<PAGE>
[LOGO OF COMMERCE FUNDS]
The Core Equity Fund
The Kansas Tax-Free Intermediate Bond Fund
Institutional Shares Prospectus
These securities have not been approved or disapproved by the Securities and
Exchange Commission, nor has the Securities and Exchange Commission passed upon
the accuracy or adequacy of this prospectus. Any representation to the contrary
is a criminal offense.
December 21, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Overview of Each Fund
Core Equity Fund 3
Kansas Tax-Free Intermediate Bond Fund 7
Investment Securities and Practices 12
Account Policies and Features 16
Buying Institutional Shares 16
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>
Core Equity Fund
--------------------------------------------------------------------------------
Michael E. Marks, CFA and Portfolio Manager
. Joined Commerce Bank in 1999
. Fund manager since Fund inception
. 7 years of experience
Please see the table on p. 12 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.
The Commerce Funds PAGE 3
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<PAGE>
Core Equity Fund (continued)
-------------------------------------------------------------------------
[GRAPHIC]
Core Equity Fund Past Performance
-------------------------------------------------------------------------
The Fund was recently organized and does not yet have a performance record as
an investment company registered under the Investment Company Act of 1940 (the
"Act"). The bar chart and table below provide some indication of the risks of
investing in the Fund by showing the annual returns and long-term performance
of the Personal Stock Fund (the "Common Trust Fund"), the predecessor common
trust that, in all material respects, had the same investment objective,
policies, guidelines and investment limitations as the Fund. The Common Trust
Fund was not registered under the Act and therefore was not subject to certain
investment restrictions imposed by the Act. If the Common Trust Fund had been
registered under the Act, the performance shown may have been adversely
affected. The performance is for periods before the effective date of this
Prospectus.
The table shows the Common Trust Fund's performance from calendar year to
calendar year since its inception. The table compares the Common Trust Fund's
performance over time to that of a broad-based securities market index. The
total return calculations in the bar chart and the table have been restated to
include the estimated expenses of the Institutional Class but do not include
waived fees or reimbursed expenses. Both charts assume reinvestment of
dividends and distributions. As with all mutual funds, how the Common Trust
Fund performed in the past is not a prediction of how the Fund will perform in
the future.
Year-by-Year Total Returns as of 12/31 Each Year
[GRAPH]
1990 4.67%
1991 40.50%
1992 3.82%
1993 1.24%
1994 (0.20)%
1995 38.71%
1996 22.88%
1997 29.52%
1998 28.29%
1999 14.64%
(percentage)
Best Calendar Quarter: 24.81%, 4th Quarter 1998
Worst Calendar Quarter: -14.62%, 3rd Quarter 1998
The Fund's total return for the nine-month period ended September 30, 2000 was
1.37%.
Average Annual Total Return as of 12/31/99
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
<S> <C> <C> <C>
Core Equity Fund 14.64% 26.54% 17.47%
S&P 500 Index* 21.04% 28.54% 18.17%
</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.
PAGE 4 The Commerce Funds
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<PAGE>
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[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) 0.29%
-----
Total Annual Fund Operating Expenses (2) 1.04%
Less: Fee Waiver 0.02%
-----
Net 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 Fund Operating
Expenses of not more than 1.13% of average daily net assets. The Adviser
reserves the right to discontinue the expense reimbursement at any time.
Until October 31, 2001, the Administrator has contractually agreed to waive
the administration fee to 0.13% of the average daily net assets.
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>
$104 $329
</TABLE>
continued
The Commerce Funds PAGE 5
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<PAGE>
Core Equity Fund (continued)
--------------------------------------------------------------------------------
[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.
PAGE 6 The Commerce Funds
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<PAGE>
Kansas Tax-Free Intermediate Bond Fund
--------------------------------------------------------------------------------
Brian P. Musielak, CFA and Portfolio Manager
. Joined Commerce Bank in 1995
. Fund manager since Fund inception
. 5 years of experience
Please see the table onpage 12 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: Under normal market conditions, 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.
. 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.
The Commerce Funds PAGE 7
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<PAGE>
Kansas Tax-Free Intermediate Bond Fund (continued)
-------------------------------------------------------------------------
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 Kansas 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.
PAGE 8 The Commerce Funds
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<PAGE>
-------------------------------------------------------------------------
[GRAPHIC]
Kansas Tax-Free Intermediate Bond Fund Past Performance
-------------------------------------------------------------------------
The Fund was recently organized and does not yet have a performance record as
an investment company registered under the Investment Company Act of 1940 (the
"Act"). The bar chart and table below provide some indication of the risks of
investing in the Fund by showing the annual returns and long-term performance
of the Kansas Tax-Free Fund (the "Kansas Common Trust Fund"), the predecessor
common trust fund that, in all material respects, had the same investment
objective, policies, guidelines and investment limitations as the Fund. The
Kansas Common Trust Fund was not registered under the Act and therefore was not
subject to certain investment restrictions 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 performance is for periods before the
effective date of this Prospectus.
The table shows the Kansas Common Trust Fund's performance from calendar year
to calendar year since its inception. The table compares the Kansas Common
Trust Fund's performance over time to that of a broad-based securities market
index. The total return calculations in the bar chart and the table have been
restated to include the estimated expenses of the Institutional Class but do
not include waived fees or reimbursed expenses. Both charts assume reinvestment
of dividends and distributions. As with all mutual funds, how the Kansas Common
Trust Fund performed in the past is not a prediction of how the Fund will
perform in the future.
Year-by-Year Total Returns as of 12/31 Each Year
[GRAPH]
1990 6.12%
1991 8.15%
1992 5.20%
1993 7.09%
1994 -4.95%
1995 12.27%
1996 2.69%
1997 6.07%
1998 4.69%
1999 -0.80%
(percentage)
Best Calendar Quarter: 5.16%, 1st Quarter 1995
Worst Calendar Quarter: -3.68%, 1st Quarter 1994
The Fund's total return for the nine-month period ended September 30, 2000 was
4.38%.
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 -0.80% 4.89% 4.55%
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.
continued
The Commerce FundsPAGE 9
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<PAGE>
Kansas Tax-Free Intermediate Bond 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>
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 Fund 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. Until October 31, 2001, the Administrator has
contractually agreed to waive the administration fee to 0.13% of the
average daily net assets. 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>
$66 $294
</TABLE>
PAGE 10 The Commerce Funds
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<PAGE>
-------------------------------------------------------------------------
[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.
The Commerce Funds PAGE 11
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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. The investment securities and practices that are
considered to be "principal" investment securities and practices are
discussed above under each Fund.
Key:
# =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 10(/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 10(/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 25 5(/2/)
Repurchase Agreements 33 1/3 33 1/3
Standby Commitments x a
When-Issued and Forward Commitments a 25
</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 12The Commerce Funds
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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.
The risks that are considered to be "principal" risks are discussed above
under each Fund.
-----------------------------------------------------------------------------
<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
Portfolio Turnover Risk X X
Short-Term Investing Risk X 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 Commerce Funds PAGE 13
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<PAGE>
the issuer to pay the principal of and interest on a municipal obligation are
subject to the provisions of bankruptcy, insolvency and other laws affecting
the rights and remedies of creditors, such as the Federal Bankruptcy Act, and
laws, if any, that may be enacted by Congress or state legislatures extending
the time for payment of principal or interest or imposing other constraints
upon the enforcement of such obligations. There is also the possibility that,
as a result of litigation or other conditions, the power or ability of the
issuer to pay when due the principal of or interest on a municipal obligation
may be materially affected. Municipal lease obligations and certificates of
participation are subject to the added risk that the governmental lessee will
fail to appropriate funds to enable it to meet its payment obligations under
the lease. Although these obligations may be secured by the leased equipment or
facilities, the disposition of the property in the event of non-appropriation
or foreclosure might prove difficult, time consuming and costly, and result in
a delay in recovering or the failure to fully recover a Fund's original
investment.
Non-Diversified Risk: The 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.
Portfolio Turnover Risk: 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.
Short-Term Investing Risk: 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 a
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 they would have otherwise profited from if they were pursuing
their normal investment strategies.
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
PAGE 14 The Commerce Funds
---------------
.
<PAGE>
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.
The Commerce Funds PAGE 15
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.
<PAGE>
Account Policies And Features
--------------------------------------------------------------------------------
The following information is intended to help you understand how to purchase
and redeem shares of The Commerce Funds. It will also explain the features you
can use to customize your Commerce Funds account to meet your needs.
Buying Institutional Shares
--------------------------------------------------------------------------------
How Are Institutional Shares Priced?
You pay no sales charges (loads) to invest in 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 receive your order in good form 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 16 The Commerce Funds
---------------
.
<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., National
Financial Data Services, Inc. (NFDS) and State Street Bank and Trust Company
and their subsidiaries or affiliates, the following investment minimums apply:
<TABLE>
<CAPTION>
Initial Additional
Investment Investments
<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>
Who Can Buy Institutional Shares?
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 their wills;
. 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 17
---------------
.
<PAGE>
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.
How Do I Buy Institutional Shares?
The following section describes features and gives specific instructions on how
to purchase Institutional Shares directly from The Commerce Funds. The Commerce
Funds has authorized certain dealers to purchase shares of Funds on behalf of
their clients. Some of the account features and instructions described in this
section may not be applicable to clients of these dealers.
1. Consider The Following Features To Customize Your Account:
Making Automatic Investments: The Automatic Investment feature lets you
transfer money from your financial institution account into your Fund account
automatically either on the 1st or the 15th of the month. The Automatic
Investment feature is one way to use dollar cost averaging to invest (see
below). Only accounts at U.S. financial institutions that permit automatic
withdrawals through the Automated Clearing House (ACH) are eligible. Check with
your financial institution to determine eligibility.
Using Dollar Cost Averaging: Dollar cost averaging involves investing a dollar
amount at regular intervals. Because more shares are purchased during periods
with lower share prices and fewer shares are purchased when the price is
higher, your average cost per share may be reduced. In order to be effective,
dollar cost averaging should be followed on a regular basis. You should be
aware, however, that shares bought using dollar cost averaging are made without
regard to their price on the day of investment or to market trends. In
addition, while you may find dollar cost averaging to be beneficial, it will
not prevent a loss if you ultimately redeem your shares at a price that is
lower than their purchase price. Dollar cost averaging does not assure a profit
or protect against a loss in a declining market. Since dollar cost averaging
involves investment in securities regardless of fluctuating price levels, you
should consider your financial ability to continue to purchase through periods
of low price levels. You can invest through dollar cost averaging on your own
or through the Automatic Investment feature described above.
PAGE 18 The Commerce Funds
---------------
.
<PAGE>
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 into the Service Shares of 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 an order in good form. 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. Moreover, although distributions are exempt for federal income
tax purposes, they will generally constitute taxable income for state and local
income tax purposes except that, subject to limitations that vary depending on
the state, distributions from interest paid by a state or municipal entity may
be exempt from tax in that state.
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 September 30, 2000, the Adviser and
its affiliates had approximately $10.2 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 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
and 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
and 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 and copy, 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] or by visiting
the Public Reference Room. 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>
[LOGO OF COMMERCE FUNDS]
The Core Equity Fund
The Kansas Tax-Free Intermediate Bond Fund
Service Shares Prospectus
These securities have not been approved or disapproved by the Securities and
Exchange Commission, nor has the Securities and Exchange Commission passed upon
the accuracy or adequacy of this prospectus. Any representation to the contrary
is a criminal offense.
December 21, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Overview of Each Fund
Core Equity Fund 3
Kansas Tax-Free Intermediate Bond Fund 7
Investment Securities and Practices 12
Account Policies and Features 16
Buying Service Shares 16
Redeeming Service Shares 22
General Policies 25
Business of The Commerce Funds 26
Tax Information 27
Service Providers 28
</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>
Core Equity Fund
--------------------------------------------------------------------------------
Michael E. Marks, CFA and Portfolio Manager
. Joined Commerce Bank in 1999
. Fund manager since Fund inception
. 7 years of experience
Please see the table onpage. 12 for moredetailed informationabout 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.
continued
The Commerce Funds PAGE 3
---------------
.
<PAGE>
Core Equity Fund (continued)
----------------------------------------------------------------------------
[GRAPHIC]
Core Equity Fund Past Performance
-------------------------------------------------------------------------
The Fund was recently organized and does not yet have a performance record as
an investment company registered under the Investment Company Act of 1940 (the
"Act"). The bar chart and table below provide some indication of the risks of
investing in the Fund by showing the annual returns and long-term performance
of the Personal Stock Fund (the "Common Trust Fund"), the predecessor common
trust fund that, in all material respects, had the same investment objective,
policies, guidelines and investment limitations as the Fund. The Common Trust
Fund was not registered under the Act and therefore was not subject to certain
investment restrictions imposed by the Act. If the Common Trust Fund had been
registered under the Act, the performance shown may have been adversely
affected. The performance is for periods before the effective date of this
Prospectus.
The table shows the Common Trust Fund's performance from calendar year to
calendar year since its inception. The table compares the Common Trust Fund's
performance over time to that of a broad-based securities market index. The
total return calculations in the bar chart and the table have been restated to
include the estimated expenses of the Service Class but do not include waived
fees or reimbursed expenses. Both charts assume reinvestment of dividends and
distributions. Interests in the Common Trust Fund were sold to investors
without a sales charge. The Service Shares' sales charge of 3.50% is not
included in the bar chart below. However, the sales charge is included in the
table below. If the Service Shares' sales charge of 3.50% had been included in
the total return reflected in the bar chart, performance would be reduced. As
with all mutual funds, how the Common Trust Fund performed in the past is not a
prediction of how the Fund will perform in the future.
Year-by-Year Total Returns as of 12/31 Each Year
[GRAPH]
1990 4.41%
1991 40.16%
1992 3.56%
1993 0.98%
1994 (0.45)%
1995 38.38%
1996 22.58%
1997 29.2%
1998 27.97%
1999 14.36%
(percentage)
Best Calendar Quarter: 24.74%, 4th Quarter 1998
Worst Calendar Quarter: 14.67%, 3rd Quarter 1998
The Fund's total return for the nine-month period ended September 30, 2000 was
1.18%.
Average Annual Total Return as of 12/31/99
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
<S> <C> <C> <C>
Core Equity Fund 10.35% 25.34% 16.76%
S&P 500 Index* 21.04% 28.54% 18.17%
</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.
PAGE 4 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>
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) 0.29%
-----
Total Annual Fund Operating Expenses (3) 1.29%
Less: Fee Waiver 0.02%
-----
Net 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.
Until October 31, 2001, the Administrator has contractually agreed to waive
the administration fee to 0.13% of the average daily net assets.
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 $743
</TABLE>
continued
The Commerce Funds PAGE 5
---------------
.
<PAGE>
Core Equity Fund (continued)
--------------------------------------------------------------------------------
[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.
PAGE 6 The Commerce Funds
---------------
.
<PAGE>
Kansas Tax-Free Intermediate Bond Fund
--------------------------------------------------------------------------------
Brian P. Musielak, CFA and Portfolio Manager
. Joined Commerce Bank in 1995
. Fund manager since Fund inception
. 5 years of experience
Please see the table onpage 12 for moredetailed informationabout 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: Under normal market conditions, 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.
. 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.
continued
The Commerce Funds PAGE 7
---------------
.
<PAGE>
Kansas Tax-Free Intermediate Bond Fund (continued)
----------------------------------------------------------------------------
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 Kansas 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.
PAGE 8 The Commerce Funds
---------------
.
<PAGE>
----------------------------------------------------------------------------
[GRAPHIC]
Kansas Tax-Free Intermediate Bond Fund Past Performance
-----------------------------------------------------------
The Fund was recently organized and does not yet have a performance record as
an investment company registered under the Investment Company Act of 1940 (the
"Act"). The bar chart and table below provide some indication of the risks of
investing in the Fund by showing the annual returns and long-term performance
of the Kansas Tax-Free Fund (the "Kansas Common Trust Fund"), the predecessor
common trust fund that, in all material respects, had the same investment
objective, policies, guidelines and investment limitations as the Fund. The
Kansas Common Trust Fund was not registered under the Act and therefore was not
subject to certain investment restrictions 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 performance is for periods before the
effective date of this Prospectus.
The table shows the Kansas Common Trust Fund's performance from calendar year
to calendar year since its inception. The table compares the Kansas Common
Trust Fund's performance over time to that of a broad-based securities market
index. The total return calculations in the bar chart and the table have been
restated to include the estimated expenses of the Service Class but do not
include waived fees or reimbursed expenses. Both charts assume reinvestment of
dividends and distributions. Interests in the Kansas Common Trust Fund were
sold to investors without a sales charge. The Service Shares' sales charge of
2.00% is not included in the bar chart below. However, the sales charge is
included in the table below. If the Service Shares' sales charge of 2.00% had
been included in the total return reflected in the bar chart, performance would
be reduced. As with all mutual funds, how the Common Trust Fund performed in
the past is not a prediction of how the Fund will perform in the future.
Year-by-Year Total Returns as of 12/31 Each Year
[GRAPH]
1990 5.86%
1991 7.88%
1992 4.95%
1993 6.82%
1994 -5.19%
1995 11.99%
1996 2.43%
1997 5.81%
1998 4.43%
1999 -1.05%
(percentage)
Best Calendar Quarter: 5.10%, 1st Quarter 1995
Worst Calendar Quarter: -3.74%, 1st Quarter 1994
The Fund's total return for the nine-month period ended September 30, 2000 was
4.18%.
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 -3.03% 4.21% 4.08%
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.
continued
The Commerce Funds PAGE 9
---------------
.
<PAGE>
Kansas Tax-Free Intermediate Bond 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>
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 (2) 0.55%
-----
Total Annual Fund Operating Expenses (3) 1.30%
-----
Less: Fee Waiver and Expense Reimbursement 0.40%
Net Annual Fund Operating Expenses (3) 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) "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 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. Until October 31, 2001, the Administrator has contractually agreed to
waive the administration fee to 0.13% of the average daily net assets.
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 $565
</TABLE>
PAGE 10 The Commerce Funds
---------------
.
<PAGE>
----------------------------------------------------------------------------
[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.
The Commerce Funds PAGE 11
---------------
.
<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. The investment securities and practices that are
considered to be "principal" investment securities and practices are
discussed above under each Fund.
Key:
# =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 10(/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 10(/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 25 5(/2/)
Repurchase Agreements 33 1/3 33 1/3
Standby Commitments /\x a
When-Issued and Forward Commitments a 25
</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 12 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. The
risks that are considered to be "principal" risks are discussed above under
each Fund.
-----------------------------------------------------------------------------
<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
Portfolio Turnover Risk X X
Short-Term Investing Risk X 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
The Commerce Funds PAGE 13
---------------
.
<PAGE>
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 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.
Portfolio Turnover Risk: 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.
Short-Term Investing Risk: 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 a
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 they would have otherwise profited from if they were pursuing
their normal investment strategies.
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
PAGE 14 The Commerce Funds
---------------
.
<PAGE>
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.
The Commerce Funds PAGE 15
---------------
.
<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 receive your order
in good form 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 16 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 17
---------------
.
<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>
Who Can Buy Service Shares?
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,
PAGE 18 The Commerce Funds
---------------
.
<PAGE>
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 their wills;
. 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.
How Do I Buy Service Shares?
The following section describes features and gives specific instructions on how
to purchase Service Shares directly from The Commerce Funds. The Commerce Funds
has authorized certain dealers to purchase shares of Funds on behalf of their
clients. Some of the account features and instructions described in this
section may not be applicable to clients of these dealers.
1. Consider The Following Features To Customize Your Account:
. Making Automatic Investments: The Automatic Investment feature lets you
transfer money from your financial institution account into your Fund account
automatically either on the 1st or the 15th of the month. The Automatic
Investment feature is one way to use dollar cost averaging to invest (see
below). Only accounts at U.S. financial institutions that permit automatic
withdrawals through the Automated Clearing House (ACH) are eligible. Check
with your financial institution to determine eligibility.
. Using Dollar Cost Averaging: Dollar cost averaging involves investing a
dollar amount at regular intervals. Because more shares are purchased during
periods with lower share prices and fewer shares are purchased when the price
is higher, your average cost per share may be reduced. In order to be
effective, dollar cost averaging should be followed on a regular basis. You
should be aware, however, that shares bought using dollar cost averaging are
made without regard to their price on the day of investment or to market
trends. In addition, while you may find dollar cost averaging to be
beneficial, it will not prevent a loss if you ultimately redeem your shares
at a price that is lower than their purchase price. Dollar cost averaging
does not assure a profit or protect against a loss in a declining market.
Since dollar cost averaging involves investment in securities regardless of
fluctuating price levels, you should consider your financial ability to
continue to purchase through periods of low price levels. You can invest
through dollar cost averaging on your own or through the Automatic Investment
feature described above.
The Commerce Funds PAGE 19
---------------
.
<PAGE>
. 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 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.
PAGE 20 The Commerce Funds
---------------
.
<PAGE>
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.
. 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:
-----------------------------------------------------------
[GRAPHIC]
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 21
---------------
.
<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 Service Shares of any other Commerce Fund.
Exchanges may also be made into the Service Shares of 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.
. 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.
PAGE 22 The Commerce Funds
---------------
.
<PAGE>
Receipt Of Proceeds From A Sale: Ordinarily, sale proceeds will be disbursed
the next business day following receipt by the Transfer Agent of a properly
completed order. Payment by check will ordinarily be made within seven calendar
days following redemption or you 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.
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:
-----------------------------------------------------------
[GRAPHIC]
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
The Commerce Funds PAGE 23
---------------
.
<PAGE>
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.
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 an order in good form. 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.
PAGE 24 The Commerce Funds
---------------
.
<PAGE>
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,
(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
The Commerce Funds PAGE 25
---------------
.
<PAGE>
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
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
PAGE 26 The Commerce Funds
---------------
.
<PAGE>
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).
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.
The Commerce Funds PAGE 27
---------------
.
<PAGE>
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. Moreover, although distributions are exempt for federal income
tax purposes, they will generally constitute taxable income for state and local
income tax purposes except that, subject to limitations that vary depending on
the state, distributions from interest paid by a state or municipal entity may
be exempt from tax in that state.
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 September 30, 2000 the Adviser and
its affiliates had approximately $10.2 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>
PAGE 28 The Commerce Funds
---------------
.
<PAGE>
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.
Fund Managers:
<TABLE>
<CAPTION>
Person Fund(s) Experience
<S> <C> <C>
Brian P. Musielak, CFA Kansas Tax-Free Joined Commerce Bank in 1995
and Assistant Vice Intermediate Bond Fund Fund manager since Fund inception
President 5 years of experience
Michael E. Marks, CFA Core Equity Fund Joined Commerce Bank in 1999
and 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 29
---------------
.
<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 and copy, 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]. or by visiting
the Public Reference Room. 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>
[LOGO OF COMMERCE FUNDS]
The National Tax-Free Intermediate Bond Fund
The Missouri Tax-Free Intermediate Bond Fund
Service Shares Prospectus
These securities have not been approved or disapproved by the Securities and
Exchange Commission, nor has the Securities and Exchange Commission passed upon
the accuracy or adequacy of this prospectus. Any representation to the contrary
is a criminal offense.
December 18, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Overview of Each Fund
National Tax-Free Intermediate Bond Fund 3
Missouri Tax-Free Intermediate Bond Fund
8
Investment Securities and Practices 13
Account Policies and Features 17
Buying Service Shares 17
Redeeming Service Shares 23
General Policies 25
Business of The Commerce Funds 27
Tax Information 27
Service Providers 29
</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 National Tax-Free Intermediate Bond Fund seeks current income exempt from
federal income tax as is consistent with the preservation of capital.
The Missouri Tax-Free Intermediate Bond Fund seeks current income exempt from
federal and, to the extent possible, from Missouri income taxes, as is
consistent with the preservation of capital.
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>
National Tax-Free Intermediate Bond Fund
--------------------------------------------------------------------------------
Brian P. Musielak, CFA and Portfolio Manager
. Joined Commerce Bank in 1995
. Fund manager since 1999
. 5 years of experience
Duration is a linear measure of interest rate risk. For example, a portfolio
with a duration of 2 years would lose 2% of its value if interest rates rose by
1%, or it would gain 2% if interest rates declined by 2%. A portfolio with a
duration of 4 years would be twice as volatile as a portfolio with a duration
of 2 years.
Please see the table on p.13 for more detailed information about the investment
practices of the National Tax-Free Intermediate Bond Fund and the risks
associated with those practices.
[GRAPHIC]
Investment Objective
---------------------------------------
Seeks current income exempt from federal income tax 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: Intends to invest primarily (at least 80%) in investment-
grade municipal bonds issued by or on behalf of the states, territories and
possessions of the United States, the District of Columbia and their
respective authorities, agencies, instrumentalities and political
subdivisions, the interest on which, in the opinion of bond counsel, is
exempt from regular federal income and federal alternative minimum taxes.
. Up to 20% of the Fund's net assets may be invested in municipal obligations
that are not exempt from regular federal income tax.
. Credit Quality: The market-weighted average credit rating of the Fund's
entire portfolio will be AA or better.
. Maturity Distribution: Actively manages maturities to take advantage of
changes in interest rates. The average weighted effective maturity of the
Fund's portfolio securities will be three to ten years, under normal market
conditions.
. The average effective duration of the Fund will be within 30% of the duration
of the Merrill Lynch Municipal Intermediate Index, although the Fund has no
restriction as to the maximum or minimum duration of any individual security
it holds. For example, if the duration of the Merrill Lynch Municipal
Intermediate Index were 5.4 years, the Fund's assets would have a duration of
between 3.78 years and 7.02 years.
. Strives to minimize net realized capital gains.
The Commerce Funds PAGE 3
---------------
.
<PAGE>
National Tax-Free Intermediate Bond Fund (continued)
-------------------------------------------------------------------------
[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.
Market Risk: General economic conditions and/or the activities of individual
companies may cause the value of the securities in the Fund to increase or
decrease.
Interest Rate Risk: Generally, the market value of fixed-income securities can
be expected to go up when interest rates go down and to go down when interest
rates go up.
Credit Risk: An issuer of bonds may default on its obligation to pay interest
and repay principal. Also, a bond's credit rating could be downgraded. The Fund
could lose money in either of these instances.
Management Risk: A strategy used by the Adviser may fail to produce the
intended results.
Municipal Obligation Risk: Payment on municipal obligations held by the Fund
relating to certain projects may be secured 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.
Tax Risk: A fund that invests in municipal obligations may be more adversely
impacted by changes in tax rates and policies than other funds.
An investment in the Fund is not a deposit of Commerce Bank and is not insured
or guaranteed by the FDIC or any other governmental agency.
PAGE 4 The Commerce Funds
---------------
.
<PAGE>
-------------------------------------------------------------------------
[GRAPHIC]
National Tax-Free Intermediate Bond Fund Past Performance
-----------------------------------------------------------
Service Shares of the Fund have less than one calendar year's performance. For
this reason, the performance information shown below is for another class of
shares (Institutional Shares) that is not offered in this Prospectus but would
have similar annual returns because both classes of shares will be invested in
the same portfolio of securities. Annual returns will differ only to the extent
that Service Shares have a 0.25% distribution (12b-1) fee and, unlike
Institutional Shares, are subject to a maximum sales charge of 2.00%.
The chart and table below provide some indication of the risks of investing in
the Fund by showing the annual returns and long-term performance of the
Institutional Shares. The bar chart shows the Institutional Shares performance
from calendar year to year since its inception. The table compares the
Institutional Shares' 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 the Fund performed in the past is not a
prediction of how it will perform in the future. The performance of the
Institutional Shares reflects expense limitations in effect. If expense
limitations were not in place, the performance of the Institutional Shares
would have been reduced. The Service Shares' sales charge of 2.00% is not
included in the bar chart below. However, the sales charge is included in the
table below. Institutional Shares are not subject to a sales charge. If the
Service Shares' sales charge of 2.00% had been included in the average annual
total return reflected in the bar chart, performance would have been reduced.
Year-by-Year Total Returns as of 12/31 Each Year (Institutional Shares)
[GRAPH]
1999 -1.12%
1998 5.56%
1997 6.54%
1996 2.97%
(percentage)
Best Calendar Quarter: 2.88%, 3rd Quarter 1998
Worst Calendar Quarter: -1.68%, 2nd Quarter 1999
The Fund's total return of the Institutional Shares for the nine-month period
ended September 30, 2000 was 5.62%.
Average Annual Total Return as of 12/31/99
<TABLE>
<CAPTION>
Since Inception
1 Year 3 Years (2/21/95)
<S> <C> <C> <C>
National Tax-Free
Intermediate Bond
Fund (Institutional
Shares) -3.10% 2.90% 4.00%
Merrill Lynch
Municipal
Intermediate Index* -0.01% 4.60% 5.84%
</TABLE>
* The Merrill Lynch Municipal Intermediate Index is comprised of investment
grade municipal securities ranging from 1 to 12 years in maturity. The Index
figures do not reflect any fees or expenses.
The Commerce Funds PAGE 5
---------------
.
<PAGE>
National Tax-Free Intermediate Bond 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>
National 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 (2) 0.55%
-----
Total Annual Fund Operating Expenses (3) 1.30%
Less: Fee Waiver and Expense Reimbursement 0.35%
-----
Net Annual Fund Operating Expenses (3) 0.95%
=====
</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 $1,000,00 or more.
(2) "Other Expenses" 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 Adviser has contractually agreed to reduce or limit the Total Annual
Fund Operating Expenses, excluding interest, taxes and extraordinary
expenses, at least until October 31, 2001, to 0.95% of the Fund's average
daily net assets. The Total Annual Fund Operating Expenses and Net Annual
Fund Operating Expenses of the Fund are estimated based on expenses
expected to be incurred by the Fund in the current fiscal year. Until
October 31, 2001, the Administrator has contractually agreed to waive the
administration fee to 0.13% of the average daily net assets.
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>
$295 $570
</TABLE>
PAGE 6 The Commerce Funds
---------------
.
<PAGE>
-------------------------------------------------------------------------
[GRAPHIC]
National Tax-Free Intermediate Bond Fund(a) Financial Highlights
-----------------------------------------------------------
The following table describes the Fund's performance for Institutional Shares
since its inception. The total return figures show how much you would have
earned (or lost) on an investment in the Fund during each time period, assuming
you had reinvested all dividends and distributions. Some of the information
reflects financial results for a single Fund share. The information for the
years ended October 31, 1995 through 1999 has been audited by KPMG LLP, the
Funds' independent auditors. Their report, along with the Fund's financial
statements, is incorporated by reference in the Fund's Statement of Additional
Information (available upon request). The information for the six-month period
ended April 30, 2000 is unaudited. The Fund's financial statements for the six-
month period are also incorporated by reference into the Statement of
Additional Information.
<TABLE>
<CAPTION>
10/31/99 Year Ended 10/31 2/21/95(b)
through ----------------------------------- through
Institutional Shares 4/30/00(f) 1999 1998 1997 1996 10/31/95
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $ 18.24 $ 19.33 $ 18.85 $ 18.46 $ 18.54 $ 18.00
Income from investment
operations(c):
Net investment income 0.39 0.74 0.74 0.72 0.73 0.54
Net realized and
unrealized gain (loss) (0.03) (0.93) 0.48 0.39 (0.07) 0.54
Distributions to
shareholders:
From net investment
income (0.39) (0.74) (0.74) (0.72) (0.73) (0.54)
From net realized gains (0.01) (0.16) -- -- (0.01) --
Net asset value, end of
period $ 18.20 $ 18.24 $ 19.33 $ 18.85 $ 18.46 $ 18.54
Total return(d) 1.96% (1.08)% 6.59% 6.16% 3.60% 6.06%
Net assets at end of
period (in 000's) $40,624 $40,243 $33,528 $25,281 $17,613 $10,721
Ratio of net expenses to
average net assets 0.70%(e) 0.70% 0.74% 0.85% 0.85% 0.85%(e)
Ratio of net investment
income to average
net assets 4.23%(e) 3.90% 3.87% 3.89% 3.93% 4.19%(e)
Ratios assuming no
voluntary waiver of
fees or expense
limitations:
Ratio of expenses to
average net assets 0.94%(e) 0.93% 1.04% 1.15% 1.55% 1.90%(e)
Ratio of net investment
income to average net
assets 3.99%(e) 3.67% 3.57% 3.59% 3.23% 3.14%(e)
Portfolio turnover rate 21% 35% 41% 6% 34% 19%
</TABLE>
(a) Formerly the National Tax-Free Bond Fund.
(b) Commencement of operations.
(c) Includes the balancing effect of calculating per share amounts.
(d) Assumes investment at the beginning of the period, reinvestment of all
dividends and distributions, and a complete redemption of the investment at
the net asset value at the end of the period.
(e) Annualized.
(f) Unaudited.
The Commerce Funds PAGE 7
---------------
.
<PAGE>
Missouri Tax-Free Intermediate Bond Fund
-------------------------------------------------------------------------
Brian P. Musielak, CFA and Portfolio Manager
. Joined Commerce Bank in 1995
. Fund manager since 1999
. 5 years of experience
Please see the table on p.13 for more detailed information about the investment
practices of the Missouri 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
Missouri 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 Missouri and
its political subdivisions, as well as other governmental issuers.
. Seeks to maximize the proportion of its dividends that are exempt from both
federal and Missouri income tax.
. Strives to minimize net realized capital gains.
. Maturity Distribution: Under normal market conditions, the average weighted
maturity of the Fund's portfolio securities will be three to ten years.
. 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 AA or better.
[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.
Market Risk: General economic conditions and/or the activities of individual
companies may cause the value of the securities in the Fund to increase or
decrease.
Interest Rate Risk: Generally, the market value of fixed-income securities can
be expected to go up when interest rates go down and to go down when interest
rates go up. Longer-term bonds and zero coupon bonds are usually more sensitive
to interest rate changes than shorter-term bonds. In general, the longer the
average maturity of bonds in the Fund, the more the Fund's share price will go
up or down in response to interest rate changes.
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 Missouri
obligations. The actual payment of principal and interest on these obligations
is dependent on the Missouri General Assembly allotting money each fiscal year
for these payments. You should also be aware that provisions of the Missouri
Constitution and other laws could result in certain adverse consequences
affecting Missouri obligations.
Non-Diversified Risk: The Missouri Tax-Free Intermediate Bond Fund is non-
diversified. Non-diversified funds typically hold fewer securities than
diversified funds do. Consequently, the change in value of any one security may
affect the overall value of a non-diversified portfolio more than it would a
diversified portfolio. In addition, a non-diversified portfolio may be more
susceptible to economic, political and regulatory developments than a
diversified investment portfolio with similar objectives. When a Fund's assets
are concentrated in obligations payable from revenues of similar projects
issued by issuers located in the same state, or in industrial development
bonds, the Fund will be subject to the particular risks (including legal and
economic conditions) relating to such securities to a greater extent than if
its assets were not so concentrated.
Tax Risk: A fund that invests in municipal obligations may be more adversely
impacted by changes in tax rates and policies than other funds. Dividends
derived from interest on obligations of other governmental issuers are exempt
from federal income tax but may be subject to Missouri income tax.
Municipal Obligation Risk: Payment on municipal obligations held by the Fund
relating to certain projects may be secured 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>
Missouri Tax-Free Intermediate Bond Fund (continued)
-------------------------------------------------------------------------
[GRAPHIC]
Missouri Tax-Free Intermediate Bond Fund Past Performance
-----------------------------------------------------------
Service Shares of the Fund have less than one calendar year's performance. For
this reason, the performance information shown below is for another class of
shares (Institutional Shares) that is not offered in this Prospectus but would
have similar annual returns because both classes of shares will be invested in
the same portfolio of securities. Annual returns will differ only to the extent
that Service Shares have a 0.25% distribution (12b-1) fee and, unlike
Institutional Shares, are subject to a maximum sales charge of 2.00%.
The chart and table below provide some indication of the risks of investing in
the Fund by showing the annual returns and long-term performance of the
Institutional Shares. The bar chart shows the Institutional Shares performance
from calendar year to year since its inception. The table compares the
Institutional Shares' 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 the Fund performed in the past is not a
prediction of how it will perform in the future. The performance of the
Institutional Shares reflects expense limitations in effect. If expense
limitations were not in place, the performance of the Institutional Shares
would have been reduced. The Service Shares' sales charge of 2.00% is not
included in the bar chart below. However, the sales charge is included in the
table below. Institutional Shares are not subject to a sales charge. If the
Service Shares' sales charge of 2.00% had been included in the average annual
total return reflected in the bar chart, performance would have been reduced.
Year-by-Year Total Returns as of 12/31 Each Year (Institutional Shares)
[GRAPH]
1999 -1.00%
1998 5.41%
1997 6.84%
1996 2.67%
(percentage)
Best Calendar Quarter: 2.70%, 3rd Quarter 1998
Worst Calendar Quarter: -1.43%, 2nd Quarter 1999
The Fund's total return of the Institutional Shares for the nine-month period
ended September 30, 2000 was 5.58%.
Average Annual Total Return as of 12/31/99
<TABLE>
<CAPTION>
Since Inception
1 Year 3 Years (2/21/95)
<S> <C> <C> <C>
Missouri Tax-Free
Intermediate Bond
Fund (Institutional
Shares) -2.99% 3.01% 3.90%
Merrill Lynch
Municipal
Intermediate Index* -0.01% 4.60% 5.84%
</TABLE>
* The Merrill Lynch Municipal Intermediate Index is comprised of investment
grade municipal securities ranging from 1 to 12 years in maturity. The Index
figures do not reflect any fees or expenses.
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>
Missouri 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 (2) 0.55%
-----
Total Annual Fund Operating Expenses (3) 1.30%
Less: Fee Waiver and Expense Reimbursements 0.40%
-----
Net Annual Fund Operating Expenses (3) 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) "Other Expenses" 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 Adviser has contractually agreed to reduce or limit the Total Annual
Fund Operating Expenses, excluding interest, taxes and extraordinary
expenses, at least until October 31, 2001, to 0.90% of the Fund's average
daily net assets. The Total Annual Fund Operating Expenses and Net Annual
Fund Operating Expenses are estimated based on fees and expenses expected
to be incurred by the Fund in the current fiscal year. Until October 31,
2001, the Administrator has contractually agreed to waive the
administration fee to 0.13% of the average daily net assets.
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 $565
</TABLE>
continued
The Commerce Funds PAGE 11
---------------
.
<PAGE>
Missouri Tax-Free Intermediate Bond Fund
------------------------------------------------------------------
[GRAPHIC]
Missouri Tax-Free Intermediate Bond Fund(a) Financial Highlights
-----------------------------------------------------------
The following table describes the Fund's performance for Institutional Shares
for the periods indicated. The total return figures show how much you would
have earned (or lost) on an investment in the Fund during each time period,
assuming you had reinvested all dividends and distributions. Some of the
information reflects financial results for a single Fund share. The information
for the years ended October 31, 1995 through 1999 has been audited by KPMG LLP,
the Funds' independent auditors. Their report, along with the Fund's financial
statements, is incorporated by reference in the Fund's Statement of Additional
Information (available upon request). The information for the six-month period
ended April 30, 2000 is unaudited. The Fund's financial statements for the six-
month period are also incorporated by reference into the Statement of
Additional Information.
<TABLE>
<CAPTION>
10/31/99 Year Ended 10/31 2/21/95(b)
through ----------------------------------- through
Institutional Shares 4/30/00(f) 1999 1998 1997 1996 10/31/95
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $ 18.07 $ 19.07 $ 18.61 $ 18.26 $ 18.40 $18.00
Income from investment
operations(c):
Net investment income 0.39 0.73 0.74 0.76 0.76 0.57
Net realized and
unrealized gain (loss) (0.05) (0.90) 0.47 0.37 (0.14) 0.40
Distributions to
shareholders:
From net investment
income (0.39) (0.73) (0.74) (0.76) (0.76) (0.57)
From net realized gains -- (0.10) (0.01) (0.02) -- --
Net asset value, end of
period $ 18.02 $ 18.07 $ 19.07 $ 18.61 $ 18.26 $18.40
Total return(d) 1.89% (0.95)% 6.65% 6.31% 3.43% 5.45%
Net assets at end of
period (in 000s) $37,246 $42,641 $34,051 $24,434 $17,034 $8,889
Ratio of net expenses to
average net assets 0.65%(e) 0.65% 0.65% 0.65% 0.65% 0.65%(e)
Ratio of net investment
income to average net
assets 4.29%(e) 3.91% 3.93% 4.14% 4.14% 4.41%(e)
Ratios assuming no
voluntary waiver of
fees or expense
limitations:
Ratio of expenses to
average net assets 0.94%(e) 0.92% 1.03% 1.21% 1.58% 2.12%(e)
Ratio of net investment
income to average net
assets 4.00%(e) 3.64% 3.55% 3.58% 3.21% 2.94%(e)
Portfolio turnover rate 17% 21% 34% 13% 49% 52%
</TABLE>
(a) Formerly the Missouri Tax-Free Bond Fund.
(b) Commencement of operations.
(c) Includes the balancing effect of calculating per share amounts.
(d) Assumes investment at the beginning of the period, reinvestment of all
dividends and distributions and a complete redemption of the investment at
the net asset value at the end of the period.
(e) Annualized.
(f) Unaudited.
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. The investment securities and practices that are
considered to be "principal" investment securities and practices are
discussed above under each Fund.
Key:
# =percent of total assets the Fund may invest
a=permitted
/\x=not permitted
-----------------------------------------------------------------------------
<TABLE>
<CAPTION>
National Tax-Free Missouri Tax-Free
Investment Securities
<S> <C> <C>
American Depository Receipts /\x /\x
Asset-Backed Securities /\x /\x
Convertible Securities /\x /\x
Corporate Debt Obligations /\x /\x
Emerging Market Securities /\x /\x
Equity Securities /\x /\x
European Depository Receipts /\x /\x
Foreign Equity Securities /\x /\x
Foreign Debt and Foreign Government
Securities /\x /\x
Hybrids /\x /\x
Mortgage-Related Securities /\x /\x
Municipal Obligations a 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 a a
Mortgage Dollar Rolls /\x /\x
Options on Foreign Currencies /\x /\x
Options on Securities and Securities
Indices 5(/1/) 5(/1/)
Repurchase Agreements 33 1/3 33 1/3
Standby Commitments a a
When-Issued and Forward Commitments 25 25
</TABLE>
-----------------------------------------------------------------------------
(1) The National Tax-Free Intermediate Bond and Missouri Tax-Free
Intermediate Bond Funds may not purchase put and call options or write
covered call and put options on securities related to foreign
currencies.
The Commerce Funds PAGE 13
---------------
.
<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. The risks that are considered to be "principal" risks are
discussed above under each Fund.
-----------------------------------------------------------------------------
<TABLE>
<CAPTION>
National Missouri
Tax-Free Tax-Free
Risks Associated with
These Investments
<S> <C> <C>
Credit Risk X X
Interest Rate Risk X X
Investment Risk X X
Management Risk X X
Market Risk X X
Municipal Obligation Risk X X
Non-Diversified Risk X
Portfolio Turnover Risk X X
Short-Term Investing Risk X X
State-Specific Risk X
Tax Risk X 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 companies whose securities are
held by a Fund may prove incorrect, resulting in losses or poor performance,
even under favorable market and interest rate conditions.
Market Risk: General economic conditions and/or the activities of individual
issuers 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 judgment. Moreover, collection of the proceeds from the
PAGE 14 The Commerce Funds
---------------
.
<PAGE>
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 extending the time for payment of
principal or interest or imposing other constraints upon the enforcement of
such obligations. There is also the possibility that, as a result of
litigation or other conditions, the power or ability of the issuer to pay
when due the principal of or interest on a municipal obligation may be
materially affected. Municipal lease obligations and certificates of
participation are subject to the added risk that the governmental lessee
will fail to appropriate funds to enable it to meet its payment obligations
under the lease. Although these obligations may be secured by the leased
equipment or facilities, the disposition of the property in the event of
non-appropriation or foreclosure might prove difficult, time consuming and
costly, and result in a delay in recovering or the failure to fully recover
a Fund's original investment.
Non-Diversified Risk: The Missouri Tax-Free Intermediate Bond Fund is non-
diversified. Non-diversified funds typically hold fewer securities than
diversified funds do. Consequently, the change in value of any one security
may affect the overall value of a non-diversified portfolio more than it
would a diversified portfolio. In addition, a non-diversified portfolio may
be more susceptible to economic, political and regulatory developments than
a diversified investment portfolio with similar objectives. When a Fund's
assets are concentrated in obligations payable from revenues of similar
projects issued by issuers located in the same state, or in industrial
development bonds, the Fund will be subject to the particular risks
(including legal and economic conditions) relating to such securities to a
greater extent than if its assets were not so concentrated.
Portfolio Turnover Risk: 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.
Short-Term Investing Risk: 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 a 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 they would have
otherwise profited from if they were pursuing their normal investment
strategies.
The Commerce Funds PAGE 15
---------------
.
<PAGE>
State-Specific Risk: The Missouri Tax-Free Intermediate Bond Fund invests its
assets predominantly in Missouri obligations. The actual payment of principal
and interest on these obligations is dependent on the General Assembly
allotting money each fiscal year for these payments. You should also be aware
that provisions of the State Constitution and other laws could result in
certain adverse consequences affecting these obligations. Increased
urbanization and continued decline in defense appropriations by the U.S.
Congress have had and will continue to have an adverse impact on the State of
Missouri in the forseeable future.
Tax Risk: A fund that invests in municipal obligations may be more adversely
impacted by changes in tax rates and policies than other funds. Interest income
on municipal obligations is normally not subject to regular federal income tax.
Any proposed or actual changes in federal income tax rates or exempt statutes
that apply to interest income, therefore, can significantly affect the demand
for and supply, liquidity and marketability of municipal obligations, which
could in turn affect a fund's ability to buy and sell municipal obligations at
favorable yield and price levels.
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 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 receive your order
in good form 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>
Sales Charge: The maximum front-end sales charge is 2.00% for each Fund and may
be less based on the amount you invest, as shown in the following chart:
<TABLE>
<CAPTION>
Maximum Dealer's
As a % of As a % of Reallowance as a %
offering price net asset value of offering price
Amount of Purchase per share per share per share*
<S> <C> <C> <C>
Less than $500,000 2.00 2.04 1.80
$500,000 but less than
$1,000,000 1.00 1.01 0.90
$1,000,000 or more 0.00** 0.00** 1.00***
</TABLE>
* Dealer's reallowance may be changed periodically.
** There is no initial sales charge on purchases of $1,000,000 or more of
Service Shares; however, a contingent deferred sales charge (CDSC) of 1.00%
will be imposed on the lesser of the POP or the NAV of the shares on the
redemption date for shares redeemed within 18 months after purchase.
*** The Distributor may pay placement fees to dealers of up to 1.00% of the
POP on Service Shares purchases of $1,000,000 or more.
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.
PAGE 18 The Commerce Funds
---------------
.
<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>
Who Can Buy Service Shares?
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.
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.
The Commerce Funds PAGE 19
---------------
.
<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
$490,000 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, you will pay a reduced sales charge of 1.00% 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 $500,000 in one or more Fund of The Commerce Funds within a
period of 13 months and under the terms and conditions of the Letter of
Intent. Service Shares you buy under a Letter of Intent will be eligible for
the same sales charge discount that would have been available had all of your
Service Shares been purchased at once. To
PAGE 20 The Commerce Funds
---------------
.
<PAGE>
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.
. 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.
The Commerce Funds PAGE 21
---------------
.
<PAGE>
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 into the Service Shares of 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.
. 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
PAGE 22 The Commerce Funds
---------------
.
<PAGE>
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.
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
The Commerce Funds PAGE 23
---------------
.
<PAGE>
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 Fund must have your financial institution account
information already on file. Proceeds will be wired directly to this
designated account.
By Telephone--Requesting Proceeds Be Sent By Check:
-----------------------------------------------------------
[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.
PAGE 24 The Commerce Funds
---------------
.
<PAGE>
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 an order in good form. 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,
(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
The Commerce Funds PAGE 25
---------------
.
<PAGE>
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 Net Realized
Fund Dividends* Capital Gains**
<S> <C> <C>
National Tax-Free Intermediate Bond x x
Missouri 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.
**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
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.
PAGE 26 The Commerce Funds
---------------
.
<PAGE>
Business Of The Commerce Funds
--------------------------------------------------------------------------------
Shareholder Servicing
The Commerce Funds have adopted a distribution plan under Rule 12b-1 that
permits each Fund to pay up to 0.25% annually of their average daily net assets
attributable to the Service 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).
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.
The Commerce Funds PAGE 27
---------------
.
<PAGE>
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 National Tax-Free Intermediate Bond and Missouri Tax-
Free Intermediate Bond Funds (the "Tax-Free Intermediate Bond Funds")
The Tax-Free Intermediate Bond Funds' distributions will generally constitute
tax-exempt income for shareholders for federal income tax purposes. It is
possible, depending on the Funds' investments, that a portion of the Funds'
distributions could be taxable to shareholders as ordinary income or capital
gains. Moreover, although distributions are exempt for federal income tax
purposes, they will generally constitute taxable income for state and local
income tax purposes except that, subject to limitations that vary depending on
the state, distributions from interest paid by a state or municipal entity may
be exempt from tax in that state.
Missouri Taxes: Resident individuals, trusts and estates resident in Missouri,
and corporations within Missouri tax jurisdiction will not be subject to
Missouri income tax on dividends from the Missouri Tax-Free Intermediate Bond
Fund that are derived from interest on obligations of the State of Missouri and
its political subdivisions (to the extent
PAGE 28 The Commerce Funds
---------------
.
<PAGE>
such interest is exempt from federal income tax) or on obligations issued by
the U.S. Government, the Government of Puerto Rico, the Virgin Islands or Guam.
Resident individuals, trusts and estates and corporations generally will be
subject to Missouri income tax on other dividends received from the Fund,
including dividends derived from interest on obligations of other issuers and
all long-term and short-term capital gains.
Service Providers
--------------------------------------------------------------------------------
Investment Adviser: Commerce Bank, N.A. (the "Adviser")
Commerce Bank, N.A. serves as Adviser for the Funds, selecting investments and
making purchases and sale orders for securities in each Fund's portfolio.
Commerce Bank, with offices at 8000 Forsyth Boulevard, St. Louis, Missouri
63105 and 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 September 30, 2000 the Adviser and
its affiliates had approximately $10.2 billion in assets under management.
The Adviser receives a fee for the advisory services provided and expenses
assumed under the Advisory Agreement. During the last fiscal year, the Funds
paid the Adviser the following fees, calculated as a percentage of the Funds'
average daily net assets:
<TABLE>
<CAPTION>
Actual Rate
Contractual for the Fiscal Year
Rate % Ended 10/31/99
<S> <C> <C>
National Tax-Free Intermediate Bond Fund 0.50% 0.35%
Missouri Tax-Free Intermediate Bond Fund 0.50% 0.30%
</TABLE>
Any difference between the contractual fees and the actual fees paid by the
Funds reflects that the Adviser did not charge the full amount of the fees to
which it would have been entitled. The Adviser may discontinue or modify its
voluntary waiver in the future at its discretion.
Fund Manager:
<TABLE>
<CAPTION>
Person Fund(s) Experience
<S> <C> <C>
Brian P. Musielak, CFA National Tax-Free and Joined Commerce Bank in 1995
and Assistant Vice Missouri Tax-Free Fund manager since 1999
President Intermediate Bond Funds 5 years of experience
</TABLE>
The Commerce Funds PAGE 29
---------------
.
<PAGE>
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 30 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 and copy, 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]. or by visiting
the Public Reference Room. 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. To make shareholder inquiries or to receive free copies
of the SAI and the annual and semi-annual reports, 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)
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THE COMMERCE FUNDS
STATEMENT OF ADDITIONAL INFORMATION
INSTITUTIONAL SHARES
SERVICE SHARES
Core Equity Fund
Kansas Tax-Free Intermediate Bond Fund
December 21, 2000
This Statement of Additional Information is not a prospectus. It is
meant to be read in conjunction with The Commerce Funds' Prospectuses dated
December 21, 2000. 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.
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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
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INDEPENDENT AUDITORS.......................................................42
COUNSEL....................................................................42
ADDITIONAL INFORMATION ON PERFORMANCE......................................42
MISCELLANEOUS..............................................................48
APPENDIX A.................................................................A-1
APPENDIX B.................................................................B-1
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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,
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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 nationally-
recognized statistical rating organization ("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 equity 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.
Investments in foreign debt securities and in securities of foreign
governments involve the risk that foreign governments may default on their
obligations, may not respect the integrity of such debt, may attempt to
renegotiate the debt at a lower rate and may not honor investments by U.S.
entities or citizens.
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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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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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 from 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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default. If the trustee could not accelerate lease obligations upon default, the
trustee would only be able to enforce lease payments as they became due. In the
event of a default or failure of appropriation, it is unlikely that the trustee
would be able to obtain an acceptable substitute source of payment. Certificates
of participation are generally subject to redemption by the issuing municipal
entity under specified circumstances. If a specified event occurs, a certificate
is callable at par either at any interest payment date or, in some cases, at any
time. As a result, certificates of participation are not as liquid or marketable
as other types of Municipal Obligations.
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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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) 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 and Fitch, 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.
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<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 2,654,052, which is a .6% increase from July, 1998. In comparison, the
growth in population in the U.S. was .9%.
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 4.8% in 1999 to $25,049. Per capita income stands at about 95% of
the national median.
The State's average monthly unemployment rate dropped to 3.3% in 1999 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
ratings for the most recent KDOT bonds are rated Aa2, AA+ and AA. 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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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.
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.
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 2,654,052 in July, 1999.
The performance of the Kansas economy remained steady in 1999 and is
expected to expand in 2000, but at a slower rate compared to prior years. 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 4.8 percent rate during 1999. This
compared to 5.6 percent in 1998. Employment by place of residence grew by 2.4
percent in 1999 compared to 3.3 percent in 1998, while employment by place of
work increased by 3.0 percent in 1999. The state unemployment rate of 3.3
percent for 1999 was down from 3.8 percent in 1998.
The Governor is statutorily mandated to present spending recommendations to
the 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.
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.
Standard & Poor's recently affirmed 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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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 unfavorable future
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 Funds 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. The
limitations designated as fundamental 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 asset coverage of at least 300% for all such
borrowings. No Fund will purchase securities while its aggregate
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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 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).
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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.
7. Purchase securities of other investment companies except (a) purchases
which are part of a plan of merger, consolidation, reorganization, or
acquisition, and (b) other purchases of the securities of investment companies
only if the purchases are of open-ended, no-load funds, are conditioned on the
waiver of management fees and further, if immediately thereafter (i) not more
than 3% of the total outstanding voting stock of such company is owned by the
Fund, (ii) not more than 5% of the Fund's total assets, taken at market value,
would be invested in the securities of any one investment company, (iii) not
more than 10% of the Fund's total assets, taken at market value, would be
invested in the aggregate in securities of investment companies as a group, and
(iv) the Fund, together with other investment companies having the same
investment adviser and companies controlled by such companies, owns not more
than 10% of the total outstanding stock of any one investment company.
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.
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<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;
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<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 a profit-sharing plan
(including a 401(k) option) available (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 an
individual retirement account (the "regular IRA") available 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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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 to share owners
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 recommend 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 Fund is authorized to issue 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 capital gains, if any, which are
made with respect to such series and which are attributable to such shares. Upon
redemption of shares, such shareowner shall be paid solely out of the funds and
property of such series of The Commerce Funds.
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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<PAGE>
MANAGEMENT OF THE COMMERCE FUNDS
Trustees and Officers of the Trust
The Board of Trustees of the Trust is responsible for the management
of the business and affairs of the Trust. The Trustees and executive officers of
the Trust and their principal occupations for the last five years are set forth
below. Each Trustee has an address c/o The Commerce Funds, 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 to 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
32 Old Slip Co., November 1993 to July 1995. Formerly, Manager, Audit
New York, NY 10005 Division, Arthur Andersen, September 1986 to November 1993.
DOB: 11/7/64
William Schuetter Vice President Vice President Commerce Bank, N.A., 1998 to Present. Vice
Commerce Bank, N.A. President of Fund Accounting, UMB Bank, from 1996 to 1998.
1000 Walnut Street Assistant Vice President, Manager of Income Processing, UMB
Kansas City, MO 64106 Bank from 1993 to 1996.
DOB: 4/17/60
Larry Franklin Vice President Vice President, Commerce Bank, N.A., 1993 to present. Business
Commerce Bank, N.A. Manager, The Commerce Funds, 1993 to 1996; Administrative
1000 Walnut Street Director 1996 to 1998; and Managing Director, 1998 to present.
Kansas City, MO 64106
DOB: 2/21/47
Peter Fortner Assistant Treasurer Vice President, Goldman, Sachs & Co., July 2000 to present.
Goldman, Sachs & Co. Vice President/Accounting Manager for Prudential Investment
32 Old Slip Fund Management LLC in their mutual fund administration group
New York, NY 10005 from 1985 to 2000.
DOB: 1/25/58
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>
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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>
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 to 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
32 Old Slip since December 1997. Assistant General Counsel since November
New York, NY 10005 1993 and Vice President of Goldman Sachs since May 1994.
DOB: 6/21/65 Formerly an Associate of Shereff, Friedman, Hoffman & Goodman.
Diana E. McCarthy Assistant Secretary Associate with the law firm Drinker Biddle & Reath LLP,
Drinker Biddle & Philadelphia, Pennsylvania.
Reath LLP
One Logan Square
18th & Cherry Streets
Philadelphia, PA
19103-6996
DOB: 7/5/51
</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.
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.
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:
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<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 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:
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<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
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<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 ("GSAM") 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
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<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 as Distributor under the Distribution Agreement
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
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<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
KPMG LLP, 99 High Street, Boston, Massachusetts 02110 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 and Ms. McCarthy, Assistant Secretary of The
Commerce Funds is an associate), 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.
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<PAGE>
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:
-43-
<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 average annual total return shown below for the Core Equity Fund
and the Kansas Tax-Free Intermediate Bond Fund is that of the Predecessor Core
Equity Fund and the Predecessor Kansas Fund. The Predecessor Funds' performance
has been restated to reflect the estimated fees (excluding waivers and
reimbursements) for the Funds for periods shown.
-44-
<PAGE>
Average Annual Returns Assuming Maximum Sales Load
and without Fee Waivers and Reimbursements.
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
------ ------- --------
<S> <C> <C> <C>
Core Equity Fund
Institutional Shares 14.64% 26.54% 17.47%
Service Shares 10.35% 25.34% 16.76%
Kansas Tax-Free Intermediate Bond Fund
Institutional Shares (0.80)% 4.89% 4.55%
Service Shares (3.03)% 4.21% 4.08%
Average Annual Returns Assuming No Sales Load
and without Fee Waivers and Reimbursements
1 Year 5 Years 10 Years
------ ------- --------
Core Equity Fund
Institutional Shares 14.64% 26.54% 17.47%
Service Shares 14.36% 26.23% 17.18%
Kansas Tax-Free Intermediate Bond Fund
Institutional Shares (0.80)% 4.89% 4.55%
Service Shares (1.05)% 4.63% 4.29%
</TABLE>
The Funds may also from time to time include in advertisements, sales
literature, communications to shareowners and other materials ("Literature") a
total return figure in order to compare more accurately its performance with
other measures of investment return. For example, in comparing a Fund's total
return with data published by Lipper Analytical Services, Inc., CDA Investment
Technologies, Inc. or Weisenberger Investment Company Service, or with the
performance of an index, the Fund may calculate 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
-45-
<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.
-46-
<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 honor punctually senior financial obligations and contracts. These
obligations have an original maturity not exceeding 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, and thus places greater emphasis on the
liquidity necessary to meet financial commitments in a timely manner. The
following summarizes the rating categories used by Fitch for short-term
obligations:
"F1" - Securities possess the highest credit quality. This designation
indicates the strongest capacity for timely payment of financial commitments and
may have an added "+" to denote any exceptionally strong credit feature.
"F2" - Securities possess good credit quality. This designation
indicates a satisfactory capacity for timely payment of financial commitments,
but the margin of safety is not as great as in the case of the higher ratings.
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.
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" - An obligation rated "C" is currently highly vulnerable to
nonpayment. 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 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 on the completion of
some act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. The parenthetical rating denotes probable credit stature upon
completion of construction or elimination of the basis of the 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 long-term ratings used by Fitch:
"AAA" - Securities 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" - Securities 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" - Securities 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" - Securities 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" - Securities are considered 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" - Securities 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" - Securities 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" - Securities 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.
Notes to Long-Term and Short-Term Ratings:
-----------------------------------------
- To provide more detailed indications of credit quality, the Fitch
ratings from and including "AA" to "CCC" and "F1" 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.
- RatingWatch: Ratings are placed on RatingWatch 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. RatingWatch is typically resolved
over a relatively short period.
A RatingOutlook indicates the direction a rating is likely to move
over a one to two-year period. Outlooks may be positive, stable or negative. A
positive or negative RatingOutlook does not imply a rating change is inevitable.
Similarly, companies whose outlooks are "stable" could be upgraded or down-
graded before an outlook moves to positive or negative if circumstances warrant
such an action. Occasionally, Fitch may be unable to identify the fundamental
trend. In these cases, the RatingOutlook may be described as evolving.
A-8
<PAGE>
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 superior quality.
Excellent protection afforded by established cash flows, highly reliable
liquidity support or demonstrated broad-based access to the market for
refinancing.
"MIG-2"/"VMIG-2" - This designation denotes strong credit quality.
Margins of protection are ample, although not so large as in the preceding
group.
"MIG-3"/"VMIG-3" - This designation denotes acceptable credit.
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-grade credit quality. Debt
instruments in this category lack sufficient margins of protection.
Fitch uses the short-term ratings described under Commercial Paper
Ratings for municipal notes.
A-10
<PAGE>
APPENDIX B
The Kansas Tax-Free Intermediate Bond and Core Equity 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 and 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 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 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
STATEMENT OF ADDITIONAL INFORMATION
SERVICE SHARES
National Tax-Free Intermediate Bond Fund
Missouri Tax-Free Intermediate Bond Fund
December 18, 2000
This Statement of Additional Information is not a prospectus. It is
meant to be read in conjunction with The Commerce Funds' Prospectuses dated
December 18, 2000. Because this Statement of Additional Information is not
itself a prospectus, no investment in the Funds should be made solely upon the
information contained herein. Copies of the Prospectuses may be obtained by
calling 1-800-995-6365. The financial statements and report thereon by the
Funds' independent accountants included in the Funds' Annual Report for the
fiscal period ended October 31,1999 and the financial statements included in the
Funds' Semi-Annual Report for the six months ended April 30, 2000 have been
incorporated by reference into this Statement of Additional Information.
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
<S> <C>
OVERVIEW OF THE COMMERCE FUNDS............................................................1
INVESTMENT OBJECTIVES, POLICIES AND RISK FACTORS..........................................1
National Tax-Free Intermediate Bond and Missouri Tax-Free Intermediate Bond Funds.........1
Futures Contracts and Related Options.....................................................2
Illiquid Securities.......................................................................3
Interest Rate Swaps, Floors and Caps......................................................3
Lending Securities........................................................................5
Municipal Obligations.....................................................................5
Options Trading...........................................................................7
Portfolio Turnover........................................................................9
Ratings of Securities.....................................................................9
Repurchase Agreements....................................................................10
Reverse Repurchase Agreements............................................................11
Securities Issued by Other Investment Companies..........................................11
Special Considerations Regarding Investment in Missouri Obligations......................11
Stand-By Commitments.....................................................................14
Temporary Investments....................................................................15
U.S. Government Obligations..............................................................16
Variable and Floating Rate Instruments...................................................17
When-Issued Purchases and Forward Commitments............................................18
Zero Coupon Bonds........................................................................19
INVESTMENT LIMITATIONS...................................................................19
PRICING OF SHARES........................................................................22
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION...........................................23
Additional Redemption Information........................................................23
DESCRIPTION OF SHARES....................................................................24
ADDITIONAL INFORMATION CONCERNING TAXES..................................................27
Federal Taxes............................................................................27
Federal Tax-Exempt Information...........................................................27
MANAGEMENT OF THE COMMERCE FUNDS.........................................................28
Trustees and Officers of the Trust.......................................................28
Investment Advisor.......................................................................31
Custodian and Transfer Agent.............................................................33
Administrator............................................................................34
Distributor..............................................................................35
THE DISTRIBUTION PLAN AND THE SHAREHOLDER ADMINISTRATIVE SERVICES PLANS..................35
PORTFOLIO TRANSACTIONS...................................................................36
Brokerage Transactions and Commissions...................................................36
INDEPENDENT AUDITORS.....................................................................38
COUNSEL..................................................................................39
ADDITIONAL INFORMATION ON PERFORMANCE....................................................39
MISCELLANEOUS............................................................................46
FINANCIAL STATEMENTS.....................................................................48
APPENDIX A..............................................................................A-1
APPENDIX B..............................................................................B-1
</TABLE>
-i-
<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 National Tax-Free
Intermediate Bond and Missouri Tax-Free Intermediate Bond Funds' respective
investment objectives and policies as set forth in the Service Shares
Prospectus. 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.
National Tax-Free Intermediate Bond and Missouri Tax-Free Intermediate Bond
---------------------------------------------------------------------------
Funds
-----
The National Tax-Free Intermediate Bond Fund is a diversified series of The
Commerce Funds. The Missouri Tax-Free Intermediate Bond Fund is a
non-diversified series of the Funds. This means that they are permitted to
invest more than 5% of its assets in the obligations of a single issuer.
Each of the Funds may invest up to 10% of its total assets in unrated
obligations provided that such obligations are determined by the Advisor to be
comparable in quality to instruments that are eligible for purchase by the Fund.
Each of the Funds may invest up to 20% of its net assets in Municipal
Obligations, the interest on which is exempt from regular federal income tax,
but is an item of tax preference for purposes of the federal alternative minimum
tax. Each Fund may also invest up to 20% of its net assets for temporary
defensive purposes in short-term taxable money market instruments, in securities
issued by other investment companies which invest in taxable or tax-exempt money
market instruments and in U.S. Government Obligations, all as discussed below.
In addition, the Funds may hold uninvested cash reserves pending investment
during temporary defensive periods, or when, in the opinion of the Advisor,
suitable tax-exempt obligations are unavailable. There is no percentage
limitation on the amount of assets which may be held uninvested by the Funds.
Uninvested cash normally will not represent a significant portion of a Fund's
assets.
The Funds may invest from time to time in "money market instruments" a term
that includes, among other things, bank obligations, commercial paper and
corporate bonds with remaining maturities of 397 days or less.
<PAGE>
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 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
-2-
<PAGE>
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 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 becomes uninterested in purchasing these securities.
Interest Rate Swaps, Floors and Caps
------------------------------------
In order to hedge against fluctuations in interest rates, the Funds may
opt to enter into interest rate and mortgage swaps and interest rate caps and
floors. A Fund typically uses interest rate and mortgage swaps to preserve a
return on a particular investment or portion of its portfolio or to shorten the
effective duration of its portfolio securities. Interest rate swaps involve the
exchange by a Fund with another party of their respective commitments to pay or
receive interest, such as an exchange of fixed rate payments for floating rate
payments. Mortgage swaps are similar to interest rate swaps in that they
represent commitments to pay and receive interest.
-3-
<PAGE>
The notional principal amount, however, is tied to a reference pool or pools of
mortgages. The purchase of an interest rate floor or cap entitles the purchaser
to receive payments of interest on a notional principal amount from the seller,
to the extent that a specified index falls below (floor) or exceeds (cap) a
predetermined interest rate. In a typical cap or floor arrangement, one party
agrees to make payments only under specified circumstances, usually in return
for payment of a fee by the other party. For example, the buyer of an interest
rate cap obtains the right to receive payments to the extent that a specified
interest rate exceeds an agreed upon level, while the seller of an interest rate
floor is obligated to make payments to the extent that a specified interest rate
falls below an agreed upon level. Since interest rate swaps, mortgage swaps and
interest rate caps and floors are individually negotiated, a Fund expects to
achieve an acceptable degree of correlation between its portfolio investments
and its interest rate swaps, mortgage swaps and interest rate caps and floors
positions.
If a Fund enters into interest rate and mortgage swaps, it will do so only
on a net basis, i.e., the two payment streams are netted out, with the Fund
receiving or paying, as the case may be, only the net amount of the two
payments. Inasmuch as these transactions are entered into for good faith hedging
purposes, the Funds and the Advisor believe that such obligations do not
constitute senior securities as defined in the 1940 Act and, accordingly, do not
treat them as being subject to the Funds' borrowing restrictions. The net amount
of the excess, if any, of a Fund's obligations over its entitlements with
respect to each interest rate or mortgage swaps is accrued on a daily basis and
an amount of cash or liquid securities having an aggregate net asset value at
least equal to such accrued excess, is maintained in a segregated account by the
Fund's Custodian.
The use of interest rate swaps, mortgage swaps, caps and floors is a
highly specialized activity that involves investment techniques and risks
different from those associated with ordinary portfolio securities transactions.
If the Advisor is incorrect in its forecasts of market values and interest
rates, the investment performance of a Fund would be less favorable than it
would have been if these investment techniques were not used.
A Fund does not enter into any interest rate or mortgage swap or interest
cap or floor transaction unless the unsecured commercial paper, senior debt or
the claims-paying ability of the other party thereto is rated either AA or A-1
or Aa or P-1 or better by S&P or Moody's or the equivalent rating of another
nationally recognized statistical rating organization ("NRSRO") or if unrated by
such rating organizations, determined by the Advisor to be of comparable credit
quality. If there is a default by the other party to such a transaction, a Fund
will have contractual remedies pursuant to the agreements related to the
transaction. The swap market has grown substantially in recent years with a
large number of banks and investment banking firms acting both as principals and
as agents utilizing standardized swap documentation. As a result, the swap
market has become relatively liquid in comparison with the markets for other
similar instruments which are traded in the relevant market. However, the staff
of the SEC takes the position that swaps, caps and floors are illiquid for
purposes of the Funds' limitations on investments in illiquid securities.
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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 from the loan justifies the attendant risks.
Municipal Obligations
---------------------
The Funds 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.
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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 Funds will invest most of their assets, under normal
circumstances, in intermediate-term Municipal Obligations, the Funds may also
purchase short-term project notes, tax anticipation notes, bond anticipation
notes, revenue anticipation notes, tax-exempt commercial paper, and other forms
of short-term tax-exempt loans. Such instruments are issued with a short-term
maturity in anticipation of the receipt of tax funds, the proceeds of bond
placements or other revenues.
Further, the Funds may purchase Municipal Obligations known as
"certificates of participation" which represent undivided proportional interests
in lease payments by a governmental or non-profit entity. The lease payments and
other rights under the lease provide for and secure the payments on the
certificates. Lease obligations may be limited by applicable municipal charter
provisions or the nature of the appropriation for the lease. In particular,
lease obligations may be subject to periodic appropriation. If the entity does
not appropriate funds for future lease payments, the entity cannot be compelled
to make such payments. Furthermore, a lease may or may not provide that the
certificate trustee can accelerate lease obligations upon default. If the
trustee could not accelerate lease obligations upon default, the trustee would
only be able to enforce lease payments as they became due. In the event of a
default or failure of appropriation, it is unlikely that the trustee would be
able to obtain an acceptable substitute source of payment. Certificates of
participation are generally subject to redemption by the issuing municipal
entity under specified circumstances. If a specified event occurs, a certificate
is callable at par either at any interest payment date or, in some cases, at any
time. As a result, certificates of participation are not as liquid or marketable
as other types of Municipal Obligations.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on Municipal Obligations. For example, under the federal tax
legislation enacted in 1986, interest on certain private activity bonds must be
included in an investor's alternative minimum taxable income, and corporate
investors must treat all tax-exempt interest as an item of tax preference. The
Commerce Funds cannot predict what legislation, if any, may be proposed or
enacted in the future regarding the federal tax status of interest on such
obligations or, with respect to the Missouri Tax-Free Intermediate Bond Fund,
what legislation may be proposed in the Missouri Legislature relating to the
status of the Missouri income tax on interest on Missouri obligations. Such
proposals, whether pending or enacted, might materially and adversely affect the
availability of Municipal or Missouri Obligations for investment by a particular
Fund and the liquidity and value of its respective portfolio. In such an event,
the Fund would re-evaluate its investment objective and policies and consider
possible changes in its structure or possible dissolution.
Certain of the Municipal Obligations held by a Fund may be insured as to
the timely payment of principal and interest. The insurance policies will
usually be obtained by the issuer of
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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 Funds may, from time to time, invest more
than 25% of their assets in Municipal Obligations covered by insurance policies.
Options Trading
---------------
Each of the Funds may purchase put and call options and may write covered
call and secured put options, which will be listed on a national securities
exchange and issued by the Options Clearing Corporation. The aggregate value of
securities subject to options written by the Funds will not exceed 5% of the
respective Fund's total assets. Notwithstanding the foregoing, a Fund may not
purchase or sell futures contracts or options on futures contracts to increase
total return unless immediately after any such transaction, the aggregate amount
of premiums paid for put options and the amount of margin deposits on existing
futures positions do not exceed 5% of the total assets of the Fund.
Options may relate to particular securities and various stock indexes or
currencies. This is a highly specialized activity which entails greater than
ordinary investment risks. Regardless of how much the market price of the
underlying security increases or decreases, the option buyer's risk is limited
to the amount of the original investment for the purchase of the option.
However, options may be more volatile than the underlying securities, and
therefore, on a percentage basis, an investment in options may be subject to
greater fluctuation than an investment in the underlying securities themselves.
A listed call option gives the purchaser of the option the right to buy from a
clearing corporation, and a writer has the obligation to sell to the clearing
corporation, the underlying security at the stated exercise price at any time
prior to the expiration of the option, regardless of the market price of the
security. The premium paid to the writer is in consideration for undertaking the
obligations under the option contract. A listed put option gives the purchaser
the right to sell to a clearing corporation the underlying security at the
stated exercise price at any time prior to the expiration date of the option,
regardless of the market price of the security. Put and call options purchased
by a Fund will be valued at the last sale price or, in the absence of such a
price, at the mean between bid and asked prices.
The Funds will write only "covered" call options on securities. The option
is "covered" if a Fund owns the security underlying the call or has an absolute
and immediate right to acquire that security without additional cash
consideration (or, if additional cash consideration is required, cash or cash
equivalents in such amount as are held in a segregated account by its Custodian)
upon conversion or exchange of other securities held by it. A call option is
also covered if a Fund holds a call on the same security as the call written
where the exercise price of the call held is (i) equal to or less than the
exercise price of the call written, or (ii) greater than the exercise price of
the call written provided the difference is maintained by the Fund in cash or
cash equivalents in a segregated account with its Custodian.
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<PAGE>
A Fund's obligation to sell a security subject to a covered call option
written by it, or to purchase a security subject to a secured put option written
by it, may be terminated prior to the expiration date of the option by the
Fund's executing a closing purchase transaction, which is effected by purchasing
on an exchange an option of the same series (i.e., the same underlying security,
exercise price and expiration date) as the option previously written. Such a
purchase does not result in the ownership of an option. A closing purchase
transaction will ordinarily be effected to realize a profit on an outstanding
option, to prevent an underlying security from being called, to permit the sale
of the underlying security or to permit the writing of a new option containing
different terms on such underlying security. The cost of such a liquidation
purchase plus transaction costs may be greater than the premium received upon
the original option, in which event the Fund will have incurred a loss in the
transaction. An option position may be closed out only on an exchange which
provides a secondary market for an option of the same series. There is no
assurance that a liquid secondary market on an exchange will exist for any
particular option. A covered call option writer, unable to effect a closing
purchase transaction, will not be able to sell the underlying security until the
option expires or the underlying security is delivered upon exercise with the
result that the writer in such circumstances will be subject to the risk of
market decline in the underlying security during such period. A Fund will write
an option on a particular security only if the Advisor believes that a liquid
secondary market will exist on an exchange for options of the same series which
will permit the Fund to make a closing purchase transaction in order to close
out its position.
When a Fund purchases a put or call option, the premium paid by it is
recorded as an asset of the Fund. When a Fund writes an option, an amount equal
to the net premium (the premium less the commission) received by the Fund is
included in the liability section of the Fund's statement of assets and
liabilities as a deferred credit. The amount of this asset or deferred credit
will be subsequently marked-to-market to reflect the current value of the option
purchased or written. The current value of the traded option is the last sale
price or, in the absence of a sale, the average of the closing bid and asked
prices. If an option purchased by a Fund expires unexercised, the Fund realizes
a loss equal to the premium paid. If a Fund enters into a closing sale
transaction on an option purchased by it, the Fund will realize a gain if the
premium received by the Fund on the closing transaction is more than the premium
paid to purchase the option, or a loss if it is less. If an option written by a
Fund expires on the stipulated expiration date or if a Fund enters into a
closing purchase transaction, it will realize a gain (or loss if the cost of a
closing purchase transaction exceeds the net premium received when the option is
sold) and the deferred credit related to such option will be eliminated. If an
option written by a Fund is exercised, the 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
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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 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 NRSRO (including Fitch) 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 Funds, a Fund's portfolio securities
may be downgraded below investment grade or may be deemed by the Advisor to be
no longer comparable to investment-grade securities. 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 and Fitch, as NRSROs, represent their opinions
as to the quality of debt securities. It should be emphasized, however, that
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<PAGE>
ratings are general and are not absolute standards of quality, and debt
securities with the same maturity, interest rate and rating may have different
yields while debt securities of the same maturity and interest rate with
different ratings may have the same yield. Subsequent to its purchase by a Fund,
an issue of debt securities may cease to be rated or its rating may be reduced
below the minimum rating required for purchase by a Fund. The Advisor will
consider such an event in conjunction with the particular Fund's investment
policy when determining whether the Fund should continue to hold the obligation.
The payment of principal and interest on most securities purchased by the
Funds will depend upon the ability of the issuers to meet their obligations. An
issuer's obligations under its debt securities are subject to the provisions of
bankruptcy, insolvency, and other laws affecting the rights and remedies of
creditors, such as the Federal Bankruptcy Code, and laws, if any, which may be
enacted by federal or state legislatures extending the time for payment of
principal or interest, or both, or imposing other constraints upon enforcement
of such obligations or, in the case of governmental entities, upon the ability
of such entities to levy taxes. The power or ability of an issuer to meet its
obligations for the payment of interest on and principal of its debt securities
may be materially adversely affected by litigation or other conditions.
Attached to this Statement of Additional Information is Appendix A, which
contains descriptions of the rating symbols used by NRSROs for securities in
which the Funds may invest.
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' Prospectus generally equals the price paid by a Fund plus interest
negotiated on the basis of current short-term rates (which may be more or less
than the rate on the securities underlying the repurchase agreement). Securities
subject to repurchase agreements are held by the Funds' Custodian (or
sub-Custodian) or in the Federal Reserve/Treasury book-entry system. Repurchase
agreements are considered to be loans under the 1940 Act.
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
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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.
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.
Special Considerations Regarding Investment in Missouri Obligations
-------------------------------------------------------------------
The following discussion highlights some of the more important economic
and financial trends and considerations affecting Missouri Obligations and is
based on information from official statements, prospectuses and other publicly
available documents relating to, among other things, securities offerings of the
State of Missouri, its agencies and instrumentalities, as available on the date
of this Statement of Additional Information. The Commerce Funds has not
independently verified any of the information contained in such statements or
other documents.
Missouri's population was 5,468,338 on July 1, 1999 according to the
Population Estimates Program, Population Division, U.S. Bureau of the Census,
which represented an increase of 6.9% from the 1990 decennial census of
5,117,073 inhabitants. As of July, 1999, St. Louis and the surrounding
metropolitan area constituted the 18th largest Metropolitan Statistical Area
(MSA) in the nation with approximately 2.56 million inhabitants, more than half
of which were Missouri residents. St. Louis is located on the eastern boundary
of the State on the Mississippi River and is a distribution center and an
important site for banking and manufacturing activity. Anchoring the western
boundary is Kansas City, which is Missouri's second largest metropolitan area.
In 1999, Kansas City was the 24th largest MSA nationally with
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approximately 1.75 million inhabitants, more than half of which were Missouri
residents. Kansas City is a major agri-business center for the United States and
is an important center for finance and industry. Springfield, St. Joseph, Joplin
and Columbia are also important population and industrial centers in the State.
Missouri's personal income rose by 4.7% during calendar year 1999, as compared
to the national average of an estimated 5.8%. Missouri's employment stood at
2,884,182 at the end of October 2000, up 70,000 from June of 2000. At the end of
November 1999, the state unemployment rate was at 3.7% compared to 2.9% at the
end of October 1999. The national rate was 3.9% at the end of October 2000.
The major sectors of the State's economy include agriculture,
manufacturing, trade, government and services. Farming has traditionally played
a dominant role in the economy and yielded a large portion of the State's
revenues. Although the concentration in farming remains above the national
average, with increasing urbanization, significant income-generating activity
has shifted from agriculture to manufacturing and services. Earnings and
employment are distributed among the manufacturing, trade and service sectors in
a close approximation of the average national distribution, thus lessening the
State's cyclical sensitivity to impact by any single sector. In 1999, services
represented the single most significant non-agriculture economic activity, with
wholesale and retail trade ranking second and manufacturing ranking third. As of
August 2000, these three economic sectors accounted for approximately 67.6% of
the State's nonagricultural employment. Manufacturing, which accounts for
approximately 3.8% of employment, is concentrated in industrial machinery,
transportation equipment and other durable goods. To the extent that the economy
suffers a recession, the manufacturing sector, in particular, could be adversely
affected.
Defense-related businesses play an important role in Missouri's economy.
In addition to the large number of civilians employed at the various military
installations and training bases in the State, aircraft production and
defense-related businesses receive sizeable annual defense contract awards. In
1998, Missouri ranked sixth among the states in Department of Defense contract
awards compared to a ranking of fourth in 1996. The continued decline in defense
appropriations by the U.S. Congress have had and will continue to have an impact
on the State.
Limitations on State debt and bond issues are contained in Article III,
Section 37 of the Constitution of Missouri. Pursuant to this section, (1) the
General Assembly may issue general obligation bonds solely to refund outstanding
bonds (provided that the refunding bonds must mature within 25 years of
issuance); (2) the General Assembly upon the recommendation of the Governor to
incur a temporary liability by reason of unforeseen emergency or of deficiency
in revenue, may issue bonds in an amount not to exceed $1 million for any one
year (must be paid within 5 years of issuance); and (3) the General Assembly, or
the people by initiative, may submit a proposition to incur temporary
indebtedness greater than $1 million by reason of unforeseen emergency or of
deficiency in revenue, and the bonds may be issued if approved by a majority of
those voting (such bonds must be retired serially and by installment within 25
years of issuance). Before any bonds are issued pursuant to Section 37, the
General Assembly must make provisions for the payment of principal and interest
and may provide for an annual tax on all taxable property in an amount
sufficient for that purpose.
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Certain water pollution bonds and State building bonds are also authorized
pursuant to Section 37(b)-(h), inclusive. In 1971, Missouri voters approved a
constitutional amendment providing for the issuance of $150 million of general
obligation bonds for the protection of the environment through the control of
water pollution. In 1979, voters approved a constitutional amendment authorizing
an additional $200 million of State Water Pollution Control Bonds. In 1982,
State voters approved a constitutional amendment authorizing the issuance of
$600 million of Third State Building Bonds. Proceeds from the Third State
Building Bonds are used to provide funds for improvement of State buildings and
property, including education, mental health, parks, corrections and other State
facilities, and for water, sewer, transportation, soil conservation and other
economic development projects. In 1988, and as amended in 1998, Missouri voters
approved a constitutional amendment authorizing the issuance of bonds in the
aggregate sum of $275 million for controlling water pollution and making
improvements to drinking water systems. In 1994, State voters approved a
constitutional amendment authorizing the issuance of $250 million Fourth State
Building Bonds. Proceeds from the Fourth State Building Bonds fund the
rebuilding of institutions of higher education, land acquisition, construction
or purchase of buildings, and planning, furnishing, equipping and landscaping
such improvements and buildings. In 1998, voters approved a constitutional
amendment authorizing the issuance of bonds in the aggregate sum of $100 million
for the purpose of providing rural water and sewer grants and loans, including
grants for the establishment of water supply hook-ups in unincorporated areas of
any county to water supplies. In 1998, voters approved a constitutional
amendment authorizing the issuance of bonds in the aggregate amount of $200
million for the purpose of providing funds for providing stormwater control
plans, studies and projects in certain counties and cities.
Article III, Section 36 of the Constitution of Missouri requires that the
General Assembly appropriate the annual principal and interest requirements for
outstanding general obligation bonds before any other appropriations are made.
Such amounts must be transferred from the General Revenue Fund to bond interest
and sinking funds. Authorization for these transfers, as well as the actual
payments of principal and interest, are provided in the first appropriation bill
of each fiscal year.
In addition to general obligation bonds, the Missouri legislature has
established numerous entities as bodies corporate and politic, which are
authorized to issue bonds to carry out their corporate purposes.
Article X, Section 16-24 of the Constitution of Missouri (the "Tax
Limitation Amendment") imposes a limit on the amount of taxes and other revenue
enhancement charges such as user fees which may be imposed by the State or a
political subdivision in any fiscal year. This limit is tied to total State
revenues for the fiscal year ended June 30, 1981, as defined in the Tax
Limitation Amendment, and adjusted annually, in accordance with the formula set
forth in the amendment. Under that formula, the revenue limit (the "Revenue
Limit") for any fixed year equals the product obtained by multiplying (i) the
ratio of total state revenues in fiscal year 1980-1981 divided by the aggregate
personal income received by persons in Missouri from all sources ("Personal
Income of Missouri") in calendar year 1979 times (ii) the Personal Income of
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Missouri in either the calendar year prior to the calendar year in which
appropriations for the fiscal year for which the calculation is being made, or
the average of Personal Income of Missouri in the previous three calendar years,
whichever is greater. If the Revenue Limit is exceeded by 1% or more in any
fiscal year, a refund of the excess revenues collected by the State is required.
If the excess revenues collected are less than 1%, then the excess is not
refunded but is transferred to the General Revenue Fund. The details of the Tax
Limitation Amendment are complex and clarification from subsequent legislation
and judicial decisions may be necessary for the Tax Limitation Amendment to be
fully implemented. The Revenue Limit can be exceeded only if the General
Assembly approves by a two-thirds vote of each house an emergency declaration as
requested by the Governor. The Revenue Limit does not apply to taxes imposed for
payment of principal and interest on bonds that have been approved by the
voters, as authorized by the Missouri Constitution. In 1999, total state
revenues exceeded the total state revenue limit by $98.9 million, the entire
amount of which will be refunded to Missouri taxpayers in calendar year 2000.
The Missouri office of Administration projects that in fiscal year 2000 and
2001, total state revenues will not exceed the total state revenue limit.
In addition, to the Revenue Limit, the General Assembly is prohibited
without voter approval from increasing taxes as fees in any fiscal year that in
total produces new annual revenues greater than $50 million, adjusted annually
by the percentage change in the personal income of Missouri for the second
previous fiscal year, or 1% of total state revenue for the previous fiscal year
prior to the General Assembly action, whichever is less. The Tax Limitation
Amendment could adversely affect the repayment capabilities of certain
non-general obligation issues if payment is dependent upon increases in taxes or
appropriations by the State's General Assembly.
General revenue collections in fiscal year 2000 were $217 million, 3.2%
above fiscal year 1999 collections. The fiscal year 2001 budget is
conservatively based upon general revenue collections of $425 million.
Stand-By Commitments
--------------------
The Funds may acquire stand-by commitments with respect to Municipal
Obligations held within their respective portfolios. Under a stand-by
commitment, a dealer or bank agrees to purchase from a Fund, at the Fund's
option, specified Municipal Obligations at their amortized cost value to the
Fund plus accrued interest, if any. Stand-by commitments may be sold,
transferred or assigned by a Fund only with the underlying instrument.
The Funds expect that stand-by commitments will generally be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, a Fund may pay for a stand-by commitment either
separately in cash or by paying a higher price for portfolio securities which
are acquired subject to the commitment (thus reducing the yield to maturity
otherwise available for the same securities). Where a Fund paid any
consideration directly or indirectly for a stand-by commitment, its cost would
be reflected as unrealized depreciation for the period during which the
commitment was held by the Fund.
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The Funds intend to enter into stand-by commitments only with dealers,
banks and broker-dealers which, in the Advisor's opinion, present minimal credit
risks. The Funds' reliance upon the credit of these dealers, banks and
broker-dealers will be secured by the value of the underlying Municipal
Obligations that are subject to the commitment. In evaluating the
creditworthiness of the issuer of a stand-by commitment, the Advisor will review
periodically the issuer's assets, liabilities, contingent claims and other
relevant financial information.
The Funds would acquire stand-by commitments solely to facilitate
portfolio liquidity and do not intend to exercise their rights thereunder for
trading purposes. Stand-by commitments acquired by a 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
Obligations, foreign government securities (if permitted), repurchase agreements
and corporate bonds with remaining maturities of 397 days or less.
Bank obligations include bankers' acceptances, negotiable certificates of
deposit and non-negotiable time deposits, including U.S. dollar-denominated
instruments issued or supported by the credit of U.S. or foreign banks or
savings institutions. Bank obligations also include obligations of foreign banks
or foreign branches of U.S. banks. Although the Funds will invest in obligations
of foreign banks or foreign branches of U.S. banks only where the Advisor deems
the 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 unfavorable future
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
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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 Funds in taxable commercial paper will consist of
issues that are rated A-1 or better by S&P, Prime-1 by Moody's or the equivalent
rating of another rating agency. Commercial paper may include variable and
floating rate instruments.
When the Advisor pursues a temporary defensive strategy, the Funds may not
profit from favorable developments that would have been available if the Funds
were pursuing their normal investment strategies. In addition, when the Advisor
uses a defensive strategy, the Funds will not be pursuing their investment
objectives.
U.S. Government Obligations
---------------------------
As stated in the Prospectus, 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.
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Variable and Floating Rate Instruments
--------------------------------------
The Funds may purchase variable rate and floating rate obligations issued
by corporations, industrial development authorities and governmental entities.
Such instruments are frequently not rated by credit rating agencies. However, in
determining the creditworthiness of unrated variable and floating rate
instruments and their eligibility for purchase by the Funds, the Advisor will
consider the earning power, cash flows and other liquidity ratios of the issuers
and guarantors of such obligations and, if the obligation is subject to a demand
feature, will monitor their financial status to meet payment on demand. In
determining average weighted portfolio maturity, an instrument will usually be
deemed to have a maturity equal to the longer of the period remaining to the
next interest rate adjustment or the time a Fund can recover payment of
principal as specified in the instrument.
While there may be no active secondary market with respect to a particular
variable or floating rate instrument purchased by a Fund, a Fund may, from time
to time as specified in the instrument, demand payment in full of the principal
of the instrument or may resell the instrument to a third party. The absence of
such an active secondary market, however, could make it difficult for a Fund to
dispose of a variable or floating rate demand instrument if the issuer defaulted
on its payment obligations during periods that a Fund is not entitled to
exercise its demand rights, and a Fund could, for these or other reasons, suffer
a loss. Variable and floating rate instruments with no active secondary market
and with notice/termination dates in excess of seven days will be included in
the calculation of a Fund's illiquid assets.
Variable and floating rate demand instruments acquired by the Funds may
include participations in Municipal Obligations purchased from and owned by
financial institutions (primarily banks). Participation interests provide the
Fund with a specified undivided interest (up to 100%) in the underlying
obligation and the right to demand payment of the unpaid principal balance plus
accrued interest on the participation interest from the institution upon a
specified number of days' notice, not to exceed thirty days. Each participation
interest is backed by an irrevocable letter of credit or guarantee of a bank
that the Advisor has determined meets the prescribed quality standards for the
Fund. The bank typically retains fees out of the interest paid on
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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 invest up to 25% of its total assets in securities issued on
a when-issued basis or enter into forward commitment transactions. These
transactions, which involve a commitment by a Fund to purchase or sell
particular securities with payment and delivery taking place at a future date
(perhaps one or two months later), permit the Fund to lock in a price or yield
on a security it owns or intends to purchase, regardless of future changes in
market prices or in interest rates. When-issued and forward commitment
transactions involve the risk, however, that the yield or price obtained in a
transaction (and therefore the value of the security) may be less favorable than
the yield or price (and therefore the value of the security) available in the
market when the securities delivery takes place. When a Fund agrees to purchase
securities on a when-issued basis or enters into a forward commitment to
purchase securities, the Funds' Custodian will set aside cash or liquid assets,
as permitted by applicable law, equal to the amount of the purchase or the
commitment in a separate account. Normally, the Custodian will set aside
portfolio securities to meet this requirement. The market value of the separate
account will be monitored and if such market value declines, the Fund will be
required subsequently to place additional assets in the separate account in
order to ensure that the value of the account remains equal to the amount of the
Fund's commitments. Because a Fund will set aside cash or liquid assets, as
permitted by applicable law, in the manner described, the Fund's liquidity and
ability to manage its portfolio might be affected in the event its when-issued
purchases or forward commitments ever exceeded 25% of the value of its assets.
In the case of a forward commitment to sell portfolio securities, the Custodian
will hold the portfolio securities in a segregated account while the commitment
is outstanding.
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
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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.
INVESTMENT LIMITATIONS
----------------------
Each Fund is subject to the investment limitations enumerated below. The
limitations designated as fundamental 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. Purchase or sell real estate, except that a Fund may invest in
securities directly or indirectly secured by real estate or interests therein or
issued by companies which invest in real estate or interests therein and may
hold and sell real estate acquired by a Fund as a result of the ownership of
securities.
2. Make loans to other persons, except that the purchase of all or a
portion of an issue of securities or obligations of the type in which a Fund may
invest shall not be deemed to be the making of a loan, and except further that a
Fund may enter into repurchase agreements in accordance with its investment
objective and policies and may lend its portfolio securities in an amount not to
exceed 33 1/3% of the value of its total assets (including the value of the
collateral for the loan).
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<PAGE>
3. Borrow money, issue senior securities or pledge its assets, except
that a Fund may borrow from banks and enter into reverse repurchase agreements
as a temporary measure for extraordinary or emergency purposes or to meet
redemptions in amounts not exceeding 33 1/3% (taken at market value) of its
total assets (including the amount borrowed) and pledge its assets to secure
such borrowings, provided the Fund maintains assets coverage of at least 300%
for all such borrowings. No Fund will purchase securities while its aggregate
borrowings (including reverse repurchase agreements and borrowings from banks)
in excess of 5% of its total assets are outstanding. Securities held in escrow
or separate accounts in connection with a Fund's investment practices are not
deemed to be pledged for purposes of this limitation.
4. Purchase securities on margin, except that (i) a Fund may obtain
such short-term credit as may be necessary for the clearance of purchases and
sales of portfolio securities, (ii) a Fund may pay initial or variation margin
in connection with futures and related option transactions, and (iii) this
investment limitation shall not apply to a Fund's transactions in futures
contracts and related options or to a Fund's transactions in securities on a
when-issued or forward commitment basis.
5. Underwrite securities of other issuers, except insofar as a Fund
technically may be deemed an underwriter under the Securities Act of 1933, as
amended ("Securities Act") in purchasing and selling portfolio securities and
except insofar as such underwriting would comply with the limits set forth in
the 1940 Act.
6. Purchase or sell commodities or contracts on commodities, except to
the extent a Fund may do so in accordance with applicable law and a Fund's
current prospectus and statement of additional information, as it may be amended
from time to time, and without registering as a commodity pool operator under
the Commodities Exchange Act.
As a matter of fundamental policy:
1. Each of the Funds will limit its investments so that less than 25%
of the Fund's total assets will be invested in the securities of the issuers in
any one industry. For purposes of this restriction, state and municipal
governments and their agencies and instrumentalities, securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities and
repurchase agreements fully collateralized by securities issued or guaranteed by
the U.S. Government, its agencies or instrumentalities are not deemed to be
industries in connection with the issuance of tax-exempt securities. Thus, a
Fund may invest 25% or more of the value of its total assets in Municipal
Obligations which are related in such a way that an economic, business or
political development or change affecting one Municipal Obligation would also
affect other Municipal Obligations. For example, a Fund may so invest in (a)
Municipal Obligations the interest on which is paid solely from revenues of
similar projects such as hospitals, electric utility systems, multi-family
housing, nursing homes, commercial facilities (including hotels), steel
companies or life care facilities, (b) Municipal Obligations whose issuers are
in the same state, or (c) industrial development obligations. The Funds will not
purchase securities (except U.S. Government Obligations) if more than 5% of its
total assets will be invested in the securities of any
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one issuer, except that up to 25% of the total assets of the National Tax-Free
Fund, and up to 50% of the total assets of the Missouri Tax-Free Fund, may be
invested without regard to this 5% limitation (although not more than 25% of the
Missouri Tax-Free Fund's total assets will be invested in the securities of any
one issuer).
As a matter of non-fundamental policy, no Fund may:
1. Purchase securities of other investment companies except (a)
purchases which are part of a plan of merger, consolidation, reorganization, or
acquisition, and (b) other purchases of the securities of investment companies
only if the purchases are of open-ended, no-load funds, are conditioned on the
waiver of management fees and further, if immediately thereafter (i) not more
than 3% of the total outstanding voting stock of such company is owned by the
Fund, (ii) not more than 5% of the Fund's total assets, taken at market value,
would be invested in the securities of any one investment company, (iii) not
more than 10% of the Fund's total assets, taken at market value, would be
invested in the aggregate in securities of investment companies as a group, and
(iv) the Fund, together with other investment companies having the same
investment adviser and companies controlled by such companies, owns not more
than 10% of the total outstanding stock of any one investment company.
2. Make short sales of securities or maintain a short position, except
that a Fund may make short sales against-the-box (defined as the extent to which
a Fund contemporaneously owns or has the right to obtain at no added cost
securities identical to those sold short).
3. Invest in illiquid securities if as a result more than 15% of its
net assets would be invested in such securities.
4. Make investments for the purpose of exercising control or
management.
5. Invest in warrants if at the time of acquisition a Fund's investment
in warrants would exceed 10% of the value of the Fund's net assets.
6. Invest in real estate limited partnership interests or
participations or other direct interests in or enter into leases with respect to
oil, gas or other mineral exploration or development programs if, as a result
thereof, more than 5% of the value of the total assets of a Fund would be
invested in such programs, except that a Fund may invest in securities issued by
companies that engage in oil, gas or other mineral exploration of development
activities.
7. Write, purchase or sell puts, calls, straddles, spreads or
combinations thereof with respect to more than 5% 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 Service Shares by adding the value of all portfolio
securities and other assets
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belonging to the Fund that are allocable to that 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 Service Shares are
allocated to the Shares in proportion to the relative net asset values of the
Funds.
As stated in their Prospectuses, a Fund's investments will be valued at
market value or, in the absence of a market value with respect to any portfolio
securities, at fair value as determined by or under the direction of The
Commerce Funds' Board of Trustees. A security that is primarily traded on a
domestic securities exchange (including securities traded through the National
Market System) is valued at the last sale price on that exchange or, if there
were no sales during the day, at the current quoted bid price. Securities traded
on only over-the-counter markets are valued on the basis of closing
over-the-counter bid prices. Securities for which there were no transactions are
valued at the average of the current bid and asked prices. Restricted securities
and securities for which market quotations are not readily available are valued
at fair value as determined in good faith by the Board of Trustees.
The value of a Fund's portfolio securities that are traded on stock
exchanges outside the United States are based upon the price on the exchange as
of the close of business of the exchange immediately preceding the time of
valuation, except when an occurrence subsequent to the time a value was so
established is likely to have changed such value; then the fair value of those
securities will be determined through consideration of other factors by or under
the direction of The Commerce Funds' Board of Trustees. Securities trading in
over-the-counter markets in European and Pacific Basin countries is normally
completed well before 4:00 p.m. Eastern time. In addition, European and Pacific
Basin securities trading may not take place on all Business Days (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
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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.
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 Prospectus.
In an exchange, the redemption of shares being exchanged will be made at
the per share net asset value of the shares to be redeemed next determined after
the exchange request is received. The shares of the Fund to be acquired will be
purchased at the per share net asset value of those shares (plus any applicable
sales charge) next determined after acceptance of the purchase order by The
Commerce Funds in accordance with its customary policies for accepting
investments.
A Fund may make payment for redemption in securities or other property if
it appears appropriate to do so in light of the Fund's responsibilities under
the 1940 Act. In the event shares are redeemed for securities or other property,
shareowners may incur additional costs in connection with the conversion thereof
to cash. Redemption in kind is not as liquid as a cash redemption. Shareowners
who receive a redemption in kind may receive less than the redemption value of
their shares upon sale of the securities or property received, particularly
where such securities are sold prior to maturity.
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<PAGE>
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.
Each Fund is authorized to issue 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 Prospectus will be fully paid and non-assessable.
Each share of a series shall represent an equal beneficial interest in the
net assets of such series. Each holder of shares of a series shall be entitled
to receive distributions of income and capital gains, if any, which are made
with respect to such series and which are attributable to such shares. Upon
redemption of shares, such shareowner shall be paid solely out of the funds and
property of such series of The Commerce Funds.
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
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remaining proceeds or assets (as the case may be) of each series (or class)
ratably among the holders of shares of those series then outstanding.
Rule 18f-2 under the 1940 Act provides that any matter required by the
provisions of the 1940 Act or applicable state law, or otherwise, to be
submitted to the holders of the outstanding voting securities of an investment
company shall not be deemed to have been effectively acted upon unless approved
by the holders of a majority of the outstanding shares of each investment
portfolio affected by such matter. Rule 18f-2 further provides that an
investment portfolio shall be deemed to be affected by a matter unless the
interests of each investment portfolio in the matter are substantially identical
or the matter does not affect any interest of the investment portfolio. Under
the Rule, the approval of an investment advisory agreement or any change in a
fundamental investment policy would be effectively acted upon with respect to an
investment portfolio only if approved by a majority of the outstanding shares of
such investment portfolio. However, the Rule also provides that the ratification
of the appointment of independent accountants, the approval of principal
underwriting contracts and the election of Trustees may be effectively acted
upon by shareowners of The Commerce Funds voting together in the aggregate
without regard to a particular investment portfolio.
The shareowners have the power to vote only for the election of Trustees,
for the removal of Trustees and with respect to such additional matters relating
to The Commerce Funds as may be required by law, by the Trust Instrument, or as
the Trustees may consider desirable. The Trustees may also determine that a
matter affects only the interests of one or more classes of a series, in which
case any such matter shall be voted on by such class or classes. Each whole
share shall be entitled to one vote as to any matter on which it is entitled to
vote, and each fractional share shall be entitled to a proportionate fractional
vote. There 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
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<PAGE>
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 Prospectus or in this Statement of Additional
Information, a "majority" of shareowners of The Commerce Funds or a particular
Fund means, with respect to the approval of an investment advisory agreement or
a change in an investment objective or a fundamental investment policy, the vote
of the lesser of (1) 67% of the shares of The Commerce Funds or 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 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 Funds' distributions will generally constitute tax-exempt income for
shareowners for federal income tax purposes. It is possible, depending upon the
Funds' investments, that a portion of the Funds' distributions could be taxable
to shareowners as ordinary income or capital gains, but the Funds do not expect
that this will be the case.
State and local income taxes generally apply to interest on bonds of
states and political subdivisions outside of the state in which the tax is
imposed. Missouri exempts interest on (i) its own obligations, (ii) the
obligations of its political subdivisions, (iii) U.S. Government
-26-
<PAGE>
obligations, and (iv) obligations of certain U.S. territories and possessions,
from its personal income tax and general corporate income tax. The Funds'
distributions from these sources will retain their exempt character in the hands
of shareowners.
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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<PAGE>
MANAGEMENT OF THE COMMERCE FUNDS
Trustees and Officers of the Trust
The Board of Trustees of the Trust is responsible for the management of
the business and affairs of the Trust. The Trustees and executive officers of
the Trust and their principal occupations for the last five years are set forth
below. Each Trustee has an address c/o The Commerce Funds, 1000 Walnut Street,
Kansas City, Missouri 64106.
<TABLE>
<CAPTION>
Position(s) Held with
Name, Address and Age the Trust Principal Occupation(s) During Past 5 Years
--------------------- --------------------- -------------------------------------------
<S> <C> <C>
John Eric Helsing Trustee and Chairman Retired. Former Professor and Chairman, 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 Comerce 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 1999
c/o The Commerce Funds to present, Executive Vice President from June 1998 to January
1000 Walnut Street 1999, and Chief Financial Officer from January 1990 to June 1998;
Kansas City, MO 64141 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
and owns securities of the Adviser's parent corporation, Commerce Bancshares
Corp. 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.
-28-
<PAGE>
<TABLE>
<CAPTION>
Position(s) Held with
Name, Address and Age the Trust Principal Occupation(s) During Past 5 Years
--------------------- --------------------- -------------------------------------------
<S> <C> <C>
James A. McNamara Vice President Vice President, Goldman Sachs & Co. since April 1998. Senior
Goldman Sachs Asset Management Vice President and Eastern Regional Manager for Dreyfus
4900 Sears Tower Institutional Service Corp. from 1996 to 1998. From 1993 to
Chicago, IL 60606 1996 Vice President, Institutional Sales Representative,
DOB: 10/2/62 Midwestern United States for Dreyfus.
John Perlowski Vice President Vice President, Goldman Sachs & Co., since July 1995.
Goldman, Sachs & Co. Director/Fund Accounting & Custody, Investors Bank & Trust
32 Old Slip Co., November 1993 to July 1995. Formerly, Manager, Audit
New York, NY 10005 Division, Arthur Andersen, September 1986 to November 1993.
DOB: 11/7/64
William Schuetter Vice President Vice President Commerce Bank, N.A., 1998 to Present. Vice
Commerce Bank, N.A. President of Fund Accounting, UMB Bank, from 1996 to 1998.
1000 Walnut Street Assistant Vice President, Manager of Income Processing, UMB
Kansas City, MO 64106 Bank from 1993 to 1996.
DOB: 4/17/60
Larry Franklin Vice President Vice President, Commerce Bank, N.A., 1993 to present. Business
Commerce Bank, N.A. Manager, The Commerce Funds, 1993 to 1996; Administrative
1000 Walnut Street Director 1996 to 1998; and Managing Director, 1998 to present.
Kansas City, MO 64106
DOB: 2/21/47
Peter Fortner Assistant Treasurer Vice President, Goldman, Sachs & Co., 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 LLP Philadelphia, Pennsylvania.
One Logan Square
18th and Cherry Streets
Philadelphia, PA 19103-6996
DOB: 02/07/43
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 to 1998.
New York, NY 10005
DOB: 9/3/69
</TABLE>
-29-
<PAGE>
<TABLE>
<CAPTION>
Position(s) Held with
Name, Address and Age the Trust Principal Occupation(s) During Past 5 Years
--------------------- --------------------- -------------------------------------------
<S> <C> <C>
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
32 Old Slip since December 1997. Assistant General Counsel since November
New York, NY 10005 1993 and Vice President of Goldman Sachs since May 1994.
DOB: 6/21/65 Formerly an Associate of Shereff, Friedman, Hoffman & Goodman.
Diana E. McCarthy Assistant Secretary Associate with the law firm
Drinker Biddle & Reath LLP Drinker Biddle & Reath LLP
One Logan Square Philadelphia, Pennsyvlania
18th & Cherry Streets
Philadelphia, PA 19103-6996
DOB: 7/5/51
</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.
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. All Trustees are
reimbursed for out of pocket expenses incurred in connection with attendance at
meetings. Drinker Biddle & Reath LLP, of which Mr. McConnel is a partner,
receives legal fees as counsel to the Trust.
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 Commerce Funds
in the shares of one or more portfolios in The Commerce Funds, and the amount
paid to the Trustees under the Plan will be determined based upon the
performance of such investments. Deferral of Trustees' fees will have no effect
on a portfolio's assets, liabilities, and net income per share, and will not
obligate The Commerce Funds to retain the services of any Trustee or obligate a
portfolio to any level of compensation to the Trustee. The Commerce Funds may
invest in underlying securities without shareowner approval.
The following chart provides certain information about the Trustee fees
paid by the Trust for the fiscal year ended October 31, 1999:
-30-
<PAGE>
PENSION OR
RETIREMENT
BENEFITS
AGGREGATE ACCRUED AS AGGREGATE
NAME OF COMPENSATION PART OF FUND COMPENSATION
PERSON/POSITION FROM THE TRUST* EXPENSES FROM THE FUND
--------------- --------------- -------- -------------
JOHN ERIC HELSING, $6,000 $0 N/A
Trustee, 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
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:
Annual Rate
-----------
National Tax-Free Intermediate Bond Fund.................. 0.50%
Missouri Tax-Free Intermediate Bond Fund.................. 0.50%
-31-
<PAGE>
For the fiscal years ended October 31, 1999, 1998 and 1997. The
Commerce Funds paid the Advisor fees for advisory services as follows:
<TABLE>
<CAPTION>
Fiscal year ended Fiscal year ended Fiscal year ended
October 31, 1999 October 31, 1998 October 31, 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
National Tax-Free Intermediate Bond
Fund $193,766 $145,111 $104,058
Missouri Tax-Free Intermediate Bond
Fund $200,106 $144,482 $ 97,420
</TABLE>
For the fiscal years ended October 31, 1999 and 1998 and 1997, the
Advisor voluntarily agreed to waive a portion of its advisory fee for certain
portfolios. During the periods stated, these waivers reduced advisory fees by
the following:
<TABLE>
<CAPTION>
Fiscal year ended Fiscal year ended Fiscal year ended
October 31, 1999 October 31, 1998 October 31, 1997
---------------- ----------------- ----------------
<S> <C> <C> <C>
National Tax-Free Intermediate Bond Fund $58,130 $33,187 --
Missouri Tax-Free Intermediate Bond Fund $80,043 $57,793 $38,968
</TABLE>
In addition, for the fiscal years ended October 31, 1999, 1998 and
1997, the Advisor voluntarily agreed to reimburse the expenses of certain of the
Funds. The effect of these reimbursements during the period was to reduce
expenses as follows:
<TABLE>
<CAPTION>
Fiscal year ended Fiscal year ended Fiscal year ended
October 31, 1999 October 31, 1998 October 31, 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
National Tax-Free Intermediate Bond
Fund $29,663 $54,535 $69,387
Missouri Tax-Free Intermediate Bond
Fund $26,626 $50,592 $116,567
</TABLE>
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.
-32-
<PAGE>
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
Funds 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 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
-33-
<PAGE>
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 ("GSAM") 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 shareowners and other
administrative services necessary to conduct the business of The Commerce Funds.
For these services and facilities, GSAM is entitled to receive a monthly fee
from each Fund at an annual rate of 0.15% of its average daily net assets. For
the fiscal year ended October 31, 1999, GSAM received administration fees at the
annual rate of 0.15% of the average daily net assets of each Fund. For the
fiscal years ended October 31, 1999, 1998 and 1997, the fees paid by the Funds
for administration services were as follows:
<TABLE>
<CAPTION>
Fiscal year ended Fiscal year ended Fiscal year ended
October 31, 1999 October 31, 1998 October 31, 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
National Tax-Free Intermediate Bond
Fund $58,219 $43,526 $31,217
</TABLE>
-34-
<PAGE>
<TABLE>
<CAPTION>
Fiscal year ended Fiscal year ended Fiscal year ended
October 31, 1999 October 31, 1998 October 31, 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Missouri Tax-Free Intermediate Bond
Fund $60,031 $43,344 $29,226
</TABLE>
Distributor
-----------
The Commerce Funds' shares are offered on a continuous basis through
Goldman, Sachs & Co., which acts under the Distribution Agreement as Distributor
for The Commerce Funds. Goldman is located at 85 Broad Street, New York, New
York 10004. Goldman, Sachs & Co. may receive a portion of the sales load imposed
on the sale of shares of the Funds and has advised The Commerce Funds that it
has retained approximately $18,000, $22,000 and $47,000 of such sales loads for
the fiscal years ended October 31, 1999, 1998 and 1997, respectively.
THE DISTRIBUTION PLAN AND THE SHAREHOLDER ADMINISTRATIVE
SERVICES PLANS
The Distributor is entitled to payment on a monthly basis at an
annual rate not exceeding 0.25% of the average daily net assets of Service
Shares from the Trust for distribution expenses incurred pursuant to the
Distribution Plan (the "12b-1 Plan") adopted on behalf of the Service Shares.
Under the 12b-1 Plan, the Trust may pay the Distributor (or any other person)
for: (i) direct out-of-pocket promotional expenses incurred by the Distributor
in advertising and marketing Service Shares; (ii) expenses incurred in
connection with preparing, printing, mailing, and distributing or publishing
advertisements and sales literature for Service Shares; (iii) expenses incurred
in connection with printing and mailing prospectuses and statements of
additional information to other than current Service Class shareowners; (iv)
periodic payments or commissions to one or more securities dealers, brokers,
financial institutions or other industry professionals, such as investment
advisors, accountants, and estate planning firms with respect to a Fund's
Service Shares beneficially owned by customers for whom the distribution
organization is the record or holder of record of such Service Shares; or (v)
for such other services as may be construed, by any court or governmental agency
or commission, including the Securities and Exchange Commission, to constitute
distribution services under the 1940 Act or rules and regulations thereunder.
During the fiscal year ended October 31, 1999, The Commerce Funds
paid the Distributor $56,082 in the aggregate under the Funds' 12b-1 Plan.
The Commerce Funds may enter into Servicing Agreements with Service
Organizations, which may include the Advisor and its affiliates, pursuant to the
Shareholder Administrative Services Plan for Service Shares (the "Services
Plan"). The Servicing Agreements provide that the Service Organizations will
render shareholder administrative support services to their customers who are
the beneficial owners of Service Shares of the Funds
-35-
<PAGE>
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 Service Shares; (iii) arranging for bank wires;
(iv) responding to customer inquiries concerning their investments in shares;
(v) providing subaccounting with respect to shares beneficially owned by
customers or the information necessary for such subaccounting; (vi) if required
by law, forwarding shareholder communications; (vii) processing share exchange
and redemption requests from customers; (viii) assisting customers in changing
dividend options, account designations and addresses; (ix) establishing and
maintaining accounts and records relating to customers that invest in shares;
(x) responding to customer inquiries relating to the services performed by the
Service Organization; and (xi) other similar services requested by the Commerce
Funds. Banks acting as Service Organizations are prohibited from engaging in any
activity primarily intended to result in the sale of Fund shares. However,
Service Organizations other than banks may be requested to provide marketing
assistance (e.g., forwarding sales literature and advertising to their
customers) in connection with the distribution of Fund shares.
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 is 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
-36-
<PAGE>
of negotiated brokerage commissions, transactions in foreign securities
generally involve the payment of fixed brokerage commissions, which are
generally higher than those in the United States.
Debt securities purchased and sold by the Funds are generally traded
in the over-the-counter market on a net basis (i.e., without commission) through
dealers, or otherwise involve transactions directly with the issuer of an
instrument. The cost of securities purchased from underwriters includes an
underwriting commission or concession, and the prices at which securities are
purchased from and sold to dealers include a dealer's mark-up or mark-down.
The Advisory Agreements for the Funds provide that, in executing
portfolio transactions and selecting brokers or dealers, the Advisor will use
reasonable efforts to seek the best overall terms available on behalf of each
Fund. In assessing the best overall terms available for any transaction, the
Advisor will consider all factors it deems relevant, including the breadth of
the market in the security, the price of the security, the financial condition
and execution capability of the broker or dealer, and the reasonableness of the
commission, if any, both for the specific transaction and on a continuing basis.
In addition, the Agreements authorize the Advisor, subject to the prior approval
of the Board of Trustees, to cause the 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
-37-
<PAGE>
Advisor to allocate purchase and sale orders for portfolio securities to
broker/dealers and other financial institutions including, in the case of agency
transactions, institutions which are affiliated with the Advisor, to take into
account the sale of Fund shares if the Advisor believes that the quality of the
transaction and the amount of the commission are comparable to what they would
be with other qualified brokerage firms, provided such transactions comply with
the requirements of Rule 17e-1 under the 1940 Act. In addition, the Funds will
not purchase securities during the existence of any underwriting or selling
group relating thereto of which the Advisor, Goldman, Sachs & Co., or any
affiliated person thereof is a member, except to the extent permitted by the
SEC. Under certain circumstances, the Funds may be at a disadvantage when
compared to other investment companies which have similar investment objectives
but that are not subject to such limitations.
Investment decisions for each Fund are made independently from those
made for the other Funds and from those made for other investment companies and
accounts 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.
During the fiscal year ended October 31, 1999, the Missouri Tax-Free
Intermediate Bond Fund entered into repurchase agreement transactions with State
Street Bank and Trust Company, which was one of the broker/dealers that engaged
as principal in the largest dollar amount of portfolio transactions with the
Fund. At October 31, 1999, the value of the Fund's outstanding repurchase
agreement transactions with State Street Bank and Trust Company was as follows:
Missouri Tax-Free Intermediate Bond Fund $223,000
INDEPENDENT AUDITORS
KPMG LLP, 99 High Street, Boston, Massachusetts 02110, 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.
-38-
<PAGE>
ADDITIONAL INFORMATION ON PERFORMANCE
From time to time, yield and total return of the Funds for various
periods may be quoted in advertisements, shareholder reports or other
communications to shareowners. The performance of each Fund may also be compared
to those of other mutual funds with similar investment objectives and to stock,
bond and other relevant indices or to rankings prepared by independent services
or other financial or industry publications that monitor the performance of
mutual funds.
Yield Calculations. A Fund's yield is calculated by dividing its net
------------------
investment income per share (as described below) earned during a 30-day period
by the maximum offering price per share on the last day of the period and
annualizing the result on a semi-annual basis by adding one to the quotient,
raising the sum to the power of six, subtracting one from the result and then
doubling the difference. A Fund's net investment income per share earned during
the period may be different than that determined for accounting purposes and is
based on the average daily number of shares outstanding during the period
entitled to receive dividends and includes dividends and interest earned during
the period minus expenses accrued for the period, net of reimbursements. This
calculation can be expressed as follows:
Yield = 2 [(a-b + 1)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
-39-
<PAGE>
income on the obligation for each day of the subsequent month that the
obligation is in the portfolio. For purposes of this calculation, it is assumed
that each month contains 30 days. The maturity of an obligation with a call
provision is the next call date on which the obligation reasonably may be
expected to be called or, if none, the maturity date. With respect to debt
obligations purchased at a discount or premium, the formula generally calls for
amortization of the discount or premium. The amortization schedule will be
adjusted monthly to reflect changes in the market values of such debt
obligations.
With respect to mortgage-related obligations which are expected to
be subject to monthly payments of principal and interest ("pay downs"), (a) gain
or loss attributable to actual monthly pay downs are accounted for as an
increase or decrease to interest income during the period; and (b) a Fund may
elect either (i) to amortize the discount and premium on the remaining security,
based on the cost of the security, to the weighted average maturity date, if
such information is available, or to the remaining term of the security, if any,
if the weighted average maturity date is not available, or (ii) not to amortize
discount or premium on the remaining security.
Undeclared earned income may be subtracted from the maximum offering
price per share (variable "d" in the formula). Undeclared earned income is the
net investment income which, at the end of the 30-day base period, has not been
declared as a dividend, but is reasonably expected to be and is declared as a
dividend shortly thereafter.
Prior to the date of this Statement of Additional Information, the
National Tax-Free Intermediate Bond and Missouri Tax-Free Intermediate Bond
Funds did not offer Service Shares. Based on the foregoing calculations, for the
30-day period ended April 30, 2000, the yields for the Institutional Shares of
the National Tax-Free Intermediate Bond and Missouri Tax-Free Intermediate Bond
Funds, were as follows:
Yield Assuming
Yield Assuming Maximum Maximum Sales Load
Sales Load and With Fee and Without Fee
Waivers and Waivers or
Reimbursements Reimbursements
-------------- --------------
National Tax-Free 4.45% 4.21%
Intermediate Bond
Fund
Missouri Tax-Free 4.44% 4.15%
Intermediate Bond
Fund
The Distribution Rate for a specified period is calculated by
dividing the total distribution per unit by the maximum offering price or net
asset value on the last day of the period and then annualizing such amount. For
the 30 day period ended April 30, 2000, the
-40-
<PAGE>
Distribution Rates for Institutional Shares of the National Tax-Free
Intermediate Bond and Missouri Tax-Free Intermediate Bond Funds, were as
follows:
<TABLE>
<CAPTION>
Rate Assuming Rate Assuming Rate Assuming No Rate Assuming No
Maximum Sales Load Maximum Sales Load Sales Load and Sales Load and
and With Fee and Without Fee With Fee Waivers Without Fee
Waivers and Waivers and and Waivers and
Reimbursements Reimbursements Reimbursements Reimbursements
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
National Tax-Free 4.26% 4.02% 4.34% 4.10%
Intermediate Bond Fund
Institutional Shares
Missouri Tax-Free 4.35% 4.06% 4.44% 4.15%
Intermediate Bond Fund
Institutional Shares
</TABLE>
A tax-exempt Fund's "tax-equivalent" yield is computed as follows:
(a) by dividing the portion of the Fund's yield (calculated as above) that is
exempt from both federal and state income taxes by one minus a stated combined
federal and state income tax rate; (b) dividing the portion of the Fund's yield
(calculated as above) that is exempt from federal income tax by one, minus a
stated federal income tax rate; and (c) adding the quotient to that portion, if
any, of the Fund's yield that is not exempt from federal income tax.
The tax-equivalent yields for the 30-day period ended April 30,
2000 for Institutional Shares of the National Tax-Free Intermediate Bond Fund
and Missouri Tax-Free Intermediate Bond Fund, with and without fee waivers
(assuming a 39.6% federal tax rate for both Funds and a 6.0% Missouri tax rate
for the Missouri Tax-Free Intermediate Bond Fund) were as follows:
-41-
<PAGE>
<TABLE>
<CAPTION>
Yield Assuming Yield Assuming Maximum
Maximum Sales Load Sales Load and Without
and With Fee Waivers Fee Waivers
and Reimbursements or Reimbursements
------------------ -----------------
<S> <C> <C>
National Tax-Free 7.05% 6.66%
Intermediate Bond Fund
Missouri Tax-Free 7.66% 7.15%
Intermediate Bond Fund
</TABLE>
The foregoing calculations are made assuming that (1) all dividends
and capital gain distributions are reinvested on the reinvestment dates at the
price per share existing on the reinvestment date, 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:
-42-
<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.
-43-
<PAGE>
Based on the foregoing calculations, the average annual total
returns for Institutional Shares of the Funds were as follows:
<TABLE>
<CAPTION>
Return Assuming Return Assuming Return Assuming Return Assuming
Maximum Sales Maximum Sales No Sales Load and No Sales Load and
and With Fee Load and Without Fee Waivers Without Fee
Waivers and Fee Waivers and With and Waivers
Reimbursements Reimbursements and Reimbursements Reimbursements
-------------- -------------- ------------------ --------------
<S> <C> <C> <C> <C>
Average Annual Return for the period from commencement of operations through April 30, 2000.
National Tax Free 4.05% 3.58% 4.46% 3.99%
Intermediate Bond Fund(1)
Missouri Tax Free 3.95% 3.29% 4.36% 3.70%
Intermediate Bond Fund(1)
</TABLE>
<TABLE>
<CAPTION>
Return Assuming Return Assuming Return Assuming Return Assuming No
Maximum Sales Maximum Sales No Sales Load and Sales Load and
Load and With Fee Load and Without With Fee Waivers Without Fee
Waivers and Fee Waivers and and Waivers and
Reimbursements Reimbursements Reimbursements Reimbursements
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Average Annual Total Returns for the one-year period ended April 30, 2000.
National Tax Free (2.46)% (2.64)% (0.47)% (0.66)%
Intermediate Bond
Fund (1)
Missouri Tax Free (2.48)% (2.75)% (0.47)% (0.74)%
Intermediate Bond
Fund (1)
</TABLE>
(1) Commenced operations on February 21, 1995.
-44-
<PAGE>
Based on the foregoing calculations, the aggregate total returns for
the Funds were as follows:
<TABLE>
<CAPTION>
Return Assuming Return Assuming Return Assuming Return Assuming
Maximum Sales Maximum Sales No Sales Load and No Sales Load and
Load and With Fee Load and Without With Fee Waivers Without Fee
Waivers and Fee Waivers and and Waivers and
Reimbursements Reimbursements Reimbursements Reimbursements
-------------- -------------- -------------- --------------
Aggregate Total Return from commencement of operations through April 30, 2000.
<S> <C> <C> <C> <C>
National Tax Free
Intermediate Bond
Fund(1) 22.89% 20.07% 25.41% 22.54%
Missouri Tax Free
Intermediate Bond
Fund(1) 22.29% 18.34% 24.80% 20.77%
</TABLE>
(1) Commenced operations on February 21, 1995.
The average annual total return and aggregate total return
information presented for the Funds in the foregoing Tables is based on average
annual total return and aggregate total return, respectively, of Institutional
Shares of the Funds during the periods indicated, as adjusted to reflect the
effect of the maximum sales charge of 2.00% on purchases of Institutional Shares
of the Funds and the maximum payments under the Shareholder Administrative
Services Plans applicable to Institutional and Service Shares and the
distribution expenses pursuant to the 12b-1 Plan applicable to Service Shares.
The sales charge was removed from the Institutional Shares of the Funds as of
October 31, 1998. The average annual total returns and aggregate total returns
do not include fees that may be imposed by institutions upon their customers. If
such fees had been included in the returns reported above, performance of these
Funds would have been lower.
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
-45-
<PAGE>
other distributions on a Fund investment are reinvested by being paid in
additional Fund shares, any future income or capital appreciation of the Fund
would increase the value, not only of the original Fund investment, but also of
the additional Fund shares received through reinvestment. As a result, the value
of the Fund investment would increase more quickly than if dividends or other
distributions had been paid in cash.
In addition, the Funds may also include in Literature discussions
and/or illustrations of the potential investment goals of a prospective
investor, investment management strategies, techniques, policies or investment
suitability of the Fund (such as value investing, market timing, dollar cost
averaging, asset allocation, constant ratio transfer, automatic accounting
rebalancing, the advantages and disadvantages of investing in tax-deferred and
taxable investments), economic conditions, the relationship between sectors of
the economy and the economy as a whole, various securities markets, the effects
of inflation and historical performance of various asset classes, including but
not limited to, stocks, bonds and Treasury securities. From time to time,
Literature may summarize the substance of information contained in shareholder
reports (including the investment composition of the Fund), as well as the views
of the Advisor as to current market, economy, trade and interest rate trends,
legislative, regulatory and monetary developments, investment strategies and
related matters believed to be of relevance to the Fund. The Fund may also
include in Literature charts, graphs or drawings which compare the investment
objective, return potential, relative stability and/or growth possibilities of
the Fund and/or other mutual funds, or illustrate the potential risks and
rewards of investment in various investment vehicles, including but not limited
to, stocks, bonds, Treasury securities and shares of the Fund and/or other
mutual funds. Literature may include a discussion of certain attributes or
benefits to be derived by an investment in the Fund and/or other mutual funds,
shareholder profiles and hypothetical investor scenarios, timely information on
financial management, tax and retirement planning and investment alternatives to
certificates of deposit and other financial instruments. Such Literature may
include symbols, headlines or other material which highlight or summarize the
information discussed in more detail therein.
MISCELLANEOUS
As of December 5, 2000, the Advisor held of record 94% of the
outstanding shares of the Institutional Class of the National Tax-Free
Intermediate Bond Fund and 90% of the outstanding shares of the Institutional
Class of the Missouri Tax-Free Intermediate Bond Fund, as fiduciary or agent on
behalf of its customers.
Any persons or organizations listed above as owning 25% or more of
the outstanding shares of a Fund may be presumed to "Control" (as that term is
defined in the 1940 Act) the Fund. As a result, those persons or organizations
could have the ability to vote a majority of the shares of the Institutional
Class of a Fund on any matter requiring the approval of shareowners of the Fund.
-46-
<PAGE>
As of December 5, 2000, the following shareowners owned of record 5%
or more of the National Tax-Free Intermediate Bond Fund's and Missouri Tax-Free
Intermediate Bond Funds outstanding Institutional Shares:
<TABLE>
<CAPTION>
Number of Shares Percent
Fund Shareholder Outstanding of Class
<S> <C> <C> <C>
National Tax-Free Intermediate Mori & Co. 1,568,534 71%
Bond Fund (Institutional) Mutual Funds
P.O. Box 13366
Kansas City, MO
Hoco & Co. 544,201 24%
Mutual Funds
P.O. Box 13366
Kansas City, MO
Helen Pierson Trust 193,241 9%
c/o Commerce Bank
8000 Forsyth
St. Louis, MO
Missouri Tax-Free Intermediate Mori & Co. 1,640,581 75%
Bond Fund (Institutional) Mutual Funds
P.O. Box 13366
Kansas City, MO
Hoco & Co. 274,994 12%
Mutual Funds
P.O. Box 13366
Kansas City, MO
</TABLE>
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.
-47-
<PAGE>
FINANCIAL STATEMENTS
The Commerce Funds' Annual Report with respect to the Funds for the
fiscal year ended October 31, 1999 and Semi-Annual Report for the six-month
period ended April 30, 2000 have been filed with the Securities and Exchange
Commission. The financial statements in such Annual Report (the "Financial
Statements") and the financial statements in the Semi-Annual Report are
incorporated by reference into this Statement of Additional Information. The
Financial Statements included in the Annual Report for the Funds for the fiscal
period ended October 31, 1999 have been audited by The Commerce Funds'
independent accountants, KPMG LLP, whose report thereon also appears in such
Annual Report and is incorporated herein by reference. The Financial Statements
in such Annual Report have been incorporated herein in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
-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 from local
A-1
<PAGE>
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 honor senior financial debt obligations and contracts. These obligations have
an original maturity not exceeding 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, and thus places greater emphasis on the
liquidity necessary to meet financial commitments in a timely manner. The
following summarizes the rating categories used by Fitch for short-term
obligations:
"F1" - Securities possess the highest credit quality. This designation
indicates the strongest capacity for timely payment of financial commitments and
may have an added "+" to denote any exceptionally strong credit feature.
"F2" - Securities possess good credit quality. This designation
indicates a satisfactory capacity for timely payment of financial commitments,
but the margin of safety is not as great as in the case of the higher ratings.
"F3" - Securities possess fair credit quality. This designation
indicates that the capacity for timely payment of financial commitments is
adequate; however, near-term adverse changes could result in a reduction to non-
investment grade.
A-2
<PAGE>
"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.
Corporate and Municipal Long-Term Debt Ratings
----------------------------------------------
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
"AAA" - An obligation rated "AAA" has the highest rating assigned by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is extremely strong.
"AA" - An obligation rated "AA" differs from the highest rated
obligations only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
A-3
<PAGE>
"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" - An obligation rated "C" is currently highly vulnerable to
nonpayment. 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.
"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
A-4
<PAGE>
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 medium-grade obligations (i.e., they
are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
"Ba" - 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.
A-5
<PAGE>
"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 on the completion of
some act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. The parenthetical rating denotes probable credit stature upon
completion of construction or elimination of the basis of the 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 long-term ratings used by Fitch:
"AAA" - Securities 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" - Securities are 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" - Securities are 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" - Securities are 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" - Securities are 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.
A-6
<PAGE>
"B" - Securities 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" - Securities 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" - Securities 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.
Notes to Long-Term and Short-Term Ratings:
- To provide more detailed indications of credit quality, the Fitch
ratings from and including "AA" to "CCC" and "F1" 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.
- '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.
- RatingWatch: Ratings are placed on RatingWatch 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. RatingWatch is typically resolved
over a relatively short period.
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A RatingOutlook indicates the direction a rating is likely to move over
a one to two-year period. Outlooks may be positive, stable or negative. A
positive or negative RatingOutlook does not imply a rating change is inevitable.
Similarly, companies whose outlooks are "stable" could be upgraded or downgraded
before an outlook moves to positive or negative if circumstances warrant such an
action. Occasionally, Fitch may be unable to identify the fundamental trend. In
these cases, the RatingOutlook may be described as evolving.
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:
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<PAGE>
"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 superior credit quality.
Excellent protection afforded by established cash flows, highly reliable
liquidity support or demonstrated broad-based access to the market for
refinancing.
"MIG-2"/"VMIG-2" - This designation denotes strong credit quality.
Margins of protection are ample, although not so large as in the preceding
group.
"MIG-3"/"VMIG-3" - This designation denotes acceptable credit.
Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less well established.
"SG" - This designation denotes speculative-grade credit quality. Debt
instruments in this category lack sufficient margins of protection.
Fitch uses the short-term ratings described under Commercial Paper
Ratings for municipal notes.
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<PAGE>
APPENDIX B
The 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.
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<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 and rise in the
underlying instruments, that position will have increased in value and 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 by speculators
B-4
<PAGE>
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.
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
B-5
<PAGE>
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 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
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<PAGE>
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 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 a
currency other than the U.S. dollar or determined by reference to the value of
one or more currencies other than the U.S. dollar. The types of transactions
covered by the special rules include the following: (i) the acquisition of, or
becoming the obligor under, a bond or other debt instrument (including, to the
extent provided in Treasury regulations, preferred stock); (ii) the accruing of
certain trade receivables and payables; and (iii) the entering into or
acquisition of any forward contract, futures contract, option and similar
financial instrument. However, regulated futures contracts and non-equity
options are generally not subject to the special currency rules if they are or
would be treated as sold for their fair market value at year-end under the
"mark-to-market" rules, unless an election is made to have such currency rules
apply. The disposition of a currency other than the U.S. dollar by a U.S.
taxpayer is also treated as a transaction subject to the special currency rules.
With respect to transactions covered by the special rules, foreign currency gain
or loss is calculated separately from any gain or loss on the underlying
transaction and is normally taxable as ordinary gain or loss. A taxpayer may
elect to treat as capital gain or loss foreign currency
B-7
<PAGE>
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
