<PAGE>
As filed with the Securities and Exchange Commission on October 16, 1996
1933 Act File No. 33-11387
1940 Act File No. 811-4984
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 18
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 19
AMERICAN AADVANTAGE FUNDS
(Exact name of registrant as specified in charter)
4333 Amon Carter Boulevard
Fort Worth, Texas 76155
(Address of principal executive offices)
Registrant's telephone number, including area code: (817) 967-3509
WILLIAM F. QUINN, PRESIDENT
4333 Amon Carter Boulevard
Fort Worth, Texas 76155
(Name and address of agent for service)
Copies to:
CLIFFORD J. ALEXANDER, ESQ.
ROBERT J. ZUTZ, ESQ.
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N.W.
Washington, D.C. 20036
Telephone: (202) 778-9000
It is proposed that this filing will become effective on December 30, 1996
pursuant to paragraph (a)(2) of Rule 485.
Registrant filed a Notice pursuant to Rule 24f-2 under the Investment
Company Act of 1940 within sixty days of its fiscal year ended October 31,
1995.
Registrant has adopted a Hub and Spoke (R) operating structure for each of
its series except the American AAdvantage Short-Term Income Fund. This
Post-Effective Amendment includes a signature page for the AMR Investment
Services Trust and the Equity 500 Index Fund, each a hub trust.
<PAGE>
AMERICAN AADVANTAGE FUNDS
CONTENTS OF REGISTRATION STATEMENT
This registration statement is comprised of the following:
Cover Sheet
Contents of Registration Statement
Cross Reference Sheet
Prospectus for the following funds of the AMR Class:
Balanced Fund, Growth and Income Fund, International
Equity Fund, Limited-Term Income Fund and S&P 500 Index
Fund.
Statement of Additional Information for the AMR Class,
Institutional Class and PlanAhead Class of the following
funds: Balanced Fund, Growth and Income Fund,
International Equity Fund, Limited-Term Income Fund,
Money Market Fund, Municipal Money Market Fund, S&P 500
Index Fund and U.S. Treasury Money Market Fund.
Part C
Signature Pages
Exhibits
This filling is made to add a new series, the S&P 500 Index Fund, to the
American AAdvantage Funds AMR Class prospectus and the combined American
AAdvantage Funds statement of additional information. No changes are
hereby made to the prospectuses of American AAdvantage Funds Institutional
Class, the PlanAhead Class or the AMR Class Money Market Funds, the other
series of American AAdvantage Funds.
<PAGE>
AMERICAN AADVANTAGE FUNDS
AMR CLASS
FORM N-1A CROSS-REFERENCE SHEET
Part A
Form N-1A
Item No. PROSPECTUS CAPTION
1 Cover Page
2 Table of Fees and Expenses
3 Financial Highlights
4 Cover Page; Introduction; Investment Objectives,
Policies and Risks; Investment Restrictions
5 Management and Administration of the Trusts;
Investment Advisers
5A Not Applicable
6 Dividends, Other Distributions and Tax Matters;
General Information; Shareholder Communications
7 Yield and Total Returns; Management and
Administration of the Trusts; Purchase,
Redemption and Valuation of Shares
8 Yield and Total Returns; Purchase, Redemption and
Valuation of Shares
9 Inapplicable
Part B
STATEMENT OF ADDITIONAL
N-1A Item No. INFORMATION CAPTION
10 Cover Page
11 Table of Contents
12 Not Applicable
13 Investment Restrictions; Approach to Stock
Selection; Other Information
<PAGE>
14 Trustees and Officers of the Trust and the AMR
Trust; Trustees and Officers of the Equity 500
Index Trust
15 Control Persons and 5% Shareholders
16 Management, Administrative Services and
Distribution Fees; Expense Limitations;
Investment Advisory Agreements
17 Portfolio Securities Transactions
18 Description of the Trust; Other Information
19 Net Asset Value; Redemption in Kind
20 Tax Information
21 Inapplicable
22 Yield and Total Return Quotations
23 Financial Statements
PART C. OTHER INFORMATION
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C of this Registration Statement. <PAGE>
<TABLE>
<CAPTION>
<S> <C>
THIS PROSPECTUS contains important information about the PROSPECTUS
AMR Class of the AMERICAN AADVANTAGE FUNDS ("Trust"), an JANUARY 1, 1997
open-end management investment company, which consists of
multiple investment portfolios. This Prospectus pertains [LOGO]
only to the five funds listed on this cover page AMERICAN
(individually referred to as a "Fund" and, collectively, AAdvantage
the "Funds"). EACH FUND, EXCEPT THE S&P 500 INDEX FUND, Funds(REGISTERED TRADEMARK)
SEEKS ITS INVESTMENT OBJECTIVE BY INVESTING ALL OF ITS AMR Class (SERVICE)
INVESTABLE ASSETS IN A CORRESPONDING PORTFOLIO OF THE AMR
INVESTMENT SERVICES TRUST ("AMR TRUST"). THE S&P 500 INDEX BALANCED FUND
FUND INVESTS ALL OF ITS INVESTABLE ASSETS IN THE EQUITY 500 GROWTH AND INCOME FUND
INDEX PORTFOLIO. (THE EQUITY 500 INDEX PORTFOLIO AND THE INTERNATIONAL EQUITY FUND
PORTFOLIOS OF THE AMR TRUST ARE REFERRED TO HEREIN LIMITED-TERM INCOME FUND
INDIVIDUALLY AS A "PORTFOLIO" AND, COLLECTIVELY, THE S&P 500 INDEX FUND
"PORTFOLIOS".) EACH PORTFOLIO HAS AN INVESTMENT OBJECTIVE
IDENTICAL TO THE INVESTING FUND. The investment experience
of each Fund will correspond directly with the investment
experience of each Portfolio. Each Fund offers the AMR
Class of shares to tax exempt retirement and benefit plans
of AMR Corporation and its affiliates. Prospective
investors in the AMR Class should read this Prospectus
carefully before making an investment decision and retain
it for future reference. Each Fund, except the S&P 500
Index Fund, consists of multiple classes of shares designed
to meet the needs of different groups of investors. The S&P
500 Index Fund currently offers only the AMR Class of
shares.
IN ADDITION TO THIS PROSPECTUS, a Statement of Additional
Information ("SAI") dated January 1, 1997 has been filed
with the Securities and Exchange Commission and is
incorporated herein by reference. The SAI contains more
detailed information about the Funds. For a free copy of
the SAI, call 817-967-3509. For further information about
the AMR Class or for information on the other classes of
shares, please refer to the appropriate address and phone
number on the back cover of this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY SUCH STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
</TABLE>
<PAGE>
THE AMERICAN AADVANTAGE BALANCED FUND(SERVICEMARK) ("Balanced Fund") seeks
income and capital appreciation by investing all of its investable assets
in the Balanced Portfolio of the AMR Trust ("Balanced Portfolio") which in
turn primarily invests in equity and debt securities (such as stocks and
bonds).
THE AMERICAN AADVANTAGE GROWTH AND INCOME FUND(SERVICEMARK) ("Growth and
Income Fund") seeks long-term capital appreciation and current income by
investing all of its investable assets in the Growth and Income Portfolio
of the AMR Trust ("Growth and Income Portfolio") which in turn primarily
invests in equity securities (such as stocks).
THE AMERICAN AADVANTAGE INTERNATIONAL EQUITY FUND(SERVICEMARK)
("International Equity Fund") seeks long-term capital appreciation by
investing all of its investable assets in the International Equity
Portfolio of the AMR Trust ("International Equity Portfolio") which in
turn primarily invests in equity securities of issuers based outside the
United States (such as foreign stocks).
THE AMERICAN AADVANTAGE LIMITED-TERM INCOME FUND(SERVICEMARK) ("Limited-
Term Income Fund") seeks income and capital appreciation by investing all
of its investable assets in the Limited-Term Income Portfolio of the AMR
Trust ("Limited-Term Income Portfolio") which in turn primarily invests in
debt obligations.
THE AMERICAN AADVANTAGE S&P 500 INDEX FUND1/ ("S&P 500 Index Fund") seeks
to provide investment results that, before expenses, correspond to the
total return of common stocks publicly traded in the United States, as
represented by the Standard & Poor's 500 Composite Stock Price Index (the
"S&P 500" or "Index"), by investing all of its investable assets in the
Equity 500 Index Portfolio which in turn invests in common stocks of
companies that compose the S&P 500.
Under a Hub and Spoke(REGISTERED TRADEMARK)2/ operating structure
(or, with respect to the S&P 500 Index Fund, a Master-Feeder operating
structure), each Fund seeks its investment objective by investing all of
its investable assets in a corresponding Portfolio as described above.
Each Portfolio's investment objective is identical to that of its
corresponding Fund. Whenever the phrase "all of the Fund's investable
assets" is used, it means that the only investment securities that will be
held by a Fund will be that Fund's interest in its corresponding
Portfolio. AMR Investment Services, Inc. (the "Manager") provides
investment management and administrative services to the Portfolios,
except for the Equity 500 Index Portfolio, and administrative services to
the Funds. Bankers Trust Company ("BT") provides investment advisory,
administrative and other services to the Equity 500 Index Portfolio. This
Hub and Spoke structure (or Master-Feeder structure) is different from
that of many other investment companies which directly acquire and manage
their own portfolios of securities. Accordingly, investors should
carefully consider this investment approach. See "Investment Objectives,
Policies and Risks -- Additional Information About the Portfolios." A Fund
may withdraw its investment in a corresponding Portfolio at any time if
the Trust's Board of Trustees ("Board") determines that it would be in the
best interest of that Fund and its shareholders to do so. Upon any such
withdrawal, that Fund's assets would be invested in accordance with the
<PAGE>
investment policies and restrictions described in this Prospectus and the
SAI.
<TABLE>
<CAPTION>
<S> <C>
Table of Fees and Expenses . . . . . . . . . . . . . 3 Management and Administration of the Trusts . . . . . 18
Financial Highlights . . . . . . . . . . . . . . . . 3 Investment Advisers . . . . . . . . . . . . . . . . . 21
Introduction . . . . . . . . . . . . . . . . . . . . 8 Purchase, Redemption and Valuation of Shares . . . . 23
Investment Objectives, Policies and Risks . . . . . . 8 Dividends, Other Distributions and Tax Matters . . . 25
Investment Restrictions . . . . . . . . . . . . . . . 17 General Information . . . . . . . . . . . . . . . . . 27
Yields and Total Returns . . . . . . . . . . . . . . 18 Shareholder Communications . . . . . . . . . . . . . 27
</TABLE>
---------------
1/ S&P is a trademark of The McGraw-Hill Companies, Inc. and
has been licensed for use. "Standard & Poor's(REGISTERED
TRADEMARK)", "S&P(REGISTERED TRADEMARK)", "Standard &
Poor's 500", "S&P 500(REGISTERED TRADEMARK)", and "500"
are all trademarks of The McGraw-Hill Companies, Inc. and
have been licensed for use by Bankers Trust Company. The
S&P 500 Index Fund is not sponsored, sold or promoted by
Standard & Poor's, and Standard & Poor's makes no
representation regarding the advisability of investing in
that Fund.
2/ Hub and Spoke is a registered service mark of Signature
Financial Group, Inc.
3 PROSPECTUS
<PAGE>
<TABLE>
<CAPTION>
TABLE OF FEES AND EXPENSES
Annual Operating Expenses (as a percentage of average net assets) of the AMR Class:
INTER-
GROWTH NATIONAL LIMITED-TERM S&P 500
BALANCED AND INCOME EQUITY INCOME INDEX
FUND FUND FUND FUND FUND(1)
<S> <C> <C> <C> <C> <C>
Management Fees (net of waiver) 0.28% 0.28% 0.43% 0.20% 0.08%(2)
12b-1 Fees 0.00% 0.00% 0.00% 0.00% 0.00%
Other Expenses (net of waiver) 0.08% 0.08% 0.11% 0.11% 0.12%(3)
----- ----- ----- ----- -----
Total Operating Expenses (net of waiver) 0.36% 0.36% 0.54% 0.31% 0.20%(4)
===== ===== ===== ===== =====
</TABLE>
----------------
(1) Because the S&P 500 Index Fund's shares were not offered for sale
prior to January 1, 1997, Annual Operating Expenses are based on
estimated expenses.
(2) The investment adviser has voluntarily agreed to waive a portion
of its investment advisory fee. Without such waiver, the
Management Fee would be equal to 0.10%.
(3) "Other Expenses" before fee waivers are estimated to be 0.14%.
(4) "Total Operating Expenses" before fee waivers are estimated to be
0.24%.
The above expenses reflect the expenses of both the Fund and the
Portfolio in which it invests. The Board believes that the aggregate per
share expenses of each Fund and its corresponding Portfolio will be
approximately equal to the expenses that the Fund would incur if its
assets were invested directly in the type of securities held by the
Portfolio.
EXAMPLES
An AMR Class investor in each Fund would directly or indirectly
pay on a cumulative basis the following expenses on a $1,000 investment
assuming a 5% annual return:
1 Year 3 Years 5 Years 10 Years
Balanced Fund $4 $12 $20 $46
Growth and Income Fund 4 12 20 46
International Equity Fund 6 17 30 68
Limited-Term Income Fund 3 10 17 39
S&P 500 Index Fund __ __ N/A N/A
PROSPECTUS 4
<PAGE>
The purpose of the table above is to assist a potential investor
in understanding the various costs and expenses to be incurred directly or
indirectly as a shareholder in the AMR Class of a Fund. Additional
information may be found under "Management and Administration of the
Trusts" and "Investment Advisers."
THE FOREGOING EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS
THAN THOSE SHOWN AND PERFORMANCE MAY BE BETTER OR WORSE THAN THE 5% ANNUAL
RETURN ASSUMED IN THE EXAMPLES.
FINANCIAL HIGHLIGHTS
The financial highlights in the following tables have been derived from
financial statements of the Trust. The information for the periods ended
October 31, 1987 through 1995 has been audited by Ernst & Young LLP,
independent auditors. The semi-annual information for the six-months ended
April 30, 1996 is unaudited. Such information should be read in
conjunction with the financial statements and the report of the
independent auditors appearing in the Annual Report incorporated by
reference in the SAI, which contains further information about performance
of the Funds and can be obtained by investors without charge. Financial
highlights are not available for the S&P 500 Index Fund because it has not
commenced operations.
5 PROSPECTUS
<PAGE>
<TABLE>
<CAPTION>
(For a share outstanding throughout the period)
Balanced Fund
---------------------------------------------------------------------
AMR Class
-----------------------------------------------------------------------
Period Ended April 30,
1996(5)(6) Year Ended October 31, Period Ended October 31,
(unaudited) 1995(4)(5) 1994 (1)(3)
-------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $13.98 $12.36 $12.35
Income from investment operations:
Net investment income 0.30 0.58 0.14
Net gains (losses) on securities
(both realized and unrealized) 1.03 1.71 (0.13)
Total from investment operations 1.33 2.29 0.01
Less distributions:
Dividends from net investment income (0.60) (0.53) --
Distributions from net realized
gains on securities (0.44) (0.14) --
Total distributions (1.04) (0.67) --
Net asset value, end of period $14.27 $13.98 $12.36
Total return (annualized)(7) 17.85% 19.77% (0.08)%(8)
Ratios/supplemental data:
Net assets, end of period (in
thousands) $579,195 $542,619 $393,504
Ratios to average net
assets (9)(10)(11):
Expenses 0.36% 0.38% 0.36%
Net investment income 4.17% 4.54% 4.65%
Portfolio turnover rate 47% 73 48%
</TABLE>
PROSPECTUS 6
<PAGE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
Institutional Class
----------------------------------------------------------------------------------
Year Ended October 31,
Period
Ended
October
31,
1994(3) 1993 1992 1991 1990(2) 1989 1988 1987(1)
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $13.23 $11.99 $11.60 $9.87 $11.05 $10.13 $9.08 $10.00
Income from investment operations:
Net investment income 0.57 0.49 0.55 0.58 0.57 0.53 0.56 0.16
Net gains (losses) on securities
(both realized and unrealized) (0.54) 1.57 0.41 1.79 (1.18) 0.90 0.73 (1.08)
Total from investment operations 0.03 2.06 0.96 2.37 (0.61) 1.43 1.29 (0.92)
Less distributions:
Dividends from net investment
income (0.56) (0.52) (0.56) (0.64) (0.51) (0.51) (0.40) --
Distributions from net realized
gains on securities (0.34) (0.30) (0.01) -- (0.06) -- -- --
Total distributions (0.90) (0.82) (0.57) (0.64) (0.57) (0.51) (0.24) --
Net asset value, end of period $12.36 $13.23 $11.99 $11.60 $9.87 $11.05 $10.13 $9.08
Total return (annualized)(7) (0.08)% 19.19% 8.75% 25.35% (5.24)% 15.49% 14.63% (31.84)%
Ratios/supplemental data:
Net assets, end of period (in
thousands) $222,873 $532,543 $370,087 $311,906 $233,702 $210,119 $147,581 $118,986
Ratios to average net
assets (9)(10)(11):
Expenses 0.36% 0.34% 0.35% 0.37% 0.44% 0.47% 0.52% 0.45%
Net investment income 4.77% 4.91% 5.31% 6.06% 6.50% 6.32% 6.25% 5.59%
Portfolio turnover rate 48% 83% 80% 55% 62% 78% 77% 17%
</TABLE>
7 PROSPECTUS
<PAGE>
-----------------
(1) The Balanced Fund commenced active operations on July 17, 1987. The
AMR Class commenced active operations on August 1, 1994 and at that
time existing shares of the Balanced Fund were designated as
Institutional Class shares.
(2) Penmark Investments, Inc. was replaced by Independence Investment
Associates, Inc. as an investment adviser to the Fund as of the
close of business on February 28, 1990.
(3) Average shares outstanding for the period rather than end of period
shares were used to compute net investment income per share.
(4) GSB Investment Management, Inc. was added as an investment adviser
to the Balanced Fund on January 1, 1995.
(5) Class expenses per share were subtracted from net investment income
per share for the Fund before class expenses to determine net
investment income per share.
(6) Capital Guardian Trust Company was replaced by Brandywine Asset
Management, Inc. as an investment adviser to the Balanced Fund on
April 1, 1996.
(7) Total return is calculated assuming an initial investment is made at
the net asset value last calculated on the business day before the
first day of each period reported, reinvestment of all dividends and
capital gains distributions on the payable date, accrual for the
maximum shareholder services fee of .30% (for periods prior to
August 1, 1994) and a sale at net asset value on the last day of
each period reported.
(8) Total return for the AMR Class for the period ended October 31, 1994
reflects Institutional Class returns from November 1, 1993 through
July 31, 1994 and returns of the AMR Class for the period August 1,
1994 (commencement of operations) through October 31, 1994. Due to
the different expense structures between the classes, total returns
for the AMR Class would vary from the results shown had it been in
operation for the entire year.
(9) Effective August 1, 1994, expenses include administrative services
fees paid by the Fund to the Manager. Prior to that date, expenses
exclude shareholder services fees paid directly by shareholders to
the Manager, which amounted to approximately $.01 per share in each
period on an annualized basis.
(10) The method of determining average net assets was changed from a
monthly average to a daily average starting with the periods ended
October 31, 1994.
(11) Annualized.
PROSPECTUS 8
<PAGE>
<TABLE>
<CAPTION>
(For a share outstanding throughout the period)
Growth and Income Fund
----------------------------------------------------------------------------
AMR Class
----------------------------------------------------------------------------
Period Ended Year Ended Period Ended
April 30, 1996(5)(6) October 31, October 31,
(unaudited) 1995(5) 1994(1)(4)
----------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $15.95 $14.20 $13.99
Income from investment operations:
Net investment income 0.23 0.44 0.11
Net gains (losses) on securities
(both realized and unrealized) 2.17 2.30 0.10
Total from investment operations 2.40 2.74 0.21
Less distributions:
Dividends from net investment income (0.44) (0.45) --
Distributions from net realized gains
on securities (0.57) (0.54) --
Total distributions (1.01) (0.99) --
Net asset value, end of period $17.34 $15.95 $14.20
Total return (annualized)(7) 26.96% 21.03% 3.43%(8)
Ratios/supplemental data:
Net assets, end of period (in
thousands) $898,423 $706,884 $505,892
Ratios to average net
assets (9)(10)(11):
Expenses 0.34% 0.38% 0.37%
Net investment income 2.82% 3.20% 3.18%
Portfolio turnover rate 33% 26% 23%
</TABLE>
9 PROSPECTUS
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
Institutional Class
-----------------------------------------------------------------------------------
Year Ended October 31,
Period
Ended
October
31,
1994(4) 1993 1992(3) 1991 1990(2) 1989 1988 1987(1)
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $14.63 $12.79 $12.10 $9.47 $11.59 $9.96 $8.30 $10.00
Income from investment operations:
Net investment income 0.43 0.36 0.39 0.42 0.42 0.42 0.42 0.10
Net gains (losses) on securities
(both realized and unrealized) 0.08 2.21 0.77 2.70 (1.94) 1.59 1.40 (1.80)
Total from investment operations 0.51 2.57 1.16 3.12 (1.52) 2.01 1.82 (1.70)
Less distributions:
Dividends from net investment income (0.41) (0.37) (0.39) (0.49) (0.43) (0.38) (0.16) --
Distributions from net realized
gains on securities (0.54) (0.36) (0.08) -- (0.17) -- -- --
Total distributions (0.95) (0.73) (0.47) (0.49) (0.60) (0.38) (0.16) --
Net asset value, end of period $14.19 $14.63 $12.79 $12.10 $9.47 $11.59 $9.96 $8.30
Total return (annualized)(7) 3.36% 21.49% 10.00% 33.83% (13.52)% 20.94% 22.20% (58.51)%
Ratios/supplemental data:
Net assets, end of period (in
thousands) $22,737 $477,088 $339,739 $264,628 $182,430 $187,869 $140,073 $134,796
Ratios to average net
assets (9)(10)(11):
Expenses 0.33% 0.34% 0.36% 0.37% 0.45% 0.45% 0.53% 0.43%
Net investment income 3.28% 3.12% 3.57% 4.19% 4.49% 4.40% 4.20% 3.68%
Portfolio turnover rate 23% 30% 35% 52% 41% 50% 56% 22%
</TABLE>
PROSPECTUS 10
<PAGE>
-----------------
(1) The Growth and Income Fund commenced active operations on July 17,
1987. The AMR Class commenced active operations on August 1, 1994
and at that time existing shares of the Growth and Income Fund were
designated as Institutional Class shares.
(2) GSB Investment Management, Inc. was added as an investment adviser
to the Growth and Income Fund on April 10, 1990.
(3) The assets of the Growth and Income Fund previously managed by
Atlanta Capital Management were transferred to GSB Investment
Management, Inc. as of the close of business on December 5, 1991.
(4) Average shares outstanding for the period rather than end of period
shares were used to compute net investment income per share.
(5) Class expenses per share were subtracted from net investment income
per share for the Fund before class expenses to determine net
investment income per share.
(6) Capital Guardian Trust Company was replaced by Brandywine Asset
Management, Inc. as an investment adviser to the Growth and Income
Fund on April 1, 1996.
(7) Total return is calculated assuming an initial investment is made at
the net asset value last calculated on the business day before the
first day of each period reported, reinvestment of all dividends and
capital gains distributions on the payable date, accrual for the
maximum shareholder services fee of .30% (for periods prior to
August 1, 1994) and a sale at net asset value on the last day of
each period reported.
(8) Total return for the AMR Class for the period ended October 31, 1994
reflects Institutional Class returns from November 1, 1993 through
July 31, 1994 and returns of the AMR Class for the period August 1,
1994 (commencement of operations) through October 31, 1994. Due to
the different expense structures between the classes, total returns
for the AMR Class would vary from the results shown had it been in
operation for the entire year.
(9) Effective August 1, 1994, expenses include administrative services
fees paid by the Fund to the Manager. Prior to that date, expenses
exclude shareholder services fees paid directly by shareholders to
the Manager, which amounted to less than $.01 per share in each
period on an annualized basis.
(10) The method of determining average net assets was changed from a
monthly average to a daily average starting with the periods ended
October 31, 1994.
(11) Annualized.
11 PROSPECTUS
<PAGE>
<TABLE>
<CAPTION>
(For a share outstanding throughout the period)
International Equity Fund
------------------------------------------------------------------------------------------------------
AMR Class Institutional Class
------------------------------------------ --------------------------------------------------------
Year Ended October 31,
Period Ended
April 30, Year Ended Period Ended Period Ended
1996(5) October 31, October 31, October 31,
(unaudited) 1995(5) 1994(1)(3)(4) 1994(3)(4) 1993(2) 1992 1991(1)
------------------------------------------- --------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $13.31 $12.87 $12.61 $12.07 $8.93 $10.13 $10.00
Income from
investment
operations:
Net investment income 0.14 0.30 0.05 0.32 0.17 0.12 --
Net gains
(losses) on
securities (both
realized and
unrealized) 1.61 0.68 0.21 1.10 3.09 (1.31) 0.13
Total from investment
operations 1.75 0.98 0.26 1.42 3.26 (1.19) 0.13
Less distributions:
Dividends from net
investment income (0.30) (0.22) -- (0.17) (0.12) (0.01) --
Distributions from
net realized gains
on securities (0.24) (0.32) -- (0.45) -- -- --
Total distributions (0.54) (0.54) -- (0.62) (0.12) (0.01) --
Net asset value, end
of period $14.52 $13.31 $12.87 $12.87 $12.07 $8.93 $10.13
Total return
(annualized)(6) 23.86% 8.18% 11.77% 11.77%(7) 36.56% (12.07)% 5.69%
Ratios/supplemental
data:
Net assets, end
of period (in
thousands) $279,332 $227,939 $165,524 $23,115 $66,652 $38,837 $10,536
Ratios to average net
assets(8)(9)(10):
Expenses 0.58% 0.60% 0.63% 0.61% 0.78% 1.17% 1.90%(11)
Net investment income 2.15% 2.65% 1.41% 2.74% 2.00% 2.04% 0.38%(11)
Portfolio turnover
rate 14% 21% 37% 37% 61% 21% 2%
</TABLE>
PROSPECTUS 12
<PAGE>
------------------
(1) The International Equity Fund commenced active operations on August
7, 1991. The AMR Class commenced active operations on August 1, 1994
and at that time existing shares of the International Equity Fund
were designated as Institutional Class shares.
(2) HD International Limited was replaced by Hotchkis and Wiley as an
investment adviser to the International Equity Fund as of May 21,
1993.
(3) Morgan Stanley Asset Management Inc. was added as an investment
adviser to the International Equity Fund as of August 1, 1994.
(4) Average shares outstanding for the period rather than end of period
shares were used to compute net investment income per share.
(5) Class expenses per share were subtracted from net investment income
per share for the Fund before class expenses to determine net
investment income per share.
(6) Total return is calculated assuming an initial investment is made at
the net asset value last calculated on the business day before the
first day of each period reported, reinvestment of all dividends and
capital gains distributions on the payable date, accrual for the
maximum shareholder services fee of .30% (for periods prior to
August 1, 1994) and a sale at net asset value on the last day of
each period reported.
(7) Total return for the AMR Class for the period ended October 31, 1994
reflects Institutional Class returns from November 1, 1993 through
July 31, 1994 and returns of the AMR Class for the period August 1,
1994 (commencement of operations) through October 31, 1994. Due to
the different expense structures between the classes, total returns
for the AMR Class would vary from the results shown had it been in
operation for the entire year.
(8) Effective August 1, 1994, expenses include administrative services
fees paid by the Fund to the Manager. Prior to that date, expenses
exclude shareholder services fees paid directly by shareholders to
the Manager. Such fees amounted to less than $.04 per share in each
period on an annualized basis and were waived by the Manager for the
period ended October 31, 1991.
(9) The method of determining average net assets was changed from a
monthly average to a daily average starting with the periods ended
October 31, 1994.
(10) Annualized.
(11) Estimated based on expected annual expenses and actual average net
assets.
13 PROSPECTUS
<PAGE>
<TABLE>
<CAPTION>
(For a share outstanding throughout the period)
Limited-Term Income Fund
-----------------------------------------------------------------------------------------------------
AMR Class Institutional Class
----------------------------- ---------------------------------------------------------------------
Year Ended October 31,
Period Year Period Period
Ended Ended Ended Ended
April 30, October October October
1996 31, 31, 31,
(unaudited) 1995 1994(1)(3) 1994(3) 1993 1992 1991(2) 1990 1989 1988(1)
----------------------------- ---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $9.81 $9.68 $9.78 $10.23 $10.13 $10.07 $9.76 $9.94 $10.12 $10.00
Income from
investment
operations:
Net investment income 0.33 0.64 0.14 0.52 0.58 0.75 0.83 0.92 0.96 0.64
Net gains (losses)
on securities (both
realized and
unrealized) (0.19) 0.13 (0.10) (0.46) 0.15 0.06 0.31 (0.18) (0.12) 0.05
Total from
investment operations 0.14 0.77 0.04 0.06 0.73 0.81 1.14 0.74 0.84 0.69
Less distributions:
Dividends from
net investment
income (0.33) (0.64) (0.14) (0.52) (0.58) (0.75) (0.83) (0.92) (1.02) (0.57)
Distributions from
net realized gains
on securities -- -- -- (0.10) (0.05) -- -- -- -- --
Total distributions (0.33) (0.64) (0.14) (0.62) (0.63) (0.75) (0.83) (0.92) (1.02) (0.57)
Net asset value, end
of period $9.62 $9.81 $9.68 $9.67 $10.23 $10.13 $10.07 $9.76 $9.94 $10.12
Total return
(annualized)(4) 2.77% 8.22% 0.59%(5) 0.42% 7.20% 7.94% 11.87% 7.51% 7.62% 7.41%
Ratios/supplemental
data:
Net assets, end of
period (in
thousands) $66,017 $64,595 $53,445 $112,141 $238,874 $209,928 $141,629 $83,265 $60,507 $40,855
Ratios to average
net assets
(6)(7)(8): 0.33% 0.36% 0.33% 0.31% 0.26% 0.27% 0.35% 0.48% 0.59% 0.50%
Net investment income
Expenses 6.74% 6.60% 5.77% 5.26% 5.76% 7.40% 8.42% 9.44% 9.77% 8.01%
Portfolio turnover
rate 121% 183% 94% 94% 176% 133% 165% 156% 158% 127%
</TABLE>
PROSPECTUS 14
<PAGE>
------------------------
(1) The Limited-Term Income Fund commenced active operations on December
3, 1987. The AMR Class commenced active operations on August 1, 1994
and at that time existing shares of the Limited-Term Income Fund
were designated as Institutional Class shares.
(2) AMR Investment Services, Inc. began portfolio management of the
Limited-Term Income Fund on March 1, 1991 replacing Brown Brothers,
Harriman & Co. and Barrow, Hanley, Mewhinney & Strauss, Inc.
(3) Average shares outstanding for the period rather than end of period
shares were used to compute net investment income per share.
(4) Total return is calculated assuming an initial investment is made at
the net asset value last calculated on the business day before the
first day of each period reported, reinvestment of all dividends and
capital gains distributions on the payable date, accrual for the
maximum shareholder services fee of .30% (for periods prior to
August 1, 1994) and a sale at net asset value on the last day of
each period reported.
(5) Total return for the AMR Class for the period ended October 31, 1994
reflects Institutional Class returns from November 1, 1993 through
July 31, 1994 and returns of the AMR Class for the period August 1,
1994 (commencement of operations) through October 31, 1994. Due to
the different expense structures between the classes, total returns
for the AMR Class would vary from the results shown had it been in
operation for the entire year.
(6) Effective August 1, 1994, expenses include administrative services
fees paid by the Fund to the Manager. Prior to that date, expenses
exclude shareholder services fees paid directly by shareholders to
the Manager. Such fees amounted to less than $.03 per share in each
period on an annualized basis.
(7) The method of determining average net assets was changed from a
monthly average to a daily average starting with the periods ended
October 31, 1994.
(8) Annualized.
15 PROSPECTUS
<PAGE>
INTRODUCTION
The Trust is an open-end, management investment company organized
as a Massachusetts business trust on January 16, 1987. The Funds are five
of the several investment portfolios of the Trust. Each Fund has a
distinctive investment objective and investment policies. Each Fund,
except the S&P 500 Index Fund, invests all of its investable assets in a
corresponding Portfolio of the AMR Trust that has an identical investment
objective. The S&P 500 Index Fund invests all of its investable assets in
the Equity 500 Index Portfolio, which is a separate investment company
advised by BT that has an identical investment objective. The Manager
provides the Portfolios, except the Equity 500 Index Portfolio, with
business and asset management services, including the evaluation and
monitoring of the investment advisers. The Manager also provides the
Funds with administrative services. BT provides the Equity 500 Index
Portfolio with investment advisory, administrative and other services.
The Balanced Fund, Growth and Income Fund, International Equity
Fund and Limited-Term Income Fund consist of multiple classes of shares,
including the "AMR Class," for tax-exempt retirement and benefit plans of
AMR Corporation and its affiliates, the "PlanAhead Class" which is
available to all investors, including smaller institutional investors,
investors using intermediary organizations such as discount brokers or
plan sponsors, individual retirement accounts ("IRAs"), and self-employed
individual retirement plans ("HR-10 Plans" or "Keogh Plans"), and the
"Institutional Class" which is available to large institutional investors
investing at least $2 million in the Funds. The S&P 500 Index Fund
currently offers only the AMR Class of shares. For further information
about the Institutional Class call (800) 967-9009 and for the PlanAhead
Class call (800) 388-3344.
Although each class of shares is designed to meet the needs of
different categories of investors, all classes of each Fund share the same
portfolio of investments and share a common investment objective. See
"Investment Objectives, Policies and Risks." There is no guarantee that a
Fund will achieve its investment objective. Based on its value, a share of
a Fund, regardless of class, will receive a proportionate share of the
investment income and the gains (losses) earned (or incurred) by the Fund.
It also will bear its proportionate share of expenses that are allocated
to the Fund as a whole. However, certain expenses presently are allocated
separately to each class of shares.
The assets of the Balanced Portfolio, the Growth and Income
Portfolio and the International Equity Portfolio are allocated by the
Manager among investment advisers designated for each of those Portfolios.
BT serves as the investment adviser to the Equity 500 Index Portfolio, the
Portfolio corresponding to the S&P 500 Index Fund. Investment decisions
for the Limited-Term Income Portfolio are made directly by the Manager.
See "Investment Advisers." With the exception of the S&P 500 Index Fund,
each investment adviser has discretion to purchase and sell portfolio
securities in accordance with the investment objectives, policies and
PROSPECTUS 16
<PAGE>
restrictions described in this Prospectus and in the SAI and by specific
investment strategies developed by the Manager.
AMR Class shares are sold without any sales charges at the next
share price calculated after an investment is received and accepted.
Shares will be redeemed at the next share price calculated after receipt
of a redemption order. See "Purchase, Redemption and Valuation of Shares."
INVESTMENT OBJECTIVES, POLICIES AND RISKS
The investment objective and policies of each Fund and its
corresponding Portfolio are described below. Except as otherwise
indicated, the investment policies of any Fund may be changed at any time
by the Board to the extent that such changes are consistent with the
investment objective of the applicable Fund. However, each Fund's
investment objective may not be changed without a majority vote of that
Fund's outstanding shares, which is defined as the lesser of (a) 67% of
the shares of the applicable Fund present or represented if the holders of
more than 50% of the shares are present or represented at the
shareholders' meeting, or (b) more than 50% of the shares of the
applicable Fund (hereinafter, "majority vote"). Except for the Equity 500
Index Portfolio, a Portfolio's investment objective may not be changed
without a majority vote of that Portfolio's interest holders. The
investment objective of the Equity 500 Index Portfolio is not a
fundamental policy. Shareholders of the S&P 500 Index Fund will receive
thirty days prior written notice with respect to any change in the
investment objective of the Equity 500 Index Portfolio.
Each Fund has a fundamental investment policy which allows it to
invest all of its investable assets in its corresponding Portfolio. All
other fundamental investment policies and the non-fundamental investment
policies of each Fund and its corresponding Portfolio are identical.
Therefore, although the following discusses the investment policies of
each Portfolio, the AMR Trust's Board of Trustees ("AMR Trust Board") and
the Equity 500 Index Portfolio's Board of Trustees ("Equity 500 Index
Portfolio Board"), it applies equally to each Fund and each Board.
AMERICAN AADVANTAGE BALANCED FUND -- This Fund's investment objective is
to realize both income and capital appreciation. This Fund seeks its
investment objective by investing all of its investable assets in the
Balanced Portfolio, which invests primarily in equity and debt securities.
Although equity securities (such as stocks) will be purchased primarily
for capital appreciation and debt securities (such as bonds) will be
purchased primarily for income purposes, income and capital appreciation
potential will be considered in connection with all such investments.
Excluding collateral for securities loaned, ordinarily the Portfolio will
have a minimum of 30% and a maximum of 70% of its assets invested in
equity securities and a minimum of 30% and a maximum of 70% of its assets
invested in debt securities which, at the time of purchase, are rated in
one of the four highest rating categories by all nationally recognized
statistical rating organizations ("Rating Organizations") rating that
security such as Standard & Poor's ("S&P Rating") or Moody's Investor
17 PROSPECTUS
<PAGE>
Services, Inc. ("Moody's") or, if unrated, are deemed to be of comparable
quality by the applicable investment adviser. Obligations rated in the
fourth highest rating category are limited to 25% of the Portfolio's debt
allocation. Obligations rated in the BBB or Baa categories by any Rating
Organization have speculative characteristics and thus changes in economic
conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than is the case with
higher grade bonds. See the SAI for a description of debt ratings. The
Portfolio, at the discretion of the investment advisers, may retain a
security that has been downgraded below the initial investment criteria.
The Portfolio usually invests between 50% and 65% of its assets in equity
securities and between 35% and 50% of its assets in debt securities. The
remainder of the Portfolio's assets may be invested in other investment
companies and in cash or cash equivalents, including investment-grade
short-term obligations. However, when its investment advisers deem that
market conditions warrant, the Portfolio may, for temporary defensive
purposes, invest up to 100% of its assets in cash, cash equivalents and
investment grade short-term obligations.
The Portfolio's investments in debt securities may include
investments in obligations of the U.S. Government and its agencies and
instrumentalities, including separately traded registered interest and
principal securities ("STRIPS") and other zero coupon obligations;
corporate bonds, notes and debentures; non-convertible preferred stocks;
mortgage-backed securities; asset-backed securities; and domestic,
Yankeedollar and Eurodollar bank deposit notes, certificates of deposit,
bonds and notes. Such obligations may have a fixed, variable or floating
rate of interest. See the SAI for a further description of the foregoing
securities. The value of the Portfolio's debt investments will vary in
response to interest rate changes as described in "American AAdvantage
Limited-Term Income Fund."
The Portfolio also may engage in dollar rolls or purchase or sell
securities on a "when-issued" and on a "forward commitment" basis. The
purchase or sale of when-issued securities enables an investor to hedge
against anticipated changes in interest rates and prices by locking in an
attractive price or yield. The price of when-issued securities is fixed at
the time the commitment to purchase or sell is made, but delivery and
payment for the when-issued securities take place at a later date,
normally one to two months after the date of purchase. During the period
between purchase and settlement, no payment is made by the purchaser to
the issuer and no interest accrues to the purchaser. Such transactions
therefore involve a risk of loss if the value of the security to be
purchased declines prior to the settlement date or if the value of the
security to be sold increases prior to the settlement date. A sale of a
when-issued security also involves the risk that the other party will be
unable to settle the transaction. Dollar rolls are a type of forward
commitment transaction. Purchases and sales of securities on a forward
commitment basis involve a commitment to purchase or sell securities with
payment and delivery to take place at some future date, normally one to
two months after the date of the transaction. As with when-issued
securities, these transactions involve certain risks, but they also enable
PROSPECTUS 18
<PAGE>
an investor to hedge against anticipated changes in interest rates and
prices. Forward commitment transactions are executed for existing
obligations, whereas in a when-issued transaction, the obligations have
not yet been issued. When purchasing securities on a when-issued or on a
forward commitment basis, a segregated account of liquid assets at least
equal to the value of purchase commitments for such securities will be
maintained until the settlement date.
The Portfolio's equity investments may consist of common stocks,
preferred stocks and convertible securities, including foreign securities
that are represented by U.S. dollar-denominated American Depository
Receipts which are traded in the United States on exchanges and in the
over-the-counter market. When purchasing equity securities, emphasis will
be placed on undervalued securities with above average growth
expectations. The Manager believes that purchasing securities which the
investment advisers believe are undervalued in the market and that have
above average growth potential will outperform other investment styles
over the longer term while minimizing volatility and downside risk. The
Manager will recommend that, with respect to portfolio management of
equity assets, the Trust retain only those investment advisers who, in the
Manager's opinion, utilize such an approach.
BARROW, HANLEY, MEWHINNEY & STRAUSS, INC.; BRANDYWINE ASSET
MANAGEMENT, INC.; GSB INVESTMENT MANAGEMENT, INC.; HOTCHKIS AND WILEY; and
INDEPENDENCE INVESTMENT ASSOCIATES, INC. currently manage the assets of
the Balanced Portfolio. Boatmen's Trust Company ("Boatmen's") also is an
investment adviser to the Balanced Portfolio; however, the Manager does
not expect to allocate assets to Boatmen's at this time. See "Investment
Advisers."
AMERICAN AADVANTAGE GROWTH AND INCOME FUND -- This Fund's investment
objective is to realize long-term capital appreciation and current income.
This Fund seeks its investment objective by investing all of its
investable assets in the Growth and Income Portfolio, which invests
primarily in equity securities. Excluding collateral for securities
loaned, ordinarily at least 80% of the Portfolio's assets will be invested
in equity securities consisting of common stocks, preferred stocks,
securities convertible into common stocks, and securities having common
stock characteristics, such as rights and warrants, and foreign equity
securities that are represented by U.S. dollar-denominated American
Depository Receipts which are traded in the United States on exchanges and
in the over-the-counter market. When purchasing equity securities, primary
emphasis will be placed on undervalued securities with above average
growth expectations. In order to seek either above average current income
or capital appreciation when interest rates are expected to decline, the
Portfolio may invest in debt securities which, at the time of purchase,
are rated in one of the four highest rating categories by all Rating
Organizations rating that security or, if unrated, are deemed to be of
comparable quality by the applicable investment adviser. Obligations rated
in the fourth highest rating category are limited to 25% of the
Portfolio's debt allocation. See "American AAdvantage Balanced Fund" for a
description of the risks involved with these obligations. The Portfolio
19 PROSPECTUS
<PAGE>
may also invest in other investment companies or in cash and cash
equivalents, including investment grade short-term obligations, in order
to maintain liquidity. See the SAI for definitions of the foregoing
securities and for a description of debt ratings. However, when its
investment advisers deem that market conditions warrant, the Portfolio
may, for temporary defensive purposes, invest up to 100% of its assets in
cash, cash equivalents and investment grade short-term obligations. In
addition, the Portfolio may purchase or sell securities on a "when-issued"
or on a "forward commitment" basis as described in "American AAdvantage
Balanced Fund."
BARROW, HANLEY, MEWHINNEY & STRAUSS, INC.; BRANDYWINE ASSET
MANAGEMENT, INC.; GSB INVESTMENT MANAGEMENT, INC.; HOTCHKIS AND WILEY; and
INDEPENDENCE INVESTMENT ASSOCIATES, INC. currently manage the assets of
the Growth and Income Portfolio. Boatmen's also is an investment adviser
to the Growth and Income Portfolio; however, the Manager does not expect
to allocate assets to Boatmen's at this time. See "Investment Advisers."
AMERICAN AADVANTAGE INTERNATIONAL EQUITY FUND -- This Fund's investment
objective is to realize long-term capital appreciation. This Fund seeks
its investment objective by investing all of its investable assets in the
International Equity Portfolio, which invests primarily in equity
securities of issuers based outside the United States. Ordinarily the
Portfolio will invest at least 65% of its assets in common stocks and
securities convertible into common stocks of issuers in at least three
different countries located outside the United States. However, excluding
collateral for securities loaned, the Portfolio generally invests in
excess of 80% of its assets in such securities. The remainder of the
Portfolio's assets will be invested in non-U.S. debt securities which, at
the time of purchase, are rated in one of the three highest rating
categories by any Rating Organization or, if unrated, are deemed to be of
comparable quality by the applicable investment adviser and traded
publicly on a world market, or in cash or cash equivalents, including
investment grade short-term obligations or in other investment companies.
However, when its investment advisers deem that market conditions warrant,
the Portfolio may, for temporary defensive purposes, invest up to 100% of
its assets in cash, cash equivalents, other investment companies and
investment grade short-term obligations.
The investment advisers select securities based upon a country's
economic outlook, market valuation and potential changes in currency
exchange rates. When purchasing equity securities, primary emphasis will
be placed on undervalued securities with above average growth
expectations.
Overseas investing carries potential risks not associated with
domestic investments. Such risks include but are not limited to: (1)
political and financial instability abroad, including risk of
nationalization or expropriation of assets and the risk of war; (2) less
liquidity and greater volatility of foreign investments; (3) less public
information regarding foreign companies; (4) less government regulation
and supervision of foreign stock exchanges, brokers and listed companies;
PROSPECTUS 20
<PAGE>
(5) lack of uniform accounting, auditing and financial reporting
standards; (6) delays in transaction settlement in some foreign markets;
(7) possibility of an imposition of confiscatory foreign taxes; (8)
possible limitation on the removal of securities or other assets of the
Portfolio; (9) restrictions on foreign investments and repatriation of
capital; (10) currency fluctuations; (11) cost and possible restrictions
of currency conversion; (12) withholding taxes on dividends in foreign
countries; and (13) possibly higher commissions, custodial fees and
management costs than in the U.S. market. These risks are often greater
for investments in emerging or developing countries.
The Portfolio will limit its investments to those in countries
which have been recommended by the Manager and which have been approved by
the AMR Trust Board. Countries may be added or deleted with AMR Trust
Board approval. In determining which countries will be approved, the AMR
Trust Board will evaluate the risk factors set forth above and will
particularly focus on the ability to repatriate funds, the size and
liquidity aspects of a particular country's market and the investment
climate for foreign investors. The current countries in which the
Portfolio may invest are Australia, Austria, Belgium, Canada, Denmark,
Finland, France, Germany, Hong Kong, Ireland, Italy, Japan, Malaysia,
Mexico, Netherlands, New Zealand, Norway, Singapore, South Korea, Spain,
Sweden, Switzerland and the United Kingdom.
The Portfolio may trade forward foreign currency contracts
("forward contracts"), which are derivatives, to hedge currency
fluctuations of underlying stock or bond positions or in other
circumstances permitted by the Commodity Futures Trading Commission.
Forward contracts to sell foreign currency may be used when the management
of the Portfolio believes that the currency of a particular foreign
country may suffer a decline against the U.S. dollar. Forward contracts
are also entered into to set the exchange rate for a future transaction.
In this manner, the Portfolio may protect itself against a possible loss
resulting from an adverse change in the relationship between the U.S.
dollar or other currency which is being used for the security purchase and
the foreign currency in which the security is denominated during the
period between the date on which the security is purchased or sold and the
date on which payment is made or received. Forward contracts involve
certain risks which include, but are not limited to: (1) imperfect
correlation between the securities hedged and the contracts themselves;
and (2) possible decrease in the total return of the Portfolio. Forward
contracts are discussed in greater detail in the SAI.
The Portfolio also may trade currency futures for the same
reasons as for entering into forward contracts as set forth above.
Currency futures are traded on U.S. and foreign currency exchanges. The
use of currency futures also entails certain risks which include, but are
not limited to: (1) less liquidity due to daily limits on price
fluctuation; (2) imperfect correlation between the securities hedged and
the contracts themselves; (3) possible decrease in the total return of the
Portfolio due to hedging; (4) possible reduction in value for both the
contracts and the securities being hedged; and (5) potential losses in
21 PROSPECTUS
<PAGE>
excess of the amounts invested in the currency futures contracts
themselves. The Portfolio may not enter into currency futures contracts if
the purchase or sale of such contract would cause the sum of the
Portfolio's initial and any variation margin deposits to exceed 5% of its
total assets. Currency futures contracts, which are derivatives, are
discussed in greater detail in the SAI.
HOTCHKIS AND WILEY, MORGAN STANLEY ASSET MANAGEMENT INC. and
TEMPLETON INVESTMENT COUNSEL, INC. currently serve as investment advisers
to the International Equity Portfolio. Rowe Price-Fleming International,
Inc. ("Fleming") also is an investment adviser to the International Equity
Portfolio; however, the Manager does not expect to allocate assets to
Fleming at this time. See "Investment Advisers."
AMERICAN AADVANTAGE LIMITED-TERM INCOME FUND -- This Fund's investment
objective is to realize income and capital appreciation. As an investment
policy, the Fund primarily seeks income and secondarily seeks capital
appreciation. The Fund seeks its investment objective by investing all of
its investable assets in the Limited-Term Income Portfolio, which invests
primarily in debt obligations. Permissible investments include securities
of the U.S. Government and its agencies and instrumentalities, including
STRIPS and other zero coupon obligations; corporate bonds, notes and
debentures; non-convertible preferred stocks; mortgage-backed securities;
asset-backed securities; domestic, Yankeedollar and Eurodollar
certificates of deposit, bank deposit notes, and bank notes; other
investment companies; and cash or cash equivalents including investment
grade short-term obligations. Such obligations may have a fixed, variable
or floating rate of interest. At the time of purchase, all such securities
will be rated in one of the four highest rating categories by all Rating
Organizations rating such obligation or, if unrated, will be deemed to be
of comparable quality by the investment adviser. Obligations rated in the
fourth highest rating category are limited to 25% of the Portfolio's total
assets. See "American AAdvantage Balanced Fund" for a description of the
risks involved with these obligations. The Portfolio, at the discretion of
the Manager, may retain a security which has been downgraded below the
initial investment criteria. See the SAI for definitions of the foregoing
securities and for a description of debt ratings. Principal and/or
interest payments for obligations of the U.S. Government's agencies or
instrumentalities may or may not be backed by the full faith and credit of
the U.S. Government.
Investments in Eurodollar (U.S. dollar obligations issued outside
the United States by domestic or foreign entities) and Yankeedollar (U.S.
dollar obligations issued inside the United States by foreign entities)
obligations involve additional risks. Most notably, there generally is
less publicly available information about foreign issuers; there may be
less governmental regulation and supervision; foreign issuers may use
different accounting and financial standards; and the adoption of foreign
governmental restrictions may adversely affect the payment of principal
and interest on foreign investments. In addition, not all foreign branches
of United States banks are supervised or examined by regulatory
authorities as are United States banks, and such branches may not be
PROSPECTUS 22
<PAGE>
subject to reserve requirements. The Portfolio also may engage in dollar
rolls or purchase or sell securities on a "when-issued" or "forward
commitment" basis as described under "American AAdvantage Balanced Fund."
The market value of fixed rate securities, and thus the net asset
value of this Portfolio's shares, is expected to vary inversely with
movements in interest rates. The market value of variable and floating
rate instruments will not vary as much due to the periodic adjustments in
their interest rates. An adjustment which increases the interest rate of
such securities should reduce or eliminate declines in market value
resulting from a prior upward movement in interest rates, and an
adjustment which decreases the interest rate of such securities should
reduce or eliminate increases in market value resulting from a prior
downward movement in interest rates.
Mortgage-backed securities are securities representing interests
in "pools" of mortgages in which payments of both interest and principal
on the securities are made monthly, in effect, "passing through" monthly
payments made by the individual borrowers on the mortgage loans which
underlie the securities (net of fees paid to the issuer or guarantor of
the securities). Early repayment of principal on mortgage pass-through
securities (arising from prepayments of principal due to sale of the
underlying property, refinancing, or foreclosure, net of fees and costs
which may be incurred) may expose the Portfolio to a lower rate of return
upon reinvestment of principal. Also, if a security subject to prepayment
has been purchased at a premium, in the event of prepayment, the value of
the premium would be lost. Like other debt securities, when interest rates
rise, the value of mortgage-related securities generally will decline;
however, when interest rates decline, the value of mortgage-related
securities with prepayment features may not increase as much as other debt
securities.
Payment of principal and interest on some mortgage pass-through
securities (but not the market value of the securities themselves) may be
guaranteed by the full faith and credit of the U.S. Government (in the
case of securities guaranteed by the Government National Mortgage
Association ("GNMA")) or guaranteed by agencies or instrumentalities of
the U.S. Government (in the case of securities guaranteed by the Federal
National Mortgage Association ("FNMA") or the Federal Home Loan Mortgage
Corporation ("FHLMC"), which are supported only by the discretionary
authority of the U.S. Government to purchase the agency's obligations).
Mortgage pass-through securities created by non-governmental issuers (such
as commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers)
may be supported with various credit enhancements such as pool insurance,
guarantees issued by governmental entities, a letter of credit from a bank
or senior/subordinated structures.
Collateralized mortgage obligations ("CMOs") are hybrid
instruments with characteristics of both mortgage-backed bonds and
mortgage pass-through securities. Similar to a mortgage pass-through,
interest and prepaid principal on a CMO are paid, in most cases, monthly.
23 PROSPECTUS
<PAGE>
CMOs may be collateralized by whole mortgage loans but are more typically
collateralized by portfolios of mortgage pass-through securities
guaranteed by GNMA, FHLMC or FNMA. CMOs are structured in multiple
classes, with each class bearing a different stated maturity or interest
rate.
The Portfolio is permitted to invest in asset-backed securities,
subject to the Portfolio's rating and quality requirements. Through the
use of trusts and special purpose subsidiaries, various types of assets,
primarily home equity loans, automobile and credit card receivables, and
other types of receivables or other assets as well as purchase contracts,
financing leases and sales agreements entered into by municipalities, are
being securitized in pass-through structures similar to the mortgage pass-
through structures described above. Consistent with the Fund's and the
Portfolio's investment objective, policies and quality standards, the
Portfolio may invest in these and other types of asset-backed securities
which may be developed in the future.
Asset-backed securities involve certain risks that do not exist
with mortgage-related securities, resulting mainly from the fact that
asset-backed securities do not usually contain the benefit of a complete
security interest in the related collateral. For example, credit card
receivables generally are unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, some of
which may reduce the ability to obtain full payment. In the case of
automobile receivables, due to various legal and economic factors,
proceeds from repossessed collateral may not always be sufficient to
support payments on the securities. The risks associated with asset-backed
securities are often reduced by the addition of credit enhancements such
as a letter of credit from a bank, excess collateral or a third-party
guarantee.
Although investments will not be restricted by either maturity or
duration of the securities purchased, under normal circumstances, the
Portfolio will seek to maintain a dollar weighted average duration of one
to three years. Because the timing on return of principal for both asset-
backed and mortgage-backed securities is uncertain, in calculating the
average weighted duration of the Portfolio, the duration of these
securities may be based on certain industry conventions. The Manager
serves as the sole active investment adviser to the Limited-Term Income
Fund and its corresponding Portfolio.
AMERICAN AADVANTAGE S&P 500 INDEX FUND -- This Fund's investment
objective is to provide investment results that, before expenses,
correspond to the total return (i.e., the combination of capital changes
and income) of common stocks publicly traded in the United States, as
represented by the S&P 500. This Fund seeks its investment objective by
investing all of its investable assets in the Equity 500 Index Portfolio
which invests in common stocks of companies that compose the S&P 500. The
Fund offers investors a convenient means of diversifying their holdings of
common stocks while relieving those investors of the administrative
PROSPECTUS 24
<PAGE>
burdens typically associated with purchasing and holding these
instruments.
The Portfolio is not managed according to traditional methods of
"active" investment management, which involve the buying and selling of
securities based upon economic, financial, and market analyses and
investment judgment. Instead, the Portfolio, utilizing a "passive" or
"indexing" investment approach, attempts to replicate, before expenses,
the performance of the S&P 500.
Under normal conditions, the Portfolio will invest at least 80%
of its assets in common stocks of companies that compose the S&P 500. In
seeking to replicate the performance of the S&P 500, BT, the Portfolio's
investment adviser, will attempt over time to allocate the Portfolio's
investments among common stocks in approximately the same weightings as
the S&P 500, beginning with the heaviest-weighted stocks that make up a
larger portion of the Index's value. Over the long term, BT normally seeks
a correlation between the performance of the Portfolio, before expenses,
and that of the S&P 500 of 0.98 or better. A figure of 1.00 would indicate
perfect correlation. In the unlikely event that the correlation is not
achieved, the Equity 500 Index Portfolio Board will consider alternative
structures.
BT utilizes a two-stage sampling approach in seeking to obtain
the objective. Stage one, which encompasses large capitalization stocks,
maintains the stock holdings at or near their benchmark weights. Large
capitalization stocks are defined as those securities that represent 0.10%
or more of the Index. In stage two, smaller stocks are analyzed and
selected using risk characteristics and industry weights in order to match
the sector and risk characteristics of the smaller companies in the S&P
500. This approach helps to maximize portfolio liquidity while minimizing
costs.
BT generally will seek to match the composition of the S&P 500,
but usually will not invest the Portfolio's stock portfolio to mirror the
Index exactly. Because of the difficulty and expense of executing
relatively small stock transactions, the Portfolio may not always be
invested in the less heavily weighted S&P 500 stocks and may at times have
its portfolio weighted differently from the S&P 500. When the Portfolio's
size is greater, BT expects to purchase more of the stocks in the S&P 500
and to match the relative weighting of the S&P 500 more closely and
anticipates that the Portfolio will be able to mirror, before expenses,
the performance of the S&P 500 with little variance. In addition, the
Portfolio may omit or remove any S&P 500 stock from the Portfolio if,
following objective criteria, BT judges the stock to be insufficiently
liquid or believes the merit of the investment has been substantially
impaired by extraordinary events or financial conditions. BT will not
purchase the stock of Bankers Trust New York Corporation, which is
included in the Index, and instead will overweight its holdings of
companies engaged in similar businesses.
25 PROSPECTUS
<PAGE>
Under normal conditions, BT will attempt to invest as much of the
Portfolio's assets as is practical in common stocks included in the S&P
500. However, the Portfolio may maintain up to 20% of its assets in short-
term debt securities and money market instruments hedged with stock index
futures and options to meet redemption requests or to facilitate the
investment in common stocks.
When the Portfolio has cash from new investments in the Portfolio
or holds a portion of its assets in money market instruments, it may enter
into stock index futures or options to attempt to increase its exposure to
the stock market. Strategies the Portfolio could use to accomplish this
include purchasing futures contracts, writing put options, and purchasing
call options. When the Portfolio wishes to sell securities, because of
shareholder redemptions or otherwise, it may use stock index futures or
options thereon to hedge against market risk until the sale can be
completed. These strategies could include selling futures contracts,
writing call options, and purchasing put options.
BT will choose among futures and options strategies based on its
judgment of how best to meet the Portfolio's goals. In selecting futures
and options, BT will assess such factors as current and anticipated stock
prices, relative liquidity and price levels in the options and futures
markets compared to the securities markets, and the Portfolio's cash flow
and cash management needs. If BT judges these factors incorrectly, or if
price changes in the Portfolio's futures and options positions are not
well correlated with those of its other investments, the Portfolio could
be hindered in the pursuit of the objective and could suffer losses. The
Portfolio could also be exposed to risks if it could not close out its
futures or options positions because of an illiquid secondary market. BT
will only use these strategies for cash management purposes. Futures and
options will not be used to increase portfolio risk above the level that
could be achieved using only traditional investment securities or to
acquire exposure to changes in the value of assets or indices that by
themselves would not be purchased for the Portfolio. Futures and options
are discussed in greater detail in the SAI.
The Portfolio intends to stay invested in the securities
described above to the extent practical in light of the objective and
long-term investment perspective. However, the Portfolio's assets may be
invested in short-term instruments with remaining maturities of 397 days
or less to meet anticipated redemptions and expenses or for day-to-day
operating purposes. Short-term instruments consist of (1) short-term
obligations of the U.S. Government, its agencies, instrumentalities,
authorities or political subdivisions; (2) other short-term debt
securities rated Aa or higher by Moody's or AA or higher by S&P Rating or,
if unrated, of comparable quality in the opinion of BT; (3) commercial
paper; (4) bank obligations, including negotiable certificates of deposit,
time deposits and bankers' acceptances; and (5) repurchase agreements. At
the time the Portfolio invests in commercial paper, bank obligations or
repurchase agreements, the issuer or the issuer's parent must have
outstanding debt rated Aa or higher by Moody's or AA or higher by S&P
Rating or outstanding commercial paper or bank obligations rated Prime-1
PROSPECTUS 26
<PAGE>
by Moody's or A-1 by S&P Rating; or, if no such ratings are available, the
instrument must be of comparable quality in the opinion of BT.
The S&P 500 is a well-known stock market index that includes
common stocks of 500 companies from several industrial sectors
representing a significant portion of the market value of all common
stocks publicly traded in the United States, most of which are listed on
the New York Stock Exchange (the "Exchange"). Stocks in the S&P 500 are
weighted according to their market capitalization (i.e., the number of
shares outstanding multiplied by the stock's current price). BT believes
that the performance of the S&P 500 is representative of the performance
of publicly traded common stocks in general. The composition of the S&P
500 is determined by Standard & Poor's Corporation ("S&P") and is based on
such factors as the market capitalization and trading activity of each
stock and its adequacy as a representation of stocks in a particular
industry group, and may be changed from time to time. For more complete
information about the Index, see the SAI.
The Fund and the Portfolio are not sponsored, endorsed, sold or
promoted by S&P. S&P makes no representation or warranty, express or
implied, to the owners of the Fund or the Portfolio or any member of the
public regarding the advisability of investing in securities generally or
in the Fund and the Portfolio particularly or the ability of the S&P 500
to track general stock market performance. S&P does not guarantee the
accuracy and/or the completeness of the S&P 500 or any data included
therein.
S&P MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE RESULTS TO
BE OBTAINED BY THE FUND OR THE PORTFOLIO, OWNERS OF THE FUND OR THE
PORTFOLIO, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500 OR
ANY DATA INCLUDED THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES AND
HEREBY EXPRESSLY DISCLAIMS ALL SUCH WARRANTIES OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE S&P 500 OR ANY
DATA INCLUDED THEREIN.
The ability of the Fund and the Portfolio to meet their
investment objective depends to some extent on the cash flow experienced
by the Fund and by the other investors in the Portfolio, since investments
and redemptions by shareholders of the Fund generally will require the
Portfolio to purchase or sell securities. BT will make investment changes
to accommodate cash flow in an attempt to maintain the similarity of the
Portfolio to the S&P 500. An investor should also be aware that the
performance of the S&P 500 is a hypothetical number that does not take
into account brokerage commissions and other costs of investing, unlike
the Portfolio which must bear these costs. Finally, since the Portfolio
seeks to track the S&P 500, BT generally will not attempt to judge the
merits of any particular stock as an investment.
OTHER INVESTMENT POLICIES -- In addition to the investment policies
described previously, each Portfolio may also lend its securities, enter
into fully collateralized repurchase agreements, and invest in private
placement offerings.
27 PROSPECTUS
<PAGE>
SECURITIES LENDING. Each Portfolio (except for the Equity 500
Index Portfolio) may lend securities to broker-dealers or other
institutional investors pursuant to agreements requiring that the loans be
continuously secured by any combination of cash, securities of the U.S.
Government and its agencies and instrumentalities and approved bank
letters of credit that at all times equal at least 100% of the market
value of the loaned securities. Such loans will not be made if, as a
result, the aggregate amount of all outstanding securities loans by any
Portfolio of the AMR Trust would exceed 33 1/3% of its total assets. A
Portfolio continues to receive interest on the securities loaned and
simultaneously earns either interest on the investment of the cash
collateral or fee income if the loan is otherwise collateralized. However,
a Portfolio normally pays (including, in some cases, payments to the
Manager) lending fees and related expenses from this interest or fee
income. Should the borrower of the securities fail financially, there is a
risk of delay in recovery of the securities loaned or loss of rights in
the collateral. However, the Portfolios seek to minimize this risk by
making loans only to borrowers which are deemed by the Manager to be of
good financial standing and which have been approved by the AMR Trust
Board. For purposes of complying with each Portfolio's investment policies
and restrictions, collateral received in connection with securities loans
will be deemed an asset of a Portfolio to the extent required by law. See
the SAI for further information regarding loan transactions.
REPURCHASE AGREEMENTS. A repurchase agreement is an agreement
under which securities are acquired by a Portfolio from a securities
dealer or bank subject to resale at an agreed upon price on a later date.
The acquiring Portfolio bears a risk of loss in the event that the other
party to a repurchase agreement defaults on its obligations and the
Portfolio is delayed or prevented from exercising its rights to dispose of
the collateral securities. However, the investment advisers or the Manager
attempt to minimize this risk by entering into repurchase agreements only
with financial institutions which are deemed to be of good financial
standing and which have been approved by the AMR Trust Board or the Equity
500 Index Portfolio Board, as appropriate. See the SAI for more
information regarding repurchase agreements.
PRIVATE PLACEMENT OFFERINGS. Investments in private placement
offerings are made in reliance on the "private placement" exemption from
registration afforded by Section 4(2) of the Securities Act of 1933 (the
"1933 Act"), and resold to qualified institutional buyers under Rule 144A
under the 1933 Act ("Section 4(2) securities"). Section 4(2) securities
are restricted as to disposition under the federal securities laws and
generally are sold to institutional investors such as the Portfolios that
agree they are purchasing the securities for investment and not with an
intention to distribute to the public. Any resale by the purchaser must be
pursuant to an exempt transaction and may be accomplished in accordance
with Rule 144A. Section 4(2) securities normally are resold to other
institutional investors such as the Portfolios through or with the
assistance of the issuer or dealers that make a market in the Section 4(2)
securities, thus providing liquidity. The Portfolios will not invest more
than 15% of their respective net assets in Section 4(2) securities and
PROSPECTUS 28
<PAGE>
illiquid securities unless the applicable investment adviser determines,
by continuous reference to the appropriate trading markets and pursuant to
guidelines approved by the AMR Trust Board or the Equity 500 Index
Portfolio Board that any Section 4(2) securities held by such Portfolio in
excess of this level are at all times liquid.
Because it is not possible to predict with assurance exactly how
this market for Section 4(2) securities offered and sold under Rule 144A
will develop, the AMR Trust Board, the Equity 500 Index Portfolio Board
and the applicable investment adviser, pursuant to the guidelines approved
by the respective Boards, will carefully monitor the respective
Portfolios' investments in these securities, focusing on such important
factors, among others, as valuation, liquidity, and availability of
information. Investments in Section 4(2) securities could have the effect
of reducing a Portfolio's liquidity to the extent that qualified
institutional buyers no longer wish to purchase these restricted
securities.
BROKERAGE PRACTICES AND PORTFOLIO TURNOVER -- Each investment adviser will
place its own orders to execute securities transactions which are designed
to implement the applicable Portfolio's investment objective and policies.
In placing such orders, each investment adviser will seek the best
available price and most favorable execution. The full range and quality
of services offered by the executing broker or dealer is considered when
making these determinations. Pursuant to written guidelines approved by
the AMR Trust Board or the Equity 500 Index Portfolio Board, as
appropriate, an investment adviser of a Portfolio or its affiliated
broker-dealer may execute portfolio transactions and receive usual and
customary brokerage commissions (within the meaning of Rule 17e-1 under
the Investment Company Act of 1940, as amended ("1940 Act")) for doing so.
The Limited-Term Income Portfolio normally will not incur any
brokerage commissions on its transactions because debt instruments are
generally traded on a "net" basis with dealers acting as principal for
their own accounts without a stated commission. The price of the
obligation, however, usually includes a profit to the dealer. Obligations
purchased in underwritten offerings include a fixed amount of compensation
to the underwriter, generally referred to as the underwriter's concession
or discount. No commissions or discounts are paid when securities are
purchased directly from an issuer.
No Portfolio, other than the Limited-Term Income Portfolio,
currently expects its portfolio turnover rate to exceed 100%. The
portfolio turnover rate for the Limited-Term Income Fund for the fiscal
year ended October 31, 1996 was ___%. A Portfolio's turnover rate, or the
frequency of portfolio transactions, will vary from year to year depending
on market conditions and the Portfolio's cash flows. High portfolio
activity increases a Portfolio's transaction costs, including brokerage
commissions, and may result in a greater number of taxable transactions.
ADDITIONAL INFORMATION ABOUT THE PORTFOLIOS -- As previously described,
investors should be aware that each Fund, unlike mutual funds that
29 PROSPECTUS
<PAGE>
directly acquire and manage their own portfolios of securities, seeks to
achieve its investment objective by investing all of its investable assets
in a corresponding Portfolio of the AMR Trust, which is a separate
investment company managed by the Manager, or in the Equity 500 Index
Portfolio, which is a separate investment company advised by BT. Since a
Fund will invest only in its corresponding Portfolio, that Fund's
shareholders will acquire only an indirect interest in the investments of
the Portfolio. Historically, the Manager has sponsored traditionally
structured funds and, therefore, has limited experience with funds that
invest all their assets in a separate portfolio.
The Manager expects, although it cannot guarantee, that the Trust
will achieve economies of scale by investing in the AMR Trust and the
Equity 500 Index Portfolio. In addition to selling their interests to the
Funds, the Portfolios may sell their interests to other nonaffiliated
investment companies and/or other institutional investors. All
institutional investors in a Portfolio will pay a proportionate share of
the Portfolio's expenses and will invest in that Portfolio on the same
terms and conditions. However, if another investment company invests all
of its assets in a Portfolio, it would not be required to sell its shares
at the same public offering price as a Fund and would be allowed to charge
different sales commissions. Therefore, investors in a Fund may experience
different returns from investors in another investment company that
invests exclusively in that Fund's corresponding Portfolio.
The Fund's investment in a Portfolio may be materially affected
by the actions of large investors in that Portfolio, if any. For example,
as with all open-end investment companies, if a large investor were to
redeem its interest in a Portfolio, that Portfolio's remaining investors
could experience higher pro rata operating expenses, thereby producing
lower returns. As a result, that Portfolio's security holdings may become
less diverse, resulting in increased risk. Institutional investors in a
Portfolio that have a greater pro rata ownership interest in the Portfolio
than the Fund could have effective voting control over the operation of
that Portfolio. A change in a Portfolio's fundamental objective, policies
and restrictions, that is not approved by the shareholders of its
corresponding Fund could require that Fund to redeem its interest in the
Portfolio. Any such redemption could result in a distribution in kind of
portfolio securities (as opposed to a cash distribution) by the Portfolio.
Should such a distribution occur, that Fund could incur brokerage fees or
other transaction costs in converting such securities to cash. In
addition, a distribution in kind could result in a less diversified
portfolio of investments for that Fund and could affect adversely its
liquidity.
The Portfolios' and their corresponding Funds' investment
objectives and policies are described above. See "Investment Restrictions"
for a description of their investment restrictions. The investment
objective of a Fund can be changed only with shareholder approval. The
approval of a Fund and of other investors in its corresponding Portfolio,
if any, is not required to change the investment objective, policies or
limitations of that Portfolio, unless otherwise specified. Written notice
PROSPECTUS 30
<PAGE>
shall be provided to shareholders of a Fund within thirty days prior to
any changes in its corresponding Portfolio's investment objective. If the
investment objective of a Portfolio changes and the shareholders of its
corresponding Fund do not approve a parallel change in that Fund's
investment objective, the Fund would seek an alternative investment
vehicle or the Manager and the investment advisers would actively manage
the Fund.
See "Management and Administration of the Trusts" for a complete
description of the investment management fee and other expenses associated
with a Fund's investment in its corresponding Portfolio. This Prospectus
and the SAI contain more detailed information about each Fund and its
corresponding Portfolio, including information related to (1) the
investment objective, policies and restrictions of each Fund and its
corresponding Portfolio, (2) the Board of Trustees and officers of the
Trust, the AMR Trust, and the Equity 500 Index Portfolio Board, (3)
brokerage practices, (4) the Funds' shares, including the rights and
liabilities of its shareholders, (5) additional performance information,
including the method used to calculate yield and total return, and (6) the
determination of the value each Fund's shares.
INVESTMENT RESTRICTIONS
The following fundamental investment restrictions and the non-fundamental
investment restrictions are identical for each Fund and its corresponding
Portfolio. Therefore, although the following discusses the investment
restrictions of each Portfolio, the AMR Trust Board and the Equity 500
Index Portfolio, it applies equally to each Fund and Board. The following
fundamental investment restrictions may be changed with respect to a
particular Fund by the majority vote of that Fund's outstanding shares or
with respect to a Portfolio by the majority vote of that Portfolio's
interest holders. No Portfolio may:
- Invest more than 5% of its total assets (taken at market
value) in securities of any one issuer, other than
obligations issued by the U.S. Government, its agencies
and instrumentalities, or purchase more than 10% of the
voting securities of any one issuer, with respect to 75%
of a Portfolio's total assets.
- Invest more than 25% of its total assets in the
securities of companies primarily engaged in any one
industry other than the U.S. Government, its agencies and
instrumentalities. Finance companies as a group are not
considered a single industry for purposes of this policy.
The following non-fundamental investment restrictions may be changed with
respect to a particular Fund by a vote of a majority of the Board or with
respect to a Portfolio by a vote of a majority of the AMR Trust Board or
the Equity 500 Index Portfolio Board, as appropriate. No Portfolio may:
31 PROSPECTUS
<PAGE>
- Invest in securities of an issuer that, together with any
predecessor, has been in operation for less than three
years if more than 5% of the Portfolio's total assets
would be invested in such securities. This limitation
does not apply with regard to collateralized trust
securities.
- Invest more than 15% of its net assets in illiquid
securities, including time deposits and repurchase
agreements that mature in more than seven days.
The above percentage limits are based upon asset values at the
time of the applicable transaction; accordingly, a subsequent change in
asset values will not affect a transaction that was in compliance with the
investment restrictions at the time such transaction was effected. See the
SAI for other investment limitations.
YIELDS AND TOTAL RETURNS
Yields for the AMR Class of the Funds will be computed by
dividing the net investment income earned per AMR Class share during the
relevant time period by the maximum offering price per AMR Class share on
the last day of the period. Total return quotations for the AMR Class of
the Funds may reflect the average annual compounded (or aggregate
compounded) rate of return during the designated time period based on a
hypothetical initial investment and the redeemable value of that
investment at the end of the period. Additionally, the AMR Class of the
Limited-Term Income Fund may advertise a "monthly distribution rate." This
rate is based on an annualized monthly dividend accrual rate per share
compared with the month-end share price of the AMR Class of this Fund.
The Funds will at times compare their performance to applicable published
indices, and may also disclose their performance as ranked by certain
ranking entities. Each class of a Fund has different expenses which will
impact its performance. See the SAI for more information about the
calculation of yields and total returns.
MANAGEMENT AND ADMINISTRATION OF THE TRUSTS
FUND MANAGEMENT AGREEMENT -- The Board has general supervisory
responsibility over the Trust's affairs, while the business affairs of the
AMR Trust and of the Equity 500 Index Portfolio are subject to the
supervision of their respective Board of Trustees. The Manager provides
or oversees all administrative, investment advisory and portfolio
management services for the Trust pursuant to a Management Agreement dated
April 3, 1987, as amended October 1, 1995, together with the
Administrative Services Agreement described below. The AMR Trust and the
Manager also entered into a Management Agreement dated October 1, 1995
that obligates the Manager to provide or oversee all administrative,
investment advisory and portfolio management services for the AMR Trust.
The Manager, located at 4333 Amon Carter Boulevard, MD 5645, Fort Worth,
Texas 76155, is a wholly owned subsidiary of AMR Corporation ("AMR"), the
parent company of American Airlines, Inc., and was organized in 1986 to
PROSPECTUS 32
<PAGE>
provide business management, advisory, administrative and asset management
consulting services. The assets of the corresponding Portfolios of the
Balanced Fund, the Growth and Income Fund and the International Equity
Fund are allocated by the Manager among one or more investment advisers
designated for that Fund. See "Investment Advisers." BT serves as
investment adviser and administrator of, and provides custody and transfer
agency services to, the Equity 500 Index Portfolio. The Manager serves as
the sole active investment adviser to the corresponding Portfolio of the
Limited-Term Income Fund. In addition, with the exception of the
International Equity Fund and the S&P 500 Index Fund, if so requested by
any of its investment advisers, the Manager will make the investment
decisions with respect to assets allocated to that investment adviser
which the investment adviser determines should be invested in investment
grade short-term obligations. As of October 31, 1996, the Manager had
assets under management totaling approximately $____ billion, including
approximately $___ billion under active management and $___ billion as
named fiduciary or fiduciary adviser. Of the total, approximately $___
billion of assets are related to AMR. American Airlines, Inc. is not
responsible for investments made in the American AAdvantage Funds.
The Manager provides the Trust and the AMR Trust with office
space, office equipment and personnel necessary to manage and administer
the Trusts' operations. This includes complying with reporting
requirements; corresponding with shareholders; maintaining internal
bookkeeping, accounting and auditing services and records; and supervising
the provision of services to the Trusts by third parties. The Manager also
develops the investment programs for each Portfolio of the AMR Trust,
selects and changes investment advisers (subject to approval by the AMR
Trust Board and appropriate interest holders), allocates assets among
investment advisers, monitors the investment advisers' investment programs
and results, and coordinates the investment activities of the investment
advisers to ensure compliance with regulatory restrictions.
The Manager bears the expense of providing the above services and
pays the fees of the investment advisers of the Funds and the Portfolios
of the AMR Trust. As compensation for paying the investment advisory fees
and for providing the Portfolios with advisory and asset allocation
services, the Manager receives from the AMR Trust an annualized advisory
fee that is calculated and accrued daily, equal to the sum of (1) 0.25% of
the net assets of the Limited-Term Income Portfolio, (2) 0.10% of the net
assets of the other Portfolios of the AMR Trust, plus (3) all fees payable
by the Manager to the AMR Trust's investment advisers as described in
"Investment Advisers." The advisory fee is payable quarterly in arrears.
To the extent that a Fund invests all of its investable assets in its
corresponding Portfolio, the Manager will not receive an advisory fee
under its Management Agreement with the Trust.
Each Management Agreement will continue in effect provided that
annually such continuance is specifically approved by a vote of the Board
and the AMR Trust Board, including the affirmative votes of a majority of
the independent Trustees of each Board who are not parties to the
Management Agreement or "interested persons" as defined in the 1940 Act of
33 PROSPECTUS
<PAGE>
any such party ("Independent Trustees"), cast in person at a meeting
called for the purpose of considering such approval, or by the vote of a
Fund's shareholders or a Portfolio's interest holders. A Management
Agreement may be terminated with respect to a Fund or a Portfolio at any
time, without penalty, by a majority vote of outstanding Fund shares or
Portfolio interests on sixty (60) days' written notice to the Manager, or
by the Manager, on sixty (60) days' written notice to the Trust or the AMR
Trust. A Management Agreement will automatically terminate in the event of
its "assignment" as defined in the 1940 Act.
The Trust is responsible for the following expenses: audits by
independent auditors; transfer agency, custodian, dividend disbursing
agent and shareholder recordkeeping services; taxes, if any, and the
preparation of each Fund's tax returns; interest; costs of Trustee and
shareholder meetings; printing and mailing prospectuses and reports to
existing shareholders; fees for filing reports with regulatory bodies and
the maintenance of the Funds' existence; legal fees; fees to federal and
state authorities for the registration of shares; fees and expenses of
Independent Trustees; insurance and fidelity bond premiums; and any
extraordinary expenses of a nonrecurring nature.
A majority of the Independent Trustees of the Board have adopted
written procedures reasonably appropriate to deal with potential conflicts
of interest between the Trust and the AMR Trust, including creating a
separate Board of Trustees of the AMR Trust.
FUND ADVISORY AGREEMENTS -- Each investment adviser, except BT, has
entered into a separate investment advisory agreement with the Manager to
provide investment advisory services to the Funds and Portfolios of the
AMR Trust. To the extent that a Fund invests all of its investable assets
in a corresponding Portfolio, however, an investment adviser will receive
an advisory fee only on behalf of the Portfolio and not on behalf of its
corresponding Fund. Except for the Limited-Term Income Portfolio and the
Equity 500 Index Portfolio, the assets of each Portfolio are allocated
among the investment advisers designated for that Portfolio and described
in this Prospectus in "Investment Advisers." The Manager may enter into
new or modified advisory agreements with existing or new investment
advisers without approval of Fund shareholders or Portfolio interest
holders, but subject to approval of the Board and the AMR Trust Board. The
Securities and Exchange Commission issued an exemptive order which
eliminates the need for shareholder/interest holder approval, subject to
compliance with certain conditions. These conditions include the
requirement that within 90 days of hiring a new adviser or implementing a
material change with respect to an advisory contract, the applicable Fund
send a notice to shareholders containing information about the change that
would be included in a proxy statement. The Manager recommends investment
advisers to the Board and the AMR Trust Board based upon its continuing
quantitative and qualitative evaluation of the investment advisers' skill
in managing assets using specific investment styles and strategies. The
allocation of assets among investment advisers may be changed at any time
by the Manager. Allocations among advisers will vary based upon a variety
of factors, including the overall investment performance of each
PROSPECTUS 34
<PAGE>
investment adviser, the Portfolio's cash flow needs and market conditions.
The Manager need not allocate assets to each investment adviser designated
for a Portfolio. The investment advisers can be terminated without penalty
to the AMR Trust by the Manager and the AMR Trust Board or the interest
holders of the applicable Portfolio. Short-term investment performance, by
itself, is not a significant factor in selecting or terminating an
investment adviser, and the Manager does not expect to recommend frequent
changes of investment advisers. The Prospectus will be supplemented if
additional investment advisers are retained or the contract with any
existing investment adviser is terminated.
Each investment adviser has discretion to purchase and sell
securities for its segment of a Portfolio's assets in accordance with that
Portfolio's objective, policies and restrictions and the more specific
strategies provided by the Manager. Although the investment advisers are
subject to general supervision by the AMR Trust Board, the Equity 500
Index Portfolio Board and/or the Manager, as appropriate, these parties do
not evaluate the investment merits of specific securities transactions. As
compensation for its services, each investment adviser, except BT, is paid
a fee by the Manager out of the proceeds of the management fee received by
the Manager from the AMR Trust.
ADMINISTRATIVE SERVICES AGREEMENTS -- The Manager and the Trust entered
into an Administrative Services Agreement which obligates the Manager to
provide the Funds those administrative and management services (other than
investment advisory services) described in the Management Agreement. To
the extent that a Fund invests all of its investable assets in a
corresponding Portfolio, however, the Manager will receive no fee under
this Agreement.
BT serves as the administrator to the Equity 500 Index Portfolio.
Under an Administration and Services Agreement with the Portfolio, BT
calculates the value of the assets of the Portfolio and generally assists
the Equity 500 Index Portfolio Board in all aspects of the administration
and operation of the Portfolio. The Administration and Services Agreement
provides for the Portfolio to pay BT a fee, computed daily and paid
monthly, at the rate of 0.05% of the average daily net assets of the
Portfolio. Under the Administration and Services Agreement, BT may
delegate one or more of its responsibilities to others, including
Federated Services Company, at BT's expense.
ALLOCATION OF FUND EXPENSES -- Expenses of each Fund generally are
allocated equally among the shares of that Fund, regardless of class.
However, certain expenses approved by the Board will be allocated solely
to the class to which they relate.
PRINCIPAL UNDERWRITER -- BROKERS TRANSACTION SERVICES, INC. ("BTS"), 7001
Preston Road, Dallas, Texas, 75205 serves as the principal underwriter of
the Trust.
CUSTODIAN AND TRANSFER AGENT -- NATIONSBANK OF TEXAS, N.A., Dallas, Texas,
serves as custodian for the Portfolios of the AMR Trust and the Funds, and
35 PROSPECTUS
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as transfer agent for the AMR Class. Bankers Trust Company, New York, New
York, acts as custodian and transfer agent of the assets of the Equity 500
Index Portfolio. The Chase Manhattan Bank N.A., New York, New York, acts
as subcustodian for the International Equity Portfolio and its
corresponding Fund.
INDEPENDENT AUDITOR -- The independent auditor for the Trust, except the
S&P 500 Index Fund, and the AMR Trust is Ernst & Young LLP, Dallas, Texas.
The independent auditor for the S&P 500 Index Fund and the Equity 500
Index Portfolio is Coopers & Lybrand L.L.P.
INVESTMENT ADVISERS
Set forth below is a brief description of the investment advisers for each
Fund and its corresponding Portfolio. References to the investment
advisers retained by a Portfolio also apply to the corresponding Fund.
Except for the Manager and BT, the investment advisers do not provide any
services to the Funds or the Portfolios except for portfolio investment
management and related recordkeeping services, or have any affiliation
with the Trust, the AMR Trust, the Equity 500 Index Portfolio or the
Manager. BT provides investment advisory, administrative and other
services to the Equity 500 Index Portfolio. See "Bankers Trust Company"
below for a full discussion of those services.
William F. Quinn has served as President of the Manager since it
was founded in 1986 and Nancy A. Eckl currently serves as Vice President-
Trust Investments of the Manager. She previously served as Vice
President - Finance and Compliance of the Manager from December 1990 to
May 1995. In these capacities, Mr. Quinn and Ms. Eckl have primary
responsibility for the day-to-day operations of the Balanced Fund, the
Growth and Income Fund, the International Equity Fund and their
corresponding Portfolios. These responsibilities include oversight of the
investment advisers to these Funds, regular review of their performance
and asset allocations among them.
Michael W. Fields is responsible for the portfolio management
oversight of the Limited-Term Income Fund and its corresponding Portfolio.
Mr. Fields has been with the Manager since it was founded in 1986 and
currently serves as Vice President-Fixed Income Investments. Benjamin L.
Mayer is responsible for the day-to-day portfolio management of the
Limited-Term Income Portfolio. Mr. Mayer has served as Senior Portfolio
Manager of the Manager since May 1995. Prior to that time, he was a Vice
President, Institutional Fixed Income Sales at Merrill, Lynch, Pierce,
Fenner & Smith from January 1994 to April 1995 and Vice President,
Regional Senior Strategist from April 1989 to January 1994. Mr. Mayer has
had portfolio management responsibility for the Fund since August 1995.
Frank Salerno, Managing Director of BT, is responsible for the
day-to-day management of the Equity 500 Index Portfolio. Mr. Salerno has
been employed by BT since prior to 1989 and has managed the Equity 500
Index Portfolio's assets since the Portfolio commenced operations
December 31, 1992.
PROSPECTUS 36
<PAGE>
BANKERS TRUST COMPANY, 280 Park Avenue, New York, New York 10017,
is a New York banking corporation and is a wholly owned subsidiary of
Bankers Trust New York Corporation. BT conducts a variety of general
banking and trust activities and is a major wholesale supplier of
financial services to the international and domestic institutional market,
with a global network of over 120 offices in more than 40 countries. As of
June 30, 1996, Bankers Trust New York Corporation was the seventh largest
bank holding company in the United States with total assets of
approximately $115 billion and approximately $215 billion in assets under
management globally. Of that total, approximately $85 billion are in U.S.
equity index assets alone. BT serves as investment adviser and
administrator to the Equity 500 Index Portfolio. For its services, BT
receives a fee from the Equity 500 Index Portfolio, computed daily and
paid monthly, at the annual rate of 0.10% (before waiver) of the average
daily net assets of the Portfolio.
BARROW, HANLEY, MEWHINNEY & STRAUSS, INC. ("Barrow"), 3232
McKinney Avenue, 15th Floor, Dallas, Texas 75204, is a professional
investment counseling firm which has been providing investment advisory
services since 1979. The firm is wholly owned by United Asset Management
Corporation, a Delaware corporation. As of October 31, 1996, Barrow had
discretionary investment management authority with respect to
approximately $____ billion of assets, including approximately $___
billion of assets of AMR and its subsidiaries and affiliated entities.
Barrow serves as an investment adviser to the Balanced Portfolio, the
Growth and Income Portfolio and the Limited-Term Income Portfolio,
although the Manager does not presently intend to allocate any of the
assets in the Limited-Term Income Portfolio to Barrow. The Manager pays
Barrow an annualized fee equal to .30% on the first $200 million in AMR
Trust assets under its discretionary management, .20% on the next $300
million, .15% on the next $500 million, and .125% on assets over $1
billion.
BOATMEN'S TRUST COMPANY ("Boatmen's"), 100 N. Broadway, St.
Louis, Missouri 63178, is a professional trust and investment advisory
firm founded in 1889 and has been providing investment services since the
1930s. Boatmen's is a wholly owned subsidiary of Boatmen's Bancshares,
Inc. As of October 31, 1996, Boatmen's had assets under management
totaling approximately $__ billion, including approximately $___ million
of assets of AMR and its subsidiaries and affiliated entities. Boatmen's
serves as an investment adviser to the Balanced Portfolio and the Growth
and Income Portfolio, although the Manager does not presently intend to
allocate assets to Boatmen's. For its services to the Balanced Portfolio
and the Growth and Income Portfolio, the Manager will pay Boatmen's an
annualized fee equal to .25% of the average daily net assets of each
Portfolio allocated to Boatmen's for management.
BRANDYWINE ASSET MANAGEMENT, INC. ("Brandywine"), 201 North
Walnut Street, Wilmington, Delaware 19801, is a privately held
professional investment counseling firm founded in 1986. As of October 31,
1996, Brandywine had assets under management totaling approximately $___
billion, including approximately $____ million of assets of AMR and its
37 PROSPECTUS
<PAGE>
subsidiaries and affiliated entities. Brandywine serves as an investment
adviser to the Balanced Portfolio and the Growth and Income Portfolio. For
its services to these Portfolios, the Manager pays Brandywine an
annualized fee equal to .225% of assets in the Balanced Portfolio and .25%
of assets in the Growth and Income Portfolio of the first $500 million of
assets under its discretionary management; .225% of the next $100 million
on all assets and .20% on all excess assets.
GSB INVESTMENT MANAGEMENT, INC. ("GSB"), 301 Commerce Street,
Fort Worth, Texas 76102, is a professional investment management firm
which was founded in 1987 by Frank P. Ganucheau, Mark J. Stupfel, and Lyle
E. Brumley. GSB is wholly owned by United Asset Management Corporation, a
Delaware corporation. As of October 31, 1996, GSB managed approximately
$____ billion of assets, including approximately $____ million of assets
of AMR and its subsidiaries and affiliated entities. GSB serves as an
investment adviser to the Balanced Portfolio and the Growth and Income
Portfolio. The Manager pays GSB an annualized fee equal to .30% of the
first $100 million in AMR Trust assets under its discretionary management,
.25% of the next $100 million, .20% of the next $100 million, and .15% on
all excess assets.
HOTCHKIS AND WILEY, 800 West Sixth Street, 5th Floor, Los
Angeles, California 90017, is a professional investment counseling firm
which was founded in 1980 by John F. Hotchkis and George Wiley. Hotchkis
and Wiley is a division of Merrill Lynch Capital Management Group, a
wholly owned subsidiary of Merrill Lynch & Co., Inc. Assets under
management as of October 31, 1996 were approximately $___ billion, which
included approximately $___ million of assets of AMR and its subsidiaries
and affiliated entities. Hotchkis and Wiley serves as an investment
adviser to the Balanced Portfolio, the Growth and Income Portfolio and the
International Equity Portfolio. The advisory contract provides for the
Manager to pay Hotchkis and Wiley an annualized fee equal to .60% of the
first $10 million of assets under its discretionary management, .50% of
the next $140 million of assets, .30% on the next $50 million of assets
and .20% of all excess AMR Trust assets managed by Hotchkis and Wiley.
INDEPENDENCE INVESTMENT ASSOCIATES, INC. ("IIA"), 53 State
Street, Boston, Massachusetts 02109, is a professional investment
counseling firm which was founded in 1982. The firm is a wholly owned
subsidiary of John Hancock Mutual Life Insurance Company. Assets under
management as of October 31, 1996, including funds managed for its parent
company, were approximately $____ billion, which included approximately
$____ million of assets of AMR and its subsidiaries and affiliated
entities. IIA serves as an investment adviser to the Balanced Portfolio
and the Growth and Income Portfolio. The Manager pays IIA an annualized
fee equal to .50% of the first $30 million of AMR Trust assets under its
discretionary management, .25% of the next $70 million of assets, and .20%
of all excess assets.
MORGAN STANLEY ASSET MANAGEMENT INC. ("MSAM"), 1221 Avenue of the
Americas, New York, New York 10020, is a wholly owned subsidiary of Morgan
Stanley Group Inc. MSAM provides portfolio management and named fiduciary
PROSPECTUS 38
<PAGE>
services to taxable and nontaxable institutions, international
organizations and individuals investing in United States and international
equity and debt securities. As of October 31, 1996, MSAM had assets under
management totaling approximately $____ billion, including approximately
$___ billion under active management and $____ billion as named fiduciary
or fiduciary adviser. As of October 31, 1996, MSAM had investment
authority over approximately $___ million of assets of AMR and its
subsidiaries and affiliated entities. MSAM serves as an investment adviser
to the International Equity Portfolio. For this service, the Manager pays
MSAM an annual fee equal to .80% of the first $25 million in AMR Trust
assets under its discretionary management, .60% of the next $25 million in
assets, .50% of the next $25 million in assets and .40% on all excess
assets.
ROWE PRICE-FLEMING INTERNATIONAL, INC. ("Fleming"), 100 East
Pratt Street, Baltimore, Maryland 21202, is a professional investment
counseling firm founded in 1979. Fleming is a joint venture owned entirely
by its three parent companies, T. Rowe Price, Robert Fleming and Jardine
Fleming. As of October 31, 1996, Fleming had assets under management
totaling approximately $____ billion, including approximately $___ million
of assets of AMR and its subsidiaries and affiliated entities. Fleming
serves as an investment adviser to the International Equity Portfolio,
although the Manager does not presently intend to allocate assets to
Fleming. For its services to the International Equity Portfolio when total
assets under Fleming's management are less than $200 million, the Manager
will pay Fleming an annualized fee equal to 0.75% of the first $20
million, 0.60% of the next $30 million and 0.50% on amounts over $50
million. When assets under Fleming's management exceed $200 million but
are less than $500 million, the Manager will pay Fleming an annualized fee
equal to 0.50% on all assets. When assets under Fleming's management
exceed $500 million but are less than $750 million, the Manager will pay
an annualized fee equal to 0.45% on all assets, and when assets exceed
$750 million, the Manager will pay Fleming a flat fee of 0.40% on all
assets. When asset levels are between $184 million and $200 million,
Fleming will pay the Manager a sliding credit to adjust for the difference
between the two fee schedules. The credit is determined by pro-rating the
difference between the original tiered fee and the flat fee ($80,000 per
annum at all asset levels) over the difference between $200 million and
the current asset size for billing purposes.
TEMPLETON INVESTMENT COUNSEL, INC. ("Templeton"), 500 East
Broward Blvd., Suite 2100, Fort Lauderdale, Florida 33394-3091, is a
professional investment counseling firm which has been providing
investment services since 1979. Templeton is indirectly owned by Franklin
Resources, Inc. As of October 31, 1996, Templeton had discretionary
investment management authority with respect to approximately $____
billion of assets, including approximately $____ million of assets of AMR
and its subsidiaries and affiliated entities. Templeton serves as an
investment adviser to the International Equity Portfolio. For this
service, the Manager pays Templeton an annualized fee equal to .50% of the
first $100 million in AMR Trust assets under its discretionary management,
39 PROSPECTUS
<PAGE>
.35% of the next $50 million in assets, .30% of the next $250 million in
assets and .25% on assets over $400 million.
Solely for the purpose of determining the applicable percentage
rates when calculating the fees for each investment adviser other than
MSAM, there shall be included all other assets or trust assets of American
Airlines, Inc. also under management by each respective investment adviser
(except assets managed by Barrow under the HALO Bond Program). For the
purpose of determining the applicable percentage rates when calculating
MSAM's fees, all equity account assets managed by MSAM on behalf of
American Airlines, Inc. shall be included. The inclusion of any such
assets will result in lower overall fee rates being applied to the
applicable Portfolio.
PURCHASE, REDEMPTION AND VALUATION OF SHARES
PURCHASING SHARES OF THE TRUST -- AMR Class shares are offered to tax-
exempt retirement and benefit plans of AMR Corporation and its affiliates.
Shares are sold without a sales charge at the next share price calculated
after the acceptance of a purchase order. AMR Class shares are offered and
orders accepted until 4:00 p.m. Eastern time on each day on which the
Exchange is open for trading and the custodian/transfer agent is open for
business ("Business Day"). The Trust reserves the right to reject any
order for the purchase of shares and to limit or suspend, without prior
notice, the offering of shares.
AMR Class shares may be purchased and redeemed as follows:
BY WIRE -- Purchases may be made by wiring funds. To ensure prompt receipt
of a transmission by wire, the investor should: telephone the transfer
agent at (214) 508-5038 or (800) 658-5811 and specify the Fund whose
shares are to be purchased; provide the name, address, telephone number
and account number of the investor; and identify the amount being wired
and by which bank. If the investor is opening a new account, the transfer
agent will provide the investor with an account number. The investor
should instruct its bank to designate the account number which the
transfer agent has assigned to the investor and to transmit the federal
funds to: Federal Reserve Bank, Dallas, for NationsBank of Texas, N.A. ABA
Routing #111-000-025, Corporate Trust Suspense Account No. 0180019810,
reference American AAdvantage Funds, attention: Fund Account Services.
BY DEPOSITING SECURITIES -- Shares of a Fund may be purchased in exchange
for an investor's securities if the securities are acceptable to its
corresponding Portfolio and satisfy applicable investment objectives and
policies. Investors interested in exchanging securities must first contact
the Manager and acquire instructions regarding submission of a written
description of the securities which the investor wishes to exchange. The
investor must represent that all such securities offered to any Fund are
not subject to any sale restrictions. Within five business days after
receipt of the written description, the Manager will advise the investor
whether the securities to be exchanged are acceptable. There is no charge
for this review by the Manager. Securities accepted by a Fund must have a
PROSPECTUS 40
<PAGE>
readily ascertainable value as evidenced by a listing on the Exchange, the
American Stock Exchange or Nasdaq. Securities are valued in the manner
described for valuing Portfolio assets in the section entitled "Valuation
of Shares." Acceptance of such orders may occur on any day during the
five-day period afforded the Manager to review the acceptability of the
securities. Upon notice of acceptance of such orders, the securities must
be delivered in fully negotiable form within three days. The Manager will
provide delivery instructions at the time of acceptance. A gain or loss
for federal income tax purposes may be realized by the investor upon the
securities exchange, depending upon the adjusted tax basis and value of
the securities tendered. A Fund will accept securities in this manner only
for investment by its corresponding Portfolio, and not for resale.
BY MAIL -- Share purchases of any Fund may be made by mail by sending a
check or other negotiable bank draft payable to the applicable Fund to
"NationsBank of Texas, N.A., 11th Floor, Elm Place, P.O. Box 830840,
Dallas, Texas 75283-0840, Attn.: American AAdvantage Funds -- AMR Class."
An additional purchase of shares should be accompanied by the
shareholder's account number. Purchase checks are accepted subject to
collection at full face value in U.S. funds and must be drawn in U.S.
dollars on a U.S. bank.
REDEMPTION OF SHARES -- Fund shares may be redeemed on any Business Day by
writing directly to NationsBank of Texas, N.A. at the address above under
"Purchasing Shares of the Trust -- By Mail." The redemption price will be
the net asset value per share next determined after receipt by NationsBank
of Texas, N.A. of all required documents in good order. "Good order" means
that the request must include a letter of instruction or stock assignment
specifying the number of shares or dollar amount to be redeemed, signed by
an authorized signatory for the owners of the shares in the exact names in
which they appear on the account, and accompanied by such other supporting
legal documents, if required, in the case of estates, trusts,
guardianships, custodians, corporations, IRAs and welfare, pension and
profit-sharing plans. In addition, any share certificates being redeemed
must be returned duly endorsed or accompanied by a stock assignment with
signatures guaranteed by a bank, trust company or member of a recognized
stock exchange.
Payment for redeemed shares will be made in cash within seven
days after the receipt of a redemption request in good order. However, the
Fund reserves the right to suspend redemptions or postpone the date of
payment (a) for any periods during which the Exchange is closed (other
than for customary weekend and holiday closings), or when trading on the
Exchange is restricted, (b) at such time as an emergency exists as
determined by the Securities and Exchange Commission so that disposal of a
Fund's investments or determination of its net asset value is not
reasonably practicable, or (c) for such other periods as the Securities
and Exchange Commission by order may permit for protection of the Funds'
shareholders. Shares purchased by check may not be redeemed until the
funds have cleared, which may take up to 15 days. Although each Fund
intends to redeem shares in cash, each reserves the right to pay the
redemption price in whole or in part by a distribution of readily
41 PROSPECTUS
<PAGE>
marketable securities held by the applicable Fund's corresponding
Portfolio. See the SAI for further information concerning redemptions in
kind.
DISTRIBUTION OF TRUST SHARES -- Shares are distributed through the Funds'
principal underwriter, BTS. BTS is compensated by the Manager, and not the
Trust. The Trust does not incur any direct distribution expenses. However,
the Trust has adopted a Distribution Plan in accordance with Rule 12b-1
under the 1940 Act which authorizes the use of any fees received by the
Manager in accordance with the Administrative Services and the Management
Agreements and any fees received by the investment advisers pursuant to
their Advisory Agreements with the Manager, to be used for distribution
purposes.
VALUATION OF SHARES -- The net asset value of each share (share price) of
the Funds is determined as of 4:00 p.m. Eastern Time on each Business Day.
The net asset value of all outstanding shares of all classes will be
determined based on a pro rata allocation of the value of the Fund's
corresponding Portfolio's investment income, expenses and total capital
gains and losses. The allocation will be based on comparative net asset
value at the beginning of the day except for expenses related solely to
one class of shares ("Class Expenses") which will be borne only by the
appropriate class of shares. Because of the Class Expenses, the net income
attributable to and the dividends payable for each class of shares may be
different. Additionally, the Funds may compute differing share prices as a
result of Class Expenses.
Equity securities listed on securities exchanges, including all
but United Kingdom securities of the International Equity Portfolio, are
valued at the last quoted sales price on a designated exchange prior to
the close of trading on the Exchange or, lacking any sales, on the basis
of the last current bid price prior to the close of trading on the
Exchange. Securities of the United Kingdom held in the International
Equity Portfolio are priced at the last jobber price (mid of the bid and
offer prices quoted by the leading stock jobber in the security) prior to
close of trading on the Exchange. Trading in foreign markets is usually
completed each day prior to the close of the Exchange. However, events may
occur which affect the values of such securities and the exchange rates
between the time of valuation and the close of the Exchange. Should events
materially affect the value of such securities during this period, the
securities are priced at fair value, as determined in good faith and
pursuant to procedures approved by the AMR Board. Over-the-counter equity
securities are valued on the basis of the last bid price on that date
prior to the close of trading. Debt securities (other than short-term
securities) will normally be valued on the basis of prices provided by a
pricing service and may take into account appropriate factors such as
institution-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other
market data. In some cases, the prices of debt securities may be
determined using quotes obtained from brokers. Securities for which market
quotations are not readily available are valued at fair value, as
determined in good faith and pursuant to procedures approved by the Board.
PROSPECTUS 42
<PAGE>
Assets and liabilities denominated in foreign currencies and forward
currency contracts are translated into U.S. dollar equivalents based on
prevailing market rates. Investment grade short-term obligations with 60
days or less to maturity held by the Portfolios are valued using the
amortized cost method as described in the SAI.
DIVIDENDS, OTHER DISTRIBUTIONS AND TAX MATTERS
DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS -- Dividends and other
distributions paid on each class of a Fund's shares are calculated at the
same time and in the same manner. Dividends from the net investment income
of the Balanced Fund, the Growth and Income Fund and the International
Equity Fund are normally declared annually. Dividends consisting of
substantially all of the net investment income of the Limited-Term Income
Fund, which are paid monthly, normally are declared on each Business Day
immediately prior to the determination of the net asset value, and are
payable to shareholders of record as of the opening of business on the day
on which declared. The S&P 500 Index Fund distributes income dividends on
the first Business Day in April, July, October and December. A Fund's net
investment income attributable to the AMR Class consists of that class's
share of the Fund's share of dividends and interest (including discount)
accrued on its corresponding Portfolio's securities, less expenses of the
Fund and the Portfolio attributable to the AMR Class. Distributions of a
Fund's share of its corresponding Portfolio's realized net short-term
capital gain, net capital gain (the excess of net long-term capital gain
over net short-term capital loss), and net gains from foreign currency
transactions, if any, normally will be made annually.
Unless a shareholder elects otherwise on the account application,
all dividends and other distributions on a Fund's AMR Class shares will be
automatically declared and paid in additional AMR Class shares of that
Fund. However, a shareholder may choose to have distributions of net
capital gain paid in shares and dividends paid in cash or to have all such
distributions and dividends paid in cash. An election may be changed at
any time by delivering written notice that is received by the transfer
agent at least ten days prior to the payment date for a dividend or other
distribution.
TAX INFORMATION -- Each Fund is treated as a separate corporation for
federal income tax purposes and intends to qualify or to continue to
qualify for treatment as a regulated investment company under the Internal
Revenue Code of 1986, as amended. In each taxable year that a Fund so
qualifies, the Fund (but not its shareholders) will be relieved of federal
income tax on that part of its investment company taxable income
(generally, taxable net investment income plus any net short-term capital
gain and gains from certain foreign currency transactions) and net capital
gain that it distributes to its shareholders. However, a Fund will be
subject to a nondeductible 4% excise tax to the extent that it fails to
distribute by the end of any calendar year substantially all of its
ordinary income for that calendar year and its capital gain net income for
the one-year period ending on October 31 of that year, plus certain other
amounts. For these and other purposes, dividends and other distributions
43 PROSPECTUS
<PAGE>
declared by a Fund in October, November or December of any year and
payable to shareholders of record on a date in one of those months will be
deemed to have been paid by the Fund and received by the shareholders on
December 31 of that year if they are paid by the Fund during the following
January. Each Portfolio has received a ruling from the Internal Revenue
Service that it is classified for federal income tax purposes as a
partnership; accordingly, no Portfolio is subject to federal income tax.
Dividends from a Fund's investment company taxable income will be
taxable to its shareholders as ordinary income to the extent of the Fund's
earnings and profits, whether received in cash or paid in additional Fund
shares. Distributions of a Fund's net capital gain (whether received in
cash or paid in additional Fund shares), when designated as such,
generally will be taxable to its shareholders as long-term capital gain,
regardless of how long they have held their Fund shares. A capital gain
distribution from a Fund also may be offset by capital losses from other
sources. Some foreign countries may impose withholding taxes on certain
dividends payable to the International Equity Portfolio.
Redemption of Fund shares may result in taxable gain or loss to
the redeeming shareholder, depending upon whether the fair market value of
the redemption proceeds exceeds or is less than the shareholder's adjusted
basis for the redeemed shares. If shares of a Fund are redeemed at a loss
after being held for six months or less, the loss will be treated as long-
term, instead of short-term, capital loss to the extent of any capital
gain distributions received on those shares.
If shares are purchased shortly before the record date for a
dividend (other than an exempt-interest dividend) or other distribution,
the investor will pay full price for the shares and receive some portion
of the price back as a taxable distribution. Each Fund notifies its
shareholders following the end of each calendar year of the amounts of
dividends and capital gain distributions paid (or deemed paid).
Each Fund is required to withhold 31% of all taxable dividends,
capital gain distributions and redemption proceeds payable to any
individuals and certain other non-corporate shareholders who do not
provide the Fund with a correct taxpayer identification number or (except
with respect to redemption proceeds) who otherwise are subject to back-up
withholding.
The foregoing is only a summary of some of the important tax
considerations generally affecting the Funds and their shareholders.
Prospective investors are urged to consult their own tax advisers
regarding specific questions as to the effect of federal, state or local
income taxes on any investment in the Trust. For further tax information,
see the SAI.
GENERAL INFORMATION
The Trust currently is comprised of nine separate investment
portfolios. Each Fund in this Prospectus, except the S&P 500 Index Fund,
PROSPECTUS 44
<PAGE>
is comprised of three classes of shares, which can be issued in an
unlimited number. The S&P 500 Index Fund currently offers only one class
of shares. Each share represents an equal proportionate beneficial
interest in that Fund and is entitled to one vote. Only shares of a
particular class may vote on matters affecting that class. Only shares of
a particular Fund may vote on matters affecting that Fund. All shares of
the Trust vote on matters affecting the Trust as a whole. Share voting
rights are not cumulative, and shares have no preemptive or conversion
rights. Shares of the Trust are nontransferable. Each series in the Trust
will not be involved in any vote involving a Portfolio in which it does
not invest its assets. Shareholders of all of the series of the Trust,
however, will vote together to elect Trustees of the Trust and for certain
other matters. Under certain circumstances, the shareholders of one or
more series could control the outcome of these votes.
On most issues subjected to a vote of a Portfolio's interest
holders, as required by the 1940 Act, its corresponding Fund will solicit
proxies from its shareholders and will vote its interest in the Portfolio
in proportion to the votes cast by that Fund's shareholders. Because a
Portfolio interest holder's votes are proportionate to its percentage
interests in that Portfolio, one or more other Portfolio investors could,
in certain instances, approve an action against which a majority of the
outstanding voting securities of its corresponding Fund had voted. This
could result in that Fund's redeeming its investment in its corresponding
Portfolio, which could result in increased expenses for that Fund.
Whenever the shareholders of a Fund are called to vote on matters related
to its corresponding Portfolio, the Board shall vote shares for which they
receive no voting instructions in the same proportion as the shares for
which they do receive voting instructions. Any information received from a
Portfolio in the Portfolio's report to shareholders will be provided to
the shareholders of its corresponding Fund.
As a Massachusetts business trust, the Trust is not obligated to
conduct annual shareholder meetings. However, the Trust will hold special
shareholder meetings whenever required to do so under the federal
securities laws or the Trust's Declaration of Trust or By-Laws. Trustees
can be removed by a shareholder vote at special shareholder meetings.
As more fully described in the SAI, the following persons may be
deemed to control certain Funds by virtue of their ownership of more than
25% of the outstanding shares of a Fund as of September 30, 1996:
AMERICAN AADVANTAGE BALANCED FUND
AMR Corporation and subsidiary companies and Employee
Benefit Trusts thereof . . . . . . . . . . . . . . . . . . . . 64%
AMERICAN AADVANTAGE GROWTH AND INCOME FUND
AMR Corporation and subsidiary companies and Employee
Benefit Trusts thereof . . . . . . . . . . . . . . . . . . . . 91%
AMERICAN AADVANTAGE INTERNATIONAL EQUITY FUND
AMR Corporation and subsidiary companies and Employee
Benefit Trusts thereof . . . . . . . . . . . . . . . . . . . . 83%
45 PROSPECTUS
<PAGE>
AMERICAN AADVANTAGE LIMITED-TERM INCOME FUND
Retirement Advisors of America, Inc. . . . . . . . . . . . . . . 50%
AMR Corporation and subsidiary companies and Employee
Benefit Trust thereofs . . . . . . . . . . . . . . . . . . . . 34%
SHAREHOLDER COMMUNICATIONS
Shareholders will receive periodic reports, including annual and
semi-annual reports which will include financial statements showing the
results of the Funds' operations and other information. The financial
statements of the Trust, the AMR Trust and the Equity 500 Index Portfolio
will be audited by independent auditors at least annually. Shareholder
inquiries and requests for information regarding the other investment
companies which also invest in the AMR Trust should be made in writing to
the Funds at P.O. Box 619003, MD 5645, Dallas/Fort Worth Airport, Texas
75261-9003 or by calling (800) 388-3344.
PROSPECTUS 46
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE
ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND IN
SALES LITERATURE SPECIFICALLY APPROVED BY OFFICERS OF THE TRUST FOR USE IN
CONNECTION WITH THE OFFER OF ANY AMR CLASS SHARES, AND, IF GIVEN OR MADE,
SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE FUNDS. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER IN ANY JURISDICTION IN WHICH, OR TO ANY PERSON TO WHOM, SUCH
OFFERING MAY NOT LAWFULLY BE MADE.
American AAdvantage Funds is a registered service mark of AMR
Corporation. AMR Class, American AAdvantage Balanced Fund, American
AAdvantage Growth and Income Fund, American AAdvantage International
Equity Fund, American AAdvantage Limited-Term Income Fund [and American
AAdvantage S&P 500 Index Fund] are service marks and PlanAhead Class is a
registered service mark of AMR Investment Services, Inc.
47 PROSPECTUS
<PAGE>
American
AAdvantage Funds(REGISTERED TRADEMARK)
AMR CLASS (SERVICEMARK)
P.O. Box 619003
Dallas/Fort Worth Airport, Texas
75261-9003
(800) 967-9009
INSTITUTIONAL CLASS
P.O. Box 619003
Dallas/Fort Worth Airport, Texas
75261-9003
(800) 967-9009
PLANAHEAD CLASS (SERVICEMARK)
P.O. Box 4580
Chicago, Illinois 60680-4580
(800) 388-3344
PROSPECTUS
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
AMERICAN AADVANTAGE FUNDS(REGISTERED)
AMR Class(SERVICEMARK)
Institutional Class
PlanAhead Class(SERVICEMARK)
January 1, 1997
The American AAdvantage Balanced Fund(SERVICEMARK) (the "Balanced
Fund"), American AAdvantage Growth and Income Fund(SERVICEMARK), formerly
the American AAdvantage Equity Fund (the "Growth and Income Fund"),
American AAdvantage International Equity Fund(SERVICEMARK) (the
"International Equity Fund"), American AAdvantage Limited-Term Income
Fund(SERVICEMARK), formerly the American AAdvantage Fixed Income Fund (the
"Limited-Term Income Fund"), American AAdvantage Money Market
Fund(SERVICEMARK) (the "Money Market Fund"), American AAdvantage Municipal
Money Market Fund(SERVICEMARK) (the "Municipal Money Market Fund"),
American AAdvantage S&P 500 Index Fund (the "S&P 500 Index Fund") and
American AAdvantage U.S. Treasury Money Market Fund(SERVICEMARK) (the
"U.S. Treasury Money Market Fund"), (individually, a "Fund" and
collectively, the "Funds") are eight separate investment portfolios of the
American AAdvantage Funds (the "Trust") a no-load, open-end, diversified
management investment company. Each Fund constitutes a separate
investment portfolio with a distinct investment objective, and distinct
purpose and strategy. Each Fund, except the S&P 500 Index Fund, consists
of multiple classes of shares designed to meet the needs of different
groups of investors. This Statement of Additional Information relates to
the AMR, Institutional and PlanAhead Classes of the Trust. The S&P 500
Index Fund currently offers only the AMR Class of shares.
Each Fund, except the S&P 500 Index Fund, seeks its investment
objective by investing all of its investable assets in a corresponding
portfolio of the AMR Investment Services Trust ("AMR Trust"). The S&P 500
Index Fund invests all of its investable assets in the Equity 500 Index
Portfolio. (The Equity 500 Index Portfolio and the portfolios of the AMR
Trust are referred to herein individually as a "Portfolio" and,
collectively, the "Portfolios".) Each Portfolio has an investment
objective identical to the investing Fund. Each corresponding Portfolio of
the AMR Trust has a similar name to the investing Fund. The AMR Trust is a
separate investment company managed by AMR Investment Services, Inc. (the
"Manager"). The Equity 500 Index Portfolio is a separate investment
company managed by Bankers Trust Company ("BT").
This Statement of Additional Information should be read in
conjunction with an AMR Class prospectus dated January 1, 1997, or an
Institutional Class or PlanAhead Class prospectus dated March 1, 1996,
(individually, a "Prospectus"), copies of which may be obtained without
charge by calling (800) 423-7526 for a PlanAhead Class Prospectus or (817)
967-3509 for an Institutional or AMR Class Prospectus.
<PAGE>
This Statement of Additional Information is not a prospectus and
is authorized for distribution to prospective investors only if preceded
or accompanied by a current Prospectus.
INVESTMENT RESTRICTIONS
Each Fund has the following fundamental investment policy that
enables it to invest in its corresponding Portfolio:
Notwithstanding any other limitation, the Fund may invest all of
its investable assets in an open-end management investment
company with substantially the same investment objectives,
policies and limitations as the Fund. For this purpose, "all of
the Fund's investable assets" means that the only investment
securities that will be held by the Fund will be the Fund's
interest in the investment company.
All other fundamental investment policies and the non-fundamental
policies of each Fund and its corresponding Portfolio are identical.
Therefore, although the following discusses the investment policies of
each Portfolio, the AMR Trust's Board of Trustees ("AMR Trust Board") and
the Equity 500 Index Portfolio's Board of Trustees ("Equity 500 Index
Portfolio Board"), it applies equally to each Fund and the Trust's Board
of Trustees ("Board").
Portfolios of the AMR Trust
In addition to the investment limitations noted in the
Prospectus, the following seven restrictions have been adopted by each
Portfolio of the AMR Trust, and may be changed with respect to any such
Portfolio only by the majority vote of that Portfolio's outstanding
interests. "Majority of the outstanding voting securities" under the
Investment Company Act of 1940, as amended (the "1940 Act"), and as used
herein means, with respect to the Portfolio, the lesser of (a) 67% of the
interests of the Portfolio present at the meeting if the holders of more
than 50% of the interests are present and represented at the interest
holders' meeting or (b) more than 50% of the interests of the Portfolio.
Whenever a Fund is requested to vote on a change in the investment
restrictions of its corresponding Portfolio, that Fund will hold a meeting
of its shareholders and will cast its votes as instructed by its
shareholders. The percentage of a Fund's votes representing that Fund's
shareholders not voting will be voted by the Board in the same proportion
as those Fund shareholders who do, in fact, vote.
No Portfolio of the AMR Trust may:
1. Purchase or sell real estate or real estate limited
partnership interests, provided, however, that the Portfolio may
invest in securities secured by real estate or interests therein
or issued by companies which invest in real estate or interests
2
<PAGE>
therein when consistent with the other policies and limitations
described in the Prospectus.
2. Purchase or sell commodities (including direct interests
and/or leases in oil, gas or minerals) or commodities contracts,
except with respect to forward foreign currency exchange
contracts, foreign currency futures contracts and "when-issued"
securities when consistent with the other policies and
limitations described in the Prospectus.
3. Engage in the business of underwriting securities issued
by others, except to the extent that, in connection with the
disposition of securities, the Portfolio may be deemed an
underwriter under federal securities law.
4. Make loans to any person or firm, provided, however, that
the making of a loan shall not be construed to include (i) the
acquisition for investment of bonds, debentures, notes or other
evidences of indebtedness of any corporation or government which
are publicly distributed or (ii) the entry into repurchase
agreements and further provided, however, that each Portfolio may
lend its portfolio securities to broker-dealers or other
institutional investors in accordance with the guidelines stated
in the Prospectus.
5. Purchase from or sell portfolio securities to its
officers, Trustees or other "interested persons" of the Trust, as
defined in the 1940 Act, including its investment advisers and
their affiliates, except as permitted by the 1940 Act and
exemptive rules or orders thereunder.
6. Issue senior securities except that the Portfolio may
engage in when-issued securities and forward commitment
transactions and the International Equity Portfolio may engage in
currency futures and forward currency contracts.
7. Borrow money, except from banks or through reverse
repurchase agreements for temporary purposes in an aggregate
amount not to exceed 10% of the value of its total assets at the
time of borrowing. In addition, although not a fundamental
policy, the Portfolios intend to repay any money borrowed before
any additional portfolio securities are purchased. See "Other
Information" for a further description regarding reverse
repurchase agreements.
The corresponding Portfolio of the Money Market Fund (the "Money
Market Portfolio"), as a fundamental policy, is restricted from purchasing
the securities of other investment companies except in connection with a
merger, consolidation, acquisition of assets or other reorganization
approved by the Portfolio's interest holders.
3
<PAGE>
The following non-fundamental investment restrictions apply to
each Portfolio of the AMR Trust and may be changed with respect to a
Portfolio by a majority vote of the AMR Trust Board. No Portfolio of the
AMR Trust may:
1. Purchase securities on margin, effect short sales (except
that the Portfolio may obtain such short-term credits as may be
necessary for the clearance of purchases or sales of securities)
or purchase or sell call options or engage in the writing of such
options.
2. Purchase or retain the securities of an issuer if, to the
AMR Trust's knowledge, one or more of the trustees or officers of
the AMR Trust, or the investment adviser responsible for the
investment of the AMR Trust's assets or its directors or
officers, individually own beneficially more than 1/2 of 1% of
the securities of such issuer and together own beneficially more
than 5% of such securities.
All Portfolios of the AMR Trust, other than the Money Market
Portfolio, may invest up to 10% of their total assets in the securities of
other investment companies to the extent permitted by law. A Portfolio of
the AMR Trust may incur duplicate advisory or management fees when
investing in another mutual fund.
In addition, no Portfolio of the AMR Trust may invest in
warrants, except as permitted by its investment policies as described in
the Prospectus, provided that no such Portfolio shall invest more than 5%
of its net assets, valued at the lower of cost or market, in warrants or
more than 2% of its net assets in warrants which are not listed on the New
York Stock Exchange ("NYSE") or American Stock Exchanges ("AMEX").
Equity 500 Index Portfolio
The following investment restrictions are "fundamental policies"
of the Equity 500 Index Portfolio and may be changed with respect to the
Portfolio only by the majority vote of the Portfolio's outstanding
interests, as defined above. Whenever the S&P 500 Index Fund is requested
to vote on a change in the fundamental policy of the Portfolio, the Fund
will hold a meeting of its shareholders and will cast its votes as
instructed by its shareholders. The percentage of the Fund's votes
representing Fund shareholders not voting will be voted by the Board in
the same proportion as the Fund shareholders who do, in fact, vote.
The Equity 500 Index Portfolio may not:
1. Borrow money or mortgage or hypothecate assets of the
Portfolio, except that in an amount not to exceed 1/3 of the
current value of the Portfolio's net assets, it may borrow money
as a temporary measure for extraordinary or emergency purposes
and enter into reverse repurchase agreements or dollar roll
transactions, and except that it may pledge, mortgage or
4
<PAGE>
hypothecate not more than 1/3 of such assets to secure such
borrowings (it is intended that money would be borrowed only from
banks and only either to accommodate requests for the withdrawal
of beneficial interests (redemption of shares) while effecting an
orderly liquidation of portfolio securities or to maintain
liquidity in the event of an unanticipated failure to complete a
portfolio security transaction or other similar situations) or
reverse repurchase agreements, provided that collateral
arrangements with respect to options and futures, including
deposits of initial deposit and variation margin, are not
considered a pledge of assets for purposes of this restriction
and except that assets may be pledged to secure letters of credit
solely for the purpose of participating in a captive insurance
company sponsored by the Investment Company Institute; for
additional related restrictions, see clause (1) below. (As an
operating policy, the Portfolio may not engage in dollar roll
transactions).
2. Underwrite securities issued by other persons except
insofar as the Portfolio may technically be deemed an underwriter
under the Securities Act of 1933 (the "1933 Act") in selling a
portfolio security.
3. Make loans to other persons except: (a) through the use
of repurchase agreements or the purchase of short-term
obligations; or (b) by purchasing a portion of an issue of debt
securities of types distributed publicly or privately.
4. Purchase or sell real estate (including limited
partnership interests but excluding securities secured by real
estate or interests therein), interests in oil, gas or mineral
leases, commodities or commodity contracts (except futures and
option contracts) in the ordinary course of business (except that
the Portfolio may hold and sell, for the Portfolio's portfolio,
real estate acquired as a result of the Portfolio's ownership of
securities).
5. Concentrate its investments in any particular industry
(excluding U.S. Government securities), but if it is deemed
appropriate for the achievement of the Portfolio's investment
objective, up to 25% of its total assets may be invested in any
one industry.
6. Issue any senior security (as that term is defined in the
1940 Act) if such issuance is specifically prohibited by the 1940
Act or the rules and regulations promulgated thereunder, provided
that collateral arrangements with respect to options and futures,
including deposits of initial deposit and variation margin, are
not considered to be the issuance of a senior security for
purposes of this restriction.
5
<PAGE>
In order to comply with certain state and Federal statutes and
policies the Equity 500 Index Portfolio will not as a matter of operating
policy:
1. Borrow money (including through dollar roll transactions)
for any purpose in excess of 10% of the Portfolio's total assets
(taken at cost) except that the Portfolio may borrow for
temporary or emergency purposes up to 1/3 of its total assets.
2. Pledge, mortgage or hypothecate for any purpose in excess
of 10% of the Portfolio's total assets (taken at market value),
provided that collateral arrangements with respect to options and
futures, including deposits of initial deposit and variation
margin, are not considered a pledge of assets for purposes of
this restriction.
3. Purchase any security or evidence of interest therein on
margin, except that such short-term credit as may be necessary
for the clearance of purchases and sales of securities may be
obtained and except that deposits of initial deposit and
variation margin may be made in connection with the purchase,
ownership, holding or sale of futures.
4. Sell any security that it does not own unless by virtue
of its ownership of other securities it has at the time of sale a
right to obtain securities, without payment of further
consideration, equivalent in kind and amount to the securities
sold and provided that if such right is conditional the sale is
made upon the same conditions.
5. Invest for the purpose of exercising control or
management.
6. Purchase securities issued by any investment company
except by purchase in the open market where no commission or
profit to a sponsor or dealer results from such purchase other
than the customary broker's commission, or except when such
purchase, though not made in the open market, is part of a plan
of merger or consolidation; provided, however, that securities of
any investment company will not be purchased for the Portfolio if
such purchase at the time thereof would cause: (a) more than 10%
of the Portfolio's total assets (taken at the greater of cost or
market value) to be invested in the securities of such issuers;
(b) more than 5% of the Portfolio's total assets (taken at the
greater of cost or market value) to be invested in any one
investment company; or (c) more than 3% of the outstanding voting
securities of any such issuer to be held for the Portfolio; and,
provided further that, except in the case of merger or
consolidation, the Portfolio shall not invest in any other
open-end investment company unless the Portfolio (1) waives the
investment advisory fee with respect to assets invested in other
open-end investment companies and (2) incurs no sales charge in
6
<PAGE>
connection with the investment (as an operating policy, the
Portfolio will not invest in another open-end registered
investment company).
7. Invest more than 15% of the Portfolio's net assets (taken
at the greater of cost or market value) in securities that are
illiquid or not readily marketable not including (a) Rule 144A
securities that have been determined to be liquid by the Equity
500 Index Portfolio Board; and (b) commercial paper that is sold
under section 4(2) of the 1933 Act which: (i) is not traded flat
or in default as to interest or principal; and (ii) is rated in
one of the two highest categories by at least two nationally
recognized statistical rating organizations and the Equity 500
Index Portfolio Board has determined the commercial paper to be
liquid; or (iii) is rated in one of the two highest categories by
one nationally recognized statistical rating agency and the
Equity 500 Index Portfolio Board have determined that the
commercial paper is equivalent quality and is liquid.
8. Invest more than 10% of the Portfolio's total assets
(taken at the greater of cost or market value) in securities that
are restricted as to resale under the 1933 Act (other than Rule
144A securities deemed liquid by the Equity 500 Index Portfolio
Board).
9. No more than 5% of the Portfolio's total assets are
invested in securities issued by issuers which (including
predecessors) have been in operation less than three years.
10. With respect to 75% of the Portfolio's total assets,
purchase securities of any issuer if such purchase at the time
thereof would cause the Portfolio to hold more than 10% of any
class of securities of such issuer, for which purposes all
indebtedness of an issuer shall be deemed a single class and all
preferred stock of an issuer shall be deemed a single class,
except that futures or option contracts shall not be subject to
this restriction.
11. If the Portfolio is a "diversified" fund with respect to
75% of its assets, invest more than 5% of its total assets in the
securities (excluding U.S. Government securities) of any one
issuer.
12. Purchase or retain in the Portfolio's portfolio any
securities issued by an issuer any of whose officers, directors,
trustees or security holders is an officer or Trustee of the
Equity 500 Index Portfolio, or is an officer or partner of BT, if
after the purchase of the securities of such issuer for the
Portfolio one or more of such persons owns beneficially more than
1/2 of 1% of the shares or securities, or both, all taken at
market value, of such issuer, and such persons owning more than
1/2 of 1% of such shares or securities together own beneficially
7
<PAGE>
more than 5% of such shares or securities, or both, all taken at
market value.
13. Invest more than 5% of the Portfolio's net assets in
warrants (valued at the lower of cost or market) (other than
warrants acquired by the Portfolio as part of a unit or attached
to securities at the time of purchase), but not more than 2% of
the Portfolio's net assets may be invested in warrants not listed
on the NYSE or the AMEX.
14. Make short sales of securities or maintain a short
position, unless at all times when a short position is open it
owns an equal amount of such securities or securities convertible
into or exchangeable, without payment of any further
consideration, for securities of the same issue and equal in
amount to, the securities sold short, and unless not more than
10% of the Portfolio's net assets (taken at market value) is
represented by such securities, or securities convertible into or
exchangeable for such securities, at any one time (the Portfolio
has no current intention to engage in short selling).
15. Write puts and calls on securities unless each of the
following conditions are met: (a) the security underlying the put
or call is within the investment policies of the Portfolio and
the option is issued by the Options Clearing Corporation, except
for put and call options issued by non-U.S. entities or listed on
non-U.S. securities or commodities exchanges; (b) the aggregate
value of the obligations underlying the puts determined as of the
date the options are sold shall not exceed 5% of the Portfolio's
net assets; (c) the securities subject to the exercise of the
call written by the Portfolio must be owned by the Portfolio at
the time the call is sold and must continue to be owned by the
Portfolio until the call has been exercised, has lapsed, or the
Portfolio has purchased a closing call, and such purchase has
been confirmed, thereby extinguishing the Portfolio's obligation
to deliver securities pursuant to the call it has sold; and (d)
at the time a put is written, the Portfolio establishes a
segregated account with its custodian consisting of cash or
short-term U.S. Government securities equal in value to the
amount the Portfolio will be obligated to pay upon exercise of
the put (this account must be maintained until the put is
exercised, has expired, or the Portfolio has purchased a closing
put, which is a put of the same series as the one previously
written).
16. Buy and sell puts and calls on securities, stock index
futures or options on stock index futures, or, financial futures
or options on financial futures unless such options are written
by other persons and: (a) the options or futures are offered
through the facilities of a national securities association or
are listed on a national securities or commodities exchange,
except for put and call options issued by non-U.S. entities or
8
<PAGE>
listed on non-U.S. securities or commodities exchanges; (b) the
aggregate premiums paid on all such options which are held at any
time do not exceed 20% of the Portfolio's total net assets: and
(c) the aggregate margin deposits required on all such futures or
options thereon held at any time do not exceed 5% of the
Portfolio's total assets.
TRUSTEES AND OFFICERS OF THE TRUST AND THE AMR TRUST
The Board provides broad supervision over the Trust's affairs.
The Manager is responsible for the management of Trust assets, and the
Trust's officers are responsible for the Trust's operations. The Trustees
and officers of the Trust and AMR Trust are listed below together, with
their principal occupations during the past five years. Unless otherwise
indicated, the address of each person listed below is 4333 Amon Carter
Boulevard, MD 5645, Fort Worth, Texas 76155.
<TABLE>
<CAPTION>
Position with
Name, Age and Address each Trust Principal Occupation During Past 5 Years
--------------------- ------------- ----------------------------------------
<S> <C> <C>
William F. Quinn* (49) Trustee and President President, AMR Investment Services, Inc. (November 1986-
Present); Chairman, American Airlines Employees Federal
Credit Union (October 1989-Present); Trustee, American
Performance Funds (September 1990-July 1994); Director,
Crescent Real Estate Equities, Inc. (April 1994-
Present); Trustee, American AAdvantage Mileage Funds
(1995-Present).
Alan D. Feld (__) Trustee Partner, Akin, Gump, Strauss, Hauer & Feld, LLP (1960-
Present); Director, Clear Channel Communications (1984-
Present); Director, CenterPoint Properties, Inc. (1994-
Present).
Ben J. Fortson (__) Trustee President and CEO, Fortson Oil Company; Director,
Kimbell Art Foundation; Director, Burnett-Tandy
Foundation; Honorary Trustee (Texas Christian
University).
John S. Justin (80) Trustee Chairman and Chief Executive Officer, Justin Industries,
2821 West Seventh Street Inc. (a diversified holding company) (1969-Present);
Fort Worth, Texas 76107 Executive Board Member, Blue Cross/Blue Shield of Texas
(1985-Present); Board Member, Zale Lipshy Hospital (June
1993-Present); Trustee, Texas Christian University
(1980-Present); Director and Executive Board Member,
Moncrief Radiation Center (1985-Present); Director,
Texas New Mexico Enterprises (1984-1993); Director,
Texas New Mexico Power Company (1979-1993); Trustee,
American AAdvantage Mileage Funds (1995-Present).
9
<PAGE>
Position with
Name, Age and Address each Trust Principal Occupation During Past 5 Years
--------------------- ------------- ----------------------------------------
Stephen D. O'Sullivan* (61) Trustee Consultant (July 1994-Present); Vice President and
Controller (April 1985-June 1994), American Airlines,
Inc.; Trustee, American AAdvantage Mileage Funds (1995-
Present).
Roger T. Staubach (55) Trustee Chairman of the Board and Chief Executive Officer (1982-
6750 LBJ Freeway Present) and President (1983-1991) of The Staubach
Dallas, TX 75240 Company (a commercial real estate company); Director,
Halliburton Company (1991-Present); Director, First USA,
Inc. (1993-Present); Director, Brinker International
(1993-Present); Director, Columbus Realty Trust (1994-
Present); Member of the Advisory Board, The Salvation
Army; Member of the Advisory Board, Dallas International
Sports Commission; Member of the Advisory Board,
Hartford Whalers Hockey Club; Trustee, Institute for
Aerobics Research; Member of Executive Council,
Daytop/Dallas; former quarterback of the Dallas Cowboys
professional football team; Trustee, American AAdvantage
Mileage Funds (1995-Present).
Nancy A. Eckl (34) Vice President Vice President, AMR Investment Services, Inc. (December
1990-Present).
Michael W. Fields (42) Vice President Vice President, AMR Investment Services, Inc. (August
1988-Present).
Barry Y. Greenberg (33) Vice President and Director, Legal and Compliance, AMR Investment Services,
Assistant Secretary Inc. (July 1995-Present); Branch Chief (May 1992-June
1995) and Staff Attorney (August 1988-May 1992),
Securities and Exchange Commission.
Rebecca L. Harris (29) Treasurer Director of Finance (May 1995-Present), Controller
(November 1991-April 1995), AMR Investment Services,
Inc.
John B. Roberson (38) Vice President Vice President (June 1991-Present).
Adriana R. Posada (42) Assistant Secretary Senior Compliance Analyst, (October 1996-Present),
Compliance Analyst (September 1993-Present), AMR
Investment Services, Inc.; Special Sales Representative
(August 1991-September 1993), American Airlines, Inc.
Clifford J. Alexander (53) Secretary Partner, Kirkpatrick & Lockhart LLP (law firm)
Robert J. Zutz (43) Assistant Secretary Partner, Kirkpatrick & Lockhart LLP (law firm)
</TABLE>
10
<PAGE>
* Messrs. Quinn and O'Sullivan, by virtue of their current or
former positions, are deemed to be "interested persons" of the
Trust as defined by the 1940 Act.
All Trustees and officers as a group own less than 1% of the
outstanding shares of any of the Funds.
As compensation for their service to the Trust and the AMR Trust,
the Independent Trustees and their spouses receive free air travel from
American Airlines, Inc., an affiliate of the Manager. The Trust and the
AMR Trust do not pay for these travel arrangements. However, the Trusts
compensate each Trustee with payments in an amount equal to the Trustees'
income tax on the value of this free airline travel. These amounts are
reflected in the following table for the fiscal year ended October 31,
1996.1
<TABLE>
<CAPTION>
Pension or Retirement Total
Aggregate Benefits Accrued as Estimated Annual Compensation
Compensation Part of the AAdvantage Benefits Upon From American
From the Trust's Expenses Retirement AAdvantage
Name of Trustee Trust ---------------- ---------- Funds Complex
--------------- ----- -------------
<S> <C> <C> <C> <C>
William F. Quinn $ 0 $0 $0 $ 0
John S. Justin $___ $0 $0 $___
Stephen D. O'Sullivan $___ $0 $0 $___
Roger T. Staubach $___ $0 $0 $___
</TABLE>
1 Messrs. Feld and Fortson did not serve as Trustees
during this period.
11
<PAGE>
TRUSTEES AND OFFICERS OF THE EQUITY 500 INDEX PORTFOLIO
The Equity 500 Index Portfolio Board oversees the activities of
the Equity 500 Index Portfolio and reviews contractual arrangements with
companies that provide services to the Portfolio. The Trustees and
officers of the Equity 500 Index Portfolio and their principal occupations
during the past five years are set forth below. Their titles may have
varied during that period. Unless otherwise indicated, the address of each
Trustee and officer is c/o Edgewood Services, Inc., Clearing Operations,
P.O. Box 897, Pittsburgh, PA 15230-0897.
<TABLE>
<CAPTION>
Position with
Equity 500 Index
Name, Age and Address Portfolio Principal Occupation During Past 5 Years
--------------------- ------------------- ----------------------------------------
<S> <C> <C>
Charles P. Biggar (65) Trustee Retired; Director of Chase/NBW Bank Advisory Board;
12 Hitching Post Lane Director, Batemen, Eichler, Hill Richards Inc.; formerly
Chappaqua, NY 10514 Vice President of International Business Machines and
President of the National Services and the Field
Engineering Divisions of IBM.
Philip W. Coolidge* (44) Trustee Chairman, Chief Executive Officer and President,
Signature Financial Group (December 1988-Present) and
Signature Broker-Dealer Services, Inc. (April 1989-
Present).
S. Leland Dill (65) Trustee Retired; Director, Coutts & Company Group and Coutts &
5070 North Ocean Drive Co. (U.S.A.) International; Director, Zweig Series
Singer Island, FL 33404 Trust; formerly Partner of KPMG Peat Marwick; Director,
Vinters International Company Inc.; General Partner of
Pemco (an investment company registered under the 1940
Act).
Philip Saunders, Jr. (60) Trustee Principal, Philip Saunders Associates (Consulting);
445 Glen Road former Director of Financial Industry Consulting, Wolf &
Weston, MA 02193 Company; President, John Hancock Home Mortgage
Corporation; and Senior Vice President of Treasury and
Financial Services, John Hancock Mutual Life Insurance
Company, Inc.
Ronald M. Petnuch (36) President and Senior Vice President, Federated Services Company
Treasurer ("FSC"); formerly Director of Proprietary Client
Services, Federated Administrative Services ("FAS") and
Associate Corporate Counsel, Federated Investors ("FI").
Charles L. Davis, Jr. (36) Vice President and Vice President, FAS.
Assistant Treasurer
12
<PAGE>
Position with
Equity 500 Index
Name, Age and Address Portfolio Principal Occupation During Past 5 Years
--------------------- ------------------- ----------------------------------------
Jay S. Neuman (46) Secretary Corporate Counsel, FI.
</TABLE>
* Mr. Coolidge, by virtue of his current or former positions, is
deemed to be an "interested person" of the Equity 500 Index
Portfolio as defined by the 1940 Act.
No person who is an officer or director of BT is an officer or
Trustee of the Equity 500 Index Portfolio. No director, officer or
employee of Edgewood Services, Inc. ("Edgewood") or any of its affiliates
will receive any compensation from the Equity 500 Index Portfolio for
serving as an officer or Trustee of the Equity 500 Index Portfolio. The
Portfolio and certain other investment companies advised by BT (the "BT
Funds Complex") collectively pay each Trustee who is not a director,
officer or employee of BT, Edgewood, or any of their affiliates an annual
fee of $10,000, respectively, per annum plus $1,250, respectively, per
meeting attended and reimburses them for travel and out-of-pocket
expenses. For the year ended December 31, 1995, the Equity 500 Index
Portfolio incurred Trustees fees equal to $1,868.
The following table reflects fees paid to the Trustees of the
Equity 500 Index Portfolio for the year ended December 31, 1995.
<TABLE>
<CAPTION>
AGGREGATE COMPENSATION TOTAL COMPENSATION FROM
FROM THE EQUITY BT FUNDS COMPLEX
NAME OF TRUSTEE 500 INDEX PORTFOLIO PAID TO TRUSTEES
<S> <C> <C>
Philip W. Coolidge $0 $0
Charles P. Biggar $706 $12,500
S. Leland Dill $706 $12,500
Philip Saunders, Jr. $0 $12,500
</TABLE>
BT reimbursed the Equity 500 Index Portfolio for a portion of its
Trustees fees for the period above. See "Management, Administrative
Services and Distribution Fees" and "Investment Advisory Agreements"
below.
13
<PAGE>
MANAGEMENT, ADMINISTRATIVE SERVICES AND DISTRIBUTION FEES
As described more fully in the Prospectus, the Manager is paid a
management fee as compensation for paying investment advisory fees and for
providing the Trust and the AMR Trust with advisory and asset allocation
services. Management fees for the fiscal years ended October 31 were
approximately as follows: 1994, $6,950,000 of which approximately
$2,965,000 was paid by the Manager to the other investment advisers; 1995
$7,603,000 of which approximately $3,985,000 was paid by the Manager to
the other investment advisers; and 1996, $_________ of which approximately
$__________ was paid by the Manager to the other investment advisers.
Management fees in the amount of approximately $214,000, $29,000 and
$________ were waived by the Manager during the fiscal years ended October
31, 1994, 1995 and 1996, respectively.
Under the Management Agreement, the Manager presently monitors
the services provided by BT to the Equity 500 Index Portfolio. The
Manager receives no fee for providing these monitoring services. In the
event that the Board determines that it is in the best interests of the
S&P 500 Index Fund's shareholders to withdraw its investment from the
Equity 500 Index Portfolio, the Manager would become responsible for
directly managing the assets of the S&P 500 Index Fund. In such event,
the Fund would pay the Manager an annual fee of up to 0.10% of the Fund's
average net assets, accrued daily and paid monthly.
Prior to August 1, 1994, shareholders of the Balanced, Growth and
Income, International Equity and Limited-Term Income Funds ("Variable NAV
Funds") were required to enter into a Shareholder Services Agreement with
the Manager which obligated the Manager to provide or oversee on behalf of
a shareholder's account certain administrative and management services
(other than investment advisory services). Shareholder services fees for
the fiscal year ended October 31, 1993 were approximately $1,244,000.
Effective August 1, 1994, shareholder services agreements were eliminated
and replaced by an administrative services fee paid by each of the
Variable NAV Funds to the Manager. Shareholder services fees for the nine
months ended July 31, 1994 were approximately $1,292,000.
In addition to the management fee, the Manager is paid an
administrative services fee for providing administrative and management
services (other than investment advisory services) to the Funds.
Administrative services fees for the fiscal years ended October 31 were
approximately as follows: 1994, $1,473,000; 1995, $2,731,000; and 1996,
$________. Administrative service fees in the amount of approximately
$14,000, $9,000 and $_______ were waived by the Manager during the fiscal
years ended October 31, 1994, 1995 and 1996, respectively.
BT provides administrative services to the Equity 500 Index
Portfolio. Under the administration and services agreement between the
Equity 500 Index Portfolio and BT, BT is obligated on a continuous basis
to provide such administrative services as the Equity 500 Index Portfolio
Board reasonably deems necessary for the proper administration of the
Portfolio. BT generally will assist in all aspects of the Portfolio's
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<PAGE>
operations; supply and maintain office facilities (which may be in BT's
own offices), statistical and research data, data processing services,
clerical, accounting, bookkeeping and recordkeeping services (including
without limitation the maintenance of such books and records as are
required under the 1940 Act and the rules thereunder, except as maintained
by other agents), internal auditing, executive and administrative
services, and stationary and office supplies; prepare reports to
investors; prepare and file tax returns; supply financial information and
supporting data for reports to and filing with the SEC and various state
Blue Sky authorities; supply supporting documentation for meetings of the
Equity 500 Index Portfolio Board; provide monitoring reports and
assistance regarding compliance with its Declaration of Trust, By-Laws,
investment objectives and policies and with Federal and state securities
laws; arrange for appropriate insurance coverage; calculate net asset
values, net income and realized capital gains or losses; and negotiate
arrangements with, and supervise and coordinate the activities of, agents
and others to supply services.
Pursuant to a sub-administration agreement between BT and
Federated Services Company ("Federated") (the "Sub-Administration
Contract"), Federated performs such sub-administration duties for the
Equity 500 Index Portfolio as from time to time may be agreed upon by BT
and Federated. The Sub-Administration Contract provides that Federated
will receive such compensation as from time to time may be agreed upon by
Federated and BT. All such compensation will be paid by BT.
For the years ended December 31, 1993, 1994 and 1995, BT earned
$37,446, $214,173 and $385,265, respectively, as compensation for
administrative and other services provided to the Equity 500 Index
Portfolio. For the six months ended June 30, 1996, BT earned $320,976.
On September 1, 1995, Brokers Transaction Services, Inc. ("BTS"),
became distributor of the Funds' shares, and as such began receiving an
annualized fee of $50,000 from the Manager for distributing the shares of
the Trust and the American AAdvantage Mileage Funds. Prior to this date,
the Trust was self-distributed.
APPROACH TO STOCK SELECTION
Investment advisers to the corresponding Portfolios of the
Balanced, Growth and Income and International Equity Funds will select
equity securities which, in their opinion, have above average growth
potential and are also selling at a discount to the market. This approach
focuses on the purchase of a diverse group of stocks below their perceived
economic value. Each of the investment advisers determines the growth
prospects of firms based upon a combination of internal and external
research using fundamental economic cycle analysis and considering
changing economic trends. The determination of value is based upon the
analysis of several characteristics of the issuer and its equity
securities including price to earnings ratio, price to book value ratio,
assets carried below market value, financial strength and dividend yield.
15
<PAGE>
REDEMPTIONS IN KIND
Although each Fund intends to redeem shares in cash, each
reserves the right to pay the redemption price in whole or in part by a
distribution of readily marketable securities held by the applicable
Fund's corresponding Portfolio. However, shareholders always will be
entitled to redeem shares for cash up to the lesser of $250,000 or 1% of
the applicable Fund's net asset value during any 90-day period.
Redemption in kind is not as liquid as a cash redemption. In addition, if
redemption is made in kind, shareholders who receive securities and sell
them could receive less than the redemption value of their securities and
could incur certain transactions costs.
EXPENSE LIMITATIONS
Subject to certain state law expense limits, the Trust pays all
of its expenses (including its share of the Portfolios' expenses) other
than those expressly assumed by the Manager. The most restrictive state
expense limit currently imposed is 2.5% of a Fund's first $30 million in
assets, 2.0% of the next $70 million in assets and 1.5% of all excess
assets. If a Fund's expenses exceed any applicable state expense limits,
the Manager would have to bear such excess expenses in order for the Trust
to continue selling its shares in that state. Any excess expenses assumed
by the Manager can be reimbursed monthly whenever a Fund's expenses are
below applicable expense limits.
INVESTMENT ADVISORY AGREEMENTS
Separate Investment Advisory Agreements between the investment
advisers of the corresponding Portfolios of the Balanced, Growth and
Income, International Equity and Limited-Term Income Funds and the AMR
Trust, as described in the Prospectus, were approved and became effective
as of October 1, 1995. Prior to that date, these Funds had entered into
Investment Advisory Agreements with the same investment advisers. On
October 1, 1995, each Fund Investment Advisory Agreement was amended to
provide that to the extent a Fund invests all of its investable assets in
its corresponding Portfolio, the adviser will not receive an advisory fee
under that Agreement.
Under the terms of the Equity 500 Index Portfolio's Investment
Advisory Agreement with BT, BT manages the Equity 500 Index Portfolio
subject to the supervision and direction of the Board of Trustees of the
Equity 500 Index Portfolio. BT will: (1) act in strict conformity with
the Equity 500 Index Portfolio's Declaration of Trust and the 1940 Act, as
the same may from time to time be amended; (2) manage the Equity 500 Index
Portfolio in accordance with the Portfolio's investment objective,
restrictions and policies; (3) make investment decisions for the Equity
500 Index Portfolio; and (4) place purchase and sale orders for securities
16
<PAGE>
and other financial institutions on behalf of the Equity 500 Index
Portfolio.
BT bears all expenses in connection with the performance of
services under the Agreement. The S&P 500 Index Fund and the Equity 500
Index Portfolio each bear certain other expenses incurred in their
operation, including: taxes, interest, brokerage fees and commissions, if
any; fees of Trustees of the Portfolio or Trustees of the Trust who are
not officers, directors or employees of BT, Edgewood, the Manager or any
of the their affiliates; SEC fees and state Blue Sky qualification fees;
charges of custodians and transfer and dividend disbursing agents; certain
insurance premiums; outside auditing and legal expenses; costs
attributable to investor services, including telephone and personnel
expenses; costs of preparing and printing prospectuses and statements of
additional information for regulatory purposes and for distribution to
existing shareholders; costs of shareholders' reports and meetings of
shareholders, officers and Trustees of the Equity 500 Index Portfolio or
Trustees of the Trust, and any extraordinary expenses.
For the years ended December 31, 1993, 1994 and 1995, BT earned
$74,893, $428,346 and $770,530, respectively, as compensation for
investment advisory services provided to the Equity 500 Index Portfolio.
During the same periods, BT reimbursed $72,112, $249,230 and $418,814,
respectively, to the Equity 500 Index Portfolio to cover expenses. For
the six months ended June 30, 1996, BT earned $641,951 and reimbursed
$343,252.
BT may have deposit, loan and other commercial banking
relationships with the issuers of obligations that may be purchased on
behalf of the Equity 500 Index Portfolio, including outstanding loans to
such issuers that could be repaid in whole or in part with the proceeds of
securities so purchased. Such affiliates deal, trade and invest for their
own accounts in such obligations and are among the leading dealers of
various types of such obligations. BT has informed the Equity 500 Index
Portfolio that, in making its investment decisions, it does not obtain or
use material inside information in its possession or in the possession of
any of its affiliates. In making investment recommendations for the
Equity 500 Index Portfolio, BT will not inquire or take into consideration
whether an issuer of securities proposed for purchase or sale by the
Equity 500 Index Portfolio is a customer of BT, its parent or its
subsidiaries or affiliates and, in dealing with its customers, BT, its
parent, subsidiaries and affiliates will not inquire or take into
consideration whether securities of such customers are held by any fund
managed by BT or any such affiliate.
Each Investment Advisory Agreement will automatically terminate
if assigned, and may be terminated without penalty at any time by the
Manager, by a vote of a majority of the Trustees or by a vote of a
majority of the outstanding voting securities of the applicable Fund on no
less than thirty (30) days' nor more than sixty (60) days' written notice
to the investment adviser, or by the investment adviser upon sixty (60)
days' written notice to the Trust. The Investment Advisory Agreements
17
<PAGE>
will continue in effect provided that annually such continuance is
specifically approved by a vote of the Trustees, including the affirmative
votes of a majority of the Trustees who are not parties to the Agreement
or "interested persons" (as defined in the 1940 Act) of any such party,
cast in person at a meeting called for the purpose of considering such
approval, or by the vote of shareholders.
PORTFOLIO SECURITIES TRANSACTIONS
The Investment Advisory Agreements provide, in substance, that in
executing portfolio transactions and selecting brokers or dealers, the
principal objective of each investment adviser is to seek the best net
price and execution available. It is expected that securities ordinarily
will be purchased in the primary markets, and that in assessing the best
net price and execution available, each investment adviser shall 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, for the specific transaction and on a continuing
basis.
BT may utilize the expertise of any of its worldwide subsidiaries
and affiliates to assist in its role as investment adviser. All orders for
investment transactions on behalf of the Equity 500 Index Portfolio are
placed by BT with broker-dealers and other financial intermediaries that
it selects, including those affiliated with BT. A BT affiliate will be
used in connection with a purchase or sale of an investment for the Equity
500 Index Portfolio only if BT believes that the affiliate's charge for
the transaction does not exceed usual and customary levels. The Equity 500
Index Portfolio will not invest in obligations for which BT or any of its
affiliates is the ultimate obligor or accepting bank. The Portfolio may,
however, invest in the obligations of correspondents and customers of BT.
In selecting brokers or dealers to execute particular
transactions, investment advisers are authorized to consider "brokerage
and research services" (as those terms are defined in Section 28(e) of the
Securities Exchange Act of 1934), provision of statistical quotations
(including the quotations necessary to determine a Portfolio's net asset
value), the sale of Trust shares by such broker-dealer or the servicing of
Trust shareholders by such broker-dealer, and other information provided
to the applicable Portfolio, to the Manager, BT and/or to the investment
advisers (or their affiliates), provided, however, that the investment
adviser determines that it has received the best net price and execution
available. The investment advisers are also authorized to cause a
Portfolio to pay a commission to a broker or dealer who provides such
brokerage and research services for executing a portfolio transaction
which is in excess of the amount of the commission another broker or
dealer would have charged for effecting that transaction. The Trustees,
the Manager or the investment advisers, as appropriate, must determine in
good faith, however, that such commission was reasonable in relation to
the value of the brokerage and research services provided viewed in terms
18
<PAGE>
of that particular transaction or in terms of all the accounts over which
the Manager or the investment adviser exercises investment discretion.
For the fiscal years ended October 31, 1994, 1995 and 1996, the following
brokerage commissions were paid by the Funds. The S&P 500 Index Fund was
not operational during these periods.
Fund 1994 1995 1996
---- ---- ---- ----
Balanced $228,250 $388,253 $_____
Growth and Income $300,096 $590,364 $_____
International Equity $391,301 $422,670 $_____
Limited-Term Income $0 $0 $_____
Money Market Funds $0 $0 $_____
For the years ended December 31, 1993, 1994 and 1995, the Equity 500 Index
Portfolio paid the following brokerage commissions: $63,408, $97,069 and
$172,924.
For the fiscal years ended October 31, 1994, 1995 and 1996, the portfolio
turnover rates for the Funds were as follows:
Fund 1994 1995 1996
---- ---- ---- ----
Balanced Fund 48% 73% __%
Growth and Income Fund 23% 26% __%
International Equity Fund 37% 21% __%
Limited-Term Income Fund 94% 183% __%
High portfolio turnover can increase a Fund's transaction costs and
generate additional capital gains or losses.
The fees of the investment advisers are not reduced by reason of
receipt of such brokerage and research services. However, with disclosure
to and pursuant to written guidelines approved by the Board or the Equity
500 Index Portfolio Board, as appropriate, an investment adviser of a
Portfolio or its affiliated broker-dealer may execute portfolio
transactions and receive usual and customary brokerage commissions (within
the meaning of Rule 17e-1 under the 1940 Act) for doing so. The Funds did
not execute any portfolio transactions in fiscal year 1994 with affiliated
brokers. During the fiscal year ended October 31, 1995, the International
Equity Fund paid $18,937 in brokerage commissions to Morgan Stanley, Inc.,
an affiliate of Morgan Stanley Asset Management, an investment adviser to
the International Equity Fund, and the Balanced Fund paid $18 in brokerage
commissions to Sutro & Company. The percentage of total commission of the
International Equity Fund paid to Morgan Stanley in 1995 was 4%
representing 8% of the International Equity Fund s total dollar value of
transactions. The percentage of total commission of the Balanced Fund paid
to Sutro & Company in 1995 was 0.005% representing 0.03% of the Balanced
Fund s total dollar value of transactions. During the fiscal year ended
19
<PAGE>
October 31, 1996, the Balanced Fund and the Growth and Income Fund paid
$______ and $____, respectively, in brokerage commissions to
_______________, an affiliate of _________________, an investment adviser
to the Balanced Fund and the Growth and Income Fund. The percentages of
total commissions of the Balanced and Growth and Income Funds paid to
__________ in 1996 were ____% and ____%, respectively. The transactions
represented ____% of the Balanced Fund's and ____% of the Growth and
Income Fund's total dollar value of portfolio transactions for the fiscal
year ended October 31, 1996.
In certain instances there may be securities that are suitable
for the Equity 500 Index Portfolio as well as for one or more of BT's
other clients. Investment decisions for the Equity 500 Index Portfolio
and for BT's other clients are made with a view to achieving their
respective investment objectives. It may develop that a particular
security is bought or sold for only one client even though it might be
held by, or bought or sold for, other clients. Likewise, a particular
security may be bought for one or more clients when one or more clients
are selling that same security. Some simultaneous transactions are
inevitable when several clients receive investment advice from the same
investment adviser, particularly when the same security is suitable for
the investment objectives of more than one client. When two or more
clients are simultaneously engaged in the purchase or sale of the same
security, the securities are allocated among clients in a manner believed
to be equitable to each. It is recognized that in some cases this system
could have a detrimental effect on the price or volume of the security as
far as the Equity 500 Index Portfolio is concerned. However, it is
believed that the ability of the Equity 500 Index Portfolio to participate
in volume transactions will produce better executions for the Portfolio.
NET ASSET VALUE
It is the policy of the Money Market Fund, Municipal Money Market
Fund and U.S. Treasury Money Market Fund (collectively the "Money Market
Funds") to attempt to maintain a constant price per share of $1.00. There
can be no assurance that a $1.00 net asset value per share will be
maintained. The portfolio instruments held by the Money Market Funds'
corresponding Portfolios are valued based on the amortized cost valuation
technique pursuant to Rule 2a-7 under the 1940 Act. This involves valuing
an instrument at its cost and thereafter assuming a constant amortization
to maturity of any discount or premium, even though the portfolio security
may increase or decrease in market value. Such market fluctuations are
generally in response to changes in interest rates. Use of the amortized
cost valuation method requires the corresponding Portfolios of the Money
Market Funds to purchase instruments having remaining maturities of 397
days or less, to maintain a dollar weighted average portfolio maturity of
90 days or less, and to invest only in securities determined by the
Trustees to be of high quality with minimal credit risks.
20
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TAX INFORMATION
Taxation of the Funds
---------------------
To qualify as a regulated investment company ("RIC") under the
Internal Revenue Code of 1986, as amended ("Code"), each Fund (each of
which is treated as a separate corporation for these purposes) must, among
other requirements:
. Derive at least 90% of its gross income each
taxable year from dividends, interest, payments
with respect to securities loans and gains from
the sale or other disposition of securities or
(in the case of the International Equity Fund)
foreign currencies, or certain other income,
including gains from options, futures or forward
contracts ("Income Requirement");
. Derive less than 30% of its gross income each
taxable year from the sale or other disposition
of securities, or non-foreign currency options or
futures, or (in the case of the International
Equity Fund) foreign currencies (or futures or
forward contracts thereon) that are not directly
related to the Fund's principal business of
investing in securities (or futures with respect
thereto), that are held for less than three
months ("Short-Short Limitation");
. Diversify its investments in securities within
certain statutory limits; and
. Distribute annually to its shareholders at least
90% of its investment company taxable income
(generally, taxable net investment income plus
net short-term capital gain) plus, in the case
of the Municipal Money Market Fund, net interest
income excludable from gross income under section
103(a) of the Code ("Distribution Requirement").
Each Fund has received either a ruling from the Internal Revenue
Service ("IRS") or an opinion of counsel that the Fund, as an investor in
its corresponding Portfolio, is deemed to own a proportionate share of the
Portfolio's assets and to earn the income on that share for purposes of
determining whether the Fund satisfies all the requirements described
above to qualify as a RIC.
See the next section for a discussion of the tax consequences to
the Funds of certain investments by the Portfolios.
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Taxation of the Portfolios
--------------------------
The Portfolios have received rulings from the IRS to the effect
that, among other things, each Portfolio is treated as a separate
partnership for federal income tax purposes and is not a "publicly traded
partnership." As a result, each Portfolio is not subject to federal
income tax; instead, each investor in a Portfolio, such as a Fund, is
required to take into account in determining its federal income tax
liability its share of the Portfolio's income, gains, losses, deductions,
credits and tax preference items, without regard to whether it has
received any cash distributions from the Portfolio.
Because, as noted above, each Fund is deemed to own a
proportionate share of its corresponding Portfolio's assets and income for
purposes of determining whether the Fund satisfies the requirements to
qualify as a RIC, each Portfolio intends to conduct its operations so that
its corresponding Fund will be able to satisfy all those requirements.
Distributions to a Fund from its corresponding Portfolio (whether
pursuant to a partial or complete withdrawal or otherwise) will not result
in the Fund's recognition of any gain or loss for federal income tax
purposes, except that (1) gain will be recognized to the extent any cash
that is distributed exceeds the Fund's basis for its interest in the
Portfolio before the distribution, (2) income or gain will be recognized
if the distribution is in liquidation of the Fund's entire interest in the
Portfolio and includes a disproportionate share of any unrealized
receivables held by the Portfolio and (3) loss will be recognized if a
liquidation distribution consists solely of cash and/or unrealized
receivables. A Fund's basis for its interest in its corresponding
Portfolio generally will equal the amount of cash and the basis of any
property the Fund invests in the Portfolio, increased by the Fund's share
of the Portfolio's net income and gains and decreased by (a) the amount of
cash and the basis of any property the Portfolio distributes to the Fund
and (b) the Fund's share of the Portfolio's losses.
A Portfolio may acquire zero coupon or other securities issued
with original issue discount. As an investor in a Portfolio that holds
those securities, a Fund would have to include in its income its share of
the original issue discount that accrues on the securities during the
taxable year, even if the Portfolio (and, hence, the Fund) receives no
corresponding payment on the securities during the year. Because each
Fund annually must distribute substantially all of its investment company
taxable income, including any original issue discount, to satisfy the
Distribution Requirement and avoid imposition of the 4% excise tax
described in the Prospectus, a Fund may be required in a particular year
to distribute as a dividend an amount that is greater than the total
amount of cash it actually receives. Those distributions would be made
from the Fund's cash assets, if any, or the proceeds of redemption of a
portion of the Fund's interest in its corresponding Portfolio (which
redemption proceeds would be paid from the Portfolio's cash assets or the
proceeds of sales of portfolio securities, if necessary). The Portfolio
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might realize capital gains or losses from any such sales, which would
increase or decrease the Fund's investment company taxable income and/or
net capital gain (the excess of net long-term capital gain over net short-
term capital loss). In addition, any such gains might be realized on the
disposition of securities held for less than three months. Because of the
Short-Short Limitation applicable to the Fund, any such gains would reduce
the Portfolio's ability to sell other securities (or, in the case of the
International Equity Portfolio, certain futures or forward contracts) held
for less than three months that it might wish to sell in the ordinary
course of its portfolio management.
If the Balanced, Growth and Income or International Equity
Portfolio acquires stock in a foreign corporation that is a "passive
foreign investment company" ("PFIC") and holds the stock beyond the end of
the year of acquisition, its corresponding Fund will be subject to federal
income tax on the Fund's share of a portion of any "excess distribution"
received by the Portfolio on the stock or of any gain realized by the
Portfolio from disposition of the stock (collectively "PFIC income"), plus
interest thereon, even if the Fund distributes the PFIC income as a
taxable dividend to its shareholders. A Fund may avoid this tax and
interest if its corresponding Portfolio elects to treat the PFIC as a
"qualified electing fund," however, the requirements for that election are
difficult to satisfy. These Portfolios currently do not intend to acquire
securities that are considered PFICs.
Hedging strategies, such as entering into forward contracts and
selling and purchasing options and futures contracts, involve complex
rules that will determine for federal income tax purposes the character
and timing of recognition of gains and losses the International Equity
Portfolio and the Equity 500 Index Portfolio realize in connection
therewith. The International Equity Fund's share of the International
Equity Portfolio's (1) income from foreign currencies (except certain
gains that may be excluded by future regulations) and (2) income from
transactions in futures and forward contracts derived with respect to its
business of investing in securities or foreign currencies will qualify as
allowable income for that Fund under the Income Requirement. Similarly,
the S&P 500 Index Fund's share of the Equity 500 Index Portfolio's income
from options and futures derived with respect to its business of investing
securities will so qualify for the Fund; however, income from the
disposition of such options and futures will be subject to the Short-Short
Limitation for that Fund if they are held for less than three months.
Income from the International Equity Portfolio's disposition of foreign
currencies, and futures and forward contracts on foreign currencies, that
are not directly related to its principal business of investing in
securities (or futures with respect thereto) also will be subject to the
Short-Short Limitation for the International Equity Fund if they are held
for less than three months.
For purposes of determining whether the International Equity Fund
or the S&P 500 Index Fund satisfies the Short-Short Limitation, if its
corresponding Portfolio satisfies certain requirements, an increase in
value of a position that is part of a designated hedge will be offset by
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<PAGE>
any decrease in value (whether realized or not) of the contra hedging
position during the period of the hedge. Thus, only the net gain (if any)
will be included in such Funds' gross income for purposes of that
limitation.
Dividends and interest received by the International Equity
Portfolio may be subject to income, withholding or other taxes imposed by
foreign countries and U.S. possessions that would reduce the yield on its
securities. Tax treaties between certain countries and the United States
may reduce or eliminate these foreign taxes, however, and many foreign
countries do not impose taxes on capital gains on investments by foreign
investors.
Taxation of the Funds' Shareholders
-----------------------------------
A portion of the dividends from a Fund's investment company
taxable income, whether received in cash or paid in additional Fund
shares, may be eligible for the dividends-received deduction allowed to
corporations. The eligible portion may not exceed the aggregate dividends
received by the Fund (directly or through its corresponding Portfolio)
from U.S. corporations. However, dividends received by a corporate
shareholder and deducted by it pursuant to the dividends-received
deduction are subject indirectly to the alternative minimum tax. No
dividends paid by the Money Market Funds, the International Equity Fund or
the Limited-Term Income Fund are expected to be eligible for this
deduction.
Distributions by the Municipal Money Market Fund of the amount by
which income on tax-exempt securities exceeds certain amounts disallowed
as deductions, designated by it as "exempt-interest dividends," generally
may be excluded from gross income by its shareholders. Dividends paid by
the Fund will qualify as exempt-interest dividends if, at the close of
each quarter of its taxable year, at least 50% of the value of its total
assets (including its share of the Municipal Money Market Portfolio's
assets) consists of securities the interest on which is excludable from
gross income under section 103(a) of the Code. The Fund intends to
continue to satisfy this requirement. The aggregate dividends excludable
from shareholders' gross income may not exceed the Fund's net tax-exempt
income. The shareholders' treatment of dividends from the Fund under
local and state income tax laws may differ from the treatment thereof
under the Code.
Exempt-interest dividends received by a corporate shareholder may
be indirectly subject to the alternative minimum tax. In addition,
entities or persons who are "substantial users" (or persons related to
"substantial users") of facilities financed by private activity bonds
("PABs") or industrial development bonds ("IDBs") should consult their tax
advisers before purchasing shares of the Municipal Money Market Fund
because, for users of certain of these facilities, the interest on those
bonds is not exempt from federal income tax. For these purposes, the term
"substantial user" is defined generally to include a "non-exempt person"
24
<PAGE>
who regularly uses in trade or business a part of a facility financed from
the proceeds of PABs or IDBs.
Up to 85% of social security and railroad retirement benefits may
be included in taxable income for recipients whose adjusted gross income
(including income from tax-exempt sources such as the Municipal Money
Market Fund) plus 50% of their benefits exceeds certain base amounts.
Exempt-interest dividends from the Fund still are tax-exempt to the extent
described above; they are only included in the calculation of whether a
recipient's income exceeds the established amounts.
If more than 50% of the value of the International Equity Fund's
total assets (including its share of the International Equity Portfolio's
total assets) at the close of its taxable year consists of securities of
foreign corporations, the Fund will be eligible to, and may, file an
election with the Internal Revenue Service that will enable the Fund's
shareholders, in effect, to receive the benefit of the foreign tax credit
with respect to the Fund's share of any foreign and U.S. possessions
income taxes paid by the Portfolio. If the Fund makes this election, the
Fund will treat those taxes as dividends paid to its shareholders and each
shareholder will be required to (1) include in gross income, and treat as
paid by him, his proportionate share of those taxes, (2) treat his share
of those taxes and of any dividend paid by the Fund that represents income
from foreign or U.S. possessions sources as his own income from those
sources and (3) either deduct the taxes deemed paid by him in computing
his taxable income or, alternatively, use the foregoing information in
calculating the foreign tax credit against his federal income tax. If the
election is made, the Fund will report to its shareholders shortly after
each taxable year their respective shares of its income (including its
share of the Portfolio's income) from foreign and U.S. possessions sources
and its share of the taxes paid by the Portfolio to foreign countries and
U.S. possessions.
The foregoing is only a summary of some of the important federal
tax considerations affecting the Funds and their shareholders and is not
intended as a substitute for careful tax planning. Accordingly,
prospective investors are advised to consult their own tax advisers for
more detailed information regarding the above and for information
regarding federal, state, local and foreign taxes.
YIELD AND TOTAL RETURN QUOTATIONS
A quotation of yield on shares of each class of the Money Market
Funds may appear from time to time in advertisements and in communications
to shareholders and others. Quotations of yields are indicative of yields
for the limited historical period used but not for the future. Yield will
vary as interest rates and other conditions change. Yield also depends on
the quality, length of maturity and type of instruments invested in by the
corresponding Portfolios of the Money Market Funds, and the applicable
class's operating expenses. A comparison of the quoted yields offered for
various investments is valid only if yields are calculated in the same
25
<PAGE>
manner. In addition, other similar investment companies may have more or
less risk due to differences in the quality or maturity of securities
held.
The yields of the Money Market Funds may be calculated in one of
two ways:
(1) Current Yield--the net average annualized return without
compounding accrued interest income. For a 7-day current yield,
this is computed by dividing the net change in value over a 7
calendar-day period of a hypothetical account having one share at
the beginning of a 7 calendar-day period by the value of the
account at the beginning of this period to determine the "base
period return." The quotient is multiplied by 365 divided by 7
and stated to two decimal places. A daily current yield is
calculated by multiplying the net change in value over one day by
365 and stating it to two decimal places. Capital changes, such
as realized gains and losses from the sale of securities and
unrealized appreciation and depreciation, are excluded in
calculating the net change in value of an account, but this
calculation includes the aggregate fees and other expenses that
are charged to all shareholder accounts in a class of a Fund. In
determining the net change in value of a hypothetical account,
this value is adjusted to reflect the value of any additional
shares purchased with dividends from the original share and
dividends declared on both the original share and any such
additional shares.
(2) Effective Yield--the net average annualized return as
computed by compounding accrued interest income. In determining
the 7-day effective yield, a class of a Fund will compute the
"base period return" in the same manner used to compute the
"current yield" over a 7 calendar-day period as described above.
One is then added to the base period return and the sum is raised
to the 365/7 power. One is subtracted from the result, according
to the following formula:
effective yield = [ (base period return + 1)365/7(SUPERSCRIPT) ] - 1
Based on these formulas, the current and effective yields were as
follows for the periods and Funds indicated:
26
<PAGE>
<TABLE>
<CAPTION>
Current yield for the Effective yield for the
Current daily yield as of 7 day period ended 7 day period ended
October 31, 1996 October 31, 1996 October 31, 1996
---------------- ---------------- ----------------
<S> <C> <C> <C>
Institutional Class
-------------------
Money Market Fund _.__% _.__% _.__%
Municipal Money Market Fund _.__% _.__% _.__%
U.S. Treasury Money Market Fund _.__% _.__% _.__%
PlanAhead Class
---------------
Money Market Fund _.__% _.__% _.__%
Municipal Money Market Fund _.__% _.__% _.__%
U.S. Treasury Money Market Fund _.__% _.__% _.__%
</TABLE>
The Municipal Money Market Fund also may advertise a tax
equivalent current and effective yield. The tax equivalent yields are
calculated as follows:
current yield/(1-applicable tax rate) = current tax equivalent yield
effective yield/(1-applicable tax rate) = effective tax equivalent yield
Based on these formulas, the current and effective tax equivalent yields
for the Municipal Money Market Fund for the seven day periods ending
October 31, 1996 were:
<TABLE>
<CAPTION>
Current Effective
Class Tax Equivalent Yield Tax Equivalent Yield
----- -------------------- --------------------
<S> <C> <C>
Institutional (based on a 35.0% corporate tax rate) _.__% _.__%
PlanAhead (based on a 39.6% personal tax rate) _.__% _.__%
</TABLE>
The advertised yields for each class of the Variable NAV Funds
and the S&P 500 Index Fund are computed by dividing the net investment
income per share earned during a 30-day (or one month) period less the
aggregate fees that are charged to all shareholder accounts of the class
in proportion to the 30-day (or one month) period and the weighted average
size of an account in that class of a Fund by the maximum offering price
per share of the class on the last day of the period, according to the
following formula:
yield = 2{(a-b (OVER) cd +1)6(SUPERSCRIPT) - 1}
27
<PAGE>
where, with respect to a particular class of a Fund, "a" is the dividends
and interest earned during the period; "b" is the sum of the expenses
accrued for the period (net of reimbursement, if any) and the aggregate
fees that are charged to all shareholder accounts in proportion to the 30-
day (or one month) period and the weighted average size of an account in
the class; "c" is the average daily number of class shares outstanding
during the period that were entitled to receive dividends; and "d" is the
maximum offering price per class share on the last day of the period.
Based on this formula, the estimated 30-day yield for the period ended
October 31, 1996 for the Limited-Term Income Fund was _.__%, _.__% and
_.__%, for the AMR, Institutional and PlanAhead Classes, respectively.
Each class of the Limited-Term Income Fund may also advertise a
monthly distribution rate. The distribution rate gives the return of the
class based solely on the dividend payout to that class if someone was
entitled to the dividends for an entire month. A monthly distribution
rate is calculated from the following formula:
monthly distribution rate = A/P*(365/N)
where, with respect to a particular class of shares, "A" is the dividend
accrual per share during the month, "P" is the share price at the end of
the month and "N" is the number of days in the month. Based on this
formula, the monthly dividend rate for the AMR, Institutional and
PlanAhead Classes of the Limited-Term Income Fund for the month of October
1996 was _.__%, _.__% and _.__%, respectively. The "monthly dividend
rate" is a non-standardized performance calculation and when used in an
advertisement will be accompanied by the appropriate standardized SEC
calculations.
The advertised total return for a class of a Fund would be
calculated by equating an initial amount invested in a class of a Fund to
the ending redeemable value, according to the following formula:
P(1 + T)n(SUPERSCRIPT) = ERV
where "P" is a hypothetical initial payment of $1,000; "T" is the average
annual total return for the class; "n" is the number of years involved;
and "ERV" is the ending redeemable value of a hypothetical $1,000 payment
made in the class at the beginning of the investment period covered.
Based on this formula, annualized total returns were as follows
for the periods and Funds indicated:
28
<PAGE>
<TABLE>
<CAPTION>
For the period from
For the one-year For the five-year commencement of active
period ended period ended operations through
October 31, 1996(1) October 31, 1996(1)(2) October 31, 1996(1)(3)
------------------- ---------------------- ----------------------
<S> <C> <C> <C>
AMR Class
---------
Balanced Fund __.__% __.__% __.__%
Growth and Income Fund __.__% __.__% __.__%
International Equity Fund __.__% N/A __.__%
Limited-Term Income Fund __.__% __.__% __.__%
Institutional Class
Balanced Fund __.__% __.__% __.__%
Growth and Income Fund __.__% __.__% __.__%
International Equity Fund __.__% N/A __.__%
Limited-Term Income Fund __.__% __.__% __.__%
Money Market Fund __.__% __.__% __.__%
Institutional Class
Municipal Money Market Fund (4) __.__% N/A __.__%
U.S. Treasury Money Market Fund __.__% N/A __.__%
PlanAhead Class
Balanced Fund (5) __.__% __.__% __.__%
Growth and Income Fund __.__% __.__% __.__%
International Equity Fund __.__% N/A __.__%
Limited-Term Income Fund (5) __.__% __.__% __.__%
Money Market Fund __.__% __.__% __.__%
Municipal Money Market Fund (4) __.__% N/A __.__%
U.S. Treasury Money Market Fund __.__% N/A __.__%
</TABLE>
(1) The Institutional Class is the initial class for each
Fund. The AMR Class and PlanAhead Class were not in existence
prior to August 1, 1994. Total returns for the PlanAhead and AMR
Classes for the periods ended October 31, 1995 reflect
Institutional Class returns from the date of commencement of
operations of each of these Funds through July 31, 1994 and
returns of the applicable class for the period August 1, 1994
(commencement of operations of the new classes) through October
31, 1995. Due to the different expense structures between the
classes, total returns would vary from the results shown had the
classes been in operation for the entire periods. The S&P 500
Index Fund was not operational during this period.
(2) The International Equity Fund, Municipal Money Market
Fund and U.S. Treasury Money Market Fund had not commenced active
operations as of November 1, 1990.
29
<PAGE>
(3) The Institutional Class of the Balanced Fund and the
Growth and Income Fund commenced active operations on July 17,
1987; the Money Market Fund on September 1, 1987, the Limited-
Term Income Fund on December 3, 1987, the International Equity
Fund on August 7, 1991, the U.S. Treasury Money Market Fund on
March 2, 1992 and the Municipal Money Market Fund on November 10,
1993. The PlanAhead and AMR Classes of all the Funds commenced
active operations on August 1, 1994.
(4) Management and Administrative Services fees have been
waived for the Municipal Money Market Fund since its inception.
(5) A portion of the Service Plan Fees of the PlanAhead Class
have been waived for the Balanced and Limited-Term Income Funds
since August 1, 1994.
Each class of a Fund may also use "aggregate" total return
figures for various periods which represent the cumulative change in value
of an investment in a class of a Fund for the specific period. Such total
returns reflect changes in share prices of a class of a Fund and assume
reinvestment of dividends and distributions.
Each Fund may give total returns from inception using the date
when the current managers began active management as the inception date.
However, returns using the actual inception date of the Fund will also be
provided.
In reports or other communications to shareholders or in
advertising material, each class of a Fund may from time to time compare
its performance with that of other mutual funds in rankings prepared by
Lipper Analytical Services, Inc., Morningstar, Inc., IBC Financial Data,
Inc. and other similar independent services which monitor the performance
of mutual funds or publications such as the "New York Times," "Barrons"
and the "Wall Street Journal." Each class of a Fund may also compare its
performance with various indices prepared by independent services such as
Standard & Poor's, Morgan Stanley or Lehman Brothers or to unmanaged
indices that may assume reinvestment of dividends but generally do not
reflect deductions for administrative and management costs.
Advertisements for the Funds may mention that the Funds offer a
variety of investment options. They may also compare the Funds to
federally insured investments such as bank certificates of deposit and
credit union deposits, including the long-term effects of inflation on
these types of investments. Advertisements may also compare the
historical rate of return of different types of investments. Information
concerning broker-dealers who sell the Funds may also appear in
advertisements for the Funds, including their ranking as established by
various publications compared to other broker-dealers.
From time to time, the Manager may use contests as a means of
promoting the American AAdvantage Funds. Prizes may include free air
30
<PAGE>
travel and/or hotel accommodations. Listings for certain of the Funds may
be found in newspapers under the heading Amer AAdvant.
DESCRIPTION OF THE TRUST
The Trust is an entity of the type commonly known as a
"Massachusetts business trust." Under Massachusetts law, shareholders of
such a trust may, under certain circumstances, be held personally liable
for its obligations. However, the Trust's Declaration of Trust contains
an express disclaimer of shareholder liability for acts or obligations of
the Trust and provides for indemnification and reimbursement of expenses
out of Trust property for any shareholder held personally liable for the
obligations of the Trust. The Declaration of Trust also provides that the
Trust may maintain appropriate insurance (for example, fidelity bonding)
for the protection of the Trust, its shareholders, Trustees, officers,
employees and agents to cover possible tort and other liabilities. Thus,
the risk of a shareholder incurring financial loss due to shareholder
liability is limited to circumstances in which both inadequate insurance
existed and the Trust itself was unable to meet its obligations. The
Trust has not engaged in any other business.
The Trust was originally created to manage money for large
institutional investors, including pension and 401(k) plans for American
Airlines, Inc. The PlanAhead Class was later created to give individuals
and other smaller investors an opportunity to invest in the American
AAdvantage Funds. As a result, shareholders of the PlanAhead Class
benefit from the economies of scale generated by being part of a larger
pool of assets.
The corresponding Portfolios of the Balanced, Growth and Income
and International Equity Funds utilize a multi-manager approach designed
to reduce volatility by diversifying assets over multiple investment
management firms. Each adviser is carefully chosen by the Manager through
a rigorous screening process.
CONTROL PERSONS AND 5% SHAREHOLDERS
The following persons may be deemed to control certain Funds by
virtue of their ownership of more than 25% of the outstanding shares of a
Fund as of September 30, 1996:
American AAdvantage Balanced Fund
---------------------------------
AMR Corporation and subsidiary companies and Employee
Benefit Trusts thereof . . . . . . . . . . . . . . . . . . . . . . . 64%
4333 Amon Carter Boulevard
Fort Worth, Texas 76155
31
<PAGE>
American AAdvantage Growth and Income Fund
------------------------------------------
AMR Corporation and subsidiary companies and Employee
Benefit Trusts thereof . . . . . . . . . . . . . . . . . . . . . . . 91%
4333 Amon Carter Boulevard
Fort Worth, Texas 76155
American AAdvantage International Equity Fund
---------------------------------------------
AMR Corporation and subsidiary companies and Employee
Benefit Trusts thereof . . . . . . . . . . . . . . . . . . . . . . . 83%
4333 Amon Carter Boulevard
Fort Worth, Texas 76155
American AAdvantage Limited-Term Income Fund
--------------------------------------------
Retirement Advisors of America . . . . . . . . . . . . . . . . . . . 50%
5005 LBJ Freeway, Suite 1350
Dallas, Texas 75244
American AAdvantage Limited-Term Income Fund (cont.)
----------------------------------------------------
AMR Corporation and subsidiary companies and Employee
Benefit Trusts thereof . . . . . . . . . . . . . . . . . . . . . . . 34%
4333 Amon Carter Boulevard
Fort Worth, Texas 76155
AMR Corporation and subsidiary companies and Employee Benefit
Trusts thereof own 100% of the shares of the AMR Class of the Balanced
Fund, the Growth and Income Fund, the International Equity Fund and the
Limited-Term Income Fund.
In addition, the following persons own more than 5% of the
outstanding shares of a Fund or Class as of September 30, 1996:
<TABLE>
<CAPTION>
Total Institutional PlanAhead
American AAdvantage Balanced Fund Fund Class Class
--------------------------------- ---- ----- -----
<S> <C> <C> <C>
Retirement Advisors of America 19% 55%
5005 LBJ Freeway, Suite 1350
Dallas, TX 75244
Sky Chefs Master Trust 11% 32%
601 Ryan Plaza Drive
Arlington, Texas 76011
NA Bank & Co. 0% 32%
P.O. Box 2180
Tulsa, Oklahoma 74101
32
<PAGE>
Total Institutional PlanAhead
American AAdvantage Balanced Fund Fund Class Class
--------------------------------- ---- ----- -----
Berg Electronics Inc. Savings Plan 0% 14%
4 New York Plaza - EBS 4th. Floor
New York, New York 10004-2413
Crain Industries Inc. Savings Retirement Plan 0% 6%
770 Broadway, 10th Floor
New York, New York 10003-9522
Total Institutional PlanAhead
American AAdvantage Growth and Income Fund Fund Class Class
------------------------------------------ ---- ----- -----
Retirement Advisors of America 4% 51%
5005 LBJ Freeway, Suite 1350
Dallas, Texas 75244
Coca-Cola Retirement Plan 1% 13%
Hamill and Company (Trust Operations)
P.O. Box 6558
Houston, TX 77252-2558
Wachovia Bank of North Carolina 1% 8%
P.O. Box 3002
Winston-Salem, North Carolina 27102
Clarence Arthur & Co. 1% 11%
AmeriTrust, Texas N.A.
P.O. Box 951405
Dallas, TX 75395-1405
Calhoun & Co. 0% 6%
Comerica Bank
P.O. Box 7500
Detroit, Michigan 48275-3454
Berg Electronics Inc. Savings Plan 0% 30%
4 New York Plaza - EBS 4th. Floor
New York, New York 10004-2413
Crowe & Dunlevy Profit Sharing and Thrift Plan 0% 6%
20 N. Broadway, Suite 1800
Oklahoma City, Oklahoma 73102-8203
Technical Products Group Inc. Retirement & Savings Plan 0% 10%
2929 Allen Parkway, Suite 2500
Houston, Texas 77019
33
<PAGE>
Total Institutional PlanAhead
American AAdvantage International Equity Fund Fund Class Class
--------------------------------------------- ---- ----- -----
NA Bank & Co. 3% 19%
P.O. Box 2180
Tulsa, Oklahoma 74101
Retirement Advisors of America 5% 35%
5005 LBJ Freeway, Suite 1350
Dallas, Texas 75244
Wachovia Bank of North Carolina 1% 5%
P.O. Box 3002
Winston-Salem, North Carolina 27102
Clarence Arthur & Co. 1% 6%
AmeriTrust, Texas N.A.
P.O. Box 951405
Dallas, TX 75395-1405
FTC & Co. 1% 6%
P.O. Box 173736
Denver, Colorado 80217
Saxon & Co. 1% 8%
P.O. Box 7780-1888
Philadelphia, PA 19182
Crowe & Dunlevy Profit Sharing and Thrift Plan 0% 8%
20 N. Broadway, Suite 1800
Oklahoma City, Oklahoma 73102-8203
DLJ Securities Corp. 0% 7%
P.O. Box 2052
Jersey City, NJ 07303-2052
Joyce Vega 0% 6%
237 Park Avenue, Suite 910
New York, New York 10017-3140
Patricia G. Burke Charitable Unitrust 0% 12%
650 Smithfield St., Suite 250
Pittsburgh, PA 15222-3907
34
<PAGE>
Total Institutional PlanAhead
American AAdvantage Limited-Term Income Fund Fund Class Class
-------------------------------------------- ---- ----- -----
Retirement Advisors of America 50% 79%
5005 LBJ Freeway, Suite 1350
Dallas, Texas 75244
Wachovia Bank of North Carolina 8% 12%
P.O. Box 3002
Winston-Salem, North Carolina 27102
Technical Products Group Inc. Retirement and Savings Plan 0% 22%
2929 Allen Parkway, Suite 2500
Houston, Texas 77019
Crowe & Dunlevy Profit Sharing and Thrift Plan 0% 21%
20 N. Broadway, Suite 1800
Oklahoma City, Oklahoma 73102-8203
Berg Electronics Inc. Savings Plan 0% 10%
4 New York Plaza - EBS 4th. Floor
New York, New York 10004-2413
Chancellor Limited Partnership 0% 6%
5005 LBJ Freeway, Suite 630
Dallas, Texas 75244-6136
William R. Fulgham 0% 6%
P.O. Box 585
Gleneden Beach, OR 97388-0584
William N. Hoffman 0% 6%
3515 Davis Rd.
Granbury, TX 76049-5469
RIW Limited Partnership 0% 8%
5005 LBJ Freeway, Suite 630
Dallas, TX 75244-6136
35
<PAGE>
Total Institutional PlanAhead
American AAdvantage Money Market Fund Fund Class Class
------------------------------------- ---- ----- -----
NA Bank & Co. 5% 6%
P.O. Box 2180
Tulsa, Oklahoma 74101
City of Chicago International Airport Revenue Bonds 7% 8%
Harris Trust and Savings Bank(Indenture Trust Division)
P.O. Box 755
Chicago, Illinois 60690
Alliance Airport Authority 5% 6%
Bank One, Texas, NA (Corporate Trust Department)
500 Throckmorton
Fort Worth, Texas 76113-2604
Dallas/Fort Worth International Airport Revenue Bonds 5% 5%
AmeriTrust Texas, N.A. (Corporate Trust Department)
P.O. Box 2320
Dallas, TX 75221-2320
Shell Oil Company 5% 5%
Two Shell Plaza
P.O. Box 2099
Houston, TX 77252
Investors Bank & Trust Securities Lending 5% 6%
89 South Street
Boston, MA 02111
36
<PAGE>
Total Institutional PlanAhead
American AAdvantage Municipal Money Market Fund Fund Class Class
----------------------------------------------- ---- ----- -----
Martine Hammond-Paluda Trust 0% 15%
4612 Summerhill Road
Texarkana, TX 75503-2742
Jerome Reed Schusterman Irrevocable Trust 0% 12%
P.O. Box 699
Tulsa, OK 74101-0699
Dana White Shea Non-Exempt Trust 0% 15%
876 Mellow Lane
Simi Valley, CA 93065-5412
Robert C. Fraser 0% 15%
1221 Oak Grove Ave., #202
Burlingame, CA 94010-3783
Emanuel H. Rosen, M.D. 0% 12%
7405 Charmant Drive, Apt. 2230
San Diego, CA 92122-5012
Combs Family Limited Partnership 0% 7%
10405 Lacosta Dr.
Austin, TX 78747-1214
Onex Food Services 0% 94%
601 Ryan Plaza Drive
Arlington, TX 76011
37
<PAGE>
Total Institutional PlanAhead
American AAdvantage U.S. Treasury Money Market Fund Fund Class Class
--------------------------------------------------- ---- ----- -----
Lone Star Airport Improvement Authority 11% 34%
First National Bank of Chicago
One First National Place
Chicago, Illinois 60670
Hare & Co. 10% 31%
Bank of New York
One Wall Street
New York, NY 10286
Grapevine Industrial Development Corp. 9% 28%
First National Bank of Chicago
One First National Place
Chicago, Illinois 60670
British American Insurance Company 2% 6%
P.O. Box 1590
Dallas, Texas 75221-1590
Family Orthopedic Association Profit Sharing Plan 1% 55%
8953 Bath Road
Byron, MI 48418-9785
TRK Investors Limited Partnership 0% 12%
13851 Foothill Blvd.
Sylmar, CA 91342-3013
Joseph R. Thomas, IRA 0% 6%
2898 NW 24th Court
Boca Raton, Florida 33431-6201
</TABLE>
OTHER INFORMATION
American Depository Receipts (ADRs), European Depository Receipts
(EDRs)-ADRs are depository receipts for foreign issuers in registered form
traded in U.S. securities markets, whereas, EDRs are in bearer form and
traded in European securities markets. These securities are not
denominated in the same currency as the securities into which they may be
converted. Investing in ADRs and EDRs involves greater risks than are
normally present in domestic investments. There is generally less
publicly available information about foreign companies and there may be
less governmental regulation and supervision of foreign stock exchanges,
brokers and listed companies. In addition, such companies may use
different accounting and financial standards (and certain currencies may
become unavailable for transfer from a foreign currency), resulting in a
Fund's possible inability to convert proceeds realized upon the sale of
portfolio securities of the affected foreign companies immediately into
U.S. currency.
Bank Deposit Notes-Bank deposit notes are obligations of a bank,
rather than bank holding company corporate debt. The only structural
38
<PAGE>
difference between bank deposit notes and certificates of deposit is that
interest on bank deposit notes is calculated on a 30/360 basis as are
corporate notes/bonds. Similar to certificates of deposit, deposit notes
represent bank level investments and, therefore, are senior to all holding
company corporate debt.
Bankers' Acceptances-Bankers' acceptances are short-term credit
instruments designed to enable businesses to obtain funds to finance
commercial transactions. Generally, an acceptance is a time draft drawn
on a bank by an exporter or an importer to obtain a stated amount of funds
to pay for specific merchandise. The draft is then "accepted" by a bank
that, in effect, unconditionally guarantees to pay the face value of the
instrument on its maturity date. The acceptance may then be held by the
accepting bank as an earning asset or it may be sold in the secondary
market at the going rate of discount for a specific maturity. Although
maturities for acceptances can be as long as 270 days, most acceptances
have maturities of six months or less.
Cash Equivalents-Cash equivalents include certificates of
deposit, bearer deposit notes, bankers' acceptances, government
obligations, commercial paper, short-term corporate debt securities and
repurchase agreements.
Certificates of Deposit-Certificates of deposit are issued
against funds deposited in an eligible bank (including its domestic and
foreign branches, subsidiaries and agencies), are for a definite period of
time, earn a specified rate of return and are normally negotiable.
Commercial Paper-Commercial paper refers to promissory notes
representing an unsecured debt of a corporation or finance company with a
fixed maturity of no more than 270 days. A variable amount master demand
note (which is a type of commercial paper) represents a direct borrowing
arrangement involving periodically fluctuating rates of interest under a
letter agreement between a commercial paper issuer and an institutional
lender pursuant to which the lender may determine to invest varying
amounts.
Debentures-Debentures are unsecured debt securities. The holder
of a debenture is protected only by the general creditworthiness of the
issuer.
Derivatives-Generally, a derivative is a financial arrangement,
the value of which is based on, or "derived" from, a traditional security,
asset or market index. Some "derivatives" such as mortgage-related and
other asset-backed securities are in many respects like any other
investment, although they may be more volatile or less liquid than more
traditional debt securities. There are, in fact, many different types of
derivatives and many different ways to use them. There are a range of
risks associated with those uses. Futures and options are commonly used
for traditional hedging purposes to attempt to protect a fund from
exposure to changing interest rates, securities prices or currency
exchange rates and for cash management purposes as a low cost method of
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gaining exposure to a particular securities market without investing
directly in those securities.
Forward Foreign Currency Exchange Contracts-A forward foreign
currency exchange contract ("forward contract") is a contract to purchase
or sell a currency at a future date. The two parties to the contract set
the number of days and the price. Forward contracts are used as a hedge
against movements in future foreign exchange rates. The corresponding
Portfolio of the International Equity Fund may enter into forward
contracts to purchase or sell foreign currencies for a fixed amount of
U.S. dollars or other foreign currency.
Forward contracts may serve as long hedges -- for example, the
Portfolio may purchase a forward contract to lock in the U.S. dollar price
of a security denominated in a foreign currency that the Portfolio intends
to acquire. Forward contracts may also serve as short hedges -- for
example, the Portfolio may sell a forward contract to lock in the U.S.
dollar equivalent of the proceeds from the anticipated sale of a security
denominated in a foreign currency or from the anticipated dividend or
interest payments denominated in a foreign currency. The Manager may seek
to hedge against changes in the value of a particular currency by using
forward contracts on another foreign currency or basket of currencies, the
value of which the Manager believes will bear a positive correlation to
the value of the currency being hedged.
The cost to the Portfolio of engaging in forward contracts varies
with factors such as the currency involved, the length of the contract
period and the market conditions then prevailing. Because forward
contracts are usually entered into on a principal basis, no fees or
commissions are involved. When the Portfolio enters into a forward
contract, it relies on the contra party to make or take delivery of the
underlying currency at the maturity of the contract. Failure by the
contra party to do so would result in the loss of any expected benefit of
the transaction.
Buyers and sellers of forward contracts can enter into offsetting
closing transactions by selling or purchasing, respectively, an instrument
identical to the instrument purchased or sold. Secondary markets
generally do not exist for forward contracts, with the result that closing
transactions generally can be made for forward contracts only by
negotiating directly with the contra party. Thus, there can be no
assurance that the Portfolio will in fact be able to close out a forward
contract at a favorable price prior to maturity. In addition, in the
event of insolvency of the contra party, the Portfolio might be unable to
close out a forward contract at any time prior to maturity. In either
event, the Portfolio would continue to be subject to market risk with
respect to the position, and would continue to be required to maintain a
position in the securities or currencies that are the subject of the hedge
or to maintain cash or securities in a segregated account.
The precise matching of forward currency contract amounts and the
value of the securities involved generally will not be possible because
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the value of such securities, measured in the foreign currency, will
change after the forward contract has been established. Thus, the
Portfolio might need to purchase or sell foreign currencies in the spot
(cash) market to the extent such foreign currencies are not covered by
forward contracts. The projection of short-term currency market movements
is extremely difficult, and the successful execution of a short-term
hedging strategy is highly uncertain.
Current Securities and Exchange Commission policy requires that
cash or high grade liquid debt securities be set aside in a sufficient
amount to cover any cross hedging or other currency exchange contract that
is deemed to be speculative. These assets will be maintained in a
segregated account and marked to market daily.
Full Faith and Credit Obligations of the U.S. Government-
Securities issued or guaranteed by the U.S. Treasury, backed by the full
taxing power of the U.S. Government or the right of the issuer to borrow
from the U.S. Treasury.
Futures Contracts-Futures contracts obligate a purchaser to take
delivery of a specific amount of an obligation underlying the futures
contract at a specified time in the future for a specified price.
Likewise, the seller incurs an obligation to deliver the specified amount
of the underlying obligation. Futures are traded on both U.S. and foreign
commodities exchanges. Only currency futures will be permitted in the
corresponding Portfolio of the International Equity Fund. Futures
contracts will be traded for the same purposes as entering into forward
contracts.
The purchase of futures can serve as a long hedge, and the sale
of futures can serve as a short hedge.
No price is paid upon entering into a futures contract. Instead,
at the inception of a futures contract a Portfolio is required to deposit
"initial deposit" consisting of cash or U.S. Government Securities in an
amount generally equal to 10% or less of the contract value. Margin must
also be deposited when writing a call or put option on a futures contract,
in accordance with applicable exchange rules. Unlike margin in securities
transactions, initial margin on futures contracts does not represent a
borrowing, but rather is in the nature of a performance bond or good-faith
deposit that is returned to the Portfolio at the termination of the
transaction if all contractual obligations have been satisfied. Under
certain circumstances, such as periods of high volatility, the Portfolio
may be required by a futures exchange to increase the level of its initial
margin payment.
Subsequent "variation margin" payments are made to and from the
futures broker daily as the value of the futures position varies, a
process known as "marking-to-market." Variation margin does not involve
borrowing, but rather represents a daily settlement of the Portfolio's
obligations to or from a futures broker. When the Portfolio purchases or
sells a futures contract, it is subject to daily variation margin calls
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that could be substantial in the event of adverse price movements. If the
Portfolio has insufficient cash to meet daily variation margin
requirements, it might need to sell securities at a time when such sales
are disadvantageous.
Purchasers and sellers of futures contracts thereon can enter
into offsetting closing transactions, by selling or purchasing,
respectively, an instrument identical to the instrument purchased or sold.
Positions in futures contracts may be closed only on a futures exchange or
board of trade that provides a secondary market. The Portfolio intends to
enter into futures contracts only on exchanges or boards of trade where
there appears to be a liquid secondary market. However, there can be no
assurance that such a market will exist for a particular contract at a
particular time. In such event, it may not be possible to close a futures
contract.
Although futures contracts by their terms call for the actual
delivery or acquisition of securities, in most cases the contractual
obligation is fulfilled before the date of the contract without having to
make or take delivery of the securities. The offsetting of a contractual
obligation is accomplished by buying (or selling, as appropriate) on a
commodities exchange an identical futures contract calling for delivery in
the same month. Such a transaction, which is effected through a member of
an exchange, cancels the obligation to make or take delivery of the
securities. Since all transactions in the futures market are made, offset
or fulfilled through a clearinghouse associated with the exchange on which
the contracts are traded, the Portfolio will incur brokerage fees when it
purchases or sells futures contracts.
Under certain circumstances, futures exchanges may establish
daily limits on the amount that the price of a futures contract can vary
from the previous day's settlement price; once that limit is reached, no
trades may be made that day at a price beyond the limit. Daily price
limits do not limit potential losses because prices could move to the
daily limit for several consecutive days with little or no trading,
thereby preventing liquidation of unfavorable positions.
If the Portfolio were unable to liquidate a futures contract due
to the absence of a liquid secondary market or the imposition of price
limits, it could incur substantial losses. The Portfolio would continue
to be subject to market risk with respect to the position. In addition,
the Portfolio would continue to be required to make daily variation margin
payments and might be required to maintain the position being hedged by
the futures contract or option thereon or to maintain cash or securities
in a segregated account.
To the extent that the Portfolio enters into futures contracts,
traded on an exchange regulated by the Commodities Futures Trading
Commission ("CFTC"), in each case other than for bona fide hedging
purposes (as defined by the CFTC), the aggregate initial margin and
premiums required to establish those positions (excluding the amount by
which options are "in-the-money" at the time of purchase) will not exceed
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5% of the liquidation value of the Portfolio's portfolio, after taking
into account unrealized profits and unrealized losses on any contracts
that the Portfolio has entered into. This policy does not limit to 5% the
percentage of the Portfolio's assets that are at risk in futures contracts
and options on futures contracts.
Futures contracts require the segregation of initial margin
valued at a certain percentage of the contract and possibly adding
"variation margin" should the price of the contract move in an unfavorable
direction. As with forward contracts, the segregated assets must be
either cash or high grade liquid debt securities.
The ordinary spreads between prices in the cash and futures
market, due to differences in the nature of those markets, are subject to
distortions. First, all participants in the futures market are subject to
initial deposit and variation margin requirements. Rather than meeting
additional variation margin requirements, investors may close futures
contracts through offsetting transactions which could distort the normal
relationship between the cash and futures markets. Second, the liquidity
of the futures market depends on participants entering into offsetting
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 distortion. Third, from the point
of view of speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market
may cause temporary price distortions. Due to the possibility of
distortion, a correct forecast of securities price trends by the
investment adviser may still not result in a successful transaction.
In addition, futures contracts entail risks. Although the
investment adviser believes that use of such contracts will benefit the
Portfolio, if the investment adviser's investment judgment about the
general direction of the Index is incorrect, the Portfolio's overall
performance would be worse than if it had not entered into any such
contract. For example, if the Portfolio has hedged against the
possibility of a decrease in the Index which would adversely affect the
value of securities held in its portfolio and securities prices increase
instead, the Portfolio will lose part or all of the benefit of the
increased value of its securities which it has hedged because it will have
offsetting losses in its futures positions. In addition, in such
situations, if the Portfolio has insufficient cash, it may have to sell
securities from its portfolio 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. The Portfolio may have to sell
securities at a time when it may be disadvantageous to do so.
General Obligation Bonds-General obligation bonds are secured by
the pledge of the issuer's full faith, credit, and usually, taxing power.
The taxing power may be an unlimited ad valorem tax or a limited tax,
usually on real estate and personal property. Most states do not tax real
estate, but leave that power to local units of government.
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Illiquid Securities. Historically, illiquid securities have
included securities subject to contractual or legal restrictions on resale
because they have not been registered under the 1933 Act, securities that
are otherwise not readily marketable and repurchase agreements having a
remaining maturity of longer than seven calendar days. Securities that
have not been registered under the 1933 Act are referred to as private
placements or restricted securities and are purchased directly from the
issuer or in the secondary market. Mutual funds do not typically hold a
significant amount of these restricted or other illiquid securities
because or the potential for delays on resale and uncertainty in
valuation. Limitations on resale may have an adverse effect on the
marketability of portfolio securities and a mutual fund might be unable to
dispose of restricted or other illiquid securities promptly or at
reasonable prices and might thereby experience difficulty satisfying
redemptions within seven calendar days. A mutual fund also might have to
register such restricted securities in order to dispose of them resulting
in additional expense and delay. Adverse market conditions could impede
such a public offering of securities.
In recent years, however, a large institutional market has
developed for certain securities that are not registered under the 1933
Act, including repurchase agreements, commercial paper, foreign
securities, municipal securities and corporate bonds and notes.
Institutional investors depend on an efficient institutional market in
which the unregistered security can be readily resold or on an issuer's
ability to honor a demand for repayment. The fact that there are
contractual or legal restrictions on resale of such investments to the
general public or to certain institutions may not be indicative of their
liquidity.
Index Futures Contracts and Options on Index Futures Contracts-
The Equity 500 Index Portfolio may invest in index futures contracts,
options on index futures contracts and options on securities indices.
INDEX FUTURES CONTRACTS-U.S. futures contracts have been
designed by exchanges which have been designated "contracts markets" by
the CFTC and must be executed through a futures commission merchant, or
brokerage firm, which is a member of the relevant contract market.
Futures contracts trade on a number of exchange markets, and through their
clearing corporations. The exchanges guarantee performance of the
contracts, as between the clearing members of the exchange.
At the same time a futures contract on the Standard & Poor's
500 Composite Stock Price Index (the "S&P 500" or the "Index") is
purchased or sold, the Portfolio must allocate cash or securities as a
deposit payment ("initial deposit"). It is expected that the initial
deposit would be approximately 1-1/2% to 5% of a contract's face value.
Daily thereafter, the futures contract is valued and the payment of
"variation margin" may be required, since each day the Portfolio would
provide or receive cash that reflects any decline or increase in the
contract's value.
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OPTIONS ON INDEX FUTURES CONTRACTS-The purchase of a call
option on an index futures contract is similar in some respects to the
purchase of a call option on such an index. Depending on the pricing of
the option compared to either the price of the futures contract upon which
it is based or the price of the underlying securities, it may or may not
be less risky than ownership of the futures contract or underlying
securities. As with the purchase of futures contracts, when the Portfolio
is not fully invested it may purchase a call option on an index futures
contract to hedge against a market advance.
The writing of a call option on a futures contract with
respect to the Index constitutes a partial hedge against declining prices
of the underlying securities that are deliverable upon exercise of the
futures contract. If the futures price at expiration of the option is
below the exercise price, the Portfolio will retain the full amount of the
option premium which provides a partial hedge against any decline that may
have occurred in the Portfolio's holdings. The writing of a put option on
an index futures contract constitutes a partial hedge against increasing
prices of the underlying securities that are deliverable upon exercise of
the futures contract. If the futures price at expiration of the option is
higher than the exercise price, the Portfolio will retain the full amount
of the option premium which provides a partial hedge against any increase
in the price of securities that the Portfolio intends to purchase. If a
put or call option the Portfolio has written is exercised, the Portfolio
will incur a loss that will be reduced by the amount of the premium it
receives. Depending on the degree of correlation between changes in the
value of its portfolio securities and changes in the value of its futures
positions, the Portfolio's losses from existing options on futures may to
some extent be reduced or increased by changes in the value of portfolio
securities.
The purchase of a put option on a futures contract with
respect to the Index is similar in some respects to the purchase of
protective put options on the Index. For example, the Portfolio may
purchase a put option on an index futures contract to hedge against the
risk of lowering securities values.
The amount of risk the Portfolio assumes when it
purchases an option on a futures contract with respect to the Index is the
premium paid for the option plus related transaction costs. In addition
to the correlation risks discussed above, the purchase of such 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.
The Equity 500 Index Portfolio Board has adopted the
requirement that index futures contracts and options on index futures
contracts be used as a hedge. Stock index futures may be used on a
continual basis to equitize cash so that the Portfolio may maintain
maximum equity exposure. The Portfolio will not enter into any futures
contracts or options on futures contracts if immediately thereafter the
amount of margin deposits on all the futures contracts of the Portfolio
and premiums paid on outstanding options on futures contracts owned by the
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Portfolio would exceed 5% of the market value of the total assets of the
Portfolio.
OPTIONS ON SECURITIES INDEXES-The Portfolio may enter
into contracts providing for the making and acceptance of a cash
settlement based upon changes in the value of an index of securities
("Futures Contracts"). This investment technique is designed only to hedge
against anticipated future change in general market prices which otherwise
might either adversely affect the value of securities held by the
Portfolio or adversely affect the prices of securities which are intended
to be purchased at a later date for the Portfolio. A Futures Contract may
also be entered into to close out or offset an existing futures position.
In general, each transaction in Futures Contracts
involves the establishment of a position which will move in a direction
opposite to that of the investment being hedged. If these hedging
transactions are successful, the futures positions taken for the Portfolio
will rise in value by an amount that approximately offsets the decline in
value of the portion of the Portfolio's investments that are being hedged.
Should general market prices move in an unexpected manner, the full
anticipated benefits of Futures Contracts may not be achieved or a loss
may be realized.
Although Futures Contracts would be entered into for cash
management purposes only, such transactions do involve certain risks.
These risks could include a lack of correlation between the Futures
Contract and the equity market, a potential lack of liquidity in the
secondary market and incorrect assessments of market trends which may
result in poorer overall performance than if a Futures Contract had not
been entered into.
Brokerage costs will be incurred and "margin" will be
required to be posted and maintained as a good-faith deposit against
performance of obligations under Futures Contracts written into by the
Portfolio. The Portfolio may not purchase or sell a Futures Contract (or
options thereon) if immediately thereafter its margin deposits on its
outstanding Futures Contracts (and its premium paid on outstanding options
thereon) would exceed 5% of the market value of the Portfolio's total
assets.
The Portfolio may write (sell) covered call and put
options to a limited extent on the Index ("covered options") in an attempt
to increase income. Such options give the holder the right to receive a
cash settlement during the term of the option based upon the difference
between the exercise price and the value of the Index. The Portfolio may
forgo the benefits of appreciation on the Index or may pay more than the
market price or the Index pursuant to call and put options written by the
Portfolio.
By writing a covered call option, the Portfolio forgoes,
in exchange for the premium less the commission ("net premium"), the
opportunity to profit during the option period from an increase in the
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market value of the Index above the exercise price. By writing a covered
put option, the Portfolio, in exchange for the net premium received,
accepts the risk of a decline in the market value of the Index below the
exercise price.
The Portfolio may terminate its obligation as the writer of
a call or put option by purchasing an option with the same exercise price
and expiration date as the option previously written.
When the Portfolio writes an option, an amount equal to
the net premium received by the Portfolio is included in the liability
section of the Portfolio's Statement of Assets and Liabilities as a
deferred credit. The amount of the deferred credit will be subsequently
marked to market to reflect the current market value of the option
written. The current market value of a traded option is the last sale
price or, in the absence of a sale, the mean between the closing bid and
asked price. If an option expires on its stipulated expiration date or if
the Portfolio enters into a closing purchase transaction, the Portfolio
will realize a gain (or loss if the cost of a closing purchase transaction
exceeds the premium received when the option was sold), and the deferred
credit related to such option will be eliminated. If a call option is
exercised, the Portfolio will realize a gain or loss from the sale of the
underlying security and the proceeds of the sale will be increased by the
premium originally received. The writing of covered call options may be
deemed to involve the pledge of the securities against which the option is
being written. Securities against which call options are written will be
segregated on the books of the custodian for the Portfolio.
The Portfolio may purchase call and put options on the
Index. The Portfolio normally would purchase a call option in
anticipation of an increase in the market value of the Index. The
purchase of a call option would entitle the Portfolio, in exchange for the
premium paid, to purchase the underlying securities at a specified price
during the option period. The Portfolio ordinarily would have a gain if
the value of the securities increased above the exercise price
sufficiently to cover the premium and would have a loss if the value of
the securities remained at or below the exercise price during the option
period.
The Portfolio normally would purchase put options in
anticipation of a decline in the market value of the Index ("protective
puts"). The purchase of a put option would entitle the Portfolio, in
exchange for the premium paid, to sell the underlying securities at a
specified price during the option period. The purchase of protective puts
is designed merely to offset or hedge against a decline in the market
value of the Index. The Portfolio would ordinarily recognize a gain if
the value of the Index decreased below the exercise price sufficiently to
cover the premium and would recognize a loss if the value of the Index
remained at or above the exercise price. Gains and losses on the purchase
of protective put options would tend to be offset by countervailing
changes in the value of the Index.
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The Portfolio has adopted certain other nonfundamental
policies concerning index option transactions that are discussed above.
The Portfolio's activities in index options also may be restricted by the
requirements of the Code, for qualification as a RIC.
The hours of trading for options on the Index may not
conform to the hours during which the underlying securities are traded.
To the extent that the option markets close before the markets for the
underlying securities, significant price and rate movements can take place
in the underlying securities markets that cannot be reflected in the
option markets. It is impossible to predict the volume of trading that
may exist in such options, and there can be no assurance that viable
exchange markets will develop or continue.
Because options on securities indices require settlement
in cash, BT may be forced to liquidate portfolio securities to meet
settlement obligations.
OPTIONS ON STOCK INDICES-The Portfolio may purchase and
write put and call options on stock indices listed on stock exchanges. A
stock index fluctuates with changes in the market values of the stocks
included in the index. Options on stock indices generally are similar to
options on stock except that the delivery requirements are different.
Instead of giving the right to take or make delivery of stock at a
specified price, an option on a stock index gives the holder the right to
receive a cash "exercise settlement amount" equal to (a) the amount, if
any, by which the fixed exercise price of the option exceeds (in the case
of a put) or is less than (in the case of a call) the closing value of the
underlying index on the date of exercise, multiplied by (b) a fixed "index
multiplier." Receipt of this cash amount will depend upon the closing
level of the stock index upon which the option is based being greater
than, in the case of a call, or less than, in the case of a put, the
exercise price of the option. The amount of cash received will be equal to
such difference between the closing price of the index and the exercise
price of the option expressed in dollars times a specified multiple. The
writer of the option is obligated, in return for the premium received, to
make delivery of this amount. The writer may offset its position in stock
index options prior to expiration by entering into a closing transaction
on an exchange or the option may expire unexercised.
Because the value of an index option depends upon
movements in the level of the index rather than the price of a particular
stock, whether the Portfolio will realize a gain or loss from the purchase
or writing of options on an index depends upon movements in the level of
stock prices in the stock market generally or, in the case of certain
indices, in an industry or market segment, rather than movements in the
price of a particular stock.
Loan Participation Interests-Loan participation interests
represent interests in bank loans made to corporations. The contractual
arrangement with the bank transfers the cash stream of the underlying bank
loan to the participating investor. Because the issuing bank does not
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guarantee the participations, they are subject to the credit risks
generally associated with the underlying corporate borrower. In addition,
because it may be necessary under the terms of the loan participation for
the investor to assert through the issuing bank such rights as may exist
against the underlying corporate borrower, in the event the underlying
corporate borrower fails to pay principal and interest when due, the
investor may be subject to delays, expenses and risks that are greater
than those that would have been involved if the investor had purchased a
direct obligation (such as commercial paper) of such borrower. Moreover,
under the terms of the loan participation, the investor may be regarded as
a creditor of the issuing bank (rather than of the underlying corporate
borrower), so that the issuer may also be subject to the risk that the
issuing bank may become insolvent. Further, in the event of the
bankruptcy or insolvency of the corporate borrower, the loan participation
may be subject to certain defenses that can be asserted by such borrower
as a result of improper conduct by the issuing bank. The secondary
market, if any, for these loan participations is extremely limited and any
such participations purchased by the investor are regarded as illiquid.
Loan Transactions-Loan transactions involve the lending of
securities to a broker-dealer or institutional investor for its use in
connection with short sales, arbitrages or other security transactions.
The purpose of a qualified loan transaction is to afford a lender the
opportunity to continue to earn income on the securities loaned and at the
same time earn fee income or income on the collateral held by it.
Securities loans will be made in accordance with the following
conditions: (1) the Portfolio must receive at least 100% collateral in
the form of cash or cash equivalents, securities of the U.S. Government
and its agencies and instrumentalities, and approved bank letters of
credit; (2) the borrower must increase the collateral whenever the market
value of the loaned securities (determined on a daily basis) rises above
the level of collateral; (3) the Portfolio must be able to terminate the
loan after notice, at any time; (4) the Portfolio must receive reasonable
interest on the loan or a flat fee from the borrower, as well as amounts
equivalent to any dividends, interest or other distributions on the
securities loaned, and any increase in market value of the loaned
securities; (5) the Portfolio may pay only reasonable custodian fees in
connection with the loan; and (6) voting rights on the securities loaned
may pass to the borrower, provided, however, that if a material event
affecting the investment occurs, the AMR Trust Board or the Equity 500
Index Portfolio Board, as appropriate, must be able to terminate the loan
and vote proxies or enter into an alternative arrangement with the
borrower to enable the AMR Trust Board or the Equity 500 Index Portfolio
Board, as appropriate, to vote proxies.
While there may be delays in recovery of loaned securities or
even a loss of rights in collateral supplied should the borrower fail
financially, loans will be made only to firms deemed by the AMR Trust
Board or the Equity 500 Index Portfolio Board, as appropriate, to be of
good financial standing and will not be made unless the consideration to
be earned from such loans would justify the risk. Such loan transactions
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are referred to in this Statement of Additional Information as "qualified"
loan transactions.
The cash collateral so acquired through qualified loan
transactions may be invested only in those categories of high quality
liquid securities previously authorized by the AMR Trust Board or the
Equity 500 Index Portfolio Board, as appropriate.
Mortgage-Backed Securities-Mortgage-backed securities consist of
both collateralized mortgage obligations and mortgage pass-through
certificates .
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOs")-CMOs and
interests in real estate mortgage investment conduits ("REMICs") are debt
securities collateralized by mortgages, or mortgage pass-through
securities. CMOs divide the cash flow generated from the underlying
mortgages or mortgage pass-through securities into different groups
referred to as "tranches," which are then retired sequentially over time
in order of priority. The principal governmental issuers of such
securities are the Federal National Mortgage Association ("FNMA"), a
government sponsored corporation owned entirely by private stockholders
and the Federal Home Loan Mortgage Corporation ("FHLMC"), a corporate
instrumentality of the United States created pursuant to an act of
Congress which is owned entirely by Federal Home Loan Banks. The issuers
of CMOs are structured as trusts or corporations established for the
purpose of issuing such CMOs and often have no assets other than those
underlying the securities and any credit support provided. A REMIC is a
mortgage securities vehicle that holds residential or commercial mortgages
and issues securities representing interests in those mortgages. A REMIC
may be formed as a corporation, partnership, or segregated pool of assets.
The REMIC itself is generally exempt from federal income tax, but the
income from the mortgages is reported by investors. For investment
purposes, interests in REMIC securities are virtually indistinguishable
from CMOs.
MORTGAGE PASS-THROUGH CERTIFICATES-Mortgage pass-through
certificates are issued by governmental, government-related and private
organizations which are basked by pools of mortgage loans.
(1) Government National Mortgage Association ("GNMA") Mortgage
Pass-Through Certificates ("Ginnie Maes")-GNMA is a wholly-owned U.S.
Government corporation within the Department of Housing and Urban
Development. Ginnie Maes represent an undivided interest in a pool of
mortgages that are insured by the Federal Housing Administration or the
Farmers Home Administration or guaranteed by the Veterans Administration.
Ginnie Maes entitle the holder to receive all payments (including
prepayments) of principal and interest owed by the individual mortgagors,
net of fees paid to GNMA and to the issuer which assembles the mortgage
pool and passes through the monthly mortgage payments to the certificate
holders (typically, a mortgage banking firm), regardless of whether the
individual mortgagor actually makes the payment. Because payments are
made to certificate holders regardless of whether payments are actually
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received on the underlying mortgages, Ginnie Maes are of the "modified
pass-through" mortgage certificate type. The GNMA is authorized to
guarantee the timely payment of principal and interest on the Ginnie Maes.
The GNMA guarantee is backed by the full faith and credit of the United
States, and the GNMA has unlimited authority to borrow funds from the U.S.
Treasury to make payments under the guarantee. The market for Ginnie Maes
is highly liquid because of the size of the market and the active
participation in the secondary market of security dealers and a variety of
investors.
(2) FHLMC Mortgage Participation Certificates ("Freddie Macs")-
Freddie Macs represent interests in groups of specified first lien
residential conventional mortgages underwritten and owned by the FHLMC.
Freddie Macs entitle the holder to timely payment of interest, which is
guaranteed by the FHLMC. The FHLMC guarantees either ultimate collection
or timely payment of all principal payments on the underlying mortgage
loans. In cases where the FHLMC has not guaranteed timely payment of
principal, the FHLMC may remit the amount due because of its guarantee of
ultimate payment of principal at any time after default on an underlying
mortgage, but in no event later than one year after it becomes payable.
Freddie Macs are not guaranteed by the United States or by any of the
Federal Home Loan Banks and do not constitute a debt or obligation of the
United States or of any Federal Home Loan Bank. The secondary market for
Freddie Macs is highly liquid because of the size of the market and the
active participation in the secondary market of the FHLMC, security
dealers and a variety of investors.
(3) FNMA Guaranteed Mortgage Pass-Through Certificates ("Fannie
Maes")-Fannie Maes represent an undivided interest in a pool of
conventional mortgage loans secured by first mortgages or deeds of trust,
on one family or two to four family, residential properties. The FNMA is
obligated to distribute scheduled monthly installments of principal and
interest on the mortgages in the pool, whether or not received, plus full
principal of any foreclosed or otherwise liquidated mortgages. The
obligation of the FNMA under its guarantee is solely its obligation and is
not backed by, nor entitled to, the full faith and credit of the United
States.
(4) Mortgage-Related Securities Issued by Private Organizations-
Pools created by non-governmental issuers generally offer a higher rate of
interest than government and government-related pools because there are no
direct or indirect government guarantees of payments in such pools.
However, timely payment of interest and principal of these pools is often
partially supported by various enhancements such as over-collateralization
and senior/subordination structures and by various forms of insurance or
guarantees, including individual loan, title, pool and hazard insurance.
The insurance and guarantees are issued by government entities, private
insurers or the mortgage poolers. Although the market for such securities
is becoming increasingly liquid, securities issued by certain private
organizations may not be readily marketable.
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<PAGE>
Municipal Lease Obligations ("MLOs")-MLOs are issued by state and
local governments and authorities to acquire land and a wide variety of
equipment and facilities. These obligations typically are not fully
backed by the municipality's credit and thus interest may become taxable
if the lease is assigned. If funds are not appropriated for the following
year's lease payments, a lease may terminate with the possibility of
default on the lease obligation. With respect to MLOs purchased by the
corresponding Portfolios of the Municipal Money Market Fund, the AMR Trust
Board has established the following guidelines for determining the
liquidity of the MLOs in its portfolio, and, subject to review by the AMR
Trust Board, has delegated that responsibility to the investment adviser:
(1) the frequency of trades and quotes for the security; (2) the number of
dealers willing to purchase or sell the security and the number of other
potential buyers; (3) the willingness of dealers to undertake to make a
market in the security; (4) the nature of the marketplace trades; (5) the
likelihood that the marketability of the obligation will be maintained
through the time the security is held by the Portfolio; (6) the credit
quality of the issuer and the lessee; (7) the essentiality to the lessee
of the property covered by the lease and (8) for unrated MLOs, the MLOs'
credit status analyzed according to the factors reviewed by rating
agencies.
Private Activity Obligations-Private activity obligations are
issued to finance, among other things, privately operated housing
facilities, pollution control facilities, convention or trade show
facilities, mass transit, airport, port or parking facilities and certain
facilities for water supply, gas, electricity or sewage or solid waste
disposal. Private activity obligations are also issued to privately held
or publicly owned corporations in the financing of commercial or
industrial facilities. The principal and interest on these obligations
may be payable from the general revenues of the users of such facilities.
Shareholders, depending on their individual tax status, may be subject to
the federal alternative minimum tax on the portion of a distribution
attributable to these obligations. Interest on private activity
obligations will be considered exempt from federal income taxes; however,
shareholders should consult their own tax advisers to determine whether
they may be subject to the federal alternative minimum tax.
Ratings of Long-Term Obligations-The Portfolio utilizes ratings
provided by the following nationally recognized statistical rating
organizations ("Rating Organizations") in order to determine eligibility
of long-term obligations.
The four highest Moody's Investors Service, Inc. ("Moody's")
ratings for long-term obligations (or issuers thereof) are Aaa, Aa, A and
Baa. Obligations rated Aaa are judged by Moody's to be of the best
quality. Obligations rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, such debt comprises what is
generally known as high-grade debt. Moody's states that debt rated Aa is
rated lower than Aaa debt because margins of protection or other elements
make long-term risks appear somewhat larger than for Aaa debt.
Obligations which are rated A by Moody's possess many favorable investment
52
<PAGE>
attributes and are considered "upper medium-grade obligations."
Obligations which are rated Baa by Moody's are considered to be medium
grade obligations, i.e., they are neither highly protected or 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. Moody's also
supplies numerical indicators 1, 2, and 3 to rating categories. The
modifier 1 indicates that the security is in the higher end of its rating
category; the modifier 2 indicates a mid-range ranking; and modifier 3
indicates a ranking toward the lower end of the category.
The four highest Standard & Poor's ratings for long-term
obligations are AAA, AA, A and BBB. Obligations rated AAA have the
highest rating assigned by Standard & Poor's. Capacity to pay interest
and repay principal is extremely strong. Obligations rated AA have a very
strong capacity to pay interest and repay principal and differs from the
highest rated issues only in a small degree. Obligations rated A have a
strong capacity to pay principal and interest, although they are somewhat
more susceptible to the adverse effects of changes in circumstances and
economic conditions. Obligations rated BBB by Standard & Poor's are
regarded as having adequate capacity to pay interest and repay principal.
Whereas it normally exhibits adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
Duff & Phelps' four highest ratings for long-term obligations are
AAA, AA, A and BBB. Obligations rated AAA have the highest credit quality
with risk factors being negligible. Obligations rated AA are of high
credit quality and strong protection factors. Risk is modest but may vary
slightly from time to time because of economic conditions. Obligations
rated A have average but adequate protection factors. However, risk
factors are more variable and greater in periods of economic stress.
Obligations rated BBB have below average protection factors with
considerable variability in risk during economic cycles, but are still
considered sufficient for prudent investment.
Thomson BankWatch ("Bankwatch") long-term debt ratings apply to
specific issues of long-term debt and preferred stock. They specifically
assess the likelihood of an untimely repayment of principal or interest
over the term to maturity of the rated instrument. BankWatch's four
highest ratings for long-term obligations are AAA, AA, A and BBB.
Obligations rated AAA indicate that the ability to repay principal and
interest on a timely basis is very high. Obligations rated AA indicate a
superior ability to repay principal and interest on a timely basis, with
limited incremental risk compared to issues rated in the highest category.
Obligations rated A indicate the ability to repay principal and interest
is strong. Issues rated A could be more vulnerable to adverse
developments (both internal and external) than obligations with higher
ratings. BBB is the lowest investment grade category and indicates an
acceptable capacity to repay principal and interest. Issues rated BBB
53
<PAGE>
are, however, more vulnerable to adverse developments (both internal and
external) than obligations with higher ratings.
Fitch Investors Service, Inc. ("Fitch") investment grade bond
ratings provide a guide to investors in determining the credit risk
associated with a particular security. The ratings represent Fitch's
assessment of the issuer's ability to meet the obligations of a specific
debt issue or class of debt in a timely manner. Obligations rated AAA are
considered to be investment grade and of the highest credit quality. The
obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonable foreseeable
events. Bonds rated AA are considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay
principal is very strong, although not quite as strong as bonds rated AAA.
Bonds rated A are considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
Bonds rated BBB are considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal
is considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these
bonds, and therefore impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher than for
bonds with higher ratings.
IBCA's four highest long term obligation ratings are AAA, AA, A
and BBB. Obligations rated AAA are those for which there is the lowest
expectation of investment risk. Capacity for timely repayment of
principal and interest is substantial such that adverse changes in
business, economic or financial conditions are unlikely to increase
investment risk substantially. AA obligations have a very low expectation
of investment risk. Capacity for timely repayment of principal and
interest is substantial. Adverse changes in business, economic, or
financial conditions may increase investment risk albeit not very
significantly. Obligations rated A have a low expectation of investment
risk. Capacity for timely repayment of principal and interest is strong,
although adverse changes in business, economic, or financial conditions
may lead to increased investment risk. Obligations rated BBB have a low
expectation of investment risk. Capacity for timely repayment of
principal and interest is adequate, although adverse changes in business,
economic, or financial conditions are more likely to lead to increased
investment risk than for obligations in other categories.
Standard & Poor's, Duff & Phelps and Fitch apply indicators
"+","-," and no character to indicate relative standing within the major
rating categories.
Ratings of Municipal Obligations-Moody's ratings for state and
municipal short-term obligations are designated Moody's Investment Grade
or "MIG" with variable rate demand obligations being designated as "VMIG."
A VMIG rating may also be assigned to commercial paper programs which are
54
<PAGE>
characterized as having variable short-term maturities but having neither
a variable rate nor demand feature. Factors used in determination of
ratings include liquidity of the borrower and short-term cyclical
elements.
Standard & Poor's uses SP-1, SP-2, and SP-3 to rate short-term
municipal obligations. A rating of SP-1 denotes a very strong or strong
capacity to pay principal and interest.
Ratings of Short-term Obligations-The rating P-1 is the highest
short-term rating assigned by Moody's. Among the factors considered by
Moody's in assigning ratings are the following: (1) evaluations of the
management of the issuer; (2) economic evaluation of the issuer's industry
or industries and an appraisal of speculative-type risks which may be
inherent in certain areas; (3) evaluation of the issuer's products in
relation to competition and customer acceptance; (4) liquidity; (5) amount
and quality of long-term debt; (6) trend of earnings over a period of ten
years; (7) financial strength of a parent company and the relationships
which exist with the issuer; and (8) recognition by the management of
obligations which may be present or may arise as a result of public
interest questions and preparations to meet such obligations.
Short-term obligations (or issuers thereof) rated A-1 by Standard
& Poor's have the following characteristics. Liquidity ratios are
adequate to meet cash requirements. The issuer has access to at least two
additional channels of borrowing. Basic earnings and cash flow have an
upward trend with allowance made for unusual circumstances. Typically,
the issuer's industry is well established and the issuer has a strong
position within the industry. The reliability and quality of management
are unquestioned. Relative strength or weakness of the above factors
determines whether the issuer's short-term obligation is rated A-1, A-2,
or A-3.
IBCA's short-term rating of A1 indicates obligations supported by
the highest capacity for timely repayment. Where issues possess
particularly strong credit features, a rating of A1+ is assigned.
Obligations rated A2 are supported by a good capacity for timely
repayment.
The distinguishing feature of Duff & Phelps Credit Ratings'
short-term rating is the refinement of the traditional 1 category. The
majority of short-term debt issuers carry the highest rating, yet quality
differences exist within that tier. Obligations rated D-1+ indicate the
highest certainty of timely payment. Safety is just below risk-free U.S.
Treasury obligations. Obligations rated D-1 have a very high certainty of
timely payment. Risk factors are minor. Obligations rated D-1- have a
high certainty of timely payment. Risk factors are very small.
Obligations rated D-2 have good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding
needs may enlarge total financing requirements, access to capital markets
is good. Risk factors are small.
55
<PAGE>
Thomson BankWatch short-term ratings are intended to assess the
likelihood of an untimely or incomplete payment of principal or interest.
Obligations rated TBW-1 indicate a very high likelihood that principal and
interest will be paid on a timely basis. While the degree of safety
regarding timely payment of principal and interest is strong for an
obligation rated TBW-2, the relative degree of safety is not as high as
for issues rated TBW-1.
Fitch's short-term ratings apply to debt obligations that are
payable on demand or have original maturities of generally up to three
years, including commercial paper, certificates of deposit, medium-term
notes, and municipal and investment notes. A rating of F-1+ indicates
exceptionally strong credit quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
Obligations rated F-1 have very strong credit quality. Issues assigned
this rating reflect an assurance of timely payment only slightly less in
degree than issues rated F-1+. Issues assigned a rating of F-2 indicate
good credit quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not as
great as for issues assigned F-1+ and F-1 ratings.
Repurchase Agreements-A repurchase agreement, which provides a
means to earn income on funds for periods as short as overnight, is an
arrangement under which the purchaser (e.g., a Portfolio) purchases
securities and the seller agrees, at the time of sale, to repurchase the
securities at a specified time and price. The repurchase price will be
higher than the purchase price, the difference being income to the
purchaser, or the purchase and repurchase prices may be the same, with
interest at a stated rate due to the purchaser together with the
repurchase price on repurchase. In either case, the income to the
purchaser is unrelated to the interest rate on the securities subject to
the repurchase agreement.
Each Portfolio may enter into repurchase agreements with any bank
or registered broker-dealer who, in the opinion of the AMR Trust Board or
the Equity 500 Index Portfolio Board, as appropriate, presents a minimum
risk of bankruptcy during the term of the agreement based upon guidelines
that periodically are reviewed by the AMR Trust Board and the Equity 500
Index Portfolio Board. Each Portfolio may enter into repurchase
agreements as a short-term investment of its idle cash in order to earn
income. The securities will be held by a custodian (or agent) approved by
the AMR Trust Board or the Equity 500 Index Portfolio Board, as
appropriate, during the term of the agreement. However, if the market
value of the securities subject to the repurchase agreement becomes less
than the repurchase price (including interest), the Portfolio will direct
the seller of the securities to deliver additional securities so that the
market value of all securities subject to the repurchase agreement will
equal or exceed the repurchase price.
In the event of the commencement of bankruptcy or insolvency
proceedings with respect to the seller of the securities before the
repurchase of the securities under a repurchase agreement, a Portfolio may
56
<PAGE>
encounter a delay and incur costs before being able to sell the security
being held as collateral. Delays may involve loss of interest or decline
in price of the securities. Apart from the risk of bankruptcy or
insolvency proceedings, there is also the risk that the seller may fail to
repurchase the securities, in which case a Portfolio may incur a loss if
the proceeds to the Portfolio from the sale of the securities to a third
party are less than the repurchase price.
Reverse Repurchase Agreements-The Portfolios may borrow funds for
temporary purposes by entering into reverse repurchase agreements.
Pursuant to such agreements, a Portfolio would sell portfolio securities
to financial institutions such as banks and broker/dealers and agree to
repurchase them at a mutually agreed-upon date and price. The Portfolios
intend to enter into reverse repurchase agreements only to avoid selling
securities to meet redemptions during market conditions deemed unfavorable
by the investment adviser possessing investment authority. At the time a
Portfolio enters into a reverse repurchase agreement, it will place in a
segregated custodial account assets such as liquid high quality debt
securities having a value not less than 100% of the repurchase price
(including accrued interest), and will subsequently monitor the account to
ensure that such required value is maintained. Reverse repurchase
agreements involve the risk that the market value of the securities sold
by a Portfolio may decline below the price at which such Portfolio is
obligated to repurchase the securities. Reverse repurchase agreements are
considered to be borrowings by an investment company under the 1940 Act.
Resource Recovery Obligations-Resource recovery obligations are a
type of municipal revenue obligation issued to build facilities such as
solid waste incinerators or waste-to-energy plants. Usually, a private
corporation will be involved and the revenue cash flow will be supported
by fees or units paid by municipalities for use of the facilities. The
viability of a resource recovery project, environmental protection
regulations and project operator tax incentives may affect the value and
credit quality of these obligations.
Revenue Obligations-Revenue obligations are backed by the revenue
cash flow of a project or facility.
Rights and Warrants-Rights are short-term warrants issued in
conjunction with new stock issues. Warrants are options to purchase an
issuer's securities at a stated price during a stated term. There is no
specific limit on the percentage of assets a Portfolio may invest in
rights and warrants, although the ability of some of the Portfolios to so
invest is limited by their investment objectives or policies.
Separately Traded Registered Interest and Principal Securities
and Zero Coupon Obligations-Separately traded registered interest and
principal securities or "STRIPS" and zero coupon obligations are
securities that do not make regular interest payments. Instead they are
sold at a discount from their face value. Each Portfolio will take into
account as income a portion of the difference between these obligations'
purchase prices and their face values. Because they do not pay coupon
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<PAGE>
income, the prices of STRIPS and zero coupon obligations can be very
volatile when interest rates change. STRIPS are zero coupon bonds issued
by the U.S. Treasury.
Tax, Revenue or Bond Anticipation Notes-Tax, revenue or bond
anticipation notes are issued by municipalities in expectation of future
tax or other revenues which are payable from these specific taxes or
revenues. Bond anticipation notes usually provide interim financing in
advance of an issue of bonds or notes, the proceeds of which are used to
repay the anticipation notes. Tax-exempt commercial paper is issued by
municipalities to help finance short-term capital or operating needs in
anticipation of future tax or other revenue.
U.S. Government Securities-U.S. Government securities are issued
or guaranteed by the U.S. Government and include U.S. Treasury obligations
(see definition below) and securities issued by U.S. agencies and
instrumentalities.
U. S. Government agencies or instrumentalities that issue or
guarantee securities include, but are not limited to, the Federal Housing
Administration, Farmers Home Administration, Export-Import Bank of the
United States, Small Business Administration, GNMA, General Services
Administration, Central Bank for Cooperatives, Federal Home Loan Banks,
FHLMC, Federal Intermediate Credit Banks, Federal Land Banks, Maritime
Administration, Tennessee Valley Authority, District of Columbia Armory
Board, Inter-American Development Bank, Asian-American Development Bank,
Agency for International Development, Student Loan Marketing Association
and International Bank of Reconstruction and Development.
Obligations of U.S. Government agencies and instrumentalities may
or may not be supported by the full faith and credit of the United States.
Some are backed by the right of the issuer to borrow from the Treasury;
others are supported by discretionary authority of the U.S. Government to
purchase the agencies' obligations; while still others, such as the
Student Loan Marketing Association, are supported only by the credit of
the instrumentality. In the case of securities not backed by the full
faith and credit of the United States, the investor must look principally
to the agency issuing or guaranteeing the obligation for ultimate
repayment, and may not be able to assert a claim against the United States
itself in the event the agency or instrumentality does not meet its
commitment.
U.S. Treasury Obligations-U.S. Treasury obligations include
bills, notes and bonds issued by the U.S. Treasury and Separately Traded
Registered Interest and Principal component parts of such obligations
known as STRIPS.
Variable or Floating Rate Obligations-A variable rate obligation
is one whose terms provide for the adjustment of its interest rate on set
dates and which, upon such adjustment, can reasonably be expected to have
a market value that approximates its par value. A floating rate
obligation is one whose terms provide for the adjustment of its interest
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<PAGE>
rate whenever a specified interest rate changes and which, at any time,
can reasonably be expected to have a market value that approximates its
par value. Variable or floating rate obligations may be secured by bank
letters of credit.
Pursuant to Rule 2a-7 under the 1940 Act, variable or floating
rate obligations with stated maturities of more than 397 days may be
deemed to have shorter maturities as follows:
(1) An obligation that is issued or guaranteed by the United
States Government or any agency thereof which has a variable rate of
interest readjusted no less frequently than every 762 days will be deemed
by a Portfolio to have a maturity equal to the period remaining until the
next readjustment of the interest rate.
(2) A variable rate obligation, the principal amount of which is
scheduled on the face of the instrument to be paid in 397 days or less,
will be deemed by a Portfolio to have a maturity equal to the period
remaining until the next readjustment of the interest rate.
(3) A variable rate obligation that is subject to a demand
feature will be deemed by a Portfolio to have a maturity equal to the
longer 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.
(4) A floating rate obligation that is subject to a demand
feature will be deemed by a Portfolio to have a maturity equal to the
period remaining until the principal amount can be recovered through
demand.
As used above, an obligation is "subject to a demand feature"
when a Portfolio is entitled to receive the principal amount of the
obligation either at any time on no more than 30 days' notice or at
specified intervals not exceeding one year and upon no more than 30 days'
notice.
Variable Rate Auction and Residual Interest Obligations-Variable
rate auction and residual interest obligations are created when an issuer
or dealer separates the principal portion of a long-term, fixed-rate
municipal bond into two long-term, variable-rate instruments. The
interest rate on one portion reflects short-term interest rates, while the
interest rate on the other portion is typically higher than the rate
available on the original fixed-rate bond.
When-Issued and Delayed Delivery Securities-Delivery of and
payment for securities on a when-issued or delayed delivery basis may take
place as long as a month or more after the date of the purchase
commitment. The value of these securities is subject to market fluctuation
during this period and no income accrues to a Portfolio until settlement
takes place. A Portfolio maintains with the Custodian a segregated
account containing high grade liquid securities in an amount at least
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equal to these commitments. When entering into a when-issued or delayed
delivery transaction, the Portfolio will rely on the other party to
consummate the transaction; if the other party fails to do so, the
Portfolio may be disadvantaged.
FINANCIAL STATEMENTS
The American AAdvantage Funds' Annual Report to shareholders for
the fiscal year ended October 31, 1996 is supplied with the Statement of
Additional Information, and the financial statements and accompanying
notes appearing therein are incorporated by reference in this Statement of
Additional Information.
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APPENDIX A
The following table shows the performance of the S&P 500
Composite Stock Price Index for the periods indicated. Stock prices
fluctuated widely during the periods but were higher at the end than at
the beginning. The results shown should not be considered as a
representation of the income or capital gain or loss that may be generated
by the Index in the future. Nor should this be considered as a
representation of the past or future performance of the S&P 500 Index
Fund.
<TABLE>
<CAPTION>
Year Total Return Year Total Return
---- ------------ ---- ------------
<S> <C> <C> <C>
1995 37.49% 1960 0.47%
1994 1.32% 1959 11.96%
1993 9.99% 1958 43.36%
1992 7.67% 1957 -10.78%
1991 30.55% 1956 6.56%
1990 -3.17% 1955 31.56%
1989 31.49% 1954 52.62%
1988 16.81% 1953 -0.99%
1987 5.23% 1952 18.73%
1986 18.47% 1951 24.02%
1985 32.16% 1950 31.71%
1984 6.27% 1949 18.79%
1983 22.51% 1948 5.50%
1982 21.41% 1947 5.71%
1981 -4.91% 1946 -8.07%
1980 32.42% 1945 36.44%
1979 18.44% 1944 19.75%
1978 6.56% 1943 25.90%
1977 -7.18% 1942 20.34%
1976 23.84% 1941 -11.59%
1975 37.20% 1940 -9.78%
1974 -26.47% 1939 -0.41%
1973 -14.66% 1938 31.12%
1972 18.98% 1937 -35.03%
1971 14.31% 1936 33.92%
A-1
<PAGE>
Year Total Return Year Total Return
---- ------------ ---- ------------
1970 4.01% 1935 47.67%
1969 -8.51% 1934 -1.44%
1968 11.06% 1933 53.99%
1967 23.98% 1932 -8.19%
1966 -10.06% 1931 -43.34%
1965 12.45% 1930 -24.90%
1964 16.48% 1929 -8.42%
1963 22.08% 1928 43.61%
1962 -8.73% 1927 37.49%
1961 26.89% 1926 11.62%
</TABLE>
A-2
<PAGE>
TABLE OF CONTENTS
-----------------
Investment Restrictions . . . . . . . . . . . . . . . . . . . . . . . . 1
Trustees and Officers of the Trust and the AMR Trust . . . . . . . . . 6
Trustees and Officers of the Equity 500 Index Trust . . . . . . . . . . 9
Management, Administrative Services and Distribution Fees . . . . . . . 10
Approach to Stock Selection . . . . . . . . . . . . . . . . . . . . . . 11
Redemptions in Kind . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Expense Limitations . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Investment Advisory Agreements . . . . . . . . . . . . . . . . . . . . 12
Portfolio Securities Transactions . . . . . . . . . . . . . . . . . . . 13
Net Asset Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Tax Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Yield and Total Return Quotations . . . . . . . . . . . . . . . . . . . 18
Description of the Trust . . . . . . . . . . . . . . . . . . . . . . . 21
Control Persons and 5% Shareholders . . . . . . . . . . . . . . . . . . 22
Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . 40
Appendix A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1<PAGE>
AMERICAN AADVANTAGE FUNDS
PART C. OTHER INFORMATION
-------------------------
Item 24. Financial Statements and Exhibits
---------------------------------
(a) Financial Statements included as a part of this
Registration Statement:
Included in Part A: Financial Highlights -
AMR Class: Balanced Fund and Growth and Income
Fund: for the period August 1, 1994 (commencement
of offering of AMR Class shares) to October 31,
1994, for the year ended October 31, 1995 and for
the six months ended April 30, 1996.
International Equity Fund: AMR Class shares: for
the period August 1, 1994 (commencement of
offering of AMR Class shares) to October 31,
1994, for the year ended October 31, 1995 and for
the six months ended April 30, 1996. Limited-Term
Income Fund: for the period August 1, 1994
(commencement of offering of AMR Class shares) to
October 31, 1994, for the year ended October 31,
1995 and for the six months ended April 30, 1996.
Institutional Class: Balanced Fund and Growth
and Income Fund: for the period July 17, 1987
(commencement of operations) to October 31, 1987,
for each of the six years in the period ended
October 31, 1993, and for the period November 1,
1993 to July 31, 1994. International Equity Fund:
for the period from August 7, 1991 (commencement
of operations) to October 31, 1991, for each of
the two years in the period ended October 31,
1993, and for the period November 1, 1993 to July
31, 1994. Limited-Term Income Fund: for the
period from December 3, 1987 (commencement of
operations) to October 31, 1988, for each of the
five years in the period ended October 31, 1993,
and for the period November 1, 1994 to July 31,
1994.
Included in Part B:
The audited financial statements and independent
accountant's report to the American AAdvantage
Fund for the fiscal year ended October 31, 1996
C-1
<PAGE>
to be included in Part B will be filed by
amendment.
(b) Exhibits:
(1) Declaration of Trust(i)
(2) Bylaws(i)
(3) Voting trust agreement -- none
(4) Specimen security -- none
(5) (a) Fund Management Agreement(iv),
(ix), (x) & (xii)
(b) Fund Advisory Agreements(iii),
(iv), (v), (ix) & (xiii)
(c) Administrative Services
Agreement for the Plan Ahead,
AMR and Institutional Classes
(iv), (ix) & (x)
(d) Administrative Services Plan for
the Platinum Class(x)
(6) Distribution Agreement(x)
(7) Bonus, profit sharing or pension plans
-- none
(8) Custodian Agreement(ii) & (xii)
(9) (a) Transfer Agency and Service
Agreement with NationsBank
Texas, N.A.(ii), (xii) & (xiii)
(b) Transfer Agency and Registrar
Agreement with Goldman, Sachs &
Co.(vi) (ix) & (xii)
(c) Service Plan Agreement for the
PlanAhead Class(ix)
(10) Opinion and consent of counsel(xiv)
(11) Consent of Independent Auditors (filed
herewith)
(12) Financial statements omitted from
prospectus -- none
(13) Letter of investment intent(ii)
(14) Prototype retirement plan -- none
C-2
<PAGE>
(15) (a) Plan pursuant to Rule 12b-1 for
the Institutional, PlanAhead and
AMR Classes(ii)
(b) Plan pursuant to Rule 12b-1 for
the Platinum Class(x)
(16) Schedule for Computation of Performance
Quotations(xiv)
(17) Electronic Filers (filed herewith as
Exhibit 27)
(18) Amended and Restated Plan pursuant to
Rule 18f-3(xi)
(i) Incorporated by reference to the initial registration statement
of the American AAdvantage Funds ("Trust") on Form N-1A as filed
with the Securities and Exchange Commission ("SEC") on January
16, 1987.
(ii) Incorporated by reference to Pre-Effective Amendment No. 2 to the
registration statement of the Trust on Form N-1A as filed with
the SEC on April 1, 1987.
(iii) Incorporated by reference to Post-Effective Amendment ("PEA") No.
1 to the registration statement of the Trust on Form N-1A as
filed with the SEC on December 30, 1987.
(iv) Incorporated by reference to PEA No. 4 to the registration
statement of the Trust on Form N-1A as filed with the SEC on
December 31, 1990.
(v) Incorporated by reference to PEA No. 5 to the registration
statement of the Trust on Form N-1A as filed with the SEC on
July 29, 1991.
(vi) Incorporated by reference to PEA No. 8 to the registration
statement of the Trust on Form N-1A as filed with the SEC on
August 30, 1993.
(vii) Incorporated by reference to PEA No. 9 to the registration
statement of the Trust on Form N-1A as filed with the SEC on
December 23, 1993.
(viii) Incorporated by reference to PEA No. 10 to the registration
statement of the Trust on Form N-1A as filed with the SEC on
June 1, 1994.
(ix) Incorporated by reference to PEA No. 11 to the registration
statement of the Trust on Form N-1A as filed with the SEC on
December 28, 1994.
(x) Incorporated by reference to PEA No. 13 to the registration
statement of the Trust on Form N-1A as filed with the SEC on
August 22, 1995.
(xi) Incorporated by reference to PEA No. 14 to the registration
statement of the Trust on Form N-1A as filed with the SEC on
September 11, 1995.
(xii) Incorporated by reference to PEA No. 15 to the registration
statement of the Trust on Form N-1A as filed with the SEC on
December 22, 1995.
C-3
<PAGE>
(xiii) Incorporated by reference to PEA No. 16 to the registration
statement of the Trust on Form N-1A as filed with the SEC on
May 1, 1996.
(xiv) Incorporated by reference to PEA No. 17 to the registration
statement of the Trust on Form N-1A as filed with the SEC on
August 16, 1996.
Other Exhibits:
Copy of Power of Attorney to which the President and Trustees of
the Equity 500 Index Portfolio have signed this Post-Effective
Amendment are filed herewith.
C-4
<PAGE>
Item 25. Persons Controlled by or under
Common Control with Registrant
------------------------------
See "Control Persons and 5% Shareholders" in the
Statement of Additional Information dated September 30,
1996.
Item 26. Number of Holders of Securities
-------------------------------
<TABLE>
<CAPTION>
Number of Record Holders as of September 30, 1996
----------------------------------------------------------
Mileage Inst'l PlanAhead AMR Platinum
Fund Class Class Class Class Class
---- ------ ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Balanced Fund 119 26 262 4 -
Growth and Income Fund 266 24 427 2 -
Limited-Term Income 28 19 54 1 -
Fund
International Equity 154 32 211 3 -
Fund
Money Market Fund 1,456 179 1,106 - 2
Municipal Money Market 235 2 31 - 2
Fund
Short-Term Income Fund - - - - -
S&P 500 Index Fund - - - - -
U.S. Treasury Money 153 9 40 - 2
Market Fund
</TABLE>
Item 27. Indemnification
---------------
Article XI, Section 2 of the Declaration of Trust of the Trust
provides that:
(a) Subject to the exceptions and limitations contained in
paragraph (b) below:
C-5
<PAGE>
(i) every person who is, or has been, a Trustee or
officer of the Trust (hereinafter referred to as "Covered Person") shall
be indemnified by the appropriate portfolios to the fullest extent
permitted by law against liability and against all expenses reasonably
incurred or paid by him in connection with any claim, action, suit or
proceeding in which he becomes involved as a party or otherwise by virtue
of his being or having been a Trustee or officer and against amounts paid
or incurred by him in the settlement thereof;
(ii) the words "claim," "action," "suit," or
"proceeding" shall apply to all claims, actions, suits or proceedings
(civil, criminal or other, including appeals), actual or threatened while
in office or thereafter, and the words "liability" and "expenses" shall
include, without limitation, attorneys' fees, costs, judgments, amounts
paid in settlement, fines, penalties and other liabilities.
(b) No indemnification shall be provided hereunder to a
Covered Person:
(i) who shall have been adjudicated by a court or
body before which the proceeding was brought (A) to be liable to the Trust
or its Shareholders by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of
his office or (B) not to have acted in good faith in the reasonable belief
that his action was in the best interest of the Trust; or
(ii) in the event of a settlement, unless there has
been a determination that such Trustee or officer did not engage in
willful misfeasance, bad faith, gross negligence or reckless disregard of
the duties involved in the conduct of his office (A) by the court or other
body approving the settlement; (B) by at least a majority of those
Trustees who are neither interested persons of the Trust nor are parties
to the matter based upon a review of readily available facts (as opposed
to a full trial-type inquiry); or (C) by written opinion of independent
legal counsel based upon a review of readily available facts (as opposed
to a full trial-type inquiry); provided, however, that any Shareholder
may, by appropriate legal proceedings, challenge any such determination by
the Trustees, or by independent counsel.
(c) The rights of indemnification herein provided may be
insured against by policies maintained by the Trust, shall be severable,
shall not be exclusive of or affect any other rights to which any Covered
Person may now or hereafter be entitled, shall continue as to a person who
has ceased to be such Trustee or officer and shall inure to the benefit of
the heirs, executors and administrators of such a person. Nothing
contained herein shall affect any rights to indemnification to which Trust
personnel, other than Trustees and officers, and other persons may be
entitled by contract or otherwise under law.
(d) Expenses in connection with the preparation and
presentation of a defense to any claim, action, suit, or proceeding of the
character described in paragraph (a) of this Section 2 may be paid by the
applicable Portfolio from time to time prior to final disposition thereof
C-6
<PAGE>
upon receipt of an undertaking by or on behalf of such Covered Person that
such amount will be paid over by him to the Trust if it is ultimately
determined that he is not entitled to indemnification under this Section
2; provided, however, that:
(i) such Covered Person shall have provided
appropriate security for such undertaking;
(ii) the Trust is insured against losses arising out
of any such advance payments; or
(iii) either a majority of the Trustees who are neither
interested persons of the Trust nor parties to the matter, or independent
legal counsel in a written opinion, shall have determined, based upon a
review of readily available facts (as opposed to a trial-type inquiry or
full investigation), that there is reason to believe that such Covered
Person will be found entitled to indemnification under this Section 2.
According to Article XII, Section 1 of the Declaration of Trust,
the Trust is a trust, not a partnership. Trustees are not liable
personally to any person extending credit to, contracting with or having
any claim against the Trust, a particular Portfolio or the Trustees. A
Trustee, however, is not protected from liability due to willful
misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office.
Article XII, Section 2 provides that, subject to the provisions
of Section 1 of Article XII and to Article XI, the Trustees are not liable
for errors of judgment or mistakes of fact or law, or for any act or
omission in accordance with advice of counsel or other experts or for
failing to follow such advice.
Item 28. I. Business and Other Connections of Investment Manager
----------------------------------------------------
AMR Investment Services, Inc., 4333 Amon Carter Boulevard, MD
5645, Fort Worth, Texas 76155, offers investment management and
administrative services. Information as to the officers and directors of
the Manager is included in its current Form ADV filed with the SEC and is
incorporated by reference herein.
II. Business and Other Connections of Investment
Advisers
--------------------------------------------
The investment advisers listed below provide investment advisory
services to the AMR Investment Services Trust.
Barrow, Hanley, Mewhinney & Strauss, 200 Crescent Court, 19th
Floor, Dallas, Texas 75201.
C-7
<PAGE>
Brandywine Asset Management, Inc., 201 North Walnut Street,
Wilmington, Delaware 19801.
GSB Investment Management, Inc., 301 Commerce Street, Suite 1501,
Fort Worth, Texas 76102.
Hotchkis & Wiley, 800 West Sixth Street, 5th Floor, Los Angeles,
California 90017.
Independence Investment Associates, Inc., 53 State Street,
Boston, Massachusetts 02109.
Morgan Stanley Asset Management Inc., 1221 Avenue of the
Americas, 21st Floor, New York, New York 10020.
Rowe Price-Fleming International, Inc., 100 East Pratt Street,
Baltimore, Maryland 21202.
Templeton Investment Counsel, Inc. 500 East Broward Blvd., Ft.
Lauderdale, Florida 33394.
The investment advisers listed below provide investment advisory
services to the Equity 500 Index Portfolio.
Bankers Trust Company, 280 Park Avenue, New York, New York
10017.
Information as to the officers and directors of each of the above
investment advisers is included in that adviser's current Form ADV filed
with the SEC and is incorporated by reference herein.
Boatmen's Trust Company, 100 N. Broadway, St. Louis, Missouri
63178, also provides investment advisory services to the Mileage Trust.
The following list sets forth information as to any fiduciary or other
business, vocation or employment of a substantial nature in which each
director of Boatmen's is, or at any time during the past two fiscal years
has been, engaged for his or her own account or in the capacity of
director, officer, employee, partner or trustee. Unless otherwise
indicated, the address of each person listed above.
C-8
<PAGE>
The names and principal occupations of the principal executive
officer and each director of Boatmen's Bancshares, Inc., the parent
company of Boatmen's, are as follows:
<TABLE>
<CAPTION>
Name Principal Occupation
---- --------------------
<S> <C>
Andrew B. Craig Chairman of the Board and Chief Executive
Officer
Richard L. Battram Vice Chairman, The May Department Stores
Company
B.A. Bridgewater, Jr. Chairman, President and Chief Executive
Officer, Brown Group, Inc.
William E. Cornelius Retired Chairman and Chief Executive Officer,
Union Electric Company
Ilus W. Davis Chairman of Kansas City Office of Armstrong,
Teasdale, Schafly & Davis
John E. Hayes, Jr. Chairman of the Board, President and Chief
Executive Officer, Western Resources, Inc.
Samuel B. Hayes III President and Director
Lee M. Liberman Chairman Emeritus, Laclede Gas Company
John P. MacCarthy Vice Chairman and Director
William E. Maritz Chairman of the Board and Chief Executive
Officer, Maritz, Inc.
Andrew E. Newman Chairman of the Board, Edison Brothers Stores,
Inc.
Jerry E. Ritter Executive Vice President, Chief Financial and
Administrative Officer, Anheuser-Busch
Companies, Inc.
William F. Stiritz Chairman and Chief Executive Officer, Ralston
Purina Company
A.E. Suter Senior Vice Chairman and Chief Operating
Officer, Emerson Electric Company
Dwight D. Sutherland Partner, Sutherland Lumber Company
Theodore C. Wetterau Retired Chairman and Chief Executive Officer,
Wetterau Incorporated
</TABLE>
C-9
<PAGE>
Item 29. Principal Underwriter
---------------------
(a) Brokers Transaction Services, Inc., 7001 Preston
Road, Dallas, TX 75205 is the principal underwriter for the Trust and the
American AAdvantage Mileage Funds.
(b) The directors and officers of the Trust's principal
underwriter are:
<TABLE>
<CAPTION>
Positions & Offices Position
Name with Underwriter with Registrant
---- ------------------- ---------------
<S> <C> <C>
Don A. Buckholz Chairman, Director and Chief None
Executive Officer
Raymond E. Wooldridge Chief Operating Officer, None
Director and President
William D. Felder Director, Executive Vice None
President
Sue H. Peden Vice President None
</TABLE>
Item 30. Location of Accounts and Records
--------------------------------
The books and other documents required by Rule 31a-1 under the
Investment Company Act of 1940 are maintained in the physical possession
of the Trust's custodian, sub-custodian, Manager, transfer agent or
investment advisers.
Item 31. Management Services
-------------------
All substantive provisions of any management-related
service contract are discussed in Part A or Part B.
Item 32. Undertakings
------------
Registrant hereby undertakes to file a Post-Effective Amendment
to the Registration Statement, containing financial statements for the S&P
C-10
<PAGE>
500 Index Fund that need not be certified, within four to six months from
the effective date of its commencement of operations.
Registrant hereby undertakes, if requested by the holders of at
least 10% of the Registrant's outstanding shares, to call a meeting of
shareholders for the purpose of voting upon the question of removal of a
trustee or trustees and to assist in communications with other
shareholders in accordance with Section 16(c) of the 1940 Act, as though
Section 16(c) applied.
Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of its latest annual report to
Shareholders, upon request and without charge.
Registrant hereby undertakes to carry out all indemnification
provisions of its Declaration of Trust in accordance with Investment
Company Act Release No. 11330 (September 4, 1980) and successor releases.
Insofar as indemnification for liability arising under the
Securities Act of 1933, as amended ("1933 Act"), may be permitted to
trustees, officers and controlling persons of the Registrant pursuant to
the provisions under Item 27 herein, or otherwise, the Registrant has been
advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the 1933 Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred
or paid by a trustee, officer or controlling person of the Registrant in
the successful defense of any action, suit or proceeding) is asserted by
such trustee, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit
to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the 1933
Act and will be governed by the final adjudication.
C-11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, and the Investment Company Act of 1940, as amended, the
Registrant has duly caused this Post-Effective Amendment No. 18 to its
Registration Statement on Form N-1A under Rule 485(a) to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Fort
Worth and the State of Texas on October 15, 1996.
AMERICAN AADVANTAGE FUNDS
By: /s/ William F. Quinn
---------------------------
William F. Quinn
President
Attest:
/s/ Barry Y. Greenberg
--------------------------
Barry Y. Greenberg
Vice President and Assistant Secretary
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Post-Effective Amendment No. 18 to the Registration
Statement has been signed below by the following persons in the capacities
and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ William F. Quinn President and October 15, 1996
----------------------------- Trustee
William F. Quinn
John S. Justin* Trustee October 15, 1996
-----------------------------
John S. Justin
Stephen D. O'Sullivan* Trustee October 15, 1996
-----------------------------
Stephen D. O'Sullivan
Roger T. Staubach* Trustee October 15, 1996
-----------------------------
Roger T. Staubach
*By /s/ William F. Quinn
------------------------------------
William F. Quinn, Attorney-In-Fact
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, and the Investment Company Act of 1940, as amended, the AMR
Investment Services Trust has duly caused this Post-Effective Amendment
No. 18 of the American AAdvantage Funds' Registration Statement on Form N-
1A as it relates to the AMR Investment Services Trust to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Fort
Worth and the State of Texas on October 15, 1996.
AMR INVESTMENT SERVICES TRUST
By: /s/ William F. Quinn
---------------------------
William F. Quinn
President
Attest:
/s/ Barry Y. Greenberg
--------------------------
Barry Y. Greenberg
Vice President and Assistant Secretary
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Post-Effective Amendment No. 18 to the Registration
Statement as it relates to the AMR Investment Services Trust has been
signed below by the following persons in the capacities and on the dates
indicated.
Signature Title Date
--------- ----- ----
/s/ William F. Quinn President and October 15, 1996
-------------------------- Trustee
William F. Quinn
/s/ John S. Justin* Trustee October 15, 1996
--------------------------
John S. Justin
/s/ Stephen D. O'Sullivan* Trustee October 15, 1996
--------------------------
Stephen D. O'Sullivan
/s/ Roger T. Staubach* Trustee October 15, 1996
-------------------------
Roger T. Staubach
*By /s/ William F. Quinn
------------------------------------
William F. Quinn, Attorney-In-Fact
<PAGE>
SIGNATURES
Equity 500 Index Portfolio has duly caused this Post-Effective
Amendment No. 18 to the Registration Statement on Form N-1A of the
American AAdvantage Funds to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Pittsburgh and the Commonwealth
of Pennsylvania on this 15th day of October, 1996.
EQUITY 500 INDEX PORTFOLIO
By: /s/ Ronald M. Petnuch*
---------------------------
Ronald M. Petnuch
President
This Post-Effective Amendment No. 18 to the Registration
Statement on Form N-1A of American AAdvantage Funds has been signed below
by the following persons in the capacities and on the dates indicated with
respect to Equity 500 Index Portfolio on October 15, 1996.
Signature Title
--------- -----
/s/ Philip W. Coolidge Trustee
--------------------------
Philip W. Coolidge
/s/ Charles P. Biggar* Trustee
--------------------------
Charles P. Biggar
/s/ Philip Saunders, Jr.* Trustee
-------------------------
Philip Saunders, Jr.
/s/ S. Leland Dill* Trustee
--------------------------
S. Leland Dill
/s/ Ronald M. Petnuch* President and
-------------------------- Treasurer (Chief
Ronald M. Petnuch Executive Officer,
Principal Financial
and Accounting Officer
By: /s/ Jay S. Neuman
-------------------------
Jay S. Neuman, Secretary
of Equity 500 Index Portfolio
as Attorney-in Fact pursuant
to a Power of Attorney filed
herewith
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description Page
------- ----------- ----
1 Declaration of Trust(i)
2 Bylaws(i)
3 Voting trust agreement -- none
4 Specimen security -- none
5 (a) Fund Management Agreement(iv), (ix) & (x)
(b) Fund Advisory Agreements(iii), (iv), (v),
(viii), (ix) & (xiii)
(c) Administrative Services Agreement for the AMR,
Institutional and PlanAhead Classes (iv), (ix) &
(x)
(d) Administrative Services Plan for the
Platinum Class(x)
6 Distribution Agreement(x)
7 Bonus, profit sharing or pension plans -- none
8 Custodian Agreement(ii) & (xii)
9 (a) Transfer Agency and Service Agreement with
NationsBank Texas, N.A.(ii), (xii) & (xiii)
(b) Transfer Agency and Registrar Agreement with
Goldman, Sachs & Co.(vi), (ix) & (xii)
(c) Service Plan Agreement for the PlanAhead
Class(ix)
10 Opinion and consent of counsel(xiv)
11 Consent of Independent Auditors (filed herewith)
12 Financial statements omitted from prospectus -- none
13 Letter of investment intent(ii)
14 Prototype retirement plan -- none
15 (a) Plan pursuant to Rule 12b-1 for the Institutional,
PlanAhead and AMR Classes(ii)
(b) Plan pursuant to Rule 12b-1 for the Platinum Class
(x)
16 Schedule for Computation of Performance Quotations(xiii)
17 Electronic Filers -- (filed herewith as Exhibit 27)
18 Amended and Restated Plan pursuant to Rule 18f-3(xi)
<PAGE>
19 Power of Attorney to which the President and Trustees of the
Equity 500 Index Portfolio have signed this Post-Effective
Amendment (filed herewith).
(i) Incorporated by reference to the initial registration
statement of the American AAdvantage Funds ("Trust") on
Form N-1A as filed with the Securities and Exchange
Commission ("SEC") on January 16, 1987.
(ii) Incorporated by reference to Pre-Effective Amendment No.
2 to the registration statement of the Trust on Form N-1A
as filed with the SEC on April 1, 1987.
(iii) Incorporated by reference to Post-Effective Amendment
("PEA") No. 1 to the registration statement of the Trust
on Form N-1A as filed with the SEC on December 30, 1987.
(iv) Incorporated by reference to PEA No. 4 to the
registration statement of the Trust on Form N-1A as filed
with the SEC on December 31, 1990.
(v) Incorporated by reference to PEA No. 5 to the
registration statement of the Trust on Form N-1A as filed
with the SEC on July 29, 1991.
(vi) Incorporated by reference to PEA No. 8 to the
registration statement of the Trust on Form N-1A as filed
with the SEC on August 30, 1993.
(vii) Incorporated by reference to PEA No. 9 to the
registration statement of the Trust on Form N-1A as filed
with the SEC on December 23, 1993.
(viii) Incorporated by reference to PEA No. 10 to the
registration statement of the Trust on Form N-1A as filed
with the SEC on June 1, 1994.
(ix) Incorporated by reference to PEA No. 11 to the
registration statement of the Trust on Form N-1A as filed
with the SEC on December 28, 1994.
(x) Incorporated by reference to PEA No. 13 to the
registration statement of the Trust on Form N-1A as filed
with the SEC on August 22, 1995.
(xi) Incorporated by reference to PEA No. 14 to the
registration statement of the Trust on Form N-1A as filed
with the SEC on September 11, 1995.
(xii) Incorporated by reference to PEA No. 15 to the
registration statement of the Trust on Form N-1A as filed
with the SEC on December 22, 1995.
(xiii) Incorporated by reference to PEA No. 16 to the
registration statement of the Trust on Form N-1A as filed
with the SEC on May 1, 1996.
(xiv) Incorporated by reference to PEA No. 17 to the
registration statement of the Trust on Form N-1A as filed
with the SEC on August 16, 1996.
<PAGE>
<PAGE>
Consent of Independent Auditors
We consent to the reference to our firm under the captions "Financial
Highlights," "Management and Administration of the Trust-Independent
Auditor" and "Shareholder Communications" and to the use of our report
dated December 19, 1995 in the Registration Statement (Form N-1A) and its
corporation by reference in the related Prospectus of American AAdvantage
Funds, filed with the Securities and Exchange Commission in this Post-
Effective Amendment No. 18 to the Registration Statement under the
Securities Act of 1933 (File No. 33-11387) and in this Amendment No. 19 to
the Registration Statement under the Investment Company Act of 1940.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Dallas, Texas
October 11, 1996
<PAGE>
<PAGE>
POWER OF ATTORNEY
The undersigned Trustees and officers, as indicated respectively
below, of BT Investment Funds, BT Institutional Funds, BT Pyramid Mutual
Funds, The Leadership Trust, and BT Advisor Funds (each, a "Trust") and,
Cash Management Portfolio, Treasury Money Portfolio, Tax Free Money
Portfolio, NY Tax Free Money Portfolio, International Equity Portfolio,
Utility Portfolio, Short/ Intermediate U.S. Government Securities
Portfolio, Equity 500 Index Portfolio, Asset Management Portfolio, Capital
Appreciation Portfolio, Intermediate Tax Free Portfolio, and BT Investment
Portfolio (each, a "Portfolio Trust") each hereby constitutes and appoints
the Secretary and each Assistant Secretary of each Trust and each
Portfolio Trust and the Deputy General Counsel of Federated Investors,
each of them with full powers of substitution, as his true and lawful
attorney-in-fact and agent to execute in his name and on his behalf in any
and all capacities the Registration Statements on Form N-1A, and any and
all amendments thereto, and all other documents, filed by a Trust or a
Portfolio Trust with the Securities and Exchange Commission (the "SEC")
under the Investment Company Act of 1940, as amended, and (as applicable)
the Securities Act of 1933, as amended, and any and all instruments which
such attorneys and agents, or any of them, deem necessary or advisable to
enable the Trust or Portfolio Trust to comply with such Acts, the rules,
regulations and requirements of the SEC, and the securities or Blue Sky
laws of any state or other jurisdiction, and to file the same, with all
exhibits thereto and other documents in connection therewith, with the SEC
and such other jurisdictions, and the undersigned each hereby ratifies and
confirms as his own act and deed any and all acts that such attorneys and
agents, or any of them, shall do or cause to be done by virtue hereof.
Any one of such attorneys and agents has, and may exercise, all of the
powers hereby conferred. The undersigned each hereby revokes any Powers
of Attorney previously granted with respect to any Trust or Portfolio
Trust concerning the filings and actions described herein.
IN WITNESS WHEREOF, each of the undersigned has hereunto set his
hand as of the 30th day of September, 1996.
SIGNATURES TITLE
/s/ Ronald M. Petnuch
------------------------ President and Treasurer (Chief
Ronald M. Petnuch Executive Officer, Principal Financial
and Accounting Officer) of each Trust
and Portfolio Trust
Trustee of each Trust and
Philip W. Coolidge Portfolio Trust
/s/ Charles P. Biggar
------------------------- Trustee of each Portfolio Trust
Charles P. Biggar and BT Institutional Funds
<PAGE>
SIGNATURES TITLE
/s/ S. Leland Dill
------------------------- Trustee of each Portfolio Trust
S. Leland Dill and BT Investment Funds
/s/ Philip Saunders, Jr.
-------------------------- Trustee of each Portfolio Trust
Philip Saunders, Jr. and BT Investment Funds
Trustee of BT Investment Funds
Kelvin J. Lancaster and BT Pyramid Mutual Funds
Trustee of BT Institutional Funds
Richard J. Herring and BT Advisor Funds
Trustee of BT Institutional Funds
Bruce E. Langton and BT Advisor Funds
Trustee of BT Pyramid Mutual
Martin J. Gruber Funds, The Leadership Trust, and BT
Advisor Funds
Trustee of BT Pyramid Mutual
Harry Van Benschoten Funds, The Leadership Trust, and BT
Advisor Funds
<PAGE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AMERICAN
AADVANTAGE FUNDS STATEMENTS OF OPERATIONS, STATEMENTS OF ASSETS AND LIABILITIES,
FINANCIAL HIGHLIGHTS AND CHANGES IN NET ASSETS AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH SEMI ANNUAL REPORT DATED APRIL 30, 1996.
</LEGEND>
<SERIES>
<NUMBER> 023
<NAME> AMERICAN AADVANTAGE BALANCED FUND-AMR CLASS
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> APR-30-1996
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 864,402
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 864,402
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 266
<TOTAL-LIABILITIES> 266
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 684,324
<SHARES-COMMON-STOCK> 40,585<F1>
<SHARES-COMMON-PRIOR> 38,819
<ACCUMULATED-NII-CURRENT> 10,115
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 33,275
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 136,422
<NET-ASSETS> 864,136
<DIVIDEND-INCOME> 7,859
<INTEREST-INCOME> 11,375
<OTHER-INCOME> 20
<EXPENSES-NET> 1,873
<NET-INVESTMENT-INCOME> 17,381
<REALIZED-GAINS-CURRENT> 32,831
<APPREC-INCREASE-CURRENT> 27,871
<NET-CHANGE-FROM-OPS> 78,083
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 22,970
<DISTRIBUTIONS-OF-GAINS> 16,814
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,417
<NUMBER-OF-SHARES-REDEEMED> 5,540
<SHARES-REINVESTED> 2,889
<NET-CHANGE-IN-ASSETS> 65,123
<ACCUMULATED-NII-PRIOR> 26,077
<ACCUMULATED-GAINS-PRIOR> 25,312
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 856,299
<PER-SHARE-NAV-BEGIN> 13.98
<PER-SHARE-NII> 0.30
<PER-SHARE-GAIN-APPREC> 1.03
<PER-SHARE-DIVIDEND> 0.60
<PER-SHARE-DISTRIBUTIONS> 0.44
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.27
<EXPENSE-RATIO> 0.36
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>AMR CLASS. PER SHARE AMOUNTS ARE BY CLASS.
</FN>
<PAGE>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AMERICAN
AADVANTAGE FUNDS STATEMENTS OF OPERATIONS, STATEMENTS OF ASSETS AND LIABILITIES,
FINANCIAL HIGHLIGHTS AND CHANGES IN NET ASSETS AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH SEMI ANNUAL REPORT DATED APRIL 30, 1996.
</LEGEND>
<SERIES>
<NUMBER> 013
<NAME> AMERICAN AADVANTAGE GROWTH AND INCOME FUND-AMR CLASS
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> APR-30-1996
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 992,985
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 992,985
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 111
<TOTAL-LIABILITIES> 111
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 733,290
<SHARES-COMMON-STOCK> 51,826<F1>
<SHARES-COMMON-PRIOR> 44,325
<ACCUMULATED-NII-CURRENT> 6,908
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 44,230
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 208,446
<NET-ASSETS> 992,874
<DIVIDEND-INCOME> 12,649
<INTEREST-INCOME> 1,533
<OTHER-INCOME> 8
<EXPENSES-NET> 1,652
<NET-INVESTMENT-INCOME> 12,538
<REALIZED-GAINS-CURRENT> 44,311
<APPREC-INCREASE-CURRENT> 69,379
<NET-CHANGE-FROM-OPS> 126,228
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 20,011
<DISTRIBUTIONS-OF-GAINS> 25,694
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5,750
<NUMBER-OF-SHARES-REDEEMED> 1,082
<SHARES-REINVESTED> 2,834
<NET-CHANGE-IN-ASSETS> 207,360
<ACCUMULATED-NII-PRIOR> 16,460
<ACCUMULATED-GAINS-PRIOR> 28,468
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 902,644
<PER-SHARE-NAV-BEGIN> 15.95
<PER-SHARE-NII> 0.23
<PER-SHARE-GAIN-APPREC> 2.17
<PER-SHARE-DIVIDEND> 0.44
<PER-SHARE-DISTRIBUTIONS> 0.57
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 17.34
<EXPENSE-RATIO> 0.34
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>AMR CLASS. PER SHARE AMOUNTS ARE BY CLASS.
</FN>
<PAGE>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AMERICAN
AADVANTAGE FUNDS STATEMENTS OF OPERATIONS, STATEMENTS OF ASSETS AND LIABILITIES,
FINANCIAL HIGHLIGHTS AND CHANGES IN NET ASSETS AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH SEMI ANNUAL REPORT DATED APRIL 30, 1996.
</LEGEND>
<SERIES>
<NUMBER> 053
<NAME> AMERICAN AADVANTAGE INTERNATIONAL EQUITY FUND-AMR CLASS
<MULTIPLIER> 1000
<CURRENCY> US DOLLAR
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-END> APR-30-1996
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 322,649
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 322,649
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 49
<TOTAL-LIABILITIES> 49
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 264,732
<SHARES-COMMON-STOCK> 19,242<F1>
<SHARES-COMMON-PRIOR> 17,123
<ACCUMULATED-NII-CURRENT> 2,694
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 4,484
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 50,690
<NET-ASSETS> 322,600
<DIVIDEND-INCOME> 3,326
<INTEREST-INCOME> 554
<OTHER-INCOME> 15
<EXPENSES-NET> 878
<NET-INVESTMENT-INCOME> 3,017
<REALIZED-GAINS-CURRENT> 5,295
<APPREC-INCREASE-CURRENT> 27,658
<NET-CHANGE-FROM-OPS> 35,970
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 5,125
<DISTRIBUTIONS-OF-GAINS> 4,170
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,363
<NUMBER-OF-SHARES-REDEEMED> 936
<SHARES-REINVESTED> 693
<NET-CHANGE-IN-ASSETS> 66,193
<ACCUMULATED-NII-PRIOR> 5,440
<ACCUMULATED-GAINS-PRIOR> 3,936
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 286,435
<PER-SHARE-NAV-BEGIN> 13.31
<PER-SHARE-NII> 0.41
<PER-SHARE-GAIN-APPREC> 1.61
<PER-SHARE-DIVIDEND> 0.30
<PER-SHARE-DISTRIBUTIONS> 0.24
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.52
<EXPENSE-RATIO> 0.58
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>AMR CLASS. PER SHARE AMOUNTS ARE BY CLASS.
</FN>
<PAGE>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AMERICAN
AADVANTAGE FUNDS STATEMENTS OF OPERATIONS, STATEMENTS OF ASSETS AND LIABILITIES,
FINANCIAL HIGHLIGHTS AND CHANGES IN NET ASSETS AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH SEMI ANNUAL REPORT DATED APRIL 30, 1996.
</LEGEND>
<SERIES>
<NUMBER> 043
<NAME> AMERICAN AADVANTAGE LIMITED-TERM INCOME FUND-AMR CLASS
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> APR-30-1996
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 184,327
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 184,327
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,082
<TOTAL-LIABILITIES> 1,082
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 191,840
<SHARES-COMMON-STOCK> 6,866<F1>
<SHARES-COMMON-PRIOR> 6,581
<ACCUMULATED-NII-CURRENT> 53
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (5,088)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (3,560)
<NET-ASSETS> 183,245
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 6,444
<OTHER-INCOME> 1
<EXPENSES-NET> 464
<NET-INVESTMENT-INCOME> 5,981
<REALIZED-GAINS-CURRENT> (86)
<APPREC-INCREASE-CURRENT> (3,623)
<NET-CHANGE-FROM-OPS> 2,272
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 2,127
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 751
<NUMBER-OF-SHARES-REDEEMED> 682
<SHARES-REINVESTED> 216
<NET-CHANGE-IN-ASSETS> (20,801)
<ACCUMULATED-NII-PRIOR> 53
<ACCUMULATED-GAINS-PRIOR> (5,002)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 182,992
<PER-SHARE-NAV-BEGIN> 9.81
<PER-SHARE-NII> 0.33
<PER-SHARE-GAIN-APPREC> (0.19)
<PER-SHARE-DIVIDEND> 0.33
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.62
<EXPENSE-RATIO> 0.33
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>AMR CLASS. PER SHARE AMOUNTS ARE BY CLASS.
</FN>
<PAGE>
</TABLE>
