
Custodian fees ........................................................................ 121,731 19,734
Professional fees ..................................................................... 10,932 3,044
Trustee fees .......................................................................... 1,141 425
Registration fees ..................................................................... 15,359 1,875
Amortization of deferred organization expenses ........................................ 4,880 5,300
Other ................................................................................. 16,330 4,031
------------- -----------
Total expenses ...................................................................... 673,116 109,645
Less -- Investment advisory fees waived and expense reimbursements .................... (175,639) (31,173)
------------- -----------
Net expenses ........................................................................ 497,477 78,472
Distribution fees ................................................................... 20 --
------------- -----------
Total expenses and distribution fees ............................................. 497,497 78,472
------------- -----------
Net investment income (loss)......................................................... 89,185 367,231
------------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT AND FOREIGN
CURRENCY TRANSACTIONS:
Net realized gain (loss) on investment transactions ................................... 1,367,085 5,614
Net realized loss on foreign currency related transactions ............................ (224,293) --
Net change in unrealized gain (loss) on investments ................................... 5,228,799 (83,100)
Net change in unrealized loss on translation of assets and liabilities denominated in
foreign currencies ................................................................. (3,491,860) --
------------- -----------
Net realized and unrealized gain (loss) on investments and foreign currency
transactions .................................................................. 2,879,731 (77,486)
------------- -----------
Net increase (decrease) in net assets resulting from operations .................. $ 2,968,916 $ 289,745
============= ===========
<CAPTION>
Missouri
Tax-Free
Bond Fund
-------------
<S> <C>
INVESTMENT INCOME:
Interest .............................................................................. $ 430,660
Dividends/(b)/......................................................................... --
-----------
Total investment income ............................................................. 430,660
-----------
EXPENSES:
Advisory fees ......................................................................... 44,187
Administration fees ................................................................... 13,256
Transfer agent fees ................................................................... 15,008
Custodian fees ........................................................................ 21,933
Professional fees ..................................................................... 3,276
Trustee fees .......................................................................... 427
Registration fees ..................................................................... 1,640
Amortization of deferred organization expenses ........................................ 5,289
Other ................................................................................. 3,995
-----------
Total expenses ...................................................................... 109,011
Less -- Investment advisory fees waived and expense reimbursements .................... (51,568)
-----------
Net expenses ........................................................................ 57,443
Distribution fees ................................................................... --
-----------
Total expenses and distribution fees ............................................. 57,443
-----------
Net investment income (loss)......................................................... 373,217
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT AND FOREIGN
CURRENCY TRANSACTIONS:
Net realized gain (loss) on investment transactions ................................... 18,627
Net realized loss on foreign currency related transactions ............................ --
Net change in unrealized gain (loss) on investments ................................... (113,456)
Net change in unrealized loss on translation of assets and liabilities denominated in
foreign currencies ................................................................. --
-----------
Net realized and unrealized gain (loss) on investments and foreign currency
transactions .................................................................. (94,829)
-----------
Net increase (decrease) in net assets resulting from operations .................. $ 278,388
===========
</TABLE>
43
<PAGE>
THE COMMERCE FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
For the Six Months Ended April 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Short-Term
Government Bond
Fund Fund
----------- ------------
<S> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ......................................................... $ 1,121,320 $ 5,008,363
Net realized gain (loss) on investment transactions .................................. (122,632) (24,727)
Net realized loss from foreign currency related transactions ......................... -- --
Net change in unrealized gain (loss) on investments .................................. (386,991) (2,351,246)
Net change in unrealized loss on translation of assets and liabilities denominated in
foreign currencies ................................................................. -- --
----------- ------------
Net increase (decrease) in net assets resulting from operations .................... 611,697 2,632,390
----------- ------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income
Institutional Shares ............................................................... (1,121,182) (5,006,590)
Service Shares ..................................................................... (138) (1,773)
From net realized gain on investment transactions
Institutional Shares ............................................................... -- (184,700)
----------- ------------
Total distributions to shareholders ............................................. (1,121,320) (5,193,063)
----------- ------------
FROM SHARE TRANSACTIONS:
Net proceeds from sale of shares
Institutional Shares ............................................................... 15,071,926 36,118,854
Service Shares ..................................................................... 34,724 201,718
Reinvestment of dividends and distributions
Institutional Shares ............................................................... 684,572 4,106,064
Service Shares ..................................................................... 138 1,103
Cost of shares redeemed
Institutional Shares ............................................................... (9,987,256) (20,880,161)
Service Shares ..................................................................... -- --
----------- ------------
Net increase in net assets resulting from share transactions .................... 5,804,104 19,547,578
----------- ------------
Total increase .................................................................. 5,294,481 16,986,905
NET ASSETS:
Beginning of period .................................................................. 33,838,511 151,204,716
----------- ------------
End of period ........................................................................ $39,132,992 $168,191,621
=========== ============
ACCUMULATED UNDISTRIBUTED NET INVESTMENT INCOME (LOSS) .................................... $ 16,269 $ 76,707
=========== ============
SUMMARY OF SHARE TRANSACTIONS:
Institutional Shares
Sold ................................................................................. 823,703 1,906,380
Issued on reinvestment of dividends and distributions ................................ 37,422 217,003
Redeemed ............................................................................. (546,009) (1,103,351)
----------- -----------
Increase in shares outstanding ..................................................... 315,116 1,020,032
=========== ===========
Service Shares
Sold ................................................................................. 1,915 10,739
Issued on reinvestment of dividends and distributions ................................ 8 59
Redeemed ............................................................................. -- --
----------- -----------
Increase in shares outstanding ..................................................... 1,923 10,798
=========== ===========
</TABLE>
- -------------
/(a)/The Growth and Income Fund commenced operations on March 3, 1997.
The accompanying notes are an integral part of these financial statements.
44
<PAGE>
<TABLE>
<CAPTION>
Growth and
Balanced Income
Fund Fund /(a)/
----------- -----------
<S> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ........................................................ $ 968,597 $ 27,668
Net realized gain (loss) on investment transactions ................................. 1,165,750 (5,399)
Net realized loss from foreign currency related transactions ........................ -- --
Net change in unrealized gain (loss) on investments ................................. 1,581,144 8,671
Net change in unrealized loss on translation of assets and liabilities denominated in
foreign currencies ............................................................... -- --
----------- -----------
Net increase (decrease) in net assets resulting from operations .................... 3,715,491 30,940
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income
Institutional Shares ............................................................... (921,215) --
Service Shares ..................................................................... (1,773) --
From net realized gain on investment transactions
Institutional Shares ............................................................... (3,708,474) --
----------- -----------
Total distributions to shareholders ............................................. (4,631,462) --
----------- -----------
FROM SHARE TRANSACTIONS:
Net proceeds from sale of shares
Institutional Shares ............................................................... 20,447,067 12,088,351
Service Shares ..................................................................... 519,507 366,523
Reinvestment of dividends and distributions
Institutional Shares ............................................................... 4,562,408 --
Service Shares ..................................................................... 1,816 --
Cost of shares redeemed
Institutional Shares ............................................................... (12,934,021) (78,269)
Service Shares ..................................................................... -- --
------------ -----------
Net increase in net assets resulting from share transactions .................... 12,596,777 12,376,605
----------- -----------
Total increase .................................................................. 11,680,806 12,407,545
NET ASSETS:
Beginning of period .................................................................. 69,880,248 --
----------- -----------
End of period ........................................................................ $81,561,054 $12,407,545
=========== ===========
ACCUMULATED UNDISTRIBUTED NET INVESTMENT INCOME (LOSS) .................................... $ 188,057 $ 27,668
=========== ===========
SUMMARY OF SHARE TRANSACTIONS:
Institutional Shares
Sold ................................................................................. 863,455 676,660
Issued on reinvestment of dividends and distributions ................................ 194,600 --
Redeemed ............................................................................. (547,418) (4,470)
----------- -----------
Increase in shares outstanding ..................................................... 510,637 672,190
=========== ===========
Service Shares
Sold ................................................................................. 21,931 20,640
Issued on reinvestment of dividends and distributions ................................ 78 --
Redeemed ............................................................................. -- --
----------- -----------
Increase in shares outstanding ..................................................... 22,009 20,640
=========== ===========
<CAPTION>
Growth MidCap
Fund Fund
--------------- ----------------
<S> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ......................................................... $ 669,250 $ (221,409)
Net realized gain (loss) on investment transactions .................................. 9,835,665 (1,249,377)
Net realized loss from foreign currency related transactions ......................... -- --
Net change in unrealized gain (loss) on investments .................................. 14,983,478 (3,574,861)
Net change in unrealized loss on translation of assets and liabilities denominated in
foreign currencies ................................................................ -- --
------------ ------------
Net increase (decrease) in net assets resulting from operations .................... 25,488,393 (5,045,647)
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income
Institutional Shares ............................................................... (619,199) --
Service Shares ..................................................................... (1,524) --
From net realized gain on investment transactions
Institutional Shares ............................................................... (14,172,190) (781,830)
------------ ------------
Total distributions to shareholders ............................................. (14,792,913) (781,830)
------------ ------------
FROM SHARE TRANSACTIONS:
Net proceeds from sale of shares
Institutional Shares ............................................................... 65,388,431 18,498,948
Service Shares ..................................................................... 2,199,304 100,316
Reinvestment of dividends and distributions
Institutional Shares ............................................................... 13,311,135 678,633
Service Shares ..................................................................... 1,514 --
Cost of shares redeemed
Institutional Shares ............................................................... (32,249,005) (10,931,689)
Service Shares ..................................................................... (10) --
------------ ------------
Net increase in net assets resulting from share transactions .................... 48,651,369 8,346,208
------------ ------------
Total increase .................................................................. 59,346,849 2,518,731
NET ASSETS:
Beginning of period .................................................................. 208,907,785 74,641,440
------------ ------------
End of period ........................................................................ $268,254,634 $ 77,160,171
============ ============
ACCUMULATED UNDISTRIBUTED NET INVESTMENT INCOME (LOSS) .................................... $ 64,871 $ (221,409)
============ ============
SUMMARY OF SHARE TRANSACTIONS:
Institutional Shares
Sold ................................................................................. 2,220,179 660,467
Issued on reinvestment of dividends and distributions ................................ 468,764 23,870
Redeemed ............................................................................. (1,086,112) (389,568)
------------ ------------
Increase in shares outstanding ..................................................... 1,602,831 294,769
============ ============
Service Shares
Sold ................................................................................. 73,720 3,583
Issued on reinvestment of dividends and distributions ................................ 51 --
Redeemed ............................................................................. -- --
------------ ------------
Increase in shares outstanding ..................................................... 73,771 3,583
============ ============
<CAPTION>
International National
Equity Tax-Free
Fund Bond Fund
--------------- --------------
<S> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ......................................................... $ 89,185 $ 367,231
Net realized gain (loss) on investment transactions .................................. 1,367,085 5,614
Net realized loss from foreign currency related transactions ......................... (224,293) --
Net change in unrealized gain (loss) on investments .................................. 5,228,799 (83,100)
Net change in unrealized loss on translation of assets and liabilities denominated in
foreign currencies ................................................................ (3,491,860) --
----------- -----------
Net increase (decrease) in net assets resulting from operations .................... 2,968,916 289,745
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income
Institutional Shares ............................................................... (268,546) (367,231)
Service Shares ..................................................................... -- --
From net realized gain on investment transactions
Institutional Shares ............................................................... (598,118) --
----------- -----------
Total distributions to shareholders ............................................. (866,664) (367,231)
----------- -----------
FROM SHARE TRANSACTIONS:
Net proceeds from sale of shares
Institutional Shares ............................................................... 15,098,968 4,204,062
Service Shares ..................................................................... 67,611 --
Reinvestment of dividends and distributions
Institutional Shares ............................................................... 679,367 56,832
Service Shares ..................................................................... -- --
Cost of shares redeemed
Institutional Shares ............................................................... (5,789,514) (1,823,689)
Service Shares ..................................................................... -- --
----------- -----------
Net increase in net assets resulting from share transactions .................... 10,056,432 2,437,205
----------- -----------
Total increase .................................................................. 12,158,684 2,359,719
NET ASSETS:
Beginning of period .................................................................. 51,589,026 17,613,285
----------- -----------
End of period ........................................................................ $63,747,710 $19,973,004
=========== ===========
ACCUMULATED UNDISTRIBUTED NET INVESTMENT INCOME (LOSS) .................................... $ 66,141 $ 9,525
=========== ===========
SUMMARY OF SHARE TRANSACTIONS:
Institutional Shares
Sold ................................................................................. 701,413 227,284
Issued on reinvestment of dividends and distributions ................................ 31,993 3,071
Redeemed ............................................................................. (268,013) (98,407)
---------- -----------
Increase in shares outstanding ..................................................... 465,393 131,948
========== ===========
Service Shares
Sold ................................................................................. 3,123
Issued on reinvestment of dividends and distributions ................................ --
Redeemed ............................................................................. --
----------
Increase in shares outstanding ..................................................... 3,123
==========
<CAPTION>
Missouri
Tax-Free
Bond
Fund
--------------
<S> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ......................................................... $ 373,217
Net realized gain (loss) on investment transactions .................................. 18,627
Net realized loss from foreign currency related transactions ......................... --
Net change in unrealized gain (loss) on investments .................................. (113,456)
Net change in unrealized loss on translation of assets and liabilities denominated in
foreign currencies ................................................................ --
-----------
Net increase (decrease) in net assets resulting from operations .................... 278,388
-----------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income
Institutional Shares ............................................................... (373,217)
Service Shares ..................................................................... --
From net realized gain on investment transactions
Institutional Shares ............................................................... (14,681)
-----------
Total distributions to shareholders ............................................. (387,898)
-----------
FROM SHARE TRANSACTIONS:
Net proceeds from sale of shares
Institutional Shares ............................................................... 3,597,640
Service Shares ..................................................................... --
Reinvestment of dividends and distributions
Institutional Shares ............................................................... 64,758
Service Shares ..................................................................... --
Cost of shares redeemed
Institutional Shares ............................................................... (1,999,615)
Service Shares ..................................................................... --
-----------
Net increase in net assets resulting from share transactions .................... 1,662,783
-----------
Total increase .................................................................. 1,553,273
NET ASSETS:
Beginning of period .................................................................. $17,034,414
-----------
End of period ........................................................................ $18,587,687
===========
ACCUMULATED UNDISTRIBUTED NET INVESTMENT INCOME (LOSS) .................................... $ 10,626
===========
SUMMARY OF SHARE TRANSACTIONS:
Institutional Shares
Sold ................................................................................. 196,918
Issued on reinvestment of dividends and distributions ................................ 3,541
Redeemed ............................................................................. (109,692)
-----------
Increase in shares outstanding ..................................................... 90,767
===========
Service Shares
Sold .................................................................................
Issued on reinvestment of dividends and distributions ................................
Redeemed .............................................................................
Increase in shares outstanding .....................................................
</TABLE>
45
<PAGE>
THE COMMERCE FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
For the Year Ended October 31, 1996
<TABLE>
<CAPTION>
Short-Term
Government Bond
Fund Fund
----------- ------------
<S> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ....................................................... $ 1,614,004 $ 7,329,409
Net realized gain (loss) on investment transactions ................................ (2,446) 250,806
Net realized loss from foreign currency related transactions ....................... -- --
Net change in unrealized gain (loss) on investments ................................ (219,238) (1,214,248)
Net change in unrealized loss on translation of assets and liabilities denominated
in foreign currencies ........................................................... -- --
----------- ------------
Net increase in net assets resulting from operations ............................. 1,392,320 6,365,967
----------- ------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income ......................................................... (1,614,004) (7,329,409)
From net realized gain on investment transactions .................................. (246,010) (1,391,915)
----------- ------------
Total distributions to shareholders .............................................. (1,860,014) (8,721,324)
----------- ------------
FROM SHARE TRANSACTIONS:
Net proceeds from sale of shares ................................................... 24,924,994 78,675,112
Reinvestment of dividends and distributions ........................................ 1,295,008 7,491,166
Cost of shares redeemed ............................................................ (12,125,108) (31,110,483)
----------- ------------
Net increase in net assets resulting from share transactions ..................... 14,094,894 55,055,795
----------- ------------
Total increase ................................................................ 13,627,200 52,700,438
NET ASSETS:
Beginning of year .................................................................. 20,211,311 98,504,278
----------- ------------
End of year......................................................................... $33,838,511 $151,204,716
=========== ============
ACCUMULATED UNDISTRIBUTED
NET INVESTMENT INCOME ............................................................... $ 16,269 $ 76,707
=========== ============
SUMMARY OF SHARE TRANSACTIONS:
Sold ............................................................................... 1,348,707 4,132,922
Issued on reinvestment of dividends and distributions .............................. 70,101 391,702
Redeemed ........................................................................... (656,586) (1,619,214)
----------- ------------
Increase in shares outstanding ................................................... 762,222 2,905,410
=========== ============
</TABLE>
- --------------
The above information relates to Institutional Shares.
The accompanying notes are an integral part of these financial statements.
46
<PAGE>
<TABLE>
<CAPTION>
Balanced Growth
Fund Fund
----------- ------------
<S> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ....................................................... $ 1,444,493 $ 1,215,945
Net realized gain (loss) on investment transactions ................................ 3,633,059 14,171,671
Net realized loss from foreign currency related transactions ....................... -- --
Net change in unrealized gain (loss) on investments ................................ 2,979,254 20,413,669
Net change in unrealized loss on translation of assets and liabilities denominated
in foreign currencies ........................................................... -- --
----------- ------------
Net increase in net assets resulting from operations ............................. 8,056,806 35,801,285
----------- ------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income ......................................................... (1,422,102) (1,233,937)
From net realized gain on investment transactions .................................. (1,461,563) (6,627,050)
----------- ------------
Total distributions to shareholders .............................................. (2,883,665) (7,860,987)
----------- ------------
FROM SHARE TRANSACTIONS:
Net proceeds from sale of shares ................................................... 29,373,815 93,709,847
Reinvestment of dividends and distributions ........................................ 2,865,066 7,452,682
Cost of shares redeemed ............................................................ (15,860,466) (61,930,178)
----------- ------------
Net increase in net assets resulting from share transactions ..................... 16,378,415 39,232,351
----------- ------------
Total increase ................................................................ 21,551,556 67,172,649
NET ASSETS:
Beginning of year .................................................................. 48,328,692 141,735,136
----------- ------------
End of year......................................................................... $69,880,248 $208,907,785
============ ============
ACCUMULATED UNDISTRIBUTED
NET INVESTMENT INCOME ............................................................... $ 142,448 $ 16,344
=========== ============
SUMMARY OF SHARE TRANSACTIONS:
Sold ............................................................................... 1,297,097 3,571,900
Issued on reinvestment of dividends and distributions .............................. 126,879 296,637
Redeemed ........................................................................... (699,003) (2,393,934)
----------- ------------
Increase in shares outstanding ................................................... 724,973 1,474,603
=========== ============
<CAPTION>
International
MidCap Equity
Fund Fund
----------- -----------
<S> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ....................................................... $ (225,170) $ 282,561
Net realized gain (loss) on investment transactions ................................ 583,211 606,179
Net realized loss from foreign currency related transactions ....................... -- (60,783)
Net change in unrealized gain (loss) on investments ................................ 6,869,864 4,232,406
Net change in unrealized loss on translation of assets and liabilities denominated
in foreign currencies ........................................................... -- (1,006,981)
----------- -----------
Net increase in net assets resulting from operations ............................. 7,227,905 4,053,382
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income ......................................................... -- (107,021)
From net realized gain on investment transactions .................................. (1,205,033) (85,792)
----------- -----------
Total distributions to shareholders .............................................. (1,205,033) (192,813)
----------- -----------
FROM SHARE TRANSACTIONS:
Net proceeds from sale of shares ................................................... 41,229,162 33,783,562
Reinvestment of dividends and distributions ........................................ 1,073,165 156,566
Cost of shares redeemed ............................................................ (15,348,445) (7,225,443)
----------- -----------
Net increase in net assets resulting from share transactions ..................... 26,953,882 26,714,685
----------- -----------
Total increase ................................................................ 32,976,754 30,575,254
NET ASSETS:
Beginning of year .................................................................. 41,664,686 21,013,772
----------- -----------
End of year......................................................................... $74,641,440 $51,589,026
=========== ===========
ACCUMULATED UNDISTRIBUTED
NET INVESTMENT INCOME ............................................................... -- $ 245,502
=========== ===========
SUMMARY OF SHARE TRANSACTIONS:
Sold ............................................................................... 1,537,748 1,685,034
Issued on reinvestment of dividends and distributions .............................. 41,581 8,234
Redeemed ........................................................................... (566,313) (359,077)
----------- -----------
Increase in shares outstanding ................................................... 1,013,016 1,334,191
=========== ===========
<CAPTION>
National Missouri
Tax-Free Tax-Free
Bond Fund Bond Fund
----------- -----------
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ....................................................... $ 539,768 $ 506,160
Net realized gain (loss) on investment transactions ................................ (5,961) 20,856
Net realized loss from foreign currency related transactions ....................... -- --
Net change in unrealized gain (loss) on investments ................................ (25,939) (54,709)
Net change in unrealized loss on translation of assets and liabilities denominated
in foreign currencies ........................................................... -- --
----------- -----------
Net increase in net assets resulting from operations ............................. 507,868 472,307
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income ......................................................... (539,768) (506,160)
From net realized gain on investment transactions .................................. (5,570) --
----------- -----------
Total distributions to shareholders .............................................. (545,338) (506,160)
----------- -----------
FROM SHARE TRANSACTIONS:
Net proceeds from sale of shares ................................................... 10,518,564 10,435,951
Reinvestment of dividends and distributions ........................................ 54,574 71,819
Cost of shares redeemed ............................................................ (3,643,702) (2,328,641)
----------- -----------
Net increase in net assets resulting from share transactions ..................... 6,929,436 8,179,129
----------- -----------
Total increase ................................................................ 6,891,966 8,145,276
NET ASSETS:
Beginning of year .................................................................. 10,721,319 8,889,138
----------- -----------
End of year......................................................................... $17,613,285 $17,034,414
=========== ===========
ACCUMULATED UNDISTRIBUTED
NET INVESTMENT INCOME ............................................................... $ 9,525 $ 10,626
============ ===========
SUMMARY OF SHARE TRANSACTIONS:
Sold ............................................................................... 570,941 572,789
Issued on reinvestment of dividends and distributions .............................. 2,968 3,935
Redeemed ........................................................................... (197,928) (127,110)
----------- -----------
Increase in shares outstanding ................................................... 375,981 449,614
=========== ===========
</TABLE>
47
<PAGE>
THE COMMERCE FUNDS
SHORT-TERM GOVERNMENT FUND
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
Income from Distributions to
investment operations shareholders
--------------------------------- ---------------------------------
Net
realized
and
unrealized
Net asset gain
value, Net (loss) on From net From net
beginning investment invest- investment realized gain
of period income ments/(b)/ income on investments
-------------- ------------- ----------------- ------------ -------------------
For the Six Months Ended April 30, 1997 (unaudited)
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Institutional Shares $18.43 $0.56 $(0.25) $(0.56) --
Service Shares/(a)/ 18.37 0.40 (0.19) (0.40) --
For the Year Ended October 31, 1996
- ---------------------------------------------------
Institutional Shares 18.83 1.09 (0.18) (1.09) (0.22)
For the Period December 12, 1994 (commencement of operations) through October 31, 1995
- ----------------------------------------------------------------------------------------------------------------------------
Institutional Shares 18.00 1.06 0.83 (1.06) --
</TABLE>
<TABLE>
<CAPTION>
Ratio
Net Ratio of net
asset of net investment Net
value, expenses income assets at
end to average to average Portfolio end
of Total net net turnover of period
period return/(c)/ assets assets rate (in 000's)
-------- ------------- -------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30, 1997 (unaudited)
- ----------------------------------------------------------------------
Institutional Shares $18.18 1.68% 0.68%/(d)/ 6.12%/(d)/ 25% $ 39,098
Service Shares/(a)/ 18.18 1.14 0.93/(d)/ 4.93/(d)/ 25 35
For the Year Ended October 31, 1996
- --------------------------------------------
Institutional Shares 18.43 5.02 0.68 5.90 12 33,839
For the Period December 12, 1994 (commencement of operations) through October 31, 1995
- ----------------------------------------------------------------------------------------------------------------------------
Institutional Shares 18.83 10.72 0.68/(d)/ 6.38/(d)/ 158 20,211
</TABLE>
<TABLE>
<CAPTION>
Ratios assuming
no waiver of
investment advisory
fees or expense
reimbursements
--------------------------------
Ratio
of net
Ratio investment
of income
expenses to
to average average
net net
assets assets
--------------- ---------------
<S> <C> <C>
For the Six Months Ended April 30, 1997 (unaudited)
- -----------------------------------------------------
Institutional Shares 1.13%/(d)/ 5.67%/(d)/
Service Shares/(a)/ 1.38/(d)/ 4.48/(d)/
For the Year Ended October 31, 1996
- --------------------------------------------
Institutional Shares 1.11 5.47
For the Period December 12, 1994 (commencement of operations) through October 31, 1995
- ---------------------------------------------------------------------------------------
Institutional Shares 1.14/(d)/ 5.92/(d)/
</TABLE>
- --------------------
/(a)/ Service share activity commenced on January 2, 1997.
/(b)/ Includes the balancing effect of calculating per share amounts.
/(c)/ Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no
sales charges. Total return would be reduced if sales charges were taken
into account.
/(d)/ Annualized.
The accompanying notes are an integral part of these financial statements.
48
<PAGE>
THE COMMERCE FUNDS
BOND FUND
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
Income from
investment operations
----------------------------------
Net
realized
and
unrealized
Net asset gain
value, Net (loss) on
beginning investment invest-
of period income ments/(b)/
----------------- --------------- ---------------
<S> <C> <C> <C>
For the Six Months Ended April 30, 1997 (unaudited)
- ---------------------------------------------------
Institutional Shares $19.07 $0.60 $(0.28)
Service Shares/(a)/ 19.00 0.39 (0.23)
For the Year Ended October 31, 1996
- -----------------------------------
Institutional Shares 19.61 1.16 (0.28)
For the Period December 12, 1994
(commencement of operations) through October 31, 1995
- -----------------------------------------------------
Institutional Shares 18.00 1.12 1.61
<CAPTION>
Distributions to
shareholders
---------------------------------
Net
asset
value,
From net From net end
investment realized gain of Total
income on investments period return/(c)/
-------------- ----------------- ---------- ------------
<S> <C> <C> <C> <C>
For the Six Months Ended April 30, 1997 (unaudited)
- ---------------------------------------------------
Institutional Shares $(0.60) $(0.02) $18.77 1.69%
Service Shares/(a)/ (0.39) -- 18.77 0.86
For the Year Ended October 31, 1996
- -----------------------------------
Institutional Shares (1.16) (0.26) 19.07 4.71
For the Period December 12, 1994 (commencement of operations)
through October 31, 1995
- -------------------------------------------------------------
Institutional Shares (1.12) -- 19.61 15.59
<CAPTION>
Ratio
Ratio of net
of net investment Net
expenses income assets at
to average to average Portfolio end
net net turnover of period
assets assets rate (in 000's)
-------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
For the Six Months Ended April 30, 1997 (unaudited)
- ---------------------------------------------------
Institutional Shares 0.87%/(d)/ 6.34%/(d)/ 5% $ 167,989
Service Shares/(a)/ 1.12/(d)/ 5.82/(d)/ 5 203
For the Year Ended October 31, 1996
- -----------------------------------
Institutional Shares 0.84 6.10 31 151,205
For the Period December 12, 1994
(commencement of operations) through October 31, 1995
- -----------------------------------------------------
Institutional Shares 0.88/(d)/ 6.64/(d)/ 58 98,504
</TABLE>
- --------------------
/(a)/ Service share activity commenced on January 2, 1997.
/(b)/ Includes the balancing effect of calculating per share amounts.
/(c)/ Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no
sales charges. Total return would be reduced if sales charges were taken
into account.
/(d)/ Annualized.
The accompanying notes are an integral part of these financial statements.
49
<PAGE>
THE COMMERCE FUNDS
BALANCED FUND
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
Income from Distributions to
investment operations shareholders
---------------------------- --------------------------------
Net
realized
and Net
unrealized asset
Net asset gain value,
value, Net on From net From net end
beginning investment invest- investment realized gain of Total
of period income ments/(b)/ income on investments period return/(c)/
------------ ------------ ------------ ----------- ---------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30, 1997 (unaudited)
- ---------------------------------------------------
Institutional Shares $24.00 $0.29 $0.94 $(0.29) $(1.26) $23.68 5.25%
Service Shares/(a)/ 23.25 0.13 0.43 (0.13) -- 23.68 2.42
For the Year Ended October 31, 1996
- -----------------------------------
Institutional Shares 22.10 0.54 2.56 (0.54) (0.66) 24.00 14.45
For the Period December 12, 1994 (commencement of operations) through October 31, 1995
- --------------------------------------------------------------------------------------
Institutional Shares 18.00 0.59 4.06 (0.55) -- 22.10 26.14
<CAPTION>
Ratios assuming
no waiver of
investment advisory
fees or expense
reimbursements
------------------------
Ratio Ratio
Ratio of net Ratio of net
of net investment Net of investment
expenses income Average assets at expenses income
to average to average Portfolio commis- end to average to average
net net turnover sion of period net net
assets assets rate rate (in 000's) assets assets
------------ ------------ ------------ ----------- ---------------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30, 1997 (unaudited)
- ---------------------------------------------------
Institutional Shares 1.13%/(d)/ 2.58%/(d)/ 14% $0.0580 $81,040 1.52%/(d)/ 2.19%/(d)/
Service Shares/(a)/ 1.38/(d)/ 2.49/(d)/ 14 0.0580 521 1.77/(d)/ 2.10/(d)/
For the Year Ended October 31, 1996
- -----------------------------------
Institutional Shares 1.13 2.47 58 0.0764 69,880 1.45 2.15
For the Period December 12, 1994 (commencement of operations) through October 31, 1995
- --------------------------------------------------------------------------------------
Institutional Shares 1.13/(d)/ 3.28/(d)/ 59 -- 48,329 1.45/(d)/ 2.96/(d)/
</TABLE>
- --------------------
/(a)/ Service share activity commenced on January 2, 1997.
/(b)/ Includes the balancing effect of calculating per share amounts.
/(c)/ Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no
sales charges. Total return would be reduced if sales charges were taken
into account.
/(d)/ Annualized.
The accompanying notes are an integral part of these financial statements.
50
<PAGE>
THE COMMERCE FUNDS
GROWTH AND INCOME FUND
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
Income from Distributions to
investment operations shareholders
------------------------------ -------------------------------
Net
realized Net
and asset
Net asset unrealized value,
value, Net loss on From net From net end
beginning investment invest- investment realized gain of
of period income ments /(b)/ income on investments period
----------- ------------ ------------ ------------ ---------------- --------
For the Period March 3, 1997 /(a)/ through April 30, 1997 (unaudited)
- ---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Institutional Shares $18.00 $0.04 $(0.13) -- -- $17.91
Service Shares 18.00 0.02 (0.12) -- -- 17.90
<CAPTION>
Ratio
Ratio of net
of net investment Net
expenses income assets at
to average to average Portfolio Average end
Total net net turnover commission of period
return /(c)/ assets assets rate Rate (in 000's)
-------------------------------------------------------------------------------
For the Period March 3, 1997 /(a)/ through April 30, 1997 (unaudited)
- ---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Institutional Shares (0.50)% 1.20%/(d)/ 1.76%/(d)/ 1% $ 0.0794 $12,039
Service Shares (0.56) 1.45/(d)/ 1.46/(d)/ 1 0.0794 369
<CAPTION>
Ratios assuming
no expense
reimbursements
--------------------------------
Ratio
Ratio of net
of net investment
expenses loss to
to average average
net net
assets assets
--------------------------------
For the Period March 3, 1997 /(a)/ through April 30, 1997 (unaudited)
- ---------------------------------------------------------------------
<S> <C> <C>
Institutional Shares 3.14%/(d)/ (0.18)%/(d)/
Service Shares 3.39/(d)/ (0.48)/(d)/
</TABLE>
- --------------------
/(a)/ Commencement of operations.
/(b)/ Includes the balancing effect of calculating per share amounts.
/(c)/ Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no
sales charges. Total return would be reduced if sales charges were taken
into account.
/(d)/ Annualized.
The accompanying notes are an integral part of these financial statements.
51
<PAGE>
THE COMMERCE FUNDS
GROWTH FUND
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
Income from Distributions to
investment operations shareholders
------------------------------ --------------------------------
Net
realized
and
Net asset unrealized
value, Net gain on From net From net
beginning investment invest- investment realized gain
of period income ments (b) income on investments
------------- ------------- ------------- ------------ -----------------
<S> <C> <C> <C> <C> <C>
For the Six Months Ended April 30, 1997 (unaudited)
- ---------------------------------------------------
Institutional Shares $28.95 $0.08 $3.13 $(0.08) $(1.92)
Service Shares(a) 28.26 0.03 1.89 (0.03) --
For the Year Ended October 31, 1996
- -----------------------------------
Institutional Shares 24.68 0.19 5.40 (0.19) (1.13)
For the Period December 12, 1994 (commencement of operations) through October 31, 1995
- --------------------------------------------------------------------------------------
Institutional Shares 18.00 0.15 6.68 (0.15) --
<CAPTION>
Ratio
Net Ratio of net
asset of net investment
value, expenses income
end to average to average Portfolio
of Total net net turnover
period return/(c)/ assets assets rate
--------- ------------- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
For the Six Months Ended April 30, 1997 (unaudited)
- ---------------------------------------------------
Institutional Shares $30.16 11.51% 1.10%/(d)/ 0.56%/(d)/ 19%
Service Shares(a) 30.15 6.79 1.35/(d)/ 0.33/(d)/ 19
For the Year Ended October 31, 1996
- -----------------------------------
Institutional Shares 28.95 23.43 1.08 0.72 36
For the Period December 12, 1994 (commencement of operations) through October 31, 1995
- --------------------------------------------------------------------------------------
Institutional Shares 24.68 38.06 1.11/(d)/ 0.81/(d)/ 33
<CAPTION>
Net
Average assets at
commis- end
sion of period
rate (in 000's)
------------ -------------
<S> <C> <C>
For the Six Months Ended April 30, 1997 (unaudited)
- ---------------------------------------------------
Institutional Shares $0.0548 $266,031
Service Shares/(a)/ 0.0548 2,224
For the Year Ended October 31, 1996
- -----------------------------------
Institutional Shares 0.0654 208,908
For the Period December 12, 1994 (commencement of operations) through October 31, 1995
- --------------------------------------------------------------------------------------
Institutional Shares -- 141,735
</TABLE>
- --------------------
/(a)/ Service share activity commenced on January 2, 1997.
/(b)/ Includes the balancing effect of calculating per share amounts.
/(c)/ Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no
sales charges. Total return would be reduced if sales charges were taken
into account.
/(d)/ Annualized.
The accompanying notes are an integral part of these financial statements
52
<PAGE>
THE COMMERCE FUNDS
MIDCAP FUND
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
Income from Distributions to
investment operations shareholders
--------------------------- ----------------------------
Net
realized
and Net
unrealized asset
Net asset gain value,
value, Net (loss) on From net From net end
beginning investment invest- investment realized gain of
of period loss ments/(b)/ income on investments period
----------- ------------- ------------- ------------ --------------- ---------
<S> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30, 1997 (unaudited)
- ---------------------------------------------------
Institutional Shares $28.06 $(0.06) $(1.63) -- $(0.29) $26.08
Service Shares/(a)/ 28.64 (0.04) (2.53) -- -- 26.07
For the Year Ended October 31, 1996
- -------------------------------------------
Institutional Shares 25.30 (0.07) 3.51 -- (0.68) 28.06
For the Period December 12, 1994 (commencement of operations) through October 31, 1995
- --------------------------------------------------------------------------------------
Institutional Shares 18.00 (0.04) 7.34 -- -- 25.30
<CAPTION>
Ratio
Ratio of net
of net investment Net
expenses loss Average assets at
to average to average Portfolio commis- end
Total net net turnover sion of period
return/(c)/ assets assets rate rate (in 000's)
------------- ----------- ------------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30, 1997 (unaudited)
- ---------------------------------------------------
Institutional Shares (6.10)% 1.25%/(d)/ (0.57)%/(d)/ 36% $0.0608 $77,067
Service Shares/(a)/ (8.97) 1.50/(d)/ (0.80)/(d)/ 36 0.0608 93
For the Year Ended October 31, 1996
- -------------------------------------------
Institutional Shares 13.78 1.22 (0.37) 71 0.0692 74,641
For the Period December 12, 1994 (commencement
of operations) through October 31, 1995
- ------------------------------------------------ 40.56 1.32/(d)/ (0.29)/(d)/ 59 -- 41,665
Institutional Shares
</TABLE>
- ------------------
/(a)/ Service share activity commenced on January 2, 1997.
/(b)/ Includes the balancing effect of calculating per share amounts.
/(c)/ Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no
sales charges. Total return would be reduced if sales charges were taken
into account.
/(d)/ Annualized.
The accompanying notes are an integral part of these financial statements.
53
<PAGE>
THE COMMERCE FUNDS
INTERNATIONAL EQUITY FUND
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
Income from Distributions to
investment operations shareholders
------------------------------------ ---------------------------
Net
Net realized and
realized unrealized
and gain (loss) Net Ratio
unrealized on foreign asset of net
Net asset gain currency value, expenses
value, Net (loss) on related From net From net end to average
beginning investment invest- trans- investment realized gain of Total net
of period income ments/(b)/ actions/(b)/ income on investments period return/(c)/ assets
----------- ------------ ---------- ------------ ----------- --------------- -------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30, 1997 (unaudited)
- ---------------------------------------------------
Institutional Shares $20.96 $0.03 $2.54 $(1.43) $(0.10) $(0.24) $21.76 5.50% 1.72%/(d)/
Service Shares/(a)/ 21.70 0.05 (0.01) 0.01 -- -- 21.75 0.23 1.97/(d)/
For the Year Ended October 31, 1996
- -----------------------------------
Institutional Shares 18.64 0.11 3.02 (0.67) (0.07) (0.07) 20.96 13.25 1.72
For the Period December 12, 1994 (commencement of operations) through October 31, 1995
- --------------------------------------------------------------------------------------
Institutional Shares 18.00 0.12 0.95 (0.40) (0.03) -- 18.64 3.73 1.81/(d)/
<CAPTION>
Ratios assuming
no waiver of
investment advisory
fees or expense
reimbursements
------------------------
Ratio
Ratio of net
of net Net Ratio investment
investment Average assets at of income
income Portfolio commis- end expenses (loss) to
to average turnover sion of period to average average
net assets rate rate (in 000's) net assets net assets
----------- --------- --------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30, 1997 (unaudited)
- ---------------------------------------------------
Institutional Shares 0.31%/(d)/ 11% $0.0009 $63,680 2.33%/(d)/ (0.30)%/(d)/
Service Shares/(a)/ 2.09/(d)/ 11 0.0009 68 2.58/(d)/ 1.48/(d)/
For the Year Ended October 31, 1996
- -----------------------------------
Institutional Shares 0.74 21 0.0147 51,589 2.64 (0.18)
For the Period December 12, 1994 (commencement of operations) through October 31, 1995
- --------------------------------------------------------------------------------------
Institutional Shares 1.06/(d)/ 25 -- 21,014 3.50/(d)/ (0.63)/(d)/
</TABLE>
- -----------------
/(a)/ Commencement of operations.
/(b)/ Includes the balancing effect of calculating per share amounts.
/(c)/ Assumes investment of the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no
sales charges. Total return would be reduced if a sales charge were taken
into account.
/(d)/ Annualized.
The accompanying notes are an integral part of these financial statements.
54
<PAGE>
THE COMMERCE FUNDS
NATIONAL TAX-FREE BOND FUND
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
Income from Distributions to
investment operations shareholders
------------------------- ---------------------------
Net
realized
and Net
unrealized asset
Net asset gain value,
value, Net (loss) on From net From net end
beginning investment invest- investment realized gain of Total
of period income ments (b) income on investments period return /(c)/
----------- ----------- ----------- ----------- -------------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30, 1997 (unaudited)
- ---------------------------------------------------
$18.46 $0.37 $(0.07) $(0.37) $ -- $18.39 1.60%
For the Year Ended October 31, 1996
- -----------------------------------
18.54 0.73 (0.07) (0.73) (0.01) 18.46 3.60
For the Period February 21, 1995 /(a)/ through October 31, 1995
- ---------------------------------------------------------------
18.00 0.54 0.54 (0.54) -- 18.54 6.06
<CAPTION>
Ratios assuming
no expense
reimbursements
---------------------------
Ratio Ratio Ratio
of net of net Net Ratio of net
expenses investment assets at of investment
to average income Portfolio end expenses income
net to average turnover of period to average to average
assets net assets rate (in 000's) net assets net assets
---------- ------------ --------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30, 1997 (unaudited)
- ---------------------------------------------------
0.85%/(d)/ 3.98%/(d)/ 21% $19,973 1.19%/(d)/ 3.64%/(d)/
For the Year Ended October 31, 1996
- -----------------------------------
0.85 3.93 34 17,613 1.55 3.23
For the Period February 21, 1995 /(a)/ through October 31, 1995
- ---------------------------------------------------------------
0.85/(d)/ 4.19/(d)/ 19 10,721 1.90/(d)/ 3.14/(d)/
</TABLE>
- -----------------
/(a)/ Commencement of operations.
/(b)/ Includes the balancing effect of calculating per share amounts.
/(c)/ Assumes investment at the beginning of the period, reinvestment of all
dividends and distributions, a complete redemption of the investment at
the net asset value at the end of the period and no sales charges. Total
return would be reduced if a sales charge were taken into account.
/(d)/ Annualized.
The accompanying notes are an integral part of these financial statements.
55
<PAGE>
THE COMMERCE FUNDS
MISSOURI TAX-FREE BOND FUND
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
Income from Distributions to
investment operations shareholders
-------------------------- ----------------------------
Net
realized
and Net
unrealized asset
Net asset gain value,
value, Net (loss) on From net From net end
beginning investment invest- investment realized gain of Total
of period income ments /b/ income on investments period return /c/
----------- ------------ ------------ ----------- ---------------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30, 1997 (unaudited)
- ---------------------------------------------------
$18.26 $0.38 $(0.08) $(0.38) $(0.02) $18.16 1.64%
For the Year Ended October 31, 1996
- -----------------------------------
18.40 0.76 (0.14) (0.76) -- 18.26 3.43
For the Period February 21, 1995 /a/ through October 31, 1995
- -------------------------------------------------------------
18.00 0.57 0.40 (0.57) -- 18.40 5.45
<CAPTION>
Ratios assuming
no waiver of
investment advisory fees
or expense reimbursements
-------------------------
Ratio Ratio Ratio
of net of net Net Ratio of net
expenses investment assets at of investment
to average income Portfolio end expenses income
net to average turnover of period to average to average
assets net assets rate (in 000's) net assets net assets
------------ ------------ --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
For the Six Months Ended April 30, 1997 (unaudited)
- ---------------------------------------------------
0.65%/d/ 4.22%/d/ 23% $18,588 1.23%/d/ 3.64%/d/
For the Year Ended October 31, 1996
- ------------------------------------
0.65 4.14 49 17,034 1.58 3.21
For the Period February 21, 1995 /a/ through October 31, 1995
- -------------------------------------------------------------
0.65/d/ 4.41/d/ 52 8,889 2.12/d/ 2.94/d/
</TABLE>
- -------------------
/a/ Commencement of operations.
/b/ Includes the balancing effect of calculating per share amounts.
/c/ Assumes investment at the beginning of the period, reinvestment of all
dividends and distributions, a complete redemption of the investment at the
net asset value at the end of the period and no sales charges. Total return
would be reduced if a sales charge were taken into account.
/d/ Annualized.
The accompanying notes are an integral part of these financial statements.
56
<PAGE>
THE COMMERCE FUNDS
NOTES TO FINANCIAL STATEMENTS
April 30, 1997
(Unaudited)
1. ORGANIZATION
The Commerce Funds (the "Trust") is a Delaware business trust registered
under the Investment Company Act of 1940, as amended (the "1940 Act"), as an
open-end, management investment company. The Trust consists of nine portfolios
(individually, a "Fund" and collectively, the "Funds"): Short-Term Government
Fund, Bond Fund, Balanced Fund, Growth and Income Fund, Growth Fund, MidCap Fund
(formerly Aggressive Growth Fund), International Equity Fund, National Tax-Free
Bond Fund and Missouri Tax-Free Bond Fund. Each of the Funds (except National
Tax-Free Bond Fund and Missouri Tax-Free Bond Fund) offers two classes of
shares, Institutional Shares and Service Shares. The Growth and Income Fund
commenced investment operations on March 3, 1997 with both Institutional and
Service Shares. All other Service Shares commenced investment operations on
January 2, 1997. Each Fund is registered as a diversified management investment
company under the 1940 Act, other than the Missouri Tax-Free Bond Fund, which is
registered as non-diversified under the 1940 Act.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Funds which are in conformity with those generally accepted in
the investment company industry.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that may affect the reported amounts.
A. Investment Valuation
Investments in securities traded on a U.S. exchange or the NASDAQ system
are valued at their last sale or closing price on the principal exchange on
which they are traded or NASDAQ, on the valuation day; if no sale occurs,
securities traded on a U.S. exchange or NASDAQ are valued at the mean between
the closing bid and asked prices. The value of a Fund's portfolio securities
that are traded on stock exchanges outside the U.S. are based upon the price on
the exchange as of the close of business of the exchange immediately preceding
the time of valuation, except when an occurrence subsequent to the time a value
was so established is likely to have changed such value; then the fair value of
those securities will be determined through consideration of other factors by or
under the direction of the Board of Trustees. Unlisted equity and debt
securities for which market quotations are available are valued at the mean
between the most recent bid and asked prices. Fixed-income securities are valued
at prices supplied by an independent pricing service, which reflect
broker/dealer-supplied valuations and matrix pricing systems. Short-term debt
obligations maturing in sixty days or less are valued at amortized cost.
Restricted securities, and other securities for which quotations are not
available, are valued at fair value using methods approved by the Board of
Trustees.
B. Securities Transactions and Investment Income
Securities transactions are recorded on the trade date. Realized gains and
losses on sales of investments are calculated on the identified cost basis.
Dividend income is recorded on the ex-dividend date and interest income is
recorded on the accrual basis.
57
<PAGE>
THE COMMERCE FUNDS
NOTES TO FINANCIAL STATEMENTS--(Continued)
April 30, 1997
(Unaudited)
2. SIGNIFICANT ACCOUNTING POLICIES--(Continued)
C. Premiums and Discounts on Debt Securities Owned
The National Tax-Free Bond and the Missouri Tax-Free Bond Funds amortize
premiums on debt securities on the effective yield basis, and do not accrete
market discounts on debt securities. The Growth, MidCap and International Equity
Funds accrete market discounts and amortize premiums on a yield to maturity
basis. The Short-Term Government, Bond, Balanced and Growth and Income Funds do
not accrete market discounts or amortize premiums on long-term debt securities.
The Short-Term Government, Bond and Balanced Funds invest in mortgage-backed
securities. Certain mortgage security paydown gains and losses are taxable as
ordinary income. Such paydown gains and losses increase or decrease taxable
ordinary income available for distributions and are included in interest income
in the accompanying Statements of Operations. For all Funds, original issue
discount on debt securities is amortized to interest income over the life of the
security with a corresponding increase in the cost basis of that security.
D. Foreign Currency Translations
The books and records of the Funds are maintained in U.S. dollars.
Amounts denominated in foreign currencies are translated into U.S. dollars on
the following basis: (i) investment valuations, other assets and liabilities
initially expressed in foreign currencies are converted each business day into
U.S. dollars based on current exchange rates; and (ii) purchases and sales of
foreign investments, income and expenses are converted into U.S. dollars based
upon currency exchange rates prevailing on the respective dates of such
transactions.
Net realized gain (loss) on foreign currency transactions represent: (i)
foreign exchange gains and losses from the sale of foreign currencies and
investments; (ii) foreign exchange gains and losses between trade date and
settlement date on investment securities transactions and foreign exchange
contracts; and (iii) foreign exchange gains and losses from the difference
between amounts of dividends and interest recorded and the amounts actually
received. Net unrealized gain (loss) on translation of assets and liabilities
denominated in foreign currencies arises from changes in the value of assets and
liabilities, including investments in securities, resulting from changes in the
exchange rate.
E. Forward Foreign Currency Exchange Contracts
The International Equity Fund is authorized to enter into forward foreign
currency exchange contracts for the purchase of a specific foreign currency at a
fixed price on a future date as a hedge or cross-hedge against either specific
transactions or portfolio positions as a means to manage its foreign exchange
rate risk. All commitments are "marked-to-market" daily at the applicable
exchange rates and any resulting unrealized gains or losses are recorded in the
Fund's financial statements. The Fund records realized gains and losses at the
time the forward contract is offset by entry into a closing transaction or
extinguished by delivery of the currency. Risks may arise upon entering these
contracts as a result of the potential inability of counterparties to meet the
terms of their contracts and unanticipated movements in the value of a foreign
currency relative to the U.S. dollar.
F. Federal Taxes
Each Fund intends to comply with the requirements of the Internal Revenue
Code of 1986, as amended, applicable to regulated investment companies and to
distribute each year substantially all of its investment company taxable and
tax-exempt income to its shareholders. Accordingly, no federal income tax
provisions are required. The characterization of distributions to shareholders
for financial reporting purposes is determined in accordance with income tax
rules.
58
<PAGE>
THE COMMERCE FUNDS
NOTES TO FINANCIAL STATEMENTS--(Continued)
April 30, 1997
(Unaudited)
2. SIGNIFICANT ACCOUNTING POLICIES--(Continued)
As of the Trust's most recent tax year-end, the following Funds had
capital loss carryforwards for U.S. federal income tax purposes:
<TABLE>
<CAPTION>
Fund Amount Year of Expiration
------------------------------- --------------------------- -----------------------------
<S> <C> <C>
Short-Term Government Fund $8,584 2004
National Tax-Free Bond Fund $5,961 2004
</TABLE>
These amounts are available to be carried forward to offset future capital
gains of the Funds to the extent permitted by applicable laws or regulations.
G. Deferred Organization Expenses
Organization-related costs are being amortized on a straight-line basis
over a period of five years beginning with the commencement of each of the
Fund's operations. If any or all of the shares held by The Goldman Sachs Funds
Group, L.P. representing initial capital of the Funds are redeemed during the
amortization period, the redemption proceeds will be reduced by the pro rata
portion of the unamortized organizational cost balance.
H. Expenses
Expenses incurred by the Funds which do not specifically relate to an
individual Fund are allocated to the Funds based on each Fund's relative average
net assets for the period. Service Class shareholders bear all expenses and fees
relating to the Distribution Plan.
I. Repurchase Agreements
During the term of a repurchase agreement, the market value of the
underlying collateral, including accrued interest, is required to equal or
exceed the value of the repurchase agreement. The underlying collateral for all
repurchase agreements is held in safekeeping in the customer-only account of
State Street Bank & Trust Company, the Funds' custodian, or at sub-custodians.
The market value of the underlying collateral is monitored by daily pricing.
In connection with transactions in repurchase agreements, if the seller
defaults and the value of the security declines, or if the seller enters an
insolvency proceeding, realization of the collateral by the Trust may be delayed
or limited.
J. Dividends and Distributions to Shareholders
Dividends from net investment income are declared daily and paid monthly
by the Short-Term Government, Bond, National Tax-Free Bond and Missouri Tax-Free
Bond Funds; declared and paid quarterly by the Balanced, Growth and Income and
Growth Funds; and declared and paid annually by the MidCap and International
Equity Funds. Each Fund's net realized capital gains (including net short-term
capital gains), if any, are declared and distributed at least annually.
Distributions to shareholders are recorded on the ex-dividend date.
59
<PAGE>
THE COMMERCE FUNDS
NOTES TO FINANCIAL STATEMENTS--(Continued)
April 30, 1997
(Unaudited)
3. AGREEMENTS
The Funds have entered into an Advisory Agreement with Commerce Bank, N.A.
(St. Louis) and Commerce Bank, N.A. (Kansas City) (the "Advisor"). Pursuant to
the terms of the Advisory Agreement, the Advisor is responsible for managing the
investments and making investment decisions for each of the Funds. For these
services and for assuming related expenses, the Advisor is entitled to a fee,
computed daily and payable monthly, at the following annual rate of the
corresponding Fund's average daily net assets:
<TABLE>
<S> <C>
Short-Term Government Fund................................... .50%
Bond Fund.................................................... .50%
Balanced Fund................................................ 1.00%
Growth and Income Fund....................................... .75%
Growth Fund.................................................. .75%
MidCap Fund.................................................. .75%
International Equity Fund.................................... 1.50%
National Tax-Free Bond Fund.................................. .50%
Missouri Tax-Free Bond Fund.................................. .50%
</TABLE>
As authorized by the Advisory Agreement, the Advisor has entered into a
Sub-Advisory Agreement with Rowe-Price Fleming International, Inc. (the
"Sub-Advisor") whereby the Sub-Advisor manages the investment assets of the
International Equity Fund. As compensation for services rendered under the
Sub-Advisory Agreement, the Sub-Advisor is entitled to a fee from the Advisor at
the following annual rate:
<TABLE>
<CAPTION>
Average Daily Net Assets Annual Rate
------------------------ -----------
<S> <C>
First $20 million......................................... .75%
Next $30 million.......................................... .60%
Over $50 million.......................................... .50%
</TABLE>
For the period ended April 30, 1997, the Advisor has voluntarily agreed to
waive a portion of its advisory fee for certain portfolios. The resulting
advisory fees are .30% for the Short-Term Government Fund, .75% for the Balanced
Fund, .89% for the International Equity Fund and .30% for the Missouri Tax-Free
Bond Fund. The effect of these waivers by the Advisor for the period ended April
30, 1997 was to reduce advisory fees by $36,661, $93,811, $175,639 and $17,675
for the Short-Term Government, Balanced, International Equity and Missouri
Tax-Free Bond Funds, respectively.
In addition, for the period ended April 30, 1997, the Advisor has
voluntarily agreed to reimburse expenses (excluding interest, taxes,
distribution expenses and extraordinary expenses) to the extent that such
expenses exceed, on an annualized basis, .68%, .88%, 1.13%, 1.20%, 1.13%, 1.72%,
.85% and .65% of average net assets of the Short-Term Government, Bond,
Balanced, Growth and Income, Growth, International Equity, National Tax-Free
Bond and Missouri Tax-Free Bond Funds, respectively. The effect of these
reimbursements by the Advisor for the period ended April 30, 1997 was to reduce
expenses by $44,892, $51,485, $30,673, $31,173 and $33,893 for the Short-Term
Government, Balanced, Growth and Income, National Tax-Free Bond and Missouri
Tax-Free Bond Funds, respectively. The amount reimbursable to the Short-Term
Government, Balanced, Growth and Income, National Tax-Free Bond and Missouri
Tax-Free Bond Funds at April 30, 1997 was approximately $10,400, $27,200,
$30,700, $6,400 and $9,600, respectively, and are reflected in "Other Assets" in
the accompanying Statements of Assets and Liabilities.
60
<PAGE>
THE COMMERCE FUNDS
NOTES TO FINANCIAL STATEMENTS--(Continued)
April 30, 1997
(Unaudited)
3. AGREEMENTS--(Continued)
Included in "Accrued expenses and other liabilities" in the accompanying
Statements of Assets and Liabilities of the Bond Fund and International Equity
Fund are approximately $500 and $5,200, respectively, related to excess
reimbursements payable to the Advisor.
Goldman Sachs Asset Management ("GSAM"), a separate operating division of
Goldman, Sachs & Co., serves as the Trust's administrator, pursuant to an
Administration Agreement. Under the Administration Agreement, GSAM administers
the Trust's business affairs. As compensation for the services rendered under
the Administration Agreement and its assumption of related expenses, GSAM is
entitled to a fee, computed daily and payable monthly, at an annual rate of .15%
of the average daily net assets of each Fund.
Goldman, Sachs & Co. serves as Distributor of shares of the Funds pursuant
to a Distribution Agreement and may receive a portion of the sales load imposed
on the sale of shares of the Funds. The maximum sales load imposed on sale of
shares of the Short-Term Government Fund is 2.00%; for all other Funds, the
maximum sales load imposed on the sale of shares of the Funds is 3.50%. Goldman
Sachs has advised the Trust that it has retained approximately $21,000 for the
period ended April 30, 1997.
The Trust, on behalf of each Fund (except National Tax-Free Bond Fund and
Missouri Tax-Free Bond Fund), has adopted a Distribution Plan for the Service
Shares pursuant to Rule 12b-1. Under the distribution plan, payments by each
Fund for distribution expenses may not exceed .25% (annualized) of the average
daily net assets of the Fund's Service Shares.
Pursuant to a Shareholder Administrative Services Plan adopted by its
Board of Trustees, the Funds may enter into agreements with service
organizations such as banks and financial institutions, which may include the
Advisor and its affiliates ("Service Organizations"), under which they will
render shareholder administration support services. For these services, the
Service Organizations are entitled to receive fees from a Fund at an annual rate
of up to .25% of the average daily net asset value of Fund shares beneficially
owned by clients of such Service Organizations. The Shareholder Servicing
expense for the period ended April 30, 1997 was approximately $4,900, $20,500,
$14,200, $38,800, $9,000 and $4,200 for the Short-Term Government, Bond,
Balanced, Growth, MidCap and International Equity Funds, respectively, and are
reflected in "Other Expenses" in the accompanying Statements of Operations.
4. CONCENTRATION OF CREDIT RISK
The Missouri Tax-Free Bond Fund invests substantially all of its assets in
debt obligations of issuers located in the State of Missouri. The issuers'
abilities to meet their obligations may be affected by Missouri economic or
political developments.
61
<PAGE>
THE COMMERCE FUNDS
NOTES TO FINANCIAL STATEMENTS--(Continued)
April 30, 1997
(Unaudited)
5. INVESTMENT TRANSACTIONS
Purchases and proceeds from sales or maturities of long-term securities
for the period ended April 30, 1997 were as follows:
<TABLE>
Short-Term Government Fund
<S> <C>
Purchases (excluding U.S. Government securities)......................................................... $ 2,150,729
Sales (excluding U.S. Government securities)............................................................. 288,788
Purchases of U.S. Government securities.................................................................. 10,477,706
Sales of U.S. Government securities...................................................................... 8,703,352
Bond Fund
Purchases (excluding U.S. Government securities)......................................................... $ 4,044,630
Sales (excluding U.S. Government securities)............................................................. 1,030,781
Purchases of U.S. Government securities.................................................................. 27,317,138
Sales of U.S. Government securities...................................................................... 6,523,536
Balanced Fund
Purchases (excluding U.S. Government securities)......................................................... $ 11,602,418
Sales (excluding U.S. Government securities)............................................................. 7,603,759
Purchases of U.S. Government securities.................................................................. 4,118,126
Sales of U.S. Government securities...................................................................... 2,319,879
Growth and Income Fund
Purchases (excluding U.S. Government securities)......................................................... $ 11,768,634
Sales (excluding U.S. Government securities)............................................................. 109,331
Purchases of U.S. Government securities.................................................................. --
Sales of U.S. Government securities...................................................................... --
Growth Fund
Purchases (excluding U.S. Government securities)......................................................... $ 59,462,929
Sales (excluding U.S. Government securities)............................................................. 42,811,447
Purchases of U.S. Government securities.................................................................. --
Sales of U.S. Government securities...................................................................... --
MidCap Fund
Purchases (excluding U.S. Government securities)......................................................... $ 33,744,032
Sales (excluding U.S. Government securities)............................................................. 27,210,488
Purchases of U.S. Government securities.................................................................. --
Sales of U.S. Government securities...................................................................... --
International Equity Fund
Purchases (excluding U.S. Government securities)......................................................... $ 14,666,892
Sales (excluding U.S. Government securities)............................................................. 6,345,592
Purchases of U.S. Government securities.................................................................. --
Sales of U.S. Government securities...................................................................... --
National Tax-Free Bond Fund
Purchases (excluding U.S. Government securities)......................................................... $ 5,752,211
Sales (excluding U.S. Government securities)............................................................. 3,814,822
Purchases of U.S. Government securities.................................................................. --
Sales of U.S. Government securities...................................................................... --
Missouri Tax-Free Bond Fund
Purchases (excluding U.S. Government securities)......................................................... $ 5,520,689
Sales (excluding U.S. Government securities)............................................................. 4,027,204
Purchases of U.S. Government securities.................................................................. --
Sales of U.S. Government securities...................................................................... --
</TABLE>
62
<PAGE>
THE COMMERCE FUNDS
FORM N-1A
PART C. OTHER INFORMATION
Item 24. FINANCIAL STATEMENTS AND EXHIBITS
---------------------------------
(a) Financial Statements
(1) Included in Part A:
(a) For the Registrant's Growth and Income Fund:
Unaudited Financial Highlights for the Institutional and Service
Shares of the Growth and Income Fund from March 3, 1997
(inception of the Fund) through April 30, 1997.
(b) For the Registrant's Other Portfolios:
Financial Highlights (i) for the Institutional and Service Shares
of Registrant's Short-Term Government Fund, Bond Fund, Balanced
Fund, Growth Fund, MidCap Fund and International Equity Fund for
the six months ended April 30, 1997; (ii) for the Institutional
and Service Shares of Registrant's Short-Term Government Fund,
Bond Fund, Balanced Fund, Growth Fund, MidCap Fund and
International Equity Fund for the fiscal year ended October 31,
1996; (iii) for Registrant's National Tax-Free Bond Fund and
Missouri Tax-Free Bond Fund for the fiscal year ended October 31,
1996; (iv) for Registrant's Short-Term Government Fund, Bond
Fund, Balanced Fund, Growth Fund, MidCap Fund and International
Equity Fund for the period from December 12, 1994 (commencement
of operations) through October 31, 1995; and (v) 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 the Registrant's Annual Report for
the fiscal year ended October 31, 1996, as previously filed with the
Commission, are incorporated herein by reference. Financial
statements (unaudited) for the period ended April 30, 1997 for
Registrants' Institutional and Service Shares of the Short-Term
Government Fund, Bond Fund, Balanced Fund, Growth Fund, MidCap Fund,
International Equity Fund and Growth and Income Fund are attached to
and 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.
C-1
<PAGE>
(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/
(c) Addendum No. 1 to Advisory Agreement among Registrant,
Commerce Bank, N.A. (St. Louis) and Commerce Bank, N.A.
(Kansas City) with respect to the Growth and Income Fund.
(6) Distribution Agreement between Registrant and Goldman, Sachs &
Co./1/
(a) Addendum No. 1 to Distribution Agreement between Registrant
and Goldman, Sachs & Co. with respect to the Growth and
Income Fund.
(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/
(9) (a) Administration Agreement between Registrant and Goldman
Sachs Asset Management./1/
(b) Addendum No. 1 to Administration Agreement between
Registrant and Goldman Sachs Asset Management with respect
to the Growth and Income Fund.
(c) Transfer Agency Agreement between Registrant and State
Street Bank and Trust Company./1/
(d) Amended and Restated Shareholder Administrative Services
Plan for Institutional Shares and related Servicing
Agreement./2/
(e) Amended and Restated Shareholder Administrative Services
Plan for Service Shares and related Servicing Agreement./2/
(10) Opinion and Consent of Counsel./3/
(11) (a) Consent of Drinker Biddle & Reath LLP.
(b) Consent of Independent Auditors.
(12) Not Applicable.
(13) (a) Purchase Agreement between Registrant and Initial
Trustee./1/
(b) Purchase Agreement between Registrant and Goldman, Sachs &
Co./1/
C-2
<PAGE>
(c) Purchase Agreement between Registrant and Commerce Bank,
N.A. (Kansas City)./1/
(d) Purchase Agreement between Registrant and Goldman, Sachs &
Co.
(14) Not Applicable.
(15) Amended and Restated Distribution Plan for Service Shares./2/
(16) Schedule of Computation of Performance Quotations for the Short-
Term Government Fund, Bond Fund, Balanced Fund, Growth Fund,
MidCap Fund, International Equity Fund, National Tax-Free Bond
Fund and Missouri Tax-Free Bond Fund./1/
(17) Financial Data Schedules as of April 30, 1997.
(18) Amended and Restated Plan Pursuant to Rule 18f-3 for Operation of
a Multi-Class System./2/
- ---------------
1. Filed electronically as an Exhibit and incorporated herein by reference to
Post-Effective Amendment No. 1 to Registrant's Registration Statement on
Form N-1A filed on June 30, 1995.
2. Filed electronically as an Exhibit and incorporated herein by reference to
Post-Effective Amendment No. 4 to Registrant's Registration Statement on
Form N-1A filed on December 13, 1996.
3. Filed pursuant to Rule 24f-2 as part of Registrant's Rule 24f-2 Notice.
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
September 9, 1997
-----------------
<S> <C> <C>
Title of Series Institutional Service
--------------- ------------- -------
Short-Term Government Fund... 427 18
Bond Fund.................... 1217 25
Balanced Fund................ 2378 108
Growth Fund.................. 3845 444
MidCap Fund.................. 2863 71
Growth and Income Fund....... 75 86
International Equity Fund.... 1084 48
National Tax-Free Bond Fund.. 16 N/A
Missouri Tax-Free Bond Fund.. 50 N/A
</TABLE>
C-3
<PAGE>
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 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
C-4
<PAGE>
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, 1994, as well as the capacity in which such person
was connected.
<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
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
</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. 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
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 Foundation President and CEO
Director 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
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
</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>
Mr. Hugh J. Zimmer, The Zimmer Companies Chairman
Director 1220 Washington #202
P.O. Box 411299
Kansas City, MO 64141
Mr. Kenneth J. Ragan, None None
Executive Vice President
Mr. Marc J. Andreoli, None None
Senior Vice President &
Assistant Secretary
Mr. Kevin G. Barth, None None
Executive Vice President
Mr. Dennis 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
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
</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. 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
Executive 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
Mr. Michael D. Fields, None None
Senior Vice President
Mr. Stephen A. Meleher None None
</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
Business Men's Assurance Company of Executive Officer
America
One Penn Valley Park Director
Kansas City, MO 64108
Seafield Capital Corporation
2600 Grand Avenue Suite 500
Kansas City, MO 64108 Director
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
John J. Thiebauth Dotmar, Inc. d/b/a The Director
Executive Vice President Stange Company
2324 Walden Parkway
St. Louis, MO 63146
</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>
Thomas M. Noonan None None
Vice Chairman and Director
William A. Sullins, Jr., None None
Vice Chairman and Director
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. James 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. Joe Curtis, None None
Vice Chairman
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
Mr. Douglas A. Albrecht, Enterprise Capital Group President
Director 11525 Olde Cabin Road
St. Louis, MO 63141
Mr. Alois J. Koller, Sr., Koller-Craft Plastic Products, Inc. Chairman
Director Drawer K
Fenton, MO 63026
Mr. Hal A. Kroeger, HALAK, Inc. President
Director P.O. Box 8440
St. Louis, MO 63132
</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. 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. 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. Paul F. Hummer, A.F. Green Industries, Inc. CEO, Chairman and President
Director Green Boulevard
Mexico, MO 65265
Mr. Jack O. Snyder, Snyder Development Co, President
Director 202 N. Prospect Road
Bloomington, IL 61704
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
</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 Investment Advisers Act of 1940 (File No. 801-14713).
C-11
<PAGE>
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, Goldman Sachs Trust, Goldman Sachs Equity Portfolios,
Inc. and Trust for Credit Unions, and as administrator and distributor for the
units of The Benchmark Funds.
(b) Set forth below is certain information pertaining to the executive
committee of Goldman, Sachs & Co., Registrant's principal underwriter. None of
the members of the executive committee hold positions or offices with the
Registrant.
GOLDMAN SACHS EXECUTIVE COMMITTEE
Name and Principal
Business Address Position
- ---------------- --------
Jon S. Corzine (1) Chief Executive Officer
Robert J. Hurst (1) Managing Director
Henry M. Paulson, Jr. (1) Chief Operating Officer
John A. Thain (3) Chief Financial Officer
John L. Thornton (3) Managing Director
Roy J. Zuckerberg (2) Managing Director
- ---------------
(1) 85 Broad Street, New York, NY 10004
(2) One New York Plaza, New York, NY 10004
(3) Peterborough Court, 133 Fleet Street, London
EC4A 2BB, England
(c) None.
Item 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 LLP, Philadelphia National Bank Building, 1345
Chestnut Street, Philadelphia, Pennsylvania (Registrant's Trust Instrument,
By-Laws and minute books).
C-12
<PAGE>
Item 31. MANAGEMENT SERVICES
-------------------
Not Applicable.
Item 32. UNDERTAKINGS
------------
(a) Registrant undertakes to provide its latest available Annual Report, upon
request and without charge, to any recipient of the Prospectuses for the Short-
Term Government Fund, Bond Fund, Balanced Fund, Growth Fund, MidCap Fund, Growth
and Income 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-13
<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. 6 to its Registration Statement to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of Mission
Hills, State of Kansas, on the 16th day of September, 1997.
THE COMMERCE FUNDS
Registrant
/s/ Warren W. Weaver
-----------------------------
Warren W. Weaver
President
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment to Registrant's Registration Statement has been signed below
by the following persons in the capacities and on the date indicated.
Signatures Title Date
---------------------------- ------------- ------------
/s/ Randall D. Barron*
- ----------------------
Randall D. Barron Trustee, Treasurer September 16, 1997
/s/ David L. Bodde*
- -------------------
David L. Bodde Trustee September 16, 1997
/s/ John Eric Helsing*
- ----------------------
John Eric Helsing Trustee, Chairman September 16, 1997
/s/John Joseph Holland*
- -----------------------
John Joseph Holland Trustee September 16, 1997
/s/ Warren W. Weaver
- ----------------------
Warren W. Weaver Trustee, President September 16, 1997
* By: /s/ Warren W. Weaver
---------------------
Warren W. Weaver
Attorney-in-Fact
C-14
<PAGE>
THE COMMERCE FUNDS
POWER OF ATTORNEY
-----------------
Know All Men by These Presents, that the undersigned, Warren W.
Weaver, hereby constitutes and appoints W. Bruce McConnel, III, his true and
lawful attorney, to execute in his name, place, and stead, in his capacity as
Trustee or officer, or both, of the Trust, the Registration Statement and any
amendments thereto and all instruments necessary or incidental in connection
therewith, and to file the same with the Securities and Exchange Commission; and
said attorney shall have full power and authority to do and perform in his name
and on his behalf, in any and all capacities, every act whatsoever requisite or
necessary to be done in the premises, as fully and to all intents and purposes
as he might or could do in person, said acts of said attorney being hereby
ratified and approved.
DATED: December 12, 1996
/s/ Warren W. Weaver
- ---------------------------
Warren W. Weaver
C-15
<PAGE>
THE COMMERCE FUNDS
POWER OF ATTORNEY
-----------------
Know All Men by These Presents, that the undersigned, John Joseph
Holland, hereby constitutes and appoints Warren W. Weaver and W. Bruce McConnel,
III, his true and lawful attorneys, to execute in his name, place, and stead, in
his capacity as Trustee or officer, or both, of the Trust, the Registration
Statement and any amendments thereto and all instruments necessary or incidental
in connection therewith, and to file the same with the Securities and Exchange
Commission; and said attorneys shall have full power and authority to do and
perform in his name and on his behalf, in any and all capacities, every act
whatsoever requisite or necessary to be done in the premises, as fully and to
all intents and purposes as he might or could do in person, said acts of said
attorneys being hereby ratified and approved.
DATED: December 12, 1996
/s/ John Joseph Holland
- ----------------------------
John Joseph Holland
C-16
<PAGE>
THE COMMERCE FUNDS
POWER OF ATTORNEY
-----------------
Know All Men by These Presents, that the undersigned, John Eric
Helsing, hereby constitutes and appoints Warren W. Weaver and W. Bruce McConnel,
III, his true and lawful attorneys, to execute in his name, place, and stead, in
his capacity as Trustee or officer, or both, of the Trust, the Registration
Statement and any amendments thereto and all instruments necessary or incidental
in connection therewith, and to file the same with the Securities and Exchange
Commission; and said attorneys shall have full power and authority to do and
perform in his name and on his behalf, in any and all capacities, every act
whatsoever requisite or necessary to be done in the premises, as fully and to
all intents and purposes as he might or could do in person, said acts of said
attorneys being hereby ratified and approved.
DATED: December 12, 1996
/s/John Eric Helsing
- ---------------------------
John Eric Helsing
C-17
<PAGE>
THE COMMERCE FUNDS
POWER OF ATTORNEY
-----------------
Know All Men by These Presents, that the undersigned, Randall D.
Barron, hereby constitutes and appoints Warren W. Weaver and W. Bruce McConnel,
III, his true and lawful attorneys, to execute in his name, place, and stead, in
his capacity as Trustee or officer, or both, of the Trust, the Registration
Statement and any amendments thereto and all instruments necessary or incidental
in connection therewith, and to file the same with the Securities and Exchange
Commission; and said attorneys shall have full power and authority to do and
perform in his name and on his behalf, in any and all capacities, every act
whatsoever requisite or necessary to be done in the premises, as fully and to
all intents and purposes as he might or could do in person, said acts of said
attorneys being hereby ratified and approved.
DATED: December 12, 1996
/s/Randall D. Barron
- ---------------------------
Randall D. Barron
C-18
<PAGE>
THE COMMERCE FUNDS
POWER OF ATTORNEY
-----------------
Know All Men by These Presents, that the undersigned, David L. Bodde,
hereby constitutes and appoints Warren W. Weaver and W. Bruce McConnel, III, his
true and lawful attorneys, to execute in his name, place, and stead, in his
capacity as Trustee or officer, or both, of the Trust, the Registration
Statement and any amendments thereto and all instruments necessary or incidental
in connection therewith, and to file the same with the Securities and Exchange
Commission; and said attorneys shall have full power and authority to do and
perform in his name and on his behalf, in any and all capacities, every act
whatsoever requisite or necessary to be done in the premises, as fully and to
all intents and purposes as he might or could do in person, said acts of said
attorneys being hereby ratified and approved.
DATED: December 12, 1996
/s/David L. Bodde
- ---------------------------
David L. Bodde
C-19
<PAGE>
COMMERCE FUNDS
--------------
EXHIBIT INDEX
-------------
Exhibits
--------
(5)(c) Addendum No. 1 to Advisory Agreement Among Registrant, Commerce
Bank, N.A. (St. louis) and Commerce Bank N.A. (Kansas City) with
respect to the Growth and Income Fund.
(6)(a) Addendum No. 1 to Distribution Agreement Between Registrant and
Goldman, Sachs & Co. with respect to the Growth and Income Fund.
(9)(b) Addendum No. 1 to Administration Agreement Between Registrant and
Goldman Sachs Asset Management with Respect to the Growth and
Income Fund.
(11)(a) Consent of Drinker Biddle & Reath LLP
(11)(b) Consent of Independent Auditors
(13)(d) Purchase Agreement Between Registrant and Goldman, Sachs & Co.
(17) Financial Data Schedules as of April 30, 1997.
<PAGE>
Exhibit (5)(c)
ADDENDUM NO. 1 TO ADVISORY AGREEMENT
This Addendum No. 1, dated as of the 28th day of February 1997, among
COMMERCE BANK, N.A. (St. Louis), with its principal office and place of business
in St. Louis, Missouri, COMMERCE BANK, N.A. (Kansas City), with its principal
office and place of business in Kansas City, Missouri (collectively, the
"Advisor"), and THE COMMERCE FUNDS, a Delaware Business Trust having its
principal office and place of business at 4900 Sears Tower, Chicago, Illinois
(the "Trust");
WHEREAS, the Trust and the Advisor have entered into an Advisory
Agreement dated as of December 1, 1994 (the "Advisory Agreement"), pursuant to
which the Trust appointed the Advisor to act as investment adviser to the Trust
for its Short-Term Government Fund, Bond Fund, Balanced Fund, Growth Fund,
Aggressive Growth Fund, International Equity Fund, National Tax-Free Bond Fund
and Missouri Tax-Free Bond Fund (each a "Fund");
WHEREAS, the Trust has notified the Advisor that it has established a
Growth and Income Fund and that it desires to retain the Advisor to act as the
investment adviser therefor, and the Advisor has notified the Trust that it is
willing to serve as investment adviser for the Growth and Income Fund;
NOW THEREFORE, the parties hereto, intending to be legally bound,
hereby agree as follows:
1. APPOINTMENT. The Trust hereby appoints the Advisor to act as
-----------
investment adviser to the Trust for the Growth and Income Fund for the period
and on the terms set forth in the Advisory Agreement. The Advisor hereby
accepts such appointment and agrees to render the services set forth in the
Advisory Agreement for the compensation herein provided.
2. COMPENSATION. For the services provided and the expenses assumed
------------
pursuant to the Advisory Agreement with respect to the Growth and Income Fund,
the Trust will pay the Advisor and the Advisor will accept as full compensation
therefor fees, computed daily and paid monthly, based on the net assets of the
Growth and Income Fund considered at the following annual rate: .75% of 1% of
the Growth and Income Fund's average daily net assets.
3. CAPITALIZED TERMS. From and after the date hereof, the term
-----------------
"Fund" as used in the Advisory Agreement shall be deemed to include the Growth
and Income Fund. Capitalized terms used herein and not otherwise defined shall
have the meanings ascribed to them in the Advisory Agreement.
4. MISCELLANEOUS. Except to the extent supplemented hereby, the
-------------
Advisory Agreement shall remain unchanged and in full
<PAGE>
force and effect and is hereby ratified and confirmed in all respects as
supplemented hereby.
IN WITNESS WHEREOF, the undersigned have executed this Addendum as of
the date and year first above written.
THE COMMERCE FUNDS
By:/s/ Paul Klug, Jr.
-------------------------------
Name:
Title:
COMMERCE BANK, N.A. (St. Louis)
By:/s/ Gary Campbell
--------------------------------
Name:
Title:
COMMERCE BANK, N.A. (Kansas City)
By:/s/ Thomas Weiford
-------------------------------
Name:
Title:
<PAGE>
Exhibit (6)(a)
ADDENDUM NO. 1 TO DISTRIBUTION AGREEMENT
This Addendum No. 1, dated as of the 18th day of February 1997, between THE
COMMERCE FUNDS, a Delaware Business Trust having its principal office and place
of business at 4900 Sears Tower, Chicago, Illinois (the "Trust") and GOLDMAN,
SACHS & CO., with its principal office and place of business in Chicago,
Illinois (the "Distributor");
WHEREAS, the Trust and the Distributor have entered into a
Distribution Agreement dated as of October 18, 1994 (the "Distribution
Agreement"), pursuant to which the Trust appointed the Distributor to act as the
distributor to the Trust for its Short-Term Government Fund, Bond Fund, Balanced
Fund, Growth Fund, Aggressive Growth Fund, International Equity Fund, National
Tax-Free Bond Fund and Missouri Tax-Free Bond Fund (each a "Fund");
WHEREAS, the Trust has notified the Distributor that it has
established a Growth and Income Fund and that it desires to retain the
Distributor to act as the distributor therefor, and the Distributor has notified
the Trust that it is willing to serve as distributor for the Growth and Income
Fund;
NOW THEREFORE, the parties hereto, intending to be legally bound,
hereby agree as follows:
1. APPOINTMENT. The Trust hereby appoints the Distributor to act as
-----------
distributor to the Trust for the Growth and Income Fund for the period and on
the terms set forth in the Distribution Agreement. The Distributor hereby
accepts such appointment and agrees to render the services set forth in the
Distribution Agreement for the compensation provided in the Distribution
Agreement.
2. CAPITALIZED TERMS. From and after the date hereof, the term
-----------------
"Fund" as used in the Distribution Agreement shall be deemed to include the
Growth and Income Fund. Capitalized terms used herein and not otherwise defined
shall have the meanings ascribed to them in the Distribution Agreement.
3. MISCELLANEOUS. Except to the extent supplemented hereby, the
-------------
Distribution Agreement shall remain unchanged and in full force and effect and
is hereby ratified and confirmed in all respects as supplemented hereby.
<PAGE>
Exhibit (9)(b)
ADDENDUM NO. 1 TO ADMINISTRATION AGREEMENT
This Addendum No. 1, dated as of the 18th day of February 1997, between THE
COMMERCE FUNDS, a Delaware Business Trust having its principal office and place
of business at 4900 Sears Tower, Chicago, IL (the "Trust") and GOLDMAN SACHS
ASSET MANAGEMENT, with its principal office and place of business in New York,
New York (the "Administrator");
WHEREAS, the Trust and the Administrator have entered into an
Administration Agreement dated as of November 8, 1994 (the "Administration
Agreement"), pursuant to which the Trust appointed the Administrator to act as
the administrator to the Trust for its Short-Term Government Fund, Bond Fund,
Balanced Fund, Growth Fund, Aggressive Growth Fund, International Equity Fund,
National Tax-Free Bond Fund and Missouri Tax-Free Bond Fund, (each a "Fund");
WHEREAS, the Trust has notified the Administrator that it has
established a Growth and Income Fund and that it desires to retain the
Administrator to act as the administrator therefor, and the Administrator has
notified the Trust that it is willing to serve as administrator for the Growth
and Income Fund;
NOW THEREFORE, the parties hereto, intending to be legally bound,
hereby agree as follows:
1. APPOINTMENT. The Trust hereby appoints the Administrator to act
-----------
as administrator to the Trust for the Growth and Income Fund for the period and
on the terms set forth in the Administration Agreement. The Administrator
hereby accepts such appointment and agrees to render the services set forth in
the Administration Agreement for the compensation herein provided.
2. COMPENSATION. For the services provided and the expenses assumed
------------
pursuant to the Administration Agreement with respect to the Growth and Income
Fund the Trust will pay the Administrator and the Administrator will accept as
full compensation therefor fees, computed daily and paid monthly, based on the
net assets of the Growth and Income Fund considered at the following annual
rate: 0.15 of 1% of the Growth and Income Fund's average daily net assets.
3. CAPITALIZED TERMS. From and after the date hereof, the term
-----------------
"Fund" as used in the Administration Agreement shall be deemed to include the
Growth and Income Fund. Capitalized terms used herein and not otherwise defined
shall have the meanings ascribed to them in the Administration Agreement.
<PAGE>
4. MISCELLANEOUS. Except to the extent supplemented hereby, the
-------------
Administration Agreement shall remain unchanged and in full force and effect and
is hereby ratified and confirmed in all respects as supplemented hereby.
IN WITNESS WHEREOF, the undersigned have executed this Addendum as of
the date and year first above written.
THE COMMERCE FUNDS
By: /s/ Warren W. Weaver
-------------------------------
Name:
Title:
GOLDMAN SACHS ASSET MANAGEMENT
By:/s/ Goldman Sachs Asset Management
---------------------------------
Name:
Title:
<PAGE>
Exhibit (11)(a)
CONSENT OF COUNSEL
------------------
We hereby consent to the use of our name and to the reference to our Firm
under the caption "Counsel" in the Statement of Additional Information included
in Post-Effective Amendment No. 6 to the Registration Statement (1933 Act No.
33-80966; 1940 Act No. 811-8598) on Form N-1A under the Securities Act of 1933
and the Investment Company Act of 1940, as amended, of The Commerce Funds. This
consent does not constitute a consent under Section 7 of the Securities Act of
1933, and in consenting to the use of our name and the references to our Firm
under such caption we have not certified any part of the Registration Statement
and do not otherwise come within the categories of persons whose consent is
required under said Section 7 or the rules and regulations of the Securities and
Exchange Commission thereunder.
/s/ Drinker Biddle & Reath LLP
--------------------------------
DRINKER BIDDLE & REATH LLP
Philadelphia, Pennsylvania
September 16, 1997
<PAGE>
Exhibit (11)(b)
INDEPENDENT AUDITORS' CONSENT
The Board of Trustees
The Commerce Funds:
We consent to the use of our report dated December 6, 1996 incorporated herein
by reference and to the references to our Firm under the headings "FINANCIAL
HIGHLIGHTS" in Part A and "INDEPENDENT AUDITORS" and "FINANCIAL STATEMENTS" in
Part B of the Registration Statement.
/s/ KPMG Peat Marwick LLP
- -----------------------------
KPMG Peat Marwick LLP
Kansas City, Missouri
September 16, 1997
<PAGE>
Exhibit (13)(d)
PURCHASE AGREEMENT
The Commerce Funds (the "Trust"), a Delaware business trust, and Goldman,
Sachs & Co. ("Goldman"), a New York General Partnership, hereby agree with each
other as follows:
1. The Trust hereby offers Goldman and Goldman hereby purchases 1 share
of each of Series I-1 and I-2 shares representing interests in Institutional
Shares and Service Shares of the Commerce Growth and Income Fund, respectively,
(such beneficial interests in The Commerce Funds, a Delaware business trust,
being hereinafter known collectively as "Shares") at a purchase price of US
$10.00 per Share. Goldman hereby acknowledges purchase of the Shares and the
Trust hereby acknowledges receipt from Goldman of funds in the amount of US
$20.00 in full payment of the Shares.
2. All Shares offered and purchased in this Agreement are hereby being
made in a private offering.
3. Goldman represents and warrants to the Trust that all Shares purchased
in this Agreement are being acquired for investment purposes and not with a view
to the distribution thereof.
IN AGREEMENT WHEREOF, and intending to be legally bound hereby, the parties
hereto have executed the Agreement as of February 18, 1997.
Attest: THE COMMERCE FUNDS
/s/ Diana McCarthy By: /s/ Warren W. Weaver
- -------------------------------- ---------------------------
Title:President and Trustee
------------------------
Attest: GOLDMAN, SACHS & CO.
/s/ Angelique Barrow By: /s/ Goldman, Sachs and Co.
- -------------------------------- ----------------------------
Title:
-------------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEMI-ANNUAL REPORT DATED APRIL 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 1
<NAME> SHORT-TERM GOVERNMENT FUND - INSTITUTIONAL SHARES
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-1-1996
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 39,364,204
<INVESTMENTS-AT-VALUE> 39,290,699
<RECEIVABLES> 670,512
<ASSETS-OTHER> 38,017
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 39,999,228
<PAYABLE-FOR-SECURITIES> 468,685
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 397,551
<TOTAL-LIABILITIES> 866,236
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 39,321,444
<SHARES-COMMON-STOCK> 2,150,847
<SHARES-COMMON-PRIOR> 1,835,731
<ACCUMULATED-NII-CURRENT> 16,269
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (131,216)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (73,505)
<NET-ASSETS> 39,132,992
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,245,951
<OTHER-INCOME> 0
<EXPENSES-NET> (124,631)
<NET-INVESTMENT-INCOME> 1,121,320
<REALIZED-GAINS-CURRENT> (122,632)
<APPREC-INCREASE-CURRENT> (386,991)
<NET-CHANGE-FROM-OPS> 611,697
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,121,182)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 823,703
<NUMBER-OF-SHARES-REDEEMED> (546,009)
<SHARES-REINVESTED> 37,422
<NET-CHANGE-IN-ASSETS> 5,294,481
<ACCUMULATED-NII-PRIOR> 16,269
<ACCUMULATED-GAINS-PRIOR> (8,584)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 91,642
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 206,184
<AVERAGE-NET-ASSETS> 36,952,151
<PER-SHARE-NAV-BEGIN> 18.43
<PER-SHARE-NII> 0.56
<PER-SHARE-GAIN-APPREC> (0.25)
<PER-SHARE-DIVIDEND> (0.56)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 18.18
<EXPENSE-RATIO> 0.68
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEMI-ANNUAL REPORT DATED APRIL 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 2
<NAME> SHORT-TERM GOVERNMENT FUND - SERVICE SHARES
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 39,364,204
<INVESTMENTS-AT-VALUE> 39,290,699
<RECEIVABLES> 670,512
<ASSETS-OTHER> 38,017
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 39,999,228
<PAYABLE-FOR-SECURITIES> 468,685
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 397,551
<TOTAL-LIABILITIES> 866,236
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 39,321,444
<SHARES-COMMON-STOCK> 1,923
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 16,269
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (131,216)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (73,505)
<NET-ASSETS> 39,132,992
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,245,951
<OTHER-INCOME> 0
<EXPENSES-NET> (124,631)
<NET-INVESTMENT-INCOME> 1,121,320
<REALIZED-GAINS-CURRENT> (122,632)
<APPREC-INCREASE-CURRENT> (386,991)
<NET-CHANGE-FROM-OPS> 611,697
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (138)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,915
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 8
<NET-CHANGE-IN-ASSETS> 5,294,481
<ACCUMULATED-NII-PRIOR> 16,269
<ACCUMULATED-GAINS-PRIOR> (8,584)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 91,642
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 206,184
<AVERAGE-NET-ASSETS> 8,592
<PER-SHARE-NAV-BEGIN> 18.37
<PER-SHARE-NII> 0.40
<PER-SHARE-GAIN-APPREC> (0.19)
<PER-SHARE-DIVIDEND> (0.40)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 18.18
<EXPENSE-RATIO> 0.93
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEMI-ANNUAL REPORT DATED APRIL 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 3
<NAME> BOND FUND - INSTITUTIONAL SHARES
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 164,330,561
<INVESTMENTS-AT-VALUE> 166,693,178
<RECEIVABLES> 2,298,728
<ASSETS-OTHER> 30,752
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 169,022,658
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 831,037
<TOTAL-LIABILITIES> 831,037
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 165,777,093
<SHARES-COMMON-STOCK> 8,949,730
<SHARES-COMMON-PRIOR> 7,929,698
<ACCUMULATED-NII-CURRENT> 76,707
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (24,796)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,362,617
<NET-ASSETS> 168,191,621
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 5,697,117
<OTHER-INCOME> 0
<EXPENSES-NET> (688,754)
<NET-INVESTMENT-INCOME> 5,008,363
<REALIZED-GAINS-CURRENT> (24,727)
<APPREC-INCREASE-CURRENT> (2,351,246)
<NET-CHANGE-FROM-OPS> 2,632,390
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (5,006,590)
<DISTRIBUTIONS-OF-GAINS> (184,700)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,906,380
<NUMBER-OF-SHARES-REDEEMED> (1,103,351)
<SHARES-REINVESTED> 217,003
<NET-CHANGE-IN-ASSETS> 16,986,905
<ACCUMULATED-NII-PRIOR> 76,707
<ACCUMULATED-GAINS-PRIOR> 184,631
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 395,051
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 688,754
<AVERAGE-NET-ASSETS> 159,268,419
<PER-SHARE-NAV-BEGIN> 19.07
<PER-SHARE-NII> 0.60
<PER-SHARE-GAIN-APPREC> (0.28)
<PER-SHARE-DIVIDEND> (0.60)
<PER-SHARE-DISTRIBUTIONS> (0.02)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 18.77
<EXPENSE-RATIO> 0.87
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEMI-ANNUAL REPORT DATE APRIL 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 4
<NAME> BOND FUND - SERVICE SHARES
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 164,330,561
<INVESTMENTS-AT-VALUE> 166,693,178
<RECEIVABLES> 2,298,728
<ASSETS-OTHER> 30,752
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 169,022,658
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 831,037
<TOTAL-LIABILITIES> 831,037
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 165,777,093
<SHARES-COMMON-STOCK> 10,798
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 76,707
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (24,796)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,362,617
<NET-ASSETS> 168,191,621
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 5,697,117
<OTHER-INCOME> 0
<EXPENSES-NET> (688,754)
<NET-INVESTMENT-INCOME> 5,008,363
<REALIZED-GAINS-CURRENT> (24,727)
<APPREC-INCREASE-CURRENT> (2,351,246)
<NET-CHANGE-FROM-OPS> 2,632,390
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,773)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 10,739
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 59
<NET-CHANGE-IN-ASSETS> 16,986,905
<ACCUMULATED-NII-PRIOR> 76,707
<ACCUMULATED-GAINS-PRIOR> 184,631
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 395,051
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 688,754
<AVERAGE-NET-ASSETS> 93,472
<PER-SHARE-NAV-BEGIN> 19.00
<PER-SHARE-NII> 0.39
<PER-SHARE-GAIN-APPREC> (0.23)
<PER-SHARE-DIVIDEND> (0.39)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 18.77
<EXPENSE-RATIO> 1.12
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS A SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEMI-ANNUAL REPORT DATED APRIL 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 5
<NAME> BALANCED FUND - INSTITUTIONAL SHARES
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 70,318,352
<INVESTMENTS-AT-VALUE> 81,375,322
<RECEIVABLES> 850,279
<ASSETS-OTHER> 55,661
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 82,281,262
<PAYABLE-FOR-SECURITIES> 363,543
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 356,665
<TOTAL-LIABILITIES> 720,208
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 69,240,717
<SHARES-COMMON-STOCK> 3,422,064
<SHARES-COMMON-PRIOR> 2,911,427
<ACCUMULATED-NII-CURRENT> 188,057
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,075,310
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 11,056,970
<NET-ASSETS> 81,561,054
<DIVIDEND-INCOME> 245,589
<INTEREST-INCOME> 1,147,247
<OTHER-INCOME> 0
<EXPENSES-NET> (424,239)
<NET-INVESTMENT-INCOME> 968,597
<REALIZED-GAINS-CURRENT> 1,165,750
<APPREC-INCREASE-CURRENT> 1,581,144
<NET-CHANGE-FROM-OPS> 3,715,491
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (921,215)
<DISTRIBUTIONS-OF-GAINS> (3,708,474)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 863,455
<NUMBER-OF-SHARES-REDEEMED> (547,418)
<SHARES-REINVESTED> 194,600
<NET-CHANGE-IN-ASSETS> 11,680,806
<ACCUMULATED-NII-PRIOR> 142,448
<ACCUMULATED-GAINS-PRIOR> 3,618,034
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 375,270
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 569,535
<AVERAGE-NET-ASSETS> 75,535,264
<PER-SHARE-NAV-BEGIN> 24.00
<PER-SHARE-NII> 0.29
<PER-SHARE-GAIN-APPREC> 0.94
<PER-SHARE-DIVIDEND> (0.29)
<PER-SHARE-DISTRIBUTIONS> (1.26)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 23.68
<EXPENSE-RATIO> 1.13
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEMI-ANNUAL REPORT DATED APRIL 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 6
<NAME> THE BALANCED FUND - SERVICE SHARES
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 70,318,352
<INVESTMENTS-AT-VALUE> 81,375,322
<RECEIVABLES> 850,279
<ASSETS-OTHER> 55,661
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 82,281,262
<PAYABLE-FOR-SECURITIES> 363,543
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 356,665
<TOTAL-LIABILITIES> 720,208
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 69,240,717
<SHARES-COMMON-STOCK> 22,009
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 188,057
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,075,310
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 11,056,970
<NET-ASSETS> 81,561,054
<DIVIDEND-INCOME> 245,589
<INTEREST-INCOME> 1,147,247
<OTHER-INCOME> 0
<EXPENSES-NET> (424,239)
<NET-INVESTMENT-INCOME> 968,597
<REALIZED-GAINS-CURRENT> 1,165,750
<APPREC-INCREASE-CURRENT> 1,581,144
<NET-CHANGE-FROM-OPS> 3,715,491
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,773)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 21,931
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 78
<NET-CHANGE-IN-ASSETS> 11,680,806
<ACCUMULATED-NII-PRIOR> 142,448
<ACCUMULATED-GAINS-PRIOR> 3,618,034
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 375,270
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 569,535
<AVERAGE-NET-ASSETS> 213,694
<PER-SHARE-NAV-BEGIN> 23.25
<PER-SHARE-NII> 0.13
<PER-SHARE-GAIN-APPREC> 0.43
<PER-SHARE-DIVIDEND> (0.13)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 23.68
<EXPENSE-RATIO> 1.38
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEMI-ANNUAL REPORT DATED APRIL 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 7
<NAME> THE GROWTH FUND - INSTITUTIONAL SHARES
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 206,211,999
<INVESTMENTS-AT-VALUE> 271,708,663
<RECEIVABLES> 1,895,138
<ASSETS-OTHER> 34,316
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 273,638,117
<PAYABLE-FOR-SECURITIES> 4,946,375
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 437,108
<TOTAL-LIABILITIES> 5,383,483
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 192,857,677
<SHARES-COMMON-STOCK> 8,820,029
<SHARES-COMMON-PRIOR> 7,217,198
<ACCUMULATED-NII-CURRENT> 64,871
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 9,835,422
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 65,496,664
<NET-ASSETS> 268,254,634
<DIVIDEND-INCOME> 1,489,528
<INTEREST-INCOME> 500,777
<OTHER-INCOME> 0
<EXPENSES-NET> (1,321,055)
<NET-INVESTMENT-INCOME> 669,250
<REALIZED-GAINS-CURRENT> 9,835,665
<APPREC-INCREASE-CURRENT> 14,983,478
<NET-CHANGE-FROM-OPS> 25,488,393
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (619,199)
<DISTRIBUTIONS-OF-GAINS> (14,172,190)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,220,179
<NUMBER-OF-SHARES-REDEEMED> (1,086,112)
<SHARES-REINVESTED> 468,764
<NET-CHANGE-IN-ASSETS> 59,346,849
<ACCUMULATED-NII-PRIOR> 16,344
<ACCUMULATED-GAINS-PRIOR> 14,171,947
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 903,827
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,321,055
<AVERAGE-NET-ASSETS> 242,249,478
<PER-SHARE-NAV-BEGIN> 28.95
<PER-SHARE-NII> 0.08
<PER-SHARE-GAIN-APPREC> 3.13
<PER-SHARE-DIVIDEND> (0.08)
<PER-SHARE-DISTRIBUTIONS> (1.92)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 30.16
<EXPENSE-RATIO> 1.10
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEMI-ANNUAL REPORT DATED APRIL 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 8
<NAME> THE GROWTH FUND - SERVICE SHARES
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 206,211,999
<INVESTMENTS-AT-VALUE> 271,708,663
<RECEIVABLES> 1,895,138
<ASSETS-OTHER> 34,316
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 273,638,117
<PAYABLE-FOR-SECURITIES> 4,946,375
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 437,108
<TOTAL-LIABILITIES> 5,383,483
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 192,857,677
<SHARES-COMMON-STOCK> 73,771
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 64,871
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 9,835,422
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 65,496,664
<NET-ASSETS> 268,254,634
<DIVIDEND-INCOME> 1,489,528
<INTEREST-INCOME> 500,777
<OTHER-INCOME> 0
<EXPENSES-NET> (1,321,055)
<NET-INVESTMENT-INCOME> 669,250
<REALIZED-GAINS-CURRENT> 9,835,665
<APPREC-INCREASE-CURRENT> 14,983,478
<NET-CHANGE-FROM-OPS> 25,488,393
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,524)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 73,720
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 51
<NET-CHANGE-IN-ASSETS> 59,346,849
<ACCUMULATED-NII-PRIOR> 16,344
<ACCUMULATED-GAINS-PRIOR> 14,171,947
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 903,827
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,321,055
<AVERAGE-NET-ASSETS> 1,170,306
<PER-SHARE-NAV-BEGIN> 28.26
<PER-SHARE-NII> 0.03
<PER-SHARE-GAIN-APPREC> 1.89
<PER-SHARE-DIVIDEND> (0.03)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 30.15
<EXPENSE-RATIO> 1.35
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEMI-ANNUAL REPORT DATED APRIL 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 9
<NAME> THE MIDCAP FUND - INSTITUTIONAL SHARES
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 69,813,388
<INVESTMENTS-AT-VALUE> 79,100,016
<RECEIVABLES> 476,330
<ASSETS-OTHER> 27,478
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 79,603,824
<PAYABLE-FOR-SECURITIES> 2,244,946
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 198,707
<TOTAL-LIABILITIES> 2,443,653
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 69,542,948
<SHARES-COMMON-STOCK> 2,954,868
<SHARES-COMMON-PRIOR> 2,660,099
<ACCUMULATED-NII-CURRENT> (221,409)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1,447,996)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 9,286,628
<NET-ASSETS> 77,160,171
<DIVIDEND-INCOME> 221,218
<INTEREST-INCOME> 40,154
<OTHER-INCOME> 0
<EXPENSES-NET> (482,781)
<NET-INVESTMENT-INCOME> (221,409)
<REALIZED-GAINS-CURRENT> (1,249,377)
<APPREC-INCREASE-CURRENT> (3,574,861)
<NET-CHANGE-FROM-OPS> (5,045,647)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (781,830)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 660,467
<NUMBER-OF-SHARES-REDEEMED> (389,568)
<SHARES-REINVESTED> 23,870
<NET-CHANGE-IN-ASSETS> 2,518,731
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 583,211
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 290,667
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 482,781
<AVERAGE-NET-ASSETS> 78,117,215
<PER-SHARE-NAV-BEGIN> 28.06
<PER-SHARE-NII> (0.06)
<PER-SHARE-GAIN-APPREC> (1.63)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (0.29)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 26.08
<EXPENSE-RATIO> 1.25
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEMI-ANNUAL REPORT DATED APRIL 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 10
<NAME> THE MIDCAP FUND - SERVICE SHARES
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 69,813,388
<INVESTMENTS-AT-VALUE> 79,100,016
<RECEIVABLES> 476,330
<ASSETS-OTHER> 27,478
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 79,603,824
<PAYABLE-FOR-SECURITIES> 2,244,946
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 198,707
<TOTAL-LIABILITIES> 2,443,653
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 69,542,948
<SHARES-COMMON-STOCK> 3,583
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> (221,409)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1,447,996)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 9,286,628
<NET-ASSETS> 77,160,171
<DIVIDEND-INCOME> 221,218
<INTEREST-INCOME> 40,154
<OTHER-INCOME> 0
<EXPENSES-NET> (482,781)
<NET-INVESTMENT-INCOME> (221,409)
<REALIZED-GAINS-CURRENT> (1,249,377)
<APPREC-INCREASE-CURRENT> (3,574,861)
<NET-CHANGE-FROM-OPS> (5,045,647)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,583
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 2,518,731
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 583,211
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 290,667
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 482,781
<AVERAGE-NET-ASSETS> 49,317
<PER-SHARE-NAV-BEGIN> 28.64
<PER-SHARE-NII> (0.04)
<PER-SHARE-GAIN-APPREC> (2.53)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 26.07
<EXPENSE-RATIO> 1.50
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEMI-ANNUAL REPORT DATED APRIL 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 11
<NAME> THE INTERNATIONAL EQUITY FUND - INSTITUTIONAL SHARES
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 57,914,221
<INVESTMENTS-AT-VALUE> 63,274,526
<RECEIVABLES> 617,399
<ASSETS-OTHER> 204,606
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 64,096,531
<PAYABLE-FOR-SECURITIES> 134,695
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 214,126
<TOTAL-LIABILITIES> 348,821
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 57,254,787
<SHARES-COMMON-STOCK> 2,926,766
<SHARES-COMMON-PRIOR> 2,461,373
<ACCUMULATED-NII-CURRENT> 66,141
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,075,197
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 5,351,585
<NET-ASSETS> 63,747,710
<DIVIDEND-INCOME> 518,769
<INTEREST-INCOME> 67,913
<OTHER-INCOME> 0
<EXPENSES-NET> (497,497)
<NET-INVESTMENT-INCOME> 89,185
<REALIZED-GAINS-CURRENT> 1,142,792
<APPREC-INCREASE-CURRENT> 1,736,939
<NET-CHANGE-FROM-OPS> 2,968,916
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (268,546)
<DISTRIBUTIONS-OF-GAINS> (598,118)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 701,413
<NUMBER-OF-SHARES-REDEEMED> (268,013)
<SHARES-REINVESTED> 31,993
<NET-CHANGE-IN-ASSETS> 12,158,684
<ACCUMULATED-NII-PRIOR> 245,502
<ACCUMULATED-GAINS-PRIOR> 530,523
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 433,698
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 673,136
<AVERAGE-NET-ASSETS> 58,309,160
<PER-SHARE-NAV-BEGIN> 20.96
<PER-SHARE-NII> 0.03
<PER-SHARE-GAIN-APPREC> 1.11
<PER-SHARE-DIVIDEND> (0.10)
<PER-SHARE-DISTRIBUTIONS> (0.24)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 21.76
<EXPENSE-RATIO> 1.72
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTIANS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEMI-ANNUAL REPORT DATED APRIL 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 12
<NAME> THE INTERNATIONAL EQUITY FUND - SERVICE SHARES
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 57,914,221
<INVESTMENTS-AT-VALUE> 63,274,526
<RECEIVABLES> 617,399
<ASSETS-OTHER> 204,606
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 64,096,531
<PAYABLE-FOR-SECURITIES> 134,695
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 214,126
<TOTAL-LIABILITIES> 348,821
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 57,254,787
<SHARES-COMMON-STOCK> 3,123
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 66,141
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,075,197
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 5,351,585
<NET-ASSETS> 63,747,710
<DIVIDEND-INCOME> 518,769
<INTEREST-INCOME> 67,913
<OTHER-INCOME> 0
<EXPENSES-NET> (497,497)
<NET-INVESTMENT-INCOME> 89,185
<REALIZED-GAINS-CURRENT> 1,142,792
<APPREC-INCREASE-CURRENT> 1,736,939
<NET-CHANGE-FROM-OPS> 2,968,916
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,123
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 12,158,684
<ACCUMULATED-NII-PRIOR> 245,502
<ACCUMULATED-GAINS-PRIOR> 530,523
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 433,698
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 673,136
<AVERAGE-NET-ASSETS> 24,966
<PER-SHARE-NAV-BEGIN> 21.70
<PER-SHARE-NII> 0.05
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 21.75
<EXPENSE-RATIO> 1.97
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEMI-ANNUAL REPORT DATED APRIL 30,1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 13
<NAME> THE NATIONAL TAX-FREE BOND FUND
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 19,471,913
<INVESTMENTS-AT-VALUE> 19,564,478
<RECEIVABLES> 430,144
<ASSETS-OTHER> 60,878
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 20,055,500
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 82,496
<TOTAL-LIABILITIES> 82,496
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 19,871,277
<SHARES-COMMON-STOCK> 1,086,149
<SHARES-COMMON-PRIOR> 954,201
<ACCUMULATED-NII-CURRENT> 9,525
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (363)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 92,565
<NET-ASSETS> 19,973,004
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 445,703
<OTHER-INCOME> 0
<EXPENSES-NET> (78,472)
<NET-INVESTMENT-INCOME> 367,231
<REALIZED-GAINS-CURRENT> 5,614
<APPREC-INCREASE-CURRENT> (83,100)
<NET-CHANGE-FROM-OPS> 289,745
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (367,231)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 227,284
<NUMBER-OF-SHARES-REDEEMED> (98,407)
<SHARES-REINVESTED> 3,071
<NET-CHANGE-IN-ASSETS> 2,359,719
<ACCUMULATED-NII-PRIOR> 9,525
<ACCUMULATED-GAINS-PRIOR> (5,977)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 46,160
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 109,645
<AVERAGE-NET-ASSETS> 18,616,833
<PER-SHARE-NAV-BEGIN> 18.46
<PER-SHARE-NII> 0.37
<PER-SHARE-GAIN-APPREC> (0.07)
<PER-SHARE-DIVIDEND> (0.37)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 18.39
<EXPENSE-RATIO> 0.85
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEMI-ANNUAL REPORT DATED APRIL 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 14
<NAME> THE MISSOURI TAX-FREE BOND FUND
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 18,350,923
<INVESTMENTS-AT-VALUE> 18,306,327
<RECEIVABLES> 565,656
<ASSETS-OTHER> 40,636
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 18,912,619
<PAYABLE-FOR-SECURITIES> 249,600
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 75,332
<TOTAL-LIABILITIES> 324,932
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 18,603,024
<SHARES-COMMON-STOCK> 1,023,419
<SHARES-COMMON-PRIOR> 932,652
<ACCUMULATED-NII-CURRENT> 10,626
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 18,633
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (44,596)
<NET-ASSETS> 18,587,687
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 430,660
<OTHER-INCOME> 0
<EXPENSES-NET> (57,443)
<NET-INVESTMENT-INCOME> 373,217
<REALIZED-GAINS-CURRENT> 18,627
<APPREC-INCREASE-CURRENT> (113,456)
<NET-CHANGE-FROM-OPS> 278,388
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (373,217)
<DISTRIBUTIONS-OF-GAINS> (14,681)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 196,918
<NUMBER-OF-SHARES-REDEEMED> (109,692)
<SHARES-REINVESTED> 3,541
<NET-CHANGE-IN-ASSETS> 1,553,273
<ACCUMULATED-NII-PRIOR> 10,626
<ACCUMULATED-GAINS-PRIOR> 14,687
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 44,187
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 109,011
<AVERAGE-NET-ASSETS> 17,821,301
<PER-SHARE-NAV-BEGIN> 18.26
<PER-SHARE-NII> 0.38
<PER-SHARE-GAIN-APPREC> (0.08)
<PER-SHARE-DIVIDEND> (0.38)
<PER-SHARE-DISTRIBUTIONS> (0.02)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 18.16
<EXPENSE-RATIO> 0.65
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEMI-ANNUAL REPORT DATED APRIL 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 15
<NAME> THE GROWTH AND INCOME FUND - INSTITUTIONAL SHARES
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 12,887,904
<INVESTMENTS-AT-VALUE> 12,896,575
<RECEIVABLES> 214,613
<ASSETS-OTHER> 51,411
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 13,162,599
<PAYABLE-FOR-SECURITIES> 697,561
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 57,493
<TOTAL-LIABILITIES> 755,054
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 12,376,605
<SHARES-COMMON-STOCK> 672,190
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 27,668
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (5,399)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 8,671
<NET-ASSETS> 12,407,545
<DIVIDEND-INCOME> 10,408
<INTEREST-INCOME> 36,184
<OTHER-INCOME> 0
<EXPENSES-NET> (18,924)
<NET-INVESTMENT-INCOME> 27,668
<REALIZED-GAINS-CURRENT> (5,399)
<APPREC-INCREASE-CURRENT> 8,671
<NET-CHANGE-FROM-OPS> 30,940
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 676,660
<NUMBER-OF-SHARES-REDEEMED> (4,470)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 12,407,545
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 11,779
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 49,597
<AVERAGE-NET-ASSETS> 9,537,941
<PER-SHARE-NAV-BEGIN> 18.00
<PER-SHARE-NII> 0.04
<PER-SHARE-GAIN-APPREC> (0.13)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 17.91
<EXPENSE-RATIO> 1.20
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEMI-ANNUAL REPORT DATED APRIL 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 16
<NAME> THE GROWTH AND INCOME FUND - SERVICE SHARES
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 12,887,904
<INVESTMENTS-AT-VALUE> 12,896,575
<RECEIVABLES> 214,613
<ASSETS-OTHER> 51,411
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 13,162,599
<PAYABLE-FOR-SECURITIES> 697,561
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 57,493
<TOTAL-LIABILITIES> 755,054
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 12,376,605
<SHARES-COMMON-STOCK> 20,640
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<NET-CHANGE-IN-ASSETS> 12,407,545
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</TABLE>
