<PAGE> 1
THIS PROSPECTUS contains important PROSPECTUS
information about the 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
only to the five funds listed on this
cover page (individually referred to as
a "Fund" and, collectively, the
"Funds"). 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. 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 LOGO]
AMR Corporation and its affiliates. AMERICAN
Prospective investors in the AMR Class AAdvantage
should read this Prospectus carefully Funds
before making an investment decision --AMR Class--(SM)
and retain it for future reference.
IN ADDITION TO THIS PROSPECTUS, a
Statement of Additional Information
("SAI") dated January 1, 1997 has been BALANCED FUND
filed with the Securities and Exchange
Commission and is incorporated herein GROWTH AND INCOME FUND
by reference. The SAI contains more
detailed information about the Funds. INTERNATIONAL EQUITY FUND
For a free copy of the SAI, call
817-967-3509. For further information LIMITED-TERM INCOME FUND
about the AMR Class or for information
on the other classes of shares, please S&P 500 INDEX FUND
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.
<PAGE> 2
The AMERICAN AADVANTAGE BALANCED FUND (SM) ("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 (SM) ("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 (SM) ("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 (SM) ("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 FUND (1) ("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(R) (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
- ---------------
1 S&P is a trademark of The McGraw-Hill Companies, Inc. and has been licensed
for use. "Standard & Poor's(R)", "S&P(R)", "Standard & Poor's 500", "S&P
500(R)", 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.
PROSPECTUS
2
<PAGE> 3
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 investment policies and restrictions described
in this Prospectus and the SAI.
<TABLE>
<S> <C>
TABLE OF FEES AND EXPENSES... 4
FINANCIAL HIGHLIGHTS......... 5
INTRODUCTION................. 10
INVESTMENT OBJECTIVES,
POLICIES AND RISKS......... 11
INVESTMENT RESTRICTIONS...... 25
YIELDS AND TOTAL RETURNS..... 26
MANAGEMENT AND ADMINISTRATION
OF THE TRUSTS.............. 26
INVESTMENT ADVISERS.......... 30
PURCHASE, REDEMPTION AND
VALUATION OF SHARES........ 34
DIVIDENDS, OTHER
DISTRIBUTIONS AND TAX
MATTERS.................... 37
GENERAL INFORMATION.......... 39
SHAREHOLDER COMMUNICATIONS... 40
</TABLE>
PROSPECTUS
3
<PAGE> 4
TABLE OF FEES AND EXPENSES
Annual Operating Expenses (as a percentage of average net assets) of the
AMR Class:
<TABLE>
<CAPTION>
S&P 500
GROWTH AND INTERNATIONAL LIMITED-TERM INDEX
BALANCED FUND INCOME FUND EQUITY FUND INCOME FUND FUND(1)
<S> <C> <C> <C> <C> <C>
Management Fees (net of waiver) 0.28% 0.27% 0.40% 0.20% 0.08%(2)
12b-1 Fees 0.00% 0.00% 0.00% 0.03% 0.00%
Other Expenses (net of waiver) 0.09% 0.09% 0.17% 0.13% 0.12%(3)
------ ----- ------ ----- ----
Total Operating Expenses
(net of waiver) 0.37% 0.36% 0.57% 0.33% 0.20%(4)
====== ===== ====== ===== ====
</TABLE>
(1) Because the S&P 500 Index Fund's shares were not offered for sale prior to
January 1, 1997, its 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 each 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:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
Balanced Fund $ 4 $12 $ 21 $ 47
Growth and Income Fund 4 12 20 46
International Equity Fund 6 18 32 71
Limited-Term Income Fund 3 11 19 42
S&P 500 Index Fund 2 6 11 26
</TABLE>
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
PROSPECTUS
4
<PAGE> 5
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 had
not commenced operations.
PROSPECTUS
5
<PAGE> 6
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
BALANCED FUND
--------------------------------------------------------------------------------------------------------
AMR CLASS
--------------------------------------- INSTITUTIONAL CLASS
PERIOD ----------------------------------------------------------
ENDED APRIL YEAR ENDED PERIOD
30, OCTOBER ENDED YEAR ENDED OCTOBER 31,
1996(5)(6) 31, OCTOBER 31, ------------------------------------------------
(UNAUDITED) 1995(4)(5) 1994(1)(3) 1994(3) 1993 1992 1991 1990(2)
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning
of period $ 13.98 $ 12.36 $ 12.35 $ 13.23 $ 11.99 $ 11.60 $ 9.87 $ 11.05
----- ----- ------ ---- ---- ---- ---- ----
Income from
investment
>operations:
Net investment
income 0.30 0.58 0.14 0.57 0.49 0.55 0.58 0.57
Net gains (losses)
on securities
(both realized
and
unrealized) 1.03 1.71 (0.13) (0.54) 1.57 0.41 1.79 (1.18)
----- ----- ------ ---- ---- ---- ---- ----
Total from
investment
operations 1.33 2.29 0.01 0.03 2.06 0.96 2.37 (0.61)
----- ----- ------ ---- ---- ---- ---- ----
Less distributions:
Dividends from net
investment income (0.60) (0.53) -- (0.56) (0.52) (0.56) (0.64) (0.51)
Distributions from
net realized
gains on
securities (0.44) (0.14) -- (0.34) (0.30) (0.01) -- (0.06)
----- ----- ------ ---- ---- ---- ---- ----
Total distributions (1.04) (0.67) -- (0.90) (0.82) (0.57) (0.64) (0.57)
----- ----- ------ ---- ---- ---- ---- ----
Net asset value, end
of period $ 14.27 $ 13.98 $ 12.36 $ 12.36 $ 13.23 $ 11.99 $ 11.60 $ 9.87
----- ----- ------ ---- ---- ---- ---- ----
----- ----- ------ ---- ---- ---- ---- ----
Total return
(annualized)(7) 17.85% 19.77% (0.08)%(8) (0.08)% 19.19% 8.75% 25.35% (5.24)%
----- ----- ------ ---- ---- ---- ---- ----
----- ----- ------ ---- ---- ---- ---- ----
Ratios/supplemental
data:
Net assets, end of
period
(in thousands) $ 579,195 $ 542,619 $ 393,504 $222,873 $532,543 $370,087 $311,906 $233,702
Ratios to average
net
assets(9)(10)(11):
Expenses 0.36% 0.38% 0.36% 0.36% 0.34% 0.35% 0.37% 0.44%
Net investment
income 4.17% 4.54% 4.65% 4.77% 4.91% 5.31% 6.06% 6.50%
Portfolio turnover
rate 47% 73% 48% 48% 83% 80% 55% 62%
<CAPTION>
PERIOD
ENDED
OCTOBER 31,
1989 1988 1987(1)
<S> <C> <C> <C>
Net asset value,
beginning
of period $ 10.13 $ 9.08 $ 10.00
---- ----- ------
Income from
investment
>operations:
Net investment
income 0.53 0.56 0.16
Net gains (losses)
on securities
(both realized
and
unrealized) 0.90 0.73 (1.08)
---- ----- ------
Total from
investment
operations 1.43 1.29 (0.92)
---- ----- ------
Less distributions:
Dividends from net
investment income (0.51) (0.40) --
Distributions from
net realized
gains on
securities -- -- --
---- ----- ------
Total distributions (0.51) (0.24) --
---- ----- ------
Net asset value, end
of period $ 11.05 $ 10.13 $ 9.08
---- ----- ------
---- ----- ------
Total return
(annualized)(7) 15.49% 14.63% (31.84)%
---- ----- ------
---- ----- ------
Ratios/supplemental
data:
Net assets, end of
period
(in thousands) $210,119 $147,581 $ 118,986
Ratios to average
net
assets(9)(10)(11):
Expenses 0.47% 0.52% 0.45%
Net investment
income 6.32% 6.25% 5.59%
Portfolio turnover
rate 78% 77% 17%
</TABLE>
(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
6
<PAGE> 7
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
GROWTH AND INCOME FUND
-----------------------------------------------------------------------------------------------------
AMR CLASS INSTITUTIONAL CLASS
PERIOD ------------------ PERIOD -----------------------------------------------------
ENDED YEAR ENDED ENDED YEAR ENDED OCTOBER 31,
APRIL 30, OCTOBER 31, OCTOBER 31, ------------------------------------------------------
1996(5)(6) 1995(5) 1994(1)(4) 1994(4) 1993 1992(3) 1991 1990(2)
-----------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning
of period $ 15.95 $ 14.20 $ 13.99 $ 14.63 $ 12.70 $ 12.10 $ 9.47 $ 11.59
----- ------ ------ ---- ---- ---- ---- ----
Income from investment
operations:
Net investment income 0.23 0.44 0.11 0.43 0.36 0.39 0.42 0.42
Net gains (losses) on
securities (both
realized
and unrealized) 2.17 2.30 0.10 0.08 2.21 0.77 2.70 (1.94)
----- ------ ------ ---- ---- ---- ---- ----
Total from investment
operations 2.40 2.74 0.21 0.51 2.57 1.16 3.12 (1.52)
----- ------ ------ ---- ---- ---- ---- ----
Less distributions:
Dividends from net
investment income (0.44) 0.45 -- (0.41) (0.37) (0.39) (0.49) (0.43)
Distributions from net
realized gains on
securities (0.57) (0.54) -- (0.54) (0.36) (0.08) -- (0.17)
----- ------ ------ ---- ---- ---- ---- ----
Total distributions (1.01) (0.99) -- (0.95) (0.73) (0.47) (0.49) (0.60)
----- ------ ------ ---- ---- ---- ---- ----
Net asset value, end of
period $ 17.34 $ 15.95 $ 14.20 $ 14.19 $ 14.63 $ 12.79 $ 12.10 $ 9.47
---- ------ ------ ---- ---- ---- ---- ----
---- ------ ------ ---- ---- ---- ---- ----
Total return
(annualized)(7) 26.96% 21.03% 3.43%(8) 3.36% 21.49% 10.00% 33.83% (13.52)%
---- ------ ------ ---- ---- ---- ---- ----
---- ------ ------ ---- ---- ---- ---- ----
Ratios/supplemental
data:
Net assets, end of
period (in
thousands) $ 898,423 $ 706,884 $ 505,892 $22,737 $477,088 $339,739 $264,628 $182,430
Ratios to average net
assets(9)(10)(11):
Expenses 0.34% 0.38% 0.37% 0.33% 0.34% 0.36% 0.37% 0.45%
Net investment
income 2.82% 3.20% 3.18% 3.28% 3.12% 3.57% 4.19% 4.49%
Portfolio turnover
rate 33% 26% 23% 23% 30% 35% 52% 41%
<CAPTION>
ENDED
OCTOBER 31,
1989 1988 1987(1)
<S> <C> <C> <C>
Net asset value,
beginning
of period $ 9.96 $ 8.30 $ 10.00
---- ---- ------
Income from investment
operations:
Net investment income 0.42 0.42 0.10
Net gains (losses) on
securities (both
realized
and unrealized) 1.59 1.40 (1.80)
---- ---- ------
Total from investment
operations 2.01 1.82 (1.70)
---- ---- ------
Less distributions:
Dividends from net
investment income (0.38) (0.16) --
Distributions from net
realized gains on
securities -- -- --
---- ---- ------
Total distributions (0.38) (0.16) --
---- ---- ------
Net asset value, end of
period $ 11.59 $ 9.96 $ 8.30
---- ---- ------
---- ---- ------
Total return
(annualized)(7) 20.94% 22.20% (58.51)%
---- ---- ------
---- ---- ------
Ratios/supplemental
data:
Net assets, end of
period (in
thousands) $187,869 $140,073 $ 134,796
Ratios to average net
assets(9)(10)(11):
Expenses 0.45% 0.53% 0.43%
Net investment
income 4.40% 4.20% 3.68%
Portfolio turnover
rate 50% 56% 22%
</TABLE>
(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.
PROSPECTUS
7
<PAGE> 8
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY FUND
----------------------------------------------------------------------------------------------------------------
AMR CLASS
------------------------------------------------ INSTITUTIONAL CLASS
PERIOD ENDED ------------------------------------------------
APRIL 30, YEAR ENDED PERIOD ENDED YEAR ENDED OCTOBER 31, PERIOD ENDED
1996(5) OCTOBER 31, OCTOBER 31, ---------------------------- OCTOBER 31,
(UNAUDITED) 1995(5) 1991(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 (0.03) (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>
(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.
PROSPECTUS
8
<PAGE> 9
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
LIMITED-TERM INCOME FUND
-----------------------------------------------------------------------------------------------------
AMR CLASS
-------------------------------------------- INSTITUTIONAL CLASS
PERIOD ENDED -------------------------------------------------
APRIL 30, YEAR ENDED PERIOD ENDED YEAR ENDED OCTOBER 31,
1996 OCTOBER 31, OCTOBER 31, -------------------------------------------------
(UNAUDITED) 1995 1994(1)(3) 1994(3) 1993 1992 1991(2) 1990
-----------------------------------------------------------------------------------------------------
<S> <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
Income from investment
operations:
Net investment income 0.33 0.64 0.14 0.52 0.58 0.75 0.83 0.92
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)
------ ------ ------ ---- ---- ---- ---- ----
Total from investment
operations 0.14 0.77 0.04 0.06 0.73 0.81 1.14 0.74
------ ------ ------ ---- ---- ---- ---- ----
Less distributions:
Dividends from net
investment income (0.33) (0.64) (0.14) (0.52) (0.58) (0.75) (0.83) (0.92)
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)
------ ------ ------ ---- ---- ---- ---- ----
Net asset value, end of
period $ 9.62 $ 9.81 $ 9.68 $ 9.67 $ 10.23 $ 10.13 $ 10.07 $ 9.76
------ ------ ------ ---- ---- ---- ---- ----
------ ------ ------ ---- ---- ---- ---- ----
Total return
(annualized)(4) 2.77% 8.22% 0.59%(5) 0.42% 7.20% 7.94% 11.87% 7.51%
------ ------ ------ ---- ---- ---- ---- ----
------ ------ ------ ---- ---- ---- ---- ----
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
Ratios to average net
assets(6)(7)(8): 6.74% 6.60% 5.77% 5.26% 5.76% 7.40% 8.42% 9.44%
Net investment income
Expenses 0.33% 0.36% 0.33% 0.31% 0.26% 0.27% 0.35% 0.48%
Portfolio turnover rate 121% 183% 94% 94% 176% 133% 165% 156%
<CAPTION>
PERIOD ENDED
OCTOBER 31,
1989 1988(1)
<S> <C> <C>
Net asset value, beginning
of period $ 10.12 $ 10.00
Income from investment
operations:
Net investment income 0.96 0.64
Net gains (losses) on
securities (both
realized and unrealized) (0.12) 0.05
---- ------
Total from investment
operations 0.84 0.69
---- ------
Less distributions:
Dividends from net
investment income (1.02) (0.57)
Distributions from net
realized gains on
securities -- --
---- ------
Total distributions (1.02) (0.57)
---- ------
Net asset value, end of
period $ 9.94 $ 10.12
---- ------
---- ------
Total return
(annualized)(4) 7.62% 7.41%
---- ------
---- ------
Ratios/supplemental data:
Net assets, end of period
(in thousands) $60,507 $ 40,855
Ratios to average net
assets(6)(7)(8): 9.77% 8.01%
Net investment income
Expenses 0.59% 0.50%
Portfolio turnover rate 158% 127%
</TABLE>
(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.
PROSPECTUS
9
<PAGE> 10
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 restrictions described in this
PROSPECTUS
10
<PAGE> 11
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
PROSPECTUS
11
<PAGE> 12
organizations ("Rating Organizations") rating that security such as Standard &
Poor's ("S&P Rating") or Moody's Investor 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
PROSPECTUS
12
<PAGE> 13
one to two months after the date of the transaction. As with when-issued
securities, these transactions involve certain risks, but they also enable 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, none of the Portfolio's assets have been
allocated 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
PROSPECTUS
13
<PAGE> 14
AAdvantage Balanced Fund" for a description of the risks involved with these
obligations. See the SAI for definitions of the foregoing securities and for a
description of debt ratings. The Portfolio may also invest in other investment
companies or in cash and cash equivalents, including investment grade short-term
obligations, in order to maintain liquidity. 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 Trust Company also is an investment adviser to the Growth
and Income Portfolio; however, none of the Portfolio's assets have been
allocated 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
PROSPECTUS
14
<PAGE> 15
regarding foreign companies; (4) less government regulation and supervision of
foreign stock exchanges, brokers and listed companies; (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 ("CFTC"). 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;
PROSPECTUS
15
<PAGE> 16
(4) possible reduction in value for both the contracts and the securities being
hedged; and (5) potential losses in 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, none of the Portfolio's assets have been allocated 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; nonconvertible 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
affect adversely the payment of principal and interest on foreign
PROSPECTUS
16
<PAGE> 17
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 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.
PROSPECTUS
17
<PAGE> 18
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. 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 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
(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
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a convenient means of diversifying their holdings of common stocks while
relieving those investors of the administrative 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.
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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
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commercial paper or bank obligations rated Prime-1 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 (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.
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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.
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 3/8% 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
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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 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 Portfolio for the fiscal year ended October 31, 1996
was 304%. A Portfolio's turnover rate, or the frequency of portfolio
transactions, will vary from year
PROSPECTUS
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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 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.
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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 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. Further, wholly
owned subsidiaries of finance companies will be considered to be in the
industries of their parent
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companies if their activities are primarily related to financing the
activities of their parent companies.
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:
o 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.
o 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
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management services for the Trust pursuant to a Management Agreement dated April
3, 1987, as amended December 17, 1996, 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 provide business management, advisory, administrative and
asset management consulting services. The assets of the Balanced Portfolio, the
Growth and Income Portfolio and the International Equity Portfolio are allocated
by the Manager among one or more investment advisers designated for that
Portfolio. 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 Limited-Term Income Portfolio. In addition, with the exception of
the International Equity Portfolio and the Equity 500 Index Portfolio, 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 $16.8 billion, including approximately $7.0
billion under active management and $9.8 billion as named fiduciary or fiduciary
adviser. Of the total, approximately $12.4 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
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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 Trustees of
each Board who are not parties to the Management Agreement or "interested
persons" as defined in the 1940 Act of 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
is permitted to 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
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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 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.
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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, except
for the International Equity Portfolio, and as transfer agent for the AMR Class.
THE BANK OF NEW YORK, New York, New York serves as custodian for the
International Equity Portfolio. BANKERS TRUST COMPANY, New York, New York,
serves as custodian and transfer agent for the assets of the Equity 500 Index
Portfolio.
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., New York, New York.
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.
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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.
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
0.08% 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 $19.5 billion of assets, including approximately
$1.5 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.
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BOATMEN'S TRUST COMPANY, 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 $43 billion, including
approximately $123 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. 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 $5.7 billion, including approximately
$542.6 million of assets of AMR and its 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 which owns
forty-six investment management companies, including GSB. As of October 31,
1996, GSB managed approximately $3.1 billion of assets, including approximately
$749 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% of 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 became a
division of Merrill Lynch Capital Management Group, a wholly owned subsidiary of
Merrill Lynch & Co., Inc., on November 12, 1996. Assets under management as of
October 31, 1996 were approximately $10.1 billion, which included approximately
$1.2 billion 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
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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, .20% on the next $800 million of
assets and .15% of all excess assets.
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 $24.1
billion, which included approximately $1.0 billion 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 services to taxable
and nontaxable institutions, international organizations and individuals
investing in United States and international equity and debt securities. As of
September 30, 1996, MSAM had assets under management totaling approximately
$67.1 billion, including approximately $50.2 billion under active management and
$16.9 billion as named fiduciary or fiduciary adviser. As of September 30, 1996,
MSAM had investment authority over approximately $313.8 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% of 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 $26 billion,
including approximately $225 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
PROSPECTUS
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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 credit the Manager with an adjustment 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 $17.2 billion of assets, including approximately $376.2 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, .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, which excludes the following business holidays: New Year's Day,
President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day ("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.
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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 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.
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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 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
PROSPECTUS
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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 AMR Trust Board for the AMR Trust
Portfolios. 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 close 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
PROSPECTUS
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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
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.
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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, 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
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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:
<TABLE>
<S> <C>
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 90%
AMERICAN AADVANTAGE INTERNATIONAL EQUITY FUND
AMR Corporation and subsidiary companies and Employee Benefit
Trusts thereof 82%
AMERICAN AADVANTAGE LIMITED-TERM INCOME FUND
Retirement Advisors of America, Inc. 50%
AMR Corporation and subsidiary companies and Employee Benefit
Trusts thereof 34%
</TABLE>
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
40
<PAGE> 41
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 and American
AAdvantage Limited-Term Income Fund are service marks and PlanAhead Class is a
registered service mark of AMR Investment Services, Inc.
PROSPECTUS
41
<PAGE> 42
-- NOTES --
<PAGE> 43
-- NOTES --
<PAGE> 44
AMERICAN
AADVANTAGE FUNDS (R)
-AMR CLASS-(SM)
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-(R)
P.O. Box 4580
Chicago, Illinois 60680-4580
(800) 388-3344
<PAGE> 45
STATEMENT OF ADDITIONAL INFORMATION
AMERICAN AADVANTAGE FUNDS(R)
AMR CLASS (SM)
DATED JANUARY 1, 1997
INSTITUTIONAL CLASS
PLANAHEAD CLASS(R)
DATED MARCH 1, 1996,
SUPPLEMENTED AS OF JANUARY 1, 1997
The American AAdvantage Balanced Fund (SM) (the "Balanced Fund"),
American AAdvantage Growth and Income Fund (SM), formerly the American
AAdvantage Equity Fund (the "Growth and Income Fund"), American AAdvantage
International Equity Fund (SM) (the "International Equity Fund"), American
AAdvantage Limited-Term Income Fund (SM), formerly the American AAdvantage
Fixed Income Fund (the "Limited-Term Income Fund"), American AAdvantage Money
Market Fund (SM) (the "Money Market Fund"), American AAdvantage Municipal Money
Market Fund (SM) (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 (SM) (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.
The S&P 500 Index Fund currently offers only the AMR Class of shares. This
Statement of Additional Information relates to the AMR, Institutional and
PlanAhead Classes of the Trust.
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)
388-3344 for a PlanAhead Class Prospectus or (817) 967-3509 for an
Institutional or AMR Class Prospectus.
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.
1
<PAGE> 46
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 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 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:
2
<PAGE> 47
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, 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 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).
3
<PAGE> 48
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.
In order to comply with certain 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
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.
4
<PAGE> 49
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 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 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.
5
<PAGE> 50
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 (59) Trustee Partner, Akin, Gump, Strauss, Hauer & Feld, LLP
1700 Pacific Avenue (1960-Present)#; Director, Clear Channel Communications
Suite 4100 (1984-Present); Director, CenterPoint Properties, Inc.
Dallas, Texas 75201 (1994-Present); Trustee, American AAdvantage Mileage Funds
(1996-Present).
Ben J. Fortson (64) Trustee President and CEO, Fortson Oil Company (1958-Present);
301 Commerce Street Director, Kimbell Art Foundation (1964-Present); Director,
Suite 3301 Burnett Foundation (1987-Present); Honorary Trustee, Texas
Fort Worth, Texas 76102 Christian University (1986-Present); Trustee American
AAdvantage Mileage Funds (1996-Present).
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).
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).
</TABLE>
6
<PAGE> 51
<TABLE>
<CAPTION>
POSITION WITH
NAME, AGE AND ADDRESS EACH TRUST PRINCIPAL OCCUPATION DURING PAST 5 YEARS
--------------------- -------------- ----------------------------------------
<S> <C> <C>
Roger T. Staubach (55) Trustee Chairman of the Board and Chief Executive Officer
6750 LBJ Freeway (1982-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).
Kneeland Youngblood, M.D.(40) Trustee Physician (1982-Present); President (1983-Present),
2305 Cedar Springs Road Youngblood Enterprises, Inc. (a health care investment and
Suite 401 management firm); Trustee, Teachers Retirement System of
Dallas, TX 75201 Texas (1993-Present); Director, United States Enrichment
Corporation (1993-Present), Director, Just For the Kids
(19995-Present); Member, Council on Foreign Relations
(1995-Present); Trustee, American AAdvantage Mileage Funds
(1996-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 (30) Treasurer Director of Finance (May 1995-Present), Controller
(November 1991-April 1995), AMR Investment Services, Inc.
John B. Roberson (38) Vice President Vice President, AMR Investment Services, Inc. (June
1991-Present).
Janice B. Schwarz (37) Assistant Secretary Senior Business Systems Coordinator, (September 1996-Present),
Senior Compliance Analyst (December 1990-August 1996), AMR
Investment Services, 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>
7
<PAGE> 52
# The law firm of Akin, Gump, Strauss, Hauer & Feld LLP ("Akin, Gump")
provides legal services to American Airlines, Inc., an affiliate of the
Manager. Mr. Feld has advised the Trusts that he has had no material
involvement in the services provided by Akin, Gump to American Airlines,
Inc. and that he has received no material benefit in connection with
these services. Akin, Gump does not provide legal services to the
Manager or AMR Corporation.
* Messrs. Quinn and O'Sullivan, by virtue of their current or former
positions, are deemed to be "interested persons" of the Trust and AMR
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. Mr. O'Sullivan, who as a retiree of American
airlines, Inc. already receives free airline travel, receives compensation
annually of up to three round trip airline tickets for each of his three adult
children. Trustees are also reimbursed for any expenses incurred in attending
Board meetings. These amounts are reflected in the following table for the
fiscal year ended October 31, 1996.(1)
<TABLE>
<CAPTION>
Aggregate Pension or Retirement Total Compensation
Compensation Benefits Accrued as Part Estimated Annual From American
From the of the AAdvantage Benefits Upon AAdvantage Funds
Name of Trustee Trust Trust's Expenses Retirement Complex
- --------------- ----- --------------- ---------- -------
<S> <C> <C> <C> <C>
John S. Justin $373 $0 $0 $1,492
William F. Quinn $0 $0 $0 $0
Stephen D. O'Sullivan $458 $0 $0 $1,832
Roger T. Staubach $2,832 $0 $0 $11,330
</TABLE>
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 & Co.
</TABLE>
- --------------------
(1) Messrs. Feld and Fortson and Dr. Youngblood did not serve as trustees during
this period.
8
<PAGE> 53
<TABLE>
<CAPTION>
POSITION WITH
EQUITY 500 INDEX
NAME, AGE AND ADDRESS PORTFOLIO PRINCIPAL OCCUPATION DURING PAST 5 YEARS
- --------------------- ---------------- ----------------------------------------
<S> <C> <C>
5070 North Ocean Drive (U.S.A.) International; Director, Zweig Series Trust;
Singer Island, FL 33404 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); former
445 Glen Road Director of Financial Industry Consulting, Wolf & Company;
Weston, MA 02193 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 Treasurer Senior Vice President, Federated Services Company ("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
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.
9
<PAGE> 54
<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.
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, $10,403,000 of which approximately $5,161,000 was paid by
the Manager to the other investment advisers. Management fees in the amount of
approximately $214,000, $29,000 and $44,000 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). 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, $2,893,400. Administrative service fees
in the amount of approximately $14,000, and $9,000 were waived by the Manager
during the fiscal years ended October 31, 1994, and 1995 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 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
10
<PAGE> 55
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.
11
<PAGE> 56
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.
INVESTMENT ADVISORY AGREEMENTS
With the exeption of Investment Advisory Agreements ("Advisory
Agreements") with Boatmen's Trust Company ("Boatmen's), Brandywine Asset
Management, Inc. ("Brandywine") and Rowe Price-Fleming International, Inc.
("Fleming"), separate 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 Advisory Agreements with the same
investment advisers. On October 1, 1995, each Fund 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 Advisory Agreement. Boatmen's and Brandywine were approved as
investment advisers of the corresponding Portfolios of the Balanced and Growth
and Income Funds and the AMR Trust, effective as of April 1, 1996. Fleming was
approved as an investment adviser to the corresponding Portfolio of the
International Equity Fund and the AMR Trust, effective as of April 1, 1996.
Following the acquisition of Hotchkis and Wiley ("Hotchkis") by Merrill Lynch,
a new Advisory Agreement with Hotchkis was approved, effective as of November
12, 1996.
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 Equity 500 Index Portfolio Board. 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 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 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
12
<PAGE> 57
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 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 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 and 1995 the following brokerage
commissions were paid by the Funds and for 1996 by their corresponding
Portfolios. The S&P 500 Index Fund was not operational during these periods.
<TABLE>
<CAPTION>
Fund/Portfolio 1994 1995 1996
- -------------- ---- ---- ----
<S> <C> <C> <C>
Balanced $228,250 $388,253 $503,947
Growth and Income $300,096 $590,364 $956,767
International Equity $391,301 $422,670 $544,844
Limited-Term Income $0 $0 $0
Money Market Funds $0 $0 $0
</TABLE>
13
<PAGE> 58
The commissions listed above were paid directly by the Funds for the fiscal
years ended October 31, 1994 and 1995. For the fiscal year ended October 31,
1996 the commissions were paid by the corresponding Portfolios of the AMR
Trust, and shareholders of the Funds bear only the pro-rata portion of the
brokerage commissions.
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.
Following is the portfolio turnover rate for the Funds for the fiscal years
ended October 31, 1994 and 1995 and portfolio turnover rate for the
corresponding Portfolios of the Funds for the fiscal year ended October 31,
1996.
<TABLE>
<CAPTION>
Fund/Portfolio 1994 1995 1996
- -------------- ---- ---- ----
<S> <C> <C> <C>
Balanced 48% 73% 76%
Growth and Income 23% 26% 40%
International Equity 37% 21% 19%
Limited-Term Income 94% 183% 304%
</TABLE>
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, an affiliate of Independence
Investment Associates, an investment adviser to the Balanced and Growth and
Income Funds. 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 October 31, 1996, the Balanced Portfolio and the
Growth and Income Portfolio paid $125 and $2,750, respectively, in brokerage
commissions to Sutro & Company. The percentages of total commissions of the
Balanced Portfolio and the Growth and Income Portfolio paid to Sutro & Company
in 1996 were 0.02% and 0.29%, respectively. The transactions represented 0.03%
of the Balanced Portfolio and 0.25% of the Growth and Income Portfolio's total
dollar value of portfolio transactions for the fiscal year ended October 31,
1996. During the fiscal year ended October 31, 1996, the International Equity
Portfolio paid $2,142, $1,002, $2,051 and $20,129, to Fleming Martin, Jardine
Fleming, Ord Minnett and Robert Fleming & Co., respectively, affiliates of Rowe
Price-Fleming International, Inc., an adviser to the International Equity
Portfolio, and $3,892 to Morgan Stanley International, an affiliate of Morgan
Stanley Asset Management also an investment adviser to the International Equity
Portfolio. The percentage of total commissions paid to affiliated brokers of
the International Equity Portfolio in 1996 was 2.68%. The transactions
represented 2.2% of the International Equity Portfolio's total dollar value of
portfolio transactions for the fiscal year ending 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.
14
<PAGE> 59
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.
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:
o 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");
o 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");
o Diversify its investments in securities within certain statutory
limits; and
o 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.
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
15
<PAGE> 60
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
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, the Growth and Income or the 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
16
<PAGE> 61
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 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" 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
17
<PAGE> 62
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 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 DIVIDED BY 7] - 1
Based on these formulas, the current and effective yields were as follows
for the periods and Funds indicated:
<TABLE>
<CAPTION>
Current yield for the Effective yield for the
Current daily yield as 7 day period ended 7 day period ended
of October 31, 1996 October 31, 1996 October 31, 1996
------------------- ---------------- ----------------
<S> <C> <C> <C>
Institutional Class
Money Market Fund 5.43% 5.42% 5.57%
Municipal Money Market Fund 3.45% 3.45% 3.51%
U.S. Treasury Money Market Fund 5.32% 5.02% 5.15%
PlanAhead Class
Money Market Fund 5.10% 5.09% 5.22%
Municipal Money Market Fund 3.14% 3.14% 3.19%
U.S. Treasury Money Market Fund 4.96% 4.66% 4.77%
</TABLE>
18
<PAGE> 63
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 DIVIDED BY (1-APPLICABLE TAX RATE) = CURRENT TAX EQUIVALENT YIELD
EFFECTIVE YIELD DIVIDED BY (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) 5.31% 5.40%
PlanAhead (based on a 39.6% personal tax rate) 5.20% 5.28%
</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:
(6)
{( (A-B) ) }
YIELD = 2 {(----- + 1) - 1}
{( CD ) }
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 7.40%, 6.82% and 6.26%, 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 DIVIDED BY 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 7.13%, 6.79% and
6.61%, 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:
(N)
P(1 + T) = ERV
19
<PAGE> 64
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:
<TABLE>
<CAPTION>
For the period from
For the one-year For the five-year period commencement of active
period ended 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 16.77% 12.62% 10.76%
Growth and Income Fund 23.66% 15.65% 12.30%
International Equity Fund 17.72% 11.32% 11.06%
Limited-Term Income Fund 5.38% 5.83% 7.04%
S&P 500 Fund(4) N/A N/A N/A
Institutional Class
Balanced Fund 16.46% 12.49% 10.69%
Growth and Income Fund 23.37% 15.51% 12.23%
International Equity Fund 17.27% 11.17% 10.93%
Limited-Term Income Fund 5.10% 5.73% 6.98%
Money Market Fund 5.57% 4.61% 6.19%
Municipal Money Market Fund (5) 3.59% N/A 3.26%
U.S. Treasury Money Market Fund 5.29% N/A 4.31%
PlanAhead Class
Balanced Fund (6) 16.01% 12.32% 10.61%
Growth and Income Fund 22.98% 15.30% 12.12%
International Equity Fund 16.95% 10.97% 10.73%
Limited-Term Income Fund (6) 4.83% 5.61% 6.91%
Money Market Fund 5.21% 4.45% 6.10%
Municipal Money Market Fund (5) 3.27% N/A 3.01%
U.S. Treasury Money Market Fund 4.94% N/A 4.11%
</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, 1996.
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 Municipal Money Market Fund and U.S. Treasury Money Market Fund
had not commenced active operations as of November 1, 1991.
(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) The S&P 500 Fund had not commenced active operations as of 10/31/96.
See Appendix A for historical performance of the S&P 500 Composite Stock
Price Index.
(5) A portion of the Management and Administrative Services fees have
been waived for the Municipal Money Market Fund since its inception.
(6) A portion of the Service Plan Fees of the PlanAhead Class have been
waived for the Balanced, Growth and Income 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.
20
<PAGE> 65
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 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, the Growth and Income and
the 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:
<TABLE>
<S> <C>
American AAdvantage Balanced Fund
AMR Corporation and subsidiary companies and Employee Benefit Trusts thereof...........................................64%
4333 Amon Carter Boulevard
Fort Worth, Texas 76155
</TABLE>
21
<PAGE> 66
<TABLE>
<S> <C>
American AAdvantage Growth and Income Fund
AMR Corporation and subsidiary companies and Employee Benefit Trusts thereof...........................................90%
4333 Amon Carter Boulevard
Fort Worth, Texas 76155
American AAdvantage International Equity Fund
AMR Corporation and subsidiary companies and Employee Benefit Trusts thereof...........................................82%
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
AMR Corporation and subsidiary companies and Employee Benefit Trusts thereof...........................................34%
4333 Amon Carter Boulevard
Fort Worth, Texas 76155
</TABLE>
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
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
<CAPTION>
Total Institutional PlanAhead
American AAdvantage Growth and Income Fund Fund Class Class
- ------------------------------------------ ---- ----- -----
<S> <C> <C> <C>
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%
</TABLE>
22
<PAGE> 67
<TABLE>
<CAPTION>
Total Institutional PlanAhead
American AAdvantage Growth and Income Fund Fund Class Class
- ------------------------------------------ ---- ----- -----
<S> <C> <C> <C>
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
<CAPTION>
Total Institutional PlanAhead
American AAdvantage International Equity Fund Fund Class Class
- --------------------------------------------- ---- ----- -----
<S> <C> <C> <C>
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%
</TABLE>
23
<PAGE> 68
<TABLE>
<CAPTION>
Total Institutional PlanAhead
American AAdvantage International Equity Fund Fund Class Class
- --------------------------------------------- ---- ----- -----
<S> <C> <C> <C>
650 Smithfield St., Suite 250
Pittsburgh, PA 15222-3907
<CAPTION>
Total Institutional PlanAhead
American AAdvantage Limited-Term Income Fund Fund Class Class
- -------------------------------------------- ---- ----- -----
<S> <C> <C> <C>
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
<CAPTION>
Total Institutional PlanAhead
American AAdvantage Money Market Fund Fund Class Class
- ------------------------------------- ---- ----- -----
<S> <C> <C> <C>
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
</TABLE>
24
<PAGE> 69
<TABLE>
<CAPTION>
Total Institutional PlanAhead
American AAdvantage Money Market Fund Fund Class Class
- ------------------------------------- ---- ----- -----
<S> <C> <C> <C>
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
<CAPTION>
Total Institutional PlanAhead
American AAdvantage Municipal Money Market Fund Fund Class Class
- ----------------------------------------------- ---- ----- -----
<S> <C> <C> <C>
Martine Hammond-Paluda Trust 0% 15%
4612 Summerhill Road
Texarkana, Texas 75503-2742
Jerome Reed Schusterman Irrevocable Trust 0% 12%
P.O. Box 699
Tulsa, Oklahoma 74101-0699
Dana White Shea Non-Exempt Trust 0% 15%
876 Mellow Lane
Simi Valley, California 93065-5412
Robert C. Fraser 0% 15%
1221 Oak Grove Ave. #202
Burlingame, California 94010-3783
Emanuel H. Rosen, M.D. 0% 12%
7405 Charmant Drive, Apt. 2230
San Diego, California 92122-5012
Combs Family Limited Partnership 0% 7%
10405 Lacosta Drive
Austin, Texas 78747-1214
Onex Food Services 0% 94%
601 Ryan Plaza Drive
Arlington, Texas 76011
<CAPTION>
Total Institutional PlanAhead
American AAdvantage U.S. Treasury Money Market Fund Fund Class Class
- --------------------------------------------------- ---- ----- -----
<S> <C> <C> <C>
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
</TABLE>
25
<PAGE> 70
<TABLE>
<CAPTION>
Total Institutional PlanAhead
American AAdvantage U.S. Treasury Money Market Fund Fund Class Class
- --------------------------------------------------- ---- ----- -----
<S> <C> <C> <C>
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 Depositary Receipts (ADRs), European Depositary Receipts
(EDRs)-ADRs are depositary 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 immediately into U.S.
currency proceeds realized upon the sale of portfolio securities of the
affected foreign companies.
Bank Deposit Notes-Bank deposit notes are obligations of a bank, rather
than bank holding company corporate debt. The only structural 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.
Cover-Transactions using forward contracts, future contracts, options on
futures contracts and options on indices ("Financial Instruments"), other than
purchased options, expose a Portfolio to an obligation to another party. A
Portfolio will not enter into any such transactions unless it owns either (1)
an offsetting ("covered") position in securities, currencies, or other forward
contracts, options or futures contracts, or (2) cash, receivables and liquid
assets, with a value, marked-to-market daily, sufficient to cover its potential
obligations to the extent not covered as provided in (1) above. Each Portfolio
will comply with SEC guidelines regarding cover these instruments and will, if
the guidelines so require, set aside cash, receivables, or liquid assets in a
segregated account with its custodian in prescribed amount.
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Assets used as cover or held in a segregated account cannot be sold
while the position in the corresponding Financial Instrument is open, unless
they are replaced with other appropriate assets. As a result, the commitment of
a large portion of a Portfolio's assets to cover or to segregated accounts
could impede portfolio management of the Portfolio's ability to meet redemption
requests or other current obligations.
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.
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 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
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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.
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 against receipt of the specified price. 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 use of futures contracts by the Equity 500 Index Portfolio is
explained further under "Index Futures Contracts and Options on Index Futures
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, a Portfolio may be required
by a futures exchange to increase the level of its initial margin payment, and
initial margin requirements might be increased generally in the future by
regulatory action.
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 a 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 that could be substantial in the event of
adverse price movements. If a 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 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 Portfolios intend 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 or currency, in most cases the contractual
obligation is fulfilled before the date of the contract without having to make
or take delivery of the securities or currency. 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 or
currency. 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, a 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.
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If a 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 a Portfolio enters into futures contracts, in each
case other than for bona fide hedging purposes (as defined by the Commodities
Futures Trading Commission ("CFTC"), the aggregate initial margin will not
exceed 5% of the liquidation value of a 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.
Futures contracts require the deposit 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 deposit 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 or currency exchange rate
trends by the investment adviser may still not result in a successful
transaction.
In addition, futures contracts entail risks. Although an investment
adviser believes that use of such contracts will benefit a particular
Portfolio, if that investment adviser's investment judgment about the general
direction of, for example, an index is incorrect, a Portfolio's overall
performance would be poorer than if it had not entered into any such contract.
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.
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 of 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.
However, 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.
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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.
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.
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.
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 Portfolio would exceed 5% of the market value of the
total assets of the Portfolio.
Futures Contracts on Stock Indices-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.
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
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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 worse 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.
Options on Securities Indices-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 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.
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
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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." 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 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 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.
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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 backed 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 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
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<PAGE> 78
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.
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 Portfolio 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, 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 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.
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<PAGE> 79
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 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, such as
"+","-," or 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 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.
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<PAGE> 80
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 A-1 indicates obligations supported by the
highest capacity for timely repayment. Where issues possess particularly strong
credit features, a rating of A-1+ is assigned. Obligations rated A-2 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.
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
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<PAGE> 81
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 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 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.
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<PAGE> 82
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 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
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<PAGE> 83
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 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
period ended October 31, 1995 and Semi-Annual Report to Shareholders for the
period ended April 30, 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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<PAGE> 84
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 or should this be
considered 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%
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-1
<PAGE> 85
TABLE OF CONTENTS
<TABLE>
<S> <C>
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.....................................................................................................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................................................................................................22
Control Persons and 5% Shareholders.....................................................................................22
Other Information.......................................................................................................26
Financial Statements....................................................................................................40
Appendix A.............................................................................................................A-1
</TABLE>
