<PAGE>
As filed with the Securities and Exchange Commission on March 2, 1998
Securities Act File No. 33-80966
Investment Company Act File No. 811-8598
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [x]
Pre-Effective Amendment No. ____ [ ]
Post-Effective Amendment No. 7 [x]
---
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [x]
Amendment No. 8 [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
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.
Title of Securities Being Registered: None
THIS POST-EFFECTIVE AMENDMENT IS BEING FILED IN ORDER TO UPDATE CERTAIN
FINANCIAL INFORMATION AND OTHER NON-MATERIAL INFORMATION OF THE COMMERCE FUNDS.
<PAGE>
THE COMMERCE FUNDS
Institutional Shares of the
Short-Term Government Fund
Bond Fund
Balanced Fund
Growth Fund
MidCap Fund
Growth and Income Fund
International Equity Fund
National Tax Free Intermediate Bond Fund
Missouri Tax-Free Intermediate Bond Fund
CROSS REFERENCE SHEET
---------------------
Pursuant to Rule 495(a)
under the Securities Act of 1933
Form N-lA Part A Item Number Prospectus Caption
- ---------------------------- ------------------
l. 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>
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 2, 1998
Institutional Shares
<PAGE>
HOW CAN I CONTACT THE COMMERCE FUNDS?
For assistance or to obtain additional information about The Commerce Funds,
you may:
. Contact a registered investment representative at selected broker/dealers or
Commerce Bank branches (call 1-800-305-2140 if you need assistance in
contacting your representative); or
. Contact your Company representative for specific information regarding your
retirement plan; or
. Contact your account administrator for specific information regarding your
Investment Management Group account; or
. Write to The Commerce Funds at:
The Commerce Funds
P.O. Box 419525
Kansas City, MO 64141-6525; or
. Call The Commerce Funds' transfer agent directly at 1-800-995-6365; or
. Access The Commerce Funds' Website at WWW.COMMERCEBANK.COM.
TABLE OF CONTENTS
<TABLE>
<S> <C>
SUMMARY OF EXPENSES........................................................ 3
FINANCIAL HIGHLIGHTS....................................................... 5
INVESTMENT OBJECTIVES AND POLICIES......................................... 13
ADDITIONAL RISK CONSIDERATIONS............................................. 22
INVESTMENT RESTRICTIONS.................................................... 24
SHAREOWNER GUIDE........................................................... 25
HOW CAN I CONTACT THE COMMERCE FUNDS?.................................... 25
HOW TO BUY INSTITUTIONAL SHARES.......................................... 25
HOW TO SELL INSTITUTIONAL SHARES......................................... 31
DIVIDEND AND DISTRIBUTION POLICIES....................................... 34
SHAREOWNER FEATURES AND PRIVILEGES....................................... 35
THE BUSINESS OF THE COMMERCE FUNDS......................................... 39
SHAREHOLDER ADMINISTRATIVE SERVICES PLAN................................... 43
EXPENSES................................................................... 43
TAX INFORMATION............................................................ 43
HOW PERFORMANCE IS MEASURED................................................ 45
OTHER INFORMATION.......................................................... 46
OTHER INVESTMENT PRACTICES................................................. 47
APPLICATION................................................................ BACK
PAGE
</TABLE>
<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 and cash equivalents.
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 2, 1998) 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 419525,
Kansas City, MO 64141-6525 or by calling 1-800-995-6365. The Prospectus and
Statement of Additional Information are also available for reference, along
with related materials, on the SEC Internet Website (http://www.sec.gov).
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED,
ENDORSED OR OTHERWISE SUPPORTED BY, COMMERCE BANK, N.A., ITS 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, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
MARCH 2, 1998
<PAGE>
MANAGEMENT OF THE FUNDS
Commerce Bank, N.A. serves as investment advisor to the Funds (the
"Advisor"). Rowe Price-Fleming International, Inc. serves as sub-investment
advisor to the International Equity Fund (the "Sub-Advisor").
WHO MAY INVEST IN INSTITUTIONAL SHARES
This Prospectus describes the Institutional Shares in each Fund.
Institutional Shares are offered primarily to:
. investors maintaining qualified accounts at bank and trust institutions,
including institutions affiliated with Commerce Bancshares, Inc. and its
subsidiaries;
. participants in employer-sponsored defined contribution plans;
. any investor who was a shareholder in The Commerce Funds prior to January
1, 1997;
. 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; and
. financial planners and their clients
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 through 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;
. and financial planners and their clients.
2
<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(3)........ None None None None None None None
Redemption Fees........ None None None None None None None
Exchange Fees(4)....... None None None None None None None
ANNUAL FUND OPERATING
EXPENSES
(as a percentage of
average daily net
assets)
Management Fees (after
fee waivers)(5)....... 0.30% 0.50% 0.66% 0.75% 0.75% 0.75% 0.99%
Other Expenses (after
fee waivers and
expense
reimbursements)(6).... 0.38% 0.35% 0.47% 0.45% 0.36% 0.48% 0.66%
---- ---- ---- ---- ---- ---- ----
Total Fund Operating
Expenses (after fee
waivers and expense
reimbursements)(6).... 0.68% 0.85% 1.13% 1.20% 1.11% 1.23% 1.65%
==== ==== ==== ==== ==== ==== ====
EXAMPLE: Assume a Fund's annual return is 5% and its expenses are the same as those stated
above. For every $1,000 you invest, here's how much you would pay in total expenses if you
closed your account after the number of years indicated, assuming deduction at the time of
purchase of the maximum applicable sales load and redemption at the end of each time
period:
One Year............... $ 27 $ 43 $ 46 $ 47 $ 46 $ 47 $ 51
Three Years............ $ 41 $ 61 $ 70 $ 72 $ 69 $ 73 $ 85
Five Years............. $ 57 $ 80 $ 95 $ 99 $ 94 $100 $122
Ten Years.............. $103 $136 $168 $175 $164 $179 $224
</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) A deferred sales charge of 1.00% is assessed on certain redemptions of
Institutional Shares that are purchased with no initial sales charge as
part of an investment of $1,000,000 or more. See "Shareowner Guide--How
are Institutional Shares Priced?"
(4) 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.
(5) 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.
3
<PAGE>
(6) In addition to the advisory fee waivers referred to in note 5, the Advisor
intends to voluntarily reimburse expenses, excluding interest, taxes and
extraordinary 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. For
the current fiscal year, without such fee waivers and expense
reimbursements, "Other Expenses" are expected to be 0.50% and 0.59% and
"Total Fund Operating Expenses" expected to be 1.50% and 2.09% of the
average daily net assets of the Balanced and International Equity Funds,
respectively. For the last fiscal year, without the fee waivers and/or
expense reimbursements described above, "Other Expenses" would be 0.61%,
0.53%, 1.27%, and 0.73% and "Total Fund Operating Expenses" would be
1.11%, 1.53%, 2.02%, and 2.23% of the average daily net assets of the
Short-Term Government, Balanced, Growth and Income and International
Equity Funds, respectively. "Other Expenses" includes shareholder
servicing fees of up to 0.25%, annualized, of the average daily net asset
value of Institutional Shares.
The above expense information is provided to help you understand the
expenses you would pay either directly (i.e., transaction expenses) or
indirectly (i.e., annual operating expenses) as a shareowner in the Funds. The
information with respect to the Short-Term Government, Bond, Balanced, Growth
and Income, Growth, MidCap and International Equity Funds is based on the
expenses incurred by those Funds during the last fiscal year, except that the
International Equity and Balanced Funds' expenses shown in the expense table
have been restated to reflect expenses expected to be incurred by such Funds
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 1-800-995-6365. 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, its
affiliates or any other institutions directly to their customer accounts for
services related to an investment in the Funds are in addition to and not
reflected in the fees and expenses described above. If you purchase or redeem
shares directly from The Commerce Funds Shareowner Services or an account
representative at a Commerce Bank branch, you may avoid these fees by
following the procedures described under "How To Buy Institutional Shares" in
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 SHOWN. 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 TH E
COMMERCE FUNDS AT THE ADDRESS OR TELEPHONE NUMBER INDICATED ON THE COVER
PAGE OF THIS PROSPECTUS.
- -------------------------------------------------------------------------------
4
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information presented below has been derived from the
financial statements incorporated by reference into the Statement of
Additional Information and has been audited by KPMG Peat Marwick LLP, the
Funds' independent accountants. This financial information should be read
together with those financial statements. Further information about the
performance of the Funds is available in the Funds' annual shareholder
reports. Both the Statement of Additional Information and the annual
shareholder reports may be obtained free of charge by calling 1-800-995-6365.
5
<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 ASSET OF NET INVESTMENT
NET ASSET GAIN FROM NET VALUE, EXPENSES INCOME TO
VALUE, NET (LOSS) ON FROM NET REALIZED END TO AVERAGE AVERAGE PORTFOLIO
BEGINNING INVESTMENT INVEST- INVESTMENT GAIN ON OF TOTAL NET NET TURNOVER
OF PERIOD INCOME MENTS(A) INCOME INVESTMENTS PERIOD RETURN(B) ASSETS ASSETS RATE
--------- ---------- ---------- ---------- ----------- ------ --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
For the Year Ended October 31, 1997
Institutional
Shares $18.43 $1.11 $ 0.04 $(1.11) -- $18.47 6.45% 0.68% 6.04% 36%
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(c) 6.38(c) 158
<CAPTION>
RATIOS ASSUMING
NO WAIVER OF
INVESTMENT ADVISORY
FEES OR EXPENSE
REIMBURSEMENTS
---------------------
RATIO
NET RATIO OF NET
ASSETS AT OF INVESTMENT
END EXPENSES INCOME TO
OF PERIOD TO AVERAGE AVERAGE
(IN 000'S) NET ASSETS NET ASSETS
---------- ---------- ----------
<S> <C> <C> <C>
For the Year Ended October 31, 1997
Institutional
Shares $48,840 1.11% 5.61%
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(c) 5.92(c)
</TABLE>
- --------
(a) Includes the balancing effect of calculating per share amounts.
(b) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, 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.
(c) Annualized.
6
<PAGE>
THE COMMERCE FUNDS
BOND 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 ASSET OF NET INVESTMENT
NET ASSET UNREALIZED VALUE, EXPENSES INCOME
VALUE, NET GAIN FROM NET FROM NET END TO AVERAGE TO AVERAGE PORTFOLIO
BEGINNING INVESTMENT (LOSS) ON INVESTMENT REALIZED GAIN OF TOTAL NET NET TURNOVER
OF PERIOD INCOME INVESTMENTS(A) INCOME ON INVESTMENTS PERIOD RETURN(B) ASSETS ASSETS RATE
--------- ---------- -------------- ---------- -------------- ------ --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
For the Year Ended October 31, 1997
Institutional
Shares $19.07 $1.17 $ 0.39 $(1.18) $(0.02) $19.43 8.50% 0.85% 6.14% 19%
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(c) 6.64(c) 58
<CAPTION>
NET
ASSETS AT
END
OF PERIOD
(IN 000'S)
----------
<S> <C>
For the Year Ended October 31, 1997
Institutional
Shares $217,803
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) Includes the balancing effect of calculating per share amounts.
(b) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, 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.
(c) Annualized.
7
<PAGE>
THE COMMERCE FUNDS
BALANCED FUND
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
INCOME FROM
INVESTMENT DISTRIBUTIONS TO
OPERATIONS SHAREHOLDERS
------------------ -----------------
RATIO
OF NET
NET RATIO INVEST-
REALIZED OF NET MENT
AND FROM NET NET EXPENSES INCOME
NET ASSET NET UNREALIZED FROM NET REALIZED ASSET TO TO
VALUE, INVEST- GAIN ON INVEST- GAIN ON VALUE, AVERAGE AVERAGE PORTFOLIO AVERAGE
BEGINNING MENT INVEST- MENT INVEST- END OF TOTAL NET NET TURNOVER COMMISSION
OF PERIOD INCOME MENTS(A) INCOME MENTS PERIOD RETURN(B) ASSETS ASSETS RATE RATE
--------- ------- ---------- -------- -------- ------ --------- -------- ------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
For the Year Ended October 31, 1997
Institutional
Shares $24.00 $0.59 $3.93 $(0.59) $(1.26) $26.67 19.92% 1.13% 2.44% 31% $0.0604
For the Year Ended October 31, 1996
Institutional
Shares 22.10 0.54 2.56 (0.54) (0.66) 24.00 14.45 1.13 2.47 58 0.0764
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 1.13(c) 3.28(c) 59 --
<CAPTION>
RATIOS ASSUMING
NO WAIVER OF
INVESTMENT ADVISORY
FEES OR EXPENSE
REIMBURSEMENTS
---------------------
RATIO
OF NET
NET RATIO OF INVESTMENT
ASSETS EXPENSES INCOME
AT END TO AVERAGE TO AVERAGE
OF PERIOD NET NET
(IN 000'S) ASSETS ASSETS
---------- ---------- ----------
<S> <C> <C> <C>
For the Year Ended October 31, 1997
Institutional
Shares $105,782 1.53% 2.04%
For the Year Ended October 31, 1996
Institutional
Shares 69,880 1.45 2.15
For the Period December 12, 1994 (commencement of operations) through October 31, 1995
Institutional
Shares 48,329 1.45(c) 2.96(c)
</TABLE>
- --------
(a) Includes the balancing effect of calculating per share amounts.
(b) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, 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.
(c) Annualized.
8
<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 RATIO
REALIZED NET RATIO OF NET
AND ASSET OF NET INVESTMENT
NET ASSET UNREALIZED FROM NET VALUE, EXPENSES INCOME TO AVERAGE
VALUE, NET GAIN ON FROM NET REALIZED END TO AVERAGE AVERAGE PORTFOLIO COMMIS-
BEGINNING INVESTMENT INVEST- INVESTMENT GAIN ON OF TOTAL NET NET TURNOVER SION
OF PERIOD INCOME MENTS(B) INCOME INVESTMENTS PERIOD RETURN(C) ASSETS ASSETS RATE RATE
--------- ---------- ---------- ---------- ----------- ------ --------- ---------- ---------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
For the Period March 3, 1997(a) through October 31, 1997
Institutional
Shares $18.00 $0.15 $3.80 $(0.13) -- $21.82 22.00% 1.20%(d) 1.30%(d) 5% $0.0774
<CAPTION>
RATIOS ASSUMING
NO EXPENSE
REIMBURSEMENTS
-----------------------
RATIO RATIO
NET OF NET OF NET
ASSETS AT EXPENSES INVESTMENT
END TO AVERAGE LOSS TO
OF PERIOD NET AVERAGE
(IN 000'S) ASSETS NET ASSETS
---------- ----------- -----------
<S> <C> <C> <C>
For the Period March 3, 1997(a) through October 31, 1997
Institutional
Shares $45,173 2.02%(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.
9
<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
------------------------- -------------------------
RATIO
NET NET RATIO OF NET
REALIZED ASSET OF NET INVESTMENT
NET ASSET AND VALUE, EXPENSES INCOME
VALUE, NET UNREALIZED FROM NET FROM NET END TO AVERAGE TO AVERAGE PORTFOLIO
BEGINNING INVESTMENT GAIN ON INVESTMENT REALIZED GAIN OF TOTAL NET NET TURNOVER
OF PERIOD INCOME INVESTMENTS(A) INCOME ON INVESTMENTS PERIOD RETURN(B) ASSETS ASSETS RATE
--------- ---------- -------------- ---------- -------------- ------ --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
For the Year Ended October 31, 1997
Institutional
Shares $28.95 $0.19 $7.51 $(0.19) $(1.92) $34.54 28.12% 1.11% 0.60% 32%
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 October 31, 1995
Institutional
Shares 18.00 0.15 6.68 (0.15) -- 24.68 38.06 1.11(c) 0.81(c) 33
<CAPTION>
NET
ASSETS AT
AVERAGE END
COMMISSION OF PERIOD
RATE (IN 000'S)
---------- ----------
<S> <C> <C>
For the Year Ended October 31, 1997
Institutional
Shares $0.0556 $343,773
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) Includes the balancing effect of calculating per share amounts.
(b) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, 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.
(c) Annualized.
10
<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
------------------------- -------------------------
RATIO
NET NET RATIO OF NET
REALIZED ASSET OF NET INVESTMENT
NET ASSET AND VALUE, EXPENSES LOSS
VALUE, NET UNREALIZED FROM NET FROM NET END TO AVERAGE TO AVERAGE PORTFOLIO
BEGINNING INVESTMENT GAIN ON INVESTMENT REALIZED GAIN OF TOTAL NET NET TURNOVER
OF PERIOD LOSS INVESTMENTS(A) INCOME ON INVESTMENTS PERIOD RETURN(B) ASSETS ASSETS RATE
--------- ---------- -------------- ---------- -------------- ------ --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
For the Year Ended October 31, 1997
Institutional
Shares $28.06 $(0.13) $5.38 -- $(0.29) $33.02 18.88% 1.23% (0.61)% 89%
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(c) (0.29)(c) 59
<CAPTION>
NET
ASSETS AT
AVERAGE END
COMMISSION OF PERIOD
RATE (IN 000'S)
---------- ----------
<S> <C> <C>
For the Year Ended October 31, 1997
Institutional
Shares $0.0608 $112,442
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) Includes the balancing effect of calculating per share amounts.
(b) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, 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.
(c) Annualized.
11
<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 RATIO
REALIZED UNREALIZED OF NET
AND LOSS ON NET RATIO INVEST-
UNREALIZED FOREIGN FROM NET ASSET OF NET MENT
NET ASSET NET GAIN CURRENCY FROM NET REALIZED VALUE, EXPENSES INCOME TO
VALUE, INVEST- (LOSS) ON RELATED INVEST- GAIN ON END TO AVERAGE AVERAGE PORTFOLIO
BEGINNING MENT INVEST- TRANS- MENT INVEST- OF TOTAL NET NET TURNOVER
OF PERIOD INCOME MENTS(A) ACTIONS(A) INCOME MENTS PERIOD RETURN(B) ASSETS ASSETS RATE
--------- ------- ---------- ---------- -------- -------- ------ --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
For the Year Ended October 31, 1997
Institutional
Shares $20.96 $0.06 $2.07 $(0.65) $(0.10) $(0.24) $22.10 7.15% 1.72% 0.35% 22%
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 0.74 21
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(c) 1.06(c) 25
<CAPTION>
RATIOS ASSUMING
NO WAIVER OF
INVESTMENT
ADVISORY
FEES OR EXPENSE
REIMBURSEMENTS
-----------------------
RATIO
RATIO OF NET
NET OF INVESTMENT
AVERAGE ASSETS AT EXPENSES INCOME
COMMIS- END TO (LOSS) TO
SION OF PERIOD AVERAGE AVERAGE
RATE (IN 000'S) NET ASSETS NET ASSETS
------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
For the Year Ended October 31, 1997
Institutional
Shares $0.0007 $78,273 2.23% (0.16)%
For the Year Ended October 31, 1996
Institutional
Shares 0.0147 51,589 2.64 (0.18)
For the Period December 12, 1994 (commencement of operations) through October 31, 1995
Institutional
Shares -- 21,014 3.50(c) (0.63)(c)
</TABLE>
- --------
(a) Includes the balancing effect of calculating per share amounts.
(b) Assumes investment of the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, 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.
(c) Annualized.
12
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives 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 objectives, policies and
restrictions of each Fund are described below under "Other Investment
Practices" and 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. Except as noted in the Statement of Additional Information 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."
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.
13
<PAGE>
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 rates. See "Additional Risk Considerations--Risks Associated With
Fixed Income Investments." In addition, neither the U.S. Government, nor any
agency or instrumentality thereof, has guaranteed, sponsored or approved the
Fund or its shares.
Mortgage-backed securities may be subject to risks including price
volatility, liquidity and interest rate risk. The prices of such securities
may be inversely affected by changes in interest rates and prepayment of the
underlying mortgage collateral may result in a decreased rate of return. See
"Other Investment Practices--Mortgage-Related Securities."
BOND FUND
INVESTMENT OBJECTIVE
THE INVESTMENT OBJECTIVE OF THE BOND FUND IS TO SEEK TOTAL RETURN THROUGH
CURRENT INCOME AND SECONDARILY, CAPITAL APPRECIATION. THE FUND PURSUES THIS
OBJECTIVE THROUGH INVESTMENT IN A DIVERSIFIED PORTFOLIO OF INVESTMENT-GRADE
CORPORATE DEBT OBLIGATIONS AND OBLIGATIONS ISSUED OR GUARANTEED BY THE U.S.
GOVERNMENT, ITS AGENCIES OR INSTRUMENTALITIES.
INVESTMENT STRATEGY
In pursuing its investment objective, the Fund will invest, during normal
market conditions, at least 65% of its total assets in fixed income debt
securities rated at the time of purchase A- or better by Standard & Poor's
Ratings Services ("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.
14
<PAGE>
The Fund may invest up to 65% of its total assets in certain mortgage-backed
and asset-backed securities. Mortgage-backed securities represent pools of
mortgage loans assembled for sale to investors by various governmental
agencies as well as by private issuers. See "Other Investment Practices--
Mortgage-Related Securities." Asset-backed securities represent a
participation in, or are secured by or payable from, a stream of payments
governed by particular assets. Such securities may include motor vehicle
installment purchase obligations, credit card receivables and home equity
loans. See "Other Investment Practices--Asset-Backed Securities." The Fund may
also invest in "stripped" and convertible securities. See "Other Investment
Practices--Stripped Securities" and "Other Investment Practices--Convertible
Securities."
Additionally, up to 20% of the total assets of the Fund may be invested
directly in debt obligations of foreign issuers. These obligations may include
obligations of foreign corporations as well as investments in obligations of
foreign governments and their political sub-divisions (which will be limited
to direct government obligations and government-guaranteed securities). The
Fund is also permitted to invest up to 20% of its total assets in obligations
issued by or on behalf of states, territories and possessions of the United
States, the District of Columbia and their authorities, agencies,
instrumentalities and political subdivisions ("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."
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.
15
<PAGE>
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. See "Additional Risk Considerations--Risks Associated with Fixed
Income Investments" below.
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 U.S. issuers. 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.
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 "Investment
Strategy" under Growth and Income, Growth and MidCap Funds 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
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-
16
<PAGE>
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 a U.S. bank
or trust company evidencing ownership of underlying securities issued by a
foreign issuer. ADR prices are denominated in United States dollars while the
securities underlying an ADR are normally denominated in a foreign currency.
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).
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. issuers. See "Additional Risk Considerations--Risks Associated with
Foreign Securities and Currencies" below.
See "Short-Term Government Fund--Risks Associated with an Investment in the
Fund" above for risks associated with investments in mortgage-backed
securities and "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.
17
<PAGE>
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 that 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.
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. See "Additional Risk Considerations--Risks Associated with
Foreign Securities and Currencies" below.
18
<PAGE>
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.
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. See "Additional Risk Considerations--Risks Associated with
Foreign Securities and Currencies" below.
19
<PAGE>
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 S&P 400 Mid-Cap Index, market liquidity as
measured in average daily trading volume, the evaluation of expected future
earnings potential versus the market and current relative market valuation,
including price-to-book, price-to-earnings and free cash flow ratios. 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.
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.
20
<PAGE>
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. 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.
21
<PAGE>
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,
including 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 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.
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.
22
<PAGE>
Investment in foreign securities involves special risks including market
risk, foreign currency risk, interest rate risk and the risks of investing in
securities of foreign issuers and of companies whose securities are
principally traded outside the United States. Market risk involves the
possibility that stock prices will decline over short or extended periods.
Stock markets tend to be cyclical, with alternate periods of generally rising
and generally declining prices. In addition, the performance of investments in
securities denominated in a foreign currency will depend on the strength of
the foreign currency against the U.S. dollar and the interest rate environment
in the country issuing the currency. Absent other events which could otherwise
affect the value of a foreign security (such as a change in the political
climate or an issuer's credit quality), appreciation in the value of the
foreign currency generally can be expected to increase the value of a foreign
currency-denominated security in terms of U.S. dollars. An increase in foreign
interest rates or a decline in the value of the foreign currency relative to
the U.S. dollar generally can be expected to depress the value of a foreign
currency-denominated security.
There are other risks and costs involved in investing in foreign securities,
which are in addition to the usual risks inherent in domestic investments.
Investment in foreign securities involves higher costs than investment in U.S.
securities, including higher transaction and custody costs as well as the
imposition of additional taxes by foreign governments. Foreign investments
also involve risks associated with the level of currency exchange rates, less
complete financial information about the issuers, less market liquidity, more
market volatility and political and economic instability. Future political and
economic developments, the possible imposition of withholding taxes, the
possible seizure or nationalization of foreign holdings, the possible
establishment of exchange controls, or the adoption of other governmental
restrictions might adversely affect an investment in foreign securities.
Additionally, foreign banks and foreign branches of domestic banks are subject
to less stringent reserve requirements, and to different accounting, auditing
and recordkeeping requirements.
The Bond and Balanced Funds may invest in foreign debt and in the securities
of foreign governments. The risks of such investments include the risk that
foreign governments may default on their obligations, may not respect the
integrity of such debt, may attempt to renegotiate the debt at a lower rate
and may not honor investments by U.S. entities or citizens.
The Balanced, Growth and Income, Growth, MidCap and International Equity
Funds may invest in ADRs, some of which may not be sponsored by the issuing
institution. A non-sponsored depository may not be required to disclose
material information that a sponsored depository would be required to provide
under its contractual relationship with the issuer. Accordingly, there may not
be a correlation between such information and the market value of such
securities.
Although a Fund may invest in securities denominated in foreign currencies,
its portfolio securities and other assets are valued in U.S. dollars. Currency
exchange rates may fluctuate significantly over short periods of time causing,
together with other factors, a Fund's net asset value to fluctuate as well.
Currency exchange rates generally are determined by the forces of supply and
demand in the foreign exchange markets and the relative merits of investments
in different countries, actual or anticipated changes in interest rates and
other complex factors, as seen from an international perspective. Currency
exchange rates also may be affected unpredictably by the intervention or the
failure to intervene by U.S. or foreign governments or central banks, or by
currency controls or political developments in the U.S. or abroad. To the
extent that a Fund's total assets, adjusted to reflect the Fund's net position
after giving effect to currency transactions, are denominated in the
currencies of foreign countries, the Fund will be more susceptible to the risk
of adverse economic and political developments within those countries. In
23
<PAGE>
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 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.
SEE "OTHER INVESTMENT PRACTICES" FOR ADDITIONAL INFORMATION ON THE
INVESTMENT POLICIES OF THE FUNDS.
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. 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.
24
<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?
For assistance or to obtain additional information about The Commerce Funds,
you may:
. Contact a registered investment representative at selected broker/dealers
or Commerce Bank branches (call 1-800-305-2140 if you need assistance in
contacting your representative); or
. Contact your Company representative for specific information regarding
your retirement plan; or
. Contact your account administrator for specific information regarding
your Investment Management Group account; or
. Write to The Commerce Funds at:
The Commerce Funds
P.O. Box 419525
Kansas City, MO 64141-6525; or
. Call The Commerce Funds transfer agent directly at 1-800-995-6365; or
. Access The Commerce Funds Website at WWW.COMMERCEBANK.COM.
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 (except SEP and SIMPLE
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., NFDS and State Street Bank and Trust Company and their
subsidiaries or affiliates, although it may differ in certain circumstances as
shown below. The minimum subsequent investment for SEP and SIMPLE IRAs is
generally $50.00.
<TABLE>
<CAPTION>
INITIAL SUBSEQUENT
INVESTMENT INVESTMENT
---------- ----------
<S> <C> <C>
Regular Account.......................................... $250 $100
Automatic Investment Feature............................. $100 $25*
Individual Retirement Accounts (including SEP, SIMPLE and
Roth IRAs), Keogh Plans.................................. $100 $25*
</TABLE>
- --------
*Minimum of six bi-monthly investments within first year of Fund ownership.
25
<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") (generally 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:
<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** 1.00***
</TABLE>
ALL FUNDS EXCEPT THE SHORT-TERM GOVERNMENT FUND:
- --------
*Dealer's reallowance may be changed periodically.
**There is no initial sales charge on purchases of $1,000,000 or more on
Institutional Shares, however, a contingent deferred sales charge of 1.00%
will be imposed on the lesser of the offering price or the net asset value of
the shares on the redemption date for shares redeemed within 18 months after
purchase.
***The Distributor may pay placement fees to dealers of up to 1.00% of the
offering price on purchases of Institutional Shares of $1,000,000 or more.
26
<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
$1,000,000 or more........................... 0.00** 0.00** 1.00***
</TABLE>
- --------
*Dealer's reallowance may be changed periodically.
**There is no initial sales charge on purchases of $1,000,000 or more on
Institutional Shares, however, a contingent deferred sales charge of 1.00%
will be imposed on the lesser of the offering price or the net asset value of
the shares on the redemption date for shares redeemed within 18 months after
purchase.
***The Distributor may pay placement fees to dealers of up to 1.00% of the
offering price on purchases of Institutional Shares of $1,000,000 or more.
Goldman, Sachs & Co. (the "Distributor") and its affiliates may, out of its
administration fee or other resources, pay a fee of up to 0.25% of the amount
invested or additional incentives to dealers who initiate and are responsible
for purchases of shares of The Commerce Funds. In addition, at its expense,
the Distributor will provide additional compensation and promotional
incentives to dealers in connection with the sales of shares of the Funds.
Subject to NASD regulation, compensation may include promotional and other
merchandise, sales and training programs and other special events sponsored by
dealers. Compensation may also include payment for reasonable expenses
incurred in connection with trips taken by invited registered representatives
for meetings or seminars of a business nature.
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;
. the Redemption Reinvestment Privilege described;
. non-profit organizations, foundations and endowments qualified under
Section 501(c)(3) of the Code (excluding individual tax sheltered
annuities);
. 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.;
27
<PAGE>
. 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);
. registered representatives of dealers who have entered into dealer
agreements with Goldman, Sachs & Co. to the extent permitted by such
firms and for their customers who were shareholders prior to January 1,
1997; and
. financial planners and their clients.
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
28
<PAGE>
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 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. Any redemption made during the 13-month period will
be subtracted from the amount of the purchases in determining whether the
Letter of Intent has been completed.
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.
29
<PAGE>
HOW DO I BUY INSTITUTIONAL SHARES?
You may purchase Institutional Shares of a Fund through The Commerce Funds
Shareowner Services, an investment representative at a Commerce Bank branch or
registered investment representatives at selected broker/dealers. An
application is located at the back of this Prospectus. 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?" above. "How Can I Contact The Commerce
Funds?" above.
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.
Investors Fiduciary Trust Company
ABA #101003621
Account #756-044-3
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?" above.
</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.
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
(generally 4:00 p.m. Eastern Time) after your purchase order is
30
<PAGE>
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. With certain exceptions, 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:
HOW TO SELL INSTITUTIONAL SHARES:
Through The Commerce Funds Shareowner Services, an investment representative
at a Commerce Bank branch or registered investment representatives at selected
broker/dealers.
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?" above.
Proper written authority is required to execute
redemption requests on behalf of corporations,
partnerships, trusts, and/or fiduciary
accounts. Redemption requests require SIGNATURE
GUARANTEES as described below with the
exception of redemptions sent to a shareowner
name/address of record in effect for no less
than 30 days.
31
<PAGE>
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 below).
Redemption requests may be placed by contacting
The Commerce Funds at the telephone number set
forth in "How Can I Contact The Commerce
Funds?" above. 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.
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.
32
<PAGE>
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 below
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 next 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
solely as a result of market conditions. Retirement accounts and certain other
accounts will not be subject to automatic liquidation.
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
will ordinarily 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.
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.
33
<PAGE>
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.
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 Intermediate Bond or Missouri Tax-Free
Intermediate 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 registrations. 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.
34
<PAGE>
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?" above. 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?" above for more information.
CAN I MAKE REGULAR INVESTMENTS TO A FUND AUTOMATICALLY?
The Automatic Investment feature lets you transfer money from your checking
account into your Fund account automatically on the date you specify in any
month you choose. The Automatic Investment feature is one way to use Dollar
Cost Averaging to invest (see below). Only checking accounts at U.S. financial
institutions which permit automatic withdrawals through the Automated Clearing
House are eligible. Check with your bank or financial institution to determine
eligibility.
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") and SIMPLE and Roth 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.
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
35
<PAGE>
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?" above. 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 Intermediate Bond Fund, the Missouri Tax-Free Intermediate 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" above. 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
"Can I Make Transactions by Telephone" below 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.
Institutional Shares being exchanged are subject to the minimum initial and
subsequent investment requirements as described above. 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?" above.
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.
36
<PAGE>
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
originating Fund must be at least $1,000 after the exchange and 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?
WITH CERTAIN EXCEPTIONS, YOU MAY ELECT TO HAVE YOUR DIVIDENDS, CAPITAL GAIN
DISTRIBUTIONS, OR BOTH RECEIVED FROM A 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 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
read the prospectus and consider carefully the investment objective, policies
and applicable fees of the acquired Fund before using this feature.
HOW DO I OBTAIN OTHER INFORMATION ABOUT MY ACCOUNT?
Contact The Commerce Funds Shareowner Services or your investment
representative for account information such as current balance, account
transactions, distributions, and other applicable information.
37
<PAGE>
CAN I MAKE TRANSACTIONS BY TELEPHONE?
YOU MAY AUTHORIZE ELECTRONIC TRANSFERS OF MONEY TO MAKE ADDITIONAL
INVESTMENTS IN OR TO 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?" ABOVE.
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.
38
<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.
(THE "ADVISOR")
Commerce Bank, N.A. serves 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.
39
<PAGE>
MORE ABOUT THE ADVISOR
Commerce Bank, N.A., with offices at 8000 Forsyth Boulevard, St. Louis,
Missouri 63105 and 922 Walnut Street, Kansas City, Missouri 64106, a
subsidiary of Commerce Bancshares, Inc., a registered multi-bank holding
company, serves as the investment advisor to each Fund. Commerce Bank, N.A.
(or its predecessor organizations) have provided investment management
services to The Commerce Funds since 1994, to private and public pension
funds, endowments and foundations since 1946 and to individuals since 1906. As
of December 31, 1997, the Advisor and its affiliates had approximately $7.6
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>
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 so that the advisory fees will not
exceed 0.30% and 0.66% of the average daily net assets of the Short-term
Government and Balanced Funds, respectively. Also, the Advisor has voluntarily
agreed to waive a portion of the investment advisory fees for the
International Equity Fund so that advisory fees payable by the Fund will not
exceed an annual rate of 1.15% of the first $20 million of average daily net
assets, 1.00% of the next $30 million of average daily net assets and 0.90% of
average daily net assets over $50 million.
For the fiscal year ended October 31, 1997, 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............................................... .75%
Growth Fund.......................................................... .75%
MidCap Fund.......................................................... .75%
International Equity Fund............................................ .99%
</TABLE>
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<PAGE>
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 and the fixed-income portion of the Balanced Fund's investments.
Mr. Colbert joined the Investment Management Group of Commerce Bank, N.A. 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. 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 and
the equity portion of the Balanced Fund's investments. Mr. Williams joined
Commerce Bank, N.A. in 1975 and became a member of its Investment Management
Group in 1977.
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. in 1989. Mr. Cox came
to Commerce Bank from Robert Murray Partners, Inc. where he was a securities
analyst and portfolio manager.
The Advisory Agreement authorizes the Advisor to engage a sub-advisor to
assist it in the performance of its services. Pursuant to such authorization,
the Advisor has appointed Rowe Price-Fleming International, Inc. as Sub-
Advisor to the International Equity Fund.
MORE ABOUT ROWE PRICE-FLEMING INTERNATIONAL, INC.
Price-Fleming, as sub-advisor, manages the investment assets of the
International Equity Fund. Price-Fleming was incorporated in Maryland in 1979
as a joint venture between T. Rowe Price Associates, Inc. ("T. Rowe Price")
and Robert Fleming Holdings Limited ("Flemings").
T. Rowe Price was incorporated in Maryland in 1947 as successor of the
investment counseling business founded by the late Thomas Rowe Price, Jr. in
1937. Flemings was incorporated in 1974 in the United Kingdom as successor to
the business founded by Robert Fleming in 1873. Flemings is a diversified
investment organization which participates in a global network of regional
investment offices in New York, London, Zurich, Geneva, Johannesburg, Bangkok,
Bombay, Jakarta, Singapore, Tokyo, Hong Kong, Manila, Kuala Lumpur, Seoul, and
Taipei. As of December 31, 1997, T. Rowe Price and its affiliates managed more
than $125 billion of assets and Flemings managed the U.S. equivalent of
approximately $30 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.
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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, Mark
Bickford-Smith, Mark J. T. Edwards, John R. Ford, James B. M. Seddon and David
J. L. Warren.
Martin Wade joined Price-Fleming in 1979 and has 29 years of experience with
Fleming Group (Fleming Group includes Flemings and/or Jardine Fleming) in
research, client service and investment management. Mark Bickford-Smith joined
Price-Fleming in 1995 and has 13 years of experience with the Fleming Group in
research and financial analysis.
Mark Edwards joined Price-Fleming in 1987 and has 16 years of experience in
financial analysis. John Ford joined Price-Fleming in 1982 and has 18 years of
experience with Fleming Group in research and portfolio management. James
Seddon joined Price-Fleming in 1987 and has 11 years of experience in
investment management. David Warren joined Price-Fleming in 1983 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. When the Fund's assets reach
$200 million, the Sub-Advisor has agreed to waive fees in excess of 0.50%, on
an annualized basis, on the average daily net assets of the Fund. For the
fiscal year ended October 31, 1997, Price-Fleming received advisory fees at
the effective annual rate of 0.62% of the International Equity Fund's average
daily net assets.
MORE ABOUT THE ADMINISTRATOR
Goldman Sachs Asset Management is the Administrator for the Funds. GSAM is a
separate operating division of Goldman, Sachs & Co., the Distributor of the
Funds. Under the Administration Agreement with The Commerce Funds, GSAM
administers the business affairs of The Commerce Funds, subject to the
supervision of the Board of Trustees, and in connection therewith, furnishes
The Commerce Funds with office facilities and is responsible for ordinary
clerical, recordkeeping and bookkeeping services required to be maintained by
The Commerce Funds (excluding those maintained by The Commerce Funds'
Custodian, Transfer Agent, Advisor and any Sub-Advisor), preparation and
filing of documents required to comply with federal and state securities laws,
supervising the activities of the Custodian and Transfer Agent, providing
assistance in connection with meetings of the Board of Trustees and
shareowners and other administrative services necessary to conduct the
business of The Commerce Funds. For these services and facilities, GSAM is
entitled to receive a monthly fee from each Fund at an annual rate of 0.15% of
its average daily net assets. For the fiscal year ended October 31, 1997, GSAM
received administration fees at the annual rate of 0.15% of the average daily
net assets of each Fund.
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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.
Conflict of interest restrictions may apply to the receipt of compensation
paid by The Commerce Funds to a Service Organization in connection with the
investment of fiduciary funds in Fund shares. Banks and other institutions
regulated by the Comptroller of the Currency or other federal or state bank
regulatory agencies, and investment advisers and other money managers subject
to the jurisdiction of the SEC, the Department of Labor or state securities
commissions, are urged to consult legal counsel before entering into
Shareowner Servicing Agreements.
EXPENSES
Except as noted in this Prospectus and the Statement of Additional
Information, the Funds' service providers bear all expenses in connection with
the performance of their services and the Funds bear the expenses incurred in
their operations.
As stated in the "Summary of Expenses," the Advisor intends to voluntarily
waive a portion of 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.
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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 (20% or 28% rate gain
depending upon the Fund's holding period for the assets the sale of which
generated the capital gains) 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 and paid in January of the following year will be
deemed for tax purposes to have been paid by the Fund and received by you in
that 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 back-up 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.
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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 average annual 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.
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.
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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 SERIES, REPRESENTING INTERESTS IN NINE
DIFFERENT FUNDS: THE SHORT-TERM GOVERNMENT, BOND, BALANCED, GROWTH AND INCOME,
GROWTH, MIDCAP, INTERNATIONAL EQUITY, NATIONAL TAX-FREE INTERMEDIATE BOND AND
MISSOURI TAX-FREE INTERMEDIATE BOND FUNDS. EACH OF THE FOREGOING FUNDS, EXCEPT
THE NATIONAL TAX-FREE INTERMEDIATE BOND AND MISSOURI TAX-FREE INTERMEDIATE
BOND FUNDS, OFFERS TWO CLASSES OF SHARES: INSTITUTIONAL SHARES AND SERVICE
SHARES. THE NATIONAL TAX-FREE INTERMEDIATE BOND AND MISSOURI TAX-FREE
INTERMEDIATE BOND FUNDS EACH OFFER ONLY INSTITUTIONAL SHARES. FOR INFORMATION
REGARDING THE FUNDS' SERVICE SHARES AND THE NATIONAL TAX-FREE INTERMEDIATE
BOND AND MISSOURI TAX-FREE INTERMEDIATE BOND FUNDS, WHICH ARE OFFERED IN
SEPARATE PROSPECTUSES, CONTACT THE COMMERCE FUNDS AT 1-800-995-6365.
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.
The differences in expenses paid by each class of shares will affect its
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.
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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
Investment Company Act of 1940 (the "1940 Act") or when the Board of Trustees
has determined a matter effects the interests of more than one series, all
shares shall be voted separately by individual series. The Board of Trustees
may also determine that a matter affects only the interests of one or more
classes of a series in which case any such matter shall be voted on by such
class or classes.
The Commerce Funds does not presently intend to hold annual meetings of
shareowners to elect Trustees or for other business. Shareowner meetings will
be held when required by the 1940 Act or other applicable law.
Under certain circumstances, shareowners have the right to call a shareowner
meeting. Such meetings will be held when requested by the shareowners of 10%
or more of The Commerce Funds' outstanding shares of beneficial interest. The
Commerce Funds will assist in shareowner communications in such matters to the
extent required by law and The Commerce Funds' undertaking with the Securities
and Exchange Commission. Voting rights are not cumulative, and accordingly the
owners of more than 50% of the aggregate shares of The Commerce Funds may
elect all of the Trustees irrespective of the vote of the other shareowners.
As of February 13, 1998, the Advisor and their affiliates possessed, on
behalf of their underlying customer accounts, voting or investment power with
respect to 95%, 93%, 80%, 99.8%, 82%, 87% and 96% of the outstanding shares of
the Short-Term Government, Bond, Balanced, Growth and Income, 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.
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 above.
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
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disadvantageous circumstances and may reduce a Fund's assets, thereby
increasing its expense ratio and decreasing its rate of return. Zero coupon
bonds are subject to greater market fluctuations from changing interest rates
than debt obligations of comparable maturities which make current
distributions of interest.
U.S. GOVERNMENT OBLIGATIONS
Each Fund may invest in U.S. Government Obligations. Examples of the types
of 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 or liquid assets, 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
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that a specified interest rate falls below an agreed-upon level. Since
interest rate swaps, mortgage swaps, caps and floors are individually
negotiated, a Fund expects to achieve an acceptable degree of correlation
between its portfolio investments and its swap, cap and floor positions.
A Fund will enter into interest rate and mortgage swaps only on a net basis,
which means that the two payment streams are netted out, with the Fund
receiving or paying, as the case may be, only the net amount of the two
payments. A Fund will maintain cash or liquid assets, 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 or liquid
assets, as 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 that involves investment techniques and risks different
from those associated with ordinary portfolio securities transactions. If the
Advisor is incorrect in its forecasts of market values and interest rates, the
investment performance of a Fund would be less favorable than it would have
been if these investment techniques were not used.
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
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instrumentalities, as well as by private issuers. CMOs provide an investor
with a specified interest in the cash flow of a pool of underlying mortgages
or other mortgage-related securities. Issuers of CMOs frequently elect to be
taxed as pass-through entities known as real estate mortgage investment
conduits ("REMICs"). CMOs are issued in multiple classes, each with a
specified fixed or floating interest rate and a final distribution date. The
relative payment rights of the various CMO classes may be structured in many
ways. Generally, payments of principal are applied to the CMO classes in the
order of their respective stated maturities, so that no principal payments
will be made on a CMO class until all other classes having an earlier stated
maturity date are paid in full. Sometimes, however, CMO classes are "parallel
pay," i.e. payments of principal are made to two or more classes concurrently.
CMOs may involve additional risks other than those found in other types of
mortgage-related obligations. CMOs may exhibit more price volatility and
interest rate risk than other types of mortgage-related obligations. During
periods of rising interest rates, CMOs may lose their liquidity as CMO market
makers may choose not to repurchase, or may offer prices, based on current
market conditions, which are unacceptable to 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 issuer is typically supported by some form of credit
enhancement, such as a letter of credit, surety bond, limited guaranty, or
subordination. Assets generating such payments will consist of such
instruments as motor vehicle installment purchase obligations, credit card
receivables and home equity loans. Each of these Funds may also invest in
other types of asset-backed securities that may be available in the future.
The yield characteristics of asset-backed securities differ from traditional
debt securities. A major difference is that the principal amount of the
obligations may be prepaid at any time because the underlying assets (i.e.,
loans) generally may be prepaid at any time. As a 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.
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Asset-backed securities may involve certain risks that are not presented by
mortgage-backed securities arising primarily from the nature of the underlying
assets (e.g., credit card and automobile loan receivables as opposed to real
estate mortgages). Ultimately, asset-backed securities are dependent upon
payment of the consumer loans or receivables by individuals, and the
certificate holder frequently has no recourse against the entity that
originated the loans or receivables. Credit card receivables are generally
unsecured and the debtors are entitled to the protection of a number of state
and federal consumer credit laws, many of which have given debtors the right
to set off certain amounts owed on the credit cards, thereby reducing the
balance due. In addition, default may require repossession of the personal
property of the debtor which may be difficult or impossible in some cases.
Most issuers of automobile receivables permit the servicers to return
possession of the underlying obligations. If the servicers were to sell these
obligations to another party, there is a risk that the purchaser would acquire
an interest superior to that of the holders of the related automobile
receivables. In addition, because of the number of vehicles involved in a
typical issuance and technical requirements under state law, the trustee for
the automobile receivables may not have an effective security interest in all
of the obligations backing such receivables. Therefore, there is a possibility
that recoveries of repossessed collateral may not, in some cases, be able to
support payments on these securities.
Asset-backed securities may be subject to greater risk of default during
periods of economic downturn than other instruments. Also, the secondary
market for certain asset-backed securities may not be as liquid as the market
for other types of securities, which could result in a Fund's experiencing
difficulty in valuing or liquidating such securities. In certain
circumstances, asset-backed securities may be considered illiquid securities
subject to the percentage limitations described below under "Illiquid
Securities."
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, 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.
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<PAGE>
STRIPPED SECURITIES
The Bond and Balanced Funds may invest in instruments known as "stripped"
securities. These instruments include U.S. Treasury bonds and notes and
federal agency obligations on which the unmatured interest coupons have been
separated from the underlying obligation. Such obligations are usually issued
at a discount to their "face value," and because of the manner in which
principal and interest are returned may exhibit greater price volatility than
more conventional debt securities. The Funds may invest in "interest only"
stripped securities that have been issued by a federal instrumentality known
as the Resolution Funding Corporation and other stripped securities issued or
guaranteed by the U.S. Government, where the principal and interest components
are traded independently under the Separate Trading of Registered Interest and
Principal Securities program ("STRIPS"). Under STRIPS, the principal and
interest components are individually numbered and separately issued by the
U.S. Treasury at the request of depository financial institutions, which then
trade the component parts independently. 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
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<PAGE>
defaults, a Fund may incur a loss if the value of the collateral securing the
repurchase agreement has declined and may incur disposition costs in
connection with liquidating the collateral. If bankruptcy proceedings are
commenced with respect to the seller, liquidation of the collateral by a Fund
may be delayed or limited.
REVERSE REPURCHASE AGREEMENTS
Each Fund may borrow money for temporary purposes by entering into
transactions called reverse repurchase agreements. Under these agreements a
Fund sells portfolio securities to a financial institution (such as a bank or
broker-dealer) and agrees to buy them back later at an agreed upon time and
price. When a Fund enters into a reverse repurchase agreement, it places in a
separate custodial account, cash or liquid assets, that have a value equal to
or greater than the repurchase price. The account is then continuously
monitored by the Advisor to make sure that an appropriate value is maintained.
Reverse repurchase agreements involve the risk that the value of portfolio
securities a Fund relinquishes may decline below the price the Fund must pay
on the repurchase date. A Fund will only enter into reverse repurchase
agreements to avoid the need to sell its securities to meet redemption
requests during unfavorable market conditions. As reverse repurchase
agreements are deemed to be borrowings by the SEC, each Fund is required to
maintain continuous asset coverage of 300%. Should the value of a 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
53
<PAGE>
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.
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
(including the value of the collateral received for the loan). There may be
risks of delay in receiving additional collateral or in recovering the
securities loaned or even a loss of rights in the collateral should the
borrower of the securities fail financially. However, loans are made only to
borrowers deemed by the Advisor to be of good standing and when, in its
judgment, the income to be earned 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
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<PAGE>
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 liquid
assets 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
55
<PAGE>
securities prices increase instead, the Fund will lose part or all of the
benefit of the increased value of its securities which it has hedged because
it will have approximately equal offsetting losses in its futures positions.
The risk of loss in trading futures contracts in some strategies can be
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.
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 cash or liquid assets, 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
56
<PAGE>
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.
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.
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<PAGE>
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. See "Financial Highlights" above for historical portfolio
turnover information for the Funds.
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.
58
<PAGE>
Account # ______________________________
Order # ________________________________
Not to be used for Individual Retirement Accounts-- For an IRA application,
call the Transfer Agent at 1-800-995-6365
ACCOUNT APPLICATION FORM (CB 5998) COMMERCE FUNDS(TM)
- --------------------------------------------------------------------------------
THIS ACCOUNT
APPLICATION FORM The Commerce Funds c/o Shareowner Services P.O. Box
SHOULD BE 419525 Kansas City, MO 64141-6525
FORWARDED PROMPTLY
TO: For additional information call 1-800-995-6365
Date: ___________
- --------------------------------------------------------------------------------
1. ACCOUNT REGISTRATION
Please Print
INDIVIDUAL
--------------------------------------- ---------------
First Name Initial Last Name (Birthdate) SS# or Tax ID#
JOINT TENANTS
The account will be registered as "Joint Tenants with
Right of Survivorship" unless otherwise specified.
--------------------------------------- ---------------
First Name Initial Last Name (Birthdate) SS# or Tax ID#
--------------------------------------- ---------------
First Name Initial Last Name (Birthdate) SS# or Tax ID#
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
CORPORATION, TRUST, OR OTHER ENTITY
MAY BE REQUIRED --------------------------------------- ---------------
Name of Corporation, Trust or other Non-Person Entity
Tax ID#
---------------------------------------------------------
Attention
---------------------------------------------------------
Date of Trust Instrument: Name of Beneficiary (If to be
included in the registration)
---------------------------------------------------------
Name(s) of Trustee(s) (If to be included in the
registration)
- --------------------------------------------------------------------------------
2. MAILING ADDRESS ( )
----------------------------------- -------------------
Street Daytime Phone
---------------------------------------------------------
City State Zip Code
<PAGE>
- --------------------------------------------------------------------------------
Check appropriate boxes:
3. TO PURCHASE
INSTITUTIONAL
SHARES
[_]Short Term $_______ [_]Growth and $_______
Government Amount Income Amount
#336
[_]Bond $_______ #346
[_]MidCap $_______
$1000 MINIMUM PER #333 Amount #339 Amount
FUND ($250 MINIMUM [_]Balanced $_______ [_]International$_______
FOR SUBSEQUENT #338 Amount Equity Amount
INVESTMENTS AND [_]Growth $_______ #340
$50 FOR SEP AND $_______
SIMPLE IRAS #337 Amount [_]National Amount
SUBSEQUENT Tax-Free
INVESTMENT) Intermediate
Bond
$_______
[_]Missouri Amount # 334
Tax-Free
Intermediate
Bond
#335
[_]ILA Prime $__
Obligations
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 ________________________________.
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4. DIVIDEND AND See "Dividend and Distribution Policies" in the
DISTRIBUTION Prospectus
OPTIONS Choose how you wish to receive dividends. If no boxes
are checked, Option A will be assigned.
A. [_] Reinvest all dividends and capital gains.
B. [_] Receive dividends in cash and reinvest capital
gains (Complete cash dividend section below.)
Fund Name _________________ Account Number ____________
Please send cash dividends to:
C. [_] Receive all dividends and capital gains in cash
(Complete cash dividend section below.)
[_] Account registration address. [_]Deposit to bank
(attach voided
check/deposit
slip)
D. [_] All dividends and capital gains reinvested in
another Commerce Fund account. (See Prospectus
regarding limitations on this privilege.)
[_] 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 ______
- --------------------------------------------------------------------------------
See "How To Buy Institutional Shares" in the Prospectus
5. RIGHT OF ACCUMULATION
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. _________
- --------------------------------------------------------------------------------
See "How To Buy Shares" in the Prospectus
6. LETTER OF INTENT
Although not obligated to do so, it is the
undersigned's intention to invest, over a 13-month
period from this date, in shares of a Fund alone or in
combination with shares of any other Fund, on which a
sales charge was paid, described in the Prospectus
which qualify for a quantity discount as described in
the accompanying Prospectus, in an amount that will
equal or exceed:
[_] $100,000 [_] $250,000 [_] $500,000 [_] $1,000,000
I/we agree to the Letter of Intent and Escrow Agreement
described in the accompanying Prospectus under "How to
Buy Shares--Letter of Intent" and incorporated by
reference herein.
<PAGE>
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7. AUTOMATIC INVESTMENT PLAN (ATTACH VOIDED CHECK OR DEPOSIT SLIP)
See "What is Dollar Cost Averaging and How Can I
Implement It?" in the Prospectus
Beginning on the day of these months: J F M A M J
J A S O N D (circle all months that apply), I/We
authorize State Street Bank (the custodian for a Fund)
to debit the amount requested below from my/our bank
account for investment in a Fund. I/We understand that
my/our participation in the Automatic Investment Plan
is subject to the terms and conditions of such plan as
amended from time to time.
--------------------------------------------------------
Amount of each monthly investment (minimum $75/Quarter)
Name of Fund
--------------------------------------------------------
Amount of each monthly investment (minimum $75/Quarter)
Name of Fund
--------------------------------------------------------
Authorized Signature (as shown on bank records)
--------------------------------------------------------
Authorized Signature (if joint bank account both sign)
- --------------------------------------------------------------------------------
8. FOR TELEPHONE See "How To Buy Shares" or "How To Sell Shares" in the
PURCHASE/REDEMPTION, 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 EXCHANGESSee "Can I Have Exchanges Made Automatically?" in the
(ATTACH VOIDED Prospectus
CHECK OR DEPOSIT
SLIP)
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>
- -------------------------------------------------------------------------------
Minimum account balance must be $5,000. Withdrawal
minimum is $100.
12. AUTOMATIC WITHDRAWAL PLAN
Check One: [_] Monthly [_] Quarterly [_] Semi-
Annual [_] Annual
Please make payments via (check one) [_] check [_] ACH
(Bank must be ACH affiliated. Attach voided check).
Payments made via check are withdrawn from your account
on or about the 1st or 15th of a month for monthly
withdrawals or the 15th of the month for
quarterly/semi-annual/annual withdrawals. (I understand
that I may change the date of redemption, via ACH, or
the amount at any time in writing to the Fund at the
address stated above.)
If withdrawal payments are to be made via ACH (attach
voided check/deposit slip)
Please withdraw $ from my account on the
of the month.
Complete this section ONLY if check is to be made
payable to person(s) other than the registered owner.
SIGNATURE GUARANTEE required. (See Section 13 of this
Form.)
--------------------------------------------------------
Name of check recipient Address City State Zip
- -------------------------------------------------------------------------------
13. TAXPAYER ID CERTIFICATION AND SIGNATURE AUTHORIZATION
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. Number Reg. Rep.'s Name
--------------------------------------------------------
Authorized Signature State Zip
THE COMMERCE FUNDS DISCLOSURE STATEMENT (YOU MUST SIGN)
The account owner acknowledges that the account owner has read 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., its 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. serves as the investment advisor to the Funds and
receives compensation for such services as disclosed in the current
prospectus
. sales charges may apply.
Dated: _________________ --------------------------
Signature
--------------------------
Signature
<PAGE>
LOGO
COMMERCE FUNDS(TM)
CB5998
<PAGE>
CROSS REFERENCE SHEET
---------------------
Institutional Shares
of the
Short-Term Government Fund
Bond Fund
Balanced Fund
Growth Fund
MidCap Fund
Growth and Income Fund
International Equity Fund
National Tax Free Intermediate Bond Fund
Missouri Tax-Free Intermediate 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>
LOGO
commerce funds(TM)
THE NATIONAL TAX-FREE INTERMEDIATE BOND FUND
THE MISSOURI TAX-FREE INTERMEDIATE BOND FUND
March 2, 1998
Institutional Shares
<PAGE>
HOW CAN I CONTACT THE COMMERCE FUNDS?
For assistance or to obtain additional information about The Commerce
Funds, you may:
. Contact a registered investment representative at selected
broker/dealers or Commerce Bank branches (call 1-800-305-2140 if you
need assistance in contacting your representative); or
. Contact your Company representative for specific information
regarding your retirement plan; or
. Contact your account administrator for specific information regarding
your Investment Management Group account; or
. Write to The Commerce Funds at:
The Commerce Funds
P.O. Box 419525
Kansas City, MO 64141-6525; or
. Call The Commerce Funds' transfer agent directly at 1-800-995-6365;
or
. Access The Commerce Funds' Website at WWW.COMMERCEBANK.COM.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SUMMARY OF EXPENSES........................................................ 2
FINANCIAL HIGHLIGHTS....................................................... 4
INVESTMENT OBJECTIVES AND POLICIES......................................... 5
ADDITIONAL RISK CONSIDERATIONS............................................. 6
INVESTMENT RESTRICTIONS.................................................... 8
SHAREOWNER GUIDE........................................................... 9
HOW CAN I CONTACT THE COMMERCE FUNDS?.................................... 9
HOW TO BUY SHARES........................................................ 9
HOW TO SELL SHARES....................................................... 14
DIVIDEND AND DISTRIBUTION POLICIES....................................... 17
SHAREOWNER FEATURES AND PRIVILEGES....................................... 18
THE BUSINESS OF THE COMMERCE FUNDS......................................... 21
SHAREHOLDER ADMINISTRATIVE SERVICES PLAN................................... 23
EXPENSES................................................................... 24
TAX INFORMATION............................................................ 24
HOW PERFORMANCE IS MEASURED................................................ 26
OTHER INFORMATION.......................................................... 27
OTHER INVESTMENT PRACTICES................................................. 29
APPLICATION................................................................ BACK
PAGE
</TABLE>
<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, only
the National Tax-Free Intermediate Bond Fund (the "National Tax-Free Fund")
and Missouri Tax-Free Intermediate Bond Fund (the "Missouri Tax-Free Fund")
(individually, a "Fund" and collectively, the "Funds") are offered by this
Prospectus. The National Tax-Free Fund and the Missouri Tax-Free Fund were
formerly known as the National Tax-Free Bond Fund and Missouri Tax-Free Bond
Fund, respectively. Under the 1940 Act, the National Tax-Free Fund is
classified as a diversified investment portfolio and the Missouri Tax-Free
Fund is classified as a non-diversified investment portfolio.
THE NATIONAL TAX-FREE INTERMEDIATE BOND FUND seeks current income exempt from
federal income tax consistent with the preservation of capital. The Fund
pursues this objective through investment in a diversified portfolio of
investment-grade Municipal Obligations.
THE MISSOURI TAX-FREE INTERMEDIATE BOND FUND seeks current income exempt from
federal and, to the extent possible, from Missouri income taxes, as is
consistent with the preservation of capital. The Fund pursues this objective
through investment primarily in investment-grade Missouri Obligations.
Commerce Bank, N.A. serves as investment advisor to the Funds (the
"Advisor").
This Prospectus contains information you should know about the Funds before
you invest. Please read it carefully and keep it for your future reference. It
contains your Shareowner Guide and a description of shareowner features. A
Statement of Additional Information (dated March 2, 1998) 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 419525,
Kansas City, MO 64141-6525 or by calling 1-800-995-6365. The Prospectus and
Statement of Additional Information are also available for reference, along
with other related materials, on the SEC Internet Website
(http://www.sec.gov).
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED,
ENDORSED OR OTHERWISE SUPPORTED BY, COMMERCE BANK, N.A., ITS 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, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
MARCH 2, 1998
<PAGE>
SUMMARY OF EXPENSES
Expenses are one of several factors to consider when investing in a Fund.
SHAREOWNER TRANSACTION EXPENSES are charges you pay when buying or selling
shares. ANNUAL FUND OPERATING EXPENSES are paid out of a Fund's assets and
include fees for portfolio management, maintenance of shareowner accounts,
general Fund administration, accounting, custody and other services. Examples
based on the summary are also shown.
<TABLE>
<CAPTION>
NATIONAL MISSOURI
TAX-FREE TAX-FREE
FUND FUND
-------- --------
<S> <C> <C>
SHAREOWNER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases (as a percentage
of offering price)(1).................................... 3.50% 3.50%
Maximum Sales Charge Imposed on Reinvested Distributions.. None None
Deferred Sales Charge Imposed on Redemptions(2)........... None None
Redemption Fees........................................... None None
Exchange Fees(3).......................................... None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average daily net assets)
Management Fees (after fee waivers)(4).................... 0.39% 0.30%
12b-1 Fees................................................ None None
Other Expenses (after fee waivers and expense
reimbursements)(5)....................................... 0.35% 0.35%
----- -----
Total Fund Operating Expenses
(after fee waivers and expense reimbursements)(5)........ 0.74% 0.65%
===== =====
EXAMPLE: Assume a Fund's annual return is 5% and its
expenses are the same as those stated above. For every
$1,000 you invest, here's how much you would pay in total
expenses if you closed your account after the number of
years indicated, assuming deduction at the time of purchase
of the maximum applicable sales load and redemption at the
end of each time period.
One Year.................................................. $42 $41
Three Years............................................... $58 $55
Five Years................................................ $75 $70
Ten Years................................................. $124 $113
</TABLE>
- --------
(1) Certain investors may not be charged a sales charge. See "Shareowner
Guide--When There Is No Sales Charge."
(2) A deferred sales charge of 1.00% is assessed on certain redemptions of
shares that are purchased with no initial sales charge as part of an
investment of $1,000,000 or more. See "Shareowner Guide--How are Shares
Priced?"
(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
the annual rate of 0.50% of the average daily net assets of each of the
National Tax-Free and Missouri Tax-Free Funds. The Advisor reserves the
right to reduce or discontinue fee waivers at any time.
(5) For the current fiscal year, without such fee waivers and expense
reimbursements, "Other Expenses" are expected to be 0.55%, and "Total Fund
Operating Expenses" are expected to be 1.05% of the average daily net
assets of the National Tax-Free Fund. For the last fiscal year, without
such fee
2
<PAGE>
waivers and expense reimbursements, "Other Expenses" would be 0.65% and
0.71% and "Total Fund Operating Expenses" would be 1.15% and 1.21% of the
average daily net assets of the National Tax-Free and Missouri Tax-Free
Funds, respectively. "Other Expenses" includes shareholder servicing fees
of up to 0.25% on an annualized basis of the average daily net asset value
of Institutional Shares.
The above expense information is provided to help you understand the
expenses you would pay either directly (i.e., transaction expenses) or
indirectly (i.e., annual operating expenses) as a shareowner in the Funds. The
information is based on the expenses incurred by the Funds during the last
fiscal year, except that the National Tax-Free Fund's expenses shown above in
the expense table have been restated to reflect expenses expected to be
incurred by such Fund in the current fiscal year. In addition, Service
Organizations may charge their clients account fees for providing account
services in connection with their clients' investments in shares of The
Commerce Funds. You should note that any fees that are charged by The Commerce
Funds' Advisor, its affiliates or any other institutions directly to their
customer accounts for services related to an investment in the Funds are in
addition to and not reflected in the fees and expenses described above. If you
purchase or redeem shares directly from The Commerce Funds Shareowner Services
or an account representative at a Commerce Bank branch, you may avoid these
fees by following the procedures described in "How To Buy Shares" in 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 SHOWN. INFORMATION ABOUT
THE ACTUAL PERFORMANCE OF THE FUNDS IS CONTAINED IN THE COMMERCE FUNDS' ANNUAL
REPORT, WHICH MAY BE OBTAINED WITHOUT CHARGE BY CONTACTING THE COMMERCE FUNDS
AT THE ADDRESS OR TELEPHONE NUMBER INDICATED ON THE COVER OF THIS PROSPECTUS.
- -------------------------------------------------------------------------------
3
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information presented below has been derived from the
financial statements incorporated by reference into the Statement of
Additional Information and has been audited by KPMG Peat Marwick LLP, the
Fund's independent accountants. The financial information should be read
together with those financial statements. Further information about the
performance of the Funds is available in the Fund's annual shareholder
reports. Both the Statement of Additional Information and the annual
shareholder reports may be obtained free of charge by calling 1-800-995-6365.
THE COMMERCE FUNDS
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 ASSET OF NET INVESTMENT NET
NET ASSET GAIN FROM NET VALUE, EXPENSES INCOME TO ASSETS AT
VALUE, NET (LOSS) ON FROM NET REALIZED END TO AVERAGE AVERAGE PORTFOLIO END
BEGINNING INVESTMENT INVEST- INVESTMENT GAIN ON OF TOTAL NET NET TURNOVER OF PERIOD
OF PERIOD INCOME MENTS(B) INCOME INVESTMENTS PERIOD RETURN(C) ASSETS ASSETS RATE (IN 000'S)
--------- ---------- ---------- ---------- ----------- ------ --------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NATIONAL TAX-FREE INTERMEDIATE BOND FUND
For the Year Ended October 31, 1997
- -----------------------------------
$18.46 $0.72 $ 0.39 $(0.72) $ -- $18.85 6.16% 0.85% 3.89% 6% $25,281
For the Year Ended October 31, 1996
- -----------------------------------
18.54 0.73 (0.07) (0.73) (0.01) 18.46 3.60 0.85 3.93 34 17,613
For the Period February 21, 1995(a) through October 31, 1995
- ------------------------------------------------------------
18.00 0.54 0.54 (0.54) -- 18.54 6.06 0.85(d) 4.19(d) 19 10,721
MISSOURI TAX-FREE INTERMEDIATE BOND FUND
For the Year Ended October 31, 1997
- -----------------------------------
$18.26 $0.76 $ 0.37 $(0.76) $(0.02) $18.61 6.31% 0.65% 4.14% 13% $24,434
For the Year Ended October 31, 1996
- -----------------------------------
18.40 0.76 (0.14) (0.76) -- 18.26 3.43 0.65 4.14 49 17,034
For the Period February 21, 1995(a) through October 31, 1995
- ------------------------------------------------------------
18.00 0.57 0.40 (0.57) -- 18.40 5.45 0.65(d) 4.41(d) 52 8,889
<CAPTION>
RATIOS ASSUMING
NO EXPENSE
REIMBURSEMENTS
---------------------
RATIO
RATIO OF NET
OF INVESTMENT
EXPENSES INCOME TO
TO AVERAGE AVERAGE
NET ASSETS NET ASSETS
---------- ----------
<S> <C> <C>
For the Year Ended October 31, 1997
- -----------------------------------
1.15% 3.59%
For the Year Ended October 31, 1996
- -----------------------------------
1.55 3.23
For the Period February 21, 1995(a) through October 31, 1995
- ------------------------------------------------------------
1.90(d) 3.14(d)
For the Year Ended October 31, 1997
- -----------------------------------
1.21% 3.58%
For the Year Ended October 31, 1996
- -----------------------------------
1.58 3.21
For the Period February 21, 1995(a) through October 31, 1995
- ------------------------------------------------------------
2.12(d) 2.94(d)
</TABLE>
- -------
(d) Annualized.
(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.
4
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and policies of each of the Funds are described
below. There is no assurance that either Fund will achieve its investment
objective. Neither Fund, by itself, constitutes a complete investment program.
Additional information regarding the investment objectives, policies and
restrictions of each Fund are described under "Other Investment Practices" and
in the Statement of Additional Information.
The investment objective of a Fund may not be changed without the
affirmative vote of the holders of at least a majority of the outstanding
shares of such Fund. Except as noted in the Statement of Additional
Information under "Investment Limitations," a Fund's investment policies may
be changed without a vote of shareowners.
NATIONAL TAX-FREE INTERMEDIATE BOND FUND
INVESTMENT OBJECTIVE
THE INVESTMENT OBJECTIVE OF THE NATIONAL TAX-FREE FUND IS TO SEEK CURRENT
INCOME EXEMPT FROM FEDERAL INCOME TAX CONSISTENT WITH THE PRESERVATION OF
CAPITAL. THE FUND PURSUES THIS OBJECTIVE THROUGH INVESTMENT IN A DIVERSIFIED
PORTFOLIO OF INVESTMENT-GRADE MUNICIPAL OBLIGATIONS (AS DEFINED BELOW).
INVESTMENT STRATEGY
Substantially all of the Fund's assets will be invested in obligations
issued by or on behalf of the states, territories and possessions of the
United States, the District of Columbia and their respective authorities,
agencies, instrumentalities and political subdivisions, the interest on which,
in the opinion of bond counsel, is exempt from regular federal income taxes
("Municipal Obligations"). Dividends paid by the Fund which are derived from
interest attributable to Municipal Obligations will be exempt from regular
federal income taxes. As a matter of fundamental policy (except during
temporary defensive periods), at least 80% of the Fund's net assets will be
invested in Municipal Obligations, the interest on which is exempt from
regular federal income and federal alternative minimum tax. Under normal
market conditions, the average weighted effective maturity of the Fund's
portfolio securities will be three to ten years.
MISSOURI TAX-FREE INTERMEDIATE BOND FUND
INVESTMENT OBJECTIVE
THE INVESTMENT OBJECTIVE OF THE MISSOURI TAX-FREE FUND IS TO SEEK CURRENT
INCOME EXEMPT FROM FEDERAL AND, TO THE EXTENT POSSIBLE, FROM MISSOURI INCOME
TAXES, AS IS CONSISTENT WITH THE PRESERVATION OF CAPITAL. THE FUND PURSUES
THIS OBJECTIVE THROUGH INVESTMENT PRIMARILY IN INVESTMENT-GRADE MISSOURI
OBLIGATIONS (AS DEFINED BELOW).
INVESTMENT STRATEGY
In pursuing its investment objective, the Fund normally will invest at least
65% of its total assets in Municipal Obligations issued by the State of
Missouri and its political subdivisions as well as certain other governmental
issuers including Puerto Rico, Guam and the Virgin Islands, the interest on
which, in the
5
<PAGE>
opinion of bond counsel, is exempt from federal and Missouri income tax
("Missouri Obligations"). Dividends derived from interest on obligations of
other governmental issuers are exempt from federal income tax but may be
subject to Missouri income tax. As a matter of fundamental policy (except
during temporary defensive periods), at least 80% of the Fund's net assets
will be invested in Municipal Obligations, the interest on which is exempt
from regular federal income and federal alternative minimum tax. The Fund
seeks to maximize the proportion of its dividends that are exempt from both
federal and Missouri income tax and presently expects to invest substantially
all of its assets in Missouri Obligations. Under normal market conditions, the
average weighted maturity of the Fund's portfolio securities will be three to
ten years.
RISKS ASSOCIATED WITH AN INVESTMENT IN THE FUND
The Missouri Tax-Free Fund's ability to achieve its investment objective is
dependent upon the ability of issuers of Municipal Obligations to meet their
continuing obligations for the payment of principal and interest. There will
be additional risks associated with investment in the Fund to the extent it
invests its assets predominantly in Missouri Obligations. The major sectors of
Missouri's economy include agriculture, manufacturing, trade, government and
services. More specifically, farming and defense-related businesses have
played an important role in the state's economy and have yielded a large
portion of the state's revenues. Increased urbanization and the continued
decline in defense appropriations by the U.S. Congress have had and will
continue to have an impact on the state.
The Missouri Constitution requires that the General Assembly appropriate the
annual principal and interest requirements for outstanding general obligation
bonds before any other appropriations are made. Such amounts must be
transferred from the General Revenue Fund to bond interest and sinking funds.
Authorization for these transfers, as well as the actual payments of principal
and interest, are provided in the first appropriation bill of each fiscal
year. In addition to general obligation bonds, the Missouri legislature has
established numerous entities as bodies corporate and politic which are
authorized to issue bonds to carry out their corporate purposes. Investors
should also be aware that certain provisions of and amendments to the Missouri
Constitution and other laws could result in certain adverse consequences
affecting Missouri Obligations. Some of the significant financial
considerations relating to the Fund's investments in Missouri Obligations are
summarized in the Statement of Additional Information.
As indicated previously, the Missouri Tax-Free Fund is classified as non-
diversified under the 1940 Act. Investment return on a non-diversified
portfolio typically is dependent upon the performance of a smaller number of
securities relative to the number held in a diversified portfolio.
Consequently, the change in value of any one security may affect the overall
value of a non-diversified portfolio more than it would a diversified
portfolio. In addition, a non-diversified portfolio may be more susceptible to
economic, political and regulatory developments than a diversified investment
portfolio with similar objectives.
ADDITIONAL RISK CONSIDERATIONS
RISKS ASSOCIATED WITH FIXED INCOME SECURITIES
Generally, the market value of fixed income securities, such as Municipal
Obligations held by the Funds, can be expected to vary inversely to changes in
prevailing interest rates. In periods of declining interest rates, the yields
and market values of investment portfolios composed primarily of fixed income
securities, such as Municipal Obligations will tend to be higher than
prevailing market rates and, in
6
<PAGE>
periods of rising interest rates, yields and market values will tend to be
somewhat lower. Zero coupon bonds are subject to greater market fluctuations
from changing interest rates than debt obligations of comparable maturities
which make current distributions of interest. Debt securities with longer
maturities, which tend to produce higher yields, are subject to potentially
greater capital appreciation and depreciation than obligations with shorter
maturities. Changes in the financial strength of an issuer or changes in the
ratings of any particular security may also affect the value of these
investments. Fluctuations in the market value of fixed income securities
subsequent to their acquisition will not affect cash income from such
securities but will be reflected in a Fund's net asset value.
RISKS ASSOCIATED WITH MUNICIPAL OBLIGATIONS
When a Fund's assets are concentrated in obligations payable from revenues
of similar projects or issued by issuers located in the same state, or in
industrial development bonds, it will be subject to the particular risks
(including legal and economic conditions) relating to such securities to a
greater extent than if its assets were not so concentrated.
Payment on Municipal Obligations held by the Funds relating to certain
projects may be secured by mortgages or deeds of trust. In the event of a
default, enforcement of a mortgage or deed of trust will be subject to
statutory enforcement procedures and limitations on obtaining deficiency
judgments. Moreover, collection of the proceeds from that foreclosure may be
delayed and the amount of the proceeds received may not be enough to pay the
principal or accrued interest on the defaulted Municipal Obligations.
OTHER INVESTMENT 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.
SEE "OTHER INVESTMENT PRACTICES" FOR ADDITIONAL INFORMATION ON THE
INVESTMENT POLICIES OF THE FUNDS.
7
<PAGE>
INVESTMENT RESTRICTIONS
Each Fund is subject to the following investment restrictions which, as
described in more detail in the Statement of Additional Information, are
fundamental policies that cannot be changed without the affirmative vote of a
majority of the outstanding shares of a Fund. Each Fund will limit its
investments so that less than 25% of the Fund's total assets will be invested
in the securities of issuers in any one industry. For the purposes of this
restriction, state and municipal governments and their agencies and
instrumentalities, securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities and repurchase agreements fully collateralized
by securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities are not deemed to be industries in connection with the
issuance of tax-exempt securities. Thus, a Fund may invest 25% or more of the
value of its total assets in Municipal Obligations which are related in such a
way that an economic, business or political development or change affecting
one Municipal Obligation would also affect other Municipal Obligations. For
example, a Fund may so invest in (a) Municipal Obligations the interest on
which is paid solely from revenues of similar projects such as hospitals,
electric utility systems, multi-family housing, nursing homes, commercial
facilities (including hotels), steel companies or life care facilities, (b)
Municipal Obligations whose issuers are in the same state, or (c) industrial
development obligations. The Funds will not purchase securities (except U.S.
Government Obligations) if more than 5% of its total assets will be invested
in the securities of any one issuer, except that up to 25% of the total assets
of the National Tax-Free Fund, and up to 50% of the total assets of the
Missouri Tax-Free Fund, may be invested without regard to this 5% limitation
(although not more than 25% of the Missouri Tax-Free Fund's total assets will
be invested in the securities of any one issuer). 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.
8
<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?
For assistance or to obtain additional information about The Commerce
Funds, you may:
. Contact a registered investment representative at selected
broker/dealers or Commerce Bank branches (call 1-800-305-2140 if you
need assistance in contacting your representative); or
. Contact your Company representative for specific information
regarding your retirement plan; or
. Contact your account administrator for specific information regarding
your Investment Management Group account; or
. Write to The Commerce Funds at:
The Commerce Funds
P.O. Box 419525
Kansas City, MO 64141-6525; or
. Call The Commerce Funds' transfer agent directly at 1-800-995-6365;
or
. Access The Commerce Funds' Website at WWW.COMMERCEBANK.COM.
HOW TO BUY SHARES
WHAT IS THE MINIMUM INVESTMENT FOR EACH FUND?
Generally, the minimum investment requirement is $1,000 for initial
purchases and $250 for subsequent purchases, although it may differ in certain
circumstances as shown below.
INVESTMENT MINIMUMS FOR SPECIFIC TYPES OF ACCOUNTS
<TABLE>
<CAPTION>
INITIAL SUBSEQUENT
INVESTMENT INVESTMENT
---------- -----------
<S> <C> <C>
Regular Account......................................... $1,000 $250
Automatic Investment Feature............................ $1,000 $75/Quarter
</TABLE>
The minimum initial investment requirement is $250 for initial purchases and
$100 for subsequent purchases for employees, directors, officers and retirees
(as well as their spouses and legal dependents) of Commerce Bancshares, Inc.,
Goldman Sachs & Co., NFDS and State Street Bank and Trust Company and their
subsidiaries or affiliates, although it may differ in certain circumstances as
shown below.
INVESTMENT MINIMUMS FOR CERTAIN TYPES OF INVESTORS
<TABLE>
<CAPTION>
INITIAL SUBSEQUENT
INVESTMENT INVESTMENT
---------- ----------
<S> <C> <C>
Regular Account........................................... $250 $100
Automatic Investment Feature.............................. $100 $ 25*
</TABLE>
- --------
*Minimum of six bi-monthly investments within first year of Fund ownership.
9
<PAGE>
HOW ARE SHARES PRICED?
SHARES OF THE FUNDS ARE PURCHASED AT THEIR PUBLIC OFFERING PRICE, WHICH IS A
FUND'S NET ASSET VALUE PER SHARE PLUS A FRONT-END SALES CHARGE. A FUND'S NET
ASSET VALUE PER SHARE ("NAV") IS CALCULATED AS FOLLOWS:
NAV = (VALUE OF FUND ASSETS)-(FUND LIABILITIES)
-------------------------------------
NUMBER OF OUTSTANDING SHARES
The net asset value is determined as of the close of regular trading hours
on the New York Stock Exchange (the "Exchange") (generally 4:00 p.m. Eastern
Time) on days the Exchange is open (a "Business Day"). On those Business Days
on which the Exchange closes prior to the close of its regular trading hours
("Early Closing Time"), the net asset value of each Fund will be determined
and its shares will be priced as of such Early Closing Time.
A Fund's investments are valued at market value or, where market quotations
are not readily available, at fair value as determined in good faith by or
under the supervision of the Board of Trustees. Certain short-term securities
may be valued at amortized cost, which approximates fair value.
SALES CHARGE. The maximum front-end sales charge is 3.50% and may be less
based on the amount you invest, as shown in the following chart:
<TABLE>
<CAPTION>
MAXIMUM
DEALER'S
AS A % OF AS A % OF REALLOWANCE AS
OFFERING NET ASSET A % OF
PRICE VALUE OFFERING PRICE
AMOUNT OF PURCHASE PER SHARE PER SHARE PER SHARE*
------------------ --------- --------- --------------
<S> <C> <C> <C>
Less than $100,000........................... 3.50 3.63 3.15
$100,000 but less than $250,000.............. 2.50 2.56 2.25
$250,000 but less than $500,000.............. 1.50 1.52 1.35
$500,000 but less than $1,000,000............ 1.00 1.01 0.90
$1,000,000 or more........................... 0.00** 0.00** 1.00***
</TABLE>
- --------
*Dealer's reallowance may be changed periodically.
** There is no initial sales charge on purchases of $1,000,000 or more on
Institutional Shares, however, a contingent deferred sales charge of 1.00%
will be imposed on the lesser of the offering price or the net asset value
of the shares on the redemption date for shares redeemed within 18 months
after purchase.
*** The Distributor may pay placement fees to dealers of up to 1.00% of the
offering price on purchases of Institutional Shares of $1,000,000 or more.
Goldman, Sachs & Co. (the "Distributor") and its affiliates may, out of its
administration fee or other resources, pay a fee of up to 0.25% of the amount
invested or additional incentives to dealers who initiate and are responsible
for purchases of shares of The Commerce Funds. In addition, at its expense,
the Distributor will provide additional compensation and promotional
incentives to dealers in connection with the sales of shares of the Funds.
Subject to NASD regulation, compensation may include promotional and other
merchandise, sales and training programs and other special events sponsored by
10
<PAGE>
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;
. the Redemption Reinvestment Privilege described below;
. shares purchased for and held in a trust, management agency, asset
allocation, custodial or other account maintained by an Investment
Management Group (Trust Department) within a bank affiliated, or within
banks that have signed a definitive agreement to become affiliated, with
Commerce Bancshares, Inc. (including shares purchased with distributions
from such accounts);
. non-profit organizations, foundations and endowments qualified under
Section 501(c)(3) of the Internal Revenue Code of 1986, as amended (the
"Code");
. employees, directors, advisory directors, officers and retirees (as well
as their spouses and legal dependents) of Commerce Bancshares, Inc.,
Goldman, Sachs & Co., 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.;
. 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;
. shares purchased for and held in a trust for which a bank affiliated with
Commerce Bancshares, Inc. is named as successor trustee or co-trustee
immediately after the current trustee ceases to serve; and shares
purchased for and held by individuals who have named a bank affiliated
with Commerce Bancshares, Inc. as their primary personal representative
or co-personal representative under will; and
. registered representatives of dealers who have entered into dealers
agreements with Goldman, Sachs & Co., to the extent permitted by such
firms; and
. financial planners and their clients.
The Distributor may periodically waive all or a portion of the sales charge
for all investors with respect to the sales of shares of the Funds. The
Distributor may also offer special concessions to enable investors to purchase
shares of the Funds at net asset value, without payment of a sales charge. To
qualify for this special net asset value purchase when applicable, the
investor must pay for such purchase with
11
<PAGE>
the proceeds from the redemption of shares of a non-affiliated mutual fund or
unit investment trust on which a sales charge was paid. A qualifying purchase
of shares in a Fund must occur within five Business Days of the prior
redemption and must be evidenced by a confirmation of the redemption
transaction. At the time of purchase, The Commerce Funds must be notified that
the purchase qualifies for a purchase without a sales charge. Proceeds from
the redemption of shares on which no sales charges or commissions were paid
would not qualify for the special net asset value purchase program.
These sales charge exemptions are based on the type of investor and/or the
reduced sales effort that will be needed in obtaining Fund investments. In
order to take advantage of these exemptions, you must certify eligibility on
your account application.
RIGHTS OF ACCUMULATION. When you buy shares in The Commerce Funds, your
current total investment determines the sales charge that you pay. Since large
investments receive a discounted sales charge, the sales charge you pay may
subsequently be reduced as you build your investment.
Over time, as your current total investment in shares accumulates to
$100,000 or beyond, the sales charge on subsequent investments is decreased.
Your current total investment is the combination of your immediate investment
along with the shares that you own in any Fund of The Commerce Funds on which
you paid a sales charge (including shares of the 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 shares at a reduced sales charge under Rights of Accumulation, you
must indicate at the time of purchase that a quantity discount is applicable.
A reduction in sales charge is subject to a check of appropriate records,
after which you will receive the lowest applicable sales charge.
Example: Suppose you own Commerce Fund shares with a total current value
of $90,000 that can be traced back to the purchase of shares with a sales
charge. If you subsequently invest $10,000 in any Fund within The Commerce
Funds family, you will pay a reduced sales charge of 2.50% of the public
offering price on the additional purchase.
LETTER OF INTENT. You may also buy shares at a reduced sales charge under a
written Letter of Intent, a non-binding commitment to invest a total of at
least $100,000 in one or more Funds of The Commerce Funds within a period of
13 months and under the terms and conditions of the Letter of Intent. Shares
you buy under a Letter of Intent will be eligible for the same sales charge
discount that would have been available had all of your share purchases been
made at once. To use this feature, complete the Letter of Intent section on
your account application. A Letter of Intent must be filed with The Commerce
Funds within 90 days of the first investment under the Letter of Intent
provision.
While submitting a Letter of Intent does not bind you to buy, or The
Commerce Funds to sell, the full amount at the sales charge indicated in the
Letter of Intent, you must complete the intended purchase to obtain the
reduced sales charge. When you sign a Letter of Intent, The Commerce Funds
holds in escrow a sufficient number of shares which can be sold to make up any
difference in the sales charge on the amount actually invested. After you
fulfill the terms of the Letter of Intent, the shares in escrow will be
released. Any redemption made during the 13-month period will be subtracted
from the amount of the purchases in determining whether the Letter of Intent
has been completed.
12
<PAGE>
If your aggregate investment exceeds that indicated in your Letter of
Intent, you will receive an adjustment which reflects the further reduced
sales charge applicable to your excess investment. It will be in the form of
additional shares credited to your account at the then current offering price
applicable to a single purchase of the total amount of the total purchase. You
must inform The Commerce Funds that the Letter of Intent is in effect each
time you buy shares.
You may include the value of all shares on which a sales charge had
previously been paid as a credit toward fulfillment of the Letter of Intent,
but no price adjustment will be made on shares previously purchased.
You may combine purchases that are made by members of your immediate family,
or the total investments of a trustee or custodian of any qualified pension or
profit-sharing plan or IRA established for your benefit or the benefit of any
member of your immediate family, for the purpose of obtaining reduced sales
charges by means of a written Letter of Intent or Right of Accumulation. You
must indicate on the account application the accounts that are to be combined
for this purpose.
HOW DO I BUY SHARES?
You may purchase shares of a Fund through The Commerce Funds Shareowner
Services, an investment representative at a Commerce Bank branch or registered
investment representatives at broker/dealers. An application is located at the
back of this Prospectus. The following chart describes ways to invest directly
in The Commerce Funds:
<TABLE>
<CAPTION>
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
---------------------------------- ----------------------------------
<S> <C> <C>
By Mail Send a completed account Send a check with your Fund
application with a check (payable account number printed on it,
to The Commerce Funds) directly to along with the stub from the
the address set forth in "How Can previous confirmation directly to
I Contact The Commerce Funds?" the address set forth in "How Can
above. I Contact The Commerce Funds?"
above.
In Person Whether opening or adding to an account, you are welcome to stop into a
Commerce Bank branch office location. A registered investment
representative can assist you.
By Wire After an account application is Contact your bank to request that
completed and an account is funds be wired to your existing
opened, instruct your bank to wire Fund account. Follow instructions
funds to: at left. Be sure to include your
name and your Fund account number.
Investors Fiduciary Trust
Company
ABA # 101003621
Account # 756-044-3
Be sure to have your bank indicate
your name, address, tax
identification number, name of the
Fund and your new account number.
Ask your bank for specific information about making federal wires,
including associated charges.
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
---------------------------------- ----------------------------------
<S> <C> <C>
By Telephone Subsequent purchases of Fund
Via shares may be made by electronic
Electronic Funds funds transfer from your bank,
Transfer checking or money market account.
You can authorize this feature and
provide necessary bank information
on your account application. Then,
when you wish to make a subsequent
purchase, you can do so by
contacting The Commerce Funds at
the telephone number set forth in
"How Can I Contact The Commerce
Funds?" above.
</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.
WHAT PRICE WILL I RECEIVE WHEN I BUY SHARES?
Your shares will be purchased at a Fund's public offering price calculated
at the next close of regular trading on the Exchange (generally 4:00 p.m.
Eastern Time) after your purchase order is received in proper form by The
Commerce Funds' transfer agent, State Street Bank and Trust Company (the
"Transfer Agent"), at its Kansas City office.
WHAT ELSE SHOULD I KNOW ABOUT BUYING SHARES?
Federal regulations require you to provide a certified Taxpayer
Identification Number upon opening or reopening an account.
If your check used for investment does not clear, a fee may be imposed by
the Transfer Agent. All payments by check must be in U.S. dollars and be drawn
only on U.S. banks. The Commerce Funds reserves the right to reject any
specific purchase order (including exchanges) or to restrict purchases or
exchanges by a particular purchaser (or group of related purchasers). The
Commerce Funds may reject or restrict purchases or exchanges of shares by a
particular purchaser or group, for example, when a pattern of frequent
purchases and sales or exchanges of shares of a Fund is evident, or if the
purchase and sale or exchange orders are, or a subsequent abrupt redemption
might be, of a size that would disrupt the management of a Fund.
The Commerce Funds will not issue share certificates. The Transfer Agent
will maintain a complete record of your account and will issue you a statement
at least quarterly. You will also be sent confirmations showing purchases and
redemptions.
HOW TO SELL SHARES
HOW DO I SELL MY SHARES?
The Commerce Funds makes it easy to sell, or "redeem," all or part of your
shares. With certain exceptions, the Commerce Funds does not charge you to
sell shares. However, the value of the shares you sell may be more or less
than your cost, depending on a Fund's current net asset value. The following
chart describes ways to sell your shares of The Commerce Funds:
14
<PAGE>
HOW TO SELL SHARES:
Through The Commerce Funds Shareowner Services, an investment representative
at a Commerce Bank branch or registered investment representatives at selected
broker/dealers.
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?" above.
Proper written authority is required to execute
redemption requests on behalf of corporations,
partnerships, trusts, and/or fiduciary
accounts. Redemption requests require SIGNATURE
GUARANTEES as described below with the
exception of redemptions sent to a shareowner
name/address of record in effect for no less
than 30 days.
In Person You are welcome to deliver your written request
signed by each owner, including each joint
owner, to a Commerce Bank branch office
location. A registered investment
representative can assist you.
By Telephone You may redeem shares (to a shareowner) by
telephone and request to receive proceeds by
check (to a shareowner name/address of record
in effect for no less than 30 days), federal
wire (for amounts exceeding $1,000) or
electronic funds transfer. In order to request
a federal wire or electronic funds transfer,
appropriate information regarding your bank,
checking or money market account must be
previously established on your account. This
information may be provided on the account
application or in a SIGNATURE GUARANTEED letter
of instruction (see description of SIGNATURE
GUARANTEES below).
Redemption requests may be placed by contacting
The Commerce Funds at the telephone number set
forth in "How Can I Contact The Commerce
Funds?" above. Additional information
pertaining to Fund share redemptions is
included in the following pages or can be
obtained by contacting The Commerce Funds
Shareowner Services.
Other redemption features, including exchanges
and automatic withdrawals, are also available.
Please refer to the Shareowner Features and
Privileges section in this prospectus for
additional information about telephone
redemption features.
Written requests to sell shares must be signed by each shareowner, including
each joint owner.
Certain types of redemption requests will need to include a SIGNATURE
GUARANTEE. You may obtain a SIGNATURE GUARANTEE from:
(1) a bank which is a member of the FDIC;
(2) a securities broker or dealer;
15
<PAGE>
(3) a credit union having the authority to issue SIGNATURE GUARANTEES;
(4) a savings and loan association;
(5) a building and loan association;
(6) a cooperative bank;
(7) a federal savings bank or association;
(8) a national securities exchange; or
(9) a registered securities association or a clearing agency.
Guarantees must be signed by an authorized signatory of the guarantor
institution and be accompanied by the words "SIGNATURE GUARANTEED." Guarantees
from notaries public will not be accepted.
Share redemptions can be suspended and the payment of redemption proceeds
delayed when the Exchange is closed (other than for customary weekend and
holiday closings), during periods when trading on the Exchange is restricted
as determined by the SEC, during any emergency as determined by the SEC which
makes it impracticable for a Fund to sell its securities or value its assets
or during any other period permitted by order of the SEC for the protection of
investors.
Other redemption features, including exchanges and automatic withdrawals,
are also available. Please refer to Shareowner Features and Privileges below
for more information.
WHAT PRICE WILL I RECEIVE FOR SHARES I WANT TO SELL?
The price you will receive when you sell your share is the net asset value
per share next 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
solely as a result of market conditions. Retirement accounts and certain other
accounts will not be subject to automatic liquidation.
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
will ordinarily 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.
16
<PAGE>
Fund shares must be paid in full in order for you to redeem them and receive
proceeds. If the shares you wish to sell were a recent purchase by check or
telephone, The Commerce Funds can delay the subsequent payment of sales
proceeds up to 15 days after the check or telephone payment is received. This
does not apply if Fund shares were purchased by federal wire.
WHAT IF I WANT TO REINVEST SALES PROCEEDS?
You may reinvest all or any portion of your redemption proceeds in shares of
any Fund within 60 days of your redemption without a sales charge. Shares will
be purchased at a price equal to the net asset value per share next determined
after the Transfer Agent receives a reinvestment order and payment in proper
form.
If you wish to use the Redemption Reinvestment Privilege, you must submit a
written reinvestment request to the Transfer Agent stating that you are
eligible to use the feature.
Generally, using the Redemption Reinvestment Privilege will not affect any
gain or loss realized on redemptions for federal income tax purposes. However,
if a redemption results in a loss, the reinvestment may result in the loss
being disallowed under Internal Revenue Service "wash sale" rules.
DIVIDEND AND DISTRIBUTION POLICIES
AS A FUND SHAREOWNER, YOU ARE ENTITLED TO ANY DIVIDENDS AND DISTRIBUTIONS
ARISING
FROM NET INVESTMENT INCOME AND NET REALIZED CAPITAL GAINS.
The Funds declare dividends daily and distribute dividends on or about the
last Business Day of the current month. Each Fund declares and distributes net
realized capital gains annually.
For purchases by check, shares of the Funds begin earning dividends and
distributions on the next day after payment for the shares is received by the
Transfer Agent.
YOU CAN CHOOSE A DISTRIBUTION OPTION FOR DIVIDENDS AND CAPITAL GAINS:
(1) reinvest all dividend and capital gain distributions in additional
Fund shares without a sales charge;
(2) receive dividend distributions in cash and reinvest capital gain
distributions in additional Fund shares without a sales charge;
(3) receive all dividend and capital gain distributions in cash; or
(4) have all dividend and capital gain distributions deposited directly
into a designated checking account.
If you do not select an option when you open an account, all distributions
will automatically be reinvested in additional shares of the same Fund without
a sales charge. For your protection, if you elect to have distributions mailed
to you which cannot be delivered, they will be reinvested in additional shares
of the same Fund without a sales charge.
17
<PAGE>
You may invest dividend or capital gain distributions from one Fund in
another Fund of The Commerce Funds. There is no sales charge on purchases made
through the Cross Reinvestment Privilege; however, both Fund accounts must be
established at the minimum initial investment requirement and have identical
account registration. Cross Reinvestment Privileges do not apply to the
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
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?" above. The change will become effective after it is received and
processed by the Transfer Agent.
SHAREOWNER FEATURES AND PRIVILEGES
THE COMMERCE FUNDS PROVIDES A VARIETY OF WAYS TO MAKE MANAGING
YOUR INVESTMENTS MORE CONVENIENT.
Some or all of the following features as well as others described in this
Prospectus may have different conditions imposed on them in addition to those
described in this Prospectus. Consult your investment representative or
contact The Commerce Funds at the address or telephone number set forth in
"How Can I Contact The Commerce Funds?" above for more information.
CAN I MAKE REGULAR INVESTMENTS TO A FUND AUTOMATICALLY?
The Automatic Investment feature lets you transfer money from your checking
account into your Fund account automatically on the date you specify in any
month you choose. The Automatic Investment feature is one way to use Dollar
Cost Averaging to invest (see below). Only checking accounts at U.S. financial
institutions which permit automatic withdrawals through the Automated Clearing
House are eligible. Check with your bank or financial institution to determine
eligibility.
WHAT IS DOLLAR COST AVERAGING AND HOW CAN I IMPLEMENT IT?
DOLLAR COST AVERAGING INVOLVES INVESTING A FIXED DOLLAR AMOUNT AT REGULAR
INTERVALS. BECAUSE MORE SHARES ARE PURCHASED DURING PERIODS WITH LOWER SHARE
PRICES AND FEWER SHARES ARE PURCHASED WHEN THE PRICE IS HIGHER, YOUR AVERAGE
COST PER SHARE MAY BE REDUCED.
In order to be effective, Dollar Cost Averaging should be followed on a
regular basis. You should be aware, however, that shares bought using Dollar
Cost Averaging are made without regard to their price on the day of investment
or to market trends. In addition, while you may find Dollar Cost Averaging to
18
<PAGE>
be beneficial, it will not prevent a loss if you ultimately redeem your shares
at a price that is lower than their purchase price. Dollar cost averaging does
not assure a profit or protect against a loss in a declining market. You can
invest through Dollar Cost Averaging on your own or through the Automatic
Investment feature described above.
To establish an Automatic Investment account that uses the Dollar Cost
Averaging method, check the appropriate box and supply the necessary
information on the account application or send a subsequent written request
with an appropriate SIGNATURE GUARANTEE.
You may change the amount of purchase or cancel this feature at any time by
mailing written notification to The Commerce Funds at the address set forth in
"How Can I Contact The Commerce Funds?" above.
Notification will be effective three Business Days following receipt. The
Commerce Funds may modify or terminate this feature at any time or charge a
service fee, although no such fee is currently contemplated.
CAN I EXCHANGE MY INVESTMENT FROM ONE COMMERCE FUND TO ANOTHER?
As a shareowner, you have the privilege of exchanging your shares for shares
of another Fund of The Commerce Funds. Exchanges may also be made to or from
the Goldman Sachs--Institutional Liquid Assets Prime Obligations Portfolio. NO
ADDITIONAL SALES CHARGE IS IMPOSED WHEN EXCHANGING SHARES OF A FUND FOR SHARES
OF ANOTHER FUND OFFERED BY THE COMMERCE FUNDS.
You can exchange shares of one Fund for shares in another Fund within The
Commerce Funds family that may be legally sold in your state of residence by
writing or calling The Commerce Funds as described under "How To Sell Shares"
above. 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 "Can I make transactions by Telephone" below
for a description of The Commerce Funds' policy regarding responsibility for
telephone instructions. Shares purchased by check may not be exchanged until
the check has cleared.
Fund shares being exchanged are subject to the minimum initial and
subsequent investment requirements as described above. 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?" above.
In addition to free automatic exchanges pursuant to the Automatic Exchange
feature discussed below, five free exchanges are permitted in each twelve-
month period. Additional exchanges may be subject to a $5 exchange fee.
The Commerce Funds reserves the right to reject any exchange request and the
Exchange Privilege may be modified or terminated at any time. At least 60
days' notice of any material modification or
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termination of the Exchange Privilege will be given to shareowners except
where notice is not required under the regulations of the SEC.
An exchange may result in a taxable gain or loss. Any sales charge paid on
the original purchase cannot be taken into account in determining such gain or
loss if the exchange occurs within ninety (90) days after the original
purchase of shares and no sales charge is imposed on such exchange.
CAN I HAVE EXCHANGES MADE AUTOMATICALLY?
You may request on your account application that a specified dollar amount
of shares at net asset value be automatically exchanged for shares of any
other Fund of The Commerce Funds. No sales charge is imposed on exchanges.
These automatic exchanges may be made on any one day of each month and are
subject to the following conditions: The minimum dollar amount for automatic
exchanges must be at least $250 per month. In addition, the value of the
account in the originating Fund must be at least $1,000 after the exchange and
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?
WITH CERTAIN EXCEPTIONS, YOU MAY ELECT TO HAVE YOUR DIVIDENDS, CAPITAL GAIN
DISTRIBUTIONS, OR BOTH RECEIVED FROM A FUND ACCOUNT AUTOMATICALLY INVESTED IN
ADDITIONAL SHARES OF ANY OTHER INVESTMENT PORTFOLIO OF THE COMMERCE FUNDS IN
WHICH YOU CURRENTLY MAINTAIN AN OPEN 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
read the prospectus and consider carefully the investment objective, policies
and applicable fees of the acquired Fund before using this feature.
HOW DO I OBTAIN OTHER INFORMATION ABOUT MY ACCOUNT?
Contact the Commerce Funds Shareowner Services or your investment
representative for account information such as current balance, account
transactions, distributions, and other applicable information. Share prices of
each Fund will be listed in the mutual funds pricing section of most daily
newspapers under The Commerce Funds.
CAN I MAKE TRANSACTIONS BY TELEPHONE?
YOU MAY AUTHORIZE ELECTRONIC TRANSFERS OF MONEY TO MAKE ADDITIONAL
INVESTMENTS IN OR TO REDEEM SHARES FROM AN ESTABLISHED ACCOUNT IF THIS FEATURE
WAS SELECTED ON THE ACCOUNT APPLICATION OR IN A SUBSEQUENT WRITTEN REQUEST.
THE SERVICE MAY BE USED LIKE AN "ELECTRONIC CHECK" TO MOVE MONEY TO OR
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FROM YOUR CHECKING OR MONEY MARKET ACCOUNT AND YOUR FUND ACCOUNT BY CALLING
THE COMMERCE FUNDS SHAREOWNER SERVICES AT THE TELEPHONE NUMBER SET FORTH IN
"HOW CAN I CONTACT THE COMMERCE FUNDS?" ABOVE.
Telephone purchases will be effected at the public offering price next
determined after the Transfer Agent receives payment for the transaction.
Proceeds from sales of shares will be deposited into your Commerce checking or
money market account generally two business days after the redemption request
is received. You may also request receipt of your redemption proceeds by
check, which will only be sent to the registered owner of your Fund account
and only to the address of record. If you should experience difficulty in
redeeming shares by telephone (i.e. because of unusual market activity), you
are urged to consider redeeming your shares by mail or in person.
You should note that the Transfer Agent may act upon a telephone purchase or
redemption request from any person representing himself or herself to be you
and reasonably believed by the Transfer Agent to be genuine. Neither The
Commerce Funds nor any of its service contractors will be liable for any loss
or expense in acting upon telephone instructions that are reasonably believed
to be genuine. In attempting to confirm that telephone instructions are
genuine, The Commerce Funds will use such procedures as are considered
reasonable, including recording those instructions and requesting information
as to account registration (such as the name in which the account is
registered, the account number, recent transactions in the account, or the
account holder's tax identification number, address or bank). To the extent
that The Commerce Funds fails to use reasonable procedures as a basis for its
belief, it and/or its service contractors may be liable for instructions that
prove to be fraudulent or unauthorized.
The Commerce Funds may modify this feature at any time or charge a service
fee upon notice to shareowners. No such fee is currently contemplated.
CAN I ARRANGE AUTOMATIC WITHDRAWALS?
IF YOU ARE A SHAREOWNER WITH AN ACCOUNT VALUED AT $5,000 OR MORE, YOU MAY
WITHDRAW AMOUNTS IN MULTIPLES OF $100 OR MORE FROM YOUR ACCOUNT ON A MONTHLY,
QUARTERLY, SEMI-ANNUAL OR ANNUAL BASIS THROUGH THE AUTOMATIC WITHDRAWAL
FEATURE.
At your option, monthly withdrawals may be made either the first or
fifteenth day of the month and quarterly, semi-annual and annual withdrawals
will be made on the fifteenth day of the month. To participate in this
feature, check the appropriate box and supply the necessary information on the
account application or in a subsequent written request. Purchases of
additional shares concurrently with withdrawals are ordinarily not
advantageous because of the sales charge imposed on the Funds. This feature
may be suspended should the value of your account fall below $500.
THE BUSINESS OF THE COMMERCE FUNDS
BOARD OF TRUSTEES
The business affairs of The Commerce Funds are managed under the general
supervision of the Board of Trustees. Information about the Trustees and
officers of The Commerce Funds is included in the Statement of Additional
information.
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SERVICE PROVIDERS
----------------
INVESTMENT ADVISOR
COMMERCE BANK, N.A.
(THE "ADVISOR")
Commerce Bank, N.A. serves as Advisor for the Funds, selecting investments
and making purchases and sale orders for securities in each Fund's portfolio.
ADMINISTRATOR
GOLDMAN SACHS ASSET MANAGEMENT
("GSAM" OR THE "ADMINISTRATOR")
GSAM serves as Administrator of each of the Funds. GSAM is located at One
New York Plaza, New York, New York 10004.
DISTRIBUTOR
GOLDMAN, SACHS & CO.
("GOLDMAN" OR THE "DISTRIBUTOR")
Shares of each Fund are sold on a continuous basis by Goldman as
Distributor. Goldman is located at 85 Broad Street, New York, New York 10004.
TRANSFER AGENT
STATE STREET BANK AND TRUST COMPANY
(THE "TRANSFER AGENT")
State Street Bank and Trust Company ("State Street Bank") has delegated its
responsibilities as Transfer Agent to its indirect subsidiary, National
Financial Data Services, Inc. ("NFDS"), which maintains the account records of
all shareowners in the Funds and administers the distribution of income earned
as a result of investing in the Funds. State Street Bank is located at 225
Franklin Street, Boston, Massachusetts 02110. NFDS is located at 1004
Baltimore Street, Kansas City, Missouri 64105.
CUSTODIAN
STATE STREET BANK AND TRUST COMPANY
(THE "CUSTODIAN")
State Street Bank and Trust Company also serves as the Custodian of each of
the Funds.
MORE ABOUT THE ADVISOR
Commerce Bank, N.A., with offices at 8000 Forsyth Boulevard, St. Louis,
Missouri 63105 and 922 Walnut Street, Kansas City, Missouri 64106, a
subsidiary of Commerce Bancshares, Inc., a registered multi-bank holding
company, serves as the investment advisor to each Fund. Commerce Bank, N.A.
(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, 1997, the Advisor and its affiliates had approximately $7.6
billion in assets under management.
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In the Advisory Agreement with The Commerce Funds, the Advisor has agreed to
manage each Fund's investments and to be responsible for, place orders for,
and make decisions with respect to, all purchases and sales of each Fund's
securities. For the advisory services provided and expenses assumed under the
Advisory Agreement, the Advisor is entitled to receive a fee at the annual
rate of 0.50% of the average daily net assets of each of the National Tax-Free
and Missouri Tax-Free Funds. The Advisor may agree to voluntarily waive its
fees in whole or in part with respect to any particular Fund. The Advisor has
voluntarily agreed to waive a portion of the investment advisory fees
otherwise payable by the Missouri Tax-Free Fund and National Tax-Free Fund so
that the advisory fees payable by such Funds will not exceed approximately
0.30% and 0.39%, respectively, on an annualized basis, of the average daily
net assets of such Funds. For the fiscal year ended October 31, 1997, the
Advisor received advisory fees (after fee waivers) at the effective annual
rates of 0.50% and 0.30% of the average daily net assets of the National Tax-
Free Fund and Missouri Tax-Free Fund, respectively.
Craig A. MacPherson, CFA and Vice President, is the person primarily
responsible for the day-to-day management of each Fund's investments. Mr.
MacPherson joined the Investment Management Group of Commerce Bank, N.A. in
1991 as a manager of fixed income investments. Mr. MacPherson came to Commerce
Bank from Bank IV, Wichita, Kansas, where he held the title of Vice President
and Trust Investment Officer. He served as portfolio manager and head of fixed
income investments in Bank IV's trust investment section since 1987 and its
predecessor trust divisions since 1972.
MORE ABOUT THE ADMINISTRATOR
Goldman Sachs Asset Management is the Administrator for the Funds. GSAM is a
separate operating division of Goldman, Sachs & Co., the Distributor of the
Funds. Under the Administration Agreement with The Commerce Funds, GSAM
administers the business affairs of The Commerce Funds, subject to the
supervision of the Board of Trustees, and in connection therewith, furnishes
The Commerce Funds with office facilities and is responsible for ordinary
clerical, recordkeeping and bookkeeping services required to be maintained by
The Commerce Funds (excluding those maintained by The Commerce Funds'
Custodian, Transfer Agent, Advisor and any Sub-Advisor), preparation and
filing of documents required to comply with federal and state securities laws,
supervising the activities of the Custodian and Transfer Agent, providing
assistance in connection with meetings of the Board of Trustees and
shareowners and other administrative services necessary to conduct the
business of The Commerce Funds. For these services and facilities, GSAM is
entitled to receive a monthly fee from each Fund at an annual rate of 0.15% of
its average daily net assets. For the fiscal year ended October 31, 1997, GSAM
received administration fees at the annual rate of 0.15% of the average daily
net assets of each Fund.
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
shares. Such services, which are described more fully in the Statement of
Additional Information, may include processing purchase and redemption
requests from customers, placing net purchase and redemption orders with the
Distributor, processing, among other
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things, distribution payments from The Commerce Funds, providing necessary
personnel and facilities to establish and maintain customer accounts and
records and providing information periodically to customers showing their
positions in Fund shares.
For these services, the Service Organizations will be entitled to receive
fees from a Fund at an annual rate of up to 0.25% of the average daily net
asset value of Fund shares held by such Service Organizations for the benefit
of their customers. The Service Organizations are required to provide their
customers with a schedule of any credits, fees or other conditions that may be
applicable to the investment of customer assets in Fund shares. For the fiscal
year ended October 31, 1997, The Commerce Funds paid no fees to Service
Organizations on behalf of the Funds.
Conflict of interest restrictions may apply to the receipt of compensation
paid by The Commerce Funds to a Service Organization in connection with the
investment of fiduciary funds in Fund shares. Banks and other institutions
regulated by the Comptroller of the Currency or other federal or state bank
regulatory agencies, and investment advisers and other money managers subject
to the jurisdiction of the SEC, the Department of Labor or state securities
commissions, are urged to consult legal counsel before entering into
Shareowner Servicing Agreements.
EXPENSES
Except as noted in this Prospectus and the Statement of Additional
Information, the Funds' service providers bear all expenses in connection with
the performance of their services and the Funds bear the expenses incurred in
their operations.
As stated in the "Summary of Expenses," the Advisor intends to voluntarily
waive a portion of advisory fees and/or reimburse expenses for the Funds
during the current fiscal year. The result of such fee waivers and expense
reimbursements, which may be reduced or discontinued at any time, will be to
increase the performance of the Funds during the periods for which they are
made.
TAX INFORMATION
AS WITH ANY INVESTMENT YOU SHOULD CONSIDER THE TAX IMPLICATIONS OF AN
INVESTMENT IN A FUND. YOU SHOULD CONSULT YOUR TAX ADVISOR WITH SPECIFIC
REFERENCE TO YOUR OWN TAX SITUATION.
The following is only a short summary of the important tax considerations
generally affecting the Funds and their shareowners. Each Fund will send
written notices to shareowners annually regarding the tax status of
distributions made by the Funds. You should save your regular account
statements because they contain information you will need to calculate your
capital gains or losses upon your sale or exchange of shares in a Fund.
FEDERAL TAXES. Each Fund intends to qualify as a "regulated investment
company" under the Internal Revenue Code (the "Code"), with the result that to
the extent a Fund's earnings are distributed to shareowners as required by the
Code, the Fund itself generally is not required to pay federal income taxes.
To satisfy various requirements in the Code, each Fund expects to distribute
virtually all its net income each year. Each Fund anticipates that most of its
distributions will be dividends derived from
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interest on Municipal Obligations ("exempt-interest dividends"). Such exempt-
interest dividends may be treated by you as excludable from your gross income
(unless, because of your particular situation, exclusion would be disallowed).
You should note that income that is not subject to federal income taxes may
nonetheless have to be considered along with other adjusted gross income in
determining whether any Social Security payments received by you are subject
to federal income taxes.
If the Funds hold certain so-called "private activity bonds," you will need
to include as an item of tax preference for purposes of the federal
alternative minimum tax that portion of the dividends paid by the Fund derived
from interest received on such bonds. In addition, corporate shareowners will
need to take into account all exempt-interest dividends paid by the Funds in
determining certain adjustments for the federal alternative minimum tax and
the environmental tax.
Dividends derived from Fund net capital gains ("capital gain dividends")
will be taxable to you as a long-term capital gain (20% or 28% rate gain
depending upon the Fund's holding period for the assets the sale of which
generated the capital gains) 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.
Any dividend based on Fund income other than interest on Municipal
Obligations or net capital gains will be taxable to you as ordinary income,
whether the dividend is received in cash or additional shares. The Funds will
determine annually the percentages of their respective net investment income
which are exempt from tax, which constitute an item of tax preference for
purposes of the federal alternative minimum tax, and which are fully taxable
and will apply these percentages uniformly to all dividends declared from net
investment income during that year.
Any dividends declared in October, November or December with a record date
before the end of the year and paid in January of the following year will be
deemed for tax purposes to have been paid by the Fund and received by you in
that year.
You will recognize a taxable capital gain or loss when redeeming or
exchanging your shares (or in using the Automatic Withdrawal feature to direct
reinvestments), to the extent of any difference between the price at which the
shares are sold or exchanged and the price or prices at which the shares were
originally purchased for cash or under the dividend reinvestment plan. If you
hold shares for six months or less and during that time receive an exempt-
interest dividend attributable to those shares, any loss realized on the sale
or exchange of those shares will be disallowed to the extent of the exempt-
interest dividend. If you hold shares for six months or less and during that
time receive a capital gain dividend on those shares, any loss realized on the
sale or exchange of those shares will be treated as a long-term capital loss
to the extent of the capital gain dividend.
Each Fund will be required in certain cases to withhold and remit to the
U.S. Treasury 31% of the dividends paid to any investor (i) who has provided
an incorrect Social Security Number or Taxpayer Identification Number or no
number at all, (ii) who is subject to back-up withholding by the Internal
Revenue Service for failure properly to include on his return payments of
interest or dividends, or (iii) who has failed to certify to the Fund, when
required to do so, that he is not subject to backup withholding or that he is
an "exempt recipient."
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MISSOURI TAXES. Resident individuals, trusts and estates resident in
Missouri, and corporations within Missouri tax jurisdiction, will not be
subject to Missouri income tax on dividends from the Missouri Tax-Free Bond
Fund that are derived from interest on obligations of the State of Missouri
and its political subdivisions (to the extent such interest is exempt from
federal income tax) or on obligations issued by the U.S. Government, the
Government of Puerto Rico, the Virgin Islands or Guam. Resident individuals,
trusts and estates and corporations generally will be subject to Missouri
income tax on other dividends received from the Fund, including dividends
derived from interest on obligations of other issuers and all long-term and
short-term capital gains.
OTHER STATE AND LOCAL TAXES. You should consult your tax advisor regarding
state and local tax consequences which may differ from the federal tax
consequences described above.
HOW PERFORMANCE IS MEASURED
A FUND'S PERFORMANCE MAY BE QUOTED IN TERMS OF AVERAGE ANNUAL TOTAL RETURN,
AGGREGATE TOTAL RETURN, YIELD AND TAX-EQUIVALENT YIELD AS DISCUSSED BELOW.
PERFORMANCE INFORMATION IS HISTORICAL AND IS NOT INTENDED TO INDICATE FUTURE
RESULTS.
From time to time, each Fund's average annual total return, yield and tax-
equivalent yield may be quoted in advertisements. The performance of each Fund
may be compared to those of other mutual funds with similar investment
objectives and to relevant indices or to rankings prepared by independent
services or other financial or industry publications that monitor the
performance of mutual funds. For example, the performance of a Fund may be
compared to data prepared by Lipper Analytical Services, Inc., Mutual Fund
Forecaster, Wiesenberger Investment Companies Services, Morningstar or CDA
Investment Technologies, Inc., as well as to indices such as the Lehman
Brothers Bond Indexes or the Consumer Price Index. Performance data as
reported in national financial publications such as Money Magazine, Forbes,
Barron's, Morningstar, The Wall Street Journal and The New York Times, or in
publications of a local or regional nature, may also be used in comparing the
performance of a Fund.
Performance is based on historical earnings and is not intended to indicate
future performance. The investment return and principal value of an investment
in a Fund will fluctuate so that shares, when redeemed, may be worth more or
less than their original cost. Performance data may not provide a basis for
comparison with bank deposits and other investments which provide a fixed
yield for a stated period of time. Changes in the net asset value should be
considered in ascertaining the total return to shareowners for a given period.
Total return data should also be considered in light of the risks associated
with a Fund's composition, quality, operating expenses and market conditions.
Any fees charged by The 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 Funds' 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
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and changes in the price of a Fund's shares and assume that dividend and
capital gain distributions are reinvested. When considering average total
return figures for periods longer than one year, you should note that the
annual total return for any one year may be more or less than the average for
the entire period. A Fund may also advertise its total return on an aggregate,
year-by-year or other basis for various specified periods through charts,
graphs, schedules or quotations. The Funds may also advertise quotations of
total return that do not reflect the sales charge imposed on the purchase of
Fund shares. Quotations which do not reflect sales charges will, of course, be
higher than quotations which do reflect sales charges.
The yield of a Fund is computed based on the Fund's net income during a
specified 30-day period. More specifically, the Fund's yield is computed by
dividing its per share net income during the relevant period by the per share
maximum public offering price on the last day of the period and annualizing
the result on a semi-annual basis.
The tax-equivalent yield for a Fund shows the amount of taxable yield needed
to produce an after-tax equivalent of a tax-free yield, and is calculated by
increasing the yield by the amount necessary to reflect the payment of federal
and/or state income taxes at a stated rate. A Fund's tax-equivalent yield will
always be higher than a Fund's yield.
OTHER INFORMATION
THE COMMERCE FUNDS IS A DELAWARE BUSINESS TRUST THAT WAS
ORGANIZED ON FEBRUARY 7, 1994.
ABOUT THE COMMERCE FUNDS
THE COMMERCE FUNDS' TRUST INSTRUMENT AUTHORIZES THE BOARD OF TRUSTEES TO
ISSUE AN UNLIMITED NUMBER OF FULL AND FRACTIONAL SHARES OF BENEFICIAL
INTEREST, WITHOUT PAR VALUE, OF ONE OR MORE SERIES OF SHARES (OR CLASSES
THEREOF) REPRESENTING INTERESTS IN NINE DIFFERENT FUNDS: THE SHORT-TERM
GOVERNMENT, BOND, BALANCED, GROWTH AND INCOME, GROWTH, MIDCAP, INTERNATIONAL
EQUITY, NATIONAL TAX-FREE INTERMEDIATE BOND AND MISSOURI TAX-FREE INTERMEDIATE
BOND FUNDS. The Short-Term Government, Bond, Balanced, Growth and Income,
Growth, MidCap and International Equity Funds offer two classes of shares:
Institutional Shares and Service Shares. The National Tax-Free Intermediate
Bond Fund and the Missouri Tax-Free Intermediate Bond Fund offer only
Institutional Shares. Information on Commerce's other Funds, which are offered
in separate prospectuses may be obtained by calling 1-800-995-6365.
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.
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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
Investment Company Act of 1940 (the "1940 Act") or when the Board of Trustees
has determined that a matter affects the interests of more than one series,
all shares shall be voted separately by individual series. The Board of
Trustees may also determine that a matter affects only the interests of one or
more classes of a series, in which case any such matter shall be voted on by
such class or classes.
The Commerce Funds does not presently intend to hold annual meetings of
shareowners to elect Trustees or for other business. Shareowner meetings will
be held when required by the 1940 Act or other applicable law.
Under certain circumstances, shareowners have the right to call a
shareowners meeting. Such meetings will be held when requested by the
shareowners of 10% or more of The Commerce Funds' outstanding shares of
beneficial interest. The Commerce Funds will assist in shareowner
communications in such matters to the extent required by law and The Commerce
Funds' undertaking with the Securities and Exchange Commission. Voting rights
are not cumulative, and accordingly, the owners of more than 50% of the
aggregate shares of The Commerce Funds may elect all of the Trustees
irrespective of the vote of the other shareowners.
As of February 13, 1998, the Advisor and their affiliates possessed, on
behalf of their underlying customer accounts, voting or investment power with
respect to 99.6% and 95.3% of the outstanding shares of each of the National
Tax-Free and Missouri Tax-Free Funds, respectively, and therefore may be
deemed to be a controlling person of The Commerce Funds for purposes of the
1940 Act.
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 above.
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OTHER INVESTMENT PRACTICES
MUNICIPAL OBLIGATIONS
The two principal classifications of Municipal Obligations which may be held
by the Funds are "general obligation" securities and "revenue" securities.
General obligation securities are secured by the issuer's pledge of its full
faith, credit and taxing power for the payment of principal and interest.
Revenue securities are payable only from the revenues derived from a
particular facility or class of facilities or, in some cases, from the
proceeds of a special excise tax or other specific revenue source such as the
user of the facility being financed. Private activity bonds (e.g., bonds
issued by industrial development authorities) that are issued by or on behalf
of public authorities to finance various privately-operated facilities are
included within the term "Municipal Obligations" if the interest paid thereon
is exempt from regular federal income tax and not treated as a specific tax
preference item under the federal alternative minimum tax. Private activity
bonds are in most cases revenue securities and are not payable from the
unrestricted revenues of the issuer. The credit quality of such bonds is
usually directly related to the credit standing of the corporate user of the
facility involved.
Municipal Obligations may also include "moral obligation" securities, which
are normally issued by special purpose public authorities. If the issuer of
moral obligation securities is unable to meet its debt service obligations
from current revenues, it may draw on a reserve fund, the restoration of which
is a moral commitment but not a legal obligation of the state or municipality
which created the issuer.
Certain of the Municipal Obligations held by the Funds may be insured as to
the timely payment of principal and interest. The insurance policies will
usually be obtained by the issuer of the Municipal Obligation at the time of
its original issuance. In the event that the issuer defaults on an interest or
principal payment, the insurer will be notified and will be required to make
payment to the bondholders. There is, however, no guarantee that the insurer
will meet its obligations. In addition, such insurance will not protect
against market fluctuations caused by changes in interest rates and other
factors. A Fund may, from time to time, invest more than 25% of its assets in
Municipal Obligations covered by insurance policies.
Each Fund may also purchase Municipal Obligations known as "certificates of
participation," which represent undivided proportional interests in lease
payments by a governmental or non-profit entity. The lease payments and other
rights under the lease provide for and secure the payments on the
certificates. Lease obligations may be limited by applicable municipal charter
provisions or the nature of the appropriation for the lease. In particular,
lease obligations may be subject to periodic appropriation. If the entity does
not appropriate funds for future lease payments, the entity cannot be
compelled to make such payments. Furthermore, a lease may or may not provide
that the certificate trustee can accelerate lease obligations upon default. If
the trustee could not accelerate lease obligations upon default, the trustee
would only be able to enforce lease payments as they became due. In the event
of a default or failure of appropriation, it is unlikely that the trustee
would be able to obtain an acceptable substitute source of payment.
Certificates of participation are generally subject to redemption by the
issuing municipal entity under specified circumstances. If a specified event
occurs, a certificate is callable at par either at any interest payment date
or, in some cases, at any time. As a result, certificates of participation are
not as liquid or marketable as other types of Municipal Obligations.
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The Advisor, under the supervision of the Board of Trustees, will evaluate
the liquidity of a municipal lease obligation based on all relevant factors.
The Funds may purchase unrated municipal lease obligations. The Advisor, under
the Supervision of the Board of Trustees, will determine the credit quality of
such leases on an ongoing basis, including an assessment of the likelihood
that the underlying lease will be canceled.
Opinions relating to the validity of Municipal Obligations and to the
exemption of interest thereon from regular federal income tax are rendered by
bond counsel to the respective issuers at the time of issuance. Neither The
Commerce Funds nor the Advisor will review the proceedings relating to the
issuance of Municipal Obligations or the bases for such opinions.
VARIABLE AND FLOATING RATE INSTRUMENTS
Municipal Obligations and other instruments purchased by the Funds may
include variable and floating rate demand instruments issued by corporations,
industrial development authorities and governmental entities. Although
variable and floating rate demand instruments are frequently not rated by
credit rating agencies, unrated instruments purchased by a Fund will be
determined to be of comparable quality to rated instruments that may be
purchased by a Fund. While there may be no active secondary market with
respect to a particular variable or floating rate instrument purchased by a
Fund, a Fund may, from time to time as specified in the instrument, demand
payment in full of the principal of the instrument or may resell the
instrument to a third party. The absence of such an active secondary market,
however, could make it difficult for a Fund to dispose of a variable or
floating rate demand instrument if the issuer defaulted on its payment
obligations during periods that a Fund is not entitled to exercise its demand
rights, and a Fund could, for these or other reasons, suffer a loss. Variable
and floating rate instruments with no active secondary market and with
notice/termination dates in excess of seven days will be included in the
calculation of a Fund's illiquid assets.
RATINGS OF SECURITIES
Municipal Obligations acquired by the Funds will be rated investment grade
at the time of purchase. For purposes of this investment policy, investment-
grade obligations are those rated at the time of purchase AAA, AA, A or BBB by
Standard & Poor's Ratings Services ("S&P"), Aaa, Aa, A or Baa by Moody's
Investors Service, Inc. ("Moody's") or which are similarly rated by another
nationally recognized statistical rating organization ("NRSRO") (including
Fitch Investors Service, Inc., Duff & Phelps, Thomson BankWatch and IBCA) or
are unrated but deemed by the Advisor to be comparable in quality to
instruments that are so rated. Obligations rated BBB by S&P and Baa by
Moody's, or the equivalent rating by an NRSRO, are considered to have
speculative characteristics and are subject to greater credit and market risk
than securities rated in the top three investment-grade categories. The Funds
do not intend to purchase obligations rated below investment grade. Subsequent
to its purchase by a Fund, a portfolio security may be downgraded below
investment grade or may be deemed by the Advisor to be no longer comparable to
investment-grade securities. The Advisor will consider such an event in
determining whether the Fund should continue to hold the security. Each Fund
may also acquire tax-exempt commercial paper rated A-1 or higher by S&P or
Prime-1 or higher by Moody's or, when deemed advisable by the Advisor, issues
rated A-2 by S&P or Prime-2 by Moody's which the Advisor considers to be "high
quality," municipal notes rated SP-2 or higher by S&P or MIG-2 or higher by
Moody's and variable rate demand obligations rated VMIG-2 or higher by Moody's
or the equivalent rating of another
30
<PAGE>
NRSRO. Each Fund may invest up to 10% of its assets in unrated obligations
provided that such obligations are determined by the Advisor to be comparable
in quality to instruments that are eligible for purchase by the Funds. See
Appendix A to the Statement of Additional Information for a description of
applicable S&P and Moody's debt obligation ratings.
TAXABLE INVESTMENTS
Each Fund may invest up to 20% of its net assets in Municipal Obligations
the interest on which is exempt from regular federal income tax but is an item
of tax preference for purposes of the federal alternative minimum tax. Each
Fund may also invest up to 20% of its net assets for temporary defensive
purposes in short-term taxable money market instruments as described below, in
securities issued by other investment companies which invest in taxable or
tax-exempt money market instruments and in U.S. Government Obligations (as
defined below under "U.S. Government Obligations"). Each Fund may also enter
into repurchase and reverse repurchase agreements and may lend portfolio
securities.
In addition, each Fund may hold uninvested cash reserves pending investment
during temporary defensive periods, or when, in the opinion of the Advisor,
suitable tax-exempt obligations are unavailable. There is no percentage
limitation on the amount of assets which may be held uninvested by the Funds.
Uninvested cash normally will not represent a significant portion of a Fund's
assets.
ZERO COUPON BONDS
Each Fund may acquire zero coupon bonds. Such obligations will not result in
the payment of interest until maturity, and typically have greater price
volatility than coupon obligations. A Fund will purchase zero coupon bonds
only if the likely relative greater price volatility of such zero coupon bonds
is not inconsistent with the Fund's investment objective. A Fund will accrue
income on such investments for tax and accounting purposes, as required, which
is distributable to shareowners and which, because no cash is received at the
time of accrual, may require the liquidation of other portfolio securities to
satisfy the Fund's distribution obligations. These actions may occur under
disadvantageous circumstances and may reduce a Fund's assets, thereby
increasing its expense ratio and decreasing its rate of return. Zero coupon
bonds are subject to greater market fluctuations from changing interest rates
than debt obligations of comparable maturities which make current
distributions of interest.
INTEREST RATE SWAPS, MORTGAGE SWAPS, CAPS AND FLOORS
In order to hedge against fluctuations in interest rates, the Funds may
enter into interest rate swaps, mortgage swaps and other types of swap
agreements such as caps and floors. Interest rates swaps involve the exchange
by a Fund with another party of their respective commitments to pay or receive
interest, such as an exchange of fixed rate payments for floating rate
payments. Mortgage swaps are similar to interest rate swaps in that they
represent commitments to pay and receive interest. The notional principal
amount, however, is tied to a reference pool or pools of mortgages. In a
typical cap or floor agreement, one party agrees to make payments only under
specified circumstances, usually in return for payment of a fee by the other
party. For example, the buyer of an interest rate cap obtains the right to
receive payment to the extent that a specified interest rate exceeds an agreed
upon level, while the seller of an interest rate floor is obligated to make
payments to the extent that a specified interest rate falls below an agreed
upon level. Since interest rate swaps, mortgage swaps, caps and floors are
individually negotiated, a Fund expects to achieve an acceptable degree of
correlation between its portfolio investments and its swap, cap and floor
positions.
31
<PAGE>
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 or liquid assets equal to the net amount,
if any, of the excess of the Fund's obligations over its entitlements with
respect to swap transactions in a segregated account with its custodian.
Interest rate and mortgage swaps do not involve the delivery of securities, or
other underlying assets or principal. Accordingly, the risk of loss with
respect to interest rate and mortgage swaps is limited to the net amount of
interest payments that a Fund is contractually obligated to make. If the other
party to an interest rate or mortgage swap defaults, a Fund's risk of loss
consists of the net amount of interest payments that the Fund is contractually
entitled to receive. To the extent that the net amount of an interest rate or
mortgage swap is held in a segregated account consisting of cash or liquid
assets the Funds and the Advisor believe that such swaps will not constitute
senior securities under the 1940 Act and, accordingly, will not treat them as
being subject to the Funds' borrowing restriction.
The use of interest rate swaps, mortgage swaps, caps and floors is a highly
specialized activity which involves investment techniques and risks different
from those associated with ordinary portfolio securities transactions. If the
Advisor is incorrect in its forecasts of market values and interest rates, the
investment performance of a Fund would be less favorable than it would have
been if these investment techniques were not used. The staff of the Securities
and Exchange Commission ("SEC") currently takes the position that swaps, caps
and floors are illiquid for purposes of a Fund's limitation on illiquid
securities.
U.S. GOVERNMENT OBLIGATIONS
Each Fund may invest in obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities ("U.S. Government Obligations").
Examples of the types of U.S. Government Obligations which may be held by the
Funds include, in addition to U.S. Treasury bonds, notes and bills, the
obligations of Federal Home Loan Banks, Federal Farm Credit Banks, Federal
Land Banks, the Federal Housing Administration, Farmers Home Administration,
Export-Import Bank of the United States, Small Business Administration,
Government National Mortgage Association, Federal National Mortgage
Association, General Services Administration, Student Loan Marketing
Association, Central Bank for Cooperatives, Federal Home Loan Mortgage
Corporation, Federal Intermediate Credit Banks and Maritime Administration.
Obligations of certain agencies and instrumentalities of the U.S. Government,
such as those of the Government National Mortgage Association, are supported
by the right of the issuer to borrow from the Treasury; others, such as those
of the Federal National Mortgage Association, are supported by the
discretionary authority of the U.S. Government to purchase the agency's
obligations; still others, such as those of the Student Loan Marketing
Association, are supported only by the credit of the instrumentality. No
assurance can be given that the U.S. Government would provide financial
support to U.S. Government-sponsored instrumentalities if it is not obligated
to do so by law.
MONEY MARKET INSTRUMENTS
The Funds may invest from time to time in "money market instruments," a term
that includes, among other things, bank obligations, commercial paper and
corporate bonds with remaining maturities of 397 days or less.
Bank obligations include bankers' acceptances, negotiable certificates of
deposit and non-negotiable time deposits, including U.S. dollar-denominated
instruments issued or supported by the credit of U.S. or
32
<PAGE>
foreign banks or savings institutions. Bank obligations also include
obligations of foreign banks or foreign branches of U.S. banks. Although the
Funds will invest in obligations of foreign banks or foreign branches of U.S.
banks only where the Advisor deems the instrument to present minimal credit
risks, such investments nevertheless entail risks that are different from
those of investments in domestic obligations of U.S. banks due to differences
in political, regulatory and economic systems and conditions. All investments
in bank obligations are limited to the obligations of financial institutions
having more than $1 billion in total assets at the time of purchase.
Investments by a Fund in taxable commercial paper will consist of issues
that are rated A-1 or better by S&P, Prime-1 by Moody's or the equivalent
rating of another NRSRO. Commercial paper may include variable and floating
rate instruments.
STAND-BY COMMITMENTS
Each Fund may acquire stand-by commitments under which a dealer agrees to
purchase certain Municipal Obligations at the Fund's option at a price equal
to amortized cost plus interest. These commitments will be used only to assist
in maintaining the liquidity of a Fund and not for trading purposes.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS
Each Fund may purchase securities on a "when-issued" basis and may purchase
or sell securities on a "forward commitment" basis. These transactions, which
involve a commitment by a Fund to purchase or sell particular securities with
payment and delivery taking place at a future date (perhaps one or two months
later), permit the Fund to lock in a price or yield on a security it intends
to purchase, regardless of future changes in interest rates. When-issued and
forward commitment transactions involve the risk, however, that the yield or
price obtained in a transaction may be less favorable than the yield (and
therefore the value of the security) available in the market when the
securities delivery takes place. A Fund's forward commitments and when-issued
purchases are not expected to exceed 25% of the value of its total assets
absent unusual market conditions. Because a Fund is required to set aside cash
or liquid high grade debt obligations to satisfy its purchase commitments, the
Fund's liquidity and ability to manage its portfolio might be affected during
periods in which its commitments exceed 25% of the value of its assets.
Neither Fund intends to engage in when-issued purchases and forward
commitments for speculative purposes.
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements under which it buys a
security and obtains a simultaneous commitment from the seller to repurchase
the security at a specified time and price. The seller must maintain with a
Fund's custodian collateral equal to at least 100% of the repurchase price
including accrued interest as monitored daily by the Advisor. If the seller
under the repurchase agreement defaults, a Fund may incur a loss if the value
of the collateral securing the repurchase agreement has declined and may incur
disposition costs in connection with liquidating the collateral. If bankruptcy
proceedings are commenced with respect to the seller, liquidation of the
collateral by a Fund may be delayed or limited.
33
<PAGE>
REVERSE REPURCHASE AGREEMENTS
Each Fund may borrow money for temporary purposes by entering into
transactions called reverse repurchase agreements. Under these agreements a
Fund sells portfolio securities to financial institutions (such as banks and
broker-dealers) and agrees to buy them back later at an agreed upon time and
price. When a Fund enters into a reverse repurchase agreement, it places in a
separate custodial account cash or liquid assets that have a value equal to or
greater than the repurchase price. The account is then continuously monitored
by the Advisor to make sure that an appropriate value is maintained. Reverse
repurchase agreements involve the risk that the value of portfolio securities
a Fund relinquishes may decline below the price the Fund must pay when the
transaction closes. A Fund will only enter into reverse repurchase agreements
to avoid the need to sell portfolio securities to meet redemption requests
during unfavorable market conditions. As reverse repurchase agreements are
deemed to be borrowings by the SEC, each Fund is required to maintain
continuous asset coverage of 300%. Should the value of a Fund's assets decline
to below 300% of borrowings, a Fund may be required to sell portfolio
securities within three days to reduce the Fund's debt and restore 300% asset
coverage.
SECURITIES ISSUED BY OTHER INVESTMENT COMPANIES
Each Fund may invest in securities issued by other investment companies
which invest in high quality, short-term taxable or tax-exempt instruments and
which determine their net asset value per share on the amortized cost or
penny-rounding method. Such securities may be acquired by the Funds within the
limits prescribed by the 1940 Act. Income derived by a Fund from the
acquisition of shares of another investment company which invests in taxable
instruments will be, when paid by the Fund as dividends to shareowners,
subject to federal income taxes. Each Fund currently intends to limit its
investments so that, as determined immediately after a purchase is made: (a)
not more than 5% of the value of its total assets will be invested in the
securities of any one investment company; (b) not more than 10% of the value
of its total assets will be invested in the aggregate in securities of
investment companies as a group; (c) not more than 3% of the outstanding
voting stock of any one investment company will be owned by a Fund; and (d)
not more than 10% of the outstanding voting stock of any one investment
company will be owned in the aggregate by a Fund and other investment
companies advised by the Advisor, or any affiliate of Commerce Bancshares,
Inc. As a shareowner of another investment company, a Fund would bear, along
with other shareowners, its pro rata portion of the expenses of such other
investment company, including advisory fees. These expenses would be in
addition to the advisory and other expenses that a Fund bears directly in
connection with its own operations and may represent a duplication of fees to
shareowners of a Fund.
ILLIQUID SECURITIES
Each Fund may invest up to 15% of the value of its net assets in illiquid
securities, including securities having legal or contractual restrictions on
resale or no readily available market (including repurchase agreements,
variable and floating rate instruments and time deposits with
notice/termination dates in excess of seven days, interest rate and currency
swaps and certain securities which are subject to trading restrictions because
they are not registered under the Securities Act of 1933 (the "1933 Act")).
If otherwise consistent with its investment objective and policies, each
Fund may purchase commercial paper issued pursuant to Section 4(2) of the 1933
Act and securities that are not registered under the 1933 Act but can be sold
to "qualified institutional buyers" in accordance with Rule 144A
34
<PAGE>
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 portfolio
securities to broker/dealers and other institutional investors pursuant to
agreements requiring that the loans be continuously secured by collateral
equal at all times in value to at least the market value of the securities
loaned. Such loans will not be made if, as a result, the aggregate of all
outstanding loans exceeds 33 1/3% of the value of the Fund's total assets
(including the value of the collateral received for the loan). There may be
risks of delay in receiving additional collateral or in recovering the
securities loaned or even a loss of rights in the collateral should the
borrower of the securities fail financially. However, loans are made only to
borrowers deemed by the Advisor to be of good standing and when, in its
judgment, the income to be earned 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 or to various securities indices. Each Fund may also
invest in futures contracts and options on futures, index futures contracts or
interest rate futures contracts, as applicable, for hedging purposes or to
seek to increase total return. A Fund may not purchase or sell futures
contracts or options on futures contracts to increase total return unless
immediately after any such transaction the aggregate amount of premiums paid
for put options and the amount of margin deposits on its existing futures
positions do not exceed 5% of the total assets of the Fund. Purchasing options
is a specialized investment technique that may entail the risk of a complete
loss of the amounts paid as premiums to the writer of the option.
Writing a covered call option means that a Fund owns or has the right to
acquire the underlying security subject to call at the stated exercise price
at all times during the option period. Writing a secured put option means that
a Fund maintains in a segregated account with its custodian cash or liquid
assets in an amount not less than the exercise price of the option at all
times during the option period. In order to close out these types of option
positions, a Fund will be required to enter into a "closing purchase
transaction"--the purchase of a call or put option (depending upon the
position being closed out) on the same security with the same exercise price
and expiration date as the option that it previously wrote. The aggregate
value of securities subject to options written by a Fund will not exceed 5% of
its total assets.
By writing a covered call option, a Fund forgoes the opportunity to profit
from an increase in the market price of the underlying security above the
exercise price except insofar as the premium represents such a profit, and it
is not able to sell the underlying security until the option expires or is
exercised or the Fund effects a closing purchase transaction by purchasing an
option of the same series. If a Fund writes a secured put option, it assumes
the risk of loss should the market value of the underlying security decline
below the exercise price of the option. The use of covered call and secured
put options will not be a primary investment technique of either Fund, and
they are expected to be used infrequently. If the Advisor is incorrect in its
forecast for the underlying security or other factors when writing the
foregoing
35
<PAGE>
options, a Fund would be in a worse position than it would have been had the
foregoing investment techniques not been used.
In contrast to an option on a particular security, an option on an index
provides the holder with the right to make or receive a cash settlement upon
exercise of the option. The amount of this settlement will be equal to the
difference between the closing price of the index at the time of exercise and
the exercise price of the option expressed in dollars, times a specified
multiple.
To enter into a futures contract, a Fund must make a deposit of initial
margin with its custodian in a segregated account in the name of its futures
broker. Subsequent payments to or from the broker, called variation margin,
will be made on a daily basis as the price of the underlying security or index
fluctuates, making the long and short positions in the futures contracts more
or less valuable.
The risks related to the use of options and futures contracts include: (i)
the correlation between movements in the market price of the portfolio
investments (held or intended for purchase) being hedged and in the price of
the futures contract or option may be imperfect; (ii) possible lack of a
liquid secondary market for closing out options or futures positions; (iii)
the need for additional portfolio management skills and techniques; and (iv)
losses due to unanticipated market movements. Successful use of options and
futures by a Fund is subject to the Advisor's ability to correctly predict
movements in the direction of stock prices, interest rates and other economic
factors. For example, if a Fund uses futures contracts as a hedge against the
possibility of a decline in the market adversely affecting securities held by
it and securities prices increase instead, the Fund will lose part or all of
the benefit of the increased value of its securities which it has hedged
because it will have approximately equal offsetting losses in its futures
positions. The risk of loss in trading futures contracts in some strategies
can be potentially unlimited, due both to the low margin deposits required,
and the extremely high degree of leverage involved in futures pricing. As a
result, a relatively small price movement in a futures contract may result in
immediate and substantial loss or gain to the investor. Thus, a purchase or
sale of a futures contract may result in losses or gains in excess of the
amount invested in the contract.
For additional information and a description of the risks relating to option
and futures contracts trading practices, see the Statement of Additional
Information.
PORTFOLIO TURNOVER
Each Fund may sell a portfolio investment soon after its acquisition if the
Advisor believes that such a disposition is consistent with attaining the
Fund's investment objective. Fund investments may be sold for a variety of
reasons, such as a more favorable investment opportunity or other
circumstances bearing on the desirability of continuing to hold such
investments. See "Financial Highlights" above for historical portfolio
turnover information for the Funds.
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.
36
<PAGE>
Not to be used for Individual Retirement Accounts-- For an IRA application,
call the Transfer Agent at 1-800-995-6365
Account # ______________________________
Order # ________________________________
commerce funds(TM)
ACCOUNT APPLICATION FORM (CB5999)
- --------------------------------------------------------------------------------
THIS ACCOUNT
APPLICATION FORM The Commerce Funds c/o Shareowner Services P.O. Box
SHOULD BE 419524 Kansas City, MO 64141-6525
FORWARDED PROMPTLY
TO: For additional information call 1-800-995-6365
Date: ___________
- --------------------------------------------------------------------------------
1. ACCOUNT REGISTRATION
Please Print
INDIVIDUAL
--------------------------------------- ---------------
First Name Initial Last Name (Birthdate) SS# or Tax ID#
JOINT TENANTS
The account will be registered as "Joint Tenants with
Right of Survivorship" unless otherwise specified.
--------------------------------------- ---------------
First Name Initial Last Name (Birthdate) SS# or Tax ID#
--------------------------------------- ---------------
First Name Initial Last Name (Birthdate) SS# or Tax ID#
GIFT TO MINORS
---------------------------------------------------------
Custodian's Name (Only one can be named)
--------------------------------------- ---------------
Minor's Name (Only one) SS#
Under the __ (State of Residence) Uniform Gift to
Minors Act
ADDITIONAL DOCUMENTATION
CORPORATION, TRUST, OR OTHER ENTITY
MAY BE REQUIRED --------------------------------------- ---------------
Name of Corporation, Trust or other Non-Person Entity
Tax ID#
---------------------------------------------------------
Attention
---------------------------------------------------------
Date of Trust Instrument:Name of Beneficiary (If to be
included in the registration)
---------------------------------------------------------
Name(s) of Trustee(s) (If to be included in the
registration)
- --------------------------------------------------------------------------------
( )
2. MAILING ADDRESS ----------------------------------- -------------------
Street Daytime Phone
---------------------------------------------------------
City State Zip Code
<PAGE>
- -------------------------------------------------------------------------------
3. TO PURCHASE SHARES Check appropriate boxes:
<TABLE>
<S> <C> <C> <C> <C>
[_]Short Term $_______ [_]Mid Cap $_______
$1000 MINIMUM Government Amount #339 Amount
(EXCEPT $250 #336
MINIMUM FOR [_]Bond $_______ [_]International$_______
SUBSEQUENT #333 Amount Equity Amount
INVESTMENTS AND #340
$50 FOR SEP AND [_]Balanced
SIMPLE IRAS (Employee Benefit [_]National
Plans only) Tax-Free
#338 $_______ Intermediate
Amount Bond $_______
#334 Amount
[_]Growth $_______
#337 Amount [_]Missouri $_______
Tax-Free
Intermediate
Bond
Amount
[_]Growth and $_______ #335
Income
#346 Amount
[_]ILA Prime $__
Obligations Amount
</TABLE>
[_] 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. _________
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6. LETTER OF INTENT See "How To Buy Shares" in the Prospectus
Although not obligated to do so, it is the
undersigned's intention to invest, over a 13-month
period from this date, in shares of a Fund alone or in
combination with shares of any other Fund, on which a
sales charge was paid, described in the Prospectus
which qualify for a quantity discount as described in
the accompanying Prospectus, in an amount that will
equal or exceed:
[_] $100,000 [_] $250,000 [_] $500,000 [_] $1,000,000
I/we agree to the Letter of Intent and Escrow Agreement
described in the accompanying Prospectus under "How to
Buy Shares--Letter of Intent" and incorporated by
reference herein.
<PAGE>
- -------------------------------------------------------------------------------
7. AUTOMATIC See "What is Dollar Cost Averaging and How Can I
INVESTMENT PLAN Implement It?" in the Prospectus
(ATTACH VOIDED
CHECK OR DEPOSIT Beginning on the day of these months: J F M A M J
SLIP) J A S O N D (circle all months that apply), I/We
authorize State Street Bank (the custodian for a Fund)
to debit the amount requested below from my/our bank
account for investment in a Fund. I/We understand that
my/our participation in the Automatic Investment Plan
is subject to the terms and conditions of such plan as
amended from time to time.
--------------------------------------------------------
Amount of each monthly investment (minimum $100)
Name of Fund
--------------------------------------------------------
Amount of each monthly investment (minimum $100)
Name of Fund
--------------------------------------------------------
Authorized Signature (as shown on bank records)
--------------------------------------------------------
Authorized Signature (if joint bank account both sign)
- -------------------------------------------------------------------------------
8. TELEPHONE PURCHASE/ See "How To Buy Shares" or "How To Sell Shares" in the
REDEMPTION 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 See "Can I Have Exchanges Made Automatically?" in the
Prospectus
(ATTACH VOIDED CHECK OR DEPOSIT SLIP)
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 .
- -------------------------------------------------------------------------------
[_] Check the box if you would like duplicate
11. DUPLICATE MAILINGS confirmations/statements sent to another address:
--------------------------------------------------
Name
--------------------------------------------------
Street Address City State Zip
<PAGE>
- -------------------------------------------------------------------------------
Minimum account balance must be $5,000. Withdrawal
minimum is $100.
12. AUTOMATIC WITHDRAWAL PLAN
Check One: [_] Monthly [_] Quarterly [_] Semi-
Annual [_] Annual
Please make payments via (check one) [_] check [_] ACH
(Bank must be ACH affiliated. Attach voided check).
Payments made via check are withdrawn from your account
on or about the 1st or 15th of a month for monthly
withdrawals or the 15th of the month for
quarterly/semi-annual/annual withdrawals. (I understand
that I may change the date of redemption, via ACH, or
the amount at any time in writing to the Fund at the
address stated above.)
If withdrawal payments are to be made via ACH (attach
voided check/deposit slip)
Please withdraw $ from my account on the
of the month.
Complete this section ONLY if check is to be made
payable to person(s) other than the registered owner.
SIGNATURE GUARANTEE required. (See Section 13 of this
Form.)
--------------------------------------------------------
Name of check recipient Address CityStateZip
- -------------------------------------------------------------------------------
13. TAXPAYER ID CERTIFICATION AND SIGNATURE AUTHORIZATION
1) The number shown on this Account Application Form is
my/our correct Taxpayer Identification number, and 2)
I/we am/are not subject to backup withholding because
(a) I/we am/are exempt from backup withholding, or (b)
I/we have not been notified by the Internal Revenue
Service (IRS) that I/we am/are subject to backup
withholding as a result of a failure to report all
interest or dividends, or (c) the IRS has notified
me/us that I/we am/are no longer subject to backup
withholding.
You must cross out item (2) above if you have been
notified by the IRS that you are currently subject to
federal backup withholding because of under reporting
interest or dividends on your federal tax return or if
you have not been notified by the IRS that you are no
longer subject to backup withholding.
I/we further certify that I/we am/are neither a citizen
nor a resident of the United States for the purpose of
the Internal Revenue Code. I/we am/are a resident of ___
NOTE: FAILURE TO COMPLETE THIS SECTION MAY RESULT IN
BACKUP WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO
YOU.
By checking only the appropriate box and signing below,
I/we certify under penalties of perjury that:
[_] I/we do not have a taxpayer identification
number, but I/we have applied for or intend to
apply for one. I/we understand that the required
31% withholding may apply before I/we provide such
number and certifications, which should be provided
within 60 days.
or [_] I/we am/are an exempt recipient.
or [_] I/we am/are neither a citizen nor a resident of
the United States for the purpose of the Internal
Revenue Code. I/we am/are a resident of ________ .
Permanent Foreign Address:______________________________
________________________________________________________
________________________________________________________
---------------------------------------------------------
By the execution of this Account Application Form, the
undersigned represents and warrants that it has the
full right, power and authority to make the investment
applied for pursuant to this Form and is acting for
itself or in some fiduciary capacity in making such
investment.
THE UNDERSIGNED AFFIRMS THAT I/WE HAVE RECEIVED A
CURRENT PROSPECTUS FOR THE FUND AND HAS REVIEWED THE
SAME.
Sign Here:
--------------------------------------------------------
Signature Name (print) and Title
--------------------------------------------------------
Signature Name (print) and Title
SIGNATURE GUARANTEE REQUIRED ONLY IF A SPECIAL
PAYEE/ADDRESS IS DESIGNATED UNDER ITEM #'S 4 AND 12.
SEE "HOW TO SELL SHARES" IN THE PROSPECTUS.
--------------------------------------------------------
SIGNATURE GUARANTEE (IF REQUIRED)
<PAGE>
- -------------------------------------------------------------------------------
14. FOR DEALER ONLY Investment dealer's signature is required for Automatic
Withdrawal Plan or Letter of Intent. If an Automatic
Withdrawal Plan is being opened, we believe that the
amount to be withdrawn is reasonable in light of the
investor's circumstances and we recommend establishment
of the account.
--------------------------------------------------------
Branch Office Location Branch Number/Branch Phone
--------------------------------------------------------
Reg. Rep. Number Reg. Rep.'s Name
--------------------------------------------------------
Authorized Signature State Zip
THE COMMERCE FUNDS DISCLOSURE STATEMENT (YOU MUST SIGN)
The account owner acknowledges that the account owner has read 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., its 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. serves as the investment advisor to the Funds and
receives compensation for such services as disclosed in the current
prospectus
. sales charges may apply.
Dated: _________________ --------------------------
Signature
--------------------------
Signature
<PAGE>
LOGO
commerce funds(TM)
CB 5999
<PAGE>
THE COMMERCE FUNDS
Service Shares of the
Short-Term Government Fund
Bond Fund
Balanced Fund
Growth Fund
MidCap Fund
Growth and Income Fund
International Equity Fund
CROSS REFERENCE SHEET
---------------------
Pursuant to Rule 495(a)
under the Securities Act of 1933
Form N-lA Part A Item Number Prospectus Caption
- ---------------------------- ------------------
l. 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>
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 2, 1998
Service Shares
<PAGE>
HOW CAN I CONTACT THE COMMERCE FUNDS?
For assistance or to obtain additional information about The Commerce Funds,
you may:
. Contact a registered investment representative at selected
broker/dealers or Commerce Bank branches (call 1-800-305-2140 if you
need assistance in contacting your representative); or
. Contact your Company representative for specific information
regarding your retirement plan; or
. Contact your account administrator for specific information
regarding your Investment Management Group account; or
. Write to The Commerce Funds at:
The Commerce Funds
P.O. Box 419525
Kansas City, MO 64141-6525; or
. Call The Commerce Funds' transfer agent directly at 1-800-995-6365;
or
. Access The Commerce Funds' Website at WWW.COMMERCEBANK.COM.
TABLE OF CONTENTS
<TABLE>
<S> <C>
SUMMARY OF EXPENSES................................................... 3
FINANCIAL HIGHLIGHTS.................................................. 5
INVESTMENT OBJECTIVES AND POLICIES.................................... 12
ADDITIONAL RISK CONSIDERATIONS........................................ 21
INVESTMENT RESTRICTIONS............................................... 23
SHAREOWNER GUIDE...................................................... 24
HOW CAN I CONTACT THE COMMERCE FUNDS?............................... 24
HOW TO BUY SERVICE SHARES........................................... 24
HOW TO SELL SERVICE SHARES.......................................... 30
DIVIDEND AND DISTRIBUTION POLICIES.................................. 33
SHAREOWNER FEATURES AND PRIVILEGES.................................. 34
THE BUSINESS OF THE COMMERCE FUNDS.................................... 38
DISTRIBUTION PLAN..................................................... 41
SHAREHOLDER ADMINISTRATIVE SERVICES PLAN.............................. 42
EXPENSES.............................................................. 42
TAX INFORMATION....................................................... 43
HOW PERFORMANCE IS MEASURED........................................... 44
OTHER INFORMATION..................................................... 45
OTHER INVESTMENT PRACTICES............................................ 47
APPLICATION........................................................... Back Page
</TABLE>
<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 and cash equivalents.
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 2, 1998) 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 419525,
Kansas City, MO 64141-6525 or by calling 1-800-995-6365. The Prospectus and
Statement of Additional Information are also available for reference, along
with other related materials, on the SEC Website (http://www.sec.gov).
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED,
ENDORSED OR OTHERWISE SUPPORTED BY, COMMERCE BANK, N.A., ITS 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, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
MARCH 2, 1998
<PAGE>
MANAGEMENT OF THE FUNDS
Commerce Bank, N.A. serves as investment advisor to the Funds (the
"Advisor"). Rowe Price-Fleming International, Inc. serves as sub-investment
advisor to the International Equity Fund (the "Sub-Advisor").
WHO MAY INVEST IN SERVICE SHARES
This Prospectus describes the Service Shares in each Fund. Service Shares
are offered primarily to:
. individuals, corporations or other entities, purchasing 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;
and
. financial planners and their clients.
The Commerce Funds is also authorized to issue an additional class of
shares, Institutional Shares, in each of the Funds. Institutional Shares are
offered in a separate prospectus, primarily to:
. investors maintaining qualified accounts at bank and trust institutions,
including institutions affiliated with Commerce Bancshares, Inc. and its
subsidiaries;
. participants in employer-sponsored defined contribution plans;
. any investor who was a shareholder in The Commerce Funds prior to January
1, 1997;
. 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; and
. financial planners and their clients.
2
<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(3)........ None None None None None None None
Redemption Fees........ None None None None None None None
Exchange Fees(4)....... None None None None None None None
ANNUAL FUND OPERATING
EXPENSES
(as a percentage of
average daily net
assets)
Management Fees (after
fee waivers)(5)....... 0.30% 0.50% 0.66% 0.75% 0.75% 0.75% 0.99%
Rule 12b-1 Fees........ 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25%
Other Expenses (after
expense
reimbursements)(6).... 0.38% 0.35% 0.47% 0.45% 0.36% 0.48% 0.66%
---- ---- ---- ---- ---- ---- ----
Total Fund Operating
Expenses (after fee
waivers and expense
reimbursements)(6).... 0.93% 1.10% 1.38% 1.45% 1.36% 1.48% 1.90%
==== ==== ==== ==== ==== ==== ====
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 $ 50 $ 54
Three Years............ $ 49 $ 69 $ 77 $ 79 $ 77 $ 80 $ 93
Five Years............. $ 70 $ 93 $108 $111 $107 $113 $134
Ten Years.............. $132 $164 $195 $202 $193 $206 $249
</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) A deferred sales charge of 1.00% is assessed on certain redemptions of
Service Shares that are purchased with no initial sales charge as part of
an investment of $1,000,000 or more. See "Shareowner Guide--How are
Service Shares Priced?"
(4) 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.
(5) 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.
(6) In addition to the fee waivers referred to in note 5, the Advisor intends
to voluntarily reimburse expenses, excluding interest, taxes and
extraordinary 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 annual expense
ratios of not more than
3
<PAGE>
0.93%, 1.13%, 1.38%, 1.45%, 1.38% and 1.97%, respectively. For the current
fiscal year, without such fee waivers and expense reimbursements, "Other
Expenses" are expected to be 0.50% and 0.59% and "Total Fund Operating
Expenses" are expected to be 1.75% and 2.34% of the average daily net
assets of the Balanced and International Equity Funds, respectively. For
the last fiscal year, without the fee waivers and expense reimbursements
described above, Other Expenses would be 0.61%, 0.53%, 1.27% and 0.73% and
"Total Fund Operating Expenses" would be 1.36%, 1.78%, 2.27% and 2.48% of
the average daily net assets of the Short-Term Government, Balanced, Growth
and Income and International Equity Funds, respectively. "Other Expenses"
includes shareholder servicing fees of up to 0.25% annualized, of the
average daily net asset value of Service Shares.
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 Short-Term
Government, Bond, Balanced, Growth and Income, Growth, MidCap and
International Equity Funds is based on the expenses incurred by those Funds
during the last fiscal year, except that the International Equity and Balanced
Funds' expenses shown in the expense table have been restated to reflect
expenses expected to be incurred by such Funds in 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 1-800-995-6365. 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, its
affiliates or any other institutions directly to their customer accounts for
services related to an investment in the Funds are in addition to and not
reflected in the fees and expenses described above. If you purchase or redeem
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" in 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 SHOWN. 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.
- -------------------------------------------------------------------------------
4
<PAGE>
FINANCIAL HIGHLIGHTS
The financial information presented below has been derived from the
financial statements incorporated by reference into the Statement of
Additional Information and has been audited by KPMG Peat Marwick LLP, the
Funds' independent accountants. This financial information should be read
together with those financial statements. Information in the financial
highlights presented below for the fiscal year ended October 31, 1997 reflects
investment results of both Institutional and Service Shares of the Funds,
except for the Growth and Income Fund. (Service Shares were first offered on
January 2, 1997.) Further information about the performance of the Funds is
available in the Funds' annual shareholder reports. Both the Statement of
Additional Information and the annual shareholder reports may be obtained free
of charge by calling 1-800-995-6365.
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 ASSET OF NET INVESTMENT
NET ASSET GAIN FROM NET VALUE, EXPENSES INCOME TO
VALUE, NET (LOSS) ON FROM NET REALIZED END TO AVERAGE AVERAGE PORTFOLIO
BEGINNING INVESTMENT INVEST- INVESTMENT GAIN 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 Year Ended October 31, 1997
Institutional
Shares $18.43 $1.11 $ 0.04 $(1.11) -- $18.47 6.45% 0.68% 6.04% 36%
Service
Shares(a) 18.37 0.92 0.10 (0.92) -- 18.47 5.81 0.93(d) 5.64(d) 36
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
NET RATIO OF NET
ASSETS AT OF INVESTMENT
END EXPENSES INCOME TO
OF PERIOD TO AVERAGE AVERAGE
(IN 000'S) NET ASSETS NET ASSETS
---------- ---------- ----------
<S> <C> <C> <C>
For the Year Ended October 31, 1997
Institutional
Shares $48,840 1.11% 5.61%
Service
Shares(a) 450 1.36(d) 5.21(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 shares were first offered to the public on January 2, 1997.
(b) Includes the balancing effect of calculating per share amounts.
(c) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no
sales charges. Total return would be reduced if sales charges were taken
into account.
(d) Annualized.
5
<PAGE>
THE COMMERCE FUNDS
BOND 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 ASSET OF NET INVESTMENT
NET ASSET UNREALIZED VALUE, EXPENSES INCOME
VALUE, NET GAIN FROM NET FROM NET END TO AVERAGE TO AVERAGE PORTFOLIO
BEGINNING INVESTMENT (LOSS) ON INVESTMENT REALIZED GAIN OF TOTAL NET NET TURNOVER
OF PERIOD INCOME INVESTMENTS(B) INCOME ON INVESTMENTS PERIOD RETURN(C) ASSETS ASSETS RATE
--------- ---------- -------------- ---------- -------------- ------ --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
For the Year Ended October 31, 1997
Institutional
Shares $19.07 $1.17 $ 0.39 $(1.18) $(0.02) $19.43 8.50% 0.85% 6.14% 19%
Service
Shares(a) 19.00 0.94 0.43 (0.94) -- 19.43 7.48 1.10(d) 5.67(d) 19
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 Year Ended October 31, 1997
Institutional
Shares $217,803
Service
Shares(a) 739
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 shares were first offered to the public on January 2, 1997.
(b) Includes the balancing effect of calculating per share amounts.
(c) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no sales
charges. Total return would be reduced if sales charges were taken into
account.
(d) Annualized.
6
<PAGE>
THE COMMERCE FUNDS
BALANCED FUND
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
INCOME FROM
INVESTMENT DISTRIBUTIONS TO
OPERATIONS SHAREHOLDERS
------------------ -----------------
RATIO
OF NET
NET RATIO INVEST-
REALIZED OF NET MENT
AND FROM NET NET EXPENSES INCOME
NET ASSET NET UNREALIZED FROM NET REALIZED ASSET TO TO
VALUE, INVEST- GAIN ON INVEST- GAIN ON VALUE, AVERAGE AVERAGE PORTFOLIO AVERAGE
BEGINNING MENT INVEST- MENT INVEST- END OF TOTAL NET NET TURNOVER COMMISSION
OF PERIOD INCOME MENTS(B) INCOME MENTS PERIOD RETURN(C) ASSETS ASSETS RATE RATE
--------- ------- ---------- -------- -------- ------ --------- -------- ------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
For the Year Ended October 31, 1997
Institutional
Shares $24.00 $0.59 $3.93 $(0.59) $(1.26) $26.67 19.92% 1.13% 2.44% 31% $0.0604
Service
Shares(a) 23.25 0.40 3.42 (0.41) -- 26.66 16.53 1.38(d) 2.13(d) 31 0.0604
For the Year Ended October 31, 1996
Institutional
Shares 22.10 0.54 2.56 (0.54) (0.66) 24.00 14.45 1.13 2.47 58 0.0764
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 1.13(d) 3.28(d) 59 --
<CAPTION>
RATIOS ASSUMING
NO WAIVER OF
INVESTMENT
ADVISORY
FEES OR EXPENSE
REIMBURSEMENTS
-------------------
RATIO
OF NET
INVEST-
RATIO OF MENT
NET EXPENSES INCOME
ASSETS TO TO
AT END AVERAGE AVERAGE
OF PERIOD NET NET
(IN 000'S) ASSETS ASSETS
---------- --------- ---------
<S> <C> <C> <C>
For the Year Ended October 31, 1997
Institutional
Shares $105,782 1.53% 2.04%
Service
Shares(a) 1,219 1.78(d) 1.73(d)
For the Year Ended October 31, 1996
Institutional
Shares 69,880 1.45 2.15
For the Period December 12, 1994 (commencement of operations) through October 31, 1995
Institutional
Shares 48,329 1.45(d) 2.96(d)
</TABLE>
- --------
(a) Service shares were first offered to the public on January 2, 1997.
(b) Includes the balancing effect of calculating per share amounts.
(c) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no sales
charges. Total return would be reduced if sales charges were taken into
account.
(d) Annualized.
7
<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 RATIO
REALIZED NET RATIO OF NET
AND ASSET OF NET INVESTMENT
NET ASSET UNREALIZED FROM NET VALUE, EXPENSES INCOME TO AVERAGE
VALUE, NET GAIN ON FROM NET REALIZED END TO AVERAGE AVERAGE PORTFOLIO COMMIS-
BEGINNING INVESTMENT INVEST- INVESTMENT GAIN ON OF TOTAL NET NET TURNOVER SION
OF PERIOD INCOME MENTS(B) INCOME INVESTMENTS PERIOD RETURN(C) ASSETS ASSETS RATE RATE
--------- ---------- ---------- ---------- ----------- ------ --------- ---------- ---------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
For the Period March 3, 1997(a) through October 31, 1997
Service Shares $18.00 $0.12 $3.80 $(0.11) -- $21.81 21.81% 1.45%(d) 1.02%(d) 5% $0.0774
<CAPTION>
RATIOS ASSUMING
NO EXPENSE
REIMBURSEMENTS
-----------------------
RATIO RATIO
NET OF NET OF NET
ASSETS AT EXPENSES INVESTMENT
END TO AVERAGE LOSS TO
OF PERIOD NET AVERAGE
(IN 000'S) ASSETS NET ASSETS
---------- ----------- -----------
<S> <C> <C> <C>
For the Period March 3, 1997(a) through October 31, 1997
Service Shares $2,588 2.27%(d) 0.20%(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.
8
<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
------------------------- -------------------------
RATIO
NET NET RATIO OF NET
REALIZED ASSET OF NET INVESTMENT
NET ASSET AND VALUE, EXPENSES INCOME
VALUE, NET UNREALIZED FROM NET FROM NET END TO AVERAGE TO AVERAGE PORTFOLIO
BEGINNING INVESTMENT GAIN ON INVESTMENT REALIZED GAIN OF TOTAL NET NET TURNOVER
OF PERIOD INCOME INVESTMENTS(B) INCOME ON INVESTMENTS PERIOD RETURN(C) ASSETS ASSETS RATE
--------- ---------- -------------- ---------- -------------- ------ --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
For the Year Ended October 31, 1997
Institutional
Shares $28.95 $0.19 $7.51 $(0.19) $(1.92) $34.54 28.12% 1.11% 0.60% 32%
Service
Shares(a) 28.26 0.09 6.25 (0.10) -- 34.50 22.47 1.36(d) 0.35(d) 32
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 October 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
AVERAGE END
COMMISSION OF PERIOD
RATE (IN 000'S)
---------- ----------
<S> <C> <C>
For the Year Ended October 31, 1997
Institutional
Shares $0.0556 $343,773
Service
Shares(a) 0.0556 5,758
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 shares were first offered to the public on January 2, 1997.
(b) Includes the balancing effect of calculating per share amounts.
(c) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no sales
charges. Total return would be reduced if sales charges were taken into
account.
(d) Annualized.
9
<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
------------------------- -------------------------
RATIO
NET NET RATIO OF NET
REALIZED ASSET OF NET INVESTMENT
NET ASSET AND VALUE, EXPENSES LOSS
VALUE, NET UNREALIZED FROM NET FROM NET END TO AVERAGE TO AVERAGE PORTFOLIO
BEGINNING INVESTMENT GAIN ON INVESTMENT REALIZED GAIN OF TOTAL NET NET TURNOVER
OF PERIOD LOSS INVESTMENTS(B) INCOME ON INVESTMENTS PERIOD RETURN(C) ASSETS ASSETS RATE
--------- ---------- -------------- ---------- -------------- ------ --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
For the Year Ended October 31, 1997
Institutional
Shares $28.06 $(0.13) $5.38 -- $(0.29) $33.02 18.88% 1.23% (0.61)% 89%
Service
Shares(a) 28.64 (0.11) 4.41 -- -- 32.94 15.01 1.48(d) (0.95)(d) 89
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
COMMISSION OF PERIOD
RATE (IN 000'S)
---------- ----------
<S> <C> <C>
For the Year Ended October 31, 1997
Institutional
Shares $0.0608 $112,442
Service
Shares(a) 0.0608 658
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 shares were first offered to the public on January 2, 1997.
(b) Includes the balancing effect of calculating per share amounts.
(c) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no sales
charges. Total return would be reduced if sales charges were taken into
account.
(d) Annualized.
10
<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 RATIO
REALIZED UNREALIZED RATIO OF NET
AND LOSS ON NET OF NET INVEST-
UNREALIZED FOREIGN ASSET EXPENSES MENT
NET ASSET NET GAIN CURRENCY FROM NET FROM NET VALUE, TO INCOME TO
VALUE, INVEST- (LOSS) ON RELATED INVEST- REALIZED END AVERAGE AVERAGE PORTFOLIO
BEGINNING MENT INVEST- TRANS- MENT GAIN ON OF TOTAL NET NET TURNOVER
OF PERIOD INCOME MENTS(B) ACTIONS(B) INCOME INVESTMENTS PERIOD RETURN(C) ASSETS ASSETS RATE
--------- ------- ---------- ---------- -------- ----------- ------ --------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
For the Year Ended October 31, 1997
Institutional
Shares $20.96 $0.06 $2.07 $(0.65) $(0.10) $(0.24) $22.10 7.15% 1.72% 0.35% 22%
Service
Shares(a) 21.70 0.01 0.51 (0.16) -- -- 22.06 1.66 1.97(d) 0.14(d) 22
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 0.74 21
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) 1.06(d) 25
<CAPTION>
RATIOS ASSUMING
NO WAIVER OF
INVESTMENT
ADVISORY
FEES OR EXPENSE
REIMBURSEMENTS
-----------------------
RATIO
OF NET
RATIO INVEST-
NET OF MENT
AVERAGE ASSETS AT EXPENSES INCOME
COMMIS- END TO (LOSS) TO
SION OF PERIOD AVERAGE AVERAGE
RATE (IN 000'S) NET ASSETS NET ASSETS
------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
For the Year Ended October 31, 1997
Institutional
Shares $0.0007 $78,273 2.23% (0.16)%
Service
Shares(a) 0.0007 231 2.48(d) (0.37)(d)
For the Year Ended October 31, 1996
Institutional
Shares 0.0147 51,589 2.64 (0.18)
For the Period December 12, 1994 (commencement of operations) through October 31, 1995
Institutional
Shares -- 21,014 3.50(d) (0.63)(d)
</TABLE>
- --------
(a) Service shares were first offered to the public on January 2, 1997.
(b) Includes the balancing effect of calculating per share amounts.
(c) Assumes investment of the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of
the investment at the net asset value at the end of the period and no sales
charges. Total return would be reduced if sales charges were taken into
account.
(d) Annualized.
11
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives 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 objectives, policies and
restrictions of each Fund are described under "Other Investment Practices" and
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. Except as noted in the Statement of Additional Information 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."
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.
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
12
<PAGE>
value of securities not held to maturity can be expected to vary inversely to
changes in prevailing interest rates. See "Additional Risk Considerations--
Risks Associated With Fixed Income Investments." In addition, neither the U.S.
Government, nor any agency or instrumentality thereof, has guaranteed,
sponsored or approved the Fund or its shares.
Mortgage-backed securities may be subject to risks including price
volatility, liquidity and interest rate risk. The prices of such securities
may be inversely affected by changes in interest rates and prepayment of the
underlying mortgage collateral may result in a decreased rate of return. See
"Other Investment Practices--Mortgage-Related Securities."
BOND FUND
INVESTMENT OBJECTIVE
THE INVESTMENT OBJECTIVE OF THE BOND FUND IS TO SEEK TOTAL RETURN THROUGH
CURRENT INCOME AND SECONDARILY, CAPITAL APPRECIATION. THE FUND PURSUES THIS
OBJECTIVE THROUGH INVESTMENT IN A DIVERSIFIED PORTFOLIO OF INVESTMENT-GRADE
CORPORATE DEBT OBLIGATIONS AND OBLIGATIONS ISSUED OR GUARANTEED BY THE U.S.
GOVERNMENT, ITS AGENCIES OR INSTRUMENTALITIES.
INVESTMENT STRATEGY
In pursuing its investment objective, the Fund will invest, during normal
market conditions, at least 65% of its total assets in fixed income debt
securities rated at the time of purchase A- or better by Standard & Poor's
Ratings Services ("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." Asset-backed securities represent a
participation in, or are secured by or
13
<PAGE>
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." The Fund may also invest in "stripped" and
convertible securities. See "Other Investment Practices--Stripped Securities"
and "Other Investment Practices--Convertible Securities."
Additionally, up to 20% of the total assets of the Fund may be invested
directly in debt obligations of foreign issuers. These obligations may include
obligations of foreign corporations as well as investments in obligations of
foreign governments and their political sub-divisions (which will be limited
to direct government obligations and government-guaranteed securities). The
Fund is also permitted to invest up to 20% of its total assets in obligations
issued by or on behalf of states, territories and possessions of the United
States, the District of Columbia and their authorities, agencies,
instrumentalities and political subdivisions ("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."
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.
14
<PAGE>
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. See "Additional Risk Considerations--Risks Associated with Fixed
Income Investments" below.
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 U.S. issuers. 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.
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 "Investment
Strategy" under the Growth and Income, Growth and MidCap Funds 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
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
15
<PAGE>
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 a U.S. bank
or trust company evidencing ownership of underlying securities issued by a
foreign issuer. ADR prices are denominated in United States dollars while the
securities underlying an ADR are normally denominated in a foreign currency.
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).
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. issuers. See "Additional Risk Considerations--Risks Associated with
Foreign Securities and Currencies" below.
See "Short-Term Government Fund--Risks Associated with an Investment in the
Fund" above for risks associated with investments in mortgage-backed
securities and "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.
16
<PAGE>
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 that 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.
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. 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.
17
<PAGE>
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 that 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.
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. 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
18
<PAGE>
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 S&P 400 Mid-Cap Index, market liquidity as
measured in average daily trading volume, the evaluation of expected future
earnings potential versus the market and current relative market valuation,
including price-to-book, price-to-earnings and free cash flow ratios. 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 400 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.
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
19
<PAGE>
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. 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.
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,
including 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
20
<PAGE>
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
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.
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
21
<PAGE>
increase the value of a foreign currency-denominated security in terms of U.S.
dollars. An increase in foreign interest rates or a decline in the value of
the foreign currency relative to the U.S. dollar generally can be expected to
depress the value of a foreign currency-denominated security.
There are other risks and costs involved in investing in foreign securities,
which are in addition to the usual risks inherent in domestic investments.
Investment in foreign securities involves higher costs than investment in U.S.
securities, including higher transaction and custody costs as well as the
imposition of additional taxes by foreign governments. Foreign investments
also involve risks associated with the level of currency exchange rates, less
complete financial information about the issuers, less market liquidity, more
market volatility and political and economic instability. Future political and
economic developments, the possible imposition of withholding taxes, the
possible seizure or nationalization of foreign holdings, the possible
establishment of exchange controls, or the adoption of other governmental
restrictions might adversely affect an investment in foreign securities.
Additionally, foreign banks and foreign branches of domestic banks are subject
to less stringent reserve requirements, and to different accounting, auditing
and recordkeeping requirements.
The Bond and Balanced Funds may invest in foreign debt and in the securities
of foreign governments. The risks of such investments include the risk that
foreign governments may default on their obligations, may not respect the
integrity of such debt, may attempt to renegotiate the debt at a lower rate
and may not honor investments by U.S. entities or citizens.
The Balanced, Growth and Income, Growth, MidCap and International Equity
Funds may invest in ADRs, some of which may not be sponsored by the issuing
institution. A non-sponsored depository may not be required to disclose
material information that a sponsored depository would be required to provide
under its contractual relationship with the issuer. Accordingly, there may not
be a correlation between such information and the market value of such
securities.
Although a Fund may invest in securities denominated in foreign currencies,
its portfolio securities and other assets are valued in U.S. dollars. Currency
exchange rates may fluctuate significantly over short periods of time causing,
together with other factors, a Fund's net asset value to fluctuate as well.
Currency exchange rates generally are determined by the forces of supply and
demand in the foreign exchange markets and the relative merits of investments
in different countries, actual or anticipated changes in interest rates and
other complex factors, as seen from an international perspective. Currency
exchange rates also may be affected unpredictably by the intervention or the
failure to intervene by U.S. or foreign governments or central banks, or by
currency controls or political developments in the U.S. or abroad. To the
extent that a Fund's total assets, adjusted to reflect the Fund's net position
after giving effect to currency transactions, are denominated in the
currencies of foreign countries, the Fund will be more susceptible to the risk
of adverse economic and political developments within those countries. In
addition, the respective net currency positions of the International Equity
Fund may expose it to risks independent of its securities positions. Although
the net long and short foreign currency exposure of the International Equity
Fund will not exceed its total asset value, to the extent that the Fund is
fully invested in foreign securities while also maintaining currency
positions, it may be exposed to greater risk than it would have if it did not
maintain the currency positions. The Funds investing in foreign securities are
also subject to the possible imposition of exchange control regulations or
freezes on convertibility of currency.
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.
22
<PAGE>
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.
SEE "OTHER INVESTMENT PRACTICES" FOR ADDITIONAL INFORMATION ON THE
INVESTMENT POLICIES OF THE FUNDS.
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. 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.
23
<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?
For assistance or to obtain traditional information about The Commerce
Funds, you may:
. Contact a registered investment representative at selected
broker/dealers or Commerce Bank branches (call 1-800-305-2140 if you
need assistance in contacting your representative); or
. Contact your Company representative for specific information
regarding your retirement plan; or
. Contact your account administrator for specific information regarding
your Investment Management Group account; or
. Write to The Commerce Funds at:
The Commerce Funds
P.O. Box 419525
Kansas City, MO 64141-6525; or
. Call The Commerce Funds' transfer agent directly at 1-800-995-6365;
or
. Access The Commerce Funds' Website at WWW.COMMERCEBANK.COM.
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 (except SEP and SIMPLE
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., NFDS and State Street Bank and Trust Company and their
subsidiaries or affiliates, although it may differ in certain circumstances as
shown below. The minimum subsequent investment for SEP and SIMPLE IRAs is
generally $50.00.
<TABLE>
<CAPTION>
INITIAL SUBSEQUENT
INVESTMENT INVESTMENT
---------- ----------
<S> <C> <C>
Regular Account.......................................... $250 $100
Automatic Investment Feature............................. $100 $25*
Individual Retirement Accounts (including SEP, SIMPLE and
Roth IRAs), Keogh Plans................................. $100 $25*
</TABLE>
- --------
*Minimum of six bi-monthly investments within first year of Fund ownership.
24
<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") (generally 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** 1.00***
</TABLE>
- --------
* Dealer's reallowance may be changed periodically.
** There is no initial sales charge on purchases of $1,000,000 or more of
service shares, however, a contingent deferred sales charge of 1.00% will be
imposed on the lesser of the offering price or the net asset value of the
shares on the redemption date for shares redeemed within 18 months after
purchase.
*** The Distributor may pay placement fees to dealers of up to 1.00% of the
offering price on purchases of service shares of $1,000,000 or more.
25
<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***
$1,000,000 or more........................... 0.00** 0.00** 1.00***
</TABLE>
- --------
* Dealer's reallowance may be changed periodically.
** There is no initial sales charge on purchases of $1,000,000 or more of
service shares, however, a contingent deferred sales charge of 1.00% will be
imposed on the lesser of the offering price or the net asset value of the
shares on the redemption date for shares redeemed within 18 months after
purchase.
*** The Distributor may pay placement fees to dealers of up to 1.00% of the
offering price on purchases of service shares of $1,000,000 or more.
Goldman, Sachs & Co. (the "Distributor") and its affiliates 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. Subject to NASD regulations,
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;
. the Redemption Reinvestment Privilege described below;
. non-profit organizations, foundations and endowments qualified under
Section 501(c)(3) of the Code (excluding individual tax-sheltered
annuities);
. any state, county or city, or any instrumentality, department, authority
or agency thereof, prohibited by applicable laws from paying a sales
charge for the purchase of Fund shares;
. registered representatives of dealers who have entered into dealer
agreements with Goldman, Sachs & Co. to the extent permitted by such
firms;
. financial planners and their clients;
. purchases by 401(k) plan participants (and their spouses and dependent
children) who already hold Institutional Shares of The Commerce Funds in
their 401(k) Plan accounts, provided no investment advice is sought from
Commerce Bank, N.A.;
. purchases by Commerce Bank's personal clients (and their spouses and
dependent children) who maintain managed accounts with the Bank's
Investment Management Group where the purchase money consists of either
(i) cash distributions from the managed account or (ii) money outside of
the managed account and the client does not seek investment advice from
the Bank;
26
<PAGE>
. purchases by Commerce Bank's personal clients (and their spouses and
dependent children) who maintain custody accounts with the Bank's
Investment Management Group, where the shares are not held in a custody
account, provided the client does not seek investment advice from the
Bank; and
. purchases by Commerce Bank's "will file" clients (and their spouses and
dependent children) who maintain trust accounts with the Bank in which
the Bank is successor trustee, where the shares are not held in the name
of the Trust.
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.
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.
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<PAGE>
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. Any redemption made during the 13-month period will
be subtracted from the amount of the purchases in determining whether the
Letter of Intent has been completed.
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.
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<PAGE>
HOW DO I BUY SERVICE SHARES?
You may purchase Service Shares of a Fund through The Commerce Funds
Shareowner Services, an investment representative at a Commerce Bank branch or
registered investment representatives at selected broker/dealers. An
application is attached to the back of this Prospectus. 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?" above. "How Can I Contact The Commerce
Funds?" above.
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.
Investors Fiduciary Trust Company
ABA #101003621
Account #756-044-3
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?" above.
</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.
29
<PAGE>
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 (generally
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. With certain exceptions, 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:
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<PAGE>
HOW TO SELL SERVICE SHARES:
Through The Commerce Funds Shareowner Services, an investment representative
at a Commerce Bank branch or registered investment representatives at selected
broker/dealers.
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 above.
Proper written authority is required to execute
redemption requests on behalf of corporations,
partnerships, trusts, and/or fiduciary
accounts. Redemption requests require SIGNATURE
GUARANTEES as described below with the
exception of redemptions sent to a shareowner
name/address of record in effect for no less
than 30 days.
In Person You are welcome to deliver your written request
signed by each owner, including each joint
owner, to a Commerce Bank branch office
location. A registered investment
representative can assist you.
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 below).
Redemption requests may be placed by contacting
The Commerce Funds at the telephone number set
forth in "How Can I Contact The Commerce
Funds?" above. 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.
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<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 below
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 next 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
solely as a result of market conditions. Retirement accounts and certain other
accounts will not be subject to automatic liquidation.
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
will ordinarily 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
32
<PAGE>
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.
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.
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<PAGE>
If you do not select an option when you open an account, all distributions
will automatically be reinvested in additional Service Shares of the same Fund
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 Intermediate Bond or Missouri Tax-Free Intermediate 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
registrations. 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?" above. 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?" above for more information.
CAN I MAKE REGULAR INVESTMENTS TO A FUND AUTOMATICALLY?
The Automatic Investment feature lets you transfer money from your checking
account into your Fund account automatically on the date you specify in any
month you choose. The Automatic Investment feature is one way to use Dollar
Cost Averaging to invest (see below). Only checking accounts at U.S. financial
institutions which permit automatic withdrawals through the Automated Clearing
House are eligible. Check with your bank or financial institution to determine
eligibility.
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") and SIMPLE and Roth 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.
34
<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?" above. 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
Intermediate Bond Fund, the Missouri Tax-Free Intermediate 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 OR 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" above. 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 "Can I Make
Transactions by Telephone" below 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.
35
<PAGE>
Fund shares being exchanged are subject to the minimum initial and
subsequent investment requirements as described above. 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?" above.
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 originating Fund must be at least
$1,000 after the exchange and 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?
WITH CERTAIN EXCEPTIONS, YOU MAY ELECT TO HAVE YOUR DIVIDENDS, CAPITAL GAIN
DISTRIBUTIONS, OR BOTH RECEIVED FROM 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
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
read the prospectus and consider carefully the investment objective, policies
and applicable fees of the acquired Fund before using this feature.
36
<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 TO 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?" ABOVE.
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.
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<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.
(THE "ADVISOR")
Commerce Bank, N.A. serves 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., with offices at 8000 Forsyth Boulevard, St. Louis,
Missouri 63105 and 922 Walnut Street, Kansas City, Missouri 64106, a
subsidiary of Commerce Bancshares, Inc., a registered multi-bank holding
company, serves as the investment advisor to each Fund. Commerce Bank, N.A.
(or its predecessor organizations) have provided investment management
services to The Commerce Funds since 1994, to private and public pension
funds, endowments and foundations since 1946 and to individuals since 1906. As
of December 31, 1997, the Advisor and its affiliates had approximately $7.6
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>
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 so that the advisory fees will not
exceed 0.30% and 0.66% of the average daily net assets of the Short-Term
Government and Balanced Funds, respectively. Also, the Advisor has voluntarily
agreed to waive a portion of the investment advisory fees for the
International Equity Fund so that advisory fees payable by the Fund will not
exceed an annual rate of 1.15% of the first $20 million of average daily net
assets, 1.00% of the next $30 million of average daily net assets and 0.90% of
average daily net assets over $50 million.
For the fiscal year ended October 31, 1997, 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..................................................... .75%
Growth Fund................................................................ .75%
MidCap Fund................................................................ .75%
International Equity Fund.................................................. .99%
</TABLE>
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 and the fixed-income portion of the
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Balanced Fund's investments. Mr. Colbert joined the Investment Management
Group of Commerce Bank, N.A. 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. 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 and
the equity portion of the Balanced Fund's investments. Mr. Williams joined
Commerce Bank, N.A. in 1975 and became a member of its Investment Management
Group in 1977.
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. in 1989. Mr. Cox came
to Commerce Bank from Robert Murray Partners, Inc. where he was a securities
analyst and portfolio manager.
The Advisory Agreement authorizes the Advisor to engage a sub-advisor to
assist it in the performance of its services. Pursuant to such authorization,
the Advisor has appointed Rowe Price-Fleming International, Inc. as Sub-
Advisor to the International Equity Fund.
MORE ABOUT ROWE PRICE-FLEMING INTERNATIONAL, INC.
Price-Fleming, as sub-advisor, manages the investment assets of the
International Equity Fund. Price-Fleming was incorporated in Maryland in 1979
as a joint venture between T. Rowe Price Associates, Inc. ("T. Rowe Price")
and Robert Fleming Holdings Limited ("Flemings").
T. Rowe Price was incorporated in Maryland in 1947 as successor of the
investment counseling business founded by the late Thomas Rowe Price, Jr. in
1937. Flemings was incorporated in 1974 in the United Kingdom as successor to
the business founded by Robert Fleming in 1873. Flemings is a diversified
investment organization which participates in a global network of regional
investment offices in New York, London, Zurich, Geneva, Johannesburg, Bangkok,
Bombay, Jakarta, Singapore, Tokyo, Hong Kong, Manila, Kuala Lumpur, Seoul, and
Taipei. As of December 31, 1997, T. Rowe Price and its affiliates managed more
than $125 billion of assets and Flemings managed the U.S. equivalent of
approximately $30 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, Mark
Bickford-Smith, Mark J. T. Edwards, John R. Ford, James B. M. Seddon and David
J. L. Warren.
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Martin Wade joined Price-Fleming in 1979 and has 29 years of experience with
Fleming Group (Fleming Group includes Flemings and/or Jardine Fleming) in
research, client service and investment management. Mark Bickford-Smith joined
Price-Fleming in 1995 and has 13 years of experience with the Fleming Group in
research and financial analysis.
Mark Edwards joined Price-Fleming in 1987 and has 16 years of experience in
financial analysis. John Ford joined Price-Fleming in 1982 and has 18 years of
experience with Fleming Group in research and portfolio management. James
Seddon joined Price-Fleming in 1987 and has 11 years of experience in
investment management. David Warren joined Price-Fleming in 1983 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. When the Fund's assets reach
$200 million, the Sub-Advisor has agreed to waive fees in excess of 0.50% on
an annualized basis of the average daily net assets of the Fund. For the
fiscal year ended October 31, 1997, Price-Fleming received advisory fees at
the effective annual rate of 0.62% of the International Equity Fund's average
daily net assets.
MORE ABOUT THE ADMINISTRATOR
Goldman Sachs Asset Management is the Administrator for the Funds. GSAM is a
separate operating division of Goldman, Sachs & Co., the Distributor of the
Funds. Under the Administration Agreement with The Commerce Funds, GSAM
administers the business affairs of The Commerce Funds, subject to the
supervision of the Board of Trustees, and in connection therewith, furnishes
The Commerce Funds with office facilities and is responsible for ordinary
clerical, recordkeeping and bookkeeping services required to be maintained by
The Commerce Funds (excluding those maintained by The Commerce Funds'
Custodian, Transfer Agent, Advisor and any Sub-Advisor), preparation and
filing of documents required to comply with federal and state securities laws,
supervising the activities of the Custodian and Transfer Agent, providing
assistance in connection with meetings of the Board of Trustees and
shareowners and other administrative services necessary to conduct the
business of The Commerce Funds. For these services and facilities, GSAM is
entitled to receive a monthly fee from each Fund at an annual rate of 0.15% of
its average daily net assets. For the fiscal year ended October 31, 1997, GSAM
received administration fees at the annual rate of 0.15% of the average daily
net assets of each Fund.
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,
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<PAGE>
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.
SHAREHOLDER ADMINISTRATIVE SERVICES PLAN
Pursuant to a Shareholder 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 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.
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.
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<PAGE>
TAX INFORMATION
AS WITH ANY INVESTMENT YOU SHOULD CONSIDER THE TAX IMPLICATIONS OF AN
INVESTMENT IN A FUND. YOU
SHOULD CONSULT YOUR TAX ADVISOR WITH SPECIFIC REFERENCE TO YOUR OWN TAX
SITUATION.
The following is only a short summary of the important tax considerations
generally affecting the Funds and their shareowners. Each Fund will send
written notices to shareowners annually regarding the tax status of
distributions made by the Fund. You should save your regular account
statements because they contain information you will need to calculate your
capital gains or losses upon your sale or exchange of shares in a Fund.
Federal Taxes. Each Fund intends to qualify as a "regulated investment
company" under the Internal Revenue Code (the "Code"), with the result that to
the extent a Fund's earnings are distributed to shareowners as required by the
Code, the Fund itself 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 (20% or 28% rate gain
depending upon the Fund's holding period for the assets the sale of which
generated the capital gains) 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 and paid in January of the following year will be
deemed for tax purposes to have been paid by the Fund and received by you in
that 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.
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<PAGE>
Each Fund will be required in certain cases to withhold and remit to the
U.S. Treasury 31% of the dividends paid to any investor (i) who has provided
an incorrect Social Security Number or Taxpayer Identification Number or no
number at all, (ii) who is subject to back-up 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 average annual 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.
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
44
<PAGE>
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 SERIES, REPRESENTING INTERESTS IN NINE
DIFFERENT FUNDS: THE SHORT-TERM GOVERNMENT, BOND, BALANCED, GROWTH AND INCOME,
GROWTH, MIDCAP, INTERNATIONAL EQUITY, NATIONAL TAX-FREE INTERMEDIATE BOND AND
MISSOURI TAX-FREE INTERMEDIATE BOND FUNDS. EACH OF THE FOREGOING FUNDS, EXCEPT
THE NATIONAL TAX-FREE INTERMEDIATE BOND AND MISSOURI TAX-FREE INTERMEDIATE
BOND FUNDS, OFFERS TWO CLASSES OF SHARES: INSTITUTIONAL SHARES AND SERVICE
SHARES. THE NATIONAL TAX-FREE INTERMEDIATE BOND AND MISSOURI TAX-FREE
INTERMEDIATE BOND FUNDS OFFER ONLY INSTITUTIONAL SHARES. FOR INFORMATION
REGARDING THE FUNDS' INSTITUTIONAL SHARES, WHICH ARE OFFERED IN SEPARATE
PROSPECTUSES, CONTACT THE COMMERCE FUNDS AT 1-800-995-6365.
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 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.
The differences in expenses paid by each class of shares will affect its
performance.
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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
Investment Company Act of 1940 (the "1940 Act") or when the Board of Trustees
has determined a matter effects the interests of more than one series, all
shares shall be voted separately by individual series. The Board of Trustees
may also determine that a matter affects only the interests of one or more
classes of a series in which case any such matter shall be voted on by such
class or classes.
The Commerce Funds does not presently intend to hold annual meetings of
shareowners to elect Trustees or for other business. Shareowner meetings will
be held when required by the 1940 Act or other applicable law.
Under certain circumstances, shareowners have the right to call a shareowner
meeting. Such meetings will be held when requested by the shareowners of 10%
or more of The Commerce Funds' outstanding shares of beneficial interest. The
Commerce Funds will assist in shareowner communications in such matters to the
extent required by law and The Commerce Funds' undertaking with the Securities
and Exchange Commission. Voting rights are not cumulative, and accordingly the
owners of more than 50% of the aggregate shares of The Commerce Funds may
elect all of the Trustees irrespective of the vote of the other shareowners.
As of February 13, 1998, the Advisor and their affiliates possessed, on
behalf of their underlying customer accounts, voting or investment power with
respect to 95%, 93%, 80%, 99.8%, 82%, 87% and 96% of the outstanding shares of
the Short-Term Government, Bond, Balanced, Growth and Income, 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.
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 above.
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OTHER INVESTMENT PRACTICES
ZERO COUPON BONDS
Each Fund may acquire zero coupon bonds. Such obligations will not result in
the payment of interest until maturity and typically have greater price
volatility than coupon obligations. A Fund will accrue income on such
investments for tax and accounting purposes, as required, which is
distributable to shareowners and which, because no cash is received at the
time of accrual, may require the liquidation of other portfolio securities to
satisfy the Fund's distribution obligations. These actions may occur under
disadvantageous circumstances and may reduce a Fund's assets, thereby
increasing its expense ratio and decreasing its rate of return. Zero coupon
bonds are subject to greater market fluctuations from changing interest rates
than debt obligations of comparable maturities which make current
distributions of interest.
U.S. GOVERNMENT OBLIGATIONS
Each Fund may invest in U.S. Government Obligations. Examples of the types
of 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 or liquid assets, 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
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<PAGE>
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.
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 or liquid assets, 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 or liquid
assets, 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 that involves investment techniques and risks different
from those associated with ordinary portfolio securities transactions. If the
Advisor is incorrect in its forecasts of market values and interest rates, the
investment performance of a Fund would be less favorable than it would have
been if these investment techniques were not used.
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
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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 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 issuer is typically supported by some form of credit
enhancement, such as a letter of credit, surety bond, limited guaranty, or
subordination. Assets generating such payments will consist of such
instruments as motor vehicle installment purchase obligations, credit card
receivables and home equity loans. Each of these Funds may also invest in
other types of asset-backed securities that may be available in the future.
The yield characteristics of asset-backed securities differ from traditional
debt securities. A major difference is that the principal amount of the
obligations may be prepaid at any time because the underlying assets (i.e.,
loans) generally may be prepaid at any time. As a result, if an asset-backed
security is purchased at a premium, a prepayment rate that is faster than
expected will reduce yield to maturity, while a prepayment rate that is slower
than expected will have the opposite effect of increasing yield to maturity.
Conversely, if an asset-backed security is purchased at a discount, faster
than expected payments will increase, while slower than expected prepayments
will decrease, yield to maturity. In calculating the average weighted maturity
of a Fund, the maturity of asset-backed securities will be based on estimates
of average life.
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Prepayments on asset-backed securities generally increase with falling
interest rates and decrease with rising interest rates. Furthermore,
prepayment rates are influenced by a variety of economic and social factors.
In general, the collateral supporting non-mortgage asset-backed securities is
of a shorter maturity than mortgage loans and is less likely to experience
substantial prepayments. Like other fixed income securities, when interest
rates rise the value of an asset-backed security generally will decline;
however, when interest rates decline, the value of an asset-backed security
with prepayment features may not increase as much as that of other fixed
income securities.
Asset-backed securities may involve certain risks that are not presented by
mortgage-backed securities arising primarily from the nature of the underlying
assets (e.g., credit card and automobile loan receivables as opposed to real
estate mortgages). Ultimately, asset-backed securities are dependent upon
payment of the consumer loans or receivables by individuals, and the
certificate holder frequently has no recourse against the entity that
originated the loans or receivables. Credit card receivables are generally
unsecured and the debtors are entitled to the protection of a number of state
and federal consumer credit laws, many of which have given debtors the right
to set off certain amounts owed on the credit cards, thereby reducing the
balance due. In addition, default may require repossession of the personal
property of the debtor which may be difficult or impossible in some cases.
Most issuers of automobile receivables permit the servicers to return
possession of the underlying obligations. If the servicers were to sell these
obligations to another party, there is a risk that the purchaser would acquire
an interest superior to that of the holders of the related automobile
receivables. In addition, because of the number of vehicles involved in a
typical issuance and technical requirements under state law, the trustee for
the automobile receivables may not have an effective security interest in all
of the obligations backing such receivables. Therefore, there is a possibility
that recoveries of repossessed collateral may not, in some cases, be able to
support payments on these securities.
Asset-backed securities may be subject to greater risk of default during
periods of economic downturn than other instruments. Also, the secondary
market for certain asset-backed securities may not be as liquid as the market
for other types of securities, which could result in a Fund's experiencing
difficulty in valuing or liquidating such securities. In certain
circumstances, asset-backed securities may be considered illiquid securities
subject to the percentage limitations described below under "Illiquid
Securities."
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, in an
amount equal to the forward purchase price. The benefits derived from the use
of mortgage dollar rolls may
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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 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.
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REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements under which it buys a
security and obtains a simultaneous commitment from the seller to repurchase
the security at a specified time and price. The seller must maintain with a
Fund's custodian collateral equal to at least 100% of the repurchase price
including accrued interest as monitored daily by the Advisor. If the seller
under the repurchase agreement defaults, a Fund may incur a loss if the value
of the collateral securing the repurchase agreement has declined and may incur
disposition costs in connection with liquidating the collateral. If bankruptcy
proceedings are commenced with respect to the seller, liquidation of the
collateral by a Fund may be delayed or limited.
REVERSE REPURCHASE AGREEMENTS
Each Fund may borrow money for temporary purposes by entering into
transactions called reverse repurchase agreements. Under these agreements a
Fund sells portfolio securities to a financial institution (such as a bank or
broker-dealer) and agrees to buy them back later at an agreed upon time and
price. When a Fund enters into a reverse repurchase agreement, it places in a
separate custodial account cash or liquid assets, that have a value equal to
or greater than the repurchase price. The account is then continuously
monitored by the Advisor to make sure that an appropriate value is maintained.
Reverse repurchase agreements involve the risk that the value of portfolio
securities a Fund relinquishes may decline below the price the Fund must pay
on the repurchase date. A Fund will only enter into reverse repurchase
agreements to avoid the need to sell its securities to meet redemption
requests during unfavorable market conditions. As reverse repurchase
agreements are deemed to be borrowings by the SEC, each Fund is required to
maintain continuous asset coverage of 300%. Should the value of a 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
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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.
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
(including the value of the collateral received for the loan). There may be
risks of delay in receiving additional collateral or in recovering the
securities loaned or even a loss of rights in the collateral should the
borrower of the securities fail financially. However, loans are made only to
borrowers deemed by the Advisor to be of good standing and when, in its
judgment, the income to be earned 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,
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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 liquid
assets 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
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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.
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 cash or liquid assets, 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
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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.
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.
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The International Equity Fund may also hold foreign or domestic money market
instruments and debt securities rated at the time of purchase in one of the
three highest investment-grade categories by Moody's, S&P or another NRSRO.
The Fund does not intend to purchase unrated debt obligations. In the event
that the rating of any security held by the Fund falls below the required
rating, the Sub-Advisor will dispose of the security unless it appears this
would be disadvantageous to the Fund.
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. See "Financial Highlights" above for historical portfolio
turnover information for the Funds.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS OR IN THE STATEMENT OF
ADDITIONAL INFORMATION IN CONNECTION WITH THE OFFERING MADE BY THIS PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMMERCE FUNDS OR THE DISTRIBUTOR. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE COMMERCE FUNDS OR BY THE
DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE
MADE.
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Account # ______________________________
Not to be used for Individual Order # ________________________________
Retirement Accounts-- For an
IRA application, call the Transfer
Agent at 1-800-995-6365
LOGO
ACCOUNT APPLICATION FORM (CB 5075) COMMERCE FUNDS(TM)
- --------------------------------------------------------------------------------
THIS ACCOUNT The Commerce Funds
APPLICATION FORM c/o Shareowner Services
SHOULD BE
P.O. Box 419525
FORWARDED PROMPTLY
TO: Kansas City, MO 64141-6525
For additional information call 1-800-995-6365
Date: __________
- --------------------------------------------------------------------------------
1. ACCOUNT Please Print
REGISTRATION INDIVIDUAL
---------------------------------------- --------------
First NameInitialLast Name(Birthdate) SS# or Tax
JOINT TENANTS ID#
The account will be registered as "Joint Tenants with
Right of Survivorship" unless otherwise specified.
---------------------------------------- --------------
First NameInitialLast Name(Birthdate) SS# or Tax ID#
---------------------------------------- --------------
First NameInitialLast Name(Birthdate) SS# or Tax ID#
TRANSFER ON DEATH
------------------------ ------------ --------------
NameDate of Birth SS#
GIFT TO MINORS
--------------------------------------------------------
Custodian's Name (Only one can be named)
---------------------------------------- --------------
Minor's Name (Only one) SS#
Under the ___ (State of Residence) Uniform Gift to
Minors Act
ADDITIONAL
DOCUMENTATION CORPORATION, TRUST, OR OTHER ENTITY
MAY BE REQUIRED
---------------------------------------- --------------
Name of Corporation, Trust or other Non- Tax ID#
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:
[_]Short Term $_______ [_]Growth and $_______
$1000 MINIMUM PER Government Amount Income Amount
FUND ($250 MINIMUM #696
FOR SUBSEQUENT #686
INVESTMENTS AND
$50 FOR SEP AND
SIMPLE IRAS
SUBSEQUENT
INVESTMENTS)
[_]Bond $_______ [_]MidCap $_______
Amount Amount
#683 #689
[_]Balanced $_______ [_]International$_______
Amount Equity Amount
#688
#690
[_]Growth $_______
#687 Amount [_]ILA Prime $__
Obligations
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 ______
- --------------------------------------------------------------------------------
See "How To Buy Service Shares" in the Prospectus
5. RIGHT OF ACCUMULATION
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>
- -------------------------------------------------------------------------------
Minimum account balance must be $5,000. Withdrawal
minimum is $100.
12. AUTOMATIC
WITHDRAWAL PLAN
Check One: [_] Monthly [_] Quarterly [_] Semi-
Annual [_] Annual
Please make payments via (check one) [_] check [_] ACH
(Bank must be ACH affiliated. Attach voided check).
Payments made via check are withdrawn from your account
on or about the 1st or 15th of a month for monthly
withdrawals or the 15th of the month for
quarterly/semi-annual/annual withdrawals. (I understand
that I may change the date of redemption, via ACH, or
the amount at any time in writing to the Fund at the
address stated above.)
If withdrawal payments are to be made via ACH (attach
voided check/deposit slip)
Please withdraw $ from my account on the
of the month.
Complete this section ONLY if check is to be made
payable to person(s) other than the registered owner.
SIGNATURE GUARANTEE required. (See Section 13 of this
Form.)
--------------------------------------------------------
Name of check recipient Address CityStateZip
- -------------------------------------------------------------------------------
13. TAXPAYER ID
CERTIFICATION AND
SIGNATURE
AUTHORIZATION
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., its 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. serves as the investment advisor to the Funds and
receives compensation for such services as disclosed in the current
prospectus
. sales charges may apply.
Dated: _________________ --------------------------
Signature
--------------------------
Signature
<PAGE>
LOGO
COMMERCE FUNDS\TM\
CB5075
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF ADDITIONAL INFORMATION
INSTITUTIONAL SHARES
SERVICE SHARES
SHORT-TERM GOVERNMENT FUND
BOND FUND
BALANCED FUND
GROWTH AND INCOME FUND
GROWTH FUND
MIDCAP FUND
INTERNATIONAL EQUITY FUND
* * *
INSTITUTIONAL SHARES
NATIONAL TAX-FREE INTERMEDIATE BOND FUND
MISSOURI TAX-FREE INTERMEDIATE BOND FUND
MARCH 2, 1998
TABLE OF CONTENTS
-----------------
<TABLE>
<S> <C>
INVESTMENT OBJECTIVES, POLICIES AND RISK FACTORS.......................... 2
NET ASSET VALUE........................................................... 32
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION............................ 33
DESCRIPTION OF SHARES..................................................... 37
ADDITIONAL INFORMATION CONCERNING TAXES................................... 39
MANAGEMENT OF THE COMMERCE FUNDS.......................................... 43
INDEPENDENT AUDITORS...................................................... 54
COUNSEL................................................................... 54
ADDITIONAL INFORMATION ON PERFORMANCE..................................... 54
MISCELLANEOUS............................................................. 64
FINANCIAL STATEMENTS...................................................... 67
APPENDIX A................................................................ A-1
APPENDIX B................................................................ B-1
</TABLE>
This Statement of Additional Information, is meant to be read in
conjunction with The Commerce Funds' Prospectuses dated March 2, 1998 for the
Commerce Short-Term Government, Bond, Balanced, Growth and Income, Growth,
MidCap (formerly the Aggressive Growth Fund), International Equity, National
Tax-Free Intermediate Bond and Missouri Tax-Free Intermediate 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 1-800-995-6365.
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 market value of the portfolio securities. The
calculation excludes all securities, including options, whose maturities or
expiration dates at the time of acquisition are one year or less. Fund turnover
may vary greatly from year to year as well as within a particular year, and may
be affected by cash requirements for redemption of shares and by requirements
which enable the Fund to receive favorable tax treatment. Fund turnover will
not be a limiting factor in making portfolio decisions, and each Fund may engage
in short-term trading to achieve its investment objective.
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 Agreements for the Funds provide that, in executing
portfolio transactions and selecting brokers or dealers, the Advisor will use
reasonable efforts to seek the best overall terms available on behalf of each
Fund. In assessing the best overall terms available for any transaction, the
Advisor will consider all factors it deems relevant, including the breadth of
the market in the security, the price of the security, the financial condition
and execution capability of the broker or dealer, and the reasonableness of the
commission, if any, both for the specific transaction and on a
-2-
<PAGE>
continuing basis. In addition, the Agreements authorize the Advisor, subject to
the prior approval of the Board of Trustees, to cause the Funds to pay a
broker/dealer furnishing brokerage and research services a higher commission
than that which might be charged by another broker-dealer for effecting the same
transaction, provided that they determine in good faith that such commission is
reasonable in relation to the value of the brokerage and research services
provided by such broker/dealer, viewed in terms of either that particular
transaction or the overall responsibilities of the Advisor to the particular
Fund and to The Commerce Funds. Such brokerage and research services might
consist of reports and statistics of specific companies or industries, general
summaries of groups of stocks or bonds and their comparative earnings and
yields, broad overviews of the stock, bond and government securities markets and
the economy, and advice as to the value of securities, as well as the
advisability of investing in, purchasing or selling securities and the
availability of securities or purchasers or sellers of securities.
Supplementary research information so received is in addition to, and
not in lieu of, services required to be performed by the Advisor and does not
reduce the advisory fees payable by the Funds. The Board of Trustees will
periodically review the commissions paid by the Funds to consider whether the
commissions paid over representative periods of time appear to be reasonable in
relation to the benefits inuring to the Funds. It is possible that certain
supplementary research or other services received will primarily benefit one or
more other investment companies or other accounts for which investment
discretion is exercised. Conversely, a Fund may be the primary beneficiary of
the research or services received as a result of portfolio transactions effected
for such other account or investment company.
A Fund's portfolio securities will not be purchased from or sold to
(and savings deposits will not be made in and repurchase and reverse repurchase
agreements will not be entered into with) the Advisor, Sub-Advisor, Goldman,
Sachs & Co. or any affiliated person (as such term is defined in the 1940 Act)
thereof acting as principal or broker, except to the extent permitted by the
Securities and Exchange Commission ("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.
-3-
<PAGE>
Investment decisions for each Fund are made independently from those
made for the other Funds and from those made for other investment companies and
accounts advised or managed by the Advisor. Such other investment companies and
accounts may also invest in the same securities as the Funds. When a purchase or
sale of the same security is made at substantially the same time on behalf of
any Fund and another investment company or account, that transaction will be
aggregated (where not inconsistent with the policies set forth in the
Prospectuses) and allocated as to amount in a manner which the Advisor believes
to be equitable and consistent with its fiduciary obligations to the Fund
involved and such other investment company or account. In some instances, this
investment procedure may adversely affect the price paid or received by a Fund
or the size of the position obtained by a Fund.
The Commerce Funds are required to identify any securities of its
"regular brokers or dealers" acquired by the Funds during the most recent fiscal
year. During the fiscal year ended October 31, 1997, the Short-Term Government
fund acquired securities of Prudential Securities in the aggregate amount of
$767,363. The Bond Fund acquired securities of Morgan Stanley Group, Inc. in the
aggregate amount of $2,030,420. The Balanced Fund acquired securities of Bear
Stearns Companies, Inc., Lehman Brothers Holdings, Inc., Merrill Lynch & Co. and
Morgan Stanley Group, Inc., each a regular broker/dealer or parent. At October
31, 1997, the Balanced Fund's aggregate holdings in these securities amounted to
$297,656, $282,375, $1,082,000 and $507,650, respectively. The Growth and Income
Fund acquired securities of Bear Stearns Companies, Inc., Lehman Brothers
Holdings, Inc., Morgan Stanley, Dean Witter, Discover and Co., and J.P. Morgan
Securities, Inc. At October 31, 1997, the Growth and Income Fund's aggregate
holdings in these securities amounted to $873,125, $847,125, $882,000 and
$274,375, respectively. The Growth Fund acquired securities of Morgan Stanley,
Dean Witter, Discover and Co. and Merrill Lynch & Co., Inc. At October 31, 1997,
the Growth Fund's aggregate holdings in these securities amounted to $4,802,000
and $7,371,125, respectively. The MidCap Fund acquired securities of Bear
Stearns Companies, Inc. and Lehman Brothers Holdings, Inc. At October 31, 1997,
the MidCap Fund's aggregate holdings in these securities amounted to $1,035,844
and $1,506,000, respectively.
During the fiscal year ended October 31, 1997, the Funds entered into
repurchase agreement transactions with State Street Bank and Trust Company,
which was one of the broker/dealers that engaged as principal in the largest
dollar amount of portfolio transactions with the Funds. At October 31, 1997,
the value of each Fund's outstanding repurchase agreement transactions with
State Street Bank and Trust Company was as follows:
<TABLE>
<S> <C>
Short-Term Government Fund $ 1,116,000
Bond Fund $ 1,526,000
</TABLE>
-4-
<PAGE>
<TABLE>
<S> <C>
Balanced Fund $ 3,790,000
Growth and Income Fund $ 3,017,000
Growth Fund $ 19,877,000
MidCap Fund $ 1,584,000
International Equity Fund $ 4,436,000
</TABLE>
-5-
<PAGE>
For the fiscal years ended October 31, 1997 and 1996 and for the period
December 12, 1994 (commencement of operations) through October 31, 1995, the
Balanced, Growth, MidCap, Growth and Income and International Equity Funds paid
brokerage commissions as follows:
<TABLE>
<CAPTION>
Total
Total Total Brokerage
Brokerage Amount of Commissions
Total Commissions Transactions Paid to
Brokerage Paid to on Which Brokers Who
Commissions Affiliated Commissions Provided
Paid Persons Were Paid Research
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Fiscal year ended October 31, 1997:
Balanced Fund $ 60,007 $ 0 $ 44,338,406 $ 7,789
Growth Fund $226,998 $ 0 $190,623,385 $38,228
MidCap Fund $170,066 $ 0 $ 95,860,725 $24,770
Growth and
Income Fund/(1)/ $ 70,590 $ 6,542 $ 40,963,033 $ 0
International Equity
Fund $121,982 $10,271 $ 42,752,888 $ 0
Fiscal year ended October 31, 1996:
Balanced Fund $ 58,679 $ 0 $ 30,457,207 $14,261
Growth Fund $161,450 $ 0 $101,777,048 $44,688
MidCap Fund $107,348 $ 0 $ 46,977,298 $25,374
International Equity
Fund $ 92,250 $5,447 $ 30,494,870 $ 0
For the period December 12, 1994/(2)/ 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
</TABLE>
-6-
<PAGE>
__________
/(1)/ Commenced investment operations March 1, 1997.
/(2)/ Commencement of operations.
For the fiscal year ended October 31, 1997, 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
% of Total Which Commissions Which Commissions
Commissions Paid 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, $ 691 0.57% $ 168,512 0.39%
Ltd.
Goldman, Sachs & $ 825 0.68% $ 206,187 0.48%
Co.
Goldman Sachs $5,270 4.32% $1,954,939 4.57%
International, BA
Goldman Sachs $ 111 0.09% $ 55,641 0.13%
International, Ltd.
Goldman Sachs $ 336 0.28% $ 168,325 0.39%
International Finance,
London.
Jardine Fleming $ 888 0.73% $ 145,617 0.34%
Hong Kong
Robert Fleming & $2,048 1.68% $ 867,879 2.03%
Co., London
Robert Fleming $ 102 0.08% $ 40,582 0.09%
Securities, Ltd.
</TABLE>
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.
-7-
<PAGE>
RATINGS OF SECURITIES
- ---------------------
The ratings of Moody's, S&P, Duff & Phelps Credit Rating Co., Fitch
IBCA Investor Service, Inc. and Thomson Bank Watch, 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 Intermediate Bond and Missouri Tax-Free Intermediate Bond Funds may
include participations in Municipal Obligations purchased from and owned by
financial institutions
-8-
<PAGE>
(primarily banks). Participation interests provide the Fund with a specified
undivided interest (up to 100%) in the underlying obligation and the right to
demand payment of the unpaid principal balance plus accrued interest on the
participation interest from the institution upon a specified number of days'
notice, not to exceed thirty days. Each participation interest is backed by an
irrevocable letter of credit or guarantee of a bank that the Advisor has
determined meets the prescribed quality standards for the Fund. The bank
typically retains fees out of the interest paid on the obligation for servicing
the obligation, providing the letter of credit and issuing the repurchase
commitment.
U.S. GOVERNMENT OBLIGATIONS
- ---------------------------
As stated in the Prospectuses, pursuant to their respective investment
objectives, the Funds may invest in U.S. Government Obligations. U.S.
Government Obligations purchased by the Short-Term Government Fund with nominal
remaining maturities in excess of five years that have variable or floating
interest 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
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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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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
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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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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.
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<PAGE>
When a Fund purchases a put or call option, the premium paid by it is
recorded as an asset of the Fund. When a Fund writes an option, an amount equal
to the net premium (the premium less the commission) received by the Fund is
included in the liability section of the Fund's statement of assets and
liabilities as a deferred credit. The amount of this asset or deferred credit
will be subsequently marked-to-market to reflect the current value of the option
purchased or written. The current value of the traded option is the last sale
price or, in the absence of a sale, the average of the closing bid and asked
prices. If an option purchased by a Fund expires unexercised, the Fund realizes
a loss equal to the premium paid. If a Fund enters into a closing sale
transaction on an option purchased by it, the Fund will realize a gain if the
premium received by the Fund on the closing transaction is more than the premium
paid to purchase the option, or a loss if it is less. If an option written by a
Fund expires on the stipulated expiration date or if a Fund enters into a
closing purchase transaction, it will realize a gain (or loss if the cost of a
closing purchase transaction exceeds the net premium received when the option is
sold) and the deferred credit related to such option will be eliminated. If an
option written by a Fund is exercised, the proceeds of the sale will be
increased by the net premium originally received and the Fund will realize a
gain or loss.
As noted previously, there are risks associated with transactions in
options on securities. For example, there are significant differences between
the securities and options markets that could result in an imperfect correlation
between these markets, causing a given transaction not to achieve its
objectives. In addition, a liquid secondary market for particular options,
whether traded over-the-counter or on a national securities exchange
("Exchange"), may be absent for reasons which include the following: there may
be insufficient trading interest in certain options; restrictions may be imposed
by an Exchange on opening transactions or closing transactions or both; trading
halts, suspensions or other restrictions may be imposed with respect to
particular classes or series of options or underlying securities; unusual or
unforeseen circumstances may interrupt normal operations on an Exchange; the
facilities of an Exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume; or one or more Exchanges
could, for economic or other reasons, decide or be compelled at some future date
to discontinue the trading of options (or a particular class or series of
options), in which event the secondary market on that Exchange (or in that class
or series of options) would cease to exist, although outstanding options that
had been issued by the Options Clearing Corporation as a result of trades on
that Exchange would continue to be exercisable in accordance with their terms.
A Fund will likely be unable to control losses by closing its position where a
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
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contracts or index futures contracts, as applicable). Positions in futures
contracts may be closed out only on an exchange which provides a secondary
market for such futures. However, there can be no assurance that a liquid
secondary market will exist for any particular futures contract at any specific
time. Thus, it may not be possible to close a futures position. In the event
of adverse price movements, a Fund would continue to be required to make daily
cash payments to maintain its required margin. In such situations, if a Fund
has insufficient cash, it may have to sell portfolio securities to meet daily
margin requirements at a time when it may be disadvantageous to do so. In
addition, a Fund may be required to make delivery of the instruments underlying
futures contracts it holds. The inability to close options and futures
positions also could have an adverse impact on a Fund's ability to effectively
hedge.
Successful use of futures by a Fund is also subject to the Advisor's
ability to correctly predict movements in the direction of the underlying
security or index. For example, if a Fund has hedged against the possibility of
a decline in the market adversely affecting securities held by it and securities
prices increase instead, the Fund will lose part or all of the benefit to the
increased value of its securities which it has hedged because it will have
approximately equal offsetting losses in its futures positions. In addition, in
some situations, if a Fund has insufficient cash, it may have to sell securities
to meet daily variation margin requirements. Such sales of securities may be,
but will not necessarily be, at increased prices which reflect the rising
market. A Fund may have to sell securities at a time when it may be
disadvantageous to do so.
The risk of loss in trading futures contracts in some strategies can
be substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if at the time
of purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit, before any deduction for the
transaction costs, if the contract were closed out. Thus, a purchase or sale of
a futures contract may result in losses in excess of the amount invested in the
contract.
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.
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<PAGE>
The daily limit governs only price movement during a particular trading day and
therefore does not limit potential losses, because the limit may prevent the
liquidation of unfavorable positions. Futures contract prices have occasionally
moved to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures positions and
subjecting some futures traders to substantial losses.
The trading of futures contracts is also subject to the risk of
trading halts, suspensions, exchange or clearing-house equipment failures,
government intervention, insolvency of a brokerage firm or clearing house or
other disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.
HYBRID INSTRUMENTS
- ------------------
Hybrid instruments have been developed and combine the elements of
futures contracts or options with those of debt, preferred equity or depository
instruments (hereinafter "Hybrid Instruments"). Generally, a Hybrid Instrument
will be a debt security, preferred stock, depository share, trust certificate,
certificate of deposit or other evidence of indebtedness on which a portion of
or all interest payments, and/or the principal or stated amount payable at
maturity, redemption or retirement, is determined by reference to prices,
changes in prices, or differences between prices of securities, currencies,
intangibles, goods, articles or commodities (collectively, "Underlying Assets")
or by another objective index, economic factor or other measure, such 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
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lowering transactions costs. Of course, there is no guarantee that the strategy
will be successful and a Fund could lose money if, for example, interest rates
do not move as anticipated or credit problems develop with the issuer of the
Hybrid.
The risks of investing in Hybrid Instruments reflect a combination of
the risks of investing in securities, options, futures and currencies. Thus, an
investment in a Hybrid Instrument may entail significant risks that are not
associated with a similar investment in a traditional debt instrument that has a
fixed principal amount, is denominated in U.S. dollars or bears interest either
at a fixed rate or a floating rate determined by reference to a common,
nationally published Benchmark. The risks of a particular Hybrid Instrument
will, of course, depend upon the terms of the instrument, but may include,
without limitation, the possibility of significant changes in the Benchmarks or
the prices of Underlying Assets to which the instrument is linked. Such risks
generally depend upon factors which are unrelated to the operations or credit
quality of the issuer of the Hybrid Instrument and which may not be credit
quality of the issuer of the Hybrid Instrument and which may not be readily
foreseen by the purchaser, such as economic and political events, the supply and
demand of the Underlying Assets and interest rate movements. At various times
Benchmarks and prices for Underlying Assets have been highly volatile, and such
volatility may be expected in the future. Reference is also made to the
discussion of futures, options, and forward contracts herein for a discussion of
the risks associated with such investments.
Hybrid Instruments are potentially more volatile and carry greater
market risks than traditional debt instruments. Depending on the structure of
the particular Hybrid Instrument, changes in a Benchmark may be magnified by the
terms of the Hybrid Instrument and have an even more dramatic and substantial
effect upon the value of the Hybrid Instrument. Also, the prices of the Hybrid
Instrument and the Benchmark or Underlying Asset may not move in the same
direction or at the same time.
Hybrid Instruments may bear interest or pay preferred dividends at
below market (or even relatively nominal) rates. Alternatively, Hybrid
Instruments may bear interest at above market rates but bear an increased risk
of principal loss (or gain). The latter scenario may result 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
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consider and monitor. Hybrid Instruments also may not be subject to regulation
of the Commodities Futures Trading Commission ("CFTC"), which generally
regulates the trading of commodity futures by U.S. persons, the SEC, which
regulates the offer and sale of securities by and to U.S. persons, or any other
governmental regulatory authority.
INTEREST RATE SWAPS, FLOORS AND CAPS
- ------------------------------------
In order to hedge against fluctuations in interest rates, the Short-
Term Government, Bond, Balanced, National Tax-Free Intermediate Bond and
Missouri Tax-Free Intermediate 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 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
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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.
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 Intermediate Bond and Missouri Tax-
Free Intermediate 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
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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' shareholders for federal income tax purposes.
Although the National Tax-Free Intermediate Bond and Missouri Tax-Free
Intermediate Bond Funds will invest most of their assets, under normal
circumstances, in intermediate-term Municipal Obligations, the Funds may also
purchase short-term Project Notes, Tax Anticipation Notes, Bond Anticipation
Notes, Revenue Anticipation Notes, Tax-Exempt Commercial Paper, and other forms
of short-term tax-exempt loans. Such instruments are issued with a short-term
maturity in anticipation of the receipt of tax funds, the proceeds of bond
placements or other revenues.
From time to time, proposals have been introduced before Congress for
the purpose of restricting or eliminating the federal income tax exemption for
interest on Municipal Obligations. For example, under the federal tax
legislation enacted in 1986, interest on certain private activity bonds must be
included in an investor's alternative minimum taxable income, and corporate
investors must treat all tax-exempt interest as an item of tax preference. The
Commerce Funds cannot predict what legislation, if any, may be proposed or
enacted in the future regarding the federal tax status of interest on such
obligations or, with respect to the Missouri Tax-Free Intermediate Bond Fund,
what legislation may be proposed in the Missouri Legislature relating to the
status of the Missouri income tax on interest on Missouri obligations. Such
proposals, whether pending or enacted, might materially and adversely affect the
availability of Municipal or Missouri Obligations for investment by a particular
Fund and the liquidity and value of its respective portfolio. In such an event,
the Fund would re-evaluate its investment objective and policies and consider
possible changes in its structure or possible dissolution.
Certain of the Municipal Obligations held by a Fund may be insured as
to the timely payment of principal and interest. The insurance policies will
usually be obtained by the issuer of the Municipal Obligation at the time of its
original issuance. In the event that the issuer defaults on interest or
principal payment, the insurer will be notified and will be required to make
payment to the bondholders. There is, however, no guarantee that the insurer
will meet its obligations. In addition, such insurance will not protect against
market fluctuations caused by changes in interest rates and other factors. The
National Tax-Free Intermediate Bond and Missouri Tax-Free Intermediate Bond
Funds may, from time to time, invest more than 25% of their assets in Municipal
Obligations covered by insurance policies.
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 cash or liquid assets, equal to the
amount of the Fund's assets that could be required to consummate forward
contracts will be established with the Fund's Custodian, except to the extent
the contracts are otherwise "covered." For the purpose of determining the
adequacy of the securities in the account, the deposited securities will be
valued at market or fair value. If the market or fair value of such securities
declines, additional cash or securities will be placed in the account daily so
that the value of the account will equal the amount of such commitments by the
Fund. A forward contract to sell a foreign currency is "covered" if the Fund
owns the currency (or securities denominated in the currency) underlying the
contract, or holds a forward contract (or call option) permitting the Fund to
buy the same currency at a price no higher than the Fund's price to sell the
currency. A forward contract to buy a foreign currency is "covered" if the Fund
holds a forward contract (or put option) permitting the Fund to sell the same
currency at a price as high as or higher than the Fund's price to buy the
currency.
STAND-BY COMMITMENTS
- --------------------
The National Tax-Free Intermediate Bond and Missouri Tax-Free
Intermediate Bond Funds may acquire stand-by commitments with respect to
Municipal Obligations held within their respective portfolios. Under a stand-by
commitment, a dealer or bank agrees to purchase from a Fund, at the Fund's
option, specified Municipal Obligations at their amortized cost value to the
Fund plus accrued interest, if any. Stand-by commitments may be sold,
transferred or assigned by a Fund only with the underlying instrument.
The Funds expect that stand-by commitments will generally be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, a Fund may pay for a stand-by commitment either
separately in cash or by paying a higher price for portfolio securities which
are acquired subject to the commitment (thus reducing the yield to maturity
otherwise available for the same securities). Where a Fund paid any
consideration directly or indirectly for a stand-by commitment, its cost would
be reflected as unrealized depreciation for the period during which the
commitment was held by the Fund.
The Funds intend to enter into stand-by commitments only with dealers,
banks and broker-dealers which, in the Advisor's opinion, present minimal credit
risks. The Funds' reliance upon the credit of these dealers, banks and broker-
dealers will be secured by the value of the underlying Municipal Obligations
that are subject to the commitment. In evaluating the creditworthiness of the
issuer of a stand-by commitment, the Advisor will review periodically the
issuer's assets, liabilities, contingent claims and other relevant financial
information.
The Funds would acquire stand-by commitments solely to facilitate
portfolio liquidity and does not intend to exercise its rights thereunder for
trading purposes. Stand-by commitments acquired by a Fund would be valued at
zero in determining net asset value.
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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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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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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 5,402,508 in 1997 according to the United
States Bureau of Estimates Program, which represented an increase of 5.6% from
the 1990 decennial census of 5,117,073 inhabitants. In 1996, St. Louis and the
surrounding metropolitan area constituted the 18th largest Metropolitan
Statistical Area (MSA) in the nation with approximately 2.55 million
inhabitants, more than half of which were Missouri residents. St. Louis is
located on the eastern boundary of the State on the Mississippi River and is a
distribution center and an important site for banking and manufacturing
activity. Anchoring the western boundary is Kansas City, which is Missouri's
second largest metropolitan area. In 1996, Kansas City was the 24th largest MSA
nationally with approximately 1.69 million inhabitants, more than half of which
were Missouri residents. Kansas City is a major agri-business center for the
United States and is an important center for finance and industry. Springfield,
St. Joseph, Joplin and Columbia are also important population and industrial
centers in the State. Missouri's personal income rose at a 5.6% rate during
1996. Missouri's employment stood at 2,790,252 at the end of 1997, up 20,717
from one year ago. At the end of June 1997, the state unemployment rate was
4.1% compared to 4.7% at the end of June 1996. The national rate was 5.2% at
the end of June 1997.
The major sectors of the State's economy include agriculture,
manufacturing, trade, government and services. Farming has traditionally played
a dominant role in the economy and yielded a large portion of the State's
revenues. Although the concentration in farming remains above the national
average, with increasing urbanization, significant income-generating activity
has shifted from agriculture to manufacturing and services. Earnings and
employment are distributed among the manufacturing, trade and service sectors in
a close approximation of the average national distribution, thus lessening the
State's cyclical sensitivity to impact by any single sector. In 1996, services
represented the single most significant non-agricultural economic activity, with
wholesale and retail trade ranking second and manufacturing ranking third. In
1996, these three economic sectors
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accounted for 67.6% of the State's nonagricultural employment. Manufacturing,
which accounts for approximately 16.1% of employment, is concentrated in
defense, transportation equipment and other durable goods. To the extent that
the economy suffers a recession, the manufacturing sector, in particular, could
be adversely affected.
Defense-related businesses play an important role in Missouri's
economy. In addition to the large number of civilians employed at the various
military installations and training bases in the State, aircraft production and
defense related businesses receive sizeable annual defense contract awards. In
1996, Missouri ranked fourth among the states in Department of Defense contract
awards. The continued decline in defense appropriations by the U.S. Congress
have had and will continue to have an impact on the State.
Limitations on State debt and bond issues are contained in Article
III, Section 37 of the Constitution of Missouri. Pursuant to this section, (1)
the General Assembly may issue general obligation bonds solely to refund
outstanding bonds (provided that the refunding bonds must mature within 25 years
of issuance); (2) the General Assembly upon the recommendation of the Governor
to incur a temporary liability by reason of unforeseen emergency or of
deficiency in revenue, may issue bonds in an amount not to exceed $1 million for
any one year (must be paid within 5 years of issuance); and (3) the General
Assembly, or the people by initiative, may submit a proposition to incur
temporary indebtedness greater than $1 million by reason of unforeseen emergency
or of deficiency in revenue, and the bonds may be issued if approved by a
majority of those voting (such bonds must be retired serially and by installment
within 25 years of issuance). Before any bonds are issued pursuant to Section
37, the General Assembly must make provisions for the payment of principal and
interest and may provide for an annual tax on all taxable property in an amount
sufficient for that purpose.
Certain water pollution bonds and State building bonds are also
authorized pursuant to Sections 37(b)-(f), inclusive. In 1971, Missouri voters
approved a constitutional amendment providing for the issuance of $150 million
of general obligation bonds for the protection of the environment through the
control of water pollution. In 1979, voters approved a constitutional amendment
authorizing an additional $200 million of State Water Pollution Control Bonds.
In 1982, State voters approved a constitutional amendment authorizing the
issuance of $600 million of Third State Building Bonds. Proceeds from the Third
State Building Bonds are used to provide funds for improvement of State
buildings and property, including education, mental health, parks, corrections
and other State facilities, and for water, sewer, transportation, soil
conservation and other economic development projects. In 1988, Missouri voters
approved a constitutional amendment authorizing the issuance of bonds in the
aggregate sum of $275 million for controlling water pollution and making
improvements to drinking water systems. In 1994, state voters approved a
constitutional amendment authorizing the issuance of $250 million Fourth State
Building Bonds. Proceeds from the Fourth State Building Bonds fund the
rebuilding of institutions of higher education,
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<PAGE>
land acquisition, construction and purchase of buildings, and planning,
furnishing, equipping and landscaping such improvements and buildings.
Article III, Section 36 of the Constitution of Missouri requires that
the General Assembly appropriate the annual principal and interest requirements
for outstanding general obligation bonds before any other appropriations are
made. Such amounts must be transferred from the General Revenue Fund to bond
interest and sinking funds. Authorization for these transfers, as well as the
actual payments of principal and interest, are provided in the first
appropriation bill of each fiscal year.
In addition to general obligation bonds, the Missouri legislature has
established numerous entities as bodies corporate and politic, which are
authorized to issue bonds to carry out their corporate purposes.
Article X, Sections 16-24 of the Constitution of Missouri (the "Tax
Limitation Amendment") imposes a limit on the amount of taxes and other revenue
enhancement charges such as user fees which may be imposed by the State or a
political subdivision in any fiscal year. This limit is tied to total State
revenues for the fiscal year ended June 30, 1981, as defined in the Tax
Limitation Amendment, and adjusted annually, in accordance with the formula set
forth in the amendment. Under that formula, the revenue limit (the "Revenue
Limit") for any fixed year equals the product obtained by multiplying (i) the
ratio of total state revenues in fiscal year 1980-1981 divided by the aggregate
personal income received by persons in Missouri from all sources ("Personal
Income of Missouri") in calendar year 1979 times (ii) the Personal Income of
Missouri in either the calendar year prior to the calendar year in which
appropriations for the fiscal year for which the calculation is being made, or
the average of Personal Income of Missouri in the previous three calendar years,
whichever is greater. If the Revenue Limit is exceeded by 1% or more in any
fiscal year, a refund of the excess revenues collected by the State is required.
If the excess revenues collected are less than 1%, then the excess is not
refunded but is transferred to the General Revenue Fund. The details of the Tax
Limitation Amendment are complex and clarification from subsequent legislation
and judicial decisions may be necessary for the Tax Limitation Amendment to be
fully implemented. The Revenue Limit can be exceeded only if the General
Assembly approves by a two-thirds vote of each house an emergency declaration as
requested by the Governor. The Revenue Limit does not apply to taxes imposed
for payment of principal and interest on bonds that have been approved by the
voters, as authorized by the Missouri Constitution.
In addition to the Revenue Limit, the General Assembly is prohibited
without voter approval from increasing taxes as fees in any fiscal year that in
total produces new annual revenues greater than $50 million, adjusted annually
by the percentage change in the personal income of Missouri for the second
previous fiscal year, or 1% of total state revenue for the previous fiscal year
prior to the General Assembly action, whichever is less. The Tax Limitation
Amendment could adversely affect the repayment capabilities of certain
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non-general obligation issues if payment is dependent upon increases in taxes or
appropriations by the State's General Assembly.
General revenue collections in fiscal year 1997 were $6.199 million,
7.3% above fiscal year 1996 collections. The fiscal year 1998 budget is
conservatively based upon general revenue collections of $6.245 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 shareholders if
the holders of more than 50% of the outstanding shares are present in person or
by proxy or (2) more than 50% of the Fund's outstanding shares. Other
restrictions in the form of non-fundamental policies are subject to change by
The Commerce Funds' Board of Trustees without shareholder approval. 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 (including the value of the
collateral for the loan).
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<PAGE>
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 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, as
amended ("Securities Act") in purchasing and selling portfolio securities and
except insofar as such underwriting would comply with the limits set forth in
the 1940 Act.
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
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<PAGE>
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 (excluding
Rule 144A Securities), if at the time of acquisition more than 5% of its net
assets would be invested in such securities.
4. Invest in restricted securities (including Rule 144A Securities)
when aggregated with investments in securities of companies having a record
together with predecessors, of less than three years of continuous operation if
at the time of acquisition more than 15% of its total assets would be invested
in such securities.
5. Make investments for the purpose of exercising control or
management.
6. Invest in warrants if at the time of acquisition a Fund's
investment in warrants would exceed 10% of the value of the Fund's net assets.
7. Invest in real estate limited partnership interests or
participations or other direct interests in or enter into leases with respect to
oil, gas or other mineral exploration or development programs if, as a result
thereof, more than 5% of the value of the total assets of a Fund would be
invested in such programs, except that a Fund may invest in securities issued by
companies that engage in oil, gas or other mineral exploration of development
activities.
8. 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
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<PAGE>
Intermediate Bond and Missouri Tax-Free Intermediate Bond Funds) of the value of
its net assets.
As a matter of non-fundamental policy, the International Equity Fund
will engage in futures contracts and options thereon only for bona fide hedging,
yield enhancement, and risk management purposes, in each case in accordance with
rules and regulations of the CFTC. Initial margin deposits and premiums on
options for non-hedging purposes will not equal more than 5% of the Funds net
asset value.
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 requests and may enter into reverse repurchase agreements,
provided that the Fund maintains asset coverage of at least 300% for
all such borrowings.
2. With regard to the National Tax-Free Intermediate Bond and
Missouri Tax-Free Intermediate Bond Funds:
Each Fund will limit its investments so that less than 25% of the
Fund's total assets will be invested in the securities of issuers in
any one industry. For the purposes of this restriction, state and
municipal governments and their agencies and instrumentalities are not
deemed to be industries in connection with the issuance of tax-exempt
securities. Thus, a Fund may invest 25% or more of the value of its
total assets in Municipal Obligations which are related in such a way
that an economic, business or political development or change
affecting one Municipal Obligation would also affect the other
Municipal Obligations. For example, a Fund may so invest in (a)
Municipal Obligations the interest on which is paid solely from
revenues of similar projects such as hospitals, electric utility
systems, multi-family housing, nursing homes, commercial facilities
(including hotels), steel companies or life care facilities, (b)
Municipal Obligations whose issuers are in the same state, or (c)
industrial development obligations. The Funds will not purchase
securities (except U.S.
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<PAGE>
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 Intermediate Bond Fund, and
up to 50% of the total assets of the Missouri Tax-Free Intermediate
Bond Fund, may be invested without regard to this 5% limitation
(although not more than 25% of the Fund's total assets will be
invested in the securities of any one issuer). Additionally, a Fund
may not borrow money, except from banks for temporary or short-term
purposes, provided that the Fund maintains asset coverage of 300% for
all such borrowings.
NET ASSET VALUE
The net asset value per share for each Fund of The Commerce Funds is
calculated separately for Institutional and Service Shares by adding the value
of all portfolio securities and other assets belonging to the Fund that are
allocable to a particular class, subtracting the liabilities charged to such
class of the Fund, and dividing the result by the number of shares outstanding
of such class of the Fund. Assets which belong to the Fund consist of the
consideration received upon the issuance of shares of the Fund together with all
income, earnings, profits and proceeds derived from the investment thereof,
including any proceeds from the sale of such investments, any funds or payments
derived from any reinvestment of such proceeds, and a portion of any general
assets of The Commerce Funds not belonging to a particular investment portfolio.
Assets belonging to a particular class of a Fund are charged with the direct
liabilities of that class and with a share of the general liabilities of The
Commerce Funds which are normally allocated in proportion to the relative net
asset values of all of The Commerce Funds' investment portfolios at the time of
allocation. Payments under The Commerce Funds' Shareholder Administrative
Service Plans for Institutional Shares and Service Shares are allocated to the
Shares in proportion to the related net asset values of the Funds. Payments
under the Distribution Plan pursuant to Rule 12b-1 are applicable only to the
Service Shares of The Short-Term Government, Bond, Balanced, Growth and Income,
Growth, MidCap and International Equity Funds.
As stated in their Prospectuses, a Fund's investments will be valued
at market value or, in the absence of a market value with respect to any
portfolio securities, at fair value as determined by or under the direction of
The Commerce Funds' Board of Trustees. A security that is primarily traded on a
domestic securities exchange (including securities traded through the National
Market System) is valued at the last sale price on that exchange or, if there
were no sales during the day, at the current quoted bid price. Securities
traded on only over-the-counter markets are valued on the basis of closing over-
the-counter bid prices. Securities for which there were no transactions are
valued at the average of the
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<PAGE>
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 and Service Shares of the Short-Term Government,
Bond, Balanced, Growth and Income, Growth, MidCap and International Equity Funds
and the Shares of the National Tax-Free Intermediate Bond Fund and the Missouri
Tax-Free Intermediate Bond Funds, based on the value of the total net assets and
total number of shares outstanding on October 31, 1997, is as follows:
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<PAGE>
Table
-----
<TABLE>
<CAPTION>
Bond Fund Balanced Fund Growth & Income Fund Growth Fund
--------- --------------- --------------------- -----------
Institutional Service Institutional Service Institutional Service Institutional Service
------------- ------- ------------- ------- ------------- ------- ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Assets (in 000's).... $ 217,803 $ 739 $ 105,782 $ 1,219 $ 45,173 $ 2,588 $ 343,773 $ 5,758
Number of Shares
Outstanding............. 11,207,266 38,047 3,966,282 45,717 2,070,789 118,667 9,953,941 166,880
Net Asset Value
Per Share................ $ 19.43 $ 19.43 $ 26.67 $ 26.66 $ 21.82 $ 21.81 $ 34.54 $ 34.50
Sales Charge, 3.50 percent
of offering price (3.63
percent of net asset
value per share)........ $ 0.70 $ 0.70 $ 0.97 $ 0.97 $ 0.79 $ 0.79 $ 1.25 $ 1.25
Offering Price
to Public................ $ 20.13 $ 20.13 $ 27.64 $ 27.63 $ 22.61 $ 22.60 $ 35.79 $ 35.75
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
MidCap Fund International Equity Fund National Tax-Free Missouri Tax-Free
----------- ------------------------- ----------------- ----------------
Institutional Service Institutional Service Intermediate Bond Fund Intermediate Bond Fund
------------- ------- ------------- ------- --------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Net Assets (in 000's)...... $ 112,442 $ 658 $ 78,273 $ 231 $ 25,281 $ 24,434
Number of Shares
Outstanding............... 3,404,956 19,980 3,541,115 10,449 1,341,115 1,312,685
Net Asset Value
Per Share.................. $ 33.02 $ 32.94 $ 22.10 $ 22.06 $ 18.85 $ 18.61
Sales Charge, 3.50 percent
of offering price (3.63
percent of net asset
value per share).......... $ 1.20 $ 1.19 $ 0.80 $ 0.80 $ 0.68 $ 0.67
Offering Price
to Public.................. $ 34.22 $ 34.13 $ 22.90 $ 22.86 $ 19.53 $ 19.28
</TABLE>
<TABLE>
<CAPTION>
Short-Term
Government Fund
Institutional Service
------------------------------
<S> <C> <C>
Net Assets (in 000's)................................. $ 48,840 $ 450
Number of Shares Outstanding.......................... 2,643,812 24,359
Net Asset Value
Per Share............................................. $ 18.47 $ 18.47
Sales Charge, 2.00 percent of
offering price (2.04 percent of net
asset value per share)................................ $ 0.38 $ 0.38
Offering Price
to Public............................................. $ 18.85 $ 18.85
</TABLE>
Under the 1940 Act, a Fund may suspend the right of redemption or
postpone the date of payment for shares during any period when (a) trading on
the New York Stock Exchange is restricted by applicable rules and regulations of
the SEC; (b) the Exchange is closed for other than customary weekend and holiday
closing; (c) the SEC has by order permitted such suspension; or (d) an emergency
exists as determined by the SEC. (The Commerce Funds may also suspend or
postpone the recordation of the transfer of shares upon the occurrence of any of
the foregoing conditions.)
In addition to the situations described in the Prospectuses under "How
To Sell Shares," The Commerce Funds may redeem shares involuntarily to reimburse
the Funds for any loss sustained by reason of the failure of a shareholder to
make full payment for shares purchased by the shareholder or to collect any
charge relating to a
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<PAGE>
transaction effected for the benefit of a shareholder which is applicable to
shares of the Funds as provided in the Prospectuses.
In an exchange, the redemption of shares being exchanged will be made
at the per share net asset value of the shares to be redeemed next determined
after the exchange request is received. The shares of the Fund to be acquired
will be purchased at the per share net asset value of those shares (plus any
applicable sales charge) next determined after acceptance of the purchase order
by The Commerce Funds in accordance with its customary policies for accepting
investments.
A Fund may make payment for redemption in securities or other property
if it appears appropriate to do so in light of the Fund's responsibilities under
the 1940 Act. In the event shares are redeemed for securities or other
property, shareholders may incur additional costs in connection with the
conversion thereof to cash. Redemption in kind is not as liquid as a cash
redemption. Shareholders 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 an individual retirement account ("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.
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<PAGE>
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 regular IRAs and SIMPLE IRAs are not taxed until distributed.
An individual may contribute at any age to a Roth IRA for the
individual and for his or her nonworking spouse. Roth IRA contributions and the
earnings thereon may be withdrawn tax and penalty-free if the Roth IRA has been
established for at least five years and certain other requirements are met.
In the Profit-Sharing/401(k) Plan and in the IRAs available through
the Funds, distributions of net investment income and capital gains will be
automatically reinvested.
The foregoing brief descriptions are not complete or definitive
explanations of the Profit-Sharing/401(k) Plan or IRAs available for investment
in the Funds. Any person who wishes to establish a retirement plan account may
do so by contacting The Commerce Funds directly. The complete Plan and IRA
documents and applications will be provided to existing or prospective
shareholders 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 shareholders, 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.
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<PAGE>
The Trustees shall have full power and authority, in their sole
discretion, and without obtaining any prior authorization or vote of
shareholders 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 shareholders of The Commerce Funds voting together in the
aggregate without regard to a particular investment portfolio.
The shareholders 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
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<PAGE>
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 shareholders of any series may be called by
the Trustees and shall be called by the Trustees upon the written request of
shareholders owning at least 10% of the outstanding shares entitled to vote.
Whenever ten or more shareholders meeting the qualifications set forth in
Section 16(c) of the 1940 Act seek the opportunity of furnishing materials to
the other shareholders with a view to obtaining signatures on such a request for
a meeting, the Trustees shall provide shareholders access to The Commerce Funds'
list of record shareholders or the mailing of such materials to such record
shareholders, 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
shareholders' 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 shareholders of The
Commerce Funds or of a series may be taken without a meeting if shareholders
holding more than a majority of the shares entitled to vote, except when a
larger vote is required by law or by any provision of 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 shareholders 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
shareholders to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of the office of Trustee.
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<PAGE>
ADDITIONAL INFORMATION CONCERNING TAXES
The following summarizes certain additional tax considerations
generally affecting the Funds and their shareholders 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 shareholders, 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 generally from federal income tax on its net
investment income and realized capital gains that it distributes to
shareholders, 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").
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
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<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 shareholders, 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 sales of capital assets held for
12 months but not more than 18 months) or 20% (for sales of capital assets held
more than 18 months). 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 shareholders. 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 shareholders.
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
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<PAGE>
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.
FEDERAL - TAX-EXEMPT INFORMATION
As described in their Prospectus, the National Tax-Free Intermediate
Bond and Missouri Tax-Free Intermediate 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 shareholders.
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 shareholders 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 shareholders receiving dividends from the Fund with respect to
such year.
Interest on indebtedness incurred by a shareholder to purchase or
carry Fund shares generally is not deductible for federal income tax purposes.
If a
-44-
<PAGE>
shareholder holds Fund shares for six months or less, any loss on the sale or
exchange of those shares will be disallowed to the extent of the amount of
exempt-interest dividends earned with respect to the shares. The Treasury
Department, however, is authorized to issue regulations reducing the six-month
holding requirement to a period of not less than the greater of 31 days or the
period between regular distributions where the investment company regularly
distributes at least 90% of its net tax-exempt interest. No such regulations had
been issued as of the date of this Statement of Additional Information.
-45-
<PAGE>
MANAGEMENT OF THE COMMERCE FUNDS
TRUSTEES AND OFFICERS OF THE TRUST
The Board of Trustees of the Trust is responsible for the management
of the business and affairs of the Trust. The Trustees and executive officers
of the Trust and their principal occupations for the last five years are set
forth below. Each Trustee has an address c/o The Commerce Funds, 922 Walnut
Street, Kansas City, Missouri 64141.
<TABLE>
<CAPTION>
POSITION(S) HELD
NAME, ADDRESS AND AGE WITH THE TRUST PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS
- -------------------------- ---------------- ---------------------------------------------------
<S> <C> <C>
John Eric Helsing Trustee and Chairman Retired. Former Professor and Chairman,
c/o The Commerce Funds Department of Business Administration and
922 Walnut Street Economics of William Jewell College since
Kansas City, MO 64141 September 1990. Lecturer at William Jewell
DOB: 11/6/33 College since September 1996. 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 Director, Milbank Mfg. Company; Director, Roddes
Kansas City, MO 64141 Lumber Company
DOB: 10/10/30
* Randall D. Barron Trustee and Treasurer Retired. Former President, Missouri Division,
c/o The Commerce Funds Southwestern Bell Telephone Company since 1984.
922 Walnut Street Former Director, Commerce Bancshares, Inc.
Kansas City, MO 64141
DOB: 10/25/29
David L. Bodde Trustee Charles N. Kimball Professor of Technology and
c/o The Commerce Funds Innovation, University of Missouri, Kansas City
922 Walnut Street since July 1996. Vice President, Midwest Research
Kansas City, MO 64141 Institute since January 1991. Executive Director,
DOB: 1/27/43 Commission on Engineering, National Academy of
Sciences from April 1986 to January 1991;
Director, Missouri Technological Corporation.
Director, Kansas City Power & Light Company
since 1994.
John Joseph Holland Trustee Vice President, and Chief Financial Officer,
c/o The Commerce Funds Butler Manufacturing Company since January
922 Walnut Street 1990 and Vice President and Controller prior
Kansas City, MO 64141 thereto. Director, Allendale Insurance Company.
DOB: 3/05/50
Gordon Linke Vice President Vice President of Goldman, Sachs & Co. March
Goldman Sachs Asset 1990 to Present.
Management
555 California Street
Suite 4500
San Francisco, CA 94104
DOB: 12/18/57
</TABLE>
*Trustees who are "interested persons" of The Commerce Funds, as defined in the
1940 Act.
-46-
<PAGE>
<TABLE>
<CAPTION>
POSITION(S) HELD
NAME, ADDRESS AND AGE WITH THE TRUST PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS
- -------------------------- ------------------ -------------------------------------------------
<S> <C> <C>
Nancy L. Mucker Vice President Vice President, Goldman Sachs since April 1985.
Goldman Sachs Asset Manager of Shareholder Services for Goldman
Management Sachs Asset Management Funds Group since
4900 Sears Tower November 1989.
Chicago, IL 60606
DOB: 7/26/49
W. Bruce McConnel, III Secretary Partner of the law firm Drinker Biddle & Reath
Drinker Biddle & Reath LLP, Philadelphia, Pennsylvania.
LLP
1345 Chestnut Street
Philadelphia, PA 19107
DOB: 02/07/43
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.
DOB: 9/26/59
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,
DOB: 11/7/64 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 1992.
Legal Department Associate General Counsel to Goldman Sachs Asset
85 Broad Street Management since February 1994. Formerly
New York, NY 10004 Partner, Hale and Dorr from September 1991 to
DOB: 10/24/60 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.
DOB: 6/21/65
</TABLE>
-47-
<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, Linke, Perlowski, Richman and Surloff and Ms.
Mucker hold similar positions with one or more investment companies that are
advised by Goldman Sachs.
Each Trustee receives an annual fee of $5,000, plus $750 for each
special meeting of the Board of Trustees. All Trustees are reimbursed for out
of pocket expenses incurred in connection with attendance at meetings. Drinker
Biddle & Reath LLP, of which Mr. McConnel is a partner, receives legal fees as
counsel to the Trust. The following chart provides certain information about
the trustee fees paid by the Trust for the fiscal year ended October 31, 1997:
<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, $5,750 $0 $0 N/A
Trustee, Chairman
WARREN W. WEAVER, $5,750 $0 $0 N/A
Trustee, President
RANDALL D. BARRON, $5,750 $0 $0 N/A
Trustee, Treasurer
DAVID L. BODDE, Trustee $5,750 $0 $0 N/A
JOHN JOSEPH HOLLAND, $5,750 $0 $0 N/A
Trustee
</TABLE>
* Fund Complex includes funds with a common investment adviser or an adviser
which is an affiliated person. The Commerce Funds are not part of a Fund
Complex.
-48-
<PAGE>
INVESTMENT ADVISOR
Information about the Advisor and its duties and compensation as
Advisor is contained in the Prospectuses. For the fiscal years ended October
31, 1997 and 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>
Fiscal year ended Fiscal year ended Commencement of Operations
October 31, 1997 October 31, 1996 through October 31, 1995
----------------- ----------------- --------------------------
<S> <C> <C> <C>
Short-Term Government Fund /(1)/ $ 119,281 $ 82,030 $ 47,091
Bond Fund /(1)/ $ 867,384 $ 600,758 $386,076
Balanced Fund /(1)/ $ 649,432 $ 438,474 $271,451
Growth and Income Fund /(2)/ $ 106,879 N/A N/A
Growth Fund /(1)/ $2,132,218 $1,262,077 $799,203
MidCap Fund /(1)/ $ 664,643 $ 453,655 $166,159
International Equity Fund /(1)/ $ 674,111 $ 315,480 $ 92,576
National Tax-Free Intermediate $ 104,058 $ 68,740 $ 24,040
Bond Fund /(3)/
Missouri Tax-Free Intermediate $ 58,452 $ 36,710 $ 11,654
Bond Fund /(3)/
</TABLE>
____________________
/(1)/ Commenced investment operations on December 12, 1994.
/(2)/ Commenced investment operations on March 3, 1997.
/(3)/ Commenced investment operations on February 21, 1995.
For the fiscal years ended October 31, 1997 and 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>
Fiscal year ended Fiscal year ended Commencement of Operations
October 31, 1997 October 31, 1996 through October 31, 1995
----------------- ----------------- --------------------------
<S> <C> <C> <C>
Short-Term Government Fund/(1)/ $ 79,521 $ 54,686 $31,394
Balanced Fund/(1)/ $216,475 $146,158 $90,484
International Equity Fund/(1)/ $346,574 $255,695 $61,711
Missouri Tax-Free Intermediate Bond/(2)/ $ 38,968 $ 24,474 $ 7,769
</TABLE>
-49-
<PAGE>
___________________
(1) Commenced investment operations on December 12, 1994.
(2) Commenced investment operations on February 21, 1995.
In addition, for the fiscal years ended October 31, 1997 and 1996, and from
commencement of operations through October 31, 1995, the Advisor voluntarily
agreed to reimburse the expenses of certain of the Funds. The effect of these
reimbursements during the period was to reduce expenses as follows:
<TABLE>
<CAPTION>
Fiscal year ended Fiscal year ended Commencement of
October 31, 1997 October 31, 1996 Operations
----------------- ----------------- through October 31, 1995
------------------------
<S> <C> <C> <C>
Short-Term Government Fund/(1)/ $ 88,977 $63,161 $ 40,597
Bond Fund/(1)/ $ 0 $ 0 $ 305
Balanced Fund/(1)/ $128,384 $43,556 $ 24,555
Growth Fund /(1)/ $ 0 $ 0 $ 0
International Equity Fund/(1)/ $ 0 $96,415 $112,535
National Tax-Free Intermediate $ 61,410 $95,722 $ 50,284
Bond Fund/(2)/
Missouri Tax-Free Intermediate $ 69,387 $89,907 $ 49,431
Bond Fund/(2)/
Growth and Income Fund/(3)/ $116,567 $ 0 $ 0
</TABLE>
___________________
/(1)/ Commenced investment operations on December 12, 1994.
/(2)/ Commenced investment operations on February 21, 1995.
/(3)/ Commenced investment operations on March 3, 1997.
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.
-50-
<PAGE>
Under the terms of the Advisory Agreement, the Advisor is obligated to
manage the investment of the Funds' assets in accordance with applicable laws
and regulations, including, to the extent applicable, the regulations and
rulings of the U.S. Comptroller of the Currency relating to fiduciary powers of
national banks. These regulations provide, in general, that assets managed by a
national bank as fiduciary may not be invested in stock or obligations of, or
property acquired from, the bank, its affiliates or their directors, officers or
employees, and further provide that fiduciary assets may not be sold or
transferred, by loan or otherwise, to the bank or persons connected with the
bank as described above.
The Advisor will not accept The Commerce Funds' shares as collateral
for a loan which is for the purpose of purchasing The Commerce Funds' shares,
and will not make loans to The Commerce Funds. Inadvertent overdrafts of The
Commerce Funds' account with the Custodian occasioned by clerical error or by
failure of a shareholder to provide available funds in connection with the
purchase of shares will not be deemed to be the making of a loan to The Commerce
Funds by the Advisor.
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 of the International Equity Fund.
For the fiscal years ended October 31, 1997 and 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 $420,324, $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
-51-
<PAGE>
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 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
-52-
<PAGE>
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 shareholder 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 PLANS
- -----------------------------------------------------------------------
The Distributor is entitled to payment on a monthly basis at an annual
rate not exceeding 0.25% of the average daily net assets of Service Shares from
the Trust for distribution expenses 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)
-53-
<PAGE>
direct out-of-pocket promotional expenses incurred by the Distributor in
advertising and marketing Service Shares; (ii) expenses incurred in connection
with preparing, printing, mailing, and distributing or publishing advertisements
and sales literature for Service Shares; (iii) expenses incurred in connection
with printing and mailing prospectuses and statements of additional information
to other than current Service Class 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.
As stated in the Prospectuses, The Commerce Funds may enter into
Servicing Agreements with Service Organizations, which may include the Advisor
and its affiliates, pursuant to the Shareholder Administrative Services Plans
for Institutional Shares and Service Shares (the "Services Plans"). The
Servicing Agreements provide that the Service Organizations will render
shareholder administrative support services to their customers who are the
beneficial owners of Institutional and Service Shares of the Short-Term
Government, Bond, Balanced, Growth, Growth and Income, MidCap and International
Equity Funds and Institutional Shares of the National Tax-Free Intermediate Bond
and Missouri Tax-Free Intermediate Bond Funds in consideration for a Fund's
payment of up to 0.25% (on an annualized basis) of the average daily net asset
value of the shares of the Fund beneficially owned by such customers and held by
the Service Organizations. At The
-54-
<PAGE>
Commerce Fund's option, it may reimburse the Service Organizations' out-of-
pocket expenses as well. Such services may include: (i) processing dividend and
distribution payments from a Fund; (ii) providing information periodically to
customers showing their share positions in Institutional and Service Shares;
(iii) arranging for bank wires; (iv) responding to customer inquiries concerning
their investments in shares; (v) providing subaccounting with respect to shares
beneficially owned by customers or the information necessary for such
subaccounting; (vi) if required by law, forwarding shareholder communications;
(vii) processing share exchange and redemption requests from customers; (viii)
assisting customers in changing dividend options, account designations and
addresses; (ix) establishing and maintaining accounts and records relating to
customers that invest in shares; (x) responding to customer inquiries relating
to the services performed by the Service Organization; and (xi) other similar
services requested by the Commerce Funds. Banks acting as Service Organizations
are prohibited from engaging in any activity primarily intended to result in the
sale of Fund shares. However, Service Organizations other than banks may be
requested to provide marketing assistance (e.g., forwarding sales literature and
advertising to their customers) in connection with the distribution of Fund
shares. For the fiscal year ended October 31, 1997, an aggregate of $373,537 in
fees were accrued under the Services Plans.
The Services Plans are subject to annual reapproval by a majority of
the Trust's Board of Trustees, including a majority of the Non-Interested Plan
Trustees and is terminable without penalty at any time with respect to any Fund
by a vote of a majority of the Non-Interested Plan Trustees or by vote of the
holders of a majority of the outstanding shares of each Class of the Fund
involved. Any agreement entered into pursuant to the Services Plans with a
Service Organization is terminable with respect to any Fund without penalty, at
any time, by vote of a majority of the Non-Interested Plan Trustees, by vote of
the holders of a majority of the outstanding shares of each Class of such Fund,
or by the Service Organizations. Each agreement will also terminate
automatically in the event of its assignment.
The Trust's Board of Trustees has concluded that there is a reasonable
likelihood that the Services Plans will benefit the Funds and their
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
-55-
<PAGE>
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.
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,
shareholders and advise each shareholder to the foregoing; (vi) record the
issuance of shares of each Fund and maintain a record of and provide the Fund on
a regular basis with the total number of shares of each Fund which are
authorized, issued and outstanding; (vii) perform the customary services of a
transfer agent, a dividend disbursing agent and custodian of certain retirement
plans and, as relevant, agent in connection with accumulation, open account or
similar plans; and (viii) provide a system enabling the Funds to monitor the
total number of shares sold in each State.
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 $47,000, $31,000 and $19,000 of such
sales loads for the fiscal years ended October 31, 1997 and 1996 and for the
period from the commencement of operations through October 31, 1995,
respectively.
ADMINISTRATOR
-56-
<PAGE>
Information about GSAM and its duties and compensation as
Administrator is contained in the Prospectuses. For the fiscal years ended
October 31, 1997 and 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 Fiscal year ended Commencement of Operations
October 31, 1997 October 31, 1996 through October 31, 1995
----------------- ----------------- --------------------------
<S> <C> <C> <C>
Short-Term Government Fund/(1)/ $ 59,641 $ 41,015 $ 23,546
Bond Fund/(1)/ 260,215 180,227 115,823
Balanced Fund/(1)/ 129,886 87,695 54,291
Growth and Income Fund/(2)/ 21,376 N/A N/A
Growth Fund/(1)/ 426,443 252,415 159,840
MidCap Fund/(1)/ 132,929 90,731 33,231
International Equity Fund/(1)/ 102,068 57,118 15,429
National Tax-Free Intermediate 31,217 20,622 7,212
Bond Fund/(3)/
Missouri Tax-Free Intermediate 29,226 18,355 5,826
Bond Fund/(3)/
</TABLE>
_________
/(1)/ Commenced investment operations on December 12, 1994.
/(2)/ Commenced investment operations on March 3, 1997.
/(3)/ Commenced investment operations on February 21, 1995.
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.
-57-
<PAGE>
ADDITIONAL INFORMATION ON PERFORMANCE
From time to time, yield and total return of the Funds for various
periods may be quoted in advertisements, shareholder reports or other
communications to shareholders.
Yield Calculations. A Fund's yield is calculated by dividing its net
------------------
investment income per share (as described below) earned during a 30-day period
by the maximum offering price per share on the last day of the period and
annualizing the result on a semi-annual basis by adding one to the quotient,
raising the sum to the power of six, subtracting one from the result and then
doubling the difference. A Fund's net investment income per share earned during
the period may be different than that determined for accounting purposes and is
based on the average daily number of shares outstanding during the period
entitled to receive dividends and includes dividends and interest earned during
the period minus expenses accrued for the period, net of reimbursements. This
calculation can be expressed as follows:
Yield = 2 [(a-b + 1]/6/ - 1
---
cd)
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends.
d = maximum offering price per share on the last day of
the period.
For the purpose of determining net investment income earned during the
period (variable "a" in the formula), dividend income on equity securities held
by a Fund is recognized by accruing 1/360 of the stated dividend rate of the
security each day that the 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
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<PAGE>
provision is the next call date on which the obligation reasonably may be
expected to be called or, if none, the maturity date. With respect to debt
obligations purchased at a discount or premium, the formula generally calls for
amortization of the discount or premium. The amortization schedule will be
adjusted monthly to reflect changes in the market values of such debt
obligations.
With respect to mortgage-related obligations which are expected to be
subject to monthly payments of principal and interest ("pay downs"), (a) gain or
loss attributable to actual monthly pay downs are accounted for as an increase
or decrease to interest income during the period; and (b) a Fund may elect
either (i) to amortize the discount and premium on the remaining security, based
on the cost of the security, to the weighted average maturity date, if such
information is available, or to the remaining term of the security, if any, if
the weighted average maturity date is not available, or (ii) not to amortize
discount or premium on the remaining security.
Undeclared earned income may be subtracted from the maximum offering
price per share (variable "d" in the formula). Undeclared earned income is the
net investment income which, at the end of the 30-day base period, has not been
declared as a dividend, but is reasonably expected to be and is declared as a
dividend shortly thereafter.
The Commerce Funds do not calculate a 30-day yield for the Balanced,
Growth and Income, Growth, MidCap and International Equity Funds. Based on the
foregoing calculations, for the 30 day period ended October 31, 1997, the yields
for the Short-Term Government, Bond, National Tax-Free Intermediate Bond and
Missouri Tax-Free Intermediate Bond Funds, were as follows:
<TABLE>
<CAPTION>
Yield Assuming
Yield Assuming Maximum Sales Load
Maximum Sales Load and Without Fee
and With Fee Waivers Waivers or
and Reimbursements Reimbursements
------------------ --------------
<S> <C> <C>
Short-Term
Government Fund
Institutional Shares 5.41% 4.96%
Service Shares 5.17% 4.72%
Bond Fund
Institutional Shares 5.67% N/A
Service Shares 5.43% N/A
</TABLE>
-59-
<PAGE>
<TABLE>
<S> <C> <C>
National Tax-Free
Intermediate Bond 3.58% 3.48%
Fund
Missouri Tax-Free
Intermediate Bond 3.81% 3.28%
Fund
</TABLE>
The yields presented in the foregoing Table are based on the yields of
Institutional and Service Shares of the Short-Term Government and Bond Funds and
Institutional Shares of the National Tax-Free Intermediate Bond and Missouri
Tax-Free Intermediate Bond Funds during the period indicated, as adjusted to
reflect the effect of the maximum sales charge of 2.00% on purchases of
Institutional and Service Shares of the Short-Term Government Fund and 3.50% on
purchases of Institutional and Service Shares of the Bond Fund and Institutional
Shares of the National Tax-Free Intermediate Bond and Missouri Tax-Free
Intermediate Bond Funds. The yields reflected above do not include the maximum
payments under the Shareholder Administrative Services Plan applicable to
Institutional Shares, Service Shares and Shares or the 12b-1 Plan applicable to
Service 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. The initial public offering of Service Shares was
January 2, 1997.
The Distribution Rate for a specified period is calculated by dividing
the total distribution per unit by the maximum offering price or net asset value
on the last day of the period and then annualizing such amount. For the 30 day
period ended October 31, 1997, the Distribution Rates for the Short-Term
Government, Bond, National Tax-Free Intermediate Bond and Missouri Tax-Free
Intermediate Bond Funds, were as follows:
<TABLE>
<CAPTION>
Rate Assuming Rate Assuming Rate Assuming No Rate Assuming No
Maximum Sales Maximum Sales Sales Load and Sales Load and
Load and With Fee Load and Without With Fee Waivers Without Fee
Waivers and Fee Waivers and and Waivers and
Reimbursements Reimbursements Reimbursements Reimbursements
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Short-Term
Government Fund
Institutional Shares 5.72% 5.27% 5.83% 5.38%
Service Shares 5.47% 5.02% 5.58% 5.13%
Bond Fund
Institutional Shares 5.57% N/A 5.77% N/A
Service Shares 5.04% N/A 5.22% N/A
National Tax-Free
Intermediate Bond
Fund
Institutional Shares 3.63% 3.53% 3.76% 3.66%
</TABLE>
-60-
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Missouri Tax-Free
Intermediate Bond
Fund
Institutional Shares 3.80% 3.27% 3.94% 3.41%
</TABLE>
The Distribution Rates presented in the foregoing Table are based on
Distribution Rates of Institutional and Service Shares of the Short-Term
Government and Bond Funds and Institutional Shares of the National Tax-Free
Intermediate Bond and Missouri Tax-Free Intermediate Bond Funds during the
period indicated, as adjusted to reflect the effect of the maximum sales charge
of 2.00% on purchases of Institutional and Service Shares of the Short-Term
Government Fund and 3.50% on purchases of Institutional and Service Shares of
the Bond Fund and Institutional Shares of the National Tax-Free Intermediate
Bond and Missouri Tax-Free Intermediate Bond Funds. The Distribution Rates
reflected above do not include the maximum payments under the Shareholder
Administrative Services Plan applicable to Institutional and Service Shares and
Shares or the Distribution Plan applicable to Service 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, 1997 for the
National Tax-Free Intermediate Bond Fund and Missouri Tax-Free Intermediate Bond
Fund, with and without fee waivers (assuming a 39.6% federal tax rate for both
Funds and a 6.0% Missouri tax rate for the Missouri Tax-Free Intermediate Bond
Fund) were as follows:
<TABLE>
<CAPTION>
Yield Assuming Yield Assuming
Maximum Sales Load Maximum Sales Load and
and With Fee Waivers Without Fee Waivers
and Reimbursements or Reimbursements
--------------------- ------------------------
<S> <C> <C>
National Tax-Free
Intermediate Bond
Fund 6.01% 5.84%
</TABLE>
-61-
<PAGE>
<TABLE>
<S> <C> <C>
Missouri Tax-Free
Intermediate Bond
Fund 6.69% 5.76%
</TABLE>
The tax-equivalent yields in the foregoing Table are based on the tax-
equivalent yields of Shares of the National Tax-Free Intermediate Bond and
Missouri Tax-Free Intermediate 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/n/) - 1
---
P]
Where: T = average annual total return.
ERV = ending redeemable value at the end of the
period covered by the computation of a
hypothetical $1,000 payment made at the
beginning of the period.
P = hypothetical initial payment of $1,000.
n = period covered by the computation, expressed
in terms of years.
The Funds compute their "aggregate total return" by determining the
aggregate rates of return during specified periods that likewise equate the
initial amount invested to the ending redeemable value of such investment. The
formula for calculating aggregate total return is as follows:
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<PAGE>
T = (ERV - 1
---
P)
The calculations of average annual total return and aggregate total
return assume the reinvestment of all dividends and capital gain distributions
on the reinvestment dates during the period and include all recurring fees
charged to all shareholder accounts, assuming an account size equal to the
Fund's mean (or median) account size for any fees that vary with the size of the
account. The maximum sales load and other charges deducted from payments are
deducted from the initial $1,000 payment (variable "P" in the formula). The
ending redeemable value (variable "ERV" in each formula) is determined by
assuming complete redemption of the hypothetical investment and the deduction of
all nonrecurring charges at the end of the period covered by the computations.
-63-
<PAGE>
Based on the foregoing calculations, the average annual total returns
for the Funds were as follows:
<TABLE>
<CAPTION>
Return Assuming
Return Assuming Maximum Sales Return Assuming Return Assuming
Maximum Sales Load and No Sales Load No Sales Load
Load and With Without Fee and With Fee and Without Fee
Fee Waivers and Waivers and Waivers and Waivers and
Reimbursements Reimbursements Reimbursements Reimbursements
-------------- -------------- -------------- --------------
<S> <C> <C> <C>
Average Annual Return for the period from commencement of operations through
October 31, 1997.
Short-Term
Government Fund/(1)/
Institutional Shares 6.91% 6.44% 7.66% 7.19%
Bond Fund/(1)/
Institutional Shares 8.55% N/A 9.89% N/A
Balanced Fund/(1)/
Institutional Shares 19.45% 19.10% 20.92% 20.58%
Growth Fund/(1)/
Institutional Shares 29.44% N/A 31.04 N/A
MidCap Fund/(1)/
Institutional Shares 23.39% N/A 24.91% N/A
International Equity
Fund/(1)/
Institutional Shares 6.98% 5.89% 8.30% 7.20%
</TABLE>
____________________
/(1)/ Commenced investment operations on December 12, 1994
-64-
<PAGE>
<TABLE>
<CAPTION>
Return Assuming Return Assuming Return Assuming Return Assuming
Maximum Sales Maximum Sales No Sales Load No Sales Load
Load and With Load and Without and With Fee and Without Fee
Fee Waivers and Fee Waivers and Waivers and Waivers and
Reimbursements Reimbursements Reimbursements Reimbursements
-------------- -------------- -------------- --------------
<S> <C> <C> <C>
Average Annual Total Returns for the one-year period ended October 31, 1997.
Short-Term
Government Fund/(1)/
Institutional Shares 4.30% 3.85% 6.45% 5.99%
Bond Fund/(1)/
Institutional Shares 4.71% N/A 8.50% N/A
Balanced Fund/(1)/
Institutional Shares 15.72% 15.27% 19.92% 19.45%
Growth Fund/(1)/
Institutional Shares 23.64% N/A 28.12% N/A
MidCap Fund/(1)/
Institutional Shares 14.71% N/A 18.88% N/A
International Equity
Fund/(1)/
Institutional Shares 3.40% 2.87% 7.15% 6.60%
</TABLE>
_____________________
/(1)/ Commenced investment operations on December 12, 1994.
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<PAGE>
**2 Based on the foregoing calculations, the aggregate total returns for
the Funds were as follows:
<TABLE>
<CAPTION>
Return Assuming Return Assuming Return Assuming Return Assuming
Maximum Sales Maximum Sales No Sales Load No Sales Load
Load and With Load and Without and With Fee and Without Fee
Fee Waivers and Fee Waivers and Waivers and Waivers and
Reimbursements Reimbursements Reimbursements Reimbursements
-------------- -------------- -------------- --------------
<S> <C> <C> <C>
Aggregate Total Return for the period from commencement through October 31,
1997.
Short-Term
Government Fund/(1)/
Institutional Shares 21.30% 19.78% 23.79% 22.27%
Service Shares 3.72% 3.11% 5.81% 5.19%
Bond Fund/(1)/
Institutional Shares 26.77% N/A 31.35% N/A
Service Shares 3.71% N/A 7.48% N/A
Balanced Fund/(1)/
Institutional Shares 67.15% 65.76% 73.18% 71.79%
Service Shares 12.47% 12.11% 16.53% 16.17%
Growth and Income
Fund/(2)/
Institutional Shares 17.75% 17.67% 22.00% 21.92%
Service Shares 17.57% 17.50% 21.81% 21.74%
</TABLE>
-66-
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Growth Fund/(1)/
Institutional Shares 110.84% N/A 118.46% N/A
Service Shares 18.20% N/A 22.47% N/A
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
MidCap Fund/(1)/
Institutional Shares 83.57% N/A 90.20% N/A
Service Shares 10.98% N/A 15.01% N/A
International Equity
Fund/(1)/
Institutional Shares 21.52% 17.99% 25.91% 22.25%
Service Shares (1.91%) (2.32%) 1.66% 1.24%
</TABLE>
-68-
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
National Tax Free
Intermediate Bond 12.59% 10.67% 16.66% 14.67%
Fund/(3)/
Missouri Tax Free
Intermediate Bond 11.91% 9.15% 15.95% 13.09%
Fund/(3)/
</TABLE>
____________________
/(1)/ Commenced investment operations on December 12, 1994
/(2)/ Commenced investment operations on March 3, 1997.
/(3)/ Commenced investment operations on February 21, 1995.
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 Intermediate Bond and Missouri Tax-
Free Intermediate Bond Funds during the periods indicated, as adjusted to
reflect the effect of the maximum sales charge of 2.00% on purchases of
Institutional Shares of the Short-Term Government Fund and 3.50% on purchases of
Institutional Shares of the Bond, Balanced, Growth, MidCap, International
Equity, National Tax-Free Intermediate Bond and Missouri Tax-Free Intermediate
Bond Funds and the maximum payments under the Shareholder Administrative
Services Plans applicable to Institutional and Service Shares and the
distribution expenses pursuant to the 12b-1 Plan applicable to Service Shares.
The average annual total returns and aggregate total returns do not include fees
that may be imposed by institutions upon their customers. If such fees had been
included in the returns reported above, performance of these Funds would have
been lower.
The Funds may also from time to time include in advertisements, sales
literature, communications to shareholders 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
-69-
<PAGE>
assuming the investment of $10,000 in shares and assuming the value on the
reinvestment date. Percentage increases are determined by subtracting the
initial value of the investment from the ending value and by dividing the
remainder by the beginning value. The Fund does not, for these purposes, deduct
from the initial value invested any amount representing sales charges. The Fund
will, however, disclose the maximum sales charge and will also disclose that the
performance data do not reflect sales charges and that inclusion of sale charges
would reduce the performance quoted.
The Funds may also from time to time include discussions or
illustrations of the effects of compounding in Literature. "Compounding" refers
to the fact that, if dividends or other distributions on a Fund investment are
reinvested by being paid in additional Fund shares, any future income or capital
appreciation of the Fund would increase the value, not only of the original Fund
investment, but also of the additional Fund shares received through
reinvestment. As a result, the value of the Fund investment would increase more
quickly than if dividends or other distributions had been paid in cash.
In addition, the Funds may also include in Literature discussions
and/or illustrations of the potential investment goals of a prospective
investor, investment management strategies, techniques, policies or investment
suitability of the Fund (such as value investing, market timing, dollar cost
averaging, asset allocation, constant ratio transfer, automatic accounting
rebalancing, the advantages and disadvantages of investing in tax-deferred and
taxable investments), economic conditions, the relationship between sectors of
the economy and the economy as a whole, various securities markets, the effects
of inflation and historical performance of various asset classes, including but
not limited to, stocks, bonds and Treasury securities. From time to time,
Literature may summarize the substance of information contained in shareholder
reports (including the investment composition of the Fund), as well as the views
of the Advisor as to current market, economy, trade and interest rate trends,
legislative, regulatory and monetary developments, investment strategies and
related matters believed to be of relevance to the Fund. The Fund may also
include in Literature charts, graphs or drawings which compare the investment
objective, return potential, relative stability and/or growth possibilities of
the Fund and/or other mutual funds, or illustrate the potential risks and
rewards of investment in various investment vehicles, including but not limited
to, stocks, bonds, Treasury securities and shares of the Fund and/or other
mutual funds. Literature may include a discussion of certain attributes or
benefits to be derived by an investment in the Fund and/or other mutual funds,
shareholder profiles and hypothetical investor scenarios, timely information on
financial management, tax and retirement planning and investment alternatives to
certificates of deposit and other financial instruments. Such Literature may
include symbols, headlines or other material which highlight or summarize the
information discussed in more detail therein.
-70-
<PAGE>
MISCELLANEOUS
As of February 13, 1998, the Advisor held of record 95% of the
outstanding shares in the Short-Term Government Fund; 93% of the outstanding
shares in the Bond Fund; 80% of the outstanding shares in the Balanced Fund; 82%
of the outstanding shares in the Growth Fund; 87% of the outstanding shares in
the MidCap Fund; 96% of the outstanding shares in the International Equity Fund;
99.8% of the outstanding shares in the Growth & Income Fund; 99.6% of the
outstanding shares in the National Tax-Free Intermediate Bond Fund; and 95.3% of
the outstanding shares in the Missouri Tax-Free Intermediate 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, the following shareholders owned of record 5% or
more of the Short-Term Government Fund's outstanding Institutional Shares: Hoco
and Co. Mutual Funds, P.O. Box 13366, Kansas City, MO, 61.47%; and Mori and Co.
Mutual Funds, P.O. Box 13366, Kansas City, MO, 34.31%, for which beneficial
ownership is disclaimed or presumed disclaimed.
As of the same date, the following shareholders owned of record 5% or
more of the Bond Fund's outstanding Institutional Shares: Hoco and Co. Mutual
Funds, P.O. Box 13366, Kansas City, MO, 62.96%; and Mori and Co. Mutual Funds,
P.O. Box 13366, Kansas City, MO, 28.97%, for which beneficial ownership is
disclaimed or presumed disclaimed.
As of the same date, the following shareholder owned of record 5% or
more of the Balanced Fund's outstanding Institutional Shares: Hoco and Co.
Mutual Funds, P.O. Box 13366, Kansas City, MO, 80.25%, for which beneficial
ownership is disclaimed or presumed disclaimed.
-71-
<PAGE>
As of the same date, the following shareholders owned of record 5% or
more of the Growth and Income Fund's outstanding Institutional Shares: Hoco and
Co. Mutual Funds, P.O. Box 13366, Kansas City, MO, 68.88%; and Mori and Co.
Mutual Funds, P.O. BOX 13366, Kansas City, MO, 27.58%, for which beneficial
ownership is disclaimed or presumed disclaimed.
As of the same date, the following shareholders owned of record 5% or
more of the Growth Fund's outstanding Institutional Shares: Hoco and Co. Mutual
Funds, P.O. Box 13366, Kansas City, MO, 60.90%; Mori and Co. Mutual Funds, P.O.
Box 13366, Kansas City, MO, 12.14%; Sunnen Employees Profit Sharing Plan, c/o
Commerce Bank, N.A., 8000 Forsyth, St. Louis, MO, 63105, 9.79%; and Investors
Fiduciary Trust Co. Customers, Commerce Bank N.A. Retirement Plans, Attention:
Andy Iseman, 127 W. 10th St., Kansas City, MO, 5.44%, for which beneficial
ownership is disclaimed or presumed disclaimed.
As of the same date, the following shareholders owned of record 5% or
more of the MidCap Fund's outstanding Institutional Shares: Hoco and Co. Mutual
Funds, P.O. Box 13366, Kansas City, MO, 53.79%; Mori and Co. Mutual Funds, P.O.
Box 13366, Kansas City, MO, 24.44%; and Sunnen Employees Profit Sharing Plan,
c/o Commerce Bank, N.A., 8000 Forsyth, St. Louis, MO, 63105, 6.74%, for which
beneficial ownership is disclaimed or presumed disclaimed.
As of the same date, the following shareholders owned of record 5% or
more of the International Equity Fund's outstanding Institutional Shares: Hoco
and Co. Mutual Funds, P.O. Box 13366, Kansas City, MO, 59.52%; Mori and Co.
Mutual Funds, P.O. Box 13366, Kansas City, MO, 29.65%; and Commerce Banshares
Retirement Plan, c/o Commerce Bank, N.A., 922 Walnut, Kansas City, MO, 64106,
6.10%, for which beneficial ownership is disclaimed or presumed disclaimed.
-72-
<PAGE>
As of the same date, the following shareholders owned of record 5% or
more of the National Tax-Free Intermediate Bond Fund's outstanding Shares: Mori
and Co. Mutual Funds, P.O. Box 13366, Kansas City, MO, 76.71% for which
beneficial ownership is disclaimed or presumed disclaimed; Hoco and Co. Mutual
Funds, P.O. Box 13366, Kansas City, MO, 14.15% for which beneficial ownership is
disclaimed or presumed disclaimed; and Helen Pierson Trust, c/o Commerce Bank,
N.A., 8000 Forsyth, St. Louis, MO, 63105, 6.10%; for which beneficial ownership
is disclaimed or presumed disclaimed.
As of the same date, the following shareholders owned of record 5% or
more of the Missouri Tax-Free Intermediate Bond Fund's outstanding Shares: Mori
and Co. Mutual Funds, P.O. Box 13366, Kansas City, MO, 71.36% for which
beneficial ownership is disclaimed or presumed disclaimed; Hoco and Co. Mutual
Funds, P.O. Box 13366, Kansas City, MO, 16.10% for which beneficial ownership is
disclaimed or presumed disclaimed; and Ronald D. Limpus Trust, c/o Commerce
Bank, N.A., 922 Walnut, Kansas City, MO, 63105, 5.53%.
As of the same date, the following shareholders owned 5% or more of
the Short-Term Government Fund's outstanding Service Shares: Commerce Bank
N.A., P.O. Box 13366, Kansas City, MO, 53.01%; Shirley R. Middleton, 3905
McCarron Court, Florissant, MO, 6.21%; and Wilma J. Buchanan, 1699 Irish Sea,
High Ridge, MO, 5.45%.
As of the same date, the following shareholders owned 5% or more of
the Bond Fund's outstanding Service Shares: Commerce Bank N.A., P.O. Box 13366,
Kansas City, MO, 44.68%; James C. and Barbara F. Norris, P.O. Box 204, Bixley,
MO, 9.94%; Fred J. Harvey, 2020 Massot Road, Festus, MO, 5.13%; and Donald D.
and Wilma I. Dixon, 34 Flora Drive, Festus, MO, 5.09%.
As of the same date, the following shareholder owned 5% or more of the
Balanced Fund's outstanding Service Shares: Commerce Bank N.A., P.O. Box 13366,
Kansas City, MO, 5.31%.
As of the same date, the following shareholders owned 5% or more of
the Growth and Income Fund's outstanding Service Shares: Miceli Loan Co., 14897
Clayton Road, Suite 220, Chesterfield, MO, 12.83%; Deborah J. Groves, 1568
Parksite Drive, Cape Girardeau, MO, 7.03%; and Ralph A. Bauer, 1452 Timberlake
Manor, Chesterfield, MO, 5.42%.
As of the same date, the following shareholders owned 5% or more of
the Growth Fund's outstanding Service Shares: Commerce Bank N.A., P.O. Box
13366, Kansas
-73-
<PAGE>
City, MO, 12.24%; and Joseph J. Miceli, 14897 Clayton Road, Suite 220,
Chesterfield, MO, 5.40%.
As of the same date, the following shareholders owned 5% or more of
the MidCap Fund's outstanding Service Shares: Kathleen S. and John D. Muller,
4739 Belleview, Kansas City, MO, 28.22%; Commerce Bank N.A., P.O. Box 13366,
Kansas City, MO, 10.84%; and John H. Steele II, 3621 E. Fruitwood Lane,
Springfield, MO, 6.40%.
As of the same date, the following shareholders owned 5% of the
International Equity Fund's outstanding Service Shares: Commerce Bank N.A.,
P.O. Box 13366, Kansas City, MO, 9.62%; Chris and Robin Lenauer, Route 2, Box
286D, Owensville, MO, 7.91%; J.F. Stiefvater, P.O. Box 3378, Springfield, MO,
7.76%; Franklin E. Liesman, 3 N. 260 W. Mary Lane, St. Charles, IL, 5.53%; and
Janice M. and Tod Terry Huber, 6801 N. Shadywood Drive, Ozark, MO, 5.45%.
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, 1997 has been filed with the Securities and
Exchange Commission. The financial statements in such Annual Report (the
"Financial Statements") are incorporated by reference into this Statement of
Additional Information. The Financial Statements
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<PAGE>
included in the Annual Report for the Funds for the fiscal period ended October
31, 1997 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.
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APPENDIX A
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COMMERCIAL PAPER RATINGS
- ------------------------
A Standard & Poor's ("S&P") commercial paper rating is a current
assessment of the likelihood of timely payment of debt having an original
maturity of no more than 365 days. The following summarizes the rating
categories used by Standard and Poor's for commercial paper:
"A-1" - Obligations are rated in the highest category indicating that
the obligor's capacity to meet its financial commitment is strong. Within this
category, certain obligations are designated with a plus sign (+). This
indicates that the obligor's capacity to meet its financial commitment on these
obligations is extremely strong.
"A-2" - Obligations are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations
rated "A-1". However, the obligor's capacity to meet its financial commitment on
the obligation is satisfactory.
"A-3" - Obligations exhibit adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment on the
obligation.
"B" - Obligations are regarded as having significant speculative
characteristics. The obligor currently has the capacity to meet its financial
commitment on the obligation; however, it faces major ongoing uncertainties
which could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
"C" - Obligations are currently vulnerable to nonpayment and are
dependent on favorable business, financial, and economic conditions for the
obligor to meet its financial obligation.
"D" - Obligations are in payment default. The "D" rating category is
used when payments on an obligation are not made on the date due, even if the
applicable grace period has not expired, unless S&P believes such payments will
be made
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during such grace period. The "D" rating will also be used upon the filing of a
bankruptcy petition or the taking of a similar action if payments on an
obligation are jeopardized.
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually senior debt obligations not having an original
maturity in excess of one year, unless explicitly noted. The following
summarizes the rating categories used by Moody's for commercial paper:
"Prime-1" - Issuers (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
leading market positions in well-established industries; high rates of return on
funds employed; conservative capitalization structure with moderate reliance on
debt and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well-established access
to a range of financial markets and assured sources of alternate liquidity.
"Prime-2" - Issuers (or supporting institutions) have a strong ability
for repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
"Prime-3" - Issuers (or supporting institutions) have an acceptable
ability for repayment of senior short-term debt obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
"Not Prime" - Issuers do not fall within any of the Prime rating
categories.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff & Phelps
employs three designations, "D-1+," "D-1" and "D-1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper:
"D-1+" - Debt possesses the highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
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"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 issues as investment grade. Risk factors are larger and subject
to more variation. Nevertheless, timely payment is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer has failed to meet scheduled principal and/or interest
payments.
Fitch IBCA short-term ratings apply to debt obligations that have time
horizons of less than 12 months for most obligations, or up to three years for
U.S. public finance securities. The following summarizes the rating categories
used by Fitch IBCA for short-term obligations:
"F1" - Securities possess the highest credit quality. This
designation indicates the strongest capacity for timely payment of financial
commitments and may have an added "+" to denote any exceptionally strong credit
feature.
"F2" - Securities possess good credit quality. This designation
indicates a satisfactory capacity for timely payment of financial commitments,
but the margin of safety is not as great as in the case of securities rated
"F1."
"F3" - Securities possess fair credit quality. This
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designation indicates that the capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could result in a
reduction to non-investment grade.
"B" - Securities possess speculative credit quality. this designation
indicates minimal capacity for timely payment of financial commitments, plus
vulnerability to near-term adverse changes in financial and economic
conditions.
"C" - Securities possess high default risk. This designation
indicates that the capacity for meeting financial commitments is solely reliant
upon a sustained, favorable business and economic environment.
"D" - Securities are in actual or imminent payment default.
Thomson BankWatch short-term ratings assess the likelihood of an
untimely payment of principal and interest of debt instruments with original
maturities of one year or less. The following summarizes the ratings used by
Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's highest
category and indicates a very high likelihood that principal and interest will
be paid on a timely basis.
"TBW-2" - This designation represents Thomson BankWatch's second-
highest category and indicates that while the degree of safety regarding timely
repayment of principal and interest is strong, the relative degree of safety is
not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents Thomson BankWatch's lowest
investment-grade category and indicates that while the obligation is more
susceptible to adverse developments (both internal and external) than those with
higher ratings, the capacity to service principal and interest in a timely
fashion is considered adequate.
"TBW-4" - This designation represents Thomson BankWatch's lowest
rating category and indicates that the obligation is regarded as non-investment
grade and therefore speculative.
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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" - An obligation rated "AAA" has the highest rating assigned by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is extremely strong.
"AA" - An obligation rated "AA" differs from the highest rated
obligations only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
"A" - An obligation rated "A" is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rated categories. However, the obligor's capacity to meet
its financial commitment on the obligation is still strong.
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"BBB" - An obligation rated "BBB" exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded as having
significant speculative characteristics. "BB" indicates the least degree of
speculation and "C" the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
"BB" - Debt is less vulnerable to non-payment than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial or economic conditions which could lead to the obligor's
inadequate capacity to meet its financial commitment on the obligation.
"B" - Debt is more vulnerable to non-payment than obligations rated
"BB", but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
"CCC" - Debt is currently vulnerable to non-payment, and is dependent
upon favorable business, financial and economic conditions for the obligor to
meet its financial commitment on the obligation. In the event of adverse
business, financial or economic conditions, the obligor is not likely to have
the capacity to meet its financial commitment on the obligation.
"CC" - An obligation rated "CC" is currently highly vulnerable to non-
payment.
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"C" - The "C" rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action has been taken, but
payments on this obligation are being continued.
"D" - An obligation rated "D" is in payment default. This rating is
used when payments on an obligation are not made on the date due, even if the
applicable grace period has not expired, unless S & P believes that such
payments will be made during such grace period. "D" rating is also used upon
the filing of a bankruptcy petition or the taking of similar action if payments
on an obligation are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
"r" - This 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 are considered as medium-grade obligations, (i.e., they
are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates speculative elements; "B" indicates a general lack of characteristics
of desirable investment; "Caa" are of poor standing; "Ca" represents obligations
which are speculative in a high degree; and "C" represents the lowest rated
class of bonds). "Caa," "Ca" and "C" bonds may be in default.
Con. (---) - Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction, (b) earnings
of projects unseasoned in 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.
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, Baa1, 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 ratings used by Fitch IBCA for corporate
and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest
credit quality. These ratings denote the lowest expectation of investment risk
and are assigned only in case of exceptionally strong capacity for timely
payment of financial commitments. This capacity is very unlikely to be
adversely affected by foreseeable events.
"AA" - Bonds considered to be investment grade and of very high credit
quality. These ratings denote a very low expectation of investment risk and
indicate very strong capacity for timely payment of financial commitments. This
capacity is not significantly vulnerable to foreseeable events.
"A" - Bonds considered to be investment grade and of high credit
quality. These ratings denote a low expectation of investment risk and indicate
strong capacity for timely payment of financial commitments. This capacity may,
nevertheless, be more vulnerable to adverse changes in circumstances or in
economic conditions than bonds with higher ratings.
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"BBB" - Bonds considered to be investment grade and of good credit
quality. These ratings denote that there is currently a low expectation of
investment risk. The capacity for timely payment of financial commitments is
adequate, but adverse circumstances and in economic conditions are more likely
to impair this category.
"BB" - Bonds considered to be speculative. These ratings indicate
that there is a possibility of credit risk developing, particularly as the
result of adverse economic changes over time; however, business or financial
alternatives may be available to allow financial commitments to be met.
Securities rated in this category are not investment grade.
"B" - Bonds are considered highly speculative. these ratings indicate
that significant credit risk is present, but a limited margin of safety remains.
Financial commitments are currently being met; however, capacity for continued
payment is contingent upon a sustained, favorable business and economic
environment.
"CCC," "CC," "C" - Bonds have high default risk. Capacity for meeting
financial commitments is reliant upon sustained, favorable business or economic
developments. "CC" ratings indicate that default of some kind appears probable,
and "C" ratings signal imminent default.
"DDD," "DD" and "D" - Bonds are in default. Securities are not
meeting obligations and are extremely speculative. "DDD" designates the highest
potential for recovery on these securities, and "D" represents the lowest
potential for recovery.
To provide more detailed indications of credit quality, the Fitch IBCA
ratings from and including "AA" to "B" may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major rating
categories.
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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.
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"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 a strong
capacity to pay principal and interest. Those issues determined to possess very
strong characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest, with some vulnerability to adverse
financial and economic changes over the term of the notes.
"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term
loans are 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:
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"MIG-1"/"VMIG-1" - This designation denotes 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" - This designation denotes high quality, with margins
of protection ample although not so large as in the preceding group.
"MIG-3"/"VMIG-3" - This designation denotes favorable quality, with
all security elements accounted for but lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - This designation denotes adequate quality, carrying
specific risk but having protection commonly regarded as required of an
investment security and not distinctly or predominantly speculative.
"SG" - This designation denotes speculative quality and lack of
margins of protection.
Fitch IBCA 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 Intermediate Bond and Missouri Tax-Free
Intermediate Bond Funds may enter into futures contracts and options for hedging
purposes. Such transactions are described in this Appendix.
I. Interest Rate Futures Contracts
-------------------------------
Use of Interest Rate Futures Contracts. Bond prices are established
--------------------------------------
in both the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally within five business days after the trade. In the
futures market, only a contract is made to purchase or sell a bond in the future
for a set price on a certain date. Historically, the prices for bonds
established in the futures markets have tended to move generally in the
aggregate in concert with the cash market prices and have maintained fairly
predictable relationships. Accordingly, a Fund may use interest rate futures
contracts as a defense, or hedge, against anticipated interest rate changes and
not for speculation. As described below, this would include the use of futures
contract sales to protect against expected increases in interest rates and
futures contract purchases to offset the impact of interest rate declines.
A Fund presently could accomplish a similar result to that which it
hopes to achieve through the use of futures contracts by selling bonds with long
maturities and investing in bonds with short maturities when interest rates are
expected to increase, or conversely, selling short-term bonds and investing in
long-term bonds when interest rates are expected to decline. However, because
of the liquidity that is often available in the futures market, the protection
is more likely to be achieved, perhaps at a lower cost and without changing the
rate of interest being earned by the Fund, by using futures contracts.
Description of Interest Rate Futures Contracts. An interest rate
----------------------------------------------
futures contract sale would create an obligation by a Fund, as seller, to
deliver the specific type of financial instrument called for in the contract at
a specific future time for a specified price. A futures contract purchase would
create an obligation by a Fund, as purchaser, to take delivery of the specific
type of financial instrument at a specific future time at a specific price. The
specific securities delivered or taken, respectively, at settlement date, would
not be determined until at or near that date. The determination would be in
accordance with the rules of the exchange on which the futures contract sale or
purchase was made.
Although interest rate futures contracts by their terms call for
actual delivery or acceptance of securities, in most cases the contracts are
closed out before the settlement date without the making or taking of delivery
of securities. Closing out a futures contract sale is effected by the Fund
entering into a futures contract purchase for the same aggregate amount of the
specific type of financial instrument and the same delivery date. If the price
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of the sale exceeds the price of the offsetting purchase, the Fund is
immediately paid the difference and thus realizes a gain. If the offsetting
purchase price exceeds the sale price, the Fund pays the difference and realizes
a loss. Similarly, the closing out of a futures contract purchase is effected
by the Fund entering into a futures contract sale. If the offsetting sale price
exceeds the purchase price, the Fund realizes a gain, and if the purchase price
exceeds the offsetting sale price, the Fund realizes a loss.
Interest rate futures contracts are traded in an auction environment
on the floors of several exchanges -- principally, the Chicago Board of Trade,
the Chicago Mercantile Exchange and the New York Futures Exchange. The Funds
would deal only in standardized contracts on recognized exchanges. Each
exchange guarantees performance under contract provisions through a clearing
corporation, a nonprofit organization managed by the exchange membership.
A public market now exists in futures contracts covering various
financial instruments including long-term U.S. Treasury Bonds and Notes,
Government National Mortgage Association (GNMA) modified pass-through mortgage
backed securities, three-month U.S. Treasury Bills and ninety-day commercial
paper. The Funds may trade in any interest rate futures contracts for which
there exists a public market, including, without limitation, the foregoing
instruments.
II. Index Futures Contracts
-----------------------
General. A stock or bond index assigns relative values to the stocks
-------
or bonds included in the index, which fluctuates with changes in the market
values of the stocks or bonds included.
A Fund may sell index futures contracts in order to offset a decrease
in market value of its portfolio securities that might otherwise result from a
market decline. A Fund may do so either to hedge the value of its portfolio as
a whole, or to protect against declines, occurring prior to sales of securities,
in the value of the securities to be sold. Conversely, a Fund will purchase
index futures contracts in anticipation of purchases of securities. A long
futures position may be terminated without a corresponding purchase of
securities.
In addition, a Fund may utilize index futures contracts in
anticipation of changes in the composition of its portfolio holdings. For
example, in the event that a Fund expects to narrow the range of industry groups
represented in its holdings it may, prior to making purchases of the actual
securities, establish a long futures position based on a more restricted index,
such as an index comprised of securities of a particular industry group. A Fund
may also sell futures contracts in connection with this strategy, in order to
protect against the possibility that the value of the securities to be sold as
part of the restructuring of the portfolio will decline prior to the time of
sale.
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III. Futures Contracts on Foreign Currencies
---------------------------------------
The International Equity Fund may enter into futures contracts on
foreign currency. This futures contract is a binding obligation on one party to
deliver, and a corresponding obligation on another party to accept delivery of,
a stated quantity of foreign currency, for an amount fixed in U.S. dollars.
Foreign currency futures may be used by a Fund to hedge against exposure to
fluctuations in exchange rates between the U.S. dollar and other currencies
arising from multinational transactions.
IV. Margin Payments
---------------
Unlike purchase or sales of portfolio securities, no price is paid or
received by a Fund upon the purchase or sale of a futures contract. Initially,
a Fund will be required to deposit with the broker or in a segregated account
with the Custodian an amount of cash or cash equivalents, known as initial
margin, based on the value of the contract. The nature of initial margin in
futures transactions is different from that of margin in security transactions
in that futures contract margin does not involve the borrowing of funds by the
customer to finance the transactions. Rather, the initial margin is in the
nature of a performance bond or good faith deposit on the contract which is
returned to the Fund upon termination of the futures contract assuming all
contractual obligations have been satisfied. Subsequent payments, called
variation margin, to and from the broker, will be made on a daily basis as the
price of the underlying instruments fluctuates making the long and short
positions in the futures contract more or less valuable, a process known as
marking-to-the-market. For example, when a particular Fund has purchased a
futures contract and the price of the contract has risen in response to a rise
in the underlying instruments, that position will have increased in value and
the Fund will be entitled to receive from the broker a variation margin payment
equal to that increase in value. Conversely, where the Fund has purchased a
futures contract and the price of the future contract has declined in response
to a decrease in the underlying instruments, the position would be less valuable
and the Fund would be required to make a variation margin payment to the broker.
At any time prior to expiration of the futures contract, a Fund may elect to
close the position by taking an opposite position, subject to the availability
of a secondary market, which will operate to terminate the Fund's position in
the futures contract. A final determination of variation margin is then made,
additional cash is required to be paid by or released to the Fund, and the Fund
realizes a loss or gain.
V. Risks of Transactions in Futures Contracts
------------------------------------------
There are several risks in connection with the use of futures by a
Fund as a hedging device. One risk arises because of the imperfect correlation
between movements in the price of the futures and movements in the price of the
instruments which are the subject of the hedge. The price of the future may
move more than or less than the price of the instruments being hedged. If the
price of the futures moves less than the price of the instruments which are the
subject of the hedge, the hedge will not be fully effective but, if
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the price of the instruments being hedged has moved in an unfavorable direction,
the Fund would be in a better position than if it had not hedged at all. If the
price of the instruments being hedged has moved in a favorable direction, this
advantage will be partially offset by the loss on the futures. If the price of
the futures moves more than the price of the hedged instruments, the Fund
involved will experience either a loss or gain on the futures which will not be
completely offset by movements in the price of the instruments which are the
subject of the hedge. To compensate for the imperfect correlation of movements
in the price of instruments being hedged and movements in the price of futures
contracts, a Fund may buy or sell futures contracts in a greater dollar amount
than the dollar amount of instruments being hedged if the volatility over a
particular time period of the prices of such instruments has been greater than
the volatility over such time period of the futures, or if otherwise deemed to
be appropriate by The Commerce Funds. Conversely, a Fund may buy or sell fewer
futures contracts if the volatility over a particular time period of the prices
of the instruments being hedged is less than the volatility over such time
period of the futures contract being used, or if otherwise deemed to be
appropriate by The Commerce Funds. It is also possible that, where a Fund has
sold futures to hedge its portfolio against a decline in the market, the market
may advance and the value of instruments held in the Fund may decline. If this
occurred, the Fund would lose money on the futures and also experience a decline
in value in its portfolio securities.
When futures are purchased to hedge against a possible increase in the
price of securities or a currency before a Fund is able to invest its cash (or
cash equivalents) in an orderly fashion, it is possible that the market may
decline instead; if the Fund then concludes not to invest its cash at that time
because of concern as to possible further market decline or for other reasons,
the Fund will realize a loss on the futures contract that is not offset by a
reduction in the price of the instruments that were to be purchased.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and the
instruments being hedged, the price of futures may not correlate perfectly with
movement in the cash market due to certain market distortions. Rather than
meeting additional margin deposit requirements, investors may close futures
contracts through off-setting transactions which could distort the normal
relationship between the cash and futures markets. Second, with respect to
financial futures contracts, the liquidity of the futures market depends on
participants entering into off-setting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced thus producing distortions. Third, from
the point of view of speculators, the deposit requirements in the futures market
are less onerous than margin requirements in the securities market. Therefore,
increased participation by speculators in the futures market may also cause
temporary price distortions. Due to the possibility of price distortion in the
futures market, and because of the imperfect correlation between the movements
in the cash market and movements in the price of futures, a correct forecast of
general market trends or interest rate movements by the adviser may still not
result in a successful hedging transaction over a short time frame.
-4-
<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
-5-
<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 shareholders to comply with the Distribution Requirement and on the
income or gain qualifying under the Income Requirement 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
-6-
<PAGE>
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. 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. 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, or settlement by reference to the value of, a foreign
currency of a type in which regulated futures contracts are traded; (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.
-7-
<PAGE>
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 (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.
-8-
<PAGE>
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 shareholders. 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, recently enacted changes to the Code permit the
International Equity Fund 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.
-9-
<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 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 fiscal years ended October 31, 1997 and October 31, 1996, and
the period from December 12, 1994 (commencement of operations)
through October 31, 1995; (ii) for the Institutional Shares of
Registrant's National Tax-Free Intermediate Bond Fund and
Missouri Tax-Free Intermediate Bond Fund for the fiscal years
ended October 31, 1997 and October 31, 1996, and the period from
February 21, 1995 (commencement of operations) through October
31, 1995; and (iii) for the Institutional and Service Shares of
the Growth and Income Fund for the period from March 3, 1997
(commencement of operations) through October 31, 1997.
(2) Included in Part B:
Financial Statements included in the Registrant's Annual Report for
the fiscal year ended October 31, 1997, as previously filed with the
Commission, are incorporated herein by reference.
(b) Exhibits
(1) Trust Instrument dated February 7, 1994./1/
(2) Bylaws of Registrant./1/
(3) Not Applicable.
(4) Not Applicable.
(5) (a) Advisory Agreement among Registrant, Commerce Bank, N.A.
(St. Louis) and Commerce Bank, N.A. (Kansas City)./1/
(b) Sub-Advisory Agreement among Commerce Bank, N.A. (St.
Louis), Commerce Bank, N.A. (Kansas City) and Rowe Price-
Fleming International, Inc./1/
(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./3/
(6) Distribution Agreement between Registrant and Goldman, Sachs &
Co./1/
C-1
<PAGE>
(a) Addendum No. 1 to Distribution Agreement between Registrant
and Goldman, Sachs & Co. with respect to the Growth and
Income Fund./3/
(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./3/
(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 of Drinker Biddle & Reath LLP.
(11) (a) Consent of Drinker Biddle & Reath LLP.
(b) Consent of Independent Auditors.
(c) Opinion of Blackwell Sanders Matheny Weary & Lombardi, LLP.
(12) Not Applicable.
(13) (a) Purchase Agreement between Registrant and Initial
Trustee./1/
(b) Purchase Agreement between Registrant and Goldman, Sachs &
Co./1/
(c) Purchase Agreement between Registrant and Commerce Bank,
N.A. (Kansas City)./1/
(d) Purchase Agreement between Registrant and Goldman, Sachs &
Co./3/
(14) Not Applicable.
(15) Amended and Restated Distribution Plan for Service Shares./2/
(16) (a) 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 Intermediate Bond Fund and Missouri Tax-Free
Intermediate Bond Fund./1/
C-2
<PAGE>
(b) Schedule of Computation of Performance Quotations for the
Growth and Income Fund.
(17) Financial Data Schedules as of October 31, 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 electronically as an Exhibit and incorporated herein by reference to
Post-Effective Amendment No. 6 to Registrant's Registration Statement on
Form N-1A filed on September 16, 1997.
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
-------------------------------
Number of Record
Holders as of
February 10, 1998
-----------------
Title of Series Institutional Service
- --------------- ------------- -------
Short-Term Government Fund...... 566 27
Bond Fund....................... 1,543 44
Balanced Fund................... 3,012 184
Growth Fund..................... 4,899 666
MidCap Fund..................... 3,609 119
Growth and Income Fund.......... 144 160
International Equity Fund....... 1,213 62
National Tax-Free Intermediate
Bond Fund...................... 23 N/A
Missouri Tax-Free Intermediate
Bond Fund...................... 69 N/A
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.
C-3
<PAGE>
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 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.
C-4
<PAGE>
Item 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
----------------------------------------------------
(a) Commerce Bank, N.A., the Registrant's investment adviser, provides
a comprehensive range of financial services including investment management,
trust, retail, commercial, brokerage, and correspondent banking services.
Set forth below is a list of all of the directors and senior executive
officers of Commerce Bank, N.A. and, with respect to each such person, the name
and business address of the company or companies (if any) with which such person
has been connected at any time since November 1, 1995, as well as the capacity
in which such person was connected.
<TABLE>
<CAPTION>
NAME AND POSITION WITH NAME AND PRINCIPAL
COMMERCE BANK, N.A. BUSINESS ADDRESS OF OTHER COMPANY CONNECTION WITH OTHER COMPANY
- --------------------------------------- --------------------------------- -----------------------------
<S> <C> <C>
Mr. John O. Brown, Key Industries, Inc. Director
Vice Chairman and Director 523 East Wall
Ft. Scott, KS 66701-1554
Mr. Jonathan M. Kemper, Tower Properties Company Director
Vice Chairman and Director 911 Main Street, Suite 100
Kansas City, MO 64106
Commerce Bancshares, Inc. Vice Chairman
1000 Walnut Street
Kansas City, MO
Mr. Edward J. Reardon II None None
Executive Vice President and Director
Mr. Robert C. Matthews, Jr. None None
Executive Vice President and Director
</TABLE>
C-5
<PAGE>
<TABLE>
<S> <C> <C>
Mr. David W. Kemper, Tower Properties Company Director
Chairman, President, CEO and 911 Main Street, Suite 100
Director Kansas City, MO 64106
Commerce Bancshares, Inc. Chairman, President and
1000 Walnut Street Chief Executive Officer
Kansas City, MO
Business Men's Assurance Company of
America Director
One Penn Valley Park
Kansas City, MO 64108
Seafield Capital Corporation
2600 Grand Avenue Suite 500 Director
Kansas City, MO 64108
Wave Technologies International, Inc.
10845 Olive Blvd.
St. Louis, MO 63146 Director
Ralcorp Holdings, Inc.
901 Chouteau Avenue
St. Louis, MO 63102 Director
Mr. Seth M. Leadbeater, None None
Executive Vice President and Director
</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).
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 Trust and Trust for Credit Unions, and as administrator and distributor
for the units of The Benchmark Funds and the Commerce Funds.
(b) Set forth below is certain information pertaining to the executive
committee of Goldman, Sachs & Co., Registrant's principal underwriter. None of
the members of the executive committee hold positions or offices with the
Registrant.
C-6
<PAGE>
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 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).
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 Intermediate Bond
Fund and Missouri Tax-Free Intermediate 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-7
<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. 7 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 2nd day of March, 1998.
THE COMMERCE FUNDS
Registrant
/s/ Warren W. Weaver
-----------------------------
Warren W. Weaver
President
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment to Registrant's Registration Statement has been signed below
by the following persons in the capacities and on the date indicated.
Signatures Title Date
---------------------------- ------------- ------------
/s/ Randall D. Barron*
- ----------------------
Randall D. Barron Trustee, Treasurer March 2, 1998
/s/ David L. Bodde*
- -------------------
David L. Bodde Trustee March 2, 1998
/s/ John Eric Helsing*
- ----------------------
John Eric Helsing Trustee, Chairman March 2, 1998
/s/John Joseph Holland*
- -----------------------
John Joseph Holland Trustee March 2, 1998
/s/ Warren W. Weaver
- ----------------------
Warren W. Weaver Trustee, President March 2, 1998
* By: /s/ Warren W. Weaver
---------------------
Warren W. Weaver
Attorney-in-Fact
<PAGE>
THE COMMERCE FUNDS
POWER OF ATTORNEY
-----------------
Know All Men by These Presents, that the undersigned, Warren W.
Weaver, hereby constitutes and appoints W. Bruce McConnel, III, his true and
lawful attorney, to execute in his name, place, and stead, in his capacity as
Trustee or officer, or both, of the Trust, the Registration Statement and any
amendments thereto and all instruments necessary or incidental in connection
therewith, and to file the same with the Securities and Exchange Commission; and
said attorney shall have full power and authority to do and perform in his name
and on his behalf, in any and all capacities, every act whatsoever requisite or
necessary to be done in the premises, as fully and to all intents and purposes
as he might or could do in person, said acts of said attorney being hereby
ratified and approved.
DATED: December 12, 1996
/s/ Warren W. Weaver
- ---------------------------
Warren W. Weaver
C-1
<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-2
<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-3
<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-4
<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-5
<PAGE>
COMMERCE FUNDS
--------------
EXHIBIT INDEX
-------------
Exhibits
--------
(10) Opinion of Drinker Biddle & Reath LLP.
(11)(a) Consent of Drinker Biddle & Reath LLP.
(11)(b) Consent of Independent Auditors.
(11)(c) Consent of Blackwell Sanders Matheny Weary & Lombardi LLP.
(16)(b) Schedule of Performance Computation for the
Growth and Income Fund.
(17) Financial Data Schedules as of October 31, 1997.
<PAGE>
Exhibit 10
Drinker Biddle & Reath LLP
Philadelphia National Bank Building
1345 Chestnut Street
Philadelphia, PA 19107-3496
Telephone (215) 988-2700
Telecopy (215) 988-2757
March 2, 1998
The Commerce Funds
P.O. Box 16931
St. Louis, MO 63105
Re: The Commerce Funds -- Shares of Beneficial Interest
---------------------------------------------------
Gentlemen:
We have acted as counsel for The Commerce Funds, a Delaware business
trust ("Trust"), in connection with the registration by the Trust of its shares
of beneficial interest, no par value per share. The Trust Instrument of the
Trust authorizes the issuance of an unlimited number shares of beneficial
interest, which are divided into sixteen (16) Series, designated as follows:
Series A-1 - Short Term Government Fund, Institutional Shares; Series B-1 - Bond
Fund, Institutional Shares; Series C-1 - Balanced Fund, Institutional Shares;
Series D-1 - Growth Fund, Institutional Shares; Series E-1 - MidCap Fund,
Institutional Shares; Series F-1 - International Equity Fund, Institutional
Shares; Series G - National Tax-Free Intermediate Bond Fund, Institutional
Shares; Series H - Missouri Tax-Free Intermediate Bond Fund, Institutional
Shares; Series I-1 - Growth and Income Fund, Institutional Shares; Series A-2 -
Short-Term Government Fund, Service Shares; Series B-2 - Bond Fund, Service
Shares; Series C-2 - Balanced Fund, Service Shares; Series D-2 - Growth Fund,
Service Shares; Series E-2 - MidCap Fund, Service Shares; Series F-2 -
International Equity Fund, Service Shares; Series I-2 - Growth and Income Fund,
Service Shares (each, a "Series" and collectively, the "Series"). The Board of
Trustees ("Board") of the Trust has previously authorized the issuance of shares
of these Series to the public. The shares of beneficial interest designated
into each such series are referred to herein as the "Current Series Shares"; the
shares of beneficial interest that are not designated into series
<PAGE>
The Commerce Funds
Page 2
are referred to herein as the "Future Shares"; and the Current Series Shares and
the Future Shares are referred to collectively herein as the "Shares." You have
asked for our opinion on certain matters relating to the Shares.
We have reviewed the Trust Instrument and By-laws of the Trust,
resolutions of the Trust's Board, certificates of public officials and of the
Trust's officers and such other legal and factual matters as we have deemed
appropriate. We have also reviewed the Trust's Registration Statement on Form
N-1A under the Securities Act of 1933 (the "Registration Statement"), as amended
through Post-Effective Amendment No. 7 thereto.
This opinion is based exclusively on the laws of the State of Delaware
and the federal law of the United States of America.
We have also assumed the following for purposes of this opinion:
1. The Current Series Shares have been, and will continue to be,
issued in accordance with the Trust Instrument and By-laws of the Trust and
resolutions of the Trust's Board and shareholders relating to the creation,
authorization and issuance of the Current Series Shares.
2. Prior to the issuance of any Future Shares, the Board (a) will
duly authorize the issuance of such Future Shares, (b) will determine with
respect to each series of such Future Shares the preferences, limitations and
relative rights applicable thereto and (c) with respect to such Future Shares,
will duly take the action necessary to create such series and to determine the
number of shares of such series and the relative designations, preferences,
limitations and relative rights thereof ("Future Series Designations").
3. With respect to the Future Shares, there will be compliance with
the terms, conditions and restrictions applicable to the issuance of such shares
that are set forth in (i) the Trust Instrument and By-laws of the Trust, each as
amended as of the date of such issuance, and (ii) the applicable Future Series
Designations.
4. The Board will not change the number of Shares of any Series, or
the preferences, limitations or relative rights of
<PAGE>
The Commerce Funds
Page 3
any series of Shares after any Shares of such series have been issued.
Based upon the foregoing, we are of the opinion that:
1. The Trust is authorized to issue an unlimited number of shares of
beneficial interest in each of the Series.
2. The Trust's Board is authorized (i) to create from time to time
one or more additional series of shares and, (ii) to determine, at the time of
creation of any such series, the number of shares of such series and the
designations, preferences, limitations and relative rights thereof.
3. All necessary action by the Trust to authorize the Current Series
Shares has been taken, and the Trust has the power to issue the Current Series
Shares.
4. The Shares will be, when issued in accordance with, and sold for
the consideration described in, the Registration Statement, validly issued,
fully paid and non-assessable by the Trust.
We consent to the filing of this opinion with Post-Effective Amendment No.
7 to the Registration Statement to be filed by the Trust with the Securities and
Exchange Commission.
Very truly yours,
/s/ DRINKER BIDDLE & REATH LLP
------------------------------
DRINKER BIDDLE & REATH LLP
<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. 7 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
reference 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
March 2, 1998
<PAGE>
Exhibit 11(b)
KPMG Peat Marwick LLP
1000 Walnut, Suite 1600
P.O. Box 13127
Kansas City, MO 64199
(816) 474-6480
FAX: (816) 556-9652
INDEPENDENT AUDITORS' CONSENT
-----------------------------
The Board of Trustees
The Commerce Funds:
We consent to the use of our report dated December 5, 1997 incorporated herein
by reference and to the references to our firm under the headings, "FINANCIAL
HIGHLIGHTS" in the Prospectuses and "INDEPENDENT AUDITORS" and "Financial
Statements" in the Statement of Additional Information.
/s/ KPMG Peat Marwick LLP
-------------------------
KPMG Peat Marwick LLP
Kansas City, Missouri
February 27, 1998
<PAGE>
Exhibit 11(c)
Law Offices
BLACKWELL SANDERS
MATHENY WEARY & LOMBARDI LLP
2300 Main Street - Suite 1100
Kansas City, Missouri 64108
P.O. Box 419777-64141-6777
(816) 983-8000
FAX: (816) 983-8080
February 18, 1998
Drinker Biddle & Reath LLP
Philadelphia National Bank Building
1345 Chestnut Street
Philadelphia, Pennsylvania 19107-3496
Ladies and Gentlemen:
In connection with the Prospectus (the "Prospectus") covering the
----------
Missouri Tax-Free Intermediate Bond Fund (the "Missouri Fund") and the Statement
-------------
of Additional Information supplementing the Prospectus (the "Statement"), filed
---------
initially with the Securities and Exchange Commission on June 30, 1994, for The
Commerce Funds, a Delaware business trust, you have requested our opinion
regarding the matters of Missouri law and data relating to the general business
and economic climate in Missouri (collectively, the "Missouri Disclosures") set
--------------------
forth in the sections of the Prospectus entitled "Investment Objectives and
Policies" (more specifically, "Risks Associated with an Investment in the Fund"
within the subsection entitled "Missouri Tax-Free Intermediate Bond Fund") and
"Tax Information" (more specifically, "Missouri Taxes" within the subsection
entitled "Tax Information") and in the section of the Statement entitled
"Investment Objectives, Policies and Risk Factors" (more specifically, "Special
Considerations Regarding Investment in Missouri Obligations"). Such sections in
the Prospectus and the Statement are hereinafter referred to as the "Risk
----
Disclosure Sections."
- -------------------
In rendering our opinion, we have examined and relied on such
documents, originals or copies certified or otherwise and identified to our
satisfaction as being true copies, and copies of the Prospectus and Statement,
as we have deemed necessary for the purposes of this opinion. Further, we have
examined the Constitution of the State of Missouri and other laws, statutes,
regulations and administrative rulings (all of which are generally available to
lawyers practicing in the State of Missouri and are in a format that makes legal
research reasonably
<PAGE>
February 18, 1998
Page 2
feasible) and other data published by the State of Missouri (and its agencies)
as we deemed necessary for purposes of this opinion. We have assumed the
accuracy of such data for the purposes of this opinion.
Based solely on the above review and subject to the assumptions and
limitations set forth herein, we advise you that, in our opinion, the statements
contained in the Risk Disclosure Sections concerning the Missouri Disclosures
are true and correct in all material respects as of the date hereof (or as of
the dates specified therein, where dates are expressly provided).
We express no opinion in this letter regarding the statements and
material set forth in the Prospectus and Statement except the Risk Disclosure
Sections concerning the Missouri Disclosures. In the course of our limited role
in rendering the foregoing opinion, nothing has come to our attention that has
caused us to believe that, as of the date hereof, the statements contained in
the Risk Disclosure Sections relating solely to the State of Missouri contain
any untrue statement of a material fact or, when read together, omit to state
any material fact necessary in order to make the statements contained therein,
in light of the circumstances under which they were made, not misleading.
This opinion is based on current law, regulations and rulings as of
the date hereof and the most recent data published by the State of Missouri (and
its agencies), all of which are subject to change and is subject to the
assumptions and limitations described herein. We disclaim any undertaking to
advise you of changes which may hereafter be brought to our attention; provided,
however, that, upon written request from you, at your or the Missouri Fund's
expense and only in respect of a proposed amendment of the Prospectus, we will
advise you of changes which may hereafter be brought to our attention within a
reasonable time after receipt of such request.
This opinion may not be furnished to or relied upon by any other
person and may not be referred to in the Prospectus, the Statement or otherwise.
Very truly yours,
/s/ Blackwell Sanders Matheny
Weary & Lombardi LLP
<PAGE>
EXHIBIT 16(b)
EXHIBIT (16B-1) FOR COMMERCE FUNDS - CUMULATIVE TOTAL RETURN -
For the Period from Commencement of Operations to October 31, 1997
(Assuming the Maximum Sales Load)
------------------------------------------------------------------
CUMULATIVE TOTAL RETURNS
------------------------
ERV
Formula: T=(______) -1
P
Where:
P= a hypothetical initial payment of $1,000 made on
March 3, 1997, the date of the commencement of the
Fund
T= Cumulative total return
ERV= Ending Redeemable Value of a hypothetical $1,000
payment made at the beginning of the period assuming
the maximum sales load of 3.5%
P= $1,000
ASSUMING REIMBURSEMENTS
1) GROWTH AND INCOME FUND:
Institutional Shares
ERV= $1,177.50
CUMULATIVE TOTAL RETURN = 17.75%
2) Growth and Income Fund
Service Shares
ERV= $1,175.70
CUMULATIVE TOTAL RETURN = 17.57%
ASSUMING NO REIMBURSEMENTS
1) GROWTH AND INCOME FUND:
Institutional Shares
ERV= $1,176.70
CUMULATIVE TOTAL RETURN = 17.67%
2) Growth and Income Fund
Service Shares
ERV= $1,175.00
CUMULATIVE TOTAL RETURN = 17.50%
<PAGE>
EXHIBIT (16B-2) FOR COMMERCE FUNDS - CUMULATIVE TOTAL RETURN -
for the Period from Commencement of Operations to October 31, 1997
(Assuming no Sales Load)
------------------------------------------------------------------
CUMULATIVE TOTAL RETURNS
------------------------
ERV
Formula: T= (______) -1
P
Where:
P= a hypothetical initial payment of $1,000 made on
March 3, 1997, the date of the commencement of the
Fund
T= Cumulative total return
ERV= Ending Redeemable Value of a hypothetical $1,000
payment made at the beginning of the period
P= $1,000
ASSUMING REIMBURSEMENTS
1) GROWTH AND INCOME FUND:
Institutional Shares
ERV= $1,220.00
CUMULATIVE TOTAL RETURN = 22.00%
2) Growth and Income Fund
Service Shares
ERV= $1,218,10
CUMULATIVE TOTAL RETURN = 21.81%
ASSUMING NO REIMBURSEMENTS
1) GROWTH AND INCOME FUND:
Institutional Shares
ERV= $1,219.20
CUMULATIVE TOTAL RETURN = 21.92%
2) Growth and Income Fund
Service Shares
ERV= $1,217.40
CUMULATIVE TOTAL RETURN = 21.74%
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMMERCE
FUNDS ANNUAL REPORT DATED OCTOBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 011
<NAME> SHORT-TERM GOVERNMENT FUND - INSTITUTIONAL SHARES
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 46,418,895
<INVESTMENTS-AT-VALUE> 47,046,828
<RECEIVABLES> 4,233,428
<ASSETS-OTHER> 31,696
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 51,311,952
<PAYABLE-FOR-SECURITIES> 1,859,592
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 162,311
<TOTAL-LIABILITIES> 2,021,903
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 48,782,930
<SHARES-COMMON-STOCK> 2,643,812
<SHARES-COMMON-PRIOR> 1,835,731
<ACCUMULATED-NII-CURRENT> 59,144
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (179,958)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 627,933
<NET-ASSETS> 49,290,049
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2,669,993
<OTHER-INCOME> 0
<EXPENSES-NET> (270,666)
<NET-INVESTMENT-INCOME> 2,399,327
<REALIZED-GAINS-CURRENT> (133,888)
<APPREC-INCREASE-CURRENT> 314,447
<NET-CHANGE-FROM-OPS> 2,579,886
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,392,682)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,714,904
<NUMBER-OF-SHARES-REDEEMED> (985,134)
<SHARES-REINVESTED> 78,311
<NET-CHANGE-IN-ASSETS> 15,451,538
<ACCUMULATED-NII-PRIOR> 16,269
<ACCUMULATED-GAINS-PRIOR> (8,584)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 198,802
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 439,164
<AVERAGE-NET-ASSETS> 39,642,420
<PER-SHARE-NAV-BEGIN> 18.43
<PER-SHARE-NII> 1.11
<PER-SHARE-GAIN-APPREC> 0.04
<PER-SHARE-DIVIDEND> (1.11)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 18.47
<EXPENSE-RATIO> 1.11
<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
COMMERCE FUNDS ANNUAL REPORT DATED OCTOBER 31,1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 012
<NAME> SHORT-TERM GOVERNMENT FUND - SERVICE SHARES
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 46,418,895
<INVESTMENTS-AT-VALUE> 47,046,828
<RECEIVABLES> 4,233,428
<ASSETS-OTHER> 31,696
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 51,311,952
<PAYABLE-FOR-SECURITIES> 1,859,592
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 162,311
<TOTAL-LIABILITIES> 2,021,903
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 48,782,930
<SHARES-COMMON-STOCK> 24,359
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 59,144
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (179,958)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 627,933
<NET-ASSETS> 49,290,049
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2,669,993
<OTHER-INCOME> 0
<EXPENSES-NET> (270,666)
<NET-INVESTMENT-INCOME> 2,399,327
<REALIZED-GAINS-CURRENT> (133,888)
<APPREC-INCREASE-CURRENT> 314,447
<NET-CHANGE-FROM-OPS> 2,579,886
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (6,645)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 24,418
<NUMBER-OF-SHARES-REDEEMED> (363)
<SHARES-REINVESTED> 304
<NET-CHANGE-IN-ASSETS> 15,451,538
<ACCUMULATED-NII-PRIOR> 16,269
<ACCUMULATED-GAINS-PRIOR> (8,584)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 198,802
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 439,164
<AVERAGE-NET-ASSETS> 142,197
<PER-SHARE-NAV-BEGIN> 18.37
<PER-SHARE-NII> 0.92
<PER-SHARE-GAIN-APPREC> 0.10
<PER-SHARE-DIVIDEND> (0.92)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 18.47
<EXPENSE-RATIO> 1.36
<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 COMMERCE
FUNDS ANNUAL REPORT DATED OCTOBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 021
<NAME> BOND FUND - INSTITUTIONAL SHARES
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 204,971,060
<INVESTMENTS-AT-VALUE> 214,097,029
<RECEIVABLES> 5,211,288
<ASSETS-OTHER> 22,476
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 219,330,793
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 789,176
<TOTAL-LIABILITIES> 789,176
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 209,528,790
<SHARES-COMMON-STOCK> 11,207,266
<SHARES-COMMON-PRIOR> 7,929,698
<ACCUMULATED-NII-CURRENT> 103,694
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (216,836)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 9,125,969
<NET-ASSETS> 218,541,617
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 12,133,511
<OTHER-INCOME> 0
<EXPENSES-NET> (1,477,961)
<NET-INVESTMENT-INCOME> 10,655,550
<REALIZED-GAINS-CURRENT> (143,004)
<APPREC-INCREASE-CURRENT> 4,412,106
<NET-CHANGE-FROM-OPS> 14,924,652
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (10,693,018)
<DISTRIBUTIONS-OF-GAINS> (184,700)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5,037,764
<NUMBER-OF-SHARES-REDEEMED> (2,196,219)
<SHARES-REINVESTED> 436,023
<NET-CHANGE-IN-ASSETS> 67,336,901
<ACCUMULATED-NII-PRIOR> 76,707
<ACCUMULATED-GAINS-PRIOR> 184,631
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 867,384
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,477,961
<AVERAGE-NET-ASSETS> 173,215,066
<PER-SHARE-NAV-BEGIN> 19.07
<PER-SHARE-NII> 1.17
<PER-SHARE-GAIN-APPREC> 0.39
<PER-SHARE-DIVIDEND> (1.18)
<PER-SHARE-DISTRIBUTIONS> (0.02)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 19.43
<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 COMMERCE
FUNDS ANNUAL REPORT DATED OCTOBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 022
<NAME> BOND FUND - SERVICE SHARES
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 204,971,060
<INVESTMENTS-AT-VALUE> 214,097,029
<RECEIVABLES> 5,211,288
<ASSETS-OTHER> 22,476
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 219,330,793
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 789,176
<TOTAL-LIABILITIES> 789,176
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 209,528,790
<SHARES-COMMON-STOCK> 38,047
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 103,694
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (216,836)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 9,125,969
<NET-ASSETS> 218,541,617
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 12,133,511
<OTHER-INCOME> 0
<EXPENSES-NET> (1,477,961)
<NET-INVESTMENT-INCOME> 10,655,550
<REALIZED-GAINS-CURRENT> (143,004)
<APPREC-INCREASE-CURRENT> 4,412,106
<NET-CHANGE-FROM-OPS> 14,924,652
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (15,032)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 37,357
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 690
<NET-CHANGE-IN-ASSETS> 67,336,901
<ACCUMULATED-NII-PRIOR> 76,707
<ACCUMULATED-GAINS-PRIOR> 184,631
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 867,384
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,477,961
<AVERAGE-NET-ASSETS> 315,339
<PER-SHARE-NAV-BEGIN> 19.00
<PER-SHARE-NII> 0.94
<PER-SHARE-GAIN-APPREC> 0.43
<PER-SHARE-DIVIDEND> (0.94)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 19.43
<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 COMMERCE
FUNDS ANNUAL REPORT DATED OCTOBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 031
<NAME> BALANCED FUND - INSTITUTIONAL SHARES
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 89,365,590
<INVESTMENTS-AT-VALUE> 106,490,161
<RECEIVABLES> 660,540
<ASSETS-OTHER> 49,147
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 107,199,848
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 198,987
<TOTAL-LIABILITIES> 198,987
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 84,202,523
<SHARES-COMMON-STOCK> 3,966,282
<SHARES-COMMON-PRIOR> 2,911,427
<ACCUMULATED-NII-CURRENT> 209,213
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 5,464,554
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 17,124,571
<NET-ASSETS> 107,000,861
<DIVIDEND-INCOME> 616,428
<INTEREST-INCOME> 2,477,003
<OTHER-INCOME> 0
<EXPENSES-NET> (979,643)
<NET-INVESTMENT-INCOME> 2,113,788
<REALIZED-GAINS-CURRENT> 5,557,357
<APPREC-INCREASE-CURRENT> 7,648,745
<NET-CHANGE-FROM-OPS> 15,319,890
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,044,522)
<DISTRIBUTIONS-OF-GAINS> (3,708,475)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,767,694
<NUMBER-OF-SHARES-REDEEMED> (949,694)
<SHARES-REINVESTED> 236,855
<NET-CHANGE-IN-ASSETS> 37,120,613
<ACCUMULATED-NII-PRIOR> 142,448
<ACCUMULATED-GAINS-PRIOR> 3,618,034
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 865,907
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,324,502
<AVERAGE-NET-ASSETS> 86,123,941
<PER-SHARE-NAV-BEGIN> 24.00
<PER-SHARE-NII> 0.59
<PER-SHARE-GAIN-APPREC> 3.93
<PER-SHARE-DIVIDEND> (0.59)
<PER-SHARE-DISTRIBUTIONS> (1.26)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 26.67
<EXPENSE-RATIO> 1.53
<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 COMMERCE
FUNDS ANNUAL REPORT DATED OCTOBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 032
<NAME> BALANCED FUND - SERVICE SHARES
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 89,365,590
<INVESTMENTS-AT-VALUE> 106,490,161
<RECEIVABLES> 660,540
<ASSETS-OTHER> 49,147
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 107,199,848
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 198,987
<TOTAL-LIABILITIES> 198,987
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 84,202,523
<SHARES-COMMON-STOCK> 45,717
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 209,213
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 5,464,554
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 17,124,571
<NET-ASSETS> 107,000,861
<DIVIDEND-INCOME> 616,428
<INTEREST-INCOME> 2,477,003
<OTHER-INCOME> 0
<EXPENSES-NET> (979,643)
<NET-INVESTMENT-INCOME> 2,113,788
<REALIZED-GAINS-CURRENT> 5,557,357
<APPREC-INCREASE-CURRENT> 7,648,745
<NET-CHANGE-FROM-OPS> 15,319,890
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (10,379)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 46,192
<NUMBER-OF-SHARES-REDEEMED> (867)
<SHARES-REINVESTED> 392
<NET-CHANGE-IN-ASSETS> 37,120,613
<ACCUMULATED-NII-PRIOR> 142,448
<ACCUMULATED-GAINS-PRIOR> 3,618,034
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 865,907
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,324,502
<AVERAGE-NET-ASSETS> 561,363
<PER-SHARE-NAV-BEGIN> 23.25
<PER-SHARE-NII> 0.40
<PER-SHARE-GAIN-APPREC> 3.42
<PER-SHARE-DIVIDEND> (0.41)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 26.66
<EXPENSE-RATIO> 1.78
<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 COMMERCE
FUNDS ANNUAL REPORT DATED OCTOBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 041
<NAME> GROWTH FUND - INSTITUTIONAL SHARES
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 257,246,485
<INVESTMENTS-AT-VALUE> 348,184,676
<RECEIVABLES> 2,025,273
<ASSETS-OTHER> 26,355
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 350,236,304
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 704,894
<TOTAL-LIABILITIES> 704,894
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 235,571,060
<SHARES-COMMON-STOCK> 9,953,941
<SHARES-COMMON-PRIOR> 7,217,198
<ACCUMULATED-NII-CURRENT> 40,695
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 22,981,464
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 90,938,191
<NET-ASSETS> 349,531,410
<DIVIDEND-INCOME> 3,851,251
<INTEREST-INCOME> 970,226
<OTHER-INCOME> 0
<EXPENSES-NET> (3,135,981)
<NET-INVESTMENT-INCOME> 1,685,496
<REALIZED-GAINS-CURRENT> 22,981,707
<APPREC-INCREASE-CURRENT> 40,425,005
<NET-CHANGE-FROM-OPS> 65,092,208
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,656,440)
<DISTRIBUTIONS-OF-GAINS> (14,172,190)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,256,557
<NUMBER-OF-SHARES-REDEEMED> (2,015,211)
<SHARES-REINVESTED> 495,397
<NET-CHANGE-IN-ASSETS> 140,623,625
<ACCUMULATED-NII-PRIOR> 16,344
<ACCUMULATED-GAINS-PRIOR> 14,171,947
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,132,218
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,135,981
<AVERAGE-NET-ASSETS> 281,836,622
<PER-SHARE-NAV-BEGIN> 28.95
<PER-SHARE-NII> 0.19
<PER-SHARE-GAIN-APPREC> 7.51
<PER-SHARE-DIVIDEND> (0.19)
<PER-SHARE-DISTRIBUTIONS> (1.92)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 34.54
<EXPENSE-RATIO> 1.11
<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 COMMERCE
FUNDS ANNUAL REPORT DATED OCTOBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 042
<NAME> GROWTH FUND - SERVICE SHARES
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 257,246,485
<INVESTMENTS-AT-VALUE> 348,184,676
<RECEIVABLES> 2,025,273
<ASSETS-OTHER> 26,355
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 350,236,304
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 704,894
<TOTAL-LIABILITIES> 704,894
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 235,571,060
<SHARES-COMMON-STOCK> 166,880
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 40,695
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 22,981,464
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 90,938,191
<NET-ASSETS> 349,531,410
<DIVIDEND-INCOME> 3,851,251
<INTEREST-INCOME> 970,226
<OTHER-INCOME> 0
<EXPENSES-NET> (3,135,981)
<NET-INVESTMENT-INCOME> 1,685,496
<REALIZED-GAINS-CURRENT> 22,981,707
<APPREC-INCREASE-CURRENT> 40,425,005
<NET-CHANGE-FROM-OPS> 65,092,208
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (10,547)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 170,508
<NUMBER-OF-SHARES-REDEEMED> (3,937)
<SHARES-REINVESTED> 309
<NET-CHANGE-IN-ASSETS> 140,623,625
<ACCUMULATED-NII-PRIOR> 16,344
<ACCUMULATED-GAINS-PRIOR> 14,171,947
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,132,218
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,135,981
<AVERAGE-NET-ASSETS> 2,962,565
<PER-SHARE-NAV-BEGIN> 28.26
<PER-SHARE-NII> 0.09
<PER-SHARE-GAIN-APPREC> 6.25
<PER-SHARE-DIVIDEND> (0.10)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 34.50
<EXPENSE-RATIO> 1.36
<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 COMMERCE
FUNDS ANNUAL REPORT DATED OCTOBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 051
<NAME> MID CAP FUND - INSTITUTIONAL SHARES
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 91,032,877
<INVESTMENTS-AT-VALUE> 113,280,312
<RECEIVABLES> 551,042
<ASSETS-OTHER> 21,863
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 113,853,217
<PAYABLE-FOR-SECURITIES> 576,280
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 176,469
<TOTAL-LIABILITIES> 752,749
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 84,499,696
<SHARES-COMMON-STOCK> 3,404,956
<SHARES-COMMON-PRIOR> 2,660,099
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 6,353,337
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 22,247,435
<NET-ASSETS> 113,100,468
<DIVIDEND-INCOME> 466,106
<INTEREST-INCOME> 86,872
<OTHER-INCOME> 0
<EXPENSES-NET> (1,091,535)
<NET-INVESTMENT-INCOME> (538,557)
<REALIZED-GAINS-CURRENT> 6,551,956
<APPREC-INCREASE-CURRENT> 9,385,946
<NET-CHANGE-FROM-OPS> 15,399,345
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (781,830)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,462,199
<NUMBER-OF-SHARES-REDEEMED> (741,233)
<SHARES-REINVESTED> 23,891
<NET-CHANGE-IN-ASSETS> 38,459,028
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 583,211
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 664,643
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,091,535
<AVERAGE-NET-ASSETS> 88,385,725
<PER-SHARE-NAV-BEGIN> 28.06
<PER-SHARE-NII> (0.13)
<PER-SHARE-GAIN-APPREC> 5.38
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (0.29)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 33.02
<EXPENSE-RATIO> 1.23
<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 COMMERCE
FUNDS ANNUAL REPORT DATED OCTOBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 052
<NAME> MID CAP FUND - SERVICE SHARES
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 91,032,877
<INVESTMENTS-AT-VALUE> 113,280,312
<RECEIVABLES> 551,042
<ASSETS-OTHER> 21,863
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 113,853,217
<PAYABLE-FOR-SECURITIES> 576,280
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 176,469
<TOTAL-LIABILITIES> 752,749
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 84,499,696
<SHARES-COMMON-STOCK> 19,980
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 6,353,337
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 22,247,435
<NET-ASSETS> 113,100,468
<DIVIDEND-INCOME> 466,106
<INTEREST-INCOME> 86,872
<OTHER-INCOME> 0
<EXPENSES-NET> (1,091,535)
<NET-INVESTMENT-INCOME> (538,557)
<REALIZED-GAINS-CURRENT> 6,551,956
<APPREC-INCREASE-CURRENT> 9,385,946
<NET-CHANGE-FROM-OPS> 15,399,345
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 111,102
<NUMBER-OF-SHARES-REDEEMED> (91,122)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 38,459,028
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 583,211
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 664,643
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,091,535
<AVERAGE-NET-ASSETS> 278,757
<PER-SHARE-NAV-BEGIN> 28.64
<PER-SHARE-NII> (0.11)
<PER-SHARE-GAIN-APPREC> 4.41
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 32.94
<EXPENSE-RATIO> 1.48
<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 COMMERCE
FUNDS ANNUAL REPORT DATED OCTOBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 061
<NAME> INTERNATIONAL EQUITY FUND - INSTITUTIONAL SHARES
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 74,392,137
<INVESTMENTS-AT-VALUE> 78,742,974
<RECEIVABLES> 661,199
<ASSETS-OTHER> 716,111
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 80,120,284
<PAYABLE-FOR-SECURITIES> 1,329,351
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 287,015
<TOTAL-LIABILITIES> 1,616,366
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 71,968,741
<SHARES-COMMON-STOCK> 3,541,115
<SHARES-COMMON-PRIOR> 2,461,373
<ACCUMULATED-NII-CURRENT> 236,149
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,972,065
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4,326,963
<NET-ASSETS> 78,503,918
<DIVIDEND-INCOME> 1,127,142
<INTEREST-INCOME> 281,686
<OTHER-INCOME> 0
<EXPENSES-NET> (1,170,618)
<NET-INVESTMENT-INCOME> 238,210
<REALIZED-GAINS-CURRENT> 2,055,325
<APPREC-INCREASE-CURRENT> 712,317
<NET-CHANGE-FROM-OPS> 3,005,852
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (268,546)
<DISTRIBUTIONS-OF-GAINS> (598,118)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,709,863
<NUMBER-OF-SHARES-REDEEMED> (662,113)
<SHARES-REINVESTED> 31,992
<NET-CHANGE-IN-ASSETS> 26,914,892
<ACCUMULATED-NII-PRIOR> 245,502
<ACCUMULATED-GAINS-PRIOR> 530,523
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,020,685
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,517,192
<AVERAGE-NET-ASSETS> 67,951,745
<PER-SHARE-NAV-BEGIN> 20.96
<PER-SHARE-NII> 0.06
<PER-SHARE-GAIN-APPREC> 1.42
<PER-SHARE-DIVIDEND> (0.10)
<PER-SHARE-DISTRIBUTIONS> (0.24)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 22.10
<EXPENSE-RATIO> 2.23
<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 COMMERCE
FUNDS ANNUAL REPORT DATED OCTOBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 062
<NAME> INTERNATIONAL EQUITY FUND - SERVICE SHARES
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 74,392,137
<INVESTMENTS-AT-VALUE> 78,742,974
<RECEIVABLES> 661,199
<ASSETS-OTHER> 716,111
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 80,120,284
<PAYABLE-FOR-SECURITIES> 1,329,351
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 287,015
<TOTAL-LIABILITIES> 1,616,366
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 71,968,741
<SHARES-COMMON-STOCK> 10,449
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 236,149
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,972,065
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4,326,963
<NET-ASSETS> 78,503,918
<DIVIDEND-INCOME> 1,127,142
<INTEREST-INCOME> 281,686
<OTHER-INCOME> 0
<EXPENSES-NET> (1,170,618)
<NET-INVESTMENT-INCOME> 238,210
<REALIZED-GAINS-CURRENT> 2,055,325
<APPREC-INCREASE-CURRENT> 712,317
<NET-CHANGE-FROM-OPS> 3,005,852
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 10,451
<NUMBER-OF-SHARES-REDEEMED> (2)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 26,914,892
<ACCUMULATED-NII-PRIOR> 245,502
<ACCUMULATED-GAINS-PRIOR> 530,523
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,020,685
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,517,192
<AVERAGE-NET-ASSETS> 113,117
<PER-SHARE-NAV-BEGIN> 21.70
<PER-SHARE-NII> 0.01
<PER-SHARE-GAIN-APPREC> 0.35
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 22.06
<EXPENSE-RATIO> 2.48
<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 COMMERCE
FUNDS ANNUAL REPORT DATED OCTOBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 071
<NAME> NATIONAL TAX-FREE BOND FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 24,203,802
<INVESTMENTS-AT-VALUE> 24,837,935
<RECEIVABLES> 517,031
<ASSETS-OTHER> 46,288
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 25,401,254
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 120,448
<TOTAL-LIABILITIES> 120,448
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 24,631,502
<SHARES-COMMON-STOCK> 1,341,115
<SHARES-COMMON-PRIOR> 954,201
<ACCUMULATED-NII-CURRENT> 15,303
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (132)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 643,133
<NET-ASSETS> 25,280,806
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 986,379
<OTHER-INCOME> 0
<EXPENSES-NET> (176,898)
<NET-INVESTMENT-INCOME> 809,481
<REALIZED-GAINS-CURRENT> 5,845
<APPREC-INCREASE-CURRENT> 458,468
<NET-CHANGE-FROM-OPS> 1,273,794
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (809,481)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 589,481
<NUMBER-OF-SHARES-REDEEMED> (209,410)
<SHARES-REINVESTED> 6,843
<NET-CHANGE-IN-ASSETS> 7,667,521
<ACCUMULATED-NII-PRIOR> 9,525
<ACCUMULATED-GAINS-PRIOR> (5,977)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 104,058
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 238,308
<AVERAGE-NET-ASSETS> 20,811,520
<PER-SHARE-NAV-BEGIN> 18.46
<PER-SHARE-NII> 0.72
<PER-SHARE-GAIN-APPREC> 0.39
<PER-SHARE-DIVIDEND> (0.72)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 18.85
<EXPENSE-RATIO> 1.15
<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 COMMERCE
FUNDS ANNUAL REPORT DATED OCTOBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 081
<NAME> MISSOURI TAX-FREE BOND FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 24,880,953
<INVESTMENTS-AT-VALUE> 25,335,205
<RECEIVABLES> 414,612
<ASSETS-OTHER> 74,133
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 25,823,950
<PAYABLE-FOR-SECURITIES> 1,292,666
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 97,614
<TOTAL-LIABILITIES> 1,390,380
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 23,944,161
<SHARES-COMMON-STOCK> 1,312,685
<SHARES-COMMON-PRIOR> 932,652
<ACCUMULATED-NII-CURRENT> 16,372
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 18,885
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 454,252
<NET-ASSETS> 24,433,670
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 933,162
<OTHER-INCOME> 0
<EXPENSES-NET> (126,646)
<NET-INVESTMENT-INCOME> 806,516
<REALIZED-GAINS-CURRENT> 18,879
<APPREC-INCREASE-CURRENT> 385,392
<NET-CHANGE-FROM-OPS> 1,210,787
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (806,516)
<DISTRIBUTIONS-OF-GAINS> (14,681)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 548,660
<NUMBER-OF-SHARES-REDEEMED> (175,860)
<SHARES-REINVESTED> 7,233
<NET-CHANGE-IN-ASSETS> 7,399,256
<ACCUMULATED-NII-PRIOR> 10,626
<ACCUMULATED-GAINS-PRIOR> 14,687
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 97,420
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 235,001
<AVERAGE-NET-ASSETS> 19,484,010
<PER-SHARE-NAV-BEGIN> 18.26
<PER-SHARE-NII> 0.76
<PER-SHARE-GAIN-APPREC> 0.37
<PER-SHARE-DIVIDEND> (0.76)
<PER-SHARE-DISTRIBUTIONS> (0.02)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 18.61
<EXPENSE-RATIO> 1.21
<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
COMMERCE FUNDS ANNUAL REPORT DATED OCTOBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 091
<NAME> GROWTH AND INCOME FUND - INSTITUTIONAL SHARES
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 44,799,584
<INVESTMENTS-AT-VALUE> 47,675,231
<RECEIVABLES> 1,229,110
<ASSETS-OTHER> 37,493
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 48,941,834
<PAYABLE-FOR-SECURITIES> 1,056,430
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 123,961
<TOTAL-LIABILITIES> 1,180,391
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 44,755,926
<SHARES-COMMON-STOCK> 2,070,789
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 28,799
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 101,071
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,875,647
<NET-ASSETS> 47,761,443
<DIVIDEND-INCOME> 295,713
<INTEREST-INCOME> 60,616
<OTHER-INCOME> 0
<EXPENSES-NET> (172,040)
<NET-INVESTMENT-INCOME> 184,289
<REALIZED-GAINS-CURRENT> 101,071
<APPREC-INCREASE-CURRENT> 2,875,647
<NET-CHANGE-FROM-OPS> 3,161,007
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (152,431)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,164,150
<NUMBER-OF-SHARES-REDEEMED> (98,895)
<SHARES-REINVESTED> 5,534
<NET-CHANGE-IN-ASSETS> 47,761,443
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 106,879
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 288,607
<AVERAGE-NET-ASSETS> 20,784,281
<PER-SHARE-NAV-BEGIN> 18.00
<PER-SHARE-NII> 0.15
<PER-SHARE-GAIN-APPREC> 3.80
<PER-SHARE-DIVIDEND> (0.13)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 21.82
<EXPENSE-RATIO> 2.02
<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
COMMERCE FUNDS ANNUAL REPORT DATED OCTOBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 092
<NAME> GROWTH AND INCOME FUND - SERVICE SHARES
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 44,799,584
<INVESTMENTS-AT-VALUE> 47,675,231
<RECEIVABLES> 1,229,110
<ASSETS-OTHER> 37,493
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 48,941,834
<PAYABLE-FOR-SECURITIES> 1,056,430
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 123,961
<TOTAL-LIABILITIES> 1,180,391
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 44,755,926
<SHARES-COMMON-STOCK> 118,667
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 28,799
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 101,071
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,875,647
<NET-ASSETS> 47,761,443
<DIVIDEND-INCOME> 295,713
<INTEREST-INCOME> 60,616
<OTHER-INCOME> 0
<EXPENSES-NET> (172,040)
<NET-INVESTMENT-INCOME> 184,289
<REALIZED-GAINS-CURRENT> 101,071
<APPREC-INCREASE-CURRENT> 2,875,647
<NET-CHANGE-FROM-OPS> 3,161,007
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (3,059)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 118,593
<NUMBER-OF-SHARES-REDEEMED> (68)
<SHARES-REINVESTED> 142
<NET-CHANGE-IN-ASSETS> 47,761,443
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 106,879
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 288,607
<AVERAGE-NET-ASSETS> 620,799
<PER-SHARE-NAV-BEGIN> 18.00
<PER-SHARE-NII> 0.12
<PER-SHARE-GAIN-APPREC> 3.80
<PER-SHARE-DIVIDEND> (0.11)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 21.81
<EXPENSE-RATIO> 2.27
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
