<PAGE>
As filed with the Securities and Exchange Commission on October 13, 2000
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. 11 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 12 [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:
800-995-6365
W. Bruce McConnel, III
Drinker Biddle & Reath LLP
One Logan Square
18th and Cherry Streets
Philadelphia, Pennsylvania 19103-6996
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box)
[_] immediately upon filing pursuant to paragraph (b)
[_] on (date) pursuant to paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)(1)
[_] on (date) pursuant to paragraph (a)(1)
[X] 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: Series J-1 and J-2 shares and Series K-1
and K-2 shares representing interests in Institutional Shares and Services
Shares of each of the Commerce Kansas Tax-Free Intermediate Bond Fund and the
Commerce Core Equity Fund, respectively.
<PAGE>
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.
[LOGO OF COMMERCE FUNDS]
The Core Equity Fund
The Kansas Tax-Free Intermediate Bond Fund
Institutional Shares Prospectus
Date
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Overview of Each Fund
Core Equity Fund 4
Kansas Tax-Free Intermediate Bond Fund 8
Investment Securities and Practices 13
Account Policies and Features 17
Buying Institutional Shares 17
Redeeming Institutional Shares 21
General Policies 23
Business of The Commerce Funds 25
Tax Information 25
Service Providers 27
</TABLE>
The Commerce Funds PAGE 1
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<PAGE>
The Commerce Funds
What These Funds Are:
These Funds are mutual funds. A mutual fund is a pooled investment that gives
you an opportunity to participate in financial markets. Each Fund is
professionally managed. Each Fund has stated goals that it attempts to reach.
However, as with all mutual funds, neither of these Funds can offer guaranteed
results. You could lose money in these Funds.
The Commerce Funds consists of eleven investment portfolios, each of which has
a separate pool of assets with separate investment objectives and policies.
This Prospectus offers Institutional Shares of two of those investment
portfolios.
The Core Equity Fund seeks capital appreciation and, secondarily, current
income.
The Kansas Tax-Free Intermediate Bond Fund seeks current income exempt from
federal and, to the extent possible, from Kansas income taxes, as is consistent
with the preservation of capital.
What These Funds Are Not:
An investment in either of these Funds is not a bank deposit. Your investment is
not insured or guaranteed by the FDIC or any other agency of the government.
PAGE 2 The Commerce Funds
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<PAGE>
This Prospectus describes the Institutional Shares of each Fund. Institutional
Shares are offered primarily to:
. investors maintaining accounts at bank trust departments or trust companies,
for funds held within those accounts, including institutions affiliated with
Commerce Bancshares, Inc. and its subsidiaries (for example, Commerce Bank
Investment Management Group clients), and individuals who have named a bank
affiliated with Commerce Bancshares, Inc., as their primary personal
representative or co-personal representative under will;
. participants in employer-sponsored defined contribution plans when such plans
offer The Commerce Funds as one of their investment options;
. any investor who has been a continuous shareholder in The Commerce Funds
since January 1, 1997 or before;
. 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, broker/dealers and their clients.
The Commerce Funds is also authorized to issue an additional class of shares,
the Service Shares. 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 PAGE 3
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.
<PAGE>
Core Equity Fund
-------------------------------------------------------------------------
Michael E. Marks, CFA, Portfolio Manager
. Joined Commerce Bank in 1999
. Fund manager since Fund inception
. 7 years of experience
. Formerly, a Portfolio Manager and Senior Investment Analyst from November
1993 to October 1998 at IAA Trust Company.
Please see the table on p. for more detailed information about the investment
practices of the Core Equity Fund and the risks associated with those
practices.
[GRAPHIC]
Investment Objectives
-------------------------------------------------------------------------
Seeks capital appreciation and, secondarily, current income.
[GRAPHIC]
Primary Investment Strategies
-------------------------------------------------------------------------
. Invests principally in stocks of companies whose valuation and earnings
potentials are attractive.
. Through a disciplined approach, the Fund seeks a blend of companies either
selling below fair value or producing strong earnings leading to future
capital appreciation.
. Generally purchases common stock of companies whose characteristics are
comparable to those included in the S&P 500 Index.
. Invests, under normal market conditions, at least 65% of its total assets in
equity securities, primarily common stock.
[GRAPHIC]
Primary Risks of Investing in the Fund
-------------------------------------------------------------------------
Investment Risk: The value of your investment in this Fund may go up or down,
which means that you could lose money. The types of stocks held by the Fund may
not perform as well as other types of stocks.
Market Risk: General economic conditions and/or the activities of individual
companies may cause the value of the securities in the Fund to increase or
decrease. The Fund's net asset value may fluctuate with movements in the equity
market.
Management Risk: A strategy used by the Adviser may fail to produce the
intended results.
An investment in the Fund is not a deposit of Commerce Bank, N.A. (Commerce
Bank), and is not insured or guaranteed by the FDIC or any other governmental
agency.
PAGE 4 The Commerce Funds
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<PAGE>
--------------------------------------------------------------------------------
[GRAPHIC]
Core Equity Fund Past Performance
-------------------------------------------------------------------------
The chart and table below provide some indication of the risks of investing in
the Fund by showing its annual returns and long-term performance. The bar chart
shows the Fund's performance from calendar year to calendar year since its
inception. The table compares the Fund's performance over time to that of a
broad-based securities market index. Both charts assume reinvestment of
dividends and distributions. As with all mutual finds, how this Fund performed
in the past is not a prediction of how it will perform in the future.
The performance below is based on the performance of the Personal Stock Fund
(the "Common Trust Fund"), a common trust fund for which the Adviser serves as
trustee. The Common Trust Fund commenced operations before the Fund commenced
operations. The Common Trust Fund was not registered under the Investment
Company Act of 1940 (the "Act"), and therefore was not subject to certain
investment restrictions that are imposed by the Act. If the Common Trust Fund
had been registered under the Act, the performance shown may have been
adversely affected. The average annual total return calculations in the chart
and table have been restated to include expenses of the Fund.
Year-by-Year Total Returns as of 12/31 Each Year
[GRAPH]
1990 4.57
1991 40.37
1992 3.73
1993 1.14
1994 -0.29
1995 38.60
1996 22.77
1997 29.40
1998 28.17
1999 14.54
(percentage)
Best Calendar Quarter: 24.78%, 4th Quarter 1998
Worst Calendar Quarter: -14.64%, 3rd Quarter 1998
The Fund's performance for the nine-month period ended September 30, 2000 was
1.31%.
Average Annual Total Return as of 12/31/99
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
<S> <C> <C> <C>
Core Equity Fund 14.54% 26.45% 17.38%
S&P 500 Index* 21.04% 28.56% 18.21%
</TABLE>
*The S&P 500 Index is an unmanaged index that emphasizes large capitalization
companies.
The Index figures do not reflect any fees or expenses.
continued
The Commerce Funds PAGE 5
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<PAGE>
Core Equity Fund (continued)
-------------------------------------------------------------------------
[GRAPHIC]
Fees and Expenses
-------------------------------------------------------------------------
The following table shows the fees and expenses that you would pay directly or
indirectly if you invested in this Fund. Shareholder Fees are paid directly
from your account. Total Annual Fund Operating Expenses are deducted from the
Fund's assets, not from your account, so they affect the share price of the
Fund.
<TABLE>
<CAPTION>
Core Equity Fund
Institutional Shares
<S> <C>
Shareholder Fees
(fees paid directly from your investment)
Maximum Sales Charge (load) Imposed on Purchases
(as a percentage of offering price) None
Maximum Sales Charge (load) Imposed on Reinvested
Distributions None
Maximum Deferred Sales Charge (load) Imposed on
Redemptions None
Redemption Fees None
Annual Fund Operating Expenses
(expenses deducted from Fund assets)
Management Fees 0.75%
Other Expenses (1) 0.27%
-----
Total Annual Fund Operating Expenses (2) 1.02%
=====
</TABLE>
(1) "Other Expenses" may include shareholder servicing fees of up to 0.25%,
annualized, of the average daily net assets of shares held under the
Shareholder Administrative Services Plan.
(2) The Fund's total annual fund operating expenses are estimated based on
expenses expected to be incurred in the current fiscal year. The Adviser
intends to voluntarily reimburse expenses, excluding interest, taxes and
extraordinary expenses, during the current fiscal year to the extent
necessary for the Core Equity Fund to maintain Total Annual Operating
Expenses of not more than 1.13% of average daily net assets. The Adviser
reserves the right to discontinue the expense reimbursement at any time.
Example: The following example is intended to help you compare the cost of
investing in this Fund with the cost of investing in other mutual funds. It
makes the following assumptions: you invest $10,000 in the Fund for the time
periods indicated, your investment has a 5% return each year, and the Fund's
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years
<S> <C>
$104 $325
</TABLE>
PAGE 6 The Commerce Funds
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<PAGE>
--------------------------------------------------------------------------------
[GRAPHIC]
Core Equity Fund Financial Highlights
-------------------------------------------------------------------------
The Fund commenced operations as of the date of this Prospectus. Therefore,
financial highlights are unavailable for the Fund.
The Commerce Funds PAGE 7
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<PAGE>
Kansas Tax-Free Intermediate Bond Fund
-------------------------------------------------------------------------
Brian P. Musielak, CFA, Portfolio Manager
. Joined Commerce Bank in 1995
. Fund manager since 1999
. 5 years of experience
Please see the table on page for more detailed information about the Kansas
Tax-Free Intermediate Bond Fund and the risks associated with those practices.
[GRAPHIC]
Investment Objective
-------------------------------------------------------------------------
Seeks current income exempt from federal and, to the extent possible, from
Kansas income taxes, as is consistent with the preservation of capital.
[GRAPHIC]
Primary Investment Strategies
-------------------------------------------------------------------------
The Fund employs the following strategies in an effort to achieve current
income and capital preservation:
. Security Types: Normally invests at least 80% of its total assets in
municipal obligations, 65% of which are issued by the State of Kansas and its
political subdivisions, as well as certain other governmental issuers.
. Seeks to maximize the proportion of its dividends that are exempt from both
federal and Kansas income tax.
. Strives to minimize net realized capital gains.
. Credit Quality: Actively manages maturities to take advantage of changes in
interest rates. The market-weighted average credit rating of the Fund's
entire portfolio will be A or better.
. Maturity Distribution: Under normal market conditions, the average weighted
maturity of the Fund's portfolio securities will be five to ten years.
[GRAPHIC]
Primary Risks of Investing in the Fund
-------------------------------------------------------------------------
Investment Risk: The value of your investment in this Fund may go up or down,
which means that you could lose money.
Interest Rate Risk: Generally, the market value of fixed-income securities can
be expected to go up when interest rates go down and to go down when interest
rates go up. Longer-term bonds and zero coupon bonds are usually more sensitive
to interest rate changes than shorter-term bonds. In general, the longer the
average maturity of bonds in the Fund, the more the Fund's share price will go
up or down in response to interest rate changes.
Market Risk: General economic conditions and/or the activities of individual
issuers may cause the value of the securities in the Fund to increase or
decrease.
PAGE 8 The Commerce Funds
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<PAGE>
--------------------------------------------------------------------------------
Credit Risk: An issuer of bonds may default on its obligation to pay interest
and repay principal. Also, a bond's credit rating could be downgraded. The Fund
could lose money in either of these instances.
Management Risk: A strategy used by the Adviser may fail to produce the
intended results.
State-Specific Risk: The Fund invests its assets predominantly in Kansas
obligations. The actual payment of principal and interest on these obligations
is dependent on the Kansas legislature allotting money each fiscal year for
these payments. You should also be aware that provisions of the Kansas
Constitution and other laws could result in certain adverse consequences
affecting Kansas obligations.
Non-Diversified Risk: The Kansas Tax-Free Intermediate Bond Fund is non-
diversified. Non-diversified funds typically hold fewer securities than
diversified funds do. Consequently, the change in value of any one security may
affect the overall value of a non-diversified portfolio more than it would a
diversified portfolio. In addition, a non-diversified portfolio may be more
susceptible to economic, political and regulatory developments than a
diversified investment portfolio with similar objectives. When a Fund's assets
are concentrated in obligations payable from revenues of similar projects
issued by issuers located in the same state, or in industrial development
bonds, the Fund will be subject to the particular risks (including legal and
economic conditions) relating to such securities to a greater extent than if
its assets were not so concentrated.
Tax Risk: A fund that invests in municipal obligations may be more adversely
impacted by changes in tax rates and policies than other funds. Dividends
derived from interest on obligations of other governmental issuers are exempt
from federal income tax but may be subject to Missouri income tax.
Municipal Obligation Risk: Payment on municipal obligations held by the Fund
relating to certain projects may be secured 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.
An investment in the Fund is not a deposit of Commerce Bank and is not insured
or guaranteed by the FDIC or any other governmental agency.
continued
The Commerce Funds PAGE 9
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<PAGE>
Kansas Tax-Free Intermediate Bond Fund (continued)
-------------------------------------------------------------------------
[GRAPHIC]
Kansas Tax-Free Intermediate Bond Fund Past Performance
-------------------------------------------------------------------------
The chart and table below provide some indication of the risks of investing in
the Fund by showing its annual returns and long-term performance. The bar chart
shows the Fund's performance from calendar year to calendar year since its
inception. The table compares the Fund's performance over time to that of a
broad-based securities market index. Both charts assume reinvestment of
dividends and distributions. As with all mutual funds, how this Fund performed
in the past is not a prediction of how it will perform in the future.
The performance below is based on the performance of the Kansas Tax-Free Bond
Fund (the "Kansas Common Trust Fund"), a common trust fund for which the
Adviser serves as trustee. The Kansas Common Trust Fund commenced operations
before the Fund commenced operations. The Kansas Common Trust Fund was not
registered under the Investment Company Act of 1940 (the "Act"), and therefore
was not subject to certain investment restrictions that are imposed by the Act.
If the Kansas Common Trust Fund had been registered under the Act, the
performance shown may have been adversely affected. The average annual total
return calculations in the chart and table have been restated to include
expenses of the Fund.
Year-by-Year Total Returns as of 12/31 Each Year
[GRAPH]
1990 6.55%
1991 8.58%
1992 5.64%
1993 7.52%
1994 -4.57%
1995 12.71%
1996 3.10%
1997 6.49%
1998 5.11%
1999 -0.40%
(percentage)
Best Calendar Quarter: 5.26%, 1st Quarter 1995
Worst Calendar Quarter: -3.58%, 1st Quarter 1994
The Fund's performance for the nine-month period ended September 30, 2000 was
4.69%.
Average Annual Total Return as of 12/31/99
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
<S> <C> <C> <C>
Kansas Tax-Free
Intermediate Bond Fund -0.40% 5.32% 4.97%
Merrill Lynch Municipal
Intermediate Index* -0.01% 6.31% 6.41%
</TABLE>
* The Merrill Lynch Municipal Intermediate Index is comprised of investment-
grade municipal securities ranging from one to twelve years in maturity.
The Index figures do not reflect any fees or expenses.
PAGE 10 The Commerce Funds
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<PAGE>
--------------------------------------------------------------------------------
[GRAPHIC]
Fees and Expenses
-------------------------------------------------------------------------
The following table shows the fees and expenses that you would pay directly or
indirectly if you invested in this Fund. Shareholder Fees are paid directly
from your account. Total Annual Fund Operating Expenses are deducted from the
Fund's assets, not from your account, so they affect the share price of the
Fund.
<TABLE>
<CAPTION>
Kansas Tax-Free
Intermediate Bond Fund
Institutional Shares
<S> <C>
Shareholder Fees
(fees paid directly from your investment)
Maximum Sales Charge (load) Imposed on Purchases
(as a percentage of offering price) None
Maximum Sales Charge (load) Imposed on Reinvested
Distributions None
Maximum Deferred Sales Charge (load) Imposed on
Redemptions None
Redemption Fees None
Annual Fund Operating Expenses
(expenses deducted from Fund assets)
Management Fees 0.50%
Other Expenses (1) 0.55%
-----
Total Annual Fund Operating Expenses (2) 1.05%
-----
Less: Fee Waiver and Expense Reimbursement 0.40%
Net Annual Fund Operating Expenses (2) 0.65%
=====
</TABLE>
(1) "Other Expenses" may include shareholder servicing fees of up to 0.25%,
annualized, of the average daily net assets of shares held under the
Shareholder Administrative Services Plan.
(2) The Adviser has contractually agreed to waive fees and/or reimburse
expenses in order to keep total annual operating expenses, excluding
interest, taxes and extraordinary expenses, from exceeding 0.65% of average
daily net assets of the Kansas Tax-Free Intermediate Bond Fund until
October 31, 2001. The Fund's total annual fund operating expenses and net
annual fund operating expenses are estimated based on expenses expected to
be incurred in the current fiscal year.
Example: The following example is intended to help you compare the cost of
investing in this Fund with the cost of investing in other mutual funds. It
makes the following assumptions: you invest $10,000 in the Fund for the time
periods indicated, your investment has a 5% return each year, and the Fund's
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years
<S> <C>
$66 $208
</TABLE>
continued
The Commerce Funds PAGE 11
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.
<PAGE>
Kansas Tax-Free Intermediate Bond Fund (continued)
--------------------------------------------------------------------------------
[GRAPHIC]
Kansas Tax-Free Intermediate Bond Fund Financial Highlights
-------------------------------------------------------------------------
The Fund commenced operations as of the date of this Prospectus. Therefore,
financial highlights are unavailable for the Fund.
PAGE 12 The Commerce Funds
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<PAGE>
Investment Securities and Practices
-----------------------------------------------------------------------------
This table shows some of the investment methods and securities that the
Funds may use. The Funds' Statement of Additional Information (SAI available
on request) contains a more complete discussion of the securities and
practices each Fund may use, and the risks involved. We encourage you to
obtain and read a copy of the SAI should you have any questions about the
Funds' investment policies.
Key:
#t =percent of total assets the Fund may invest
x= not permitted
a =permitted
-----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Core Equity Kansas Tax-Free
Investment Securities
<S> <C> <C>
American Depository Receipts 10t(/1/) x
Asset-Backed Securities x x
Convertible Securities a x
Corporate Debt Obligations x x
Emerging Market Securities x x
Equity Securities a x
European Depository Receipts x x
Foreign Equity Securities 10t(/1/) x
Foreign Debt and Foreign Government
Securities x x
Hybrids x x
Mortgage-Related Securities x x
Municipal Obligations x a
Stripped Securities x x
U.S. Government Obligations a a
Variable and Floating Rate Instruments a a
Zero Coupon Bonds a a
Investment Practices
Cross Hedging of Currencies x x
Foreign Currency Exchange Contracts x x
Futures Contracts & Related Options a a
Interest Rate Swaps, Mortgage Swaps, Caps
and Floors x a
Mortgage Dollar Rolls x x
Options on Foreign Currencies x x
Options on Securities and Securities Indices 25t 5t(/2/)
Repurchase Agreements 33 1/3t 33 1/3t
Standby Commitments x a
When-Issued and Forward Commitments a 25t
</TABLE>
-----------------------------------------------------------------------------
(1) The Core Equity Fund may invest up to 10% of its total assets in
foreign securities, including ADRs.
(2) The Kansas Tax-Free Intermediate Bond Fund may not purchase put and call
options or write covered call and put options on securities related to
foreign currencies.
The Commerce Funds PAGE 13
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<PAGE>
Risks: The following chart summarizes the types of risks from which loss may
result. More information about risks associated with the Funds is provided
on the following pages and in the Funds' SAI, which is available on request.
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Core Equity Kansas Tax-Free
Risks Associated with
These Investments
<S> <C> <C>
Credit Risk X
Interest Rate Risk X
Investment Risk X X
Management Risk X X
Market Risk X X
Municipal Obligation Risk X
Non-Diversified Risk X
State-Specific Risk X
Tax Risk X
</TABLE>
------------------------------------------------------------------------------
Credit Risk: An issuer of bonds may default on its obligation to pay interest
and repay principal. A bond's credit rating could be downgraded. A Fund could
lose money in either of these instances.
Interest Rate Risk: Generally, the market value of fixed-income securities in a
Fund can be expected to go up when interest rates go down and to go down when
interest rates go up (although many mortgage related securities will have less
potential than other debt securities for capital appreciation during periods of
declining rates). Longer-term bonds and zero coupon bonds are usually more
sensitive to interest rate changes than shorter-term bonds. In general, the
longer the average maturity of bonds in a Fund, the more a Fund's share price
will go up or down in response to interest rate changes.
Investment Risk: The value of your investment in a Fund may go up or down,
which means that you could lose money.
Management Risk: A strategy used by the Adviser may fail to produce the
intended results. The Adviser's assessment of issuers whose securities are held
by a Fund may prove incorrect, resulting in losses or poor performance, even
under favorable market and interest rate conditions.
Market Risk: General economic conditions and/or the activities of individual
companies may cause the value of the securities in a Fund to increase or
decrease. A Fund's NAV may fluctuate with movements in the equity markets.
Municipal Obligation Risk: Payment on municipal obligations held by a Fund
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. The obligations of the issuer to pay the principal of and interest
on a municipal obligation are subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of creditors, such
as the Federal Bankruptcy Act, and laws, if any, that may be enacted by
Congress or state legislatures extending
PAGE 14 The Commerce Funds
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.
<PAGE>
the time for payment of principal or interest or imposing other constraints
upon the enforcement of such obligations. There is also the possibility that,
as a result of litigation or other conditions, the power or ability of the
issuer to pay when due the principal of or interest on a municipal obligation
may be materially affected. Municipal lease obligations and certificates of
participation are subject to the added risk that the governmental lessee will
fail to appropriate funds to enable it to meet its payment obligations under
the lease. Although these obligations may be secured by the leased equipment or
facilities, the disposition of the property in the event of non-appropriation
or foreclosure might prove difficult, time consuming and costly, and result in
a delay in recovering or the failure to fully recover a Fund's original
investment.
Non-Diversified Risk: The Kansas Tax-Free Intermediate Bond Fund is non-
diversified. Non-diversified funds typically hold fewer securities than
diversified funds do. Consequently, the change in value of any one security may
affect the overall value of a non-diversified portfolio more than it would a
diversified portfolio. In addition, a non-diversified portfolio may be more
susceptible to economic, political and regulatory developments than a
diversified investment portfolio with similar objectives. When a Fund's assets
are concentrated in obligations payable from revenues of similar projects
issued by issuers located in the same state, or increase industrial development
bonds, the Fund will be subject to the particular risks (including legal and
economic conditions) relating to such securities to a greater extent than if
the assets were not so concentrated.
State-Specific Risk: The Kansas Tax-Free Intermediate Bond Fund invests its
assets predominantly in Kansas obligations. The actual payment of principal and
interest on these obligations is dependent on the Kansas legislature allotting
money each fiscal year for these payments. You should also be aware that
provisions of the Kansas Constitution and other laws could result in certain
adverse consequences affecting Kansas obligations.
Tax Risk: A Fund that invests in municipal obligations may be more adversely
impacted by changes in tax rates and policies than other Funds. Interest income
on municipal obligations is normally not subject to regular federal income tax.
Any proposed or actual changes in federal income tax rates or exempt statutes
that apply to interest income, therefore, can significantly affect the demand
for and supply, liquidity and marketability of municipal obligations, which
could in turn affect a Fund's ability to buy and sell municipal obligations at
favorable yield and price levels.
Risks of Short-Term Investing: For temporary defensive purposes, the Adviser
may decide to suspend the normal investment activities of a Fund by investing
up to 100% of its assets in cash and cash equivalent short-term obligations,
including money market instruments, a term that includes bank obligations,
commercial paper, U.S. Government obligations, foreign government securities
(if permitted) and repurchase agreements. Bank obligations may include
obligations of foreign banks or foreign branches of U.S. banks. The Adviser may
temporarily adopt a defensive position to reduce changes in the value of the
Fund's shares that may result from adverse market, economic, political or other
conditions. When the Adviser pursues a temporary defensive strategy, the Funds
may not be following their stated objectives and may not profit from favorable
developments that
The Commerce Funds PAGE 15
---------------
.
<PAGE>
they would have otherwise profited from if they were pursuing their normal
investment strategies.
Portfolio Turnover: The Funds may buy and sell investments relatively often.
Such a strategy often involves higher expenses, including brokerage
commissions, and may increase the amount of capital gains (and, in particular,
short-term gains) realized by a portfolio. Shareholders must pay tax on such
capital gains.
PAGE 16 The Commerce Funds
---------------
.
<PAGE>
Account Policies And Features
--------------------------------------------------------------------------------
The following information is intended to help you understand how to purchase
and redeem shares of The Commerce Funds. It will also explain the features you
can use to customize your Commerce Funds account to meet your needs.
Buying Institutional Shares
--------------------------------------------------------------------------------
How Are Institutional Shares Priced?
You pay no sales charges (loads) to invest in Institutional Shares of these
Funds. Your share price is each Fund's net asset value (NAV), which is
generally calculated as of the close of trading (usually 4 p.m. Eastern time)
on the New York Stock Exchange (NYSE) every day the NYSE is open. Your order
will be priced at the next NAV calculated after your order is received in good
order by The Commerce Funds' Transfer Agent. Therefore, to receive the NAV of
any given day, The Commerce Funds must accept your order by the close of
regular trading on the NYSE that day. If The Commerce Funds receives and
accepts your order after the NYSE closes, you will receive the NAV that is
calculated on the close of trading on the following day. The Commerce Funds are
open for business on the same days as the NYSE. Each Fund's investments are
valued based on market value, or where market quotations are not readily
available, based on fair value as determined in good faith by the Funds' Board
of Trustees. Certain short-term securities may be valued at amortized cost,
which approximates fair value.
Trading in foreign securities is generally completed before the end of regular
trading on the NYSE and may occur on weekends and U.S. holidays and at other
times when the NYSE is closed. As a result, there may be delays in reflecting
changes in the market values of foreign securities in the calculation of the
NAV for any Fund invested in foreign securities. You may not be able to redeem
or purchase shares of an affected Fund during these times.
How to Calculate NAV
<TABLE>
<S> <C> <C>
(Value of Assets Attributable to the Class) - (Liabilities Attributable to the Class)
NAV = -----------------------------------------------------------------------------------------
Number of Outstanding Shares of the Class
</TABLE>
The Commerce Funds PAGE 17
---------------
.
<PAGE>
What Is The Minimum Investment For The Funds?
<TABLE>
<CAPTION>
Initial Additional
Investment Investments
<S> <C> <C>
Regular account $1,000 $250
Automatic investment account $500 $50/month
Individual retirement accounts (except SEP & SIMPLE
IRAs), Keogh plans, corporate retirement plans, public
employer deferred plans, profit sharing plans and
401(k) plans $1,000 $250
SEP and SIMPLE IRAs $50 $50/month
</TABLE>
What Is The Minimum Investment If I Am An Employee Of Commerce Bancshares Or
Another Commerce Funds Service Provider?
For employees, directors, officers and retirees (as well as their legal
dependents) of Commerce Bancshares, Inc., Goldman Sachs & Co., NFDS and State
Street Bank and Trust Company and their subsidiaries or affiliates, the
following investment minimums apply:
<TABLE>
<CAPTION>
Initial Additional
Investment Investment
<S> <C> <C>
Regular account $250 $100
Automatic investment account $100 $25/quarter
Individual retirement accounts (including SEP, SIMPLE
and Roth IRAs) and Keogh plans $100 $25/quarter
</TABLE>
How Do I Buy Institutional Shares?
The following section describes features and gives specific instructions on how
to purchase Institutional Shares directly from The Commerce Funds. The Commerce
Funds has authorized certain dealers to purchase shares of Funds on behalf of
their clients. Some of the account features and instructions described in this
section may not be applicable to clients of these dealers.
1. Consider The Following Features To Customize Your Account:
Making Automatic Investments: The Automatic Investment feature lets you
transfer money from your financial institution account into your Fund account
automatically either on the 1st or the 15th of the month. The Automatic
Investment feature is one way to use dollar cost averaging to invest (see
below). Only accounts at U.S. financial institutions that permit automatic
withdrawals through the Automated Clearing House (ACH) are eligible. Check with
your financial institution to determine eligibility.
Using Dollar Cost Averaging: Dollar cost averaging involves investing a dollar
amount at regular intervals. Because more shares are purchased during periods
with lower share prices and fewer shares are purchased when the price is
higher, your average cost per share may be reduced. In order to be effective,
dollar cost averaging should be followed on a regular basis. You should be
aware, however, that shares bought using dollar cost averaging are made without
regard to their price on the day of investment or to market trends. In
addition, while you may find dollar cost averaging to be beneficial, it will
not
PAGE 18 The Commerce Funds
---------------
.
<PAGE>
prevent a loss if you ultimately redeem your shares at a price that is lower
than their purchase price. Dollar cost averaging does not assure a profit or
protect against a loss in a declining market. Since dollar cost averaging
involves investment in securities regardless of fluctuating price levels, you
should consider your financial ability to continue to purchase through periods
of low price levels. You can invest through dollar cost averaging on your own
or through the Automatic Investment feature described above.
2. Contact The Commerce Funds To Open Your Account.
[GRAPHIC]
By Mail:
-------------------------------------------------------------------------
Complete an account application. Mail the completed application and a
check payable to The Commerce Funds to:
The Commerce Funds
c/o Shareholder Services
P.O. Box 219525
Kansas City, MO 64121-9525
[GRAPHIC]
In Person
-------------------------------------------------------------------------
You are welcome to stop by a Commerce Bank office location, where a
registered investment representative can assist you in opening an
account.
. Federal regulations require you to provide a certified Taxpayer
Identification Number upon opening or reopening an account.
. If your check used for investment does not clear, a fee may be imposed
by the Transfer Agent. All payments by check must be in U.S. dollars
and must be drawn only on U.S. financial institutions.
How Do I Add To My Commerce Funds Account?
To add to your original investment, you may either mail your additional
investment to the address above or you may use Electronic Funds Transfer:
[GRAPHIC]
By Electronic Funds Transfer:
-------------------------------------------------------------------------
To use Electronic Funds Transfer, have your bank send your investment
to: Investors Fiduciary Trust Company, with these instructions:
--ABA #101003621
--Account #756-044-3
--Your name and address
--Your social security or tax ID number
--Name of the Fund
--Class of shares
--Your new account number
The Commerce Funds PAGE 19
---------------
.
<PAGE>
What Are My Options For Changing My Investment Within The Commerce Funds?
. Changing Shares From Fund To Fund: As a shareholder, you have the privilege
of exchanging your shares for Institutional Shares of any other Commerce
Fund. Exchanges may also be made with the Goldman Sachs Institutional Liquid
Assets Prime Obligations Portfolio ("Money Market Fund"). Goldman Sachs Asset
Management, a unit of the Investment Management Division of Goldman, Sachs &
Co., serves as investment adviser for the Money Market Fund.
Institutional Shares being exchanged are subject to the minimum initial and
subsequent investment requirements as described above. The Commerce Funds
reserves the right to reject any exchange request and the exchange privilege
may be modified or terminated at any time. At least 60 days' notice of any
material modification or termination of the exchange privilege will be given
to shareholders except where notice is not required under the regulations of
the Securities and Exchange Commission (SEC). Before exchanging your shares,
you should consider carefully the investment objectives, policies, risks and
expenses of the Fund you are acquiring.
. Making Automatic Exchanges: You may request on your account application that
a specified dollar amount of Institutional Shares be automatically exchanged
for Institutional Shares of any other Commerce Fund. These automatic
exchanges may be made on any one day of each month and are subject to the
following conditions: 1) the minimum dollar amount for automatic exchanges
must be at least $250 per month; 2) the value of the account in the
originating Fund must be at least $1,000 after the exchange; 3) the value of
the account in the acquired Fund must equal or exceed the acquired Fund's
minimum initial investment requirement; and 4) the names, addresses and
taxpayer identification number for the shareholder accounts of the exchanged
and acquired Funds must be identical.
. Cross Reinvesting Of Distributions: You may invest dividend or capital gain
distributions from one Fund of the Institutional Class to another Fund of the
Institutional Class. If you elect to reinvest the distributions paid by one
Fund in shares of another Fund of The Commerce Funds, the dividends or
distributions will be treated as received by you for tax purposes. Cross
reinvestment privileges do not apply to the Money Market Fund described under
"Changing Shares From Fund to Fund."
PAGE 20 The Commerce Funds
---------------
.
<PAGE>
Redeeming Institutional Shares
--------------------------------------------------------------------------------
You May Sell Shares At Any Time: Your shares will be sold at the NAV next
calculated after your order is accepted by The Commerce Funds' Transfer Agent.
Your order will be processed promptly and you will generally receive the
proceeds within a week. Please Note: If the Fund has not yet collected payment
for the shares you are selling, it may delay sending the proceeds for up to 15
business days.
Receipt Of Proceeds From A Sale: Ordinarily, sale proceeds will be disbursed
the next business day following receipt by the Transfer Agent of a properly
completed order. Payment by check will ordinarily be made within seven calendar
days following redemption or you can have your proceeds sent by federal wire to
your financial institution account. Proceeds will normally be wired the
business day after your request to redeem shares is received in good order by
the Transfer Agent. Your request to wire proceeds is subject to the financial
institution's wire charges.
Written requests to sell Institutional Shares must be signed by each
shareholder, including each joint owner. Certain types of redemption requests
will need to include a Signature Guarantee. You may obtain a Signature
Guarantee from most banks or securities dealers. Guarantees from notaries
public will not be accepted.
How Do I Redeem Shares From My Commerce Funds Account?
The following section describes how to redeem shares directly through The
Commerce Funds. The Commerce Funds has authorized certain dealers to redeem
shares of Funds on behalf of their clients. Some of the account features and
instructions described in this section may not be applicable to clients of
these dealers.
1. Consider Using Automated Redemption:
. Making Automatic Withdrawals: If you are a shareholder with an account valued
at $5,000 or more, you may withdraw amounts in multiples of $100 or more from
your account on a monthly, quarterly, semi-annual or annual basis through the
Automatic Withdrawal feature. At your option, you may choose to have your
automatic withdrawal paid either by check or directly deposited into a
financial institution account. Withdrawals paid by check are distributed on
or about the 15th of the month. Direct deposits made to a financial
institution account can be made on any day of the month. To participate in
this feature, supply the necessary information on the account application or
in a subsequent written request. This feature may be suspended should the
value of your account fall below $500.
The Commerce Funds PAGE 21
---------------
.
<PAGE>
2. Contact The Commerce Funds To Redeem Shares From Your Account.
[GRAPHIC]
By Mail:
-------------------------------------------------------------------------
Write a letter to us that gives the following information:
--names of all account owners
--your account number
--the name of the Fund
--the dollar amount you want to redeem
--what we should do with the proceeds
Each owner, including each joint owner should sign the letter.
Mail your request to:
The Commerce Funds
c/o Shareholder Services
P. O. Box 219525
Kansas City, MO 64121-9525
[GRAPHIC]
By Telephone--Requesting Proceeds Be Wired:
-------------------------------------------------------------------------
Call The Commerce Funds with your request. Please see "What Are The
Important Things To Consider When Contacting The Commerce Funds by
Telephone?" below for specific instructions. When requesting a
redemption by wire you must be redeeming shares in the amount of $1,000
or more. Also, the Funds must have your financial institution account
information already on file. Proceeds will be wired directly to this
designated account.
[GRAPHIC]
By Telephone--Requesting Proceeds Be Sent By Check:
-------------------------------------------------------------------------
Call The Commerce Funds at 1-800-995-6365 (8 a.m.- 5 p.m. CST) with your
request. Please see "What Are The Important Things to Consider When
Contacting The Commerce Funds by Telephone?" below for specific
instructions. The check will be made payable to the shareholder(s) of
record and sent to the address listed on your account.
[GRAPHIC]
In Person:
-------------------------------------------------------------------------
You are welcome to stop by a Commerce Bank office location, where a
registered investment representative can assist you in redeeming shares
from your account.
PAGE 22 The Commerce Funds
---------------
.
<PAGE>
What Are The Important Things To Consider When Contacting The Commerce Funds By
Telephone?
You may call us at 1-800-995-6365 (8 a.m.- 5 p.m. CST) to explain what you want
to do. To make additions by phone or request electronic transfers or request
redemptions, we need your prior written authorization. If you did not check the
box in Section 6 of your original account application, you must send us a
letter that gives us this authorization.
Telephone purchases will be made at the NAV next determined after the Transfer
Agent receives payment for the transaction. If you should experience difficulty
in redeeming your shares by telephone (e.g., because of unusual market
activity), we urge you to consider redeeming your shares by mail.
You should note that the Transfer Agent may act on a telephone purchase or
redemption request from any person representing himself to be you and
reasonably believed by the Transfer Agent to be genuine. Neither The Commerce
Funds nor any of its service contractors will be liable for any loss or expense
in acting on telephone instructions that are reasonably believed to be genuine.
In attempting to confirm that telephone instructions are genuine, The Commerce
Funds will use all procedures considered reasonable; the Funds may be liable
for any losses if they fail to do so.
General Policies
--------------------------------------------------------------------------------
Dividend and Distribution Policies: As a Fund shareholder, you are entitled to
any dividends and distributions from net investment income and net realized
capital gains. You may choose one of the following distribution options for
dividends and capital gains:
(1) reinvest all dividend and capital gain distributions in additional
Institutional Shares,
(2) receive dividend distributions in cash and reinvest capital gain
distributions in additional Institutional Shares,
(3) receive all dividend and capital gain distributions in cash, or
(4) have all dividend and capital gain distributions deposited directly
into your designated account at a financial institution.
If you do not select an option when you open an account, all distributions will
automatically be reinvested in additional Institutional Shares of the same
Fund. For your protection, if you elect to have distributions mailed to you and
these cannot be delivered, they will be reinvested in additional Institutional
Shares of the same Fund. To change your distribution option, contact The
Commerce Funds at 1-800-995-6365 (8 a.m.- 5 p.m. CST). The change will become
effective after it is received and processed by the Transfer Agent.
The Commerce Funds PAGE 23
---------------
.
<PAGE>
<TABLE>
<CAPTION>
Monthly Quarterly Net Realized
Fund Dividends* Dividends** Capital Gains***
<S> <C> <C> <C>
Core Equity X X
Kansas Tax-Free Intermediate Bond X X
</TABLE>
* Monthly dividends are declared daily but are only distributed on or about the
last business day of the month.
** Quarterly dividends are both declared and paid on the calendar quarter
months.
*** Each Fund declares and distributes net realized capital gains annually
(December).
The Commerce Funds Reserve The Right To:
. Redeem your account involuntarily if, after 60 days' written notice, your
account's value remains below a $500 minimum balance. We will not redeem your
account involuntarily if the value falls below the minimum balance solely as
a result of market conditions. Retirement accounts and certain other accounts
will not be subject to automatic liquidation.
. Suspend or delay the payment of redemption proceeds when the NYSE is closed
(other than for customary weekend and holiday closings), during periods when
trading on the NYSE is restricted as determined by the SEC, during any
emergency as determined by the SEC or during other periods of unusual market
conditions.
. Without notice, stop offering shares of a Fund, reject any purchase order
(including exchanges), or bar an investor who is engaging in excessive
trading from purchasing or exchanging shares of a Fund.
Arrangements With Certain Institutions
Financial institutions or their designees that have entered into agreements
with The Commerce Funds or its agent may enter confirmed purchase orders on
behalf of clients and customers, with payment to follow no later than a Fund's
pricing on the following business day. If payment is not received by the Fund's
Transfer Agent by such time, the financial institution could be held liable for
resulting fees or losses. The Commerce Funds may be deemed to have received a
purchase or redemption order when a financial institution or its designee
accepts the order. Orders received by the Fund in proper form will be priced at
the Fund's NAV next computed after they are accepted by the financial
institution or its designee. Financial institutions are responsible for their
customers and The Commerce Funds for timely transmission of all subscription
and redemption requests, investment information, documentation and money.
PAGE 24 The Commerce Funds
---------------
.
<PAGE>
Business Of The Commerce Funds
--------------------------------------------------------------------------------
Shareholder Servicing
Certain financial institutions may charge their customers account fees for
purchasing or redeeming shares of The Commerce Funds. These institutions may
provide shareholder services to their clients that are not available to a
shareholder dealing directly with The Commerce Funds. Each institution is
responsible for notifying its customers regarding its fees and additional or
changed purchase or redemption terms. You should contact your financial
institution for this information.
The Funds have adopted a Shareholder Administrative Services Plan that permits
each Fund to pay up to 0.25% of the average daily net assets of the Shares held
under the plan to third parties for providing shareholder services to the
Shareholder Administrative Services Plan participants. Because these fees are
paid out of each Fund's assets, over time they will increase the cost of your
investment and may cost you more than paying other types of sales charges.
The Commerce Funds will not issue share certificates. The Transfer Agent will
maintain a complete record of your account and will issue you a statement at
least quarterly. You will also be sent confirmations of purchases and
redemptions.
As a shareholder in the Funds, you will receive an Annual Report and a Semi-
Annual Report. To eliminate unnecessary duplication, only one copy of such
reports will be sent to the same mailing address. If you would like a duplicate
copy to be mailed to you, please contact The Commerce Funds at 1-800-995-6365
(8 a.m.-5 p.m. CST).
Tax Information
--------------------------------------------------------------------------------
The following is a brief summary of the federal income tax consequences of
investing in The Commerce Funds. You may also have to pay state and local taxes
on your investment, and you should always consult with your tax adviser for
specific guidance on your investment in The Commerce Funds.
Taxes On Distributions
The Funds' distributions will generally be taxable to shareholders as ordinary
income and capital gains (which may be taxable at different rates depending on
the length of time the Fund held the relevant assets). You will be subject to
income tax on these distributions regardless of whether they are paid in cash
or reinvested in additional shares. Once a year, The Commerce Funds will send
you a statement showing the types and total amount of distributions you
received during the previous year.
You should note that if you purchase shares just before a distribution, the
purchase price would reflect the amount of the upcoming distribution. In this
case, you would be taxed on the entire amount of the distribution received,
even though, as an economic matter, the distribution simply constitutes a
return of your capital. This is known as "buying into a dividend."
The Commerce Funds PAGE 25
---------------
.
<PAGE>
Taxes On Exchanges And Redemptions
When you redeem or exchange shares in any Fund, you may recognize a gain or
loss for income tax purposes. This gain or loss will be based on the difference
between your tax basis in the shares and the amount you receive for them. To
aid in computing your tax basis, you generally should retain your account
statements for the periods during which you held shares. Any loss realized on
shares held for six months or less will be treated as a long-term capital loss
to the extent of any capital gain dividends that were received with respect to
the shares. The one major exception to these tax rules is that distributions
on, and sales, exchanges and redemptions of, shares held in an IRA (or other
tax qualified plan) will not be currently taxable.
Backup Withholding
By law, The Commerce Funds must withhold 31% of your distributions and proceeds
if you have not provided complete, correct taxpayer information.
Tax Consequences of the Kansas Tax-Free Intermediate Bond Fund
The Kansas Tax-Free Intermediate Bond Fund's distributions will generally
constitute tax-exempt income for shareholders for federal income tax purposes.
It is possible, depending on the Fund's investments, that a portion of the
Fund's distributions could be taxable to shareholders as ordinary income or
capital gains, but the Fund does not expect that this will be the case.
Moreover, although distributions are exempt for federal income tax purposes,
they will generally constitute taxable income for state and local income tax
purposes except that, subject to limitations that vary depending on the state,
distributions from interest paid by a state of municipal entity may be exempt
from tax in that state.
Kansas Taxes: Resident individuals, trusts and estates resident in Kansas, and
corporations within Kansas tax jurisdiction will not be subject to Kansas
income tax on dividends from the Kansas Tax-Free Intermediate Bond Fund that
are derived from interest on obligations of the State of Kansas 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 Kansas 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.
PAGE 26 The Commerce Funds
---------------
.
<PAGE>
Service Providers
--------------------------------------------------------------------------------
Investment Adviser: Commerce Bank, N.A. (The "Adviser")
Commerce Bank, N.A. serves as Adviser for the Funds, selecting investments and
making purchases and sale orders for securities in each Fund's portfolio.
Commerce Bank, with offices at 8000 Forsyth Boulevard, St. Louis, Missouri
63105 and 1000 Walnut Street, Kansas City, Missouri 64106, is a subsidiary of
Commerce Bancshares, Inc., a registered multi-bank holding company. Commerce
Bank has provided investment management services to The Commerce Funds since
1994, to private and public pension funds, endowments and foundations since
1946 and to individuals since 1906. As of June 30, 2000, the Adviser and its
affiliates had approximately $10.1 billion in assets under management.
As compensation for its services and its assumption of certain expenses, the
Adviser is entitled to the following fee, computed daily and payable monthly,
at the annual rate listed below (as a percentage of the Funds' average daily
net assets):
<TABLE>
<CAPTION>
Contractual Rate
<S> <C>
Core Equity Fund 0.75%
Kansas Tax-Free Intermediate Bond Fund 0.50%
</TABLE>
The Adviser may voluntarily or contractually waive a portion of its advisory
fee from time to time, and may discontinue any voluntary waiver at any time at
its discretion. The Adviser intends to voluntarily reimburse expenses,
excluding interest, taxes and extraordinary expenses, during the current fiscal
year to the extent necessary for the Core Equity Fund to maintain total annual
operating expenses of not more than 1.13% of average daily net assets. The
Adviser reserves the right to discontinue the expense reimbursement at any
time.
The Adviser has contractually agreed to waive fees and/or reimburse expenses of
the Kansas Tax-Free Intermediate Bond Fund in order to keep total annual
operating expenses, excluding interest, taxes and extraordinary expenses, from
exceeding 0.65% of the average daily net assets of the Fund until October 31,
2001.
The Commerce Funds PAGE 27
---------------
.
<PAGE>
Fund Managers:
<TABLE>
<CAPTION>
Person Fund(s) Experience
<S> <C> <C>
Brian P. Musielak, CFA, Kansas Tax-Free Joined Commerce Bank in
Assistant Vice President Intermediate Bond 1995 Fund manager since
Fund inception
5 years of experience
Michael E. Marks, CFA, Core Equity Joined Commerce Bank in
Vice President 1999 Fund manager since
Fund inception
7 years of experience
Formerly, a Portfolio
Manager and Senior
Investment Analyst from
November 1993 to
October 1998 at IAA
Trust Company.
</TABLE>
Administrator: Goldman Sachs Asset Management ("GSAM" Or The "Administrator")
GSAM serves as Administrator of each of the Funds. GSAM is located at 32 Old
Slip, New York, New York 10005. GSAM is a unit of the Investment Management
Division of Goldman, Sachs & Co., the Distributor of the Funds.
Distributor: Goldman, Sachs & Co. ("Goldman" Or The "Distributor")
Shares of each Fund are sold on a continuous basis by Goldman as Distributor.
Goldman is located at 85 Broad Street, New York, New York 10004.
Transfer Agent: State Street Bank And Trust Company ("State Street" Or The
"Transfer Agent")
State Street has delegated its responsibilities as Transfer Agent to its
indirect subsidiary, National Financial Data Services, Inc. ("NFDS"). State
Street is located at 225 Franklin Street, Boston, Massachusetts 02110. NFDS is
located at 330 W. 9th Street, Kansas City, Missouri 64105.
Custodian: State Street Bank And Trust Company (The "Custodian")
State Street also serves as the Custodian of each of the Funds.
PAGE 28 The Commerce Funds
---------------
.
<PAGE>
How Can I Contact The Commerce Funds?
If you would like more information about The Commerce Funds, you may request
the following documents:
Statement of Additional Information
The SAI contains additional information about the Funds and is incorporated by
reference into this prospectus.
Securities and Exchange Commission Reports
You can review, after paying a duplicating fee, the reports of the Funds and
the SAI by writing to the SEC's Public Reference Section, Washington, D.C.
20459-0102 or by electronic request to: [email protected]. Call the SEC at
(202) 942-8090 for information on operation of the public reference room. You
can get copies of this information for free on the SEC's EDGAR database at
http://www.sec.gov.
The Funds' investment company registration number is 811-8598.
Annual and Semi-Annual Reports
The Funds' annual and semi-annual reports contain additional information about
the Funds' investments. The annual report also discusses market conditions and
investment strategies that significantly affected the Funds' performance during
their last fiscal year. As of the date of this Prospectus, the Funds had not
commenced operations, and their annual report for the fiscal period ended
October 31, 2001 will become available December, 2001. To make shareholder
inquiries or to receive free copies of the SAI contact The Commerce Funds in
writing, via the World Wide Web, or by telephone, as listed below.
[LOGO OF COMMERCE FUNDS]
P.O. Box 219525
Kansas City, Missouri 64121-9525
www.commercefunds.com
1 - 8 0 0 - 9 9 5 - 6 3 6 5
(8 a.m. - 5 p.m. CST)
<PAGE>
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.
[LOGO OF COMMERCE FUNDS]
The Core Equity Fund
The Kansas Tax-Free Intermediate Bond Fund
Service Shares Prospectus
Date
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Overview of Each Fund
Core Equity Fund 4
Kansas Tax-Free Intermediate Bond Fund 8
Investment Securities and Practices 13
Account Policies and Features 18
Buying Service Shares 18
Redeeming Service Shares 24
General Policies 26
Business of The Commerce Funds 28
Tax Information 29
Service Providers 30
</TABLE>
The Commerce Funds PAGE 1
---------------
.
<PAGE>
The Commerce Funds
What These Funds Are: These Funds are mutual funds. A mutual fund is a pooled
investment that gives you an opportunity to participate in financial markets.
Each Fund is professionally managed. Each Fund has stated goals that it
attempts to reach. However, as with all mutual funds, neither of these Funds
can offer guaranteed results. You could lose money in these Funds.
The Commerce Funds consists of eleven investment portfolios, each of which has
a separate pool of assets with separate investment objectives and policies.
This Prospectus offers Service Shares of two of these investment portfolios.
The Core Equity Fund seeks capital appreciation and, secondarily, current
income.
The Kansas Tax-Free Intermediate Bond Fund seeks current income exempt from
federal and, to the extent possible, from Kansas income taxes, as is consistent
with the preservation of capital.
What These Funds Are Not: An investment in either of these Funds is not a bank
deposit. Your investment is not insured or guaranteed by the FDIC or any other
agency of the government.
PAGE 2 The Commerce Funds
---------------
.
<PAGE>
This Prospectus describes the Service Shares of 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,
the Institutional Shares. Institutional Shares are offered primarily to:
. investors maintaining accounts at bank trust departments or trust companies,
for funds held within those accounts, including institutions affiliated with
Commerce Bancshares, Inc. and its subsidiaries (for example, Commerce Bank
Investment Management Group clients), and individuals who have named a bank
affiliated with Commerce Bancshares, Inc., as their primary personal
representative or co-personal representative under will;
. participants in employer-sponsored defined contribution plans when such plans
offer The Commerce Funds as one of their investment options;
. any investor who has been a continuous shareholder in The Commerce Funds
since January 1, 1997 or before;
. 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, broker/dealers and their clients.
The Commerce Funds PAGE 3
---------------
.
<PAGE>
Core Equity Fund
----------------------------------------------------------------------------
Michael E. Marks, CFA, Portfolio Manager
. Joined Commerce Bank in 1999
. Fund manager since Fund inception
. 7 years of experience
. Formerly, a Portfolio Manager and Senior Investment Analyst from November
1993 to October 1998 at IAA Trust Company.
Please see the table on p. for more detailed information about the investment
practices of the Core Equity Fund and the risks associated with those
practices.
[GRAPHIC]
Investment Objectives
---------------------------------------
Seeks capital appreciation and, secondarily, current income.
[GRAPHIC]
Primary Investment Strategies
---------------------------------------
. Invests principally in stocks of companies whose valuations and earnings
potentials are attractive.
. Through a disciplined approach, the Fund seeks a blend of companies either
selling below fair value or producing strong earnings leading to future
capital appreciation.
. Generally purchases common stock of companies whose characteristics are
comparable to those included in the S&P 500 Index.
. Invests, under normal market conditions, at least 65% of its total assets in
equity securities, primarily common stock.
[GRAPHIC]
Primary Risks of Investing in the Fund
---------------------------------------
Investment Risk: The value of your investment in this Fund may go up or down,
which means that you could lose money. The types of stocks held by the Fund may
not perform as well as other types of stocks.
Market Risk: General economic conditions and/or the activities of individual
companies may cause the value of the securities in the Fund to increase or
decrease. The Fund's net asset value may fluctuate with movements in the equity
market.
Management Risk: A strategy used by the Adviser may fail to produce the
intended results.
An investment in the Fund is not a deposit of Commerce Bank, N.A. (Commerce
Bank), and is not insured or guaranteed by the FDIC or any other governmental
agency.
PAGE 4 The Commerce Funds
---------------
.
<PAGE>
--------------------------------------------------------------------------------
[GRAPHIC]
Core Equity Fund Past Performance
-------------------------------------------------------------------------
The chart and table below provide some indication of the risks of investing in
the Fund by showing its annual returns and long-term performance. The bar chart
shows the Fund's performance from calendar year to calendar year since its
inception. The table compares the Fund's performance over time to that of a
broad-based securities market index. Both charts assume reinvestment of
dividends and distributions. As with all mutual funds, how this Fund performed
in the past is not a prediction of how it will perform in the future.
The performance below is based on the performance of the Personal Stock Fund
("Common Trust Fund"), a common trust fund for which the Adviser serves as
trustee. The Common Trust Fund commenced operations before the Fund commenced
operations. The Common Trust Fund was not registered under the Investment
Company Act of 1940 (the "Act"), and therefore was not subject to certain
investment restrictions that are imposed by the Act. If the Common Trust Fund
had been registered under the Act, the performance shown may have been
adversely affected. The average annual return calculations in the chart and
table have been restated to include expenses of the Fund. Interests in the
Common Trust Fund were sold to investors without a sales charge. If the Service
Shares' sales charge of 3.50% had been included in the average annual total
return reflected in the chart and table, performance would be reduced.
Year-by-Year Total Returns as of 12/31 Each Year
[GRAPH]
1990 4.31%
1991 40.03%
1992 3.47%
1993 0.89%
1994 -0.54%
1995 38.26%
1996 22.47%
1997 29.08%
1998 27.86%
1999 14.26%
(percentage)
Best Calendar Quarter: 24.71%, 4th Quarter 1998
Worst Calendar Quarter: -14.69%, 3rd Quarter 1998
The Fund's performance for the nine-month period ended September 30, 2000 was
1.31%.
Average Annual Total Return as of 12/31/99
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
<S> <C> <C> <C>
Core Equity Fund 14.26% 26.14% 17.09%
S&P 500 Index* 21.04% 28.56% 18.21%
</TABLE>
*The S&P 500 Index is an unmanaged index that emphasizes large capitalization
companies.
The Index figures do not reflect any fees or expenses.
continued
The Commerce Funds PAGE 5
---------------
.
<PAGE>
Core Equity Fund (continued)
----------------------------------------------------------------------------
[GRAPHIC]
Fees and Expenses
-----------------------------------------------------------
The following table shows the fees and expenses that you would pay directly or
indirectly if you invested in this Fund. Shareholder Fees are paid directly
from your account. Total Annual Fund Operating Expenses are deducted from the
Fund's assets, not from your account, so they affect the share price of the
Fund.
<TABLE>
<CAPTION>
Core Equity Fund
Service Shares
<S> <C>
Shareholder Fees
(fees paid directly from your investment)
Maximum Sales Charge (load) Imposed on Purchases
(as a percentage of offering price) 3.50%
Maximum Sales Charge (load) Imposed on Reinvested
Distributions None
Maximum Deferred Sales Charge (load) Imposed on Redemptions
(1) None
Redemption Fees None
Annual Fund Operating Expenses
(expenses deducted from Fund assets)
Management Fees 0.75%
Distribution (12b-1) Fees 0.25%
Other Expenses (2) 0.27%
-----
Total Annual Fund Operating Expenses (3) 1.27%
=====
</TABLE>
(1) A deferred sales charge of 1.00% is assessed on certain redemptions of
shares that are purchased with no initial sales charge as part of an
investment of $1,000,000 or more.
(2) "Other Expenses" may include shareholder servicing fees of up to 0.25%,
annualized, of the average daily net assets of Shares held under the
Shareholder Administrative Services Plan.
(3) The Fund's total annual fund operating expenses are estimated based on
expenses expected to be incurred in the current fiscal year. The Adviser
intends to voluntarily reimburse expenses, excluding interest, taxes and
extraordinary expenses, during the current fiscal year to the extent
necessary for the Core Equity Fund to maintain Total Annual Fund Operating
Expenses of not more than 1.38%, of average daily net assets. The Adviser
reserves the right to discontinue the expense reimbursement at any time.
Example: The following example is intended to help you compare the cost of
investing in this Fund with the cost of investing in other mutual funds. It
makes the following assumptions: you invest $10,000 in the Fund for the time
periods indicated, your investment has a 5% return each year, and the Fund's
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years
<S> <C> <C>
$475 $739
</TABLE>
PAGE 6 The Commerce Funds
---------------
.
<PAGE>
----------------------------------------------------------------------------
[GRAPHIC]
Core Equity Fund Financial Highlights
-----------------------------------------------------------
The Fund commenced operations as of the date of this Prospectus. Therefore,
financial highlights are unavailable for the Fund.
continued
The Commerce Funds PAGE 7
---------------
.
<PAGE>
Kansas Tax-Free Intermediate Bond Fund
----------------------------------------------------------------------------
Brian P. Musielak, CFA, Portfolio Manager
. Joined Commerce Bank in 1995
. Fund manager since Fund inception
. 5 years of experience
Please see the table on p. for more detailed information about the Kansas Tax-
Free Intermediate Bond Fund and the risks associated with those practices.
[GRAPHIC]
Investment Objective
---------------------------------------
Seeks current income exempt from federal and, to the extent possible, from
Kansas income taxes, as is consistent with the preservation of capital.
[GRAPHIC]
Primary Investment Strategies
---------------------------------------
The Fund employs the following strategies in an effort to achieve current
income and capital preservation:
. Security Types: Normally invests at least 80% of its total assets in
municipal obligations, 65% of which are issued by the State of Kansas and its
political subdivisions, as well as certain other governmental issuers.
. Seeks to maximize the proportion of its dividends that are exempt from both
federal and Kansas income tax.
. Strives to minimize net realized capital gains.
. Credit Quality: Actively manages maturities to take advantage of changes in
interest rates. The market-weighted average credit rating of the Fund's
entire portfolio will be A or better.
. Maturity Distribution: Under normal market conditions, the average weighted
maturity of the Fund's portfolio securities will be five to ten years.
[GRAPHIC]
Primary Risks of Investing in the Fund
---------------------------------------
Investment Risk: The value of your investment in this Fund may go up or down,
which means that you could lose money.
Interest Rate Risk: Generally, the market value of fixed-income securities can
be expected to go up when interest rates go down and to go down when interest
rates go up. Longer-term bonds and zero coupon bonds are usually more sensitive
to interest rate changes than shorter-term bonds. In general, the longer the
average maturity of bonds in the Fund, the more the Fund's share price will go
up or down in response to interest rate changes.
Market Risk: General economic conditions and/or the activities of individual
issuers may cause the value of the securities in the Fund to increase or
decrease.
PAGE 8 The Commerce Funds
---------------
.
<PAGE>
----------------------------------------------------------------------------
Credit Risk: An issuer of bonds may default on its obligation to pay interest
and repay principal. Also, a bond's credit rating could be downgraded. The Fund
could lose money in either of these instances.
Management Risk: A strategy used by the Adviser may fail to produce the
intended results.
State-Specific Risk: The Fund invests its assets predominantly in Kansas
obligations. The actual payment of principal and interest on these obligations
is dependent on the Kansas legislature allotting money each fiscal year for
these payments. You should also be aware that provisions of the Kansas
Constitution and other laws could result in certain adverse consequences
affecting Kansas obligations.
Non-Diversified Risk: The Kansas Tax-Free Intermediate Bond Fund is non-
diversified. Non-diversified funds typically hold fewer securities than
diversified funds do. Consequently, the change in value of any one security may
affect the overall value of a non-diversified portfolio more than it would a
diversified portfolio. In addition, a non-diversified portfolio may be more
susceptible to economic, political and regulatory developments than a
diversified investment portfolio with similar objectives. When a Fund's assets
are concentrated in obligations payable from revenues of similar projects
issued by issuers located in the same state, or in industrial development
bonds, the Fund will be subject to the particular risks (including legal and
economic conditions) relating to such securities to a greater extent than if
its assets were not so concentrated.
Tax Risk: A fund that invests in municipal obligations may be more adversely
impacted by changes in tax rates and policies than other funds. Dividends
derived from interest on obligations of other governmental issuers are exempt
from federal income tax but may be subject to Missouri income tax.
Municipal Obligation Risk: Payment on municipal obligations held by the Fund
relating to certain projects may be secured 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.
An investment in the Fund is not a deposit of Commerce Bank and is not insured
or guaranteed by the FDIC or any other governmental agency.
continued
The Commerce Funds PAGE 9
---------------
.
<PAGE>
Kansas Tax-Free Intermediate Bond Fund (continued)
----------------------------------------------------------------------------
[GRAPHIC]
Kansas Tax-Free Intermediate Bond Fund Past Performance
-----------------------------------------------------------
The chart and table below provide some indication of the risks of investing in
the Fund by showing its annual returns and long-term performance. The bar chart
shows the Fund's performance from calendar year to calendar year since its
inception. The table compares the Fund's performance over time to that of a
broad-based securities market index. Both charts assume reinvestment of
dividends and distributions. As with all mutual funds, how this Fund performed
in the past is not a prediction of how it will perform in the future.
The performance below is based on the performance of the Kansas Tax-Free Bond
Fund (the "Kansas Common Trust Fund"), a common trust fund for which the
Adviser serves as trustee. The Kansas Common Trust Fund commenced operations
before the Fund commenced operations. The Kansas Common Trust Fund was not
registered under the Investment Company Act of 1940 (the "Act"), and therefore
was not subject to certain investment restrictions that are imposed by the Act.
If the Kansas Common Trust Fund had been registered under the Act, the
performance shown may have been adversely affected. The average annual total
return calculations in the chart and table have been restated to include
expenses of the Fund. Interests in the Kansas Common Trust Fund were sold to
investors without a sales charge. If the Service Shares' sales charge of 2.00%
had been included in the average annual total return reflected in the chart and
table, performance would be reduced.
Year-by-Year Total Returns as of 12/31 Each Year
[GRAPH]
1999 -0.65%
1998 4.85%
1997 6.23%
1996 2.85%
1995 12.43%
1994 -4.81%
1993 7.25%
1992 5.38%
1991 8.31%
1990 6.28%
(percentage)
Best Calendar Quarter: 5.19%, 1st Quarter 1995
Worst Calendar Quarter: -3.65%, 1st Quarter 1994
The Fund's performance for the nine-month period ended September 30, 2000 was
4.69%.
Average Annual Total Return as of 12/31/99
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
<S> <C> <C> <C>
Kansas Tax-Free
Intermediate Bond Fund -0.65% 5.05% 4.71%
Merrill Lynch Municipal
Intermediate Index* -0.01% 6.31% 6.41%
</TABLE>
*The Merrill Lynch Municipal Intermediate Index is comprised of investment-
grade municipal securities ranging from one to twelve years in maturity.
The Index figures do not reflect any fees or expenses.
PAGE 10 The Commerce Funds
---------------
.
<PAGE>
----------------------------------------------------------------------------
[GRAPHIC]
Fees and Expenses
-----------------------------------------------------------
The following table shows the fees and expenses that you would pay directly or
indirectly if you invested in this Fund. Shareholder Fees are paid directly
from your account. Total Annual Fund Operating Expenses are deducted from the
Fund's assets, not from your account, so they affect the share price of the
Fund.
<TABLE>
<CAPTION>
Kansas Tax-Free
Intermediate Bond Fund
Service Shares
<S> <C>
Shareholder Fees
(fees paid directly from your investment)
Maximum Sales Charge (load) Imposed on Purchases
(as a percentage of offering price) 2.00%
Maximum Sales Charge (load) Imposed on Reinvested
Distributions None
Maximum Deferred Sales Charge (load) Imposed on
Redemptions (1) None
Redemption Fees None
Annual Fund Operating Expenses
(expenses deducted from Fund assets)
Management Fees 0.50%
Distribution (12b-1) Fees 0.25%
Other Expenses 0.55%
-----
Total Annual Fund Operating Expenses (2) 1.30%
-----
Less: Fee Waiver and Expense Reimbursement 0.40%
Net Annual Fund Operating Expenses (2) 0.90%
=====
</TABLE>
(1) A deferred sales charge of 1% is assessed on certain redemptions of shares
that are purchased with no initial sales charge as part of an investment of
$1,000,000 or more.
(2) The Adviser has contractually agreed to waive fees and/or reimburse
expenses in order to keep total annual fund operating expenses, excluding
interest, taxes and extraordinary expenses, from exceeding 0.90% of the
Fund's average daily net assets until October 31, 2001. The Fund's total
annual fund operating expenses and net annual fund operating expenses are
estimated based on expenses expected to be incurred in the current fiscal
year.
Example: The following example is intended to help you compare the cost of
investing in this Fund with the cost of investing in other mutual funds. It
makes the following assumptions: you invest $10,000 in the Fund for the time
periods indicated, your investment has a 5% return each year, and the Fund's
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years
<S> <C> <C>
$290 $481
</TABLE>
continued
The Commerce Funds PAGE 11
---------------
.
<PAGE>
Kansas Tax-Free Intermediate Bond Fund (continued)
--------------------------------------------------------------------------------
[GRAPHIC]
Kansas Tax-Free Intermediate Bond Fund Financial Highlights
-----------------------------------------------------------
The Fund commenced operations as of the date of this Prospectus. Therefore,
financial highlights are unavailable for the Fund.
PAGE 12 The Commerce Funds
---------------
.
<PAGE>
Investment Securities and Practices
-----------------------------------------------------------------------------
This table shows some of the investment methods and securities that the
Funds may use. The Funds' Statement of Additional Information (SAI available
on request) contains a more complete discussion of the securities and
practices each Fund may use, and the risks involved. We encourage you to
obtain and read a copy of the SAI should you have any questions about the
Funds' investment policies.
Key:
a=permitted
#t =percent of total assets the Fund may invest
x=not permitted
-----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Core Kansas
Equity Tax-Free
Investment Securities
<S> <C> <C>
American Depository Receipts 10t(/1/) x
Asset-Backed Securities x x
Convertible Securities a x
Corporate Debt Obligations x x
Emerging Market Securities x x
Equity Securities a x
European Depository Receipts x x
Foreign Equity Securities 10t(/1/) x
Foreign Debt and Foreign Government Securities x x
Hybrids x x
Mortgage-Related Securities x x
Municipal Obligations x a
Stripped Securities x x
U.S. Government Obligations a a
Variable and Floating Rate Instruments a a
Zero Coupon Bonds a a
Investment Practices
Cross Hedging of Currencies x x
Foreign Currency Exchange Contracts x x
Futures Contracts & Related Options a a
Interest Rate Swaps, Mortgage Swaps, Caps and Floors x a
Mortgage Dollar Rolls x x
Options on Foreign Currencies x x
</TABLE>
-----------------------------------------------------------------------------
The Commerce Funds PAGE 13
---------------
.
<PAGE>
-----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Core Kansas
Equity Tax-Free
Investment Practices
(continued)
<S> <C> <C>
Options on Securities and Securities Indices 25t 5t(/2/)
Repurchase Agreements 33 1/3t 33 1/3t
Standby Commitments x a
When-Issued and Forward Commitments a 25t
</TABLE>
-----------------------------------------------------------------------------
(1) The Core Equity Fund may invest up to 10% of its total assets in foreign
securities, including ADRs.
(2) The Kansas Tax-Free Intermediate Bond Fund may not purchase put and call
options or write covered call and put options on securities related to
foreign currencies.
PAGE 14 The Commerce Funds
---------------
.
<PAGE>
Risks: The following chart summarizes the types of risks from which loss may
result. More information about risks associated with the Funds is provided on
the following pages and in the Funds' SAI, which is available upon request.
-----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Core Kansas
Equity Tax-Free
Risks Associated with
These Investments
<S> <C> <C>
Credit Risk X
Interest Rate Risk X
Investment Risk X X
Management Risk X X
Market Risk X X
Municipal Obligation Risk X
Non-Diversified Risk X
State-Specific Risk X
Tax Risk X
</TABLE>
-----------------------------------------------------------------------------
Credit Risk: An issuer of bonds may default on its obligation to pay interest
and repay principal. A bond's credit rating could be downgraded. A Fund could
lose money in either of these instances.
Interest Rate Risk: Generally, the market value of fixed-income securities in a
Fund can be expected to go up when interest rates go down and to go down when
interest rates go up (although many mortgage related securities will have less
potential than other debt securities for capital appreciation during period of
declining rates). Longer-term bonds and zero coupon bonds are usually more
sensitive to interest rate changes than shorter-term bonds. In general, the
longer the average maturity of bonds in a Fund, the more a Fund's share price
will go up or down in response to interest rate changes.
Investment Risk: The value of your investment in a Fund may go up or down,
which means that you could lose money.
Management Risk: A strategy used by the Adviser may fail to produce the
intended results. The Adviser's assessment of issuers whose securities are held
by a Fund may prove incorrect, resulting in losses or poor performance, even
under favorable market and interest rate conditions.
Market Risk: General economic conditions and/or the activities of individual
companies may cause the value of the securities in a Fund to increase or
decrease. A Fund's NAV may fluctuate with movements in the equity markets.
Municipal Obligation Risk: Payment on municipal obligations held by a Fund
pertaining 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 the foreclosure
may be delayed and the amount of the proceeds received may not be enough to pay
the principal or accrued interests on the defaulted municipal obligations. The
obligations of the issuer to pay the principal of and interest on a municipal
obligation are subject to the provisions of bankruptcy, insolvency and other
laws affecting the rights and remedies of creditors, such as the Federal
Bankruptcy Act, and laws, if any, that may be enacted by Congress or state
legislatures
The Commerce Funds PAGE 15
---------------
.
<PAGE>
extending the time for payment of principal or interest or imposing other
constraints upon the enforcement of such obligations. There is also the
possibility that, as a result of litigation or other conditions, the power or
ability of the issuer to pay when due the principal of or interest on a
municipal obligation may be materially affected. Municipal lease obligations
and certificates of participation are subject to the added risk that the
governmental lessee will fail to appropriate funds to enable it to meet its
payment obligations under the lease. Although these obligations may be secured
by the leased equipment or facilities, the disposition of the property in the
event of non-appropriation or foreclosure might prove difficult, time consuming
and costly, and result in a delay in recovering or the failure to fully recover
a Fund's original investment.
Non-Diversified Risk: The Kansas Tax-Free Intermediate Bond Fund is non-
diversified. Non-diversified funds typically hold fewer securities than
diversified funds do. Consequently, the change in value of any one security may
affect the overall value of a non-diversified portfolio more than it would a
diversified portfolio. In addition, a non-diversified portfolio may be more
susceptible to economic, political and regulatory developments than a
diversified investment portfolio with similar objectives. When a Fund's assets
are concentrated in obligations payable from revenues of similar projects
issued by issuers located in the same state, or in industrial development
bonds, the Fund will be subject to the particular risks (including legal and
economic conditions) relating to such securities to a greater extent than if
its assets were not so concentrated.
State-Specific Risk: The Kansas Tax-Free Intermediate Bond Fund invests its
assets predominantly in Kansas obligations. The actual payment of principal and
interest on these obligations is dependent on the Kansas legislature allotting
the money each fiscal year for these payments. You should also be aware that
provisions of the Kansas Constitution and other laws could result in certain
adverse consequences affecting these obligations.
Tax Risk: A Fund that invests in municipal obligations may be more adversely
impacted by changes in tax rates and policies than other Funds. Interest income
on municipal obligations is normally not subject to regular federal income tax.
Any proposed or actual changes in federal income tax rates or exempt statutes
that apply to interest income, therefore, can significantly affect the demand
for and supply, liquidity and marketability of municipal obligations, which
could in turn affect a Fund's ability to buy and sell municipal obligations at
favorable yield and price levels.
Risks of Short-Term Investing: For temporary defensive purposes, the Adviser
may decide to suspend the normal investment activities of a Fund by investing
up to 100% of its assets in cash and cash equivalent short-term obligations,
including money market instruments, a term that includes bank obligations,
commercial paper, U.S. Government obligations, foreign government securities
(if permitted) and repurchase agreements. Bank obligations may include
obligations of foreign banks or foreign branches of U.S. banks. The Adviser may
temporarily adopt a defensive position to reduce changes in the value of the
Fund's shares that may result from adverse market, economic, political or other
conditions. When the Adviser pursues a temporary defensive strategy, the Funds
may not
PAGE 16 The Commerce Funds
---------------
.
<PAGE>
be following their stated objectives and may not profit from favorable
developments that they would have otherwise profited from if they were pursuing
their normal investment strategies.
Portfolio Turnover: The Funds may buy and sell investments relatively often.
Such a strategy often involves higher expenses, including brokerage
commissions, and may increase the amount of capital gains (and, in particular,
short-term gains) realized by a portfolio. Shareholders must pay tax on such
capital gains.
The Commerce Funds PAGE 17
-----------------
.
<PAGE>
Account Policies And Features
--------------------------------------------------------------------------------
The following information is intended to help you understand how to purchase
and redeem shares of The Commerce Funds. It will also explain the features you
can use to customize your Commerce Funds account to meet your needs.
Buying Service Shares
--------------------------------------------------------------------------------
How Are Service Shares Priced?
You pay a sales charge (load) to invest in these Funds. Service Shares of the
Funds are purchased at their public offering price (POP), which is a Fund's net
asset value (NAV) per share plus a front-end sales charge. The NAV is generally
calculated as of the close of trading (usually 4 p.m. Eastern time) on the New
York Stock Exchange (NYSE) every day the NYSE is open. Your order will be
priced at the NAV next calculated after your order is received in good order by
The Commerce Funds' Transfer Agent plus any applicable sales charge. Therefore,
to receive the NAV of any given day, The Commerce Funds must accept your order
by the close of regular trading on the NYSE that day. If The Commerce Funds
receives and accepts your order after the NYSE closes, you will receive the NAV
that is calculated on the close of trading on the following day. The Commerce
Funds are open for business on the same days as the NYSE. Each Fund's
investments are valued based on market value, or where market quotations are
not readily available, based on fair value as determined in good faith by the
Funds' Board of Trustees. Certain short-term securities may be valued at
amortized cost, which approximates fair value.
Trading in foreign securities is generally completed before the end of regular
trading on the NYSE and may occur on weekends and U.S. holidays and at other
times when the NYSE is closed. As a result, there may be delays in reflecting
changes in the market values of foreign securities in the calculation of the
NAV for any Fund invested in foreign securities. You may not be able to redeem
or purchase shares of an affected Fund during these times.
How to Calculate NAV
<TABLE>
<S> <C> <C>
(Value of Assets Attributable to the Class) - (Liabilities Attributable to the Class)
NAV = -------------------------------------------------------------------------------------
Number of Outstanding Shares of the Class
</TABLE>
PAGE 18 The Commerce Funds
---------------
.
<PAGE>
Sales Charge: The maximum front-end sales charge is 3.50% for the Core Equity
Fund and is 2.00% for the Kansas Tax-Free Intermediate Bond Fund, and may be
less based on the amount you invest, as shown in the following charts:
Core Equity Fund
<TABLE>
<CAPTION>
Maximum Dealer's
As a % of As a % of Reallowance as a %
offering price net asset value of offering price
Amount of Purchase per share per share per share*
<S> <C> <C> <C>
Less than $100,000 3.50 3.63 3.15
$100,000 but less than
$250,000 2.50 2.56 2.25
$250,000 but less than
$500,000 1.50 1.52 1.35
$500,000 but less than
$1,000,000 1.00 1.01 0.90
$1,000,000 or more 0.00** 0.00** 1.00***
</TABLE>
* Dealer's reallowance may be changed periodically.
** There is no initial sales charge on purchases of $1,000,000 or more of
Service Shares; however, a contingent deferred sales charge (CDSC) of 1.00%
will be imposed on the lesser of the POP or the NAV of the shares on the
redemption date for shares redeemed within 18 months after purchase.
*** The Distributor may pay placement fees to dealers of up to 1.00% of the
NAV on purchases of Service Shares of $1,000,000 or more.
Kansas Tax-Free Intermediate Bond Fund
<TABLE>
<CAPTION>
Maximum Dealer's
As a % of As a % of Reallowance as a %
offering price net asset value of offering price
Amount of Purchase purchase per share per share*
<S> <C> <C> <C>
Less than $500,000 2.00 2.04 1.80
$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 CDSC of 1.00% will be imposed on the lesser of
the POP or the NAV of the shares on the redemption date for shares redeemed
within 18 months after purchase.
*** The Distributor may pay placement fees to dealers of up to 1.00% of the POP
on Service Shares purchases of $1,000,000 or more.
The Commerce Funds PAGE 19
---------------
.
<PAGE>
When There Is No Sales Charge: There is generally no sales charge on Service
Shares purchased by the following types of investors or transactions:
. automatic reinvestments and cross reinvestments of dividends and capital gain
distributions;
. the Exchange Privilege described below;
. the Redemption Reinvestment Privilege described below;
. non-profit organizations, foundations and endowments qualified under Section
501(c)(3) of the Internal Revenue Code (excluding individual tax sheltered
annuities);
. any state, county or city, or any instrumentality, department, authority or
agency thereof, prohibited by applicable laws from paying a sales charge for
the purchase of Fund shares;
. registered representatives of dealers who have entered into dealer agreements
with Goldman, Sachs & Co. to the extent permitted by such firms and for their
customers;
. financial planners and their clients;
. customers of Commerce Bank's Investment Management Group (IMG) who purchase
shares for an account that is outside the IMG relationship; or
. immediate family (other than spouses and legal dependents) of employees,
directors, advisory directors, officers and retirees of Commerce Bancshares,
Inc., Goldman, Sachs & Co., State Street Bank and Trust Company and National
Financial Data Services, Inc. or their subsidiaries or affiliates.
What Is The Minimum Investment For The Funds?
<TABLE>
<CAPTION>
Initial Additional
Investment Investments
<S> <C> <C>
Regular Account $1,000 $250
Automatic Investment Account $ 500 $50/month
Individual Retirement Accounts (except SEP & SIMPLE
IRAs), Keogh plans, corporate retirement plans, public
employer deferred plans, profit sharing plans and
401(k) plans $1,000 $250
SEP and SIMPLE IRAs $ 50 $50/month
</TABLE>
How Do I Buy Service Shares?
The following section describes features and gives specific instructions on how
to purchase Service Shares directly from The Commerce Funds. The Commerce Funds
has authorized certain dealers to purchase shares of Funds on behalf of their
clients. Some of the account features and instructions described in this
section may not be applicable to clients of these dealers.
PAGE 20 The Commerce Funds
---------------
.
<PAGE>
1. Consider The Following Features To Customize Your Account:
. Making Automatic Investments: The Automatic Investment feature lets you
transfer money from your financial institution account into your Fund account
automatically either on the 1st or the 15th of the month. The Automatic
Investment feature is one way to use dollar cost averaging to invest (see
below). Only accounts at U.S. financial institutions that permit automatic
withdrawals through the Automated Clearing House (ACH) are eligible. Check
with your financial institution to determine eligibility.
. Using Dollar Cost Averaging: Dollar cost averaging involves investing a
dollar amount at regular intervals. Because more shares are purchased during
periods with lower share prices and fewer shares are purchased when the price
is higher, your average cost per share may be reduced. In order to be
effective, dollar cost averaging should be followed on a regular basis. You
should be aware, however, that shares bought using dollar cost averaging are
made without regard to their price on the day of investment or to market
trends. In addition, while you may find dollar cost averaging to be
beneficial, it will not prevent a loss if you ultimately redeem your shares
at a price that is lower than their purchase price. Dollar cost averaging
does not assure a profit or protect against a loss in a declining market.
Since dollar cost averaging involves investment in securities regardless of
fluctuating price levels, you should consider your financial ability to
continue to purchase through periods of low price levels. You can invest
through dollar cost averaging on your own or through the Automatic Investment
feature described above.
. Using Rights Of Accumulation: When you buy Service Shares of The Commerce
Funds, your current total investment determines the sales charge (load) you
pay. Since larger investments receive a discounted sales charge, the sales
charge (load) you pay may subsequently be reduced as you build your
investment.
To buy Service Shares at a reduced sales charge under Rights of Accumulation,
you must indicate at the time of purchase that a quantity discount is
applicable. (See section 5 of the application.) A reduction in sales charge is
subject to a check of appropriate records, after which you will receive the
lowest applicable sales charge.
Example: Suppose you own Service Shares with a current total value of $90,000
that can be traced back to the purchase of the shares with a sales charge. If
you subsequently invest $10,000 in any Fund within The Commerce Funds family
(except Funds that have a 2.00% sales charge), you will pay a reduced sales
charge of 2.50% of the POP on the additional purchase.
. Using Letters Of Intent: You may also buy Service Shares at a reduced sales
charge under a written Letter of Intent, a non-binding commitment to invest a
total of at least $100,000 in one or more Fund of The Commerce Funds within a
period of 13
The Commerce Funds PAGE 21
---------------
.
<PAGE>
months and under the terms and conditions of the Letter of Intent. Service
Shares you buy under a Letter of Intent will be eligible for the same sales
charge discount that would have been available had all of your Service Shares
been purchased 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.
Things To Consider When Completing A Letter Of Intent:
. The Letter of Intent does not bind you to buy or sell shares of the full
amount at the sales charge indicated. However, you must complete the intended
purchase to obtain the reduced sales charge.
. When you sign a Letter of Intent, The Commerce Funds will hold in escrow a
sufficient number of shares which can be sold to make up any difference in
the sales charge on the amount actually invested.
. After you fulfill the terms of the Letter of Intent, the shares in escrow
will be released.
. If your aggregate investment exceeds that indicated in your Letter of Intent,
you will receive an adjustment which reflects the further reduced sales
charge applicable to your excess investment.
. You may combine purchases that are made by members of your immediate family,
or the total investments of a trustee or custodian of any qualified pension
or profit-sharing plan or IRA established for your benefit. Please reference
on the account application the accounts that are to be combined for this
purpose.
2. Contact The Commerce Funds To Open Your Account:
By Mail:
-----------------------------------------------------------
[GRAPHIC]
Complete an account application. Mail the completed application and a
check payable to The Commerce Funds to:
The Commerce Funds
c/o Shareholder Services
P.O. Box 219525
Kansas City, MO 64121-9525
In Person:
-----------------------------------------------------------
[GRAPHIC]
You are welcome to stop by a Commerce Bank office location, where a
registered investment representative can assist you in opening an
account.
. Federal regulations require you to provide a certified Taxpayer
Identification Number upon opening or reopening an account.
PAGE 22 The Commerce Funds
---------------
.
<PAGE>
. If your check used for investment does not clear, a fee may be imposed by the
Transfer Agent. All payments by check must be in U.S. dollars and must be
drawn only on U.S. financial institutions.
How Do I Add To My Commerce Funds Account?
To add to your original investment, you may either mail your additional
investment to the address above or you may use Electronic Funds Transfer.
By Electronic Funds Transfer:
-----------------------------------------------------------
To use Electronic Funds Transfer, have your bank send your investment
to:
[GRAPHIC]
Investors Fiduciary Trust Company, with these instructions:
--ABA #101003621
--Account #756-044-3
--Your name and address
--Your social security or tax ID number
--Name of the Fund
--Class of shares
--Your new account number
What Are My Options For Changing My Investment Within The Commerce Funds?
. Changing Shares From Fund To Fund: As a shareholder, you have the privilege
of exchanging your shares for Service Shares of any other Commerce Fund.
Exchanges may also be made with the Goldman Sachs Institutional Liquid Assets
Prime Obligations Portfolio ("Money Market Fund"). Goldman Sachs Asset
Management, a unit of the Investment Management Division of Goldman, Sachs &
Co., serves as investment adviser for the Money Market Fund.
Service Shares being exchanged are subject to the minimum initial and
subsequent investment requirements as described above. The Commerce Funds
reserves the right to reject any exchange request and the exchange privilege
may be modified or terminated at any time. At least 60 days' notice of any
material modification or termination of the exchange privilege will be given
to shareholders except where notice is not required under the regulations of
the Securities and Exchange Commission (SEC). Before exchanging your shares,
you should consider carefully the investment objectives, policies, risks and
expenses of the Fund you are acquiring.
The Commerce Funds PAGE 23
---------------
.
<PAGE>
. Making Automatic Exchanges: You may request on your account application that
a specified dollar amount of Service Shares be automatically exchanged for
Service Shares of any other Commerce Fund. These automatic exchanges may be
made on any one day of each month and are subject to the following
conditions: 1) the minimum dollar amount for automatic exchanges must be at
least $250 per month; 2) the value of the account in the originating Fund
must be at least $1,000 after the exchange; 3) the value of the account in
the acquired Fund must equal or exceed the acquired Fund's minimum initial
investment requirement; and 4) the names, addresses and taxpayer
identification number for the shareholder accounts of the exchanged and
acquired Funds must be identical.
.Cross Reinvesting Of Distributions: You may invest dividend or capital gain
distributions from one Fund of the Service Class to another Fund of the
Service Class. If you elect to reinvest the distributions paid by one Fund in
shares of another Fund of The Commerce Funds, the dividends or distributions
will be treated as received by you for tax purposes. Cross reinvestment
privileges do not apply to the Money Market Fund described under "Changing
Shares From Fund to Fund."
Redeeming Service Shares
--------------------------------------------------------------------------------
You May Sell Shares At Any Time: Your shares will be sold at the NAV next
calculated after The Commerce Funds' Transfer Agent receives your properly
completed order. Your order will be processed promptly and you will generally
receive the proceeds within a week. Please note: If the Fund has not yet
collected payment for the shares you are selling, it may delay sending the
proceeds for up to 15 business days.
Receipt Of Proceeds From A Sale: Ordinarily, sale proceeds will be disbursed
the next business day following receipt by the Transfer Agent of a properly
completed order. Payment by check will ordinarily be made within seven calendar
days following redemption or you may have your proceeds sent by federal wire to
your financial institution account. Proceeds will normally be wired the
business day after your request to redeem shares is received in good order by
the Transfer Agent. Your request to wire proceeds is subject to the financial
institution's wire charges.
Written requests to sell Service Shares must be signed by each shareholder,
including each joint owner. Certain types of redemption requests will need to
include a signature guarantee. You may obtain a signature guarantee from most
banks or securities dealers. Guarantees from notaries public will not be
accepted.
PAGE 24 The Commerce Funds
---------------
.
<PAGE>
How Do I Redeem Shares From My Commerce Funds Account?
The following section describes how to redeem shares directly through The
Commerce Funds. The Commerce Funds has authorized certain dealers to redeem
shares of Funds on behalf of their clients. Some of the account features and
instructions described in this section may not be applicable to clients of
these dealers.
1. Consider Using An Automated Redemption:
. Making Automatic Withdrawals: If you are a shareholder with an account valued
at $5,000 or more, you may withdraw amounts in multiples of $100 or more from
your account on a monthly, quarterly, semi-annual or annual basis through the
Automatic Withdrawal feature. At your option, you may choose to have your
automatic withdrawal paid either by check or directly deposited into a
financial institution account. Withdrawals paid by check are distributed on
or about the 15th of the month. Direct deposits made to a financial
institution account can be made on any day of the month. To participate in
this feature, supply the necessary information on the account application or
in a subsequent written request. This feature may be suspended should the
value of your account fall below $500.
2. Contact The Commerce Funds To Redeem Shares From Your Account
By Mail:
-----------------------------------------------------------
Write a letter to us that gives the following information:
[GRAPHIC] --names of all account owners
--your account number
--the name of the Fund
--the dollar amount you want to redeem
--what we should do with the proceeds
Each owner, including each joint owner should sign the letter. Mail your
request to:
The Commerce Funds
c/o Shareholder Services
P. O. Box 219525
Kansas City, MO 64121-9525
By Telephone--Requesting Proceeds Be Wired:
-----------------------------------------------------------
[GRAPHIC]
Call The Commerce Funds with your request. Please see "What Are The
Important Things To Consider When Contacting The Commerce Funds by
Telephone?" below for specific instructions. When requesting a
redemption by wire you must be redeeming shares in the amount of $1,000
or more. Also, the Funds must have your financial institution account
information already on file. Proceeds will be wired directly to this
designated account.
The Commerce Funds PAGE 25
---------------
.
<PAGE>
By Telephone--Requesting Proceeds Be Sent By Check:
-----------------------------------------------------------
[GRAPHIC]
Call The Commerce Funds at 1-800-995-6365 (8 a.m. - 5 p.m. CST) with
your request. Please see "What Are The Important Things to Consider When
Contacting The Commerce Funds by Telephone?" below for specific
instructions. The check will be made payable to the shareholder(s) of
record and sent to the address listed on your account.
In Person:
-----------------------------------------------------------
[GRAPHIC]
You are welcome to stop by a Commerce Bank office location, where a
registered investment representative can assist you in redeeming shares
from your account.
What Are The Important Things To Consider When Contacting The Commerce Funds By
Telephone?
You may call us at 1-800-995-6365 (8 a.m.- 5 p.m. CST) to explain what you want
to do. To make additions by phone or request electronic transfers or request
redemptions, we need your prior written authorization. If you did not check the
box in Section 8 of your original account application, you must send us a
letter that gives us this authorization.
Telephone purchases will be made at the NAV next determined after the Transfer
Agent receives payment for the transaction. If you should experience difficulty
in redeeming your shares by telephone (e.g., because of unusual market
activity), we urge you to consider redeeming your shares by mail.
You should note that the Transfer Agent may act on a telephone purchase or
redemption request from any person representing himself to be you and
reasonably believed by the Transfer Agent to be genuine. Neither The Commerce
Funds nor any of its service contractors will be liable for any loss or expense
in acting on telephone instructions that are reasonably believed to be genuine.
In attempting to confirm that telephone instructions are genuine, The Commerce
Funds will use all procedures considered reasonable; the Funds may be liable
for any losses if they fail to do so.
General Policies
--------------------------------------------------------------------------------
Dividend And Distribution Policies: As a Fund shareholder, you are entitled to
any dividends and distributions from net investment income and net realized
capital gains. You may choose one of the following distribution options for
dividends and capital gains:
(1) reinvest all dividend and capital gain distributions in additional
Service Shares,
(2) receive dividend distributions in cash and reinvest capital gain
distributions in additional Service Shares,
PAGE 26 The Commerce Funds
---------------
.
<PAGE>
(3) receive all dividend and capital gain distributions in cash, or
(4) have all dividend and capital gain distributions deposited directly
into your designated account at a financial institution.
If you do not select an option when you open an account, all distributions will
automatically be reinvested in additional Service Shares of the same Fund. For
your protection, if you elect to have distributions mailed to you and these
cannot be delivered, they will be reinvested in additional Service Shares of
the same Fund. To change your distribution option, contact The Commerce Funds
at 1-800-995-6365 (8 a.m. - 5 p.m. CST). The change will become effective after
it is received in good order and processed by the Transfer Agent.
<TABLE>
<CAPTION>
Monthly Quarterly Net Realized
Fund Dividends* Dividends** Capital Gains***
<S> <C> <C> <C>
Core Equity x x
Kansas Tax-Free Intermediate Bond x x
</TABLE>
* Monthly dividends are declared daily but are only distributed on or about the
last business day of the month.
** Quarterly dividends are both declared and paid on the calendar quarter
months.
***Each Fund declares and distributes net realized capital gains annually
(December).
The Commerce Funds Reserve The Right To:
. Redeem your account involuntarily if, after 60 days' written notice, your
account's value remains below a $500 minimum balance. We will not redeem your
account involuntarily if the value falls below the minimum balance solely as
a result of market conditions. Retirement accounts and certain other accounts
will not be subject to automatic liquidation.
. Suspend or delay the payment of redemption proceeds when the NYSE is closed
(other than for customary weekend and holiday closings), during periods when
trading on the NYSE is restricted as determined by the SEC, during any
emergency as determined by the SEC or during other periods of unusual market
conditions.
. Without notice, stop offering shares of a Fund, reject any purchase order
(including exchanges), or bar an investor who is engaging in excessive
trading from purchasing or exchanging shares of a Fund.
Arrangements With Certain Institutions
Financial institutions or their designees that have entered into agreements
with The Commerce Funds or its agent may enter confirmed purchase orders on
behalf of clients and customers, with payment to follow no later than a Fund's
pricing on the following business day. If payment is not received by the Fund's
Transfer Agent by such time, the financial institution could be held liable for
resulting fees or losses. The Commerce Funds may be deemed to have received a
purchase or redemption order when a financial institution or its designee
accepts the order. Orders received by the Fund in proper form will be priced at
the Fund's POP next computed after they are accepted by the financial
The Commerce Funds PAGE 27
---------------
.
<PAGE>
institution or its designee. Financial institutions are responsible to their
customers and The Commerce Funds for timely transmission of all subscription
and redemption requests, investment information, documentation and money.
Business Of The Commerce Funds
--------------------------------------------------------------------------------
Shareholder Servicing
The Commerce Funds have adopted a distribution plan under Rule 12b-1 that
permits each Fund to pay up to 0.25% annually of its average daily net assets
attributable to the Service Shares. The Funds also have adopted a Shareholder
Administrative Services Plan that permits each Fund to pay up to 0.25% of
average daily net assets of Shares held under the plan to third parties for
providing shareholder services to the Shareholder Administrative Services Plan
participants. Because these fees are paid out of each Fund's assets, over time
they will increase the cost of your investment and may cost you more than
paying other types of sales charges.
Certain financial institutions may charge their customers account fees for
purchasing or redeeming shares of The Commerce Funds. These institutions may
provide shareholder services to their clients that are not available to a
shareholder dealing directly with The Commerce Funds. Each institution is
responsible for notifying its customers regarding its fees and additional or
changed purchase or redemption terms. You should contact your financial
institution for this information.
The Distributor and its affiliates may, out of its administration fee or other
resources, pay a fee of up to 0.25% of the amount invested or additional
incentives to dealers who initiate and are responsible for purchases of shares
of The Commerce Funds. In addition, at its expense, the Distributor will
provide additional compensation and promotional incentives to dealers in
connection with the sales of shares of the Funds. Subject to NASD regulation,
compensation may include promotional and other merchandise, sales and training
programs and other special events sponsored by dealers. Compensation may also
include payment for reasonable expenses incurred in connection with trips taken
by invited registered representatives for meetings or seminars of a business
nature.
The Commerce Funds will not issue share certificates. The Transfer Agent will
maintain a complete record of your account and will issue you a statement at
least quarterly. You will also be sent confirmations of purchases and
redemptions.
As a shareholder in the Funds, you will receive an Annual Report and a Semi-
Annual Report. To eliminate unnecessary duplication, only one copy of such
reports will be sent to the same mailing address. If you would like a duplicate
copy to be mailed to you, please contact The Commerce Funds at 1-800-995-6365
(8 a.m. - 5 p.m. CST).
PAGE 28 The Commerce Funds
---------------
.
<PAGE>
Tax Information
--------------------------------------------------------------------------------
The following is a brief summary of the federal income tax consequences of
investing in The Commerce Funds. You may also have to pay state and local taxes
on your investment, and you should always consult with your tax adviser for
specific guidance on your investment in The Commerce Funds.
Taxes on Distributions
The Funds' distributions will generally be taxable to shareholders as ordinary
income and capital gains (which may be taxable at different rates depending on
the length of time the Fund held the relevant assets). You will be subject to
income tax on these distributions regardless of whether they are paid in cash
or reinvested in additional shares. Once a year, The Commerce Funds will send
you a statement showing the types and total amount of distributions you
received during the previous year.
You should note that if you purchase shares just before a distribution, the
purchase price would reflect the amount of the upcoming distribution. In this
case, you would be taxed on the entire amount of the distribution received,
even though, as an economic matter, the distribution simply constitutes a
return of your capital. This is known as "buying into a dividend."
Taxes on Exchanges and Redemptions
When you redeem or exchange shares in any Fund, you may recognize a gain or
loss for income tax purposes. This gain or loss will be based on the difference
between your tax basis in the shares and the amount you receive for them. To
aid in computing your tax basis, you generally should retain your account
statements for the periods during which you held shares. Any loss realized on
shares held for six months or less will be treated as a long-term capital loss
to the extent of any capital gain dividends that were received with respect to
the shares. The one major exception to these tax rules is that distributions
on, and sales, exchanges and redemptions of, shares held in an IRA (or other
tax qualified plan) will not be currently taxable.
Backup Withholding
By law, The Commerce Funds must withhold 31% of your distributions and proceeds
if you have not provided complete, correct taxpayer information.
Tax Consequences Of The Kansas Tax-Free Intermediate Bond Fund
The Kansas Tax-Free Intermediate Bond Fund's distributions will generally
constitute tax-exempt income for shareholders for federal income tax purposes.
It is possible, depending on the Fund's investments, that a portion of the
Fund's distributions could be taxable to shareholders as ordinary income or
capital gains, but the Fund does not expect that this will be the case.
Moreover, although distributions are exempt for federal income
The Commerce Funds PAGE 29
---------------
.
<PAGE>
tax purposes, they will generally constitute taxable income for state and local
income tax purposes except that, subject to limitations that vary depending on
the state, distributions from interest paid by a state or municipal entity may
be exempt from tax in that state.
Kansas Taxes: Resident individuals, trusts and estates resident in Kansas, and
corporations within Kansas tax jurisdiction will not be subject to Kansas
income tax on dividends from the Kansas Tax-Free Intermediate Bond Fund that
are derived from interest on obligations of the State of Kansas 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 Kansas income tax on
other dividends received from the Fund, including dividends derived from
interest on obligations of other issuers and all long-term and short-term
capital gains.
Service Providers
--------------------------------------------------------------------------------
Investment Adviser: Commerce Bank, N.A. (the "Adviser")
Commerce Bank, N.A. serves as Adviser for the Funds, selecting investments and
making purchases and sale orders for securities in each Fund's portfolio.
Commerce Bank, with offices at 8000 Forsyth Boulevard, St. Louis, Missouri
63105 and 1000 Walnut Street, Kansas City, Missouri 64106, is a subsidiary of
Commerce Bancshares, Inc., a registered multi-bank holding company. Commerce
Bank has provided investment management services to The Commerce Funds since
1994, to private and public pension funds, endowments and foundations since
1946 and to individuals since 1906. As of June 30, 2000 the Adviser and its
affiliates had approximately $10.1 billion in assets under management.
As compensation for its services and its assumption of certain expenses, the
Adviser is entitled to the following fee, computed daily and payable monthly,
at the annual rate listed below (as a percentage of the Funds' average daily
net assets).
<TABLE>
<CAPTION>
Contractual
Rate
<S> <C>
Core Equity Fund 0.75%
Kansas Tax-Free Intermediate Bond Fund 0.50%
</TABLE>
The Adviser may voluntarily or contractually waive a portion of its advisory
fee from time to time, and may discontinue any voluntary waiver at any time at
its discretion. The Adviser intends to voluntarily reimburse expenses,
excluding interest, taxes and extraordinary expenses, during the current fiscal
year to the extent necessary for the Core Equity Fund to maintain total annual
fund operating expenses of not more than 1.38% of average daily net assets. The
Adviser reserves the right to discontinue the expense reimbursements at any
time.
PAGE 30 The Commerce Funds
---------------
.
<PAGE>
The Adviser has contractually agreed to waive fees and/or reimburse expenses of
the Kansas Tax-Free Intermediate Bond Fund in order to keep total annual
operating expenses, excluding interest, taxes and extraordinary expenses, from
exceeding 0.90% of the Fund's average daily net assets until October 31, 2001.
Fund Managers:
<TABLE>
<CAPTION>
Person Fund(s) Experience
<S> <C> <C>
Brian P. Musielak, CFA, Kansas Tax-Free Joined Commerce Bank in 1995
Assistant Vice President Intermediate Bond Fund Fund manager since inception
5 years of experience
Michael E. Marks, CFA, Core Equity Fund Joined Commerce Bank in 1999
Vice President Fund manager since Fund
inception
7 years of experience
Formerly a Portfolio Manager
and
Senior Investment Analyst
from November 1993 to
October 1998 of IAA Trust
Company.
</TABLE>
Administrator: Goldman Sachs Asset Management ("GSAM" or the "Administrator")
GSAM serves as Administrator of each of the Funds. GSAM is located at 32 Old
Slip, New York, New York 10005. GSAM is a unit of the Investment Management
Division of Goldman, Sachs & Co., the Distributor of the Funds.
Distributor: Goldman, Sachs & Co. ("Goldman" or the "Distributor")
Shares of each Fund are sold on a continuous basis by Goldman as Distributor.
Goldman is located at 85 Broad Street, New York, New York 10004.
Transfer Agent: State Street Bank and Trust Company ("State Street" or the
"Transfer Agent")
State Street has delegated its responsibilities as Transfer Agent to its
indirect subsidiary, National Financial Data Services, Inc. ("NFDS"). State
Street is located at 225 Franklin Street, Boston, Massachusetts 02110. NFDS is
located at 330 W. 9th Street, Kansas City, Missouri 64105.
Custodian: State Street Bank and Trust Company (the "Custodian")
State Street also serves as the Custodian of each of the Funds.
The Commerce Funds PAGE 31
---------------
.
<PAGE>
How Can I Contact The Commerce Funds?
If you would like more information about The Commerce Funds, you may request
the following documents:
Statement of Additional Information
The SAI contains additional information about the Funds and is incorporated by
reference into this prospectus.
Securities and Exchange Commission Reports
You can review, after paying a duplicating fee, the reports of the Funds and
the SAI by writing to the SEC's Public Reference Section, Washington, D.C.
20459-0102 or by electronic request to: [email protected]. Call the SEC at
(202) 942-8090 for information on operation of the public reference room. You
can get copies of this information for free on the SEC's EDGAR database at
http://www.sec.gov.
The Funds' investment company registration number is 811-8598.
Annual and Semi-Annual Reports
The Funds' annual and semi-annual reports contain additional information about
the Funds' investments. The annual report also discusses market conditions and
investment strategies that significantly affected the Funds' performance during
their last fiscal year. As of the date of this Prospectus, the Funds had not
commenced operations, and their annual report for the fiscal period ended
October 31, 2001 will become available December, 2001. To make shareholder
inquiries or to receive free copies of the SAI contact The Commerce Funds in
writing, via the World Wide Web, or by telephone, as listed below.
[LOGO OF COMMERCE FUNDS]
P.O. Box 219525
Kansas City, Missouri 64121-9525
www.commercefunds.com
1 - 8 0 0 - 9 9 5 - 6 3 6 5
(8 a.m. - 5 p.m. CST)
<PAGE>
THE COMMERCE FUNDS
STATEMENT OF ADDITIONAL INFORMATION
INSTITUTIONAL SHARES
SERVICE SHARES
Core Equity Fund
Kansas Tax-Free Intermediate Bond Fund
___________, 200_
This Statement of Additional Information is not a prospectus. It is meant
to be read in conjunction with The Commerce Funds' Prospectuses dated
__________, 200_. 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.
<PAGE>
TABLE OF CONTENTS
-----------------
OVERVIEW OF THE COMMERCE FUNDS..............................................1
INVESTMENT OBJECTIVES, POLICIES AND RISK FACTORS............................1
Core Equity Fund............................................................1
Kansas Tax-Free Intermediate Bond Fund......................................1
Convertible Securities......................................................2
Foreign Investments.........................................................3
Futures Contracts and Related Options.......................................4
Illiquid Securities.........................................................5
Interest Rate Swaps, Floors and Caps........................................6
Lending Securities..........................................................7
Municipal Obligations.......................................................8
Options Trading.............................................................9
Portfolio Turnover.........................................................11
Ratings of Securities......................................................12
Repurchase Agreements......................................................13
Reverse Repurchase Agreements..............................................13
Rights Offerings and Warrants..............................................13
Securities Issued by Other Investment Companies............................14
Special Considerations Regarding Investment in Kansas Obligations..........15
Stand-By Commitments.......................................................18
Temporary Investments......................................................18
U.S. Government Obligations................................................20
Variable and Floating Rate Instruments.....................................20
When-Issued Purchases and Forward Commitments..............................21
Zero Coupon Bonds..........................................................22
INVESTMENT LIMITATIONS.....................................................23
PRICING OF SHARES..........................................................25
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION.............................26
Additional Redemption Information..........................................27
Retirement Plans...........................................................28
DESCRIPTION OF SHARES......................................................29
ADDITIONAL INFORMATION CONCERNING TAXES....................................32
Federal Taxes..............................................................32
Federal Tax-Exempt Information.............................................32
MANAGEMENT OF THE COMMERCE FUNDS...........................................33
Trustees and Officers of the Trust.........................................33
Investment Advisor.........................................................36
Custodian and Transfer Agent...............................................37
Administrator..............................................................38
Distributor................................................................39
THE DISTRIBUTION PLAN AND THE SHAREHOLDER ADMINISTRATIVE SERVICES PLANS....39
PORTFOLIO TRANSACTIONS.....................................................40
Brokerage Transactions and Commissions.....................................40
-i-
<PAGE>
INDEPENDENT AUDITORS.......................................................42
COUNSEL....................................................................42
ADDITIONAL INFORMATION ON PERFORMANCE......................................42
MISCELLANEOUS..............................................................48
APPENDIX A..................................................................1
APPENDIX B..................................................................1
-ii-
<PAGE>
OVERVIEW OF THE COMMERCE FUNDS
The Commerce Funds is an open-end, management investment company registered
under the Investment Company Act of 1940. The Commerce Funds is a Delaware
business trust, which was organized on February 7, 1994.
INVESTMENT OBJECTIVES, POLICIES AND RISK FACTORS
The following policies supplement the discussion of the Core Equity and
Kansas Tax-Free Intermediate Bond Funds' respective investment objectives and
policies as set forth in the Prospectuses. Investment methods described in this
Statement of Additional Information are among those which one or more of the
Funds have the power to utilize. Some may be employed on a regular basis; others
may not be used at all. Accordingly, reference to any particular method or
technique carries no implication that it will be utilized or, if it is, that it
will be successful.
The Core Equity Fund is a diversified series of The Commerce Funds. The
Kansas Tax-Free Intermediate Bond Fund is a non-diversified series of the Funds.
This means it is permitted to invest more than 5% of its assets in the
obligations of a single issuer.
Core Equity Fund
----------------
Although the Core Equity Fund uses the S&P 500 Index as a benchmark for
comparison, the Fund may invest its assets in securities that are not included
in this Index. The Fund is not, therefore, an "Index" fund, which typically
holds only securities that are included in the index it attempts to replicate.
Other equity securities in which the Fund may invest include warrants and
securities that are convertible into common or preferred stocks. The Fund may
also invest, either directly or through investments in sponsored and unsponsored
ADRs, up to 10% of its total assets in securities of foreign issuers.
Kansas Tax-Free Intermediate Bond Fund
--------------------------------------
The Kansas Tax-Free Intermediate Bond Fund may invest up to 10% of its
total assets in unrated obligations provided that such obligations are
determined by the Advisor to be comparable in quality to instruments that are
eligible for purchase by the Fund.
The 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. The Fund
may also invest up to 20% of its net assets for temporary defensive purposes in
short-term taxable money market instruments,
<PAGE>
in securities issued by other investment companies which invest in taxable or
tax-exempt money market instruments and in U.S. Government Obligations, all as
discussed below.
In addition, the 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 Fund.
Uninvested cash normally will not represent a significant portion of the Fund's
assets.
The Fund may invest from time to time in "money market instruments" a term
that includes, among other things, bank obligations, commercial paper and
corporate bonds with remaining maturities of 397 days or less.
Convertible Securities
----------------------
The Core Equity Fund may invest in convertible securities, including bonds,
notes and preferred stock that may be converted into common stock either at a
stated price or within a specified period of time. Convertible securities
entitle the holder to receive interest paid or accrued on debt or the dividend
paid on preferred stock until the convertible securities mature or are redeemed,
converted or exchanged. Prior to conversion, convertible securities have
characteristics similar to ordinary debt securities in that they normally
provide a stable stream of income with generally higher yields than those of
common stock of the same or similar issuers. Convertible securities rank senior
to common stock in the corporate capital structure and, therefore, generally
entail less risk than the corporation's common stock, although the extent to
which such risk is reduced depends 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
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convertible securities will be increasingly influenced by their conversion
value. In addition, convertible securities generally sell at a premium over
their conversion value determined by the extent to which investors place value
on the right to acquire the underlying stock while holding fixed income
securities.
Foreign Investments
-------------------
As indicated in the Prospectuses, the Core Equity Fund may invest up to 10%
of its total assets in securities issued by foreign issuers, including American
Depository Receipts ("ADRs"), wherever organized ("Foreign Securities"). In
considering whether to invest in 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
United States and those within other countries, and also factors relating to the
general economic, governmental and social conditions of the country or countries
where the issuer is located.
Investment in Foreign Securities involves special risks including market
risk, foreign currency risk, interest rate risk and the risks of investing in
securities of foreign issuers and of companies whose securities are principally
traded outside the United States. Market risk involves the possibility that
stock prices will decline over short or extended periods. Stock markets tend to
be cyclical, with alternate periods of generally rising and generally declining
prices. In addition, the performance of investments in securities denominated in
a foreign currency will depend on the strength of the foreign currency against
the U.S. dollar and the interest rate environment in the country issuing the
currency. Absent other events which could otherwise affect the value of a
Foreign Security (such as a change in the political climate or an issuer's
credit quality), appreciation in the value of the foreign currency generally can
be expected to increase the value of a foreign currency-denominated security in
terms of U.S. dollars. An increase in foreign interest rates or a decline in the
value of the foreign currency relative to the U.S. dollar generally can be
expected to depress the value of a foreign currency-denominated security.
There are other risks and costs involved in investing in Foreign
Securities, which are in addition to the usual risks inherent in domestic
investments. Investment in Foreign Securities involves higher costs than
investment in U.S. securities, including higher transaction and custody costs as
well as the imposition of additional taxes by foreign governments. Foreign
investments also involve risks associated with the level of currency exchange
rates, less complete financial information about the issuers, less market
liquidity, more market volatility and political and economic instability. Future
political and economic developments, the possible imposition of withholding
taxes, the possible seizure or nationalization of foreign holdings, the possible
establishment of exchange controls, or the adoption of other governmental
restrictions might adversely affect an investment in foreign securities.
Additionally, foreign banks and foreign branches of domestic banks are subject
to less stringent reserve requirements, and to different accounting, auditing
and recordkeeping requirements.
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The Fund 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 the 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, the 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 United
States or abroad.
To the extent that the 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. The
Fund is also subject to the possible imposition of exchange control regulations
or freezes on convertibility of currency.
Futures Contracts and Related Options
-------------------------------------
The Funds may invest in futures contracts and options thereon (interest
rate futures contracts or index futures contracts, as applicable) for hedging
purposes or to seek to increase total return. 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
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securities may be, but will not necessarily be, at increased prices which
reflect the rising market. A Fund may have to sell securities at a time when it
may be disadvantageous to do so.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if at the time
of purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit, before any deduction for the
transaction costs, if the contract were closed out. Thus, a purchase or sale of
a futures contract may result in losses in excess of the amount invested in the
contract.
Utilization of futures transactions by a Fund involves the risk of loss by
a Fund of margin deposits in the event of bankruptcy of a broker with whom the
Fund has an open position in a futures contract or related option.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movement during a particular trading day and therefore does not limit
potential losses, because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of futures positions and subjecting some futures
traders to substantial losses.
The trading of futures contracts is also subject to the risk of trading
halts, suspensions, exchange or clearing-house equipment failures, government
intervention, insolvency of a brokerage firm or clearing house or other
disruptions of normal trading activity, which could at times make it difficult
or impossible to liquidate existing positions or to recover excess variation
margin payments.
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.
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
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<PAGE>
time deposits with notice/termination dates in excess of seven days, stripped
mortgage-backed securities ("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.
Interest Rate Swaps, Floors and Caps
------------------------------------
In order to hedge against fluctuations in interest rates, the Kansas
Tax-Free Intermediate Bond Fund may opt to enter into interest rate and mortgage
swaps and interest rate caps and floors. The Fund typically uses interest rate
and mortgage swaps to preserve a return on a particular investment or portion of
its portfolio or to shorten the effective duration of its portfolio securities.
Interest rate swaps involve the exchange by the Fund with another party of their
respective commitments to pay or receive interest, such as an exchange of fixed
rate payments for floating rate payments. Mortgage swaps are similar to interest
rate swaps in that they represent commitments to pay and receive interest. The
notional principal amount, however, is tied to a reference pool or pools of
mortgages. The purchase of an interest rate floor or cap entitles the purchaser
to receive payments of interest on a notional principal amount from the seller,
to the extent that a specified index falls below (floor) or exceeds (cap) a
predetermined interest rate. In a typical cap or floor arrangement, one party
agrees to make payments only under specified circumstances, usually in return
for payment of a fee by the other party. For example, the buyer of an interest
rate cap obtains the right to receive payments to the extent that a specified
interest rate exceeds an agreed upon level, while the seller of an interest rate
floor is obligated to make payments to the extent that a specified interest rate
falls below an agreed upon level. Since interest rate swaps, mortgage swaps and
interest rate caps and floors are individually negotiated, the Fund expects to
achieve an acceptable degree of correlation between its portfolio investments
and its interest rate swaps, mortgage swaps and interest rate caps and floors
positions.
If the Fund enters into interest rate and mortgage swaps, it will do so
only on a net basis, i.e., the two payment streams are netted out, with the Fund
receiving or paying, as the case may be, only the net amount of the two
payments. Inasmuch as these transactions are entered into for good faith hedging
purposes, the Funds and the Advisor believe that such obligations do not
constitute senior securities as defined in the 1940 Act and, accordingly, do not
treat them as being subject to the Funds' borrowing restrictions. The net amount
of the excess, if any, of the Fund's obligations over its entitlements with
respect to each interest rate or mortgage swaps is accrued on a daily basis and
an amount of cash or liquid securities having an aggregate
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<PAGE>
net asset value at least equal to such accrued excess, is maintained in a
segregated account by the Fund's Custodian.
The use of interest rate swaps, mortgage swaps, caps and floors is a highly
specialized activity that involves investment techniques and risks different
from those associated with ordinary portfolio securities transactions. If the
Advisor is incorrect in its forecasts of market values and interest rates, the
investment performance of the Fund would be less favorable than it would have
been if these investment techniques were not used.
The Fund does not enter into any interest rate or mortgage swap or interest
cap or floor transaction unless the unsecured commercial paper, senior debt or
the claims-paying ability of the other party thereto is rated either AA or A-1
or Aa or P-1 or better by S&P or Moody's or the equivalent rating of another
NRSRO or if unrated by such rating organizations, determined by the Advisor to
be of comparable credit quality. If there is a default by the other party to
such a transaction, the Fund will have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms acting
both as principals and as agents utilizing standardized swap documentation. As a
result, the swap market has become relatively liquid in comparison with the
markets for other similar instruments which are traded in the relevant market.
However, the staff of the SEC takes the position that swaps, caps and floors are
illiquid for purposes of the Fund's limitations on investments in illiquid
securities.
Lending Securities
------------------
Each Fund may lend its portfolio securities to broker/dealers and other
institutional investors pursuant to agreements requiring that the loans be
continuously secured by collateral equal in value at all times to at least the
market value of the securities loaned. Collateral for securities loans may
include cash, securities of the U.S. Government, its agencies or
instrumentalities, or an irrevocable letter of credit issued by a bank that
meets the investment standards defined as "money market instruments" below in
"Temporary Investments." When a Fund lends its securities, it continues to
receive interest or dividends on the securities loaned and may simultaneously
earn interest on the investment of the cash loan collateral which will be
invested in readily marketable, high-quality, short-term obligations. Although
voting rights, or rights to consent, attendant to securities on loan pass to the
borrower, such loans may be called at any time and will be called so that the
securities may be voted by a Fund if a material event affecting the investment
is to occur. Such loans will not be made if, as a result, the aggregate of all
outstanding loans exceeds 33 1/3% of the value of a Fund's total assets
(including the value of the collateral received for the loan). There may be
risks of delay in receiving additional collateral or in recovering the
securities loaned or even a loss of rights in the collateral should the borrower
of the securities fail financially. However, loans are made only to borrowers
deemed by the Advisor to be of good standing and when, in its judgment, the
income to be earned form the loan justifies the attendant risks.
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Municipal Obligations
---------------------
The Kansas Tax-Free Intermediate Bond Fund may invest in 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.
The two principal classifications of Municipal Obligations consist of
"general obligation" and "revenue" issues, and the respective portfolios may
also purchase "moral obligation" issues, which are normally issued by special
purpose authorities. General obligation securities are secured by the issuer's
pledge of its full faith, credit and taxing power for the payment of principal
and interest. Revenue securities are payable only from the revenues derived from
a particular facility or class of facilities or, in some cases, from the
proceeds of a special excise tax or other specific revenue source such as the
user of the facility being financed. Private activity bonds (e.g., bonds issued
by industrial development authorities) that are issued by or on behalf of public
authorities to finance various privately-operated facilities are included within
the term "Municipal Obligations" if the interest paid thereon is exempt from
regular federal income tax and not treated as a specific tax preference item
under the federal alternative minimum tax. Private activity bonds are in most
cases revenue securities and are not payable from the unrestricted revenues of
the issuer. The credit quality of such bonds is usually directly related to the
credit standing of the corporate user of the facility involved. If the issuer of
moral obligation securities is unable to meet its debt service obligations from
current revenues, it may draw on a reserve fund, the restoration of which is a
moral commitment but not a legal obligation of the state or municipality which
created the issuer. There are, of course, variations in the quality of Municipal
Obligations both within a particular classification and between classifications,
and the yields on Municipal Obligations depend upon a variety of factors,
including general money market conditions, the financial condition of the
issuer, general conditions of the municipal bond market, the size of a
particular offering, the maturity of the obligation and the rating of the issue.
Although the Fund will invest most of its assets, under normal
circumstances, in intermediate-term Municipal Obligations, the Fund may also
purchase short-term project notes, tax anticipation notes, bond anticipation
notes, revenue anticipation notes, tax-exempt commercial paper, and other forms
of short-term tax-exempt loans. Such instruments are issued with a short-term
maturity in anticipation of the receipt of tax funds, the proceeds of bond
placements or other revenues.
Further, the Fund may purchase Municipal Obligations known as "certificates
of participation" which represent undivided proportional interests in lease
payments by a governmental or non-profit entity. The lease payments and other
rights under the lease provide for and secure the payments on the certificates.
Lease obligations may be limited by applicable municipal charter provisions or
the nature of the appropriation for the lease. In particular, lease obligations
may be subject to periodic appropriation. If the entity does not appropriate
funds for future lease payments, the entity cannot be compelled to make such
payments. Furthermore, a lease may or may not provide that the certificate
trustee can accelerate lease obligations upon
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<PAGE>
default. If the trustee could not accelerate lease obligations upon default, the
trustee would only be able to enforce lease payments as they became due. In the
event of a default or failure of appropriation, it is unlikely that the trustee
would be able to obtain an acceptable le substitute source of payment.
Certificates of participation are generally subject to redemption by the issuing
municipal entity under specified circumstances. If a specified event occurs, a
certificate is callable at par either at any interest payment date or, in some
cases, at any time. As a result, certificates of participation are not as liquid
or marketable as other types of Municipal Obligations.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on Municipal Obligations. For example, under the federal tax
legislation enacted in 1986, interest on certain private activity bonds must be
included in an investor's alternative minimum taxable income, and corporate
investors must treat all tax-exempt interest as an item of tax preference. The
Commerce Funds cannot predict what legislation, if any, may be proposed or
enacted in the future regarding the federal tax status of interest on such
obligations or what legislation may be proposed in the Kansas Legislature
relating to the status of the Kansas income tax on interest on Kansas
obligations. Such proposals, whether pending or enacted, might materially and
adversely affect the availability of Municipal or Kansas Obligations for
investment by the Fund and the liquidity and value of its portfolio. In such an
event, the Fund would re-evaluate its investment objective and policies and
consider possible changes in its structure or possible dissolution.
Certain of the Municipal Obligations held by the Fund may be insured as to
the timely payment of principal and interest. The insurance policies will
usually be obtained by the issuer of the Municipal Obligation at the time of its
original issuance. In the event that the issuer defaults on interest or
principal payment, the insurer will be notified and will be required to make
payment to the bondholders. There is, however, no guarantee that the insurer
will meet its obligations. In addition, such insurance will not protect against
market fluctuations caused by changes in interest rates and other factors. The
Fund may, from time to time, invest more than 25% of its assets in Municipal
Obligations covered by insurance policies.
Options Trading
---------------
Each of the Funds may purchase put and call options and may write covered
call and secured put options, which will be listed on a national securities
exchange and issued by the Options Clearing Corporation. The aggregate value of
securities subject to options written by the Kansas Tax-Free Intermediate Bond
Fund will not exceed 5% of the Fund's total assets. The aggregate value of
securities subject to options written by the Core Equity Fund will not exceed
25% of the Fund's total assets. Notwithstanding the foregoing, a Fund may not
purchase or sell futures contracts or options on futures contracts to increase
total return unless immediately after any such transaction, the aggregate amount
of premiums paid for put options and the amount of margin deposits on existing
futures positions do not exceed 5% of the total assets of the Fund.
Options may relate to particular securities and various stock indexes or
currencies. This is a highly specialized activity which entails greater than
ordinary investment risks.
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<PAGE>
Regardless of how much the market price of the underlying security increases or
decreases, the option buyer's risk is limited to the amount of the original
investment for the purchase of the option. However, options may be more volatile
than the underlying securities, and therefore, on a percentage basis, an
investment in options may be subject to greater fluctuation than an investment
in the underlying securities themselves. A listed call option gives the
purchaser of the option the right to buy from a clearing corporation, and a
writer has the obligation to sell to the clearing corporation, the underlying
security at the stated exercise price at any time prior to the expiration of the
option, regardless of the market price of the security. The premium paid to the
writer is in consideration for undertaking the obligations under the option
contract. A listed put option gives the purchaser the right to sell to a
clearing corporation the underlying security at the stated exercise price at any
time prior to the expiration date of the option, regardless of the market price
of the security. Put and call options purchased by a Fund will be valued at the
last sale price or, in the absence of such a price, at the mean between bid and
asked prices.
The Funds will write only "covered" call options on securities. The option
is "covered" if a Fund owns the security underlying the call or has an absolute
and immediate right to acquire that security without additional cash
consideration (or, if additional cash consideration is required, cash or cash
equivalents in such amount as are held in a segregated account by its Custodian)
upon conversion or exchange of other securities held by it. A call option is
also covered if a Fund holds a call on the same security as the call written
where the exercise price of the call held is (i) equal to or less than the
exercise price of the call written, or (ii) greater than the exercise price of
the call written provided the difference is maintained by the Fund in cash or
cash equivalents in a segregated account with its Custodian.
A Fund's obligation to sell a security subject to a covered call option
written by it, or to purchase a security subject to a secured put option written
by it, may be terminated prior to the expiration date of the option by the
Fund's executing a closing purchase transaction, which is effected by purchasing
on an exchange an option of the same series (i.e., the same underlying security,
exercise price and expiration date) as the option previously written. Such a
purchase does not result in the ownership of an option. A closing purchase
transaction will ordinarily be effected to realize a profit on an outstanding
option, to prevent an underlying security from being called, to permit the sale
of the underlying security or to permit the writing of a new option containing
different terms on such underlying security. The cost of such a liquidation
purchase plus transaction costs may be greater than the premium received upon
the original option, in which event the Fund will have incurred a loss in the
transaction. An option position may be closed out only on an exchange which
provides a secondary market for an option of the same series. There is no
assurance that a 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. Successful use of options by a Fund is subject to
the Advisor's ability to correctly predict movements in the direction of stock
prices, interest rates and other economic factors.
Portfolio Turnover
------------------
The annualized portfolio turnover rate for each Fund is calculated by
dividing the lesser of purchases or sales of portfolio securities for the year
by the monthly average market value of the portfolio securities. The calculation
excludes all securities, including
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<PAGE>
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.
Ratings of Securities
---------------------
Investment-grade obligations are those rated at the time of purchase AAA,
AA, A or BBB by S&P, Aaa, Aa, A or Baa by Moody's or which are similarly rated
by another nationally recognized statistical rating organization ("NRSRO")
(including Fitch Investors Service, Inc. and Thomson BankWatch) or are unrated
but deemed by the Advisor to be comparable in quality to instruments that are so
rated. Obligations rated BBB by S&P, Baa by Moody's or the equivalent rating of
another NRSRO are considered to have speculative characteristics and are subject
to greater credit and market risk than securities rated in the top three
investment-grade categories.
Subsequent to their purchase by the Kansas Tax-Free Intermediate Bond Fund,
the Fund's portfolio securities may be downgraded below investment grade or may
be deemed by the Advisor to be no longer comparable to investment-grade
securities. The Advisor will consider such an event in determining whether the
Fund should continue to hold the security. See Appendix A for a description of
applicable debt ratings.
The ratings of Moody's, S&P, Fitch Investor Service, Inc. and Thomson
BankWatch, as NRSROs, represent their opinions as to the quality of debt
securities. It should be emphasized, however, that ratings are general and are
not absolute standards of quality, and debt securities with the same maturity,
interest rate and rating may have different yields while debt securities of the
same maturity and interest rate with different ratings may have the same yield.
Subsequent to its purchase by a Fund, an issue of debt securities may cease to
be rated or its rating may be reduced below the minimum rating required for
purchase by a Fund. The Advisor will consider such an event in conjunction with
the particular Fund's investment policy when determining whether the Fund should
continue to hold the obligation.
The payment of principal and interest on most securities purchased by the
Funds will depend upon the ability of the issuers to meet their obligations. An
issuer's obligations under its debt securities are subject to the provisions of
bankruptcy, insolvency, and other laws affecting the rights and remedies of
creditors, such as the Federal Bankruptcy Code, and laws, if 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.
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<PAGE>
Repurchase Agreements
---------------------
Each Fund may enter into repurchase agreements under which it buys a
security and obtains a simultaneous commitment from the seller to repurchase the
security at a specified time and price. The seller must maintain with a Fund's
Custodian collateral equal to at least 100% of the repurchase price including
accrued interest as monitored daily by the Advisor. If the seller under the
repurchase agreement defaults, a Fund may incur a loss if the value of the
collateral securing the repurchase agreement has declined and may incur
disposition costs in connection with liquidating the collateral. If bankruptcy
proceedings are commenced with respect to the seller, liquidation of the
collateral by a Fund may be delayed or limited.
The repurchase price under the repurchase agreements described in the
Funds' Prospectuses generally equals the price paid by a Fund plus interest
negotiated on the basis of current short-term rates (which may be more or less
than the rate on the securities underlying the repurchase agreement). Securities
subject to repurchase agreements are held by the Funds' Custodian (or
sub-Custodian) or in the Federal Reserve/Treasury book-entry system. Repurchase
agreements are considered to be loans under the 1940 Act.
Reverse Repurchase Agreements
-----------------------------
Each Fund may borrow money for temporary purposes by entering into
transactions called reverse repurchase agreements. Under these agreements, a
Fund sells portfolio securities to a financial institution (such as a bank or
broker-dealer) and agrees to buy them back later at an agreed upon time and
price. When a Fund enters into a reverse repurchase agreement, it places in a
separate custodial account cash or liquid assets that have a value equal to or
greater than the repurchase price. The account is then continuously monitored by
the Advisor to make sure that an appropriate value is maintained. Reverse
repurchase agreements involve the risk that the value of portfolio securities a
Fund relinquishes may decline below the price the Fund must pay on the
repurchase date. A Fund will only enter into reverse repurchase agreements to
avoid the need to sell its securities to meet redemption requests during
unfavorable market conditions. As reverse repurchase agreements are deemed to be
borrowings by the SEC, each Fund is required to maintain continuous asset
coverage of 300%. Should the value of a Fund's assets decline below 300% of
borrowings, a Fund may be required to sell portfolio securities within three
days to reduce the Fund's debt and restore 300% asset coverage.
Rights Offerings and Warrants
-----------------------------
The Core Equity Fund 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 the 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
-13-
<PAGE>
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. The 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 the
Fund in units or attached to other securities are not subject to this
restriction.
Securities Issued by Other Investment Companies
-----------------------------------------------
Each Fund may invest in securities issued by other investment companies
within the limits prescribed by the 1940 Act. Each Fund currently intends to
limit its investments so that, as determined immediately after a purchase is
made: (a) not more than 5% of the value of its total assets will be invested in
the securities of any one investment company; (b) not more than 10% of the value
of its total assets will be invested in the aggregate in securities of
investment companies as a group; (c) not more than 3% of the outstanding voting
stock of any one investment company will be owned by the Fund; and (d) not more
than 10% of the outstanding voting stock of any one investment company will be
owned in the aggregate by the Fund and other investment companies advised by the
Advisor, or any affiliate of Commerce Bancshares, Inc. As a shareowner of
another investment company, a Fund would bear, along with other shareowners, its
pro rata portion of the expenses of such other investment company, including
advisory fees. These expenses would be in addition to the advisory and other
expenses that a Fund bears directly in connection with its own operations and
may represent a duplication of fees to shareowners of the Fund.
The Core Equity Fund may invest in SPDRs. SPDRs are interests in a unit
investment trust ("UIT") that may be obtained from the UIT or purchased in the
secondary market (SPDRs are listed on the American Stock Exchange). There is a
5% limit based on total assets on investments by any one Fund in SPDRs. The UIT
will issue SPDRs in aggregations known as "Creation Units" in exchange for a
"Portfolio Deposit" consisting of (a) a portfolio of securities substantially
similar to the component securities ("Index Securities") of the Standard &
Poor's 500 Composite Stock Price Index (the "S&P Index"), (b) a cash payment
equal to a pro rata portion of the dividends accrued on the UIT's portfolio
securities since the last dividend payment by the UIT, net of expenses and
liabilities, and (c) a cash payment or credit ("Balancing Amount") designed to
equalize the net asset value of the S&P Index and the net asset value of a
Portfolio Deposit.
SPDRs are not individually redeemable, except upon termination of the UIT.
To redeem, the Fund must accumulate enough SPDRs to reconstitute a Creation
Unit. The liquidity of small holdings of SPDRs, therefore, will depend upon the
existence of a secondary market. Upon redemption of a Creation Unit, the Fund
will receive Index Securities and cash identical to the Portfolio Deposit
required of an investor wishing to purchase a Creation Unit that day.
The price of SPDRs is derived from and based upon the securities held by
the UIT. Accordingly, the level of risk involved in the purchase or sale of a
SPDR is similar to the risk involved in the purchase or sale of traditional
common stock, with the exception that the pricing mechanism for SPDRs is based
on a basket of stocks. Disruptions in the markets for the securities underlying
SPDRs purchased or sold by the Funds could result in losses on SPDRs.
-14-
<PAGE>
Special Considerations Regarding Investment in Kansas Obligations
-----------------------------------------------------------------
Because the Kansas Tax-Free Intermediate Bond Fund will concentrate its
investments in Kansas Municipal Obligations, it may be affected by political,
economic or regulatory factors that may impair the ability of Kansas issuers to
pay interest on or to repay the principal of their debt obligations. Kansas
Municipal Obligations may be subject to greater price volatility than municipal
obligations in general as a result of the effect of supply and demand for these
securities which, in turn, could cause greater volatility in the value of the
shares of the Fund.
The following information as to certain Kansas risk factors is only a brief
summary of the factors affecting the financial condition of the State of Kansas,
it does not purport to be a complete description and is based on information
from official statements relating to municipal obligations issued by the State
of Kansas.
Kansas ranks as the 14th largest state in terms of size with an area in
excess of 82,000 square miles. As of July, 1999, the population is estimated to
be 2,645,052, which is a .06% increase from July, 1998. In comparison, the
growth in population in the U.S. was .09%.
Growth in the State's trade, services and manufacturing sectors has
decreased the historical dominance of agriculture on the State economy. Economic
performance in 1996 and into 1997 has been significantly better than 1995, due
largely to gains in aircraft manufacturing and recovery in agriculture. Personal
income grew at 4.2% in 1998 to $24,981. Per capita income stands at about 96% of
the national median.
The State's average monthly unemployment rate dropped to 3.6% in 1998 from
its peak of 5.5% in 1993.
The Kansas State Treasury does not issue general obligation debt. The state
instead relies on revenue and lease financing through the Department of
Transportation (KDOT) and the Development Finance Authority (KDFA). KDFA
provides financing for various public purpose projects including prison
construction, state offices, energy conservation and university facilities. The
KDOT bonds are rated Aa/AA by Moody's and Standard & Poor's, respectively. KDFA
ratings vary across underlying purpose and when not insured are generally rated
A or better by the major rating agencies.
Obligations of issuers of Kansas Municipal Obligations are subject to the
provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors, such as the Federal Bank Reform Act of 1978. In addition,
the obligations of such issuers may become subject to the laws enacted in the
future by Congress or the Kansas legislatures or by referenda extending the time
for payment of principal and/or interest, or imposing other constraints upon
enforcement of such obligations or upon municipalities to levy taxes. There is
also the possibility that, as a result of legislation, litigation involving the
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<PAGE>
taxation of municipal obligations or the rights of municipal obligation holders,
or other conditions, the power or ability of any issuer to pay, when due, the
principal of and interest on its Kansas Municipal Obligations may be materially
affected.
KANSAS RISK FACTORS. The following information is a brief summary of
particular Kansas state factors effecting the Kansas Tax-Free Intermediate Bond
Fund and does not purport to be a complete description of such factors. The
financial condition of the state, its public authorities and local governments
could affect the market values and marketability of, and therefore the net asset
value per share and the interest income of the Fund, or result in the default of
existing obligations, including obligations which may be held by the Fund.
Further, the state faces numerous forms of litigation seeking significant
damages which, if awarded, may adversely affect the financial situation of the
state or issuers located in such state. It should be noted that the
creditworthiness of obligations issued by local issues may be unrelated to the
creditworthiness of a state, and there is no obligation on the part of the state
to make payment on such local obligations in the event of default in the absence
of a specific guarantee or pledge provided by a state. The information contained
below is based primarily upon information derived from state official
statements, Certified Annual Financial Reports, state and industry trade
publications, newspaper articles, other public documents relating to securities
offerings of issuers of such states, and other historically reliable sources. It
has not been independently verified by the Fund. The Fund makes no
representation or warranty regarding the completeness or accuracy of such
information. The market value of shares of the Fund may fluctuate due to factors
such as change in interest rates, matters affecting a particular state, or for
other reasons.
GENERAL ECONOMIC CONDITIONS. Kansas is the 14th largest state in terms of
size with an area in excess of 82,000 square miles. It is rectangular in shape
and is 411 miles long from east to west and 208 miles wide. The geographic
center of the 48 contiguous states lies within its borders. Kansas became the
34th state in 1861 and Topeka was chosen to be the capitol later that year. The
population of the State of Kansas has grown from 2,477,588 in 1990 to 2,645,052
in July, 1999.
The performance of the Kansas economy remained steady in 1998. This
stability was due largely to the continued expansion in aircraft manufacturing
and the recovery of the farm economy. The major economic trends indicate that
nominal personal income in Kansas grew at a 4.7 percent rate during 1998. This
compared to 6.0 percent in 1997. Employment by place of residence grew by 3.1
percent in 1998 compared to 4.4 percent in 1997, while employment by place of
work increased by 3.8 percent in 1998. The state unemployment rate of 3.6
percent for 1998 was down from 3.8 percent in 1997.
BUDGETARY PROCESS. The Governor is statutorily mandated to present spending
recommendations to Legislature. "The Governor's Budget Report" reflects
expenditures for both the current and upcoming fiscal years and identifies the
sources of financing for those expenditures. The Legislature uses "The
Governor's Budget Report" as a guide as it appropriates the money necessary for
state agencies to operate. Only the Legislature can authorize expenditures by
the State of Kansas. The Governor recommends
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<PAGE>
spending levels, while the Legislature chooses whether to accept or modify those
recommendations. The Governor may veto legislative appropriations, although the
Legislature may override any veto by two-thirds majority vote.
The state "fiscal year" runs from July 1 to the following June 30 and is
numbered for the calendar year in which it ends. The "current fiscal year" is
the one which ends the coming June. The "actual fiscal year" is the year which
concluded the previous June. The "budget year" refers to the next fiscal year,
which begins the July following the Legislature's adjournment.
By law, "The Governor's Budget Report" must reflect actual year spending,
the Governor's revised spending recommendations for the current fiscal year,
state agency spending requests for budget year, and the Governor's spending
recommendations for the budget year. The budget recommendations cannot include
the expenditure of anticipated income attributable to proposed legislation.
DEBT ADMINISTRATION AND LIMITATION. The State of Kansas finances a portion
of its capital expenditures with various debt instruments. Of capital
expenditures that are debt-financed, revenue bonds and loans from the Pooled
Money Investment Board finance most capital improvements for buildings, and
certificates of participation and "third-party" financing pay for most capital
equipment. The Kansas Constitution makes provision for the issuance of general
obligation bonds subject to certain restrictions; however, no bonds have been
issued under this provision for many years. No other provision of the
Constitution or state statute limits the amount of debt that can be issued.
Most State debt is issued through the Kansas Development Finance Authority,
an independent instrumentality of the State created in 1987 for the primary
purpose of enhancing the ability of the State to finance capital improvements
and improving long term Capital markets for State agencies, political
subdivisions, public and private nonprofit organizations and businesses.
Although the State of Kansas has no general obligation debt rating, some
recent bond issues have been rated. Recent revenue bonds issued by the Kansas
Development Finance Authority for State agencies have received ratings ranging
from Aa1 to AA+ from Moody's and Standard & Poor's respectively. Recent fixed
rate bonds issued by the Kansas Department of Transportation were rated Aa2 from
Moody's, AA from Fitch and AA+ from Standard & Poor's.
In October 1998, Standard & Poor's assigned an issue credit rating of AA+
to the State of Kansas. Standard & Poor's credit rating reflects the state's
credit quality in the absence of general obligation debt. Other credit factors
include a very low debt burden with no significant future capital needs, a
broadening and diversified economy that has demonstrated strong performance and
declining unemployment, and conservative fiscal management and sound financial
operations, with ample statutorily mandated cash reserves.
-17-
<PAGE>
The Kansas Department of Transportation issues debt to finance highway
projects. At June 30, 1999, indebtedness on highway revenue bonds and highway
revenue refunding bonds issued in fiscal years 1992 through 1999 was $832
million. This debt is to be retired by fiscal year 2015.
Of the total State budget, debt service constituted 1.4% in 1997, 1.5% in
1998 and .4% in 1999.
Stand-By Commitments
--------------------
The Kansas Tax-Free Intermediate Bond Fund may acquire stand-by commitments
with respect to Municipal Obligations held within its 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 the Fund only with the underlying instrument.
The Fund expects that stand-by commitments will generally be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, the 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 the 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 Fund intends to enter into stand-by commitments only with dealers,
banks and broker-dealers which, in the Advisor's opinion, present minimal credit
risks. The Fund's 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 Fund 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 the Fund would be valued at zero in
determining net asset value.
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
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<PAGE>
Obligations, foreign government securities (if permitted) and repurchase
agreements. "Money market investments" also include, for purposes of the Kansas
Tax-Free Intermediate Bond Fund, corporate bonds with remaining maturities of
397 days or less.
Bank obligations include bankers' acceptances, negotiable certificates of
deposit and non-negotiable time deposits, including U.S. dollar-denominated
instruments issued or supported by the credit of U.S. or foreign banks or
savings institutions. Bank obligations also include obligations of foreign banks
or foreign branches of U.S. banks. Although the Funds will invest in obligations
of foreign banks or foreign branches of U.S. banks only where the Advisor deems
the investment to present minimal credit risks, such investments nevertheless
entail risks that are different from those of investments in domestic
obligations of U.S. banks due to differences in political, regulatory and
economic systems and conditions. These risks may include future unfavorable
political and economic developments, possible withholding taxes on interest
income, seizure or nationalization of foreign deposits, currency controls,
interest limitations, or other governmental restrictions which might affect the
payment of principal or interest on the securities held by the Fund.
Additionally, these institutions may be subject to less stringent reserve
requirements and to different accounting, auditing, reporting and recordkeeping
requirements than those applicable to domestic branches of U.S. banks. All
investments in bank obligations are limited to the obligations of financial
institutions having more than $1 billion in total assets at the time of
purchase.
Certificates of deposit issued by domestic branches of domestic banks do
not benefit materially, and certificates of deposit issued by foreign branches
of domestic banks do not benefit at all, from insurance from the Federal Deposit
Insurance Corporation.
Both domestic banks and foreign branches of domestic banks are subject to
extensive governmental regulations which may limit both the amount and types of
loans which may be made and interest rates which may be charged. In addition,
the profitability of the banking industry is dependent largely upon the
availability and costs of funds for the purpose of financing and lending
operations under prevailing money market conditions. General economic conditions
as well as exposure to credit losses arising from possible financial
difficulties of borrowers play an important part in the operations of this
industry.
Investments by the Kansas Tax-Free Intermediate Bond 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 rating agency. Commercial
paper may include variable and floating rate instruments.
When the Advisor pursues a temporary defensive strategy, the Funds may not
profit from favorable developments that would have been available if the Funds
were pursuing their normal investment strategies. In addition, when the Advisor
uses a defensive strategy, the Funds will not be pursuing their investment
objectives.
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<PAGE>
U.S. Government Obligations
---------------------------
As stated in the Prospectuses, pursuant to their respective investment
objectives, the Funds may invest in U.S. Government Obligations. Examples of the
types of U.S. Government Obligations which may be held by the Funds include, in
addition to U.S. Treasury bonds, notes and bills, the obligations of Federal
Home Loan Banks, Federal Farm Credit Banks, Federal Land Banks, the Federal
Housing Administration, Farmers Home Administration, Export-Import Bank of the
United States, Small Business Administration, Government National Mortgage
Association, Federal National Mortgage Association, General Services
Administration, Student Loan Marketing Association, Central Bank for
Cooperatives, Federal Home Loan Mortgage Corporation, Federal Intermediate
Credit Banks and Maritime Administration. Obligations of certain agencies and
instrumentalities of the U.S. Government, such as those of the Government
National Mortgage Association, are supported by the right of the issuer to
borrow from the Treasury; others, such as those of the Federal National Mortgage
Association, are supported by the discretionary authority of the U.S. Government
to purchase the agency's obligations; still others, such as those of the Student
Loan Marketing Association, are supported only by the credit of the
instrumentality. No assurance can be given that the U.S. Government would
provide financial support to U.S. Government-sponsored instrumentalities if it
is not obligated to do so by law.
U.S. Government Obligations purchased by the Short-Term Government Fund
with nominal remaining maturities in excess of five years that have variable or
floating interest rates or demand or put features may nonetheless be deemed to
have remaining maturities of five years or less so as to be permissible
investments as follows: (a) a government security with a variable or floating
rate of interest will be deemed to have a maturity equal to the period remaining
until the next readjustment of the interest rate; (b) a government security with
a demand or put feature that entitles the holder to receive the principal amount
of the underlying security at the time of or sometime after the holder gives
notice of demand or exercise of the put will be deemed to have a maturity equal
to the period remaining until the principal amount can be recovered through
demand or exercise of the put; and (c) a government security with both a
variable or floating rate of interest as described in clause (a) and a demand or
put feature as described in clause (b) will be deemed to have a maturity equal
to the shorter of the period remaining until the next readjustment of the
interest rate or the period remaining until the principal amount can be
recovered through demand or exercise of the put.
U.S. Government Obligations have historically involved little risk of loss
of principal if held to maturity. Generally, the market value of securities not
held to maturity can be expected to vary inversely to changes in prevailing
interest rates. No assurance can be given that the U.S. Government would provide
financial support to U.S. Government-sponsored instrumentalities if it is not
obligated to do so by law.
Variable and Floating Rate Instruments
--------------------------------------
The Funds may purchase variable rate and floating rate obligations issued
by corporations, industrial development authorities and governmental entities.
Such instruments are
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<PAGE>
frequently not rated by credit rating agencies. However, in determining the
creditworthiness of unrated variable and floating rate instruments and their
eligibility for purchase by the Funds, the Advisor will consider the earning
power, cash flows and other liquidity ratios of the issuers and guarantors of
such obligations and, if the obligation is subject to a demand feature, will
monitor their financial status to meet payment on demand. In determining average
weighted portfolio maturity, an instrument will usually be deemed to have a
maturity equal to the longer of the period remaining to the next interest rate
adjustment or the time a Fund can recover payment of principal as specified in
the instrument.
While there may be no active secondary market with respect to a particular
variable or floating rate instrument purchased by a Fund, a Fund may, from time
to time as specified in the instrument, demand payment in full of the principal
of the instrument or may resell the instrument to a third party. The absence of
such an active secondary market, however, could make it difficult for a Fund to
dispose of a variable or floating rate demand instrument if the issuer defaulted
on its payment obligations during periods that a Fund is not entitled to
exercise its demand rights, and a Fund could, for these or other reasons, suffer
a loss. Variable and floating rate instruments with no active secondary market
and with notice/termination dates in excess of seven days will be included in
the calculation of a Fund's illiquid assets.
Variable and floating rate demand instruments acquired by the Kansas
Tax-Free Intermediate Bond Fund may include participations in Municipal
Obligations purchased from and owned by financial institutions (primarily
banks). Participation interests provide the Fund with a specified undivided
interest (up to 100%) in the underlying obligation and the right to demand
payment of the unpaid principal balance plus accrued interest on the
participation interest from the institution upon a specified number of days'
notice, not to exceed thirty days. Each participation interest is backed by an
irrevocable letter of credit or guarantee of a bank that the Advisor has
determined meets the prescribed quality standards for the Fund. The bank
typically retains fees out of the interest paid on the obligation for servicing
the obligation, providing the letter of credit and issuing the repurchase
commitment.
When-Issued Purchases and Forward Commitments
---------------------------------------------
Each Fund may purchase securities on a when-issued basis or enter into
forward commitment transactions. These transactions, which involve a commitment
by a Fund to purchase or sell particular securities with payment and delivery
taking place at a future date (perhaps one or two months later), permit the Fund
to lock in a price or yield on a security it owns or intends to purchase,
regardless of future changes in market prices or in interest rates. When-issued
and forward commitment transactions involve the risk, however, that the yield or
price obtained in a transaction (and therefore the value of the security) may be
less favorable than the yield or price (and therefore the value of the security)
available in the market when the securities delivery takes place. When a Fund
agrees to purchase securities on a when-issued basis or enters into a forward
commitment to purchase securities, the Funds' Custodian will set aside cash or
liquid assets, as permitted by applicable law, equal to the amount of the
purchase or the commitment in a separate account. Normally, the Custodian will
set aside portfolio securities to meet this requirement. The market value of the
separate account will be monitored and if such
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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. No Fund intends to engage in when-issued purchases and forward
commitments for speculative purposes. If deemed advisable as a matter of
investment strategy, however, a Fund may dispose of or renegotiate a commitment
after it is entered into, and may sell securities it has committed to purchase
before those securities are delivered to the Fund on the settlement date. In
these cases a Fund may realize a capital gain or loss.
When a Fund engages in when-issued and forward commitment transactions, it
relies on the other party to consummate the trade. Failure of such party to do
so may result in the Fund's incurring a loss or missing an opportunity to obtain
a price considered to be advantageous.
The value of the securities underlying a when-issued purchase or a forward
commitment to purchase securities, and any subsequent fluctuations in their
value, is taken into account when determining a Fund's net asset value starting
on the day that the Fund agrees to purchase the securities. A Fund does not earn
interest on the securities it has committed to purchase until they are paid for
and delivered on the settlement date. When a Fund makes a forward commitment to
sell securities it owns, the proceeds to be received upon settlement are
included in the Fund's assets, and fluctuations in the value of the underlying
securities are not reflected in the Fund's net asset value as long as the
commitment remains in effect.
Zero Coupon Bonds
-----------------
Each Fund may acquire zero coupon bonds. Such obligations will not result
in the payment of interest until maturity and typically have greater price
volatility than coupon obligations. A Fund will accrue income on such
investments for tax and accounting purposes, as required, which is distributable
to shareowners and which, because no cash is received at the time of accrual,
may require the liquidations of other portfolio securities to satisfy the Fund's
distribution obligations. These actions may occur under disadvantageous
circumstances and may reduce a Fund's assets, thereby increasing its expense
ratio and decreasing its rate of return. Zero coupon bonds are subject to
greater market fluctuations from changing interest rates than debt obligations
of comparable maturities which make current distributions of interest.
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INVESTMENT LIMITATIONS
----------------------
Each Fund is subject to the investment limitations enumerated below, which
may not be changed with respect to a Fund without the approval of the lesser of
(1) 67% of the Fund's shares present at a meeting of shareowners if the holders
of more than 50% of the outstanding shares are present in person or by proxy or
(2) more than 50% of the Fund's outstanding shares. Other restrictions in the
form of non-fundamental policies are subject to change by The Commerce Funds'
Board of Trustees without shareholder approval. In addition, the Funds'
investment objectives are fundamental and may not be changed without shareowner
approval. If a percentage limitation is satisfied at the time of investment, a
later increase or decrease in such percentage resulting from a change in the
value of a Fund's investments will not constitute a violation of such
limitation, except that any borrowing by a Fund that exceeds the fundamental
investment limitations stated above must be reduced to meet such limitations
within the period required by the 1940 Act (currently three days). Otherwise, a
Fund may continue to hold a security even though it causes the Fund to exceed a
percentage limitation because of the fluctuation in the value of the Fund's
assets.
As a matter of fundamental policy, no Fund may:
1. With respect to 75% of a Fund's total assets: (i) invest more than 5% of
a Fund's total assets in the securities of any one issuer; (ii) invest more than
25% of a Fund's total assets in the securities of issuers in any one industry;
and (iii) hold more than 10% of the outstanding voting securities of any one
issuer; provided that the foregoing does not apply to the Kansas Tax-Free
Intermediate Bond 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.
2. Purchase or sell real estate, except that a Fund may invest in
securities directly or indirectly secured by real estate or interests therein or
issued by companies which invest in real estate or interests therein and may
hold and sell real estate acquired by a Fund as a result of the ownership of
securities.
3. Make loans to other persons, except that the purchase of all or a
portion of an issue of securities or obligations of the type in which a Fund may
invest shall not be deemed to be the making of a loan, and except further that a
Fund may enter into repurchase agreements in accordance with its investment
objective and policies and may lend its portfolio securities in an amount not to
exceed 33 1/3% of the value of its total assets (including the value of the
collateral for the loan).
4. Borrow money, issue senior securities or pledge its assets, except that
a Fund may borrow from banks and enter into reverse repurchase agreements as a
temporary measure for extraordinary or emergency purposes or to meet redemptions
in amounts not exceeding 33 1/3% (taken at market value) of its total assets
(including the amount borrowed) and pledge its assets to secure such borrowings,
provided the Fund maintains assets coverage of at least 300% for all such
borrowings. No Fund will purchase securities while its aggregate
-23-
<PAGE>
borrowings (including reverse repurchase agreements and borrowings from banks)
in excess of 5% of its total assets are outstanding. Securities held in escrow
or separate accounts in connection with a Fund's investment practices are not
deemed to be pledged for purposes of this limitation.
5. Purchase securities on margin, except that (i) a Fund may obtain such
short-term credit as may be necessary for the clearance of purchases and sales
of portfolio securities, (ii) a Fund may pay initial or variation margin in
connection with futures and related option transactions, and (iii) this
investment limitation shall not apply to a Fund's transactions in futures
contracts and related options or to a Fund's transactions in securities on a
when-issued or forward commitment basis.
6. Underwrite securities of other issuers, except insofar as a Fund
technically may be deemed an underwriter under the Securities Act of 1933, as
amended ("Securities Act") in purchasing and selling portfolio securities and
except insofar as such underwriting would comply with the limits set forth in
the 1940 Act.
7. Purchase or sell commodities or contracts on commodities, except to the
extent a Fund may do so in accordance with applicable law and a Fund's current
prospectus and statement of additional information, as it may be amended from
time to time, and without registering as a commodity pool operator under the
Commodities Exchange Act.
As a matter of fundamental policy:
1. The Kansas Tax-Free Intermediate Bond Fund will limit its investments so
that less than 25% of the Fund's total assets will be invested in the securities
of the issuers in any one industry. For purposes of this restriction, state and
municipal governments and their agencies and instrumentalities, securities
issued or guaranteed by the U.S. Government, its agencies or instrumentalities
and repurchase agreements fully collateralized by securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities are not
deemed to be industries in connection with the issuance of tax-exempt
securities. Thus, the 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, the 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 Fund 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 50% of the total assets of the Kansas Tax-Free Intermediate Bond
Fund, may be invested without regard to this 5% limitation (although not more
than 25% of the Kansas Tax-Free Intermediate Bond Fund's total assets will be
invested in the securities of any one issuer).
-24-
<PAGE>
As a matter of non-fundamental policy, no Fund may:
1. Make short sales of securities or maintain a short position, except that
a Fund may make short sales against-the-box (defined as the extent to which a
Fund contemporaneously owns or has the right to obtain at no added cost
securities identical to those sold short).
2. Invest in illiquid securities if as a result more than 15% of its net
assets would be invested in such securities.
3. Make investments for the purpose of exercising control or management.
4. 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.
5. 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.
6. Write, purchase or sell puts, calls, straddles, spreads or combinations
thereof with respect to more than 25% (5% with respect to the Kansas Tax-Free
Intermediate Bond Fund) of the value of its net assets.
PRICING OF SHARES
The net asset value per share for each Fund of The Commerce Funds is
calculated separately for Institutional and Service Shares by adding the value
of all portfolio securities and other assets belonging to the Fund that are
allocable to a particular class, subtracting the liabilities charged to such
class of the Fund, and dividing the result by the number of shares outstanding
of such class of the Fund. Assets which belong to the Fund consist of the
consideration received upon the issuance of shares of the Fund together with all
income, earnings, profits and proceeds derived from the investment thereof,
including any proceeds from the sale of such investments, any funds or payments
derived from any reinvestment of such proceeds, and a portion of any general
assets of The Commerce Funds not belonging to a particular investment portfolio.
Assets belonging to a particular class of a Fund are charged with the direct
liabilities of that class and with a share of the general liabilities of The
Commerce Funds which are normally allocated in proportion to the relative net
asset values of all of The Commerce Funds' investment portfolios at the time of
allocation. Payments under The Commerce Funds' Shareholder Administrative
Services Plans for Institutional Shares and Service Shares are allocated to the
Shares in proportion to the relative net asset values of the Funds. Payments
under the Distribution Plan pursuant to Rule 12b-1 are applicable only to the
Service Shares of the Funds.
-25-
<PAGE>
As stated in their Prospectuses, a Fund's investments will be valued at
market value or, in the absence of a market value with respect to any portfolio
securities, at fair value as determined by or under the direction of The
Commerce Funds' Board of Trustees. A security that is primarily traded on a
domestic securities exchange (including securities traded through the National
Market System) is valued at the last sale price on that exchange or, if there
were no sales during the day, at the current quoted bid price. Securities traded
on only over-the-counter markets are valued on the basis of closing
over-the-counter bid prices. Securities for which there were no transactions are
valued at the average of the current bid and asked prices. Restricted securities
and securities for which market quotations are not readily available are valued
at fair value as determined in good faith by the Board of Trustees.
The value of a Fund's portfolio securities that are traded on stock
exchanges outside the United States are based upon the price on the exchange as
of the close of business of the exchange immediately preceding the time of
valuation, except when an occurrence subsequent to the time a value was so
established is likely to have changed such value; then the fair value of those
securities will be determined through consideration of other factors by or under
the direction of The Commerce Funds' Board of Trustees. Securities trading in
over-the-counter markets in European and Pacific Basin countries is normally
completed well before 4:00 p.m. Eastern time. In addition, European and Pacific
Basin securities trading may not take place on all Business Days (as defined in
the Prospectus). 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 Funds 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 Funds.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares of the Funds are offered and sold on a continuous basis by The
Commerce Funds' Distributor, Goldman, Sachs & Co., acting as agent for The
Commerce Funds. Service Shares of the Funds are sold to investors at the public
offering price based on a Fund's net asset value plus a front-end sales charge
as described in the Prospectus. Institutional Shares of the Funds are sold to
investors at the net asset value next determined after a purchase order is
received.
Institutional Shares are offered primarily to:
. investors maintaining qualified accounts at bank trust departments or trust
companies, for funds held within those accounts, including institutions
affiliated with Commerce Bancshares, Inc. and its subsidiaries (for
example, Commerce Bank Investment Management Group clients);
. participants in employer-sponsored defined contribution plans when such
plans offer The Commerce Funds as one of their investment options;
-26-
<PAGE>
. any investor who has been a continuous shareholder in The Commerce Funds
since January 1, 1997 or before;
. employees, directors, advisory directors, officers and retirees (as well as
their spouses and legal dependents) of the 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.
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.
Additional Redemption Information
---------------------------------
Under the 1940 Act, a Fund may suspend the right of redemption or
postpone the date of payment for shares during any period when (a) trading on
the New York Stock Exchange is restricted by applicable rules and regulations of
the SEC; (b) the Exchange is closed for other than customary weekend and holiday
closing; (c) the SEC has by order permitted such suspension; or (d) an emergency
exists as determined by the SEC. (The Commerce Funds may also suspend or
postpone the recordation of the transfer of shares upon the occurrence of any of
the foregoing conditions.)
In addition to the situations described in the Prospectuses under "How
To Sell Shares," The Commerce Funds may redeem shares involuntarily to reimburse
the Funds for any loss sustained by reason of the failure of a shareholder to
make full payment for shares purchased by the shareholder or to collect any
charge relating to a transaction effected for the benefit of a shareholder which
is applicable to shares of the Funds as provided in the Prospectuses.
In an exchange, the redemption of shares being exchanged will be made
at the per share net asset value of the shares to be redeemed next determined
after the exchange request is received. The shares of the Fund to be acquired
will be purchased at the per share net asset value of those shares (plus any
applicable sales charge) next determined after acceptance of the purchase order
by The Commerce Funds in accordance with its customary policies for accepting
investments.
A Fund may make payment for redemption in securities or other property
if it appears appropriate to do so in light of the Fund's responsibilities under
the 1940 Act. In the event shares are redeemed for securities or other property,
shareowners may incur additional costs in connection with the conversion thereof
to cash. Redemption in kind is not as liquid as
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<PAGE>
a cash redemption. Shareowners who receive a redemption in kind may receive less
than the redemption value of their shares upon sale of the securities or
property received, particularly where such securities are sold prior to
maturity.
Retirement Plans
----------------
Profit-Sharing Plan. The Commence Funds have available a
profit-sharing plan (including a 401(k) option) (the "Profit-Sharing/401(k)
Plan") for use by both self-employed individuals (sole proprietorships and
partnerships) and corporations who wish to use shares of the Funds as a funding
medium for a retirement plan qualified under the Internal Revenue Code (the
"Code").
The Code provides certain tax benefits for contributions by a
self-employed individual or corporation to the Profit-Sharing/401(k) Plan. For
example, contributions to the Plan are deductible (subject to certain limits)
and earnings on the contributions are not taxed until distributed. However,
distribution of amounts from the Profit-Sharing/401(k) Plan to a participant
before the participant attains age 59 1/2 will (with certain exceptions) result
in an additional 10% tax on the amount included in the participant's gross
income.
Individual Retirement Accounts. The Commerce Funds have available an
individual retirement account (the "regular IRA") for use by individuals with
compensation for services rendered (including earned income from
self-employment) who wish to use shares of the Funds as a funding medium for
individual retirement saving. The Code limits the amount an individual may
contribute to an IRA and such contributions and earnings thereon are not subject
to federal income tax until distributed. Except for rollover distributions, an
individual who has attained, or will attain, age 70 1/2 before the end of the
taxable year may no longer contribute to a regular IRA held in his or her
behalf. Distribution of an individual's regular IRA assets (and earnings
thereon) before the individual attains age 59 1/2 will result in an additional
10% tax on the amount included in the individual's gross income.
The Commerce Funds permit certain employers (including self-employed
individuals) to make contributions to an employee's regular IRA if the employer
establishes a Simplified Employee Pension ("SEP") plan. A SEP permits an
employer to make discretionary contributions to all of its employees' regular
IRAs equal to a uniform percentage of each employee's compensation (subject to
certain limits). The Code provides certain tax benefits to employees who
contribute to an employee's regular IRA pursuant to a SEP. For example, employer
contributions to an employee's regular IRA pursuant to a SEP are deductible
(subject to certain limits).
The Commerce Funds also have available a Roth individual retirement
account (the "Roth IRA") for use by individuals with compensation for services
rendered. Individuals whose adjusted gross income ("AGI") is within the
applicable income limitations (an AGI of up to $110,000 for a single individual
and an AGI of up to $160,000 for married couples filing jointly) may contribute
at any age to a Roth IRA for the individual and for his or her nonworking
spouse. Roth IRA contributions are not deductible. Earnings on amounts
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<PAGE>
contributed to a Roth IRA, however, may be withdrawn tax and penalty-free if the
Roth IRA has been held for at least five years and the distribution is due to
the account owner's attainment of age 59 1/2 or another qualifying event.
Distributions which do not meet these criteria are generally subject to a 10%
withdrawal tax.
Savings Incentive Match Plan for Employees of Small Employers.
Finally, The Commerce Funds offer a simplified tax-favored retirement plan for
employees of small employers (a "SIMPLE IRA Plan"). Each eligible employee of
participating employers may choose to defer a percentage of his or her pre-tax
compensation to the employee's SIMPLE individual retirement account (a "SIMPLE
IRA"). The employer must generally make an annual, non-discretionary
contribution to the SIMPLE IRA of each eligible employee. The Code provides
certain tax benefits for contributions by an employer, pursuant to a SIMPLE IRA
Plan, to an employee's SIMPLE IRA. For example, these contributions are
deductible (subject to certain limits) and not subject to federal income tax
until distributed.
In the Profit-Sharing/401(k) Plan and in the IRAs available through
the Funds, distributions of net investment income and capital gains will be
automatically reinvested.
The foregoing brief descriptions are not complete or definitive
explanations of the Profit-Sharing/401(k) Plan or IRAs available for investment
in the Funds. In addition, the foregoing plans are not available for purposes of
the Kansas Tax-Free Intermediate Bond Fund. Any person who wishes to establish a
retirement plan account may do so by contacting The Commerce Funds directly. The
complete Plan and IRA documents and applications will be provided to existing or
prospective shareowners upon request, without obligation. The Commerce Funds
recommends that investors consult their attorneys or tax advisers to determine
if the retirement programs described herein are appropriate for their needs.
DESCRIPTION OF SHARES
Under the Funds' Trust Instrument, the shares of beneficial interest
in The Commerce Funds shall be divided into such transferable shares of one or
more separate and distinct series or classes of a series, as the Trustees shall
from time to time create and establish. The Trustees may, from time to time and
without vote of the shareowners, issue shares to a party or parties and for such
amount and type of consideration and on such terms, subject to applicable law,
as the Trustees may deem appropriate. The Trustees may issue fractional shares
and shares held in the treasury. Also, the Trustees may from time to time divide
or combine the shares into a greater or lesser number without thereby changing
the proportionate beneficial interests in The Commerce Funds. The proceeds
received by each Fund for each issue or sale of its shares, and all net
investment income, realized and unrealized gain and proceeds thereof, subject
only to the rights of creditors, will be specifically allocated to and
constitute the underlying assets of that Fund. The underlying assets of each
Fund will be segregated on the books of account.
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<PAGE>
Each of the Funds offers two classes of shares: Institutional Shares
and Service Shares.
Fund shares have no preemptive rights and only such conversion and
exchange rights as the Board of Trustees may grant in its discretion. All shares
issued as described in the Prospectuses will be fully paid and non-assessable.
Each share of a series shall represent an equal beneficial interest in
the net assets of such series. Each holder of shares of a series shall be
entitled to receive distributions of income and capita gains, if any, which are
made with respect to such series and which are attributable to such shares. Upon
redemption of shares, such shareowner shall be paid solely out of the funds and
property of such series of The Commerce Funds.
The Trustees shall have full power and authority, in their sole
discretion, and without obtaining any prior authorization or vote of shareowners
of any series of The Commerce Funds, to establish and designate and to change in
any manner any such series of shares or any classes of initial or additional
series and to fix such relative preferences, voting powers, rights and
privileges of such series or classes thereof as the Trustees may from time to
time determine, to divide or combine the shares or any series or classes thereof
into a greater or lesser number, to classify or reclassify any issued shares or
any series or classes thereof into one or more series or classes of shares, and
to take such other action with respect to the shares as the trustees may deem
desirable.
In the event of a liquidation or dissolution of The Commerce Funds or
an individual Fund, the Trustees may sell and convey all or substantially all of
the assets of The Commerce Funds or any series to another entity or to a
separate series of shares thereof, for adequate consideration. The sale or
conveyance may include the assumption of all outstanding obligations, taxes and
other liabilities and may include shares of beneficial interest, stock or other
ownership interests. In the alternative, the Trustees may sell and convert into
money all of the assets of The Commerce Funds or any series. After such actions,
the Trustees will distribute the remaining proceeds or assets (as the case may
be) of each series (or class) ratably among the holders of shares of those
series then outstanding.
Rule 18f-2 under the 1940 Act provides that any matter required by the
provisions of the 1940 Act or applicable state law, or otherwise, to be
submitted to the holders of the outstanding voting securities of an investment
company shall not be deemed to have been effectively acted upon unless approved
by the holders of a majority of the outstanding shares of each investment
portfolio affected by such matter. Rule 18f-2 further provides that an
investment portfolio shall be deemed to be affected by a matter unless the
interests of each investment portfolio in the matter are substantially identical
or the matter does not affect any interest of the investment portfolio. Under
the Rule, the approval of an investment advisory agreement or any change in a
fundamental investment policy would be effectively acted upon with respect to an
investment portfolio only if approved by a majority of the outstanding shares of
such investment portfolio. However, the Rule also provides that the ratification
of the appointment of independent accountants, the approval of principal
underwriting contracts and
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<PAGE>
the election of Trustees may be effectively acted upon by shareowners of The
Commerce Funds voting together in the aggregate without regard to a particular
investment portfolio.
The shareowners have the power to vote only for the election of
Trustees, for the removal of Trustees and with respect to such additional
matters relating to The Commerce Funds as may be required by law, by the Trust
Instrument, or as the Trustees may consider desirable. The Trustees may also
determine that a matter affects only the interests of one or more classes of a
series, in which case any such matter shall be voted on by such class or
classes. Each whole share shall be entitled to one vote as to any matter on
which it is entitled to vote, and each fractional share shall be entitled to a
proportionate fractional vote. There shall be no cumulative voting in the
election of Trustees. Shares may be voted in person or by proxy or in any manner
provided for in the By-laws. A proxy may be given in writing, by telefax, or in
any other manner provided for in the By-laws.
Special meetings of the shareowners of any series may be called by the
Trustees and shall be called by the Trustees upon the written request of
shareowners owning at least 10% of the outstanding shares entitled to vote.
Whenever ten or more shareowners meeting the qualifications set forth in Section
16(c) of the 1940 Act seek the opportunity of furnishing materials to the other
shareowners with a view to obtaining signatures on such a request for a meeting,
the Trustees shall provide shareowners access to The Commerce Funds' list of
record shareowners or the mailing of such materials to such record shareowners,
subject to the applicable provisions of the 1940 Act. Notice shall be sent by
mail or such other means as determined by the Trustees at least 15 days prior to
any such meeting. One-third of the shares entitled to vote in person or by proxy
shall be a quorum for the transaction of business at a shareowners' meeting,
except that where any provision of law or of the Trust Instrument permits or
requires that holders of any series shall vote as a series (or that holders of a
class shall vote as a class), then one-third of the aggregate number of shares
of that series (or that class) entitled to vote shall be necessary to constitute
a quorum for the transaction of business by that series (or that class). Any
action which may be taken by the shareowners of The Commerce Funds or of a
series may be taken without a meeting if shareowners holding more than a
majority of the shares entitled to vote, except when a larger vote is required
by law or by any provision of the Trust Instrument, shall consent to the action
in writing, provided that such action by written consent is approved by the
Board of Trustees.
When used in the Prospectuses or in this Statement of Additional
Information, a "majority" of shareowners of The Commerce Funds or a particular
Fund means, with respect to the approval of an investment advisory agreement or
a change in an investment objective or a fundamental investment policy, the vote
of the lesser of (1) 67% of the shares of The Commerce Funds or a 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 a 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
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<PAGE>
shall not be liable for any act or omission in his capacity as Trustee, or for
any act or omission of any officer or employee of The Commerce Funds or of any
other person or party, provided that nothing contained in the Trust Instrument
or in the Delaware Business Trust law shall protect any Trustee against any
liability to The Commerce Funds or to shareowners to which he would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of the office of
Trustee.
ADDITIONAL INFORMATION CONCERNING TAXES
Federal Taxes
Each Fund intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code, and to distribute out its income to
shareholders each year, so that each Fund itself generally will be relieved of
federal income and excise taxes. If a Fund were to fail to so qualify: (1) the
Fund would be taxed at regular corporate rates without any deduction for
distributions to shareholders; and (2) shareholders would be taxed as if they
received ordinary dividends, although corporate shareholders could be eligible
for the dividends received deduction.
Federal Tax-Exempt Information
The Kansas Tax-Free Intermediate Bond Fund's distributions will
generally constitute tax-exempt income for shareowners for federal income tax
purposes. It is possible, depending upon the Fund's investments, that a portion
of the Fund's distributions could be taxable to shareowners as ordinary income
or capital gains, but the Fund does not expect that this will be the case.
State and local income taxes generally apply to interest on bonds of
states and political subdivisions outside of the state in which the tax is
imposed. Kansas exempts interest on (i) its own obligations, (ii) the
obligations of its political subdivisions, (iii) U.S. Government obligations,
and (iv) obligations of certain U.S. territories and possessions, from its
personal income tax and general corporate income tax. The Fund's distributions
from these sources will retain their exempt character in the hands of
shareowners.
Interest on indebtedness incurred by a shareholder to purchase or
carry shares of the Funds generally will not be deductible for federal income
tax purposes.
You should note that a portion of the exempt-interest dividends paid
by the Funds may constitute an item of tax preference for purposes of
determining federal alternative minimum tax liability. Exempt-interest dividends
will also be considered along with other adjusted gross income in determining
whether any Social Security or Railroad Retirement payments received by you are
subject to federal income taxes.
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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, 1000 Walnut Street,
Kansas City, Missouri 64141.
<TABLE>
<CAPTION>
Position(s) Held with
Name, Address and Age the Trust Principal Occupation(s) During Past 5 Years
--------------------- --------------------- -------------------------------------------
<C> <S> <S>
John Eric Helsing Trustee and Chairman Retired. Former Professor and Chairman, Department of
c/o The Commerce Funds Business Administration and Economics of William Jewell
1000 Walnut Street College. Former Lecturer at William Jewell College.
Kansas City, MO 64141 Director, Valentine Radford Communications and Trustee,
DOB: 11/6/33 Midwest Research Institute.
*Warren W. Weaver Trustee and President Retired. Former Vice Chairman, Commerce Bancshares, Inc. and
c/o The Commerce Funds Commerce Bank, N.A. Director, Milbank Mfg. Company; Director,
1000 Walnut Street Roddis Lumber Company; Advisory Director of Aon; Advisory
Kansas City, MO 64141 Director of Commerce Bank, N.A..
DOB: 10/10/30
*Randall D. Barron Trustee and Treasurer Retired. Former President, Missouri Division, Southwestern
c/o The Commerce Funds Bell Telephone Company. Former Director, Commerce Bancshares,
1000 Walnut Street Inc.
Kansas City, MO 64141
DOB: 10/25/29
David L. Bodde Charles N. Kimball Professor of Technology and Innovation,
c/o The Commerce Funds Trustee University of Missouri, Kansas City since July 1996. Vice
1000 Walnut Street President, Midwest Research Institute since January 1991.
Kansas City, MO 64141 Director, Missouri Technological Corporation. Director,
DOB: 1/27/43 Kansas City Power & Light Company since 1994.
John Joseph Holland Trustee President and CEO, Butler Manufacturing Company, January
c/o The Commerce Funds 1999 to present, Executive Vice President from June 1998 to
1000 Walnut Street January 1999, and Chief Financial Officer from January
Kansas City, MO 64141 1990-June 1998; Director, Allendale Insurance Company.
DOB: 3/05/50
</TABLE>
*Trustees who are "interested persons" of the Company, as defined in the 1940
Act. Mr. Weaver is an interested Trustee because he is President of the Company,
owns securities of the Adviser's parent corporation, Commerce Bancshares Corp.,
and serves as an Advisory Director of the Adviser. Mr. Barron is an interested
Trustee because he is Treasurer of the Company, owns an interest in Commerce
Bancshares Corp. and owns an interest in a common trust fund for which the
Adviser serves as trustee.
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<PAGE>
<TABLE>
<CAPTION>
Position(s) Held with
Name, Address and Age the Trust Principal Occupation(s) During Past 5 Years
--------------------- --------------------- -------------------------------------------
<C> <S> <S>
James A. McNamara Vice President Vice President, Goldman Sachs & Co., since April 1998.
Goldman Sachs Asset Senior Vice President and Eastern Regional Manager for
Management Dreyfus Institutional Service Corp. from 1996 to 1998. From
4900 Sears Tower 1993 to 1996 Vice President, Institutional Sales
Chicago, IL 60606 Representative, Midwestern United States for Dreyfus.
DOB: 10/2/62
John Perlowski Vice President Vice President, Goldman Sachs & Co., since July 1995.
Goldman, Sachs & Co. Director/Fund Accounting & Custody, Investors Bank & Trust
One New York Plaza Co., November 1993 to July 1995. Formerly, Manager, Audit
New York, NY 10004 Division, Arthur Andersen, September 1986 to November 1993.
DOB: 11/7/64
William Schuetter Vice President Vice President Commerce Bank, N.A., 1998-Present. Vice
Commerce Bank, N.A. President of Fund Accounting, UMB Bank, from 1996 - 1998.
1000 Walnut Street Assistant Vice President, Manager of Income Processing, UMB
Kansas City, MO 64106 Bank from 1993 - 1996.
DOB: 4/17/60
Larry Franklin Vice President Vice President, Commerce Bank, N.A., 1993 - present. Business
Commerce Bank, N.A. Manager, The Commerce Funds, 1993 - 1996; Administrative
1000 Walnut Street Director 1996 - 1998; and Managing Director, 1998 - present.
Kansas City, MO 64106
DOB: 2/21/47
Peter Fortner Assistant Treasurer Vice President, Goldman Sachs Investment Management, July 2000
Goldman, Sachs & Co. to present. Assistant Treasurer of Goldman Sachs' proprietary
32 Old Slip mutual funds. Vice President/Accounting Manager for
New York, NY 10005 Prudential Investment Fund Management LLC in their mutual fund
DOB: 1/25/58 administration group from 1985 to 2000.
W. Bruce McConnel, III Secretary Partner of the law firm Drinker Biddle & Reath LLP,
Drinker Biddle & Reath Philadelphia, Pennsylvania.
LLP
One Logan Square
18th and Cherry Streets
Philadelphia, PA 19103-
6996
DOB: 02/07/43
</TABLE>
-34-
<PAGE>
<TABLE>
<CAPTION>
Position(s) Held with
Name, Address and Age the Trust Principal Occupation(s) During Past 5 Years
--------------------- --------------------- -------------------------------------------
<C> <S> <S>
Amy Belanger, Esq. Assistant Secretary Vice President and Assistant General Counsel, Goldman, Sachs &
Goldman, Sachs & Co. Co. 1998 to present. Formerly an Associate of Dechert Price &
32 Old Slip Rhoads, 1996 - 1998.
New York, NY 10005
DOB: 9/3/69
Howard B. Surloff Assistant Secretary Assistant General Counsel, Goldman, Sachs & Co. since
Goldman, Sachs & Co. November 1993 and General Counsel of the U.S. Funds Group
12th Floor since January 1999. Assistant General Counsel since November
Legal Department 1995 and Vice President of Goldman Sachs since May 1994.
85 Broad Street Formerly Associate of Shereff, Friedman, Hoffman & Goodman.
New York, NY 10004
DOB: 6/21/65
</TABLE>
* * *
Certain of the officers and the organizations with which they are
associated have had in the past, and may have in the future, transactions with
Goldman Sachs and its respective affiliates. The Commerce Funds has been advised
by such officers that all such transactions 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. McNamara, Fortner, Perlowski and Surloff and Ms.
Belanger hold similar positions with one or more investment companies that are
advised by Goldman Sachs.
Effective July 26, 2000, each Trustee of the Company receives a fee of
$2,000 for each regular meeting of the Board of Trustees attended, plus $750 for
each special meeting of the Board attended. In addition, the Chairman of the
Board receives an annual fee of $2,000 for his services in this capacity. All
Trustees are reimbursed for out-of-pocket expenses incurred in connection with
their attendance at meetings.
Each Trustee is entitled to participate in The Commerce Funds Deferred
Compensation Plan (the "Plan"). Under the Plan, a Trustee may elect to have his
or her deferred fees treated as if they had been invested by the Company in the
shares of one or more portfolios of the Company, and the amount paid to the
Trustees under the Plan will be determined based on the performance of such
investments. Deferral of Trustees' fees will have no effect on a portfolio's
assets, liabilities and net income per share, and will not obligate the Company
to retain the services of any Trustee or obligate a portfolio to any level of
compensation to the Trustee.
The following table provides certain information about the fees paid
by the Company to the Trustees for services rendered during the fiscal year
ended October 31, 1999:
-35-
<PAGE>
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT
BENEFITS ACCRUED AGGREGATE
NAME OF AGGREGATE COMPENSATION AS PART OF FUND COMPENSATION
PERSON/POSITION FROM THE TRUST* EXPENSES FROM THE FUND
--------------- -------------- -------- -------------
<C> <S> <S> <S>
JOHN ERIC HELSING, Trustee, $6,000 $0 N/A
Chairman
WARREN W. WEAVER, $6,000 $0 N/A
Trustee, President
RANDALL D. BARRON, $6,000 $0 N/A
Trustee, Treasurer
DAVID L. BODDE, Trustee $6,000 $0 N/A
JOHN JOSEPH HOLLAND, $6,000 $0 N/A
Trustee
</TABLE>
* During the fiscal year ended October 31, 1999, each Trustee was entitled to
receive $1,500 for each regular meeting of the Board of Trustees attended,
plus $750 for each special meeting of the Board attended. The Chairman was
not entitled to receive any fees for his services in this capacity. During
this period, the following Trustees deferred the amounts shown pursuant to
the Plan: Eric Helsing ($6,000) and David L. Bodde ($6,000).
As of October 4, 2000, the Trustees and officers of The Commerce Funds
as a group held less than 1% of each of the Institutional and Service Classes of
the Funds.
Investment Advisor
------------------
The Funds are advised by Commerce Bank, N.A., a subsidiary of Commerce
Bancshares, Inc., a registered multi-bank holding company. Commerce Bank, N.A.
(or its predecessor organizations) have provided investment management services
to The Commerce Funds since 1994, to private and public pension funds,
endowments and foundations since 1946 and to individuals since 1906.
In the Advisory Agreement with The Commerce Funds, the Advisor has
agreed to manage each Fund's investments and to be responsible for, place orders
for, and make decisions with respect to, all purchases and sales of each Fund's
securities. For the advisory services provided and expenses assumed under the
Advisory Agreement, the Advisor is entitled to receive a fee calculated as a
percentage of the Funds' average daily net assets as stated below:
-36-
<PAGE>
Annual Rate
-----------
Core Equity Fund.......................................... 0.75%
Kansas Tax-Free Intermediate Bond Fund.................... 0.50%
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.
The Advisor's own investment portfolio may include bank certificates
of deposit, bankers' acceptances, and corporate debt obligations, any of which
may also be purchased by The Commerce Funds. Joint purchase of investments for
The Commerce Funds and for the Advisor's own investment portfolio will not be
made. The Advisor's Commercial Banking Department may have deposit, loan and
other commercial banking relationships with issuers of securities purchased by
The Commerce Funds, including outstanding loans to such issuers which may be
repaid in whole or in part with the proceeds of securities purchased by The
Commerce Funds.
Under the Advisory Agreement, the Advisor is not liable for any error
of judgment or mistake of law or for any loss suffered by The Commerce Fund in
connection with the performance of such Agreement, except a loss resulting from
a breach of fiduciary duty with respect to the receipt of compensation for
services or a loss resulting from willful misfeasance, bad faith or gross
negligence on the part of the Advisor in the performance of its duties or from
its reckless disregard of its duties and obligations under the Agreement.
Custodian and Transfer Agent
----------------------------
State Street Bank serves as Custodian of each Fund's assets pursuant
to a Custody Agreement under which it has agreed, among other things, to (i)
maintain a separate account in the name of each Fund; (ii) hold and disburse
portfolio securities on account of each Fund; (iii) collect and receive all
income and other payments and distributions on account of each Fund's portfolio
investments; (iv) make periodic reports to The Commerce Funds concerning each
Fund's operations; (v) provide various accounting services to The Commerce
-37-
<PAGE>
Funds and to the Administrator for the benefit of The Commerce Funds; and (vi)
act as foreign custody manager pursuant to Rule 17f-5 of the 1940 Act with
respect to the monitoring of the Funds' assets held by eligible foreign sub-
Custodians. The Custodian is authorized to select one or more banks or trust
companies to serve as sub-Custodian on behalf of the Funds, provided that the
Custodian shall remain liable for the performance of all of its duties under its
respective Custody Agreement and will hold The Commerce Funds and Funds harmless
from losses caused by the negligence or willful misconduct of any bank or trust
company serving as sub-Custodian. State Street is located at 225 Franklin
Street, Boston, Massachusetts 02110.
As compensation for custodial services provided, The Commerce Funds
will pay the Custodian fees of 1/100th of 1% of a Fund's average monthly net
assets up to one billion, 1/133rd of 1% of the next one billion of such assets
and 1/200th of 1% of such assets in excess of two billion based on the aggregate
average daily net assets of the Funds, plus a transaction charge for certain
transactions and out-of-pocket expenses.
State Street Bank also serves as the Funds' Transfer Agent and
dividend disbursing agent. State Street has appointed NFDS, an indirect
subsidiary, to act as the Funds' Transfer Agent, as permitted in the Transfer
Agency Agreement, provided that State Street Bank shall remain liable for the
performance of all of its duties and will hold The Commerce Funds and Fund or
Funds harmless from losses caused by the negligence or willful misconduct of any
appointee. Under the Transfer Agency Agreement, NFDS will, among other things,
(i) receive purchase orders and redemption requests for shares of the Funds;
(ii) issue and redeem shares of the Funds; (iii) effect transfers of shares of
the Funds; (iv) prepare and transmit payments for dividends and distributions
declared by the Funds; (v) maintain records of accounts for the Funds,
shareowners and advise each shareholder to the foregoing; (vi) record the
issuance of shares of each Fund and maintain a record of and provide the Fund on
a regular basis with the total number of shares of each Fund which are
authorized, issued and outstanding; (vii) perform the customary services of a
Transfer Agent, a dividend disbursing agent and Custodian of certain retirement
plans and, as relevant, agent in connection with accumulation, open account or
similar plans; and (viii) provide a system enabling the Funds to monitor the
total number of shares sold in each State.
Administrator
-------------
Goldman Sachs Asset Management is the Administrator for the Funds.
GSAM is located at 32 Old Slip, New York, New York 10005. GSAM is a unit of the
Investment Management 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
-38-
<PAGE>
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.
Distributor
-----------
The Commerce Funds' shares are offered on a continuous basis through
Goldman, Sachs & Co., which acts under the Distribution Agreement as Distributor
for The Commerce Funds. Goldman is located at 85 Broad Street, New York, New
York 10004. Goldman, Sachs & Co. may receive a portion of the sales load imposed
on the sale of shares of the Funds.
THE DISTRIBUTION PLAN AND THE SHAREHOLDER ADMINISTRATIVE SERVICES PLANS
The Distributor is entitled to payment on a monthly basis at an annual
rate not exceeding 0.25% of the average daily net assets of Service Shares from
the Trust for distribution expenses incurred pursuant to the Distribution Plan
(the "12b-1 Plan") adopted on behalf of the Service Shares. Under the 12b-1
Plan, the Trust may pay the Distributor (or any other person) for: (i) direct
out-of-pocket promotional expenses incurred by the Distributor in advertising
and marketing Service Shares; (ii) expenses incurred in connection with
preparing, printing, mailing, and distributing or publishing advertisements and
sales literature for Service Shares; (iii) expenses incurred in connection with
printing and mailing prospectuses and statements of additional information to
other than current Service Class shareowners; (iv) periodic payments or
commissions to one or more securities dealers, brokers, financial institutions
or other industry professionals, such as investment advisors, accountants, and
estate planning firms with respect to a Fund's Service Shares beneficially owned
by customers for whom the distribution organization is the record or holder of
record of such Service 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.
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 Funds in consideration for a Fund's payment of up to 0.25% (on an annualized
basis) of the average daily net asset value of the shares of the Fund
beneficially owned by such customers and held by the Service Organizations. At
The Commerce Fund's option, it may reimburse the Service Organizations'
out-of-pocket expenses as well. Such services may include: (i) processing
dividend and distribution payments from a Fund; (ii) providing information
periodically to customers showing their share positions in Institutional and
Service Shares; (iii) arranging for bank wires; (iv) responding to customer
-39-
<PAGE>
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.
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
Trustees and are terminable without penalty at any time with respect to any Fund
by a vote of a majority of the Non-Interested 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 Trustees, by vote of the
holders of a majority of the outstanding shares of each Class of such Fund, or
by the Service Organizations. Each agreement will also terminate automatically
in the event of its assignment.
The Trust's Board of Trustees has concluded that there is a reasonable
likelihood that the Services Plans will benefit the Funds and their shareowners.
PORTFOLIO TRANSACTIONS
Brokerage Transactions and Commissions
--------------------------------------
Transactions on U.S. stock exchanges involve the payment of negotiated
brokerage commissions. On exchanges on which commissions are negotiated, the
cost of the Funds' 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.
-40-
<PAGE>
The Advisory Agreements for the Funds provide that, in executing
portfolio transactions and selecting brokers or dealers, the Advisor will use
reasonable efforts to seek the best overall terms available on behalf of each
Fund. In assessing the best overall terms available for any transaction, the
Advisor will consider all factors it deems relevant, including the breadth of
the market in the security, the price of the security, the financial condition
and execution capability of the broker or dealer, and the reasonableness of the
commission, if any, both for the specific transaction and on a continuing basis.
In addition, the Agreements authorize the Advisor, subject to the prior approval
of the Board of Trustees, to cause the Funds to pay a broker/dealer furnishing
brokerage and research services a higher commission than that which might be
charged by another broker-dealer for effecting the same transaction, provided
that it determines in good faith that such commission is reasonable in relation
to the value of the brokerage and research services provided by such
broker/dealer, viewed in terms of either that particular transaction or the
overall responsibilities of the Advisor to the particular Fund and to The
Commerce Funds. Such brokerage and research services might consist of reports
and statistics of specific companies or industries, general summaries of groups
of stocks or bonds and their comparative earnings and yields, broad overviews of
the stock, bond and government securities markets and the economy, and advice as
to the value of securities, as well as the advisability of investing in,
purchasing or selling securities and the availability of securities or
purchasers or sellers of securities.
Supplementary research information so received is in addition to, and
not in lieu of, services required to be performed by the Advisor and does not
reduce the advisory fees payable by the Funds. The Board of Trustees will
periodically review the commissions paid by the Funds to consider whether the
commissions paid over representative periods of time appear to be reasonable in
relation to the benefits inuring to the Funds. It is possible that certain
supplementary research or other services received will primarily benefit one or
more other investment companies or other accounts for which investment
discretion is exercised. Conversely, a Fund may be the primary beneficiary of
the research or services received as a result of portfolio transactions effected
for such other account or investment company.
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
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
-41-
<PAGE>
Funds may be at a disadvantage when compared to other investment companies which
have similar investment objectives but that are not subject to such limitations.
Investment decisions for each Fund are made independently from those
made for the other Funds and from those made for other investment companies and
accounts advised or managed by the Advisor. Such other investment companies and
accounts may also invest in the same securities as the Funds. When a purchase or
sale of the same security is made at substantially the same time on behalf of
any Fund and another investment company or account, that transaction will be
aggregated (where not inconsistent with the policies set forth in the
Prospectuses) and allocated as to amount in a manner which the Advisor believes
to be equitable and consistent with its fiduciary obligations to the Fund
involved and such other investment company or account. In some instances, this
investment procedure may adversely affect the price paid or received by a Fund
or the size of the position obtained by a Fund.
INDEPENDENT AUDITORS
_____________, 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), One Logan Square, 18th and Cherry Streets,
Philadelphia, Pennsylvania 19103-6996, are counsel to The Commerce Funds.
ADDITIONAL INFORMATION ON PERFORMANCE
From time to time, yield and total return of the Funds for various
periods may be quoted in advertisements, shareholder reports or other
communications to shareowners. The performance of each Fund may also be compared
to those of other mutual funds with similar investment objectives and to stock,
bond and other relevant indices or to rankings prepared by independent services
or other financial or industry publications that monitor the performance of
mutual funds.
Yield Calculations. A Fund's yield is calculated by dividing its net
------------------
investment income per share (as described below) earned during a 30-day period
by the maximum offering price per share on the last day of the period and
annualizing the result on a semi-annual basis by adding one to the quotient,
raising the sum to the power of six, subtracting one from the result and then
doubling the difference. A Fund's net investment income per share earned during
the period may be different than that determined for accounting purposes and is
based on the average daily number of shares outstanding during the period
entitled to receive
-42-
<PAGE>
dividends and includes dividends and interest earned during the period minus
expenses accrued for the period, net of reimbursements. This calculation can be
expressed as follows:
Yield = 2 [(a-b + 1)6 - 1]
---
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends.
d = maximum offering price per share on the last day of the
period.
For the purpose of determining net investment income earned during the
period (variable "a" in the formula), dividend income on equity securities held
by a Fund is recognized by accruing 1/360 of the stated dividend rate of the
security each day that the security is held in its portfolio. A Fund calculates
interest earned on any debt obligations held in its portfolio by computing the
yield to maturity of each obligation held by it based on the market value of the
obligation (including actual accrued interest) at the close of business on the
last business day of each month, or, with respect to obligations purchased
during the month, the purchase price (plus actual accrued interest), and
dividing the result by 360 and multiplying the quotient by the market value of
the obligation (including actual accrued interest) in order to determine the
interest income on the obligation for each day of the subsequent month that the
obligation is in the portfolio. For purposes of this calculation, it is assumed
that each month contains 30 days. The maturity of an obligation with a call
provision is the next call date on which the obligation reasonably may be
expected to be called or, if none, the maturity date. With respect to debt
obligations purchased at a discount or premium, the formula generally calls for
amortization of the discount or premium. The amortization schedule will be
adjusted monthly to reflect changes in the market values of such debt
obligations.
With respect to mortgage-related obligations which are expected to be
subject to monthly payments of principal and interest ("pay downs"), (a) gain or
loss attributable to actual monthly pay downs are accounted for as an increase
or decrease to interest income during the period; and (b) a Fund may elect
either (i) to amortize the discount and premium on the remaining security, based
on the cost of the security, to the weighted average maturity date, if such
information is available, or to the remaining term of the security, if any, if
the weighted average maturity date is not available, or (ii) not to amortize
discount or premium on the remaining security.
-43-
<PAGE>
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 Core Equity
Fund. Based on the foregoing calculations, for the 30-day period ended September
30, 2000, the yield for the Kansas Tax-Free Intermediate Bond Fund was as
follows:
<TABLE>
<CAPTION>
Yield Assuming Maximum Yield Assuming Maximum
Sales Load and With Fee Sales Load and Without
Waivers and Fee Waivers or
Reimbursements Reimbursements
----------------------- ----------------------
<S> <C> <C>
Kansas Tax-Free
Intermediate Bond Fund
Institutional Shares % %
Service Shares % %
</TABLE>
The Distribution Rate for a specified period is calculated by
dividing the total distribution per unit by the maximum offering price or net
asset value on the last day of the period and then annualizing such amount. For
the 30 day period ended September 30, 2000, the Distribution Rate for the Kansas
Tax-Free Intermediate Bond Fund was as follows:
<TABLE>
<CAPTION>
Rate Assuming
Rate Assuming Maximum Sales Load Rate Assuming No Rate Assuming No
Maximum Sales Load and Without Fee Sales Load and With Sales Load and
and With Fee Waivers Waivers and Fee Waivers and Without Fee Waivers
and Reimbursements Reimbursements Reimbursements and Reimbursements
-------------------- ------------------ ------------------- -------------------
<S> <C> <C> <C> <C>
Kansas Tax-Free
Intermediate Bond Fund
Service Shares % % % %
Institutional Shares % % % %
</TABLE>
A tax-exempt Fund's "tax-equivalent" yield is computed as follows: (a)
by dividing the portion of the Fund's yield (calculated as above) that is exempt
from both federal and state income taxes by one minus a stated combined federal
and state income tax rate; (b) dividing the portion of the Fund's yield
(calculated as above) that is exempt from federal income tax by one minus a
stated federal income tax rate; and (c) adding the quotient to that portion, if
any, of the Fund's yield that is not exempt from federal income tax.
-44-
<PAGE>
The tax-equivalent yield for the 30-day period ended September 30,
2000 for the Kansas Tax-Free Intermediate Bond Fund, with and without fee
waivers (assuming a 39.6% federal tax rate and a ___% Kansas tax rate) was as
follows:
<TABLE>
<CAPTION>
Yield Assuming Maximum Yield Assuming Maximum
Sales Load and With Fee Sales Load and Without Fee
Waivers and Waivers
Reimbursements or Reimbursements
----------------------- --------------------------
<S> <C> <C>
Kansas Tax-Free Intermediate
Bond Fund
Institutional Shares % %
Service Shares % %
</TABLE>
The foregoing calculations are made assuming that (1) all dividends
and capital gain distributions are reinvested on the reinvestment dates at the
price per share existing on the reinvestment date, and (2) all recurring fees
charged to all shareowner accounts are included. The ending redeemable value
(variable "ERV" in the formula) is determined by assuming completed redemption
of the hypothetical investment after deduction of all nonrecurring charges at
the end of the measuring period. In addition, the Funds' yields and distribution
rates will reflect the deduction of the maximum sales load charged in connection
with purchases of shares. The yield and distribution rate calculations do not
include fees that may be imposed by institutions on their customers. If the
foregoing fees had been included in the yields and distribution rates reported
above, performance of these Funds would have been lower. For current yield
information, please contact The Commerce Funds at the telephone number on the
cover page of this Statement of Additional Information.
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:
-45-
<PAGE>
P (1 + T) n = ERV
Where: P = hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value at the end of the period
covered by the computation of a hypothetical $1,000
payment made at the beginning of the 1, 5 or 10
year periods at the end of the 1, 5 or 10 year
periods (or fraction thereof).
The Funds compute their "aggregate total return" by determining the
aggregate rates of return during specified periods that likewise equate the
initial amount invested to the ending redeemable value of such investment. The
formula for calculating aggregate total return is as follows:
T = (ERV - 1 P)
---
The calculations of average annual total return and aggregate total
return assume the reinvestment of all dividends and capital gain distributions
on the reinvestment dates during the period and include all recurring fees
charged to all shareholder accounts, assuming an account size equal to the
Fund's mean (or median) account size for any fees that vary with the size of the
account. The maximum sales load and other charges deducted from payments are
deducted from the initial $1,000 payment (variable "P" in the formula). The
ending redeemable value (variable "ERV" in each formula) is determined by
assuming complete redemption of the hypothetical investment and the deduction of
all nonrecurring charges at the end of the period covered by the computations.
The performance shown below for the Core Equity Fund and the Kansas
Tax-Free Intermediate Bond Fund is that of the Personal Stock Fund ("Common
Trust Fund") and the Kansas Tax-Free Bond Fund ("Kansas Common Trust Fund")
(collectively the "Common Trust Funds"), respectively, each a common trust fund
for which Commerce Bank serves as Trustee. The Common Trust Funds' performance
has been restated to reflect the estimated fees for the Funds for periods shown.
-46-
<PAGE>
1 Year 5 Years 10 Years
------ ------- --------
Core Equity Fund1
Institutional Shares
Service Shares
Kansas Tax-Free Intermediate Bond Fund2
Institutional Shares
Service Shares
----------------
(1) The Common Trust Fund commenced operations on _______________.
(2) The Kansas common Trust Fund commenced operations on ________________.
The Funds may also from time to time include in advertisements, sales
literature, communications to shareowners and other materials ("Literature") a
total return figure in order to compare more accurately its performance with
other measures of investment return. For example, in comparing a Fund's total
return with data published by Lipper Analytical Services, Inc., CDA Investment
Technologies, Inc. or Weisenberger Investment Company Service, or with the
performance of an index, the Fund may calculate its total return for the period
of time specified in the advertisement or communication by assuming the
investment of $10,000 in shares and assuming the value on the reinvestment date.
Percentage increases are determined by subtracting the initial value of the
investment from the ending value and by dividing the remainder by the beginning
value. The Fund does not, for these purposes, deduct from the initial value
invested any amount representing sales charges. The Fund will, however, disclose
the maximum sales charge and will also disclose that the performance data do not
reflect sales charges and that inclusion of sale charges would reduce the
performance quoted.
The Funds may also from time to time include discussions or
illustrations of the effects of compounding in Literature. "Compounding" refers
to the fact that, if dividends or other distributions on a Fund investment are
reinvested by being paid in additional Fund shares, any future income or capital
appreciation of the Fund would increase the value, not only of the original Fund
investment, but also of the additional Fund shares received through
reinvestment. As a result, the value of the Fund investment would increase more
quickly than if dividends or other distributions had been paid in cash.
In addition, the Funds may also include in Literature discussions
and/or illustrations of the potential investment goals of a prospective
investor, investment management strategies, techniques, policies or investment
suitability of the Fund (such as value investing, market timing, dollar cost
averaging, asset allocation, constant ratio transfer, automatic accounting
rebalancing, the advantages and disadvantages of investing in tax-deferred and
taxable investments), economic conditions, the relationship between sectors of
the economy and the economy as a whole, various securities markets, the effects
of inflation and historical performance of various asset classes, including but
not limited to, stocks, bonds and Treasury securities. From time to time,
Literature may summarize the substance of information contained in shareholder
reports (including the investment composition of the Fund), as well as
-47-
<PAGE>
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.
MISCELLANEOUS
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.
-48-
<PAGE>
APPENDIX A
Commercial Paper Ratings
------------------------
A Standard & Poor's commercial paper rating is a current opinion of
the creditworthiness of an obligor with respect to financial obligations having
an original maturity of no more than 365 days. The following summarizes the
rating categories used by Standard and Poor's for commercial paper:
"A-1" - Obligations are rated in the highest category indicating that
the obligor's capacity to meet its financial commitment on the obligation is
strong. Within this category, certain obligations are designated with a plus
sign (+). This indicates that the obligor's capacity to meet its financial
commitment on these obligations is extremely strong.
"A-2" - Obligations are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher rating categories. However, the obligor's capacity to meet its financial
commitment on the obligation is satisfactory.
"A-3" - Obligations exhibit adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment on the
obligation.
"B" - Obligations are regarded as having significant speculative
characteristics. The obligor currently has the capacity to meet its financial
commitment on the obligation; however, it faces major ongoing uncertainties
which could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
"C" - Obligations are currently vulnerable to nonpayment and are
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation.
"D" - Obligations are in payment default. The "D" rating category is
used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The "D" rating will be used
upon the filing of a bankruptcy petition or the taking of a similar action if
payments on an obligation are jeopardized.
Local Currency and Foreign Currency Risks
Country risk considerations are a standard part of Standard & Poor's analysis
for credit ratings on any issuer or issue. Currency of repayment is a key factor
in this analysis. An obligor's capacity to repay foreign obligations may be
lower than its capacity to repay obligations in its local currency due to the
sovereign government's own relatively lower capacity to repay external versus
domestic debt. These sovereign risk considerations are incorporated in the debt
ratings assigned to specific issues. Foreign currency issuer ratings are also
distinguished
A-1
<PAGE>
from local currency issuer ratings to identify those instances where sovereign
risks make them different for the same issuer.
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.
Fitch 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 for short-term obligations:
"F1" - Securities possess the highest credit quality. This designation
indicates the best capacity for timely payment of financial commitments and may
have an added "+" to denote any exceptionally strong credit feature.
"F2" - Securities possess good credit quality. This designation
indicates a satisfactory capacity for timely payment of financial commitments,
but the margin of safety is not as great as in the case of the higher ratings.
A-2
<PAGE>
"F3" - Securities possess fair credit quality. This designation
indicates that the capacity for timely payment of financial commitments is
adequate; however, near-term adverse changes could result in a reduction to
non-investment grade.
"B" - Securities possess speculative credit quality. This designation
indicates minimal capacity for timely payment of financial commitments, plus
vulnerability to near-term adverse changes in financial and economic conditions.
"C" - Securities possess high default risk. This designation indicates
a capacity for meeting financial commitments which is highly uncertain and
solely reliant upon a sustained, favorable business and economic environment.
"D" - Securities are in actual or imminent payment default.
Thomson Financial 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 Financial BankWatch:
"TBW-1" - This designation represents Thomson Financial 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 Financial 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 Financial 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 Financial BankWatch's
lowest rating category and indicates that the obligation is regarded as
non-investment grade and therefore speculative.
Corporate and Municipal Long-Term Debt Ratings
----------------------------------------------
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
A-3
<PAGE>
"AAA" - An obligation rated "AAA" has the highest rating assigned by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is extremely strong.
"AA" - An obligation rated "AA" differs from the highest rated
obligations only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
"A" - An obligation rated "A" is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher-rated categories. However, the obligor's capacity to meet
its financial commitment on the obligation is still strong.
"BBB" - An obligation rated "BBB" exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
Obligations rated "BB," "B," "CCC," "CC" and "C" are regarded as
having significant speculative characteristics. "BB" indicates the least degree
of speculation and "C" the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
"BB" - An obligation rated "BB" is less vulnerable to nonpayment than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to the obligor's inadequate capacity to meet its financial commitment on the
obligation.
"B" - An obligation rated "B" is more vulnerable to nonpayment than
obligations rated "BB", but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
"CCC" - An obligation rated "CCC" is currently vulnerable to
nonpayment, and is dependent upon favorable business, financial and economic
conditions for the obligor to meet its financial commitment on the obligation.
In the event of adverse business, financial, or economic conditions, the obligor
is not likely to have the capacity to meet its financial commitment on the
obligation.
"CC" - An obligation rated "CC" is currently highly vulnerable to
nonpayment.
"C" - The "C" rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action taken, but payments on this
obligation are being continued.
A-4
<PAGE>
"D" - An obligation rated "D" is in payment default. The "D" rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The "D"
rating also will be used upon the filing of a bankruptcy petition or the taking
of a similar action if payments on an obligation are jeopardized.
- PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
- "r" - The 'r' highlights obligations that Standard & Poor's believes
have significant noncredit risks. Examples of such obligations are securities
with principal or interest return 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.
- N.R. Indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular obligation as a matter of policy.
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 risk appear somewhat larger than the "Aaa"
securities.
"A" - Bonds possess many favorable investment attributes and are to be
considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds are considered as medium-grade obligations, (i.e., they
are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
A-5
<PAGE>
"Ba" - Bonds are judged to have speculative elements; their future
cannot be considered as well-assured. Often the protection of interest and
principal payments may be very moderate, and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
"B" - Bonds are generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
"Caa " - Bonds are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
"Ca" - Bonds represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
"C" - Bonds are the lowest rated class of bonds, and issues so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
Con. (...) - Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction, (b) earnings
of projects unseasoned in operating experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
Note: Moody's applies numerical modifiers 1, 2, and 3 in each generic
rating classification from "Aa" through "Caa". The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of its generic rating category.
The following summarizes the ratings used by Fitch for corporate and
municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest
credit quality. These ratings denote the lowest expectation of credit risk and
are assigned only in case of exceptionally strong capacity for timely payment of
financial commitments. This capacity is highly unlikely to be adversely affected
by foreseeable events.
"AA" - Bonds considered to be investment grade and of very high credit
quality. These ratings denote a very low expectation of credit risk and indicate
very strong capacity for timely payment of financial commitments. This capacity
is not significantly vulnerable to foreseeable events.
A-6
<PAGE>
"A" - Bonds considered to be investment grade and of high credit
quality. These ratings denote a low expectation of credit risk and indicate
strong capacity for timely payment of financial commitments. This capacity may,
nevertheless, be more vulnerable to changes in circumstances or in economic
conditions than is the case for higher ratings.
"BBB" - Bonds considered to be investment grade and of good credit
quality. These ratings denote that there is currently a low expectation of
credit risk. The capacity for timely payment of financial commitments is
considered adequate, but adverse changes in circumstances and in economic
conditions are more likely to impair this capacity. This is the lowest
investment grade 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 change over time; however, business or financial alternatives
may be available to allow financial commitments to be met. Securities rated in
this category are not investment grade.
"B" - Bonds are considered highly speculative. These ratings indicate
that significant credit risk is present, but a limited margin of safety remains.
Financial commitments are currently being met; however, capacity for continued
payment is contingent upon a sustained, favorable business and economic
environment.
"CCC", "CC" and "C" - Bonds have high default risk. Default is a real
possibility, and capacity for meeting financial commitments is solely reliant
upon sustained, favorable business or economic developments. "CC" ratings
indicate that default of some kind appears probable, and "C" ratings signal
imminent default.
"DDD," "DD" and "D" - Bonds are in default. The ratings of obligations
in this category are based on their prospects for achieving partial or full
recovery in a reorganization or liquidation of the obligor. While expected
recovery values are highly speculative and cannot be estimated with any
precision, the following serve as general guidelines. "DDD" obligations have the
highest potential for recovery, around 90%-100% of outstanding amounts and
accrued interest. "DD" indicates potential recoveries in the range of 50%-90%,
and "D" the lowest recovery potential, i.e., below 50%.
Entities rated in this category have defaulted on some or all of their
obligations. Entities rated "DDD" have the highest prospect for resumption of
performance or continued operation with or without a formal reorganization
process. Entities rated "DD" and "D" are generally undergoing a formal
reorganization or liquidation process; those rated "DD" are likely to satisfy a
higher portion of their outstanding obligations, while entities rated "D" have a
poor prospect for repaying all obligations.
- To provide more detailed indications of credit quality, the Fitch
ratings from and including "AA" to "CCC" may be modified by the addition of a
plus (+) or minus (-) sign to denote relative standing within these major rating
categories.
- 'NR' indicates the Fitch does not rate the issuer or issue in
question.
A-7
<PAGE>
- 'Withdrawn': A rating is withdrawn when Fitch deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
- RatingAlert: Ratings are placed on RatingAlert to notify investors
that there is a reasonable probability of a rating change and the likely
direction of such change. These are designated as "Positive", indicating a
potential upgrade, "Negative", for a potential downgrade, or "Evolving", if
ratings may be raised, lowered or maintained. RatingAlert is typically resolved
over a relatively short period.
Thomson Financial BankWatch assesses the likelihood of an untimely
repayment of principal or interest over the term to maturity of long term debt
and preferred stock which are issued by United States commercial banks, thrifts
and non-bank banks; non-United States banks; and broker-dealers. The following
summarizes the rating categories used by Thomson BankWatch for long-term debt
ratings:
"AAA" - This designation indicates that the ability to repay principal
and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to repay
principal and interest on a timely basis, with limited incremental risk compared
to issues rated in the highest category.
"A" - This designation indicates that the ability to repay principal
and interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BBB" - This designation represents the lowest investment-grade
category and indicates an acceptable capacity to repay principal and interest.
Issues rated "BBB" are more vulnerable to adverse developments (both internal
and external) than obligations with higher ratings.
"BB," - A rating of BB suggests that the likelihood of default is
considerably less than for lower-rated issues, although there are significant
uncertainties that could affect the ability to adequately service debt
obligations.
"B" - Issues rated B show a higher degree of uncertainty and therefore
greater likelihood of default than higher-rated issues. Adverse developments
could negatively affect the payment of interest and principal on a timely basis.
"CCC" - Issues rated CCC clearly have a high likelihood of default,
with little capacity to address further adverse changes in financial
circumstances.
"CC" - This rating is applied to issues that are subordinate to other
obligations rated CCC and are afforded less protection in the event of
bankruptcy or reorganization.
A-8
<PAGE>
"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 note rating reflects the liquidity factors and
market access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's 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 a
very strong capacity to pay debt service 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:
"MIG-1"/"VMIG-1" - This designation denotes best quality. There is
present strong protection by established cash flows, superior liquidity support
or demonstrated broad-based access to the market for refinancing.
"MIG-2"/"VMIG-2" - This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding group.
"MIG-3"/"VMIG-3" - This designation denotes favorable quality, with
all security elements accounted for but lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
A-9
<PAGE>
"MIG-4"/"VMIG-4" - This designation denotes adequate quality.
Protection commonly regarded as required of an investment security is present
and although not distinctly or predominantly speculative, there is specific
risk.
"SG" - This designation denotes speculative quality. Debt instruments
in this category lack margins of protection.
Fitch uses the short-term ratings described under Commercial Paper
Ratings for municipal notes.
A-10
<PAGE>
APPENDIX B
The Growth, MidCap, International Equity, Balanced, Bond, National
Tax-Free Intermediate Bond and Missouri Tax-Free Intermediate Bond Funds may
enter into futures contracts and options. Such transactions are described in
this Appendix.
I. Interest Rate Futures Contracts.
-------------------------------
Use of Interest Rate Futures Contracts. Bond prices are established in
--------------------------------------
both the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally within five business days after the trade. In the
futures market, only a contract is made to purchase or sell a bond in the future
for a set price on a certain date. Historically, the prices for bonds
established in the futures markets have tended to move generally in the
aggregate in concert with the cash market prices and have maintained fairly
predictable relationships. Accordingly, the Funds may use interest rate futures
contracts as a defense, or hedge, against anticipated interest rate changes and
not for speculation. As described below, this would include the use of futures
contract sales to protect against expected increases in interest rates and
futures contract purchases to offset the impact of interest rate declines.
A Fund presently could accomplish a similar result to that which it
hopes to achieve through the use of futures contracts by selling bonds with long
maturities and investing in bonds with short maturities when interest rates are
expected to increase, or conversely, selling short-term bonds and investing in
long-term bonds when interest rates are expected to decline. However, because of
the liquidity that is often available in the futures market the protection is
more likely to be achieved, perhaps at a lower cost and without changing the
rate of interest being earned by the Fund, by using futures contracts.
Description of Interest Rate Futures Contracts. An interest rate
----------------------------------------------
futures contract sale would create an obligation by a Fund, as seller, to
deliver the specific type of financial instrument called for in the contract at
a specific future time for a specified price. A futures contract purchase would
create an obligation by a Fund, as purchaser, to take delivery of the specific
type of financial instrument at a specific future time at a specific price. The
specific securities delivered or taken, respectively, at settlement date, would
not be determined until at or near that date. The determination would be in
accordance with the rules of the exchange on which the futures contract sale or
purchase was made.
B-1
<PAGE>
Although interest rate futures contracts by their terms call for
actual delivery or acceptance of securities, in most cases the contracts are
closed out before the settlement date without the making or taking of delivery
of securities. Closing out a futures contract sale is effected by the Fund
entering into a futures contract purchase for the same aggregate amount of the
specific type of financial instrument and the same delivery date. If the price
of the sale exceeds the price of the offsetting purchase, the Fund is
immediately paid the difference and thus realizes a gain. If the offsetting
purchase price exceeds the sale price, the Fund pays the difference and realizes
a loss. Similarly, the closing out of a futures contract purchase is effected by
the Fund entering into a futures contract sale. If the offsetting sale price
exceeds the purchase price, a 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
and 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 Treasury Bonds and Notes; Government
National Mortgage Association (GNMA) modified pass-through mortgage-backed
securities, three-month Treasury Bills; and ninety-day commercial paper. A Fund
may trade in any futures contract for which there exists a public market,
including, without limitation, the foregoing instruments.
II. Stock Index Futures Contracts.
-----------------------------
General. A stock index assigns relative values to the stocks included
-------
in the index and the index fluctuates with changes in the market values of the
stocks included. Some stock index futures contracts are based on broad market
indexes, such as the Standard & Poor's 500 or the New York Stock Exchange
Composite Index. In contrast, certain exchanges offer futures contracts on
narrower market indexes, such as the Standard & Poor's 100 or indexes based on
an industry or market segment, such as oil and gas stocks. Futures contracts are
traded on organized exchanges regulated by the Commodity Futures Trading
Commission. Transactions on such exchanges are cleared through a clearing
corporation, which guarantees the performance of the parties to each contract.
A Fund will 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. In a
substantial majority of these transactions, a Fund will purchase such securities
upon termination of the long futures position, but a long futures position may
be terminated without a corresponding purchase of securities.
B-2
<PAGE>
In addition, a Fund may utilize stock index futures contracts in
anticipation of changes in the composition of its 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 its portfolio will decline prior to the time of sale.
III. Futures Contracts on Foreign Currencies.
---------------------------------------
A futures contract on foreign currency creates a binding obligation on
one party to deliver, and a corresponding obligation on another party to accept
delivery of, a stated quantity of a 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 when a Fund purchases or sells a security, 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
a Fund's custodian an amount of cash or cash equivalents, the value of which may
vary but is generally equal to 10% or less of the value of the contract. This
amount is known as initial margin. 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 instrument fluctuates making the long and short positions in the
futures contract more or less valuable, a process known as "marking-to-market."
For example, when a 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 a Fund will be entitled to receive from
the broker a variation margin payment equal to that increase in value.
Conversely, where a 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 a Fund would be required to
make a variation margin payment to the broker. At any time prior to expiration
of the futures contract, The Commerce Funds may elect to close the position by
taking an opposite position, subject to the availability of a secondary market,
which will operate to terminate a 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 a Fund, and a Fund realizes a loss or
gain.
B-3
<PAGE>
V. Risks of Transactions in Futures Contracts.
------------------------------------------
There are several risks in connection with the use of futures by a
Fund as a hedging device. One risk arises because of the imperfect correlation
between movements in the price of the futures and movements in the price of the
securities which are the subject of the hedge. The price of the future may move
more than or less than the price of the securities being hedged. If the price of
the futures moves less than the price of the securities which are the subject of
the hedge, the hedge will not be fully effective but, if the price of the
securities 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
securities being hedged has moved in a favorable direction, this advantage will
be partially offset by the loss on the future. If the price of the future moves
more than the price of the hedged securities, a Fund involved will experience
either a loss or gain on the future which will not be completely offset by
movements in the price of the securities which are the subject of the hedge. To
compensate for the imperfect correlation of movements in the price of securities
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
securities being hedged if the volatility over a particular time period of the
prices of such securities has been greater than the volatility over such time
period of the future, 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 securities being
hedged is less than the volatility over such time period of the future 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
securities held in a Fund may decline. If this occurred, a Fund would lose money
on the future and also experience a decline in value in its portfolio
securities.
Where 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 securities (or options) in an orderly fashion, it is
possible that the market may decline instead; if a Fund then concludes not to
invest in securities or options at that time because of concern as to possible
further market decline or for other reasons, a Fund will realize a loss on the
futures contract that is not offset by a reduction in the price of securities 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
securities 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
B-4
<PAGE>
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 Commerce Funds may still not result in a successful
hedging transaction over a short time frame.
Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although the Funds
intend to purchase or sell futures only on exchanges or boards of trade where
there appear to be active secondary markets, there is no assurance that a liquid
secondary market on any exchange or board of trade will exist for any particular
contract or at any particular time. In such event, it may not be possible to
close a futures investment position, and in the event of adverse price
movements, the Funds 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 trading 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 the Funds 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 in its Portfolio and
securities prices increase instead, a 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 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.
B-5
<PAGE>
VI. Options on Futures Contracts
----------------------------
The Funds may purchase options on the futures contracts described
above. A futures option gives the holder, in return for the premium paid, the
right to buy (call) from or sell (put) to the writer of the option a futures
contract at a specified price at any time during the period of the option. Upon
exercise, the writer of the option is obligated to pay the difference between
the cash value of the futures contract and the exercise price. Like the buyer or
seller of a futures contract, the holder, or writer, of an option has the right
to terminate its position prior to the scheduled expiration of the option by
selling, or purchasing, an option of the same series, at which time the person
entering into the closing transaction will realize a gain or loss.
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 be fully reflected 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. Although permitted by their fundamental
investment policies, the Funds do not currently intend to write futures options
during the current fiscal year, and will not do so in the future absent any
necessary regulatory approvals.
VII. Accounting and Tax Treatment.
----------------------------
Accounting for futures contracts and options will be in accordance
with generally accepted accounting principles.
Generally, futures contracts held by the Funds at the close of the
Funds' 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 sixty
percent of such gain or loss will be treated as long-term capital gain or loss
without regard to the length of time a Fund holds the futures contract ("the
40-60 rule"). The amount of any capital gain or loss actually realized by a 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 a 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 a Fund, losses as to such contracts to sell will be subject
to certain loss deferral rules which limit the
B-6
<PAGE>
amount of loss currently deductible on either part of the straddle to the amount
thereof which exceeds the unrecognized gain (if any) with respect to the other
part of the straddle, and to certain wash sales regulations. Under short sales
rules, which will also be applicable, the holding period of the securities
forming part of the straddle will (if they have not been held for the long-term
holding period) be deemed not to begin prior to termination of the straddle.
With respect to certain futures contracts, deductions for interest and carrying
charges will not be allowed. Notwithstanding the rules described above, with
respect to futures contracts to sell which are properly identified as such, a
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 a 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, a 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, no 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. Opinions on futures contracts generally
receive federal tax treatment similar to that described above.
Certain foreign currency contracts entered into by the Funds may be
subject to the "mark-to-market" process. If the Fund makes a Capital Asset
Election with respect to such contracts, the contracts will be subject to the
40-60 rule, described above. Otherwise, such gain or loss will be treated as
100% ordinary gain or loss. To receive such federal income tax treatment, a
foreign currency contract must meet the following conditions: (1) the contract
must require delivery of a foreign currency of a type in which regulated futures
contracts are traded or upon which the settlement value of the contract depends;
(2) the contract must be entered into at arm's length at a price determined by
reference to the price in the interbank market; and (3) the contract must be
traded in the interbank market. The Treasury Department as 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 a Fund
may result in the creation of one or more straddles for federal income tax
purposes, in which case certain loss deferral, short sales, and wash sales rules
and the requirement to capitalize interest and carrying charges may apply.
Some investments may be subject to special rules which govern the
federal income tax treatment of certain transactions denominated in terms of a
currency other than the U.S. dollar or determined by reference to the value of
one or more currencies other than the U.S. dollar. The types of transactions
covered by the special rules include the following: (i) the acquisition of, or
becoming the obligor under, a bond or other debt instrument (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
B-7
<PAGE>
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 a Fund may make or may ender
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
Funds 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.
Under the federal income tax provisions applicable to regulated
investment companies, less than 30% of a company's gross income must be derived
from gains realized on the sale or other disposition of securities held for less
than three months. With respect to futures contracts and other financial
instruments subject to the "mark-to-market" rules, the Internal Revenue Service
has ruled in private letter rulings that a gain realized from such a futures
contract or financial instrument will be treated as being derived from a
security held for three months or more (regardless of the actual period for
which the contract or instrument is held) if the gain arises as a result of a
constructive sale under the "mark-to-market" rules, and will be treated as being
derived from a security held for less than three months only if the contract or
instrument is terminated (or transferred) during the taxable year (other than by
reason of the mark-to-market rules) and less than three months have elapsed
between the date the contract or instrument is acquired and the termination
date. In determining whether the 30% test is met for a taxable year, increases
and decreases in the value of the Funds' futures contracts and other investments
that qualify as part of a "designated hedge," as defined in the Code, may be
netted.
B-8
<PAGE>
THE COMMERCE FUNDS
FORM N-1A
PART C. OTHER INFORMATION
Item 23. EXHIBITS
--------
(a) Trust Instrument dated February 7, 1994.1
(b) Bylaws of Registrant.1
(c) Not applicable.
(d) (1) Advisory Agreement among Registrant, Commerce Bank, N.A.
(St. Louis) and Commerce Bank, N.A. (Kansas City).1
(2) Sub-Advisory Agreement among Commerce Bank, N.A. (St.
Louis), Commerce Bank, N.A. (Kansas City) and Rowe
Price-Fleming International, Inc.1
(3) Addendum No. 1 to Advisory Agreement among Registrant,
Commerce Bank, N.A. (St. Louis) and Commerce Bank, N.A.
(Kansas City) with respect to the Value Fund.3
(4) Form of Addendum No. 2 to Advisory Agreement between
Registrant and Commerce Bank, N.A. with respect to the Core
Equity Fund and the Kansas Tax-Free Intermediate Bond
Fund.6
(5) Interim Sub-Advisory Agreement dated August 8, 2000 among
Registrant, Commerce Bank, N.A. and Rowe Price-Fleming
International Inc. with respect to the International Equity
Fund.6
(e) Distribution Agreement between Registrant and Goldman, Sachs &
Co.1
(1) Addendum No. 1 to Distribution Agreement between Registrant
and Goldman, Sachs & Co. with respect to the Value
Fund.3
(2) Form of Addendum No. 2 to Distribution Agreement between
Registrant and Goldman Sachs & Co. with respect to the Core
Equity Fund and the Kansas Tax-Free Intermediate Bond
Fund.6
(f) Deferred Compensation Plan and Forms of Agreement.5
C-1
<PAGE>
(g) (1) Custodian Agreement between Registrant and State Street Bank
and Trust Company.1
(2) Form of Letter Agreement to Custodian Agreement between
Registrant and State Street and Trust Company with respect
to the Core Equity Fund and the Kansas Tax-Free Intermediate
Bond Fund.6
(h) (1) Administration Agreement between Registrant and Goldman Sachs
Asset Management.1
(2) Addendum No. 1 to Administration Agreement between
Registrant and Goldman Sachs Asset Management with respect
to the Value Fund.3
(3) Form of Addendum No. 2 to Administration Agreement between
Registrant and Goldman Sachs Asset Management with respect
to the Core Equity Fund and the Kansas Tax-Free Intermediate
Bond Fund.6
(4) Transfer Agency Agreement between Registrant and State
Street Bank and Trust Company.1
(5) Form of Letter Agreement to Transfer Agency Agreement
between Registrant and State Street Bank and Trust Company
with respect to the Core Equity fund and the Kansas Tax-Free
Intermediate Bond Fund.6
(6) Amended and Restated Shareholder Administrative Services
Plan for Institutional Shares and related Servicing
Agreement.6
(7) Amended and Restated Shareholder Administrative Services
Plan for Service Shares and related Servicing
Agreement.6
(i) Opinion of Counsel.7
(j) Consent of Drinker Biddle & Reath LLP.8
(k) Not Applicable.
(l) (1) Purchase Agreement between Registrant and Initial Trustee.1
(2) Purchase Agreement between Registrant and Goldman, Sachs &
Co.1
C-2
<PAGE>
(3) Purchase Agreement between Registrant and Commerce Bank,
N.A.1
(4) Purchase Agreement between Registrant and Goldman, Sachs &
Co.3
(5) Form of Purchase Agreement between Registrant and Goldman,
Sachs & Co.6
(m) Amended and Restated Distribution Plan for Service Shares.6
(n) Amended and Restated Plan Pursuant to Rule 18f-3 for Operation of
a Multi-Class System.6
----------------------------------------
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.
4. Filed electronically as an Exhibit and incorporated herein by reference to
Post-Effective Amendment No. 7 to Registrant's Registration Statement on
Form N-1A filed on March 2, 1998.
5. Filed electronically as an Exhibit and incorporated herein by reference to
Post-Effective Amendment No. 8 to Registrant's Registration Statement on
Form N-1A filed on December 18, 1998.
6. To be filed by amendment.
7. Filed herewith.
8. Included in Exhibit 23(i).
Item 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE FUND
-----------------------------------------------------------
Registrant is controlled by its Board of Trustees. As of the date of
this Registration Statement, no person is controlled by or under
common control with the Registrant.
C-3
<PAGE>
Item 25. INDEMNIFICATION
---------------
Section IV of the Administration Agreement and Section XIII of the
Distribution Agreement between the Registrant and Goldman, Sachs & Co.
("Goldman") provides for indemnification of Goldman in connection with certain
claims and liabilities to which Goldman, in its capacity as Registrant's
Administrator and Distributor, may be subject. Copies of the Administration
Agreement and Distribution Agreement are incorporated herein by reference as
Exhibits 23(e) and (h), respectively.
Registrant has obtained from a major insurance carrier a trustees' and
officers' liability policy covering certain types of errors and omissions.
In addition, Section 10.2 of Registrant's Trust Instrument, a copy of
which is incorporated herein by reference as Exhibit 23(a), provides for
indemnification of the Trustees and officers as follows:
Section 10.2 Indemnification. The Trust shall indemnify each of its
---------------
Trustees against all liabilities and expenses (including amounts paid
in satisfaction of judgments, in compromise, as fines and penalties,
and as counsel fees) reasonably incurred by him in connection with the
defense or disposition of any action, suit or other proceeding,
whether civil or criminal, in which he may be involved or with which
he may be threatened, while as a Trustee or thereafter, by reason of
his being or having been such a Trustee except with respect to any
------
matter as to which he shall have been adjudicated to have acted in bad
faith, willful misfeasance, gross negligence or reckless disregard of
his duties, provided that as to any matter disposed of by a compromise
--------
payment by such person, pursuant to a consent decree or otherwise, no
indemnification either for said payment or for any other expenses
shall be provided unless the Trust shall have received a written
opinion from independent legal counsel approved by the Trustees to the
effect that if either the matter or willful misfeasance, gross
negligence or reckless disregard of duty, or the matter of bad faith
had been adjudicated, it would in the opinion of such counsel have
been adjudicated in favor of such person. The rights accruing to any
person under these provisions shall not exclude any other right to
which he may be lawfully entitled, provided that no person may satisfy
--------
any right of indemnity or reimbursement hereunder except out of the
property of the Trust. The Trustees may make advance payments in
connection with the indemnification under this Section 10.2, provided
--------
that the indemnified person shall have given a written undertaking to
reimburse the Trust in the event it is subsequently determined that he
is not entitled to such indemnification.
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.
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<PAGE>
Section 10.3 of Registrant's Trust Instrument provides for
indemnification of shareholders as follows:
Section 10.3 Shareholders. In case any Shareholder or former
------------
Shareholder of any Series shall be held to be personally liable solely
by reason of his being or having been a Shareholder of such Series and
not because of his acts or omissions or for some other reason, the
Shareholder or former Shareholder (or his heirs, executors,
administrators or other legal representatives, or in the case of a
corporation or other entity, its corporate or other general successor)
shall be entitled out of the assets belonging to the applicable Series
to be held harmless from and indemnified against all loss and expense
arising from such liability. The Trust, on behalf of the affected
Series, shall, upon request by the Shareholder, assume the defense of
any claim made against the Shareholder for any act or obligation of
the Series and satisfy any judgment thereon from the assets of the
Series.
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to Trustees, officers and controlling persons of
Registrant pursuant to the foregoing provisions, or otherwise, Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by Registrant of expenses incurred or
paid by a Trustee, officer or controlling person of Registrant in the successful
defense of any action, suit or proceeding) is asserted by such Trustee, officer
or controlling person in connection with the securities being registered,
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
Item 26. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER
--------------------------------------------------------
(a) Commerce Bank, N.A., the Registrant's investment adviser, provides
a comprehensive range of financial services including investment management,
trust, retail, commercial, brokerage, and correspondent banking services.
Set forth below is a list of all of the directors and senior executive
officers of Commerce Bank, N.A. and, with respect to each such person, the name
and business address of the company or companies (if any) with which such person
has been connected at any time since November 1, 1997, as well as the capacity
in which such person was connected.
C-5
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
<C> <S> <S>
Name and Position with Name and Principal Connection with Other Company
Commerce Bank, N.A. Business Address of Other Company -----------------------------
------------------- ---------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Mr. John O. Brown, Key Industries, Inc. Director
Vice Chairman and Director 523 East Wall
Ft. Scott, KS 66701-1554
------------------------------------------------------------------------------------------------------------------------------------
Mr. Jonathan M. Kemper, Tower Properties Company Director
Vice Chairman and Director 911 Main Street, Suite 100
Kansas City, MO 64106
Commerce Bancshares, Inc. Vice Chairman
1000 Walnut Street
Kansas City, MO 64106
------------------------------------------------------------------------------------------------------------------------------------
Mr. Edward J. Reardon II None None
Executive Vice President and Director
------------------------------------------------------------------------------------------------------------------------------------
Mr. Robert C. Matthews, Jr. None None
Executive Vice President and Director
------------------------------------------------------------------------------------------------------------------------------------
Mr. David W. Kemper, Tower Properties Company Director
Chairman, President, CEO and Director 911 Main Street, Suite 100
Kansas City, MO 64106
Commerce Bancshares, Inc. Chairman, President and Chief
1000 Walnut Street Executive Officer
Kansas City, MO 64106
Business Men's Assurance Director
Company of America
One Penn Valley Park
Kansas City, MO 64108
Seafield Capital Corporation Director
2600 Grand Avenue Suite 500
Kansas City, MO 64108
Wave Technologies International, Inc. Director
10845 Olive Blvd.
St. Louis, MO 63146
Ralcorp Holdings, Inc. Director
901 Chouteau Avenue
St. Louis, MO 63102
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
C-6
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
<C> <S> <S>
Name and Position with Name and Principal Connection with Other Company
Commerce Bank, N.A. Business Address of Other Company -----------------------------
------------------- ---------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Mr. Seth M. Leadbeater, None None
Executive Vice President and Director
====================================================================================================================================
</TABLE>
(b) The information required by this Item 26 with respect to each
director and officer of Rowe Price-Fleming International, Inc. is incorporated
by reference to Form ADV and Schedules A and D filed by Rowe Price-Fleming
International, Inc. with the Securities and Exchange Commission pursuant to the
Investment Advisers Act of 1940 (File No. 801-14713).
Item 27. PRINCIPAL UNDERWRITERS
----------------------
(a) Goldman, Sachs & Co., or an affiliate or a division
thereof, currently serves as investment adviser and distributor of the
units or shares of Goldman Sachs Trust and Trust for Credit Unions,
and as administrator and distributor for the units of The Benchmark
Funds and The Commerce Funds.
(b) Set forth below is certain information pertaining to the
executive committee of Goldman, Sachs & Co., Registrant's principal
underwriter. None of the members of the executive committee hold
positions or offices with the Registrant.
GOLDMAN SACHS EXECUTIVE COMMITTEE
Name and Principal
Business Address Position
---------------- --------
Jon S. Corzine (1) Managing Director
Robert J. Hurst (1) Managing Director
Henry M. Paulson, Jr. (1) Managing Director
John A. Thain (3) Managing Director
John L. Thornton (3) Managing Director
Roy J. Zuckerberg (2) Managing Director
--------------------
(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.
C-7
<PAGE>
Item 28. LOCATION OF ACCOUNTS AND RECORDS
--------------------------------
(1) Commerce Bank, N.A., 8000 Forsyth Boulevard, Clayton, Missouri, and 1000
Walnut Street, Kansas City, Missouri (records relating to their functions
as investment adviser to each of Registrant's investment portfolios).
(2) Rowe-Price Fleming International, Inc., 100 East Pratt Street, Baltimore,
Maryland (records relating to its function as sub-investment adviser to
Registrant's International Equity Fund).
(3) Goldman, Sachs & Co., 32 Old Slip, 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, One Logan Square, 18th and Cherry Streets,
Philadelphia, Pennsylvania 19103-6996 (Registrant's Trust Instrument,
By-Laws and minute books).
Item 29. MANAGEMENT SERVICES
-------------------
Not Applicable.
Item 30. UNDERTAKINGS
-------------
Not Applicable.
C-8
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, Registrant has duly caused this Post-Effective
Amendment No. 11 to its Registration Statement on Form N-1A to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of Philadelphia,
Commonwealth of Pennsylvania, on the 13th day of October, 2000.
THE COMMERCE FUNDS
Registrant
* 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
----------------------- --------- --------
* Randall D. Barron
---------------------------
Randall D. Barron Trustee, Treasurer October 13, 2000
* David L. Bodde
---------------------------
David L. Bodde Trustee October 13, 2000
* John Eric Helsing
---------------------------
John Eric Helsing Trustee, Chairman October 13, 2000
* John Joseph Holland
---------------------------
John Joseph Holland Trustee October 13, 2000
* Warren W. Weaver
---------------------------
Warren W. Weaver Trustee, President October 13, 2000
*By: W. Bruce McConnel
----------------------
W. Bruce McConnel
Attorney in Fact
C-9
<PAGE>
THE COMMERCE FUNDS
POWER OF ATTORNEY
-----------------
Know All Men by These Presents, that the undersigned, Warren W. Weaver,
hereby constitutes and appoints W. Bruce McConnel, III, his true and lawful
attorney, to execute in his name, place, and stead, in his capacity as Trustee
or officer, or both, of the Trust, the Registration Statement and any amendments
thereto and all instruments necessary or incidental in connection therewith, and
to file the same with the Securities and Exchange Commission; and said attorney
shall have full power and authority to do and perform in his name and on his
behalf, in any and all capacities, every act whatsoever requisite or necessary
to be done in the premises, as fully and to all intents and purposes as he might
or could do in person, said acts of said attorney being hereby ratified and
approved.
DATED: December 12, 1996
/s/ Warren W. Weaver
----------------------------------
Warren W. Weaver
<PAGE>
THE COMMERCE FUNDS
POWER OF ATTORNEY
-----------------
Know All Men by These Presents, that the undersigned, John Joseph Holland,
hereby constitutes and appoints Warren W. Weaver and W. Bruce McConnel, III, his
true and lawful attorneys, to execute in his name, place, and stead, in his
capacity as Trustee or officer, or both, of the Trust, the Registration
Statement and any amendments thereto and all instruments necessary or incidental
in connection therewith, and to file the same with the Securities and Exchange
Commission; and said attorneys shall have full power and authority to do and
perform in his name and on his behalf, in any and all capacities, every act
whatsoever requisite or necessary to be done in the premises, as fully and to
all intents and purposes as he might or could do in person, said acts of said
attorneys being hereby ratified and approved.
DATED: December 12, 1996
/s/ John Joseph Holland
----------------------------------
John Joseph Holland
<PAGE>
THE COMMERCE FUNDS
POWER OF ATTORNEY
-----------------
Know All Men by These Presents, that the undersigned, John Eric Helsing,
hereby constitutes and appoints Warren W. Weaver and W. Bruce McConnel, III, his
true and lawful attorneys, to execute in his name, place, and stead, in his
capacity as Trustee or officer, or both, of the Trust, the Registration
Statement and any amendments thereto and all instruments necessary or incidental
in connection therewith, and to file the same with the Securities and Exchange
Commission; and said attorneys shall have full power and authority to do and
perform in his name and on his behalf, in any and all capacities, every act
whatsoever requisite or necessary to be done in the premises, as fully and to
all intents and purposes as he might or could do in person, said acts of said
attorneys being hereby ratified and approved.
DATED: December 12, 1996
/s/ John Eric Helsing
----------------------------------
John Eric Helsing
<PAGE>
THE COMMERCE FUNDS
POWER OF ATTORNEY
-----------------
Know All Men by These Presents, that the undersigned, Randall D. Barron,
hereby constitutes and appoints Warren W. Weaver and W. Bruce McConnel, III, his
true and lawful attorneys, to execute in his name, place, and stead, in his
capacity as Trustee or officer, or both, of the Trust, the Registration
Statement and any amendments thereto and all instruments necessary or incidental
in connection therewith, and to file the same with the Securities and Exchange
Commission; and said attorneys shall have full power and authority to do and
perform in his name and on his behalf, in any and all capacities, every act
whatsoever requisite or necessary to be done in the premises, as fully and to
all intents and purposes as he might or could do in person, said acts of said
attorneys being hereby ratified and approved.
DATED: December 12, 1996
/s/ Randall D. Barron
----------------------------------
Randall D. Barron
<PAGE>
THE COMMERCE FUNDS
POWER OF ATTORNEY
-----------------
Know All Men by These Presents, that the undersigned, David L. Bodde,
hereby constitutes and appoints Warren W. Weaver and W. Bruce McConnel, III, his
true and lawful attorneys, to execute in his name, place, and stead, in his
capacity as Trustee or officer, or both, of the Trust, the Registration
Statement and any amendments thereto and all instruments necessary or incidental
in connection therewith, and to file the same with the Securities and Exchange
Commission; and said attorneys shall have full power and authority to do and
perform in his name and on his behalf, in any and all capacities, every act
whatsoever requisite or necessary to be done in the premises, as fully and to
all intents and purposes as he might or could do in person, said acts of said
attorneys being hereby ratified and approved.
DATED: December 12, 1996
/s/ David L. Bodde
----------------------------------
David L. Bodde
<PAGE>
THE COMMERCE FUNDS
------------------
EXHIBIT INDEX
-------------
Exhibits
--------
23(i) Opinion of Counsel.
23(j) Consent of Drinker Biddle & Reath LLP (included in
Exhibit 23(i)).
