<PAGE> 1
As filed with the Securities and Exchange Commission on December 18, 1997
1933 Act File No. 33-11387
1940 Act File No. 811-4984
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ X ]
Pre-Effective Amendment No. [ ]
------
Post-Effective Amendment No. 23 [ X ]
------
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ X ]
Amendment No. 24
------
(Check appropriate box or boxes.)
AMERICAN AADVANTAGE FUNDS
(Exact name of Registrant as Specified in Charter)
4333 Amon Carter Boulevard
Fort Worth, Texas 76155
(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, including Area Code: (817) 967-3509
WILLIAM F. QUINN, PRESIDENT
4333 Amon Carter Boulevard
Fort Worth, Texas 76155
(Name and Address of Agent for Service)
Copy to:
CLIFFORD J. ALEXANDER, ESQ.
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, NW
Washington, DC 20036
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ X ] on March 2, 1998 pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485.
Title of Securities Being Registered ...........Shares of
Beneficial Interest
Registrant has adopted a master-feeder operating structure for each of its
series except the American AAdvantage Short- Term Income Fund. This
Post-Effective Amendment includes signature pages for the AMR Investment
Services Trust and the Equity 500 Index Portfolios, the master trusts.
<PAGE> 2
AMERICAN AADVANTAGE FUNDS
CONTENTS OF REGISTRATION STATEMENT
This registration statement is comprised of the following:
Cover Sheet
Contents of Registration Statement
Cross Reference Sheets
Prospectus for the Institutional Class consisting of the
following American AAdvantage Funds: Balanced Fund, Growth
and Income Fund, International Equity Fund, S&P 500 Index
Fund, Intermediate Bond Fund, Short-Term Bond Fund, Money
Market Fund, Municipal Money Market Fund and U.S. Government
Money Market Fund.
Prospectus for the PlanAhead Class consisting of the following
American AAdvantage Funds: Balanced Fund, Growth and Income
Fund, International Equity Fund, S&P 500 Index Fund,
Intermediate Bond Fund, Short-Term Bond Fund, Money Market
Fund, Municipal Money Market Fund and U.S. Government Money
Market Fund.
Prospectus for the AMR Class consisting of the following
American AAdvantage Funds: Balanced Fund, Growth and Income
Fund, International Equity Fund, Intermediate Bond Fund,
Short-Term Bond Fund and S&P 500 Index Fund.
Prospectus for the Platinum Class of the American AAdvantage
Money Market Fund, American AAdvantage Municipal Money Market
Fund, American AAdvantage U.S. Government Money Market Fund
and American AAdvantage Money Market Mileage Fund.
Prospectus of the American AAdvantage Short-Term Income Fund
Statement of Additional Information for the AMR Class,
Institutional Class and PlanAhead Class of the following
American AAdvantage Funds: Balanced Fund, Growth and Income
International Equity Fund, S&P 500 Index Fund, Intermediate
Bond Fund, Short-Term Bond Fund, Money Market Fund, Municipal
Money Market Fund, and U.S. Government Money Market Fund.
Statement of Additional Information for the Platinum Class of
the American AAdvantage Money Market Fund, American
AAdvantage Municipal Money Market Fund, American AAdvantage
U.S. Government Money Marke Fund and American AAdvantage
Money Market Mileage Fund.
Statement of Additional Information for the American
AAdvantage Short-Term Income Fund
Part C
Signature Pages
Exhibits
<PAGE> 3
AMERICAN AADVANTAGE FUNDS
INSTITUTIONAL CLASS
FORM N-1A CROSS-REFERENCE SHEET
Part A
<TABLE>
<CAPTION>
FORM N-1A
- - ---------
ITEM NO. PROSPECTUS CAPTION
- - -------- ------------------
<S> <C>
1 Cover Page
2 Table of Fees and Expenses
3 Financial Highlights; Yields and Total Returns
4 Cover Page; Introduction; Investment Objectives, Policies and Risks; Investment Restrictions
5 Management and Administration of the Trusts; Investment Advisers
5A Not Applicable
6 Dividends, Other Distributions and Tax Matters; General Information; Shareholder Communications
7 Management and Administration of the Trusts; Purchase, Redemption and Valuation of Shares
8 Purchase, Redemption and Valuation of Shares
9 Inapplicable
Part B
<CAPTION>
FORM N-1A STATEMENT OF ADDITIONAL
ITEM NO. INFORMATION CAPTION
- - -------- -------------------
<S> <C>
10 Cover Page
11 Table of Contents
12 Cover Page
13 Investment Restrictions; Approach to Stock Selection; Other Information
14 Trustees and Officers of the Trust and the AMR Trust; Trustees and Officers of the Equity 500
Index Portfolio
15 Control Persons and 5% Shareholders
</TABLE>
<PAGE> 4
<TABLE>
<S> <C>
16 Management, Administrative Services and Distribution Fees; Investment Advisory Agreements
17 Portfolio Securities Transactions
18 Description of the Trust; Other Information
19 Net Asset Value; Redemptions in Kind
20 Tax Information
21 Inapplicable
22 Yield and Total Return Quotations
23 Financial Statements
</TABLE>
<PAGE> 5
AMERICAN AADVANTAGE FUNDS
PLANAHEAD CLASS
FORM N-1A CROSS-REFERENCE SHEET
Part A
<TABLE>
<CAPTION>
FORM N-1A
- - ---------
ITEM NO. PROSPECTUS CAPTION
- - -------- ------------------
<S> <C>
1 Cover Page
2 Table of Fees and Expenses
3 Financial Highlights; Yields and Total Returns
4 Cover Page; Introduction; Investment Objectives, Policies and Risks; Investment Restrictions
5 Management and Administration of the Trusts; Investment Advisers
5A Not Applicable
6 Dividends, Other Distributions and Tax Matters; General Information; Shareholder Communications
7 Management and Administration of the Trusts; How to Purchase Shares; Retirement Accounts;
Distribution of Trust Shares; Valuation of Shares
8 How to Redeem Shares; Exchange Privilege
9 Inapplicable
Part B
<CAPTION>
FORM N-1A STATEMENT OF ADDITIONAL
ITEM NO. INFORMATION CAPTION
- - -------- -------------------
<S> <C>
10 Cover Page
11 Table of Contents
12 Not Applicable
13 Investment Restrictions; Approach to Stock Selection; Other Information
14 Trustees and Officers of the Trust and the AMR Trust; Trustees and Officers of the Equity 500
Index Portfolio
15 Control Persons and 5% Shareholders
</TABLE>
<PAGE> 6
<TABLE>
<S> <C>
16 Management, Administrative Services and Distribution
Fees; Investment Advisory Agreements
17 Portfolio Securities Transactions
18 Description of the Trust; Other Information
19 Net Asset Value; Redemptions in Kind
20 Tax Information
21 Inapplicable
22 Yield and Total Return Quotations
23 Financial Statements
</TABLE>
<PAGE> 7
AMERICAN AADVANTAGE FUNDS AMR CLASS
FORM N-1A CROSS-REFERENCE SHEET
Part A
<TABLE>
<CAPTION>
FORM N-1A
- - ---------
ITEM NO. PROSPECTUS CAPTION
- - -------- ------------------
<S> <C>
1 Cover Page
2 Table of Fees and Expenses
3 Financial Highlights; Yields and Total Returns
4 Cover Page; Introduction; Investment Objectives, Policies and Risks; Investment Restrictions
5 Management and Administration of the Trusts; Investment Advisers
5A Not Applicable
6 Dividends, Other Distributions and Tax Matters; General Information; Shareholder Communications
7 Management and Administration of the Trusts; Purchase, Redemption and Valuation of Shares
8 Purchase, Redemption and Valuation of Shares
9 Inapplicable
Part B
<CAPTION>
FORM N-1A STATEMENT OF ADDITIONAL
ITEM NO. INFORMATION CAPTION
- - -------- -------------------
<S> <C>
10 Cover Page
11 Table of Contents
12 Not Applicable
13 Investment Restrictions; Approach to Stock Selection; Other Information
14 Trustees and Officers of the Trust and the AMR Trust; Trustees and Officers of the Equity 500
Index Portfolio
15 Control Persons and 5% Shareholders
16 Management, Administrative Services and Distribution Fees; Investment Advisory Agreements
</TABLE>
<PAGE> 8
<TABLE>
<S> <C>
17 Portfolio Securities Transactions
18 Description of the Trust; Other Information
19 Net Asset Value; Redemptions in Kind
20 Tax Information
21 Inapplicable
22 Yield and Total Return Quotations
23 Financial Statements
</TABLE>
<PAGE> 9
AMERICAN AADVANTAGE FUNDS
PLATINUM CLASS
FORM N-1A CROSS-REFERENCE SHEET
Part A
<TABLE>
<CAPTION>
FORM N-1A
- - ---------
ITEM NO. PROSPECTUS CAPTION
- - -------- ------------------
<S> <C>
1 Cover Page
2 Table of Fees and Expenses
3 Financial Highlights; Yields and Total Returns
4 Cover Page; Introduction; Investment Objectives, Policies and Risks; Investment Restrictions
5 Management and Administration of the Trusts
5A Not Applicable
6 Dividends and Tax Matters; General Information; Shareholder Communications
7 Management and Administration of the Trusts; AAdvantage(R) Miles; How to Purchase Shares;
Valuation of Shares
8 How to Redeem Shares
9 Inapplicable
Part B
<CAPTION>
FORM N-1A STATEMENT OF ADDITIONAL
ITEM NO. INFORMATION CAPTION
- - -------- ---------------------
<S> <C>
10 Cover Page
11 Table of Contents
12 Not Applicable
13 Investment Restrictions; Other Information
14 Trustees and Officers of the Trusts and the AMR Trust
15 Control Persons and 5% Shareholders
16 Management, Administrative Services and Distribution Fees
17 Portfolio Securities Transactions
18 Description of the Trust; Other Information
</TABLE>
<PAGE> 10
<TABLE>
<S> <C>
19 Net Asset Value; Redemptions in Kind
20 Tax Information
21 Inapplicable
22 Yield and Total Return Quotations
23 Financial Statements
</TABLE>
<PAGE> 11
AMERICAN AADVANTAGE FUNDS
AMERICAN AADVANTAGE SHORT-TERM INCOME FUND
FORM N-1A CROSS-REFERENCE SHEET
Part A
<TABLE>
<CAPTION>
FORM N-1A
- - ---------
ITEM NO. PROSPECTUS CAPTION
- - -------- ------------------
<S> <C>
1 Cover Page
2 Table of Fees and Expenses
3 Financial Highlights; Yields and Total Returns
4 Cover Page; Introduction; Investment Objectives, Policies and Risks; Investment Restrictions
5 Management and Administration of the Trust; Investment Advisers
5A Not Applicable
6 Dividends, Other Distributions and Tax Matters; General Information; Shareholder Communications
7 Management and Administration of the Trust; Purchase, Redemption and Valuation of Shares
8 Purchase, Redemption and Valuation of Shares
9 Inapplicable
Part B
<CAPTION>
FORM N-1A STATEMENT OF ADDITIONAL
ITEM NO. INFORMATION CAPTION
- - -------- ---------------------
<S> <C>
10 Cover Page
11 Table of Contents
12 Cover Page
13 Investment Restrictions; Approach to Stock Selection; Other Information
14 Trustees and Officers of the Trust
15 Control Persons and 5% Shareholders
16 Management, Administrative Services and Distribution Fees; Investment Advisory Agreements
</TABLE>
<PAGE> 12
<TABLE>
<S> <C>
17 Portfolio Securities Transactions
18 Description of the Trust; Other Information
19 Net Asset Value; Redemptions in Kind
20 Tax Information
21 Inapplicable
22 Yield and Total Return Quotations
23 Financial Statements
</TABLE>
PART C. OTHER INFORMATION
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C of this
Registration Statement.
<PAGE> 13
THIS PROSPECTUS contains important information about the INSTITUTIONAL CLASS OF
THE AMERICAN AADVANTAGE FUNDS ("Trust"), an open-end management investment
company which consists of multiple investment portfolios. This Prospectus
pertains only to the nine 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 consists of multiple classes of shares designed to meet
the needs of different groups of investors. Institutional Class shares are
offered primarily to institutional investors, investing at least $2 million in
the Funds. Prospective Institutional Class investors should read this
Prospectus carefully before making an investment decision and retain it for
future reference.
IN ADDITION TO THIS PROSPECTUS, a Statement of Additional Information ("SAI")
dated March 1, 1998 has been filed with the Securities and Exchange Commission
and is incorporated herein by reference. The SAI contains more detailed
information about the Funds. For a free copy of the SAI, call 817-967-3509. For
further information about the Institutional Class or for information on the
other classes of shares, please refer to the appropriate address and phone
number on the back cover of this Prospectus.
The Securities and Exchange Commission maintains a Web site
(http://www.sec.gov) that contains the SAI, material incorporated by reference
and other information regarding the Funds and the Portfolios.
AN INVESTMENT IN ANY OF THE MONEY MARKET FUNDS IS NEITHER INSURED NOR
GUARANTEED BY THE U.S. GOVERNMENT AND THERE CAN BE NO ASSURANCE THAT THEY WILL
BE ABLE TO MAINTAIN A STABLE PRICE OF $1.00 PER SHARE.
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.
PROSPECTUS
March 1, 1998
[AMERICAN AADVANTAGE LOGO]
- Institutional Class -
BALANCED FUND
GROWTH AND INCOME FUND
INTERNATIONAL EQUITY FUND
S&P 500 INDEX FUND
INTERMEDIATE BOND FUND
SHORT-TERM BOND FUND
MONEY MARKET FUND
MUNICIPAL MONEY MARKET FUND
U.S. GOVERNMENT MONEY MARKET FUND
Managed by AMR Investment Services, Inc.
<PAGE> 14
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 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.
The AMERICAN AADVANTAGE INTERMEDIATE BOND FUND(SM) ("Intermediate Bond Fund")
seeks income and capital appreciation by investing all of its investable assets
in the Intermediate Bond Portfolio of the AMR Trust ("Intermediate Bond
Portfolio"), which in turn primarily invests in debt obligations and seeks to
maintain a dollar weighted average duration of three to seven years.
The AMERICAN AADVANTAGE SHORT-TERM BOND FUND(SM) ("Short-Term Bond Fund,"
formerly the American AAdvantage Limited-Term Income Fund) seeks income and
capital appreciation by investing all of its investable assets in the Short-Term
Bond Portfolio of the AMR Trust ("Short-Term Bond Portfolio," formerly the
Limited-Term Income Portfolio) which in turn primarily invests in debt
obligations and seeks to maintain a dollar weighted average duration of one to
three years.
The AMERICAN AADVANTAGE MONEY MARKET FUND(SM) ("Money Market Fund"), AMERICAN
AADVANTAGE MUNICIPAL MONEY MARKET FUND(SM) ("Municipal Money Market Fund") and
AMERICAN AADVANTAGE U.S. GOVERNMENT MONEY MARKET FUND(SM) ("U.S. Government
Money Market Fund" (collectively, the "Money Market Funds") each seeks current
income, liquidity, and the maintenance of a stable price per share of $1.00 by
investing all of its investable assets in the Money Market Portfolio of the AMR
Trust ("Money Market Portfolio"), the Municipal Money Market Portfolio of the
AMR Trust ("Municipal Money Market Portfolio") and the U.S. Government Money
Market Portfolio of the AMR Trust ("U.S. Government Money Market Portfolio"),
respectively (collectively the "Money Market Portfolios"), which in turn invest
in high quality, short-term obligations. The Municipal Money Market Portfolio
invests primarily in municipal obligations and the U.S. Government Money Market
Portfolio invests exclusively in obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities and in repurchase agreements that
are collateralized by such obligations.
Under 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. ("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
- - ---------------
(1) S&P is a trademark of The McGraw-Hill Companies, Inc. and has been licensed
for use. "Standard and 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.
PROSPECTUS
2
<PAGE> 15
Equity 500 Index Portfolio. This master-feeder operating structure is different
from that of many other investment companies which directly acquire and manage
their own portfolios of securities. Accordingly, investors should carefully
consider this investment approach. See "Investment Objectives, Policies and
Risks -- Additional Information About the Portfolios." A Fund may withdraw its
investment in a corresponding Portfolio at any time if the Trust's Board of
Trustees ("Board") determines that it would be in the best interest of that Fund
and its shareholders to do so. Upon any such withdrawal, that Fund's assets
would be invested in accordance with the investment policies and restrictions
described in this Prospectus and the SAI.
- - --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Table of Fees and Expenses........................ 3
Financial Highlights.............................. 4
Introduction...................................... 10
Investment Objectives, Policies and Risks......... 11
Investment Restrictions........................... 23
Yields and Total Returns.......................... 24
Management and Administration of the Trusts....... 24
Investment Advisers............................... 27
Purchase, Redemption and Valuation of Shares...... 30
Dividends, Other Distributions and Tax Matters.... 32
General Information............................... 34
Shareholder Communications........................ 35
</TABLE>
- - --------------------------------------------------------------------------------
TABLE OF FEES AND EXPENSES
Annual Operating Expenses (as a percentage of average net assets):
<TABLE>
<CAPTION>
U.S.
GROWTH INTER- INTER- SHORT- MUNICIPAL GOVERNMENT
AND NATIONAL S&P 500 MEDIATE TERM MONEY MONEY MONEY
BALANCED INCOME EQUITY INDEX BOND BOND MARKET MARKET MARKET
FUND FUND FUND FUND FUND FUND FUND FUND FUND
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees 0.33% 0.33% 0.48% % % 0.25% 0.15% 0.15% 0.15%
12b-1 Fees 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Other Expenses 0.29 0.29 0.37 0.35 0.09 0.18 0.17
---- --- ---- ---- ---- --- --- ----- -----
Total Operating Expenses 0.62% 0.62% 0.85% % % 0.60% 0.24% 0.33% 0.32%
==== === ==== ==== ==== === === ===== =====
</TABLE>
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. Because the S&P 500 Index Fund's
shares were not offered for sale prior to March 1, 1998, its Annual Operating
Expenses are based on estimates.
PROSPECTUS
3
<PAGE> 16
EXAMPLES
An Institutional 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 $6 $20 $35 $77
Growth and Income Fund 6 20 35 77
International Equity Fund 9 27 47 105
S&P 500 Index Fund
Intermediate Bond Fund
Short-Term Bond Fund 6 19 33 75
Money Market Fund 2 8 14 31
Municipal Money Market Fund 3 11 19 42
U.S. Government Money Market Fund 3 10 18 41
</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 the Institutional 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 has been audited by Ernst &
Young LLP, independent auditors. 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 as of October 31, 1997.
PROSPECTUS
4
<PAGE> 17
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
BALANCED FUND -- INSTITUTIONAL CLASS
----------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
----------------------------------------------------------------------
1997 1996(5)(6) 1995(4)(5) 1994(3) 1993 1992
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $ $ 13.95 $ 12.36 $ 13.23 $ 11.99 $ 11.60
----- ------- ------- ----- ----- -----
Income from investment
operations:
Net investment income 0.59(7) 0.54 0.57 0.49 0.55
Net gains or (losses) on
securities (both realized and
unrealized) 1.61(7) 1.71 (0.54) 1.57 0.41
----- ------- ------- ----- ----- -----
Total from investment operations 2.20 2.25 0.03 2.06 0.96
----- ------- ------- ----- ----- -----
Less distributions:
Dividends from net investment
income (0.57) (0.52) (0.56) (0.52) (0.56)
Distributions from net realized
gains on securities (0.44) (0.14) (0.34) (0.30) (0.01)
----- ------- ------- ----- ----- -----
Total distributions (1.01) (0.66) (0.90) (0.82) (0.57)
----- ------- ------- ----- ----- -----
Net asset value, end of period $ $ 15.14 $ 13.95 $ 12.36 $ 13.23 $ 11.99
===== ======= ======= ===== ===== =====
Total return (annualized)(8) % 16.46% 19.39% (0.08%) 19.19% 8.75%
===== ======= ======= ===== ===== =====
Ratios/supplemental data:
Net assets, end of period (in
thousands) $ $298,009 $249,913 $222,873(13) $532,543 $370,087
Ratios to average net
assets(9)(10)(11):
Expenses % 0.62%(7) 0.63% 0.36% 0.34% 0.35%
Net investment income % 4.00%(7) 4.30% 4.77% 4.91% 5.31%
Portfolio turnover rate(12) % 76% 73% 48% 83% 80%
Average commission rate paid(12) $ $ 0.0409 -- -- -- --
<CAPTION>
BALANCED FUND -- INSTITUTIONAL CLASS
-----------------------------------------
YEAR ENDED OCTOBER 31,
-----------------------------------------
1991 1990(2) 1989 1988
-----------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of
period $ 9.87 $ 11.05 $ 10.13 $ 9.08
----- ----- ----- -----
Income from investment
operations:
Net investment income 0.58 0.57 0.53 0.56
Net gains or (losses) on
securities (both realized and
unrealized) 1.79 (1.18) 0.90 0.73
----- ----- ----- -----
Total from investment operations 2.37 (0.61) 1.43 1.29
----- ----- ----- -----
Less distributions:
Dividends from net investment
income (0.64) (0.51) (0.51) (0.24)
Distributions from net realized
gains on securities -- (0.06) -- --
----- ----- ----- -----
Total distributions (0.64) (0.57) (0.51) (0.24)
----- ----- ----- -----
Net asset value, end of period $ 11.60 $ 9.87 $ 11.05 $ 10.13
===== ===== ===== =====
Total return (annualized)(8) 25.35% (5.24%) 15.49% 14.63%
===== ===== ===== =====
Ratios/supplemental data:
Net assets, end of period (in
thousands) $311,906 $233,702 $210,119 $147,581
Ratios to average net
assets(9)(10)(11):
Expenses 0.37% 0.44% 0.47% 0.52%
Net investment income 6.06% 6.50% 6.32% 6.25%
Portfolio turnover rate(12) 55% 62% 78% 77%
Average commission rate paid(12) -- -- -- --
</TABLE>
(1) The Balanced Fund commenced active operations on July 17, 1987.
(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) Brandywine Asset Management, Inc. replaced Capital Guardian Trust Company
as an investment adviser to the Fund as of April 1, 1996.
(7) The per share amounts and ratios reflect income and expenses assuming
inclusion of the Fund's proportionate share of the income and expenses of
the Balanced Portfolio.
(8) 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.
(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 year ended October 31, 1994.
(11) Annualized.
(12) On November 1, 1995 the Balanced Fund began investing all of its investable
assets in the Balanced Portfolio. Portfolio turnover rate and average
commission rate paid for the years ended October 31, 1996 and 1997 are
those of the Balanced Portfolio. Calculation and disclosure of the average
commission rate paid was not required prior to 1996.
(13) On August 1, 1994, assets of AMR Corporation and its employee benefit plans
were transferred to the AMR Class of the Fund.
PROSPECTUS
5
<PAGE> 18
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
GROWTH AND INCOME FUND--INSTITUTIONAL CLASS
-----------------------------------------------------
YEAR ENDED OCTOBER 31,
-----------------------------------------------------
1997 1996(5)(6) 1995(5) 1994(4) 1993
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ $ 15.91 $ 14.19 $ 14.63 $ 12.79
----- ------- ----- ----- -----
Income from investment operations:
Net investment income 0.42(7) 0.41 0.43 0.36
Net gains (losses) on securities
(both realized and unrealized) 3.15(7) 2.28 0.08 2.21
----- ------- ----- ----- -----
Total from investment operations 3.57 2.69 0.51 2.57
----- ------- ----- ----- -----
Less distributions:
Dividends from net investment income (0.41) (0.43) (0.41) (0.37)
Distributions from net realized gains
on securities (0.57) (0.54) (0.54) (0.36)
----- ------- ----- ----- -----
Total distributions (0.98) (0.97) (0.95) (0.73)
----- ------- ----- ----- -----
Net asset value,
end of period $ $ 18.50 $ 15.91 $ 14.19 $ 14.63
===== ======= ===== ===== =====
Total return (annualized)(8) % 23.37% 20.69% 3.36% 21.49%
===== ======= ===== ===== =====
Ratio/supplemental data:
Net assets,
end of period
(in thousands) $ $81,183 $71,608 $22,737>(13) $477,088
Ratios to average
net assets(9)(10)(11):
Expenses % 0.62%(7) 0.62% 0.33% 0.34%
Net investment income % 2.55%(7) 2.84% 3.28% 3.12%
Portfolio turnover rate(12) % 40% 26% 23% 30%
Average commission rate paid(12) $ $0.0412 -- -- --
<CAPTION>
GROWTH AND INCOME FUND--INSTITUTIONAL CLASS
----------------------------------------------------
YEAR ENDED OCTOBER 31,
----------------------------------------------------
1992(3) 1991 1990(2) 1989 1988
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 12.10 $ 9.47 $ 11.59 $ 9.96 $ 8.30
----- ----- ----- ----- -----
Income from investment operations:
Net investment income 0.39 0.42 0.42 0.42 0.42
Net gains (losses) on securities
(both realized and unrealized) 0.77 2.70 (1.94) 1.59 1.40
----- ----- ----- ----- -----
Total from investment operations 1.16 3.12 (1.52) 2.01 1.82
----- ----- ----- ----- -----
Less distributions:
Dividends from net investment income (0.39) (0.49) (0.43) (0.38) (0.16)
Distributions from net realized gains
on securities (0.08) -- (0.17) -- --
----- ----- ----- ----- -----
Total distributions (0.47) (0.49) (0.60) (0.38) (0.16)
----- ----- ----- ----- -----
Net asset value,
end of period $ 12.79 $ 12.10 $ 9.47 $ 11.59 $ 9.96
===== ===== ===== ===== =====
Total return (annualized)(8) 10.00% 33.83% (13.52%) 20.94% 22.20%
===== ===== ===== ===== =====
Ratio/supplemental data:
Net assets,
end of period
(in thousands) $339,739 $264,628 $182,430 $187,869 $140,073
Ratios to average
net assets(9)(10)(11):
Expenses 0.36% 0.37% 0.45% 0.45% 0.53%
Net investment income 3.57% 4.19% 4.49% 4.40% 4.20%
Portfolio turnover rate(12) 35% 52% 41% 50% 56%
Average commission rate paid(12) -- -- -- -- --
</TABLE>
(1) The Growth and Income Fund commenced active operations on July 17, 1987.
(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) Brandywine Asset Management, Inc. replaced Capital Guardian Trust Company
as an investment adviser to the Fund as of April 1, 1996.
(7) The per share amounts and ratios reflect income and expenses assuming
inclusion of the Fund's proportionate share of the income and expenses of
the Growth and Income Portfolio.
(8) 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.
(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 year ended October 31, 1994.
(11) Annualized.
(12) On November 1, 1995 the Growth and Income Fund began investing all of its
investable assets in the Growth and Income Portfolio. Portfolio turnover
rate and average commission rate paid for the years ended October 31, 1996
and 1997 are those of the Growth and Income Portfolio. Calculation and
disclosure of the average commission rate paid was not required prior to
1996.
(13) On August 1, 1994, assets of AMR Corporation and its employee benefit plans
were transferred to the AMR Class of the Fund.
PROSPECTUS
6
<PAGE> 19
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY FUND--INSTITUTIONAL CLASS
-------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, PERIOD ENDED
--------------------------------------------------------------------- OCTOBER 31,
1997 1996(5) 1995(5) 1994(3)(4) 1993(2) 1992 1991(1)
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ $ 13.29 $ 12.87 $ 12.07 $ 8.93 $ 10.13 $ 10.00
----- ----- ----- ------- ----- ----- --------
Income from investment operations:
Net investment income 0.28(6) 0.27 0.32 0.17 0.12 --
Net gains (losses) on securities (both
realized and unrealized) 1.95(6) 0.68 1.10 3.09 (1.31) 0.13
----- ----- ----- ------- ----- ----- --------
Total from investment operations 2.23 0.95 1.42 3.26 (1.19) 0.13
----- ----- ----- ------- ----- ----- --------
Less distributions:
Dividends from net investment income (0.27) (0.21) (0.17) (0.12) (0.01) --
Distributions from net realized gains
on securities (0.24) (0.32) (0.45) -- -- --
----- ----- ----- ------- ----- ----- --------
Total distributions (0.51) (0.53) (0.62) (0.12) (0.01) --
----- ----- ----- ------- ----- ----- --------
Net asset value, end of period $ $ 15.01 $ 13.29 $ 12.87 $ 12.07 $ 8.93 $ 10.13
===== ===== ===== ======= ===== ===== ========
Total return (annualized)(7) % 17.27% 7.90% 11.77% 36.56% (12.07%) 5.69%
===== ===== ===== ======= ===== ===== ========
Ratios/supplemental data:
Net assets, end of period (in
thousands) $ $62,992 $25,757 $23,115(13) $66,652 $38,837 $10,536
Ratios to average net assets
(annualized)(8)(9)(10):
Expenses % 0.85%(6) 0.85% 0.61% 0.78% 1.17% 1.90%(11)
Net investment income % 2.19%(6) 2.37% 2.74% 2.00% 2.04% 0.38%(11)
Portfolio turnover rate(12) % 19% 21% 37% 61% 21% 2%
Average commission rate paid(12) $ $0.0192 -- -- -- -- --
</TABLE>
(1) The International Equity Fund commenced active operations on August 7,
1991.
(2) HD International Limited was replaced by Hotchkis and Wiley as an
investment adviser to the International Equity Fund as of the close of
business on 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) The per share amounts and ratios reflect income and expenses assuming
inclusion of the Fund's proportionate share of the income and expenses of
the International Equity Portfolio.
(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) 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 $.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 year ended October 31, 1994.
(10) Annualized.
(11) Estimated based on expected annual expenses and actual average net assets.
(12) On November 1, 1995 the International Equity Fund began investing all of
its investable assets in the International Equity Portfolio. Portfolio
turnover rate and average commission rate paid for the years ended October
31, 1996 and 1997 are those of the International Equity Portfolio.
Calculation and disclosure of the average commission rate paid was not
required in prior to 1996.
(13) On August 1, 1994 assets of AMR Corporation and its employee benefit plans
were transferred to the AMR Class of the Fund.
PROSPECTUS
7
<PAGE> 20
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
SHORT-TERM BOND FUND--INSTITUTIONAL CLASS
------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
------------------------------------------------------------------
1997 1996 1995 1994(3) 1993 1992
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $ $ 9.82 $ 9.67 $ 10.23 $ 10.13 $ 10.07
----- ----- ----- ----- ----- -----
Income from investment
operations:
Net investment income 0.62(4) 0.62 0.52 0.58 0.75
Net gains or (losses) on
securities (both realized and
unrealized) (0.14)(4) 0.15 (0.46) 0.15 0.06
----- ----- ----- ----- ----- -----
Total from investment operations 0.48 0.77 0.06 0.73 0.81
----- ----- ----- ----- ----- -----
Less distributions:
Dividends from net investment
income (0.62) (0.62) (0.52) (0.58) (0.75)
Distributions from net realized
gains on securities -- -- (0.10) (0.05) --
----- ----- ----- ----- ----- -----
Total distributions (0.62) (0.62) (0.62) (0.63) (0.75)
----- ----- ----- ----- ----- -----
Net asset value, end of period $ $ 9.68 $ 9.82 $ 9.67 $ 10.23 $ 10.13
===== ===== ===== ===== ===== =====
Total return (annualized)(5) % 5.10% 8.18% 0.42% 7.20% 7.94%
===== ===== ===== ===== ===== =====
Ratios/supplemental data:
Net assets, end of period (in
thousands) $ $108,929 $137,293 $112,141(10) $238,874 $209,928
Ratios to average net
assets(6)(7)(8):
Expenses % 0.60%(4) 0.60% 0.31% 0.26% 0.27%
Net investment income % 6.41%(4) 6.36% 5.26% 5.76% 7.40%
Portfolio turnover rate(9) % 304% 183% 94% 176% 133%
<CAPTION>
SHORT-TERM BOND FUND--INSTITUTIONAL CLASS
-------------------------------------------
YEAR ENDED OCTOBER 31, PERIOD ENDED
---------------------------- OCTOBER 31,
1991(2) 1990 1989 1988(1)
----------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of
period $ 9.76 $ 9.94 $ 10.12 $ 10.00
----- ----- ----- --------
Income from investment
operations:
Net investment income 0.83 0.92 0.96 0.64
Net gains or (losses) on
securities (both realized and
unrealized) 0.31 (0.18) (0.12) 0.05
----- ----- ----- --------
Total from investment operations 1.14 0.74 0.84 0.69
----- ----- ----- --------
Less distributions:
Dividends from net investment
income (0.83) (0.92) (1.02) (0.57)
Distributions from net realized
gains on securities -- -- -- --
----- ----- ----- --------
Total distributions (0.83) (0.92) (1.02) (0.57)
----- ----- ----- --------
Net asset value, end of period $ 10.07 $ 9.76 $ 9.94 $ 10.12
===== ===== ===== ========
Total return (annualized)(5) 11.87% 7.51% 7.62% 7.41%
===== ===== ===== ========
Ratios/supplemental data:
Net assets, end of period (in
thousands) $141,629 $83,265 $60,507 $40,855
Ratios to average net
assets(6)(7)(8):
Expenses 0.35% 0.48% 0.59% 0.50%
Net investment income 8.42% 9.44% 9.77% 8.01%
Portfolio turnover rate(9) 165% 156% 158% 127%
</TABLE>
(1) The Short-Term Bond Fund commenced active operations on December 3, 1987.
Prior to March 1, 1998, the Short-Term Income Fund was known as the
American AAdvantage Limited-Term Income Fund.
(2) AMR Investment Services, Inc. began portfolio management of the Short-Term
Bond 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) The per share amounts and ratios reflect income and expenses assuming
inclusion of the Fund's proportionate share of the income and expenses of
the Limited-Term Income Portfolio.
(5) 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.
(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 year ended October 31, 1994.
(8) Annualized.
(9) On November 1, 1995 the Short-Term Bond Fund began investing all of its
investable assets in the Short-Term Bond Portfolio. Portfolio turnover rate
for the years ended October 31, 1996 and 1997 is that of the Short-Term
Bond Portfolio.
(10) On August 1, 1994, assets of AMR Corporation and its employee benefit plans
were transferred to the AMR Class of the Fund.
PROSPECTUS
8
<PAGE> 21
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
MONEY MARKET FUND--INSTITUTIONAL CLASS
------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
------------------------------------------------------------------------------
1997 1996 1995 1994(2) 1993 1992
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------ ------ ------ ------ ------ ------
Net investment income 0.05(3) 0.06 0.04 0.03 0.04
Less dividends from net
investment income (0.05) (0.06) (0.04) (0.03) (0.04)
------ ------ ------ ------ ------ ------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
====== ====== ====== ====== ====== ======
Total return (annualized) % 5.57% 5.96% 3.85% 3.31% 4.41%
====== ====== ====== ====== ====== ======
Ratios/supplemental data:
Net assets, end of period (in
thousands) $ $1,406,939 $1,206,041 $1,893,144 $2,882,947 $2,223,829
Ratios to average net assets
(4)(5)(6):
Expenses % 0.24%(3) 0.23% 0.21% 0.23% 0.26%
Net investment income % 5.41%(3) 5.79% 3.63% 3.23% 4.06%
<CAPTION>
MONEY MARKET FUND--INSTITUTIONAL CLASS
-----------------------------------------
YEAR ENDED OCTOBER 31,
-----------------------------------------
1991 1990 1989 1988
-----------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of
period $ 1.00 $ 1.00 $ 1.00 $ 1.00
----- ----- ----- -----
Net investment income 0.07 0.08 0.09 0.08
Less dividends from net
investment income (0.07) (0.08) (0.09) (0.08)
----- ----- ----- -----
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00
===== ===== ===== =====
Total return (annualized) 7.18% 8.50% 9.45% 7.54%
===== ===== ===== =====
Ratios/supplemental data:
Net assets, end of period (in
thousands) $715,280 $745,405 $385,916 $330,230
Ratios to average net assets
(4)(5)(6):
Expenses 0.24% 0.20% 0.22% 0.28%
Net investment income 6.93% 8.19% 9.11% 7.54%
</TABLE>
(1) The Money Market Fund commenced active operations on September 1, 1987.
(2) Average shares outstanding for the period rather than end of period shares
were used to compute net investment income per share.
(3) The per share amounts and ratios reflect income and expenses assuming
inclusion of the Fund's proportionate share of the income and expenses of
the Money Market Portfolio.
(4) The method of determining average net assets was changed from a monthly
average to a daily average starting with the year ended October 31, 1992.
(5) Effective October 1, 1990, 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.
(6) Annualized.
PROSPECTUS
9
<PAGE> 22
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
MUNICIPAL MONEY MARKET FUND --
INSTITUTIONAL CLASS
----------------------------------------
PERIOD
YEAR ENDED OCTOBER 31, ENDED
-------------------------- OCTOBER 31,
1997 1996 1995 1994(1)
----------------------------------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00
---- ---- ---- -------
Net investment income 0.04(3) 0.04 0.02
Less dividends from
net investment income (0.04) (0.04) (0.02)
---- ---- ---- -------
Net asset value,
end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00
==== ==== ==== =======
Total return
(annualized)(4) % 3.59% 3.75% 2.44%
==== ==== ==== =======
Ratios/supplemental data:
Net assets, end of
period (in thousands) $ $ 6 $ 7 $$9,736
Ratios to average net
assets(5)(6)(7):
Expenses % 0.27%(3) 0.35% 0.30%
Net investment income % 3.49%(3) 3.70% 2.38%
<CAPTION>
U.S. GOVERNMENT MONEY MARKET FUND --
INSTITUTIONAL CLASS
---------------------------------------------------------------
PERIOD
YEAR ENDED OCTOBER 31, ENDED
------------------------------------------------- OCTOBER 31,
1997 1996 1995 1994(2) 1993 1992(1)
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
---- ----- ----- ----- ------ -------
Net investment income 0.05 0.06 0.04 0.03 0.02
Less dividends from
net investment income (0.05)(3) (0.06) (0.04) (0.03) (0.02)
---- ----- ----- ----- ------ -------
Net asset value,
end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
---- ----- ----- ----- ------ -------
---- ---- ----- ----- ------ -------
Total return
(annualized)(4) % 5.29% 5.67% 3.70% 3.07% 3.61%
---- ----- ----- ----- ------ -------
---- ---- ----- ----- ------ -------
Ratios/supplemental data:
Net assets, end of
period (in thousands) $25,595 $47,184 $67,607 $136,813 $91,453
Ratios to average net
assets(5)(6)(7):
Expenses % 0.32%(3) 0.32% 0.25% 0.23% 0.27%(8)
Net investment income % 5.16%(3) 5.49% 3.44% 2.96% 3.46%(8)
</TABLE>
(1) The U.S. Government Money Market Fund commenced active operations on March
2, 1992 and the Municipal Money Market Fund commenced active operations on
November 10, 1993.
(2) Average shares outstanding for the period rather than end of period shares
were used to compute net investment income per share.
(3) The per share amounts and ratios reflect income and expenses assuming
inclusion of the Fund's proportionate share of the income and expenses of
the U.S. Government Money Market Portfolio and the Municipal Money Market
Portfolio, respectively.
(4) Total returns for the Municipal Money Market Fund exclude management and
administrative services fees waived by the Manager. Had the Fund paid such
fees, total returns would have been 2.24% for the period ended October 31,
1994 and 3.54% for the year ended October 31, 1995.
(5) The method of determining average net assets was changed from a monthly
average to a daily average starting with the period ended October 31, 1994.
(6) Operating results for the Municipal Money Market Fund exclude management and
administrative services fees waived by the Manager. Had the Fund paid such
fees, the ratio of expenses and net investment income to average net assets
would have been 0.50% and 2.18%, respectively, for the period ended October
31, 1994, 0.55% and 3.50%, respectively, for the period ended October 31,
1995 and 0.33% and 3.43%, respectively, for the period ended October 31,
1996.
(7) Annualized.
(8) Estimated based on expected annual expenses and actual average net assets.
INTRODUCTION
The Trust is an open-end, diversified management investment company
organized as a Massachusetts business trust on January 16, 1987. The Funds are
nine 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 which 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 with 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, and it
provides the Funds with administrative services. BT provides the Equity 500
Index Portfolio with investment advisory, administrative and other services.
PROSPECTUS
10
<PAGE> 23
The Balanced Fund, the Growth and Income Fund, the International Equity
Fund, the S&P 500 Index Fund, the Intermediate Bond Fund and the Short-Term Bond
Fund (collectively, the "Variable NAV Funds") currently consist of three classes
of shares, including the "Institutional Class" which is primarily for
institutional investors investing at least $2 million in the Funds and 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"). The
Money Market Funds also consist of three classes of shares, including the
Institutional Class, the PlanAhead Class and the "Platinum Class" which is
available to customers of certain broker-dealers as an investment for cash
balances in their brokerage accounts. For further information about the
PlanAhead Class, call (800) 388-3344. For further information about the Platinum
Class, call (800) 967-9009.
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 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 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 assets of the Intermediate Bond
Portfolio are allocated by the Manager between the Manager and another
investment adviser. Investment decisions for the Short-Term Bond Portfolio and
the Money Market Portfolios are made directly by the Manager. 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, the SAI, and by specific
investment strategies developed by the Manager. See "Investment Advisers."
Institutional Class shares are offered without a sales charge at the net
asset value next determined 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 30 days' 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
PROSPECTUS
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Portfolio, which invests primarily in equity and debt securities. Although
equity securities (such as stocks) will be purchased primarily for capital
appreciation and debt securities (such as bonds) will be purchased primarily for
income purposes, income and capital appreciation potential will be considered in
connection with all such investments. Excluding collateral for securities
loaned, ordinarily the Portfolio will have a minimum of 30% and a maximum of 70%
of its assets invested in equity securities and a minimum of 30% and a maximum
of 70% of its assets invested in debt securities which, at the time of purchase,
are rated in one of the four highest rating categories by all nationally
recognized statistical rating organizations ("Rating Organizations") rating that
security such as Standard & Poor's ("S&P") 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 cash or cash equivalents,
including obligations that are permitted investments for the Money Market
Portfolio and 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
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 Intermediate Bond Fund."
The Portfolio also may engage in dollar rolls or purchase or sell
securities on a "when-issued" or "forward commitment" basis. The purchase or
sale of when-issued securities enables an investor to hedge against anticipated
changes in interest rates and prices by locking in an attractive price or yield.
The price of when-issued securities is fixed at the time the commitment to
purchase or sell is made, but delivery and payment for the when-issued
securities take place at a later date, normally one to two months after the date
of purchase. During the period between purchase and settlement, no payment is
made by the purchaser to the issuer and no interest accrues to the purchaser.
Such transactions therefore involve a risk of loss if the value of the security
to be purchased declines prior to the settlement date or if the value of the
security to be sold increases prior to the settlement date. A sale of a
when-issued security also involves the risk that the other party will be unable
to settle the transaction. Dollar rolls are a type of forward commitment
transaction. Purchases and sales of securities on a forward commitment basis
involve a commitment to purchase or sell securities with payment and delivery to
take place at some future date, normally one to two months after the date of the
transaction. As with when-issued securities, these transactions involve certain
risks, but they also enable 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 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 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. The Manager believes that
purchasing securities which the investment advisers believe are undervalued in
the market
PROSPECTUS
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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. 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 traded in the United States on exchanges and in the
over-the-counter market. When purchasing equity securities, primary emphasis
will be placed on undervalued securities with above average growth expectations.
In order to seek either above average current income or capital appreciation
when interest rates are expected to decline, the Portfolio may invest in debt
securities which, at the time of purchase, are rated in one of the four highest
rating categories by all Rating Organizations rating that security or, if
unrated, are deemed to be of comparable quality by the applicable investment
adviser. Obligations rated in the fourth highest rating category are limited to
25% of the Portfolio's debt allocation. See "American AAdvantage Balanced Fund"
for a description of the risks involved with these obligations. See the SAI for
definitions of the foregoing securities and for a description of debt ratings.
The Portfolio also may invest in other investment companies or in cash and cash
equivalents, including obligations that are permitted investments for the Money
Market Portfolio. 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 "forward commitment" basis. See "American
AAdvantage Balanced Fund" for a description of these transactions.
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. 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 obligations that are
permitted investments for the Money Market Portfolio 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.
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<PAGE> 26
Overseas investing carries potential risks not associated with domestic
investments. Such risks include, but are not limited to: (1) political and
financial instability abroad, including risk of nationalization or expropriation
of assets and the risk of war; (2) less liquidity and greater volatility of
foreign investments; (3) less public information regarding foreign companies;
(4) less government regulation and supervision of foreign stock exchanges,
brokers and listed companies; (5) lack of uniform accounting, auditing and
financial reporting standards; (6) delays in transaction settlement in some
foreign markets; (7) possible 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)
possible 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, Portugal, 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; (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. See "Investment Advisers."
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 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.
PROSPECTUS
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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.
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
PROSPECTUS
15
<PAGE> 28
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
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 or outstanding commercial paper
or bank obligations rated Prime-1 by Moody's or A-1 by S&P; 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 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.
AMERICAN AADVANTAGE INTERMEDIATE BOND 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.
PROSPECTUS
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The Fund seeks its investment objective by investing all of its investable
assets in the Intermediate Bond Portfolio, which invests primarily in debt
obligations. Permissible investments include securities of the U.S. Government
and its agencies and instrumentalities, including STRIPS and other zero coupon
obligations; corporate bonds, notes and debentures; non-convertible preferred
stocks; mortgage-backed securities; asset-backed securities; domestic,
Yankeedollar and Eurodollar certificates of deposit, bank deposit notes, and
bank notes; other investment companies; and cash or cash equivalents including
obligations that are permitted investments for the Money Market Portfolio. 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 Manager or 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 and the investment adviser, 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.
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 three to seven 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.
Mortgage-backed securities are securities representing interests in "pools"
of mortgages in which payments of both interest and principal on the securities
are made monthly, in effect, "passing through" monthly payments made by the
individual borrowers on the mortgage loans which underlie the securities (net of
fees paid to the issuer or guarantor of the securities). Early repayment of
principal on mortgage pass-through securities (arising from prepayments of
principal due to sale of the underlying property, refinancing, or foreclosure,
net of fees and costs which may be incurred) may expose the Portfolio to a lower
rate of return upon reinvestment of principal. Also, if a security subject to
prepayment has been purchased at a premium, in the event of prepayment, the
value of the premium would be lost. Like other debt securities, when interest
rates rise, the value of mortgage-related securities generally will decline;
however, when interest rates decline, the value of mortgage-related securities
with prepayment features may not increase as much as other debt securities.
Payment of principal and interest on some mortgage pass-through securities
(but not the market value of the securities themselves) may be guaranteed by the
full faith and credit of the U.S. Government (in the case of securities
guaranteed by the Government National Mortgage Association ("GNMA")) or
guaranteed by agencies or instrumentalities of the U.S. Government (in the case
of securities guaranteed by the Federal National Mortgage Association ("FNMA")
or the Federal Home Loan Mortgage Corporation ("FHLMC"), which are supported
only by the discretionary authority of the U.S. Government to purchase the
agency's obligations). Mortgage pass-through securities created by
non-governmental issuers (such as commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers and other
secondary market issuers) may be supported with various credit enhancements such
as pool insurance, guarantees issued by governmental entities, a letter of
credit from a bank or senior/subordinated structures.
Collateralized mortgage obligations ("CMOs") are hybrid instruments with
characteristics of both mortgage-backed bonds and mortgage pass-through
securities. Similar to a mortgage pass-through, interest and prepaid principal
on a CMO are paid, in most cases, monthly. 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
PROSPECTUS
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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.
Investments in Yankeedollar and Eurodollar bonds, notes and certificates of
deposit involve risks that differ from investments in securities of domestic
issuers. See "American AAdvantage Money Market Fund" for a description of these
risks. 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
should 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.
The Manager and Barrow, Hanley, Mewhinney & Strauss, Inc. currently manage
the assets of the Intermediate Bond Portfolio. See "Investment Advisers."
AMERICAN AADVANTAGE SHORT-TERM BOND 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
Short-Term Bond Portfolio, which invests primarily in debt obligations.
Permissible investments include securities of the U.S. Government and its
agencies and instrumentalities, including STRIPS and other zero coupon
obligations; corporate bonds, notes and debentures; non-convertible preferred
stocks; mortgage-backed securities; asset-backed securities; domestic,
Yankeedollar and Eurodollar certificates of deposit, bank deposit notes, and
bank notes; other investment companies; and cash or cash equivalents including
obligations that are permitted investments for the Money Market Portfolio. 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 Manager. Obligations rated in
the fourth highest rating category are limited to 25% of the Portfolio's total
assets. See "American AAdvantage Balanced Fund" and "American AAdvantage
Intermediate Bond 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 Yankeedollar and Eurodollar bonds, notes and certificates of
deposit involve risks that differ from investments in securities of domestic
issuers. See "American AAdvantage Money Market Fund" for a description of these
risks. See "American AAdvantage Intermediate Bond Fund" for a description of the
risks associated with investments in mortgage-backed securities, CMOs and
asset-backed securities and for an explanation of how the value of the
Portfolio's debt instruments will vary in response to interest rate changes. The
Portfolio also may engage in dollar rolls and purchase or sell securities on a
when issued or forward commitment basis as described under "American AAdvantage
Balanced Fund."
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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 Short-Term
Bond Portfolio.
MONEY MARKET FUNDS -- The investment objectives of the Money Market Funds are to
seek current income, liquidity and the maintenance of a stable $1.00 price per
share. The Money Market Funds seek to achieve these objectives by investing all
of their investable assets in the Money Market Portfolios, which invest in high
quality, U.S. dollar-denominated short-term obligations that have been
determined by the Manager or the AMR Trust Board to present minimal credit
risks. Portfolio investments are valued based on the amortized cost valuation
technique pursuant to Rule 2a-7 under the Investment Company Act of 1940 ("1940
Act"). See the SAI for an explanation of the amortized cost valuation method.
Obligations in which the Money Market Portfolios invest generally have remaining
maturities of 397 days or less, although instruments subject to repurchase
agreements and certain variable and floating rate obligations may bear longer
final maturities. The average dollar-weighted portfolio maturity of each Money
Market Portfolio will not exceed 90 days. The Manager serves as the sole
investment adviser to the Money Market Funds. See "Management and Administration
of the Trust."
AMERICAN AADVANTAGE MONEY MARKET FUND -- The Fund's corresponding Portfolio may
invest in obligations permitted to be purchased under Rule 2a-7 of the 1940 Act
including, but not limited to, (1) obligations of the U.S. Government or its
agencies or instrumentalities; (2) loan participation interests, medium-term
notes, funding agreements and asset-backed securities; (3) domestic,
Yankeedollar and Eurodollar certificates of deposit, time deposits, bankers'
acceptances, commercial paper, bank deposit notes and other promissory notes,
including floating or variable rate obligations issued by U.S. or foreign bank
holding companies and their bank subsidiaries, branches and agencies; and (4)
repurchase agreements involving the obligations listed above. The Money Market
Portfolio will invest only in issuers or instruments that at the time of
purchase (1) have received the highest short-term rating by two Rating
Organizations such as "A-1" by S&P and "P-1" by Moody's; (2) are single rated
and have received the highest short-term rating by a Rating Organization; or (3)
are unrated, but are determined to be of comparable quality by the Manager
pursuant to guidelines approved by the AMR Trust Board and subject to
ratification by the AMR Trust Board. See the SAI for definitions of the
foregoing instruments and rating systems. The Portfolio may invest in other
investment companies. The Portfolio also may purchase or sell securities on a
when-issued or a forward commitment basis as described in "American AAdvantage
Balanced Fund."
The Portfolio will invest more than 25% of its assets in obligations issued
by the banking industry. However, for temporary defensive purposes during
periods when the Manager believes that maintaining this concentration may be
inconsistent with the best interest of shareholders, the Portfolio may not
maintain this concentration.
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 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.
Variable amount master demand notes in which the Portfolio may invest are
unsecured demand notes that permit the indebtedness thereunder to vary, and
provide for periodic adjustments in the interest rate. Because master demand
notes are direct lending arrangements between the Portfolio and the issuer, they
are not normally publicly traded. There is no secondary market for the notes;
however, the period of time remaining until payment
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of principal and accrued interest can be recovered under a variable amount
master demand note generally will not exceed seven days. To the extent this
period is exceeded, the note in question would be considered illiquid. Issuers
of variable amount master demand notes must satisfy the same criteria as set
forth for other promissory notes (e.g. commercial paper). The Portfolio will
invest in variable amount master demand notes only when such notes are
determined by the Manager, pursuant to guidelines established by the AMR Trust
Board, to be of comparable quality to rated issuers or instruments eligible for
investment by the Portfolio. In determining average dollar weighted portfolio
maturity, a variable amount master demand note will be deemed to have a maturity
equal to the longer of the period of time remaining until the next readjustment
of the interest rate or the period of time remaining until the principal amount
can be recovered from the issuer on demand.
AMERICAN AADVANTAGE MUNICIPAL MONEY MARKET FUND -- The Fund's corresponding
Portfolio may invest in municipal obligations issued by or on behalf of the
governments of states, territories, or possessions of the United States; the
District of Columbia; and their political subdivisions, agencies and
instrumentalities if the interest these obligations provide is generally exempt
from federal income tax. The Municipal Money Market Portfolio will invest only
in issuers or instruments that at the time of purchase (1) are guaranteed by the
U.S. Government, its agencies, or instrumentalities; (2) are secured by letters
of credit that are irrevocable and issued by banks which qualify as authorized
issuers for the Money Market Portfolio (see "American AAdvantage Money Market
Fund"); (3) are guaranteed by one or more municipal bond insurance policies that
cannot be canceled and are issued by third-party guarantors possessing the
highest claims-paying rating from a Rating Organization; (4) have received one
of the two highest short-term ratings from at least two Rating Organizations;
(5) are single rated and have received one of the two highest short-term ratings
from that Rating Organization; (6) have no short-term rating but the instrument
is comparable to the issuer's rated short-term debt; (7) have no short-term
rating (or comparable rating) but have received one of the top two long-term
ratings from all Rating Organizations rating the issuer or instrument; or (8)
are unrated, but are determined to be of comparable quality by the Manager
pursuant to guidelines approved by, and subject to the oversight of, the AMR
Trust Board. The Portfolio also may invest in other investment companies.
Ordinarily at least 80% of the Portfolio's net assets will be invested in
municipal obligations, the interest from which is exempt from federal income
tax. However, should market conditions warrant, the Portfolio may invest up to
20% (or for temporary defensive purposes, up to 100%) of its assets in eligible
investments for the Money Market Portfolio which are subject to federal income
tax.
The Portfolio may invest in certain municipal obligations which have rates
of interest that are adjusted periodically according to formulas intended to
minimize fluctuations in the values of these instruments. These instruments,
commonly known as variable rate demand obligations, are long-term instruments
which allow the purchaser, at its discretion, to redeem securities before their
final maturity at par plus accrued interest upon notice (typically 7 to 30
days).
Municipal obligations may be backed by the full taxing power of a
municipality ("general obligations"), or by the revenues from a specific project
or the credit of a private organization ("revenue obligations"). Some municipal
obligations are collateralized as to payment of principal and interest by an
escrow of U.S. Government or federal agency obligations, while others are
insured by private insurance companies, while still others may be supported by
letters of credit furnished by domestic or foreign banks. The Portfolio's
investments in municipal obligations may include fixed, variable, or floating
rate general obligations and revenue obligations (including municipal lease
obligations and resource recovery obligations); zero coupon and asset-backed
obligations; variable rate auction and residual interest obligations; tax,
revenue, or bond anticipation notes; tax-exempt commercial paper; and purchase
obligations that are subject to restrictions on resale. See the SAI for a
further discussion of the foregoing obligations. The Portfolio may purchase or
sell obligations on a "when-issued" or "forward commitment" basis, as described
under "American AAdvantage Balanced Fund."
The Portfolio may invest more than 25% of the value of its total assets in
municipal obligations which are related in such a way that an economic, business
or political development or change affecting one such security would also affect
the other securities; for example, securities the interest of which is paid from
revenues of similar types of projects, or securities whose issuers are located
in the same state. As a result, the Portfolio may be subject to greater risk
compared to a fund that does not follow this practice. However, the Manager
believes this risk is
PROSPECTUS
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mitigated because it is anticipated that most of the Portfolio's assets will be
insured or backed by bank letters of credit. Additionally, the Portfolio may
invest more than 25% of the value of its total assets in industrial development
bonds which, although issued by industrial development authorities, may be
backed only by the assets and revenues of the non-governmental users.
The Portfolio also may invest in municipal obligations that constitute
"private activity obligations." These include obligations that finance student
loans, residential rental projects, and solid waste disposal facilities. To the
extent the Portfolio earns interest income on private activity obligations,
shareholders will be required to treat the portion of the Fund's distributions
attributable to its share of such interest as a "tax preference item" for
purposes of determining their liability for the federal alternative minimum tax
("AMT") and, as a result, may become subject to (or increase their liability
for) the AMT. Shareholders should consult their own tax advisers to determine
whether they may be subject to the AMT. The Portfolio may invest in private
activity obligations without limitation and it is anticipated that a substantial
portion of the Portfolio's assets will be invested in these obligations. As a
result, a substantial portion of the Fund's distributions may be a tax
preference item, which will reduce the net return from the Fund for taxpayers
subject to the AMT. Interest on "qualified" private activity obligations is
exempt from federal income tax.
AMERICAN AADVANTAGE U.S. GOVERNMENT MONEY MARKET FUND -- The Fund's
corresponding Portfolio will invest exclusively in obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities and
repurchase agreements which are collateralized by such obligations. U.S.
Government securities include direct obligations of the U.S. Treasury (such as
Treasury bills, Treasury notes and Treasury bonds). The Fund may invest in
securities issued by the Agency for International Development, Farmers Home
Administration, Farm Credit Banks, Federal Home Loan Bank, Federal Intermediate
Credit Bank, Federal Financing Bank, Federal Land Bank, FNMA, GNMA, General
Services Administration, Rural Electrification Administration, Small Business
Administration, Tennessee Valley Authority, and others. Some of these
obligations, such as those issued by the Federal Home Loan Bank and FHLMC, are
supported only by the credit of the agency or instrumentality issuing the
obligation and the discretionary authority of the U.S. Government to purchase
the agency's obligations. See the SAI for a further discussion of the foregoing
obligations. Counterparties for repurchase agreements must be approved by the
AMR Trust Board. The Portfolio may purchase or sell securities on a when-issued
or forward commitment basis, as described under "American AAdvantage Balanced
Fund."
OTHER INVESTMENT POLICIES -- In addition to the investment policies described
previously, each Portfolio also may 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 1/3% of its
total assets. A Portfolio continues to receive interest on the securities loaned
and simultaneously earns either interest on the investment of the cash
collateral or fee income if the loan is otherwise collateralized. 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. Except for the Equity 500 Index Portfolio, the Manager
will receive compensation for administrative and oversight functions with
respect to securities lending. The amount of such compensation will depend on
the income generated by the loan of each Portfolio's securities. The SEC has
granted exemptive relief that permits the Portfolios to invest cash collateral
received from securities lending transactions in shares of one or more private
investment companies managed by the Manager. Subject to receipt of exemptive
relief from the SEC, the Portfolios also may invest cash collateral received
from securities lending transactions in shares of one or more registered
investment companies managed by the Manager. See the SAI for further information
regarding loan transactions.
PROSPECTUS
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REPURCHASE AGREEMENTS. A repurchase agreement is an agreement under which
securities are acquired by a Portfolio from a securities dealer or bank subject
to resale at an agreed upon price on a later date. The acquiring Portfolio bears
a risk of loss in the event that the other party to a repurchase agreement
defaults on its obligations and the Portfolio is delayed or prevented from
exercising its rights to dispose of the collateral securities. However, the
investment advisers or the Manager attempt to minimize this risk by entering
into repurchase agreements only with financial institutions which are deemed to
be of good financial standing and which have been approved by the AMR Trust
Board or the Equity 500 Index Portfolio Board, as appropriate. See the SAI for
more information regarding repurchase agreements.
PRIVATE PLACEMENT OFFERINGS. Investments in private placement offerings are
made in reliance on the "private placement" exemption from registration afforded
by Section 4(2) of the Securities Act of 1933 (the "1933 Act"), and resold to
qualified institutional buyers under Rule 144A under the 1933 Act ("Section 4(2)
securities"). Section 4(2) securities are restricted as to disposition under the
federal securities laws, and generally are sold to institutional investors, such
as the Portfolios, that agree they are purchasing the securities for investment
and not with an intention to distribute to the public. Any resale by the
purchaser must be pursuant to an exempt transaction and may be accomplished in
accordance with Rule 144A. Section 4(2) securities normally are resold to other
institutional investors such as the Portfolios through or with the assistance of
the issuer or dealers that make a market in the Section 4(2) securities, thus
providing liquidity. The Money Market Portfolios will not invest more than 10%
(and the Variable NAV Funds' respective Portfolios, no 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.
The AMR Trust Board, the Equity 500 Index Portfolio Board and the
applicable investment adviser, pursuant to the guidelines approved by the
respective Board, will carefully monitor the Portfolios' investments in Section
4(2) securities offered and sold under Rule 144A, 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 will be 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 of the 1940 Act) for doing so.
The Money Market Portfolios, the Intermediate Bond Portfolio and the
Short-Term Bond Portfolio normally will not incur any brokerage commissions on
their transactions because money market and debt instruments are generally
traded on a "net" basis with dealers acting as principal for their own accounts
and 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 Short-Term Bond Portfolio, currently expects
its portfolio turnover rate to exceed 100%. The portfolio turnover rate for the
Short-Term Bond Portfolio for the fiscal year ended October 31, 1997 was %.
A Portfolio's turnover rate, or the frequency of portfolio transactions, will
vary from year to year depending on market conditions and the Portfolio's cash
flows. High portfolio activity increases a Portfolio's transaction costs,
including brokerage commissions and may result in a greater number of taxable
transactions.
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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, 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.
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 sell their interests to other non-affiliated investment companies
and/or other institutional investors. All institutional investors in a Portfolio
pay a proportionate share of the Portfolio's expenses and invest in that
Portfolio on the same terms and conditions. However, other investment companies
investing all of their assets in a Portfolio are not required to sell their
shares at the same public offering price as a Fund and are 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 affected materially 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 its liquidity adversely.
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 would 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 of each Fund's shares.
INVESTMENT RESTRICTIONS
The following fundamental investment restrictions and the non-fundamental
investment restriction are identical for each Fund and its corresponding
Portfolio. Therefore, although the following discusses the investment
restrictions of each Portfolio, it applies equally to each Fund. The following
fundamental investment
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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. In addition, although not a fundamental
investment restriction and therefore subject to change without shareholder
vote, the Money Market Portfolio and the U.S. Government Money Market
Portfolio apply this restriction with respect to 100% of their assets.
- Invest more than 25% of its total assets in the securities of companies
primarily engaged in any one industry, provided that: (i) this limitation
does not apply to obligations issued or guaranteed by the U.S. Government,
its agencies and instrumentalities; (ii) municipalities and their agencies
and authorities are not deemed to be industries; and (iii) financial
service companies are classified according to the end users of their
services (for example, automobile finance, bank finance, and diversified
finance will be considered separate industries). With respect to the Money
Market Portfolio, this restriction does not apply to the banking industry.
The following non-fundamental investment restriction 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 invest more
than 15% (or, with respect to any Money Market Portfolio, 10%) 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
From time to time each class of the Money Market Funds may advertise their
"current yield" and "effective yield." Both yield figures are based on
historical earnings and are not intended to indicate future performance. The
current yield refers to the investment income generated over a seven
calendar-day period (which period will be stated in the advertisement). This
yield is then annualized by assuming the amount of investment income generated
during that week is earned each week over a one-year period, and is shown as a
percentage of the investment. The effective yield is calculated similarly but,
when annualized, the investment income earned is assumed to be reinvested. The
effective yield will be slightly higher than the current yield because of the
compounding effect of this assumed reinvestment. The Municipal Money Market Fund
also may quote "tax equivalent yields," which show the taxable yields a
shareholder would have to earn before federal income taxes to equal this Fund's
tax-exempt yields. The tax equivalent yield is calculated by dividing the Fund's
tax-exempt yield by the result of one minus a stated federal income tax rate. If
only a portion of the Fund's investment income was tax-exempt, only that portion
is adjusted in the calculation. As stated earlier, the Fund considers interest
on private activity obligations to be exempt from federal income tax. Each class
of a Fund has different expenses which will impact its performance.
Advertised yields for the Institutional Class of the Variable NAV Funds
will be computed by dividing the net investment income per share earned by the
applicable class during the relevant time period by the maximum offering price
per share for that class on the last day of the period. Additionally, each class
of the Intermediate Bond Fund and the Short-Term Bond 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 each
class of this Fund. Total return quotations advertised by 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. The Funds will at
times compare their performance
PROSPECTUS
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<PAGE> 37
to applicable published indices, and also may disclose their performance as
ranked by certain ranking entities. 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 the
Equity 500 Index Portfolio are subject to the supervision of their respective
Boards. The Manager provides or oversees all administrative, investment advisory
and portfolio management services for the Trust pursuant to a Management
Agreement dated April 3, 1987, as amended July 25, 1997, together with the
Administrative Services Agreement described below. The AMR Trust and the Manager
also entered into a Management Agreement dated October 1, 1995, as amended July
25, 1997, 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
investment 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
multiple investment advisers designated for that Portfolio. The assets of the
Intermediate Bond Portfolio are allocated by the Manager between the Manager and
another investment adviser. BT serves as investment adviser and administrator
of, and provides custody and transfer agency services to, the Equity 500 Index
Portfolio. See "Investment Advisers." The Manager serves as the sole active
investment adviser to the Money Market Portfolios and the Short-Term Bond
Portfolio. In addition, with the exception of the International Equity Portfolio
and the Equity 500 Index Portfolio, if so requested by any investment adviser,
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 short-term obligations of the type permitted for investment by the
Money Market Portfolio. As of December 31, 1997, the Manager had assets under
management totaling approximately $ billion including approximately $ billion
under active management and $ billion as named fiduciary or fiduciary adviser.
Of the total, approximately $ billion of assets are related to AMR. American
Airlines, Inc. is not responsible for investments made in the American
AAdvantage Funds.
The Manager provides the Trust and the AMR Trust with office space, office
equipment and personnel necessary to manage and administer the Trusts'
operations. This includes complying with reporting requirements; corresponding
with shareholders; maintaining internal bookkeeping, accounting and auditing
services and records; and supervising the provision of services to the Trusts by
third parties. The Manager oversees each Portfolio's participation in securities
lending activities and any actions taken by securities lending agents in
connection with those activities to ensure compliance with all applicable
regulatory and investment guidelines. 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) 0.15% of the net assets of the Money Market
Portfolios, (2) 0.25% of the net assets of the Intermediate Bond Portfolio and
the Short-Term Bond Portfolio, (3) 0.10% of the net assets of the other
Portfolios of the AMR Trust, plus (4) all fees payable by the Manager to the
investment advisers of the Balanced, the Growth and Income and the International
Equity Portfolios, 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. The Manager
receives compensation in connection with securities lending activities. If a
Portfolio lends its portfolio securities and receives cash collateral from the
borrower, the Manager may receive up to 25% of the net annual interest income
(the gross interest earned by the
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investment less the amount paid to the borrower as well as related expenses)
received from the investment of such cash. If a borrower posts collateral other
than cash, the borrower will pay to the lender a loan fee. The Manager may
receive up to 25% of the loan fees posted by borrowers. Currently, the Manager
receives 10% of the net annual interest income from the investment of cash
collateral or 10% of the loan fees posted by borrowers. In addition, the Manager
is compensated through the Administrative Services Agreement as described below
for other services provided.
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 expenses not otherwise assumed by the Manager,
including: 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.
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 the 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. As
described below, the assets of the Balanced, the Growth and Income and the
International Equity Portfolios are allocated among the investment advisers
designated for each Portfolio and the assets of the Intermediate Bond Portfolio
are allocated between the Manager and another investment adviser. 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 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 investment 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, 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.
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Each investment adviser has discretion to purchase and sell securities for
its segment of a Portfolio's assets in accordance with that Portfolio's
objectives, 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 the
Manager, 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. As compensation for
these services, the Manager receives an annualized fee of 0.25% of the net
assets of the Institutional Class of the Variable NAV Funds and 0.05% of the net
assets of the Institutional Class of the Money Market Funds. The fee is payable
quarterly in arrears.
BT serves as the administrator to the Equity 500 Index Portfolio. Under an
Administration and Services Agreement with the Portfolio, BT calculates the
value of the assets of the Portfolio and generally assists the Equity 500 Index
Portfolio Board in all aspects of the administration and operation of the
Portfolio. The Administration and Services Agreement provides for the Portfolio
to pay BT a fee, computed daily and paid monthly, at the rate of 0.05% of the
average daily net assets of the Portfolio. Under the Administration and Services
Agreement, BT may delegate one or more of its responsibilities to others,
including Federated Services Company, at BT's expense.
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 related to
Institutional Class shares. 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
Management Agreements and any fees received by the investment advisers pursuant
to their Advisory Agreements with the Manager, to be used for distribution
purposes.
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 -- STATE STREET BANK & TRUST COMPANY ("State Street"), Boston,
Massachusetts, serves as custodian for the Portfolios of the AMR Trust and the
Funds. BANKERS TRUST COMPANY, New York, New York, serves as custodian and
transfer agent for the assets of the Equity 500 Index Portfolio.
TRANSFER AGENT -- State Street serves as transfer agent and provides transfer
agency services for Fund shareholders through its affiliate NATIONAL FINANCIAL
DATA SERVICES, ("NFDS"), Kansas City, Missouri.
INDEPENDENT AUDITOR -- The independent auditor for the Funds 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.,
Kansas City, Missouri.
INVESTMENT ADVISERS
Set forth below is a brief description of the investment advisers for each
Fund and its corresponding Portfolio, except for the Money Market Funds and
their corresponding Portfolios, whose sole investment adviser is the Manager.
References to the investment advisers retained by a Portfolio also apply to the
corresponding
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Fund. Except for the Manager and BT, none of the investment advisers provides
any services to the Funds or the Portfolios except for portfolio investment
management and related recordkeeping services, or has 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 discussion of those services.
William F. Quinn has served as President of the Manager since it was
founded in 1986 and Nancy A. Eckl serves as Vice President-Trust Investments of
the Manager. Ms. Eckl 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, the
Intermediate Bond Fund and their corresponding Portfolios. These
responsibilities include oversight of the investment advisers, regular review of
each investment adviser's performance and asset allocations among them.
Michael W. Fields is responsible for the portfolio management oversight of
the Short-Term Bond Fund and its corresponding Portfolio. Mr. Fields has been
with the Manager since it was founded in 1986 and serves as Vice President-Fixed
Income Investments. Benjamin L. Mayer is responsible for the day-to-day
portfolio management of the Short-Term Bond Portfolio. Mr. Mayer has served as
Senior Portfolio Manager of the Manager since May 1995. Prior to that time, he
was a Vice President of 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. Fields also is responsible for the portfolio management oversight of the
portion of the Intermediate Bond Fund and its corresponding Portfolio, allocated
to the Manager. Mr. Mayer is responsible for its day-to-day portfolio
management.
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 September 30, 1997, Bankers Trust New York Corporation
was the seventh largest bank holding company in the United States with total
assets of approximately $ billion and approximately $ billion in assets
under management globally. Of that total, approximately $ 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 December 31, 1997, Barrow had discretionary investment management authority
with respect to approximately $ billion of assets, including
approximately $ billion of assets of AMR and its subsidiaries and
affiliated entities. Barrow serves as an investment adviser to the Balanced
Portfolio, the Growth and Income Portfolio, the Intermediate Bond Portfolios and
the Short-Term Bond Portfolio, although the Manager does not presently intend to
allocate any of the assets in the Short-Term Bond 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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BRANDYWINE ASSET MANAGEMENT, INC. ("Brandywine"), 201 North Walnut Street,
Wilmington, Delaware 19801, is a professional investment counseling firm founded
in 1986. Brandywine is a wholly owned subsidiary of Legg Mason, Inc. As of
December 31, 1997, Brandywine had assets under management totaling approximately
$ billion, including approximately $ million of assets of AMR and its
subsidiaries and affiliated entities. Brandywine serves as an investment adviser
to the Balanced and the Growth and Income 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 AMR Trust assets under its discretionary management, .225% of the next $100
million on all assets and .20% on all excess assets.
GSB INVESTMENT MANAGEMENT, INC. ("GSB"), 301 Commerce Street, Fort Worth,
Texas 76102, is a professional investment management firm which was founded in
1987 by Frank P. Ganucheau, Mark J. Stupfel, and Lyle E. Brumley. GSB is wholly
owned by United Asset Management Corporation, a Delaware corporation. As of
December 31, 1997, GSB managed approximately $ billion of assets, including
approximately $ million of assets of AMR and its subsidiaries and affiliated
entities. GSB serves as an investment adviser to the Balanced Portfolio and the
Growth and Income Portfolio. The Manager pays GSB an annualized fee equal to
.30% of the first $100 million in AMR Trust assets under its discretionary
management, .25% of the next $100 million, .20% of the next $100 million and
.15% on all excess assets.
HOTCHKIS AND WILEY, 800 West Sixth Street, 5th Floor, Los Angeles,
California 90017, is a professional investment counseling firm which was founded
in 1980 by John F. Hotchkis and George Wiley. Hotchkis and Wiley is a division
of Merrill Lynch Capital Management Group, a wholly owned subsidiary of Merrill
Lynch & Co., Inc. Assets under management as of December 31, 1997 were
approximately $ billion, which included approximately $ 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 Manager pays Hotchkis and
Wiley an annualized fee equal to .60% of the first $10 million of AMR Trust
assets under its discretionary management, .50% of the next $140 million of
assets, .30% of the next $50 million of assets, .20% of 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 December 31, 1997,
including funds managed for its parent company, were approximately $ billion,
which included approximately $ million of assets of AMR and its subsidiaries
and affiliated entities. IIA serves as an investment adviser to the Balanced
Portfolio and the Growth and Income Portfolio. The Manager pays IIA an
annualized fee equal to .50% of the first $30 million of AMR Trust assets under
its discretionary management, .25% of the next $70 million of assets, and .20%
of all excess assets.
MORGAN STANLEY ASSET MANAGEMENT INC. ("MSAM"), 25 Cabot Square, London,
United Kingdom E14 4QA, is a wholly owned subsidiary of Morgan Stanley, Dean
Witter, Discover & Co. 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, 1997, MSAM had assets under management totaling
approximately $ billion, including approximately $ billion under active
management and $ billion as named fiduciary or fiduciary adviser. As of
December 31, 1997, MSAM had investment authority over approximately $ million
of assets of AMR and its subsidiaries and affiliated entities. MSAM serves as an
investment adviser to the International Equity Portfolio. The Manager pays MSAM
an annual fee equal to .80% of the first $25 million of AMR Trust assets under
its discretionary management, .60% of the next $25 million in assets, .50% of
the next $25 million in assets and .40% on all excess assets.
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 December 31,
1997, Templeton had discretionary investment management authority with respect
to approximately $ billion of assets, including approximately $ million
of assets of AMR and its subsidiaries and affiliated entities. Templeton serves
as
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an investment adviser to the International Equity Portfolio. The Manager pays
Templeton an annualized fee equal to .50% of the first $100 million of 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 and BT, 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 -- Institutional Class shares are offered without
a sales charge to institutions -- including bank trust departments acting on
behalf of their clients (such as employee benefit plans, personal trusts and
other accounts for which the bank acts as agent or fiduciary); endowment funds
and charitable foundations; employee welfare plans which are tax-exempt under
Section 501(c)(9) of the Internal Revenue Code of 1986, as amended ("Code");
qualified pension and profit sharing plans, and cash or deferred arrangements
under Section 401(k) of the Code; corporations; and other institutional
investors who make an initial investment of at least $2 million. The Manager may
allow a reasonable period of time after opening an account for an investor to
meet the initial investment requirement. The Manager may waive the minimum
investment requirement for certain individuals associated with AMR or the
Manager, as more fully described in the SAI. In addition, for investors such as
investment advisors, trust companies and financial advisors who make investments
for a group of clients, the minimum initial investment can be met through an
aggregated purchase order for more than one client. Shares purchased through
financial intermediaries may be subject to transaction fees.
Trust shares are sold without a sales charge at the net asset value next
determined after the acceptance of a purchase order. Shares of the Variable NAV
Funds are offered and purchase orders accepted until the close of the New York
Stock Exchange, generally 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, Martin Luther King's Birthday, President's Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day
("Business Day"). Shares of the Money Market Fund are offered and orders
accepted until 3:00 p.m. Eastern time, or the close of the Exchange (whichever
comes first) on each day on which the Exchange is open for business except for
Columbus Day and Veteran's Day ("Money Market Business Day") and during which
federal funds become available to the Fund. Shares are offered and orders are
accepted for the Municipal Money Market Fund until 12:00 p.m. Eastern time, or
the close of the Exchange (whichever comes first) and for the U.S. Government
Money Market Fund until 2:00 p.m. Eastern time, or the close of the Exchange
(whichever comes first) on each Money Market 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.
Institutional Class shares may be purchased and redeemed as follows:
BY WIRE -- Purchases may be made by wiring funds. If opening a new account, an
investor should first forward a completed new account application to the Manager
at P.O. Box 619003, MD 5645, DFW Airport, TX 75261-9003 or by facsimile to (817)
967-0768. To ensure prompt receipt of a transmission by wire, the investor
should: telephone NFDS at (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. NFDS
will provide the investor with an account number. The investor should instruct
its bank to designate the account number and transmit the federal funds to:
State Street Bank & Trust Co., ABA Routing #0110-00028; Account #9905-342-3;
Attention: American AAdvantage Funds and reference the specific Fund.
BY DEPOSITING SECURITIES -- Shares of a Fund may be purchased in exchange for an
investor's securities if the securities are acceptable to that Fund's
corresponding Portfolio and satisfy applicable investment objectives and
policies.
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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, American Stock Exchange or The Nasdaq
Stock Market. 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
purposes of 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 American AAdvantage Funds to: "American
AAdvantage Funds, P.O. Box 419643, Kansas City, MO, 64141-6643." An additional
purchase of shares should be accompanied by the shareholder's account number.
Purchase checks are accepted subject to collection at full face value in U.S.
funds and must be drawn in U.S. dollars on a U.S. bank.
REDEMPTION OF SHARES -- Shares of the Funds may be redeemed by telephone or by
mail on any Business Day for the Variable NAV Funds and on any Money Market
Business Day for the Money Market Funds.
BY TELEPHONE -- Shares may be redeemed by telephone. Proceeds from redemption
orders placed by the following deadlines generally will be transmitted to
shareholders on the same day: 2:00 p.m. Eastern time for the Money Market Fund
and the U.S. Government Money Market Fund, and 12:00 p.m. Eastern time for the
Municipal Money Market Fund. Proceeds from redemption orders received by 4:00
p.m. Eastern Time for the Variable NAV Funds generally will be transmitted to
shareholders the next Business Day.
BY MAIL -- Variable NAV Fund shares may be redeemed on any Business Day by
writing directly to the Funds at the address above under "Purchasing Shares of
the Trust -- By Mail." Shares of the Money Market Funds may be redeemed on any
Money Market Business Day by writing to the same address. The redemption price
will be the net asset value per share next determined after receipt by the
transfer agent of all required documents in good order. "Good order" means that
the request must include a letter of instruction or stock assignment specifying
(1) the account number and Fund name; (2) the number of shares or dollar amount
to be redeemed; (3) signature of an authorized signatory for the owners of the
shares in the exact names in which they appear on the account; (4) other
supporting legal documents, if required, in the case of estates, trusts,
guardianships, custodians, corporations, IRAs and welfare, pension and
profit-sharing plans; and (5) 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.
Shares redeemed through financial intermediaries may be subject to transaction
fees.
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 the Funds intend to
redeem shares in cash, each Fund reserves the right to pay the redemption price
in whole or in part by a distribution of readily marketable
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securities held by the applicable Fund's corresponding Portfolio. See the SAI
for further information concerning redemptions in kind.
FULL REDEMPTIONS -- Unpaid dividends credited to an account up to the date of
redemption of all shares of a Money Market Fund generally will be paid at the
time of redemption.
VALUATION OF SHARES -- The net asset value of each share (share price) of the
Variable NAV Funds is determined as of the close of the Exchange, generally 4:00
p.m. Eastern time, on each Business Day and the net asset value of each share of
the Money Market Funds is determined as of the close of the Exchange, generally
4:00 p.m. Eastern time, on each Money Market Business Day. The net asset value
of all outstanding shares of a Fund will be determined by computing the Fund's
total assets (which is the value of the Fund's investment in its corresponding
Portfolio), subtracting all of the Fund's liabilities, and dividing the result
by the total number of Fund shares outstanding at such time. The net asset value
of shares of the Institutional Class will be determined based on a pro rata
allocation of the value of the Fund's corresponding Portfolio's investment
income, expenses and total capital gains and losses. The allocation will be
based on comparative net asset value at the beginning of the day except for
expenses related solely to one class of shares ("Class Expenses") which will be
borne only by the appropriate class of shares. Because of the Class Expenses,
the net income attributable to and the dividends payable for each class of
shares may be different. Additionally, the Variable NAV 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 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. Portfolio obligations held by the Money Market
Portfolios are valued in accordance with the amortized cost method, which is
designed to enable those Portfolios and their corresponding Funds to maintain a
consistent $1.00 per share net asset value. Investment grade short-term
obligations with 60 days or less to maturity held by all other Portfolios also
are valued using the amortized cost method as described in the SAI.
DIVIDENDS, OTHER DISTRIBUTIONS AND TAX MATTERS
DIVIDENDS AND OTHER 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 normally are declared
annually. Dividends consisting of substantially all of the net investment income
of the Intermediate Bond Fund and the Short-Term Bond 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,
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July and October. In December, the S&P 500 Index Fund will distribute another
income dividend, plus any capital gains. Each Fund may make an additional
dividend or other distribution, if necessary, to avoid a 4% excise tax on
certain undistributed income and gain. A Fund's net investment income
attributable to the Institutional Class consists of that class's pro rata share
of the Fund's share of dividends and interest (including discount) accrued on
the securities held by its corresponding Portfolio, less applicable expenses of
the Fund and the Portfolio attributable to the Institutional 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.
All of each Money Market Fund's net investment income and net short-term
capital gain, if any, generally is declared as dividends on each Money Market
Business Day immediately prior to the determination of the net asset value.
Dividends generally will be paid on the first day of the following month. Each
Money Market Fund's net investment income attributable to the Institutional
Class will consist of (1) that class' pro rata share of the Fund's share of
interest accrued and discount earned on its corresponding Portfolio's
securities, less amortization of premium and expenses of both the Portfolio and
(2) the Fund's expenses attributable to the Institutional Class. The Money
Market Portfolios do not expect to realize net capital gain and, therefore, the
Money Market Funds do not foresee paying any capital gain distributions. If any
Money Market Fund (either directly or indirectly through its corresponding
Portfolio) incurs or anticipates any unusual expenses, loss or depreciation that
would affect its net asset value or income for a particular period adversely,
the Board would at that time consider whether to adhere to the dividend policy
described above or to revise it in the light of the then prevailing
circumstances.
Unless a shareholder elects otherwise on the account application, all
dividends and other distributions on a Fund's Institutional Class shares will be
automatically paid in additional Institutional Class shares of that Fund.
However, a shareholder may choose to have distributions of net capital gain
(and, if applicable, net foreign currency gains) 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 Code. 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, 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 received a ruling from the Internal Revenue
Service or an opinion of counsel that it is or should be 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 are 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 are 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. Under the Taxpayer Relief Act of 1997,
different maximum tax rates apply to a noncorporate taxpayer's net capital gain
depending on the taxpayer's holding period and marginal rate of federal income
tax -- generally, 28% for gain recognized on securities held for more than one
year but not more than 18 months and 20% (10% for taxpayers in the 15% marginal
tax bracket) for gain recognized on securities held for more than 18 months.
Pursuant to an Internal Revenue Service notice, the Fund may divide each net
capital gain distribution
PROSPECTUS
33
<PAGE> 46
into a 28% rate gain distribution and a 20% rate gain distribution (in
accordance with the Fund's holding periods for the securities it sold that
generated the distributed gain) and its shareholders must treat those portions
accordingly.
Some foreign countries may impose income or withholding taxes on certain
dividends payable to the International Equity Portfolio. The International
Equity Fund's share of any such withheld taxes may be treated by that Fund as a
deduction or, if it satisfies certain requirements, it may elect to flow the tax
through to its shareholders, who in turn may either deduct the taxes or use them
in calculating credits against their federal income tax.
A portion of the income dividends paid by the Balanced Fund, the Growth and
Income Fund and the S&P 500 Index Fund is eligible for the dividends-received
deduction allowed to corporations. The eligible portion may not exceed the
respective Fund's aggregate dividends received from U.S. corporations. However,
dividends received by a corporate shareholder and deducted by it pursuant to the
dividends-received deduction may be subject indirectly to the AMT. The
International Equity Fund's dividends most likely will not qualify for the
dividends-received deduction because none of the dividends received by that Fund
are expected to be paid by U.S. corporations.
Distributions by the Municipal Money Market Fund that it designates as
"exempt-interest dividends" generally may be excluded from gross income by its
shareholders. If the Municipal Money Market Portfolio earns taxable income from
any of its investments, the Municipal Money Market Fund's share of income will
be distributed to its shareholders as a taxable dividend. To the extent that
Portfolio invests in private activity obligations, that Fund's shareholders will
be required to treat a portion of its dividends as a "tax preference item" in
determining their liability for the AMT. Exempt-interest dividends also may be
subject to income tax under state and local tax laws. Because some states exempt
from income tax the interest on their own obligations and obligations of
governmental agencies and municipalities in the state, shareholders will receive
tax information each year regarding the Municipal Money Market Fund's
exempt-interest income by state. Interest on indebtedness incurred or continued
by a shareholder to purchase or carry shares of that Fund is not deductible.
Redemption of Fund shares (other than shares of the Money Market Funds) may
result in taxable gain or loss to the redeeming shareholder, depending upon
whether the redemption proceeds exceed or are 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)
(and for the International Equity Fund, if it satisfies the requirements and
makes the election referred to above, their share of that Fund's share of any
foreign taxes paid by the International Equity Portfolio) that year and of any
portion of those dividends that qualifies for the corporate dividends-received
deduction. The information regarding capital gain distributions designates the
portions thereof subject to the different maximum rates of tax applicable to
noncorporate taxpayers' net capital gain indicated above. The notice sent by the
Municipal Money Market Fund specifies the amounts of exempt-interest dividends
(and the portion thereof, if any, that is a tax preference item for purposes of
the AMT) and any taxable dividends.
Each Fund is required to withhold 31% of all taxable dividends, and, for
all Funds other than the Money Market Funds, 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
PROSPECTUS
34
<PAGE> 47
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 ten separate investment portfolios.
Each Fund included in this Prospectus is comprised of three classes of shares,
which can be issued in an unlimited number. Each share represents an equal
proportionate beneficial interest in that Fund and is entitled to one vote. Only
shares of a particular class may vote on matters affecting that class. Only
shares of a particular Fund may vote on matters affecting that Fund. All shares
of the Trust vote on matters affecting the Trust as a whole. Share voting rights
are not cumulative, and shares have no preemptive or conversion rights. Shares
of the Trust are nontransferable. Each series in the Trust will not be involved
in any vote involving a Portfolio in which it does not invest its assets.
Shareholders of all of the series of the Trust, however, will vote together to
elect Trustees of the Trust and for certain other matters. Under certain
circumstances, the shareholders of one or more series could control the outcome
of these votes.
On most issues subjected to a vote of a Portfolio's interest holders, as
required by the 1940 Act, its corresponding Fund will solicit proxies from its
shareholders and will vote its interest in the Portfolio in proportion to the
votes cast by that Fund's shareholders. Because a Portfolio interest holder's
votes are proportionate to its percentage interests in that Portfolio, one or
more other Portfolio investors could, in certain instances, approve an action
against which a majority of the outstanding voting securities of its
corresponding Fund had voted. This could result in that Fund's redeeming its
investment in its corresponding Portfolio, which could result in increased
expenses for that Fund. Whenever the shareholders of a Fund are called to vote
on matters related to its corresponding Portfolio, the Board shall vote shares
for which they receive no voting instructions in the same proportion as the
shares for which they do receive voting instructions. Any information received
from a Portfolio in the Portfolio's report to shareholders will be provided to
the shareholders of its corresponding Fund.
As a Massachusetts business trust, the Trust is not obligated to conduct
annual shareholder meetings. However, the Trust will hold special shareholder
meetings whenever required to do so under the federal securities laws or the
Trust's Declaration of Trust or By-Laws. Trustees can be removed by a
shareholder vote at special shareholder meetings.
As more fully described in the SAI, the following persons may be deemed to
control certain Funds by virtue of their ownership of more than 25% of the
outstanding shares of a Fund as of January 31, 1998:
AMERICAN AADVANTAGE BALANCED FUND
AMR Corporation and subsidiary companies and Employee Benefit Trusts
thereof %
AMERICAN AADVANTAGE GROWTH AND INCOME FUND
AMR Corporation and subsidiary companies and Employee Benefit Trusts
thereof %
AMERICAN AADVANTAGE INTERNATIONAL EQUITY FUND
AMR Corporation and subsidiary companies and Employee Benefit Trusts
thereof %
AMERICAN AADVANTAGE INTERMEDIATE BOND FUND
Retirement Advisors of America %
AMERICAN AADVANTAGE SHORT-TERM BOND FUND
AMR Corporation and subsidiary companies and Employee Benefit Trusts
thereof %
PROSPECTUS
35
<PAGE> 48
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
Funds will be audited by the 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. Shareholder inquiries and requests for information
regarding the other investment companies that also invest in the Equity 500
Index Portfolio should be made by calling (800) 730-1313.
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 INSTITUTIONAL 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.
PlanAhead Class is a registered service mark, and Platinum Class, American
AAdvantage Balanced Fund, American AAdvantage Growth and Income Fund, American
AAdvantage International Equity Fund, American AAdvantage Intermediate Bond
Fund, American AAdvantage Short Term Bond Fund, American AAdvantage Money Market
Fund, American AAdvantage Municipal Money Market Fund and American AAdvantage
U.S. Government Money Market Fund are service marks of AMR Investment Services,
Inc.
PROSPECTUS
36
<PAGE> 49
American Advantage Funds(R) Logo
- INSTITUTIONAL CLASS -
P.O. Box 619003
Dallas/Fort Worth Airport, Texas
75261-9003
(800) 967-9009
- PLANAHEAD CLASS(R) -
P.O. Box 419643
Kansas City, MO 64141-6643
(800) 388-3344
- PLATINUM CLASS(SM) -
P.O. Box 619003
Dallas/Fort Worth Airport, Texas
75261-9003
(800) 967-9009
<PAGE> 50
THIS PROSPECTUS contains important information about the PLANAHEAD CLASS OF THE
AMERICAN AADVANTAGE FUNDS ("Trust"), an open-end management investment company
which consists of multiple investment portfolios. This Prospectus pertains only
to the nine 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 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 consists of
multiple classes of shares designed to meet the needs of different groups of
investors. PlanAhead Class shares are available to all investors, including
smaller institutional investors, investors using intermediary organizations
such as discount brokers or plan sponsors, individual retirement accounts, and
self-employed individual retirement plans. Prospective PlanAhead Class
investors should read this Prospectus carefully before making an investment
decision and retain it for future reference.
IN ADDITION TO THIS PROSPECTUS, a Statement of Additional Information ("SAI")
dated March 1, 1998 has been filed with the Securities and Exchange Commission
and is incorporated herein by reference. The SAI contains more detailed
information about the Funds. For a free copy of the SAI, call 800-388-3344. For
further information about the PlanAhead Class or for information on the other
classes of shares, please refer to the appropriate address and phone number on
the back cover of this Prospectus.
The Securities and Exchange Commission maintains a Web Site
(http://www.sec.gov) that contains the SAI, material incorporated by reference
and other information regarding the Funds and the Portfolios.
AN INVESTMENT IN THE MONEY MARKET FUNDS IS NEITHER INSURED NOR GUARANTEED BY
THE U.S. GOVERNMENT AND THERE CAN BE NO ASSURANCE THAT THEY WILL BE ABLE TO
MAINTAIN A STABLE PRICE OF $1.00 PER SHARE.
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.
PROSPECTUS
March 1, 1998
[AMERICAN AADVANTAGE LOGO]
- PlanAhead Class -
BALANCED FUND
GROWTH AND INCOME FUND
INTERNATIONAL EQUITY FUND
S&P 500 INDEX FUND
INTERMEDIATE BOND FUND
SHORT-TERM BOND FUND
MONEY MARKET FUND
MUNICIPAL MONEY MARKET FUND
U.S. GOVERNMENT MONEY MARKET FUND
Managed by AMR Investment Services, Inc.
<PAGE> 51
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 S&P 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.
The AMERICAN AADVANTAGE INTERMEDIATE BOND FUND(SM) ("Intermediate Bond Fund")
seeks income and capital appreciation by investing all of its investable assets
in the Intermediate Bond Portfolio of the AMR Trust ("Intermediate Bond
Portfolio"), which in turn primarily invests in debt obligations and seeks to
maintain a dollar weighted average duration of three to seven years.
The AMERICAN AADVANTAGE SHORT-TERM BOND FUND(SM) ("Short-Term Bond Fund,"
formerly the "American AAdvantage Limited-Term Income Fund") seeks income and
capital appreciation by investing all of its investable assets in the Short-Term
Bond Portfolio of the AMR Trust ("Short-Term Bond Portfolio," formerly the
"Limited-Term Income Portfolio") which in turn primarily invests in debt
obligations and seeks to maintain a dollar weighted average duration of one to
three years.
The AMERICAN AADVANTAGE MONEY MARKET FUND(SM) ("Money Market Fund"), AMERICAN
AADVANTAGE MUNICIPAL MONEY MARKET FUND(SM) ("Municipal Money Market Fund") and
AMERICAN AADVANTAGE U.S. GOVERNMENT MONEY MARKET FUND(SM) ("U.S. Government
Money Market Fund") (collectively, the "Money Market Funds") each seeks current
income, liquidity, and the maintenance of a stable price per share of $1.00 by
investing all of its investable assets in the Money Market Portfolio of the AMR
Trust ("Money Market Portfolio"), the Municipal Money Market Portfolio of the
AMR Trust ("Municipal Money Market Portfolio") and the U.S. Government Money
Market Portfolio of the AMR Trust ("U.S. Government Money Market Portfolio"),
respectively (collectively the "Money Market Portfolios"), which in turn invest
in high quality, short-term obligations. The Municipal Money Market Portfolio
invests primarily in municipal obligations and the U.S. Government Money Market
Portfolio invests exclusively in obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities and in repurchase agreements that
are collateralized by such obligations.
Under 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. ("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 master-feeder operating structure is different
from that of many other investment companies which directly acquire and manage
their own portfolios of securities. Accordingly, investors should carefully
consider this investment approach. See "Investment Objectives, Policies and
Risks -- Additional Information
- - ---------------
(1) S&P is a trademark of The McGraw-Hill Companies, Inc. and has been licensed
for use. "Standard and Poor's(R)," "S&P(R)," "Standard & Poor's 500,"
"S&P(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.
PROSPECTUS
2
<PAGE> 52
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.............. 3
FINANCIAL HIGHLIGHTS.................... 4
INTRODUCTION............................ 11
INVESTMENT OBJECTIVES, POLICIES AND
RISKS................................... 11
INVESTMENT RESTRICTIONS................. 24
YIELDS AND TOTAL RETURNS................ 25
MANAGEMENT AND ADMINISTRATION OF THE
TRUSTS.................................. 25
INVESTMENT ADVISERS..................... 28
HOW TO PURCHASE SHARES.................. 31
HOW TO REDEEM SHARES.................... 32
RETIREMENT ACCOUNTS..................... 33
EXCHANGE PRIVILEGE...................... 33
DISTRIBUTION OF TRUST SHARES............ 34
VALUATION OF SHARES..................... 34
DIVIDENDS, OTHER DISTRIBUTIONS AND TAX
MATTERS................................. 35
GENERAL INFORMATION..................... 37
SHAREHOLDER COMMUNICATIONS.............. 38
</TABLE>
- - --------------------------------------------------------------------------------
TABLE OF FEES AND EXPENSES
Annual Operating Expenses (as a percentage of average net assets):
<TABLE>
<CAPTION>
U.S.
GROWTH INTER- S&P INTER- SHORT- MUNICIPAL GOVERNMENT
AND NATIONAL 500 MEDIATE TERM MONEY MONEY MONEY
BALANCED INCOME EQUITY INDEX BOND BOND MARKET MARKET MARKET
FUND FUND FUND FUND(1) FUND(1) FUND FUND FUND FUND
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees 0.33% 0.33% 0.48% % % 0.25% 0.15% 0.15% 0.15%
12b-1 Fees 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Other Expenses (after fee
waivers)(2) 0.64 0.63 0.69 0.60 0.43 0.52 0.52
---- --- ---- ---- ---- ---- --- ----- -----
Total Operating Expenses
(after fee waivers)(3) 0.97% 0.96% 1.17% % % 0.85% 0.58% 0.67% 0.67%
==== === ==== ==== ==== ==== === ===== =====
</TABLE>
(1) Because the S&P 500 Index Fund and the Intermediate Bond Fund shares were
not offered for sale prior to March 1, 1998, their Annual Operating Expenses
are based on estimates.
(2) "Other Expenses" before fee waivers are estimated to be 0.69% for the
PlanAhead Class of Short-Term Bond Fund.
(3) "Total Operating Expenses" before fee waivers are estimated to be 0.94% for
the PlanAhead Class of Short-Term Bond Fund.
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.
PROSPECTUS
3
<PAGE> 53
EXAMPLES
A PlanAhead 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 $10 $31 $54 $119
Growth and Income Fund 10 31 53 118
International Equity Fund 12 37 64 142
S&P 500 Index Fund
Intermediate Bond Fund
Short-Term Bond Fund 9 27 47 105
Money Market Fund 6 19 32 73
Municipal Money Market Fund 7 21 37 83
U.S. Government Money Market Fund 7 21 37 83
</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 the PlanAhead 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 has been audited by Ernst &
Young LLP, independent auditors. 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 and the Intermediate Bond Fund because they had not commenced
operations as of October 31, 1997.
PROSPECTUS
4
<PAGE> 54
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
BALANCED FUND
----------------------------------------------------------------------------------------------
PLANAHEAD CLASS INSTITUTIONAL CLASS
------------------------------------------------- -----------------------------------------
YEAR ENDED OCTOBER 31, PERIOD ENDED YEAR ENDED OCTOBER 31,
---------------------------------- OCTOBER 31, -----------------------------------------
1997 1996(5)(6) 1995(4)(5) 1994(1)(3) 1994(3) 1993 1992 1991
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $ $13.90 $12.35 $12.35 $13.23 $11.99 $11.60 $9.87
----- ------ ------ ------- ---- ---- ---- ----
Income from investment
operations:
Net investment income 0.57(7) 0.54 0.12 0.57 0.49 0.55 0.58
Net gains (losses) on
securities (both realized
and unrealized) 1.56(7) 1.67 (0.12) (0.54) 1.57 0.41 1.79
----- ------ ------ ------- ---- ---- ---- ----
Total from investment
operations 2.13 2.21 0.00 0.03 2.06 0.96 2.37
----- ------ ------ ------- ---- ---- ---- ----
Less distributions:
Dividends from net investment
income (0.56) (0.52) -- (0.56) (0.52) (0.56) (0.64)
Distributions from net
realized gains on securities (0.44) (0.14) -- (0.34) (0.30) (0.01) --
----- ------ ------ ------- ---- ---- ---- ----
Total distributions (1.00) (0.66) -- (0.90) (0.82) (0.57) (0.64)
----- ------ ------ ------- ---- ---- ---- ----
Net asset value, end of period $ $15.03 $13.90 $12.35 $12.36 $13.23 $11.99 $11.60
===== ====== ====== ======= ==== ==== ==== ====
Total return (annualized)(8) % 16.01% 19.06% (0.16%)(9) (0.08%) 19.19% 8.75% 25.35%
===== ====== ====== ======= ==== ==== ==== ====
Ratios/supplemental data:
Net assets, end of period (in
thousands) $ $18,000 $5,450 $528 $222,873 $532,543 $370,087 $311,906
Ratios to average net
assets(10)(11)(12)(13):
Expenses % 0.97%(7) 0.99% 0.92% 0.36% 0.34% 0.35% 0.37%
Net investment income % 3.64%(7) 3.70% 4.04% 4.77% 4.91% 5.31% 6.06%
Portfolio turnover rate(14) % 76% 73% 48% 48% 83% 80% 55%
Average commission rate
paid(14) $ $0.0409 -- -- -- -- -- --
<CAPTION>
BALANCED FUND
------------------------------
INSTITUTIONAL CLASS
------------------------------
YEAR ENDED OCTOBER 31,
------------------------------
1990(2) 1989 1988
------------------------------
<S> <C> <C> <C>
Net asset value, beginning of
period $11.05 $10.13 $9.08
---- ---- ----
Income from investment
operations:
Net investment income 0.57 0.53 0.56
Net gains (losses) on
securities (both realized
and unrealized) (1.18) 0.90 0.73
---- ---- ----
Total from investment
operations (0.61) 1.43 1.29
---- ---- ----
Less distributions:
Dividends from net investment
income (0.51) (0.51) (0.24)
Distributions from net
realized gains on securities (0.06) -- --
---- ---- ----
Total distributions (0.57) (0.51) (0.24)
---- ---- ----
Net asset value, end of period $9.87 $11.05 $10.13
==== ==== ====
Total return (annualized)(8) (5.24%) 15.49% 14.63%
==== ==== ====
Ratios/supplemental data:
Net assets, end of period (in
thousands) $233,702 $210,119 $147,581
Ratios to average net
assets(10)(11)(12)(13):
Expenses 0.44% 0.47% 0.52%
Net investment income 6.50% 6.32% 6.25%
Portfolio turnover rate(14) 62% 78% 77%
Average commission rate
paid(14) -- -- --
</TABLE>
(1) The Balanced Fund commenced active operations on July 17, 1987. The
PlanAhead 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) The per share amounts and ratios reflect income and expenses assuming
inclusion of the Fund's proportionate share of the income and expenses of
the Balanced Portfolio.
(8) 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 0.30% (for periods prior to August 1, 1994) and a sale at
net asset value on the last day of each period reported.
(9) Total return for the period ended October 31, 1994 reflects Institutional
Class returns from November 1, 1993 through July 31, 1994 and returns of
the PlanAhead Class for the period August 1, 1994 (commencement of
operations) through October 31, 1994. Due to the different expense
structures between the classes, total return for the PlanAhead Class would
vary from the results shown had it been in operation for the entire year.
(10) 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.
(11) 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.
(12) Operating results of the PlanAhead Class exclude fees waived by the
Manager. Had the PlanAhead Class paid such fees during the period, the
ratio of expenses and net investment income to average net assets would
have been 0.99% and 3.97%, respectively, for the period ended October 31,
1994 and 1.09% and 3.60%, respectively, for the year ended October 31,
1995.
(13) Annualized.
(14) On November 1, 1995, the Balanced Fund began investing all of its
investable assets in the Balanced Portfolio. Portfolio turnover rate and
average commission rate paid for the years ended October 31, 1996 and 1997
are those of the Balanced Portfolio. Calculation and disclosure of the
average commission rate paid was not required prior to 1996.
PROSPECTUS
5
<PAGE> 55
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
GROWTH AND INCOME FUND
-------------------------------------------------------------------------------------------
PLANAHEAD CLASS INSTITUTIONAL CLASS
----------------------------------------------- ----------------------------------------
YEAR ENDED OCTOBER 31, PERIOD ENDED YEAR ENDED OCTOBER 31,
-------------------------------- OCTOBER 31, ----------------------------------------
1997 1996(5)(6) 1995(5) 1994(1)(4) 1994(4) 1993 1992(3) 1991
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $ $15.81 $14.17 $13.99 $14.63 $12.79 $12.10 $9.47
----- ------- ----- ------- ----- ----- ----- -----
Income from investment
operations:
Net investment income 0.39(7) 0.40 0.05 0.43 0.36 0.39 0.42
Net gains (losses) on
securities (both realized and
unrealized) 3.10(7) 2.22 0.13 0.08 2.21 0.77 2.70
----- ------- ----- ------- ----- ----- ----- -----
Total from investment
operations 3.49 2.62 0.18 0.51 2.57 1.16 3.12
----- ------- ----- ------- ----- ----- ----- -----
Less distributions:
Dividends from net investment
income (0.40) (0.44) -- (0.41) (0.37) (0.39) (0.49)
Distributions from net
realized gains on securities (0.57) (0.54) -- (0.54) (0.36) (0.08) --
----- ------- ----- ------- ----- ----- ----- -----
Total distributions (0.97) (0.98) -- (0.95) (0.73) (0.47) (0.49)
----- ------- ----- ------- ----- ----- ----- -----
Net asset value, end of period $ $18.33 $15.81 $14.17 $14.19 $14.63 $12.79 $12.10
===== ======= ===== ======= ===== ===== ===== =====
Total return (annualized)(8) % 22.98% 20.14% 3.21%(9) 3.36% 21.49% 10.00% 33.83%
===== ======= ===== ======= ===== ===== ===== =====
Ratios/supplemental data:
Net assets, end of period (in
thousands) $ $16,084 $4,821 $56 $22,737 $477,088 $339,739 $264,628
Ratios to average net
assets(10)(11)(12)(13):
Expenses % 0.94%(7) 0.99% 0.95% 0.33% 0.34% 0.36% 0.37%
Net investment income % 2.16%(7) 2.23% 1.50% 3.28% 3.12% 3.57% 4.19%
Portfolio turnover rate(14) % 40% 26% 23% 23% 30% 35% 52%
Average commission rate
paid(14) $ $0.0412 -- -- -- -- -- --
<CAPTION>
GROWTH AND INCOME FUND
------------------------------
INSTITUTIONAL CLASS
------------------------------
YEAR ENDED OCTOBER 31,
------------------------------
1990(2) 1989 1988
------------------------------
<S> <C> <C> <C>
Net asset value, beginning of
period $11.59 $9.96 $8.30
----- ----- -----
Income from investment
operations:
Net investment income 0.42 0.42 0.42
Net gains (losses) on
securities (both realized and
unrealized) (1.94) 1.59 1.40
----- ----- -----
Total from investment
operations (1.52) 2.01 1.82
----- ----- -----
Less distributions:
Dividends from net investment
income (0.43) (0.38) (0.16)
Distributions from net
realized gains on securities (0.17) -- --
----- ----- -----
Total distributions (0.60) (0.38) (0.16)
----- ----- -----
Net asset value, end of period $9.47 $11.59 $9.96
===== ===== =====
Total return (annualized)(8) (13.52%) 20.94% 22.20%
===== ===== =====
Ratios/supplemental data:
Net assets, end of period (in
thousands) $182,430 $187,869 $140,073
Ratios to average net
assets(10)(11)(12)(13):
Expenses 0.45% 0.45% 0.53%
Net investment income 4.49% 4.40% 4.20%
Portfolio turnover rate(14) 41% 50% 56%
Average commission rate
paid(14) -- -- --
</TABLE>
(1) The Growth and Income Fund commenced active operations on July 17, 1987.
The PlanAhead 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) The per share amounts and ratios reflect income and expenses assuming
inclusion of the Fund's proportionate share of the income and expenses of
the Growth and Income Portfolio.
(8) 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 0.30% (for periods prior to August 1, 1994) and a sale at
net asset value on the last day of each period reported.
(9) Total return for the period ended October 31, 1994 reflects Institutional
Class returns from November 1, 1993 through July 31, 1994 and returns of
the PlanAhead Class for the period August 1, 1994 (commencement of
operations) through October 31, 1994. Due to the different expense
structures between the classes, total return for the PlanAhead Class would
vary from the results shown had it been in operation for the entire year.
(10) 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.
(11) 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.
(12) Operating results of the PlanAhead Class exclude fees waived by the
Manager. Had the PlanAhead Class paid such fees during the period, the
ratio of expenses and net investment income to average net assets would
have been 1.05% and 1.40%, respectively, for the period ended October 31,
1994, 1.08% and 2.14%, respectively, for the year ended October 31, 1995,
and 0.96% and 2.14%, respectively, for the year ended October 31, 1996.
(13) Annualized.
(14) On November 1, 1995 the Growth and Income Fund began investing all of its
investable assets in the Growth and Income Portfolio. Portfolio turnover
rate and average commission rate paid for the years ended October 31, 1996
and 1997 are those of the Growth and Income Portfolio. Calculation and
disclosure of the average commission rate paid was not required prior to
1996.
PROSPECTUS
6
<PAGE> 56
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY FUND
----------------------------------------------------------------------------------------------
PLANAHEAD CLASS INSTITUTIONAL CLASS
--------------------------------------------- ----------------------------------------------
YEAR ENDED OCTOBER 31, PERIOD ENDED YEAR ENDED OCTOBER 31, PERIOD ENDED
----------------------------- OCTOBER 31, ------------------------------- OCTOBER 31,
1997 1996(5) 1995(5) 1994(1)(3)(4) 1994(3)(4) 1993(2) 1992 1991(1)
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $ $13.20 $12.85 $12.61 $12.07 $8.93 $10.13 $10.00
----- ---- ----- -------- ------- ----- ----- --------
Income from investment
operations:
Net investment income 0.26(6) 0.24 0.06 0.32 0.17 0.12 --
Net gains (losses) on securities
(both realized and unrealized) 1.92(6) 0.64 0.18 1.10 3.09 (1.31) 0.13
----- ---- ----- -------- ------- ----- ----- --------
Total from investment operations 2.18 0.88 0.24 1.42 3.26 (1.19) 0.13
----- ---- ----- -------- ------- ----- ----- --------
Less distributions:
Dividends from net investment
income (0.24) (0.21) -- (0.17) (0.12) (0.01) --
Distributions from net realized
gains on securities (0.24) (0.32) -- (0.45) -- -- --
----- ---- ----- -------- ------- ----- ----- --------
Total distributions (0.48) (0.53) -- (0.62) (0.12) (0.01) --
----- ---- ----- -------- ------- ----- -----
Net asset value, end of period $ $14.90 $13.20 $12.85 $12.87 $12.07 $8.93 $10.13
===== ==== ===== ======== ======= ===== ===== ========
Total return (annualized)(7) % 16.95% 7.37% 11.60%(8) 11.77% 36.56% (12.07%) 5.69%
===== ==== ===== ======== ======= ===== ===== ========
Ratios/supplemental data:
Net assets, end of period
(in thousands) $ $7,138 $1,456 $375 $23,115 $66,652 $38,837 $10,536
Ratios to average net
assets(9)(10)(11):
Expenses % 1.17%(6) 1.33% 1.25% 0.61% 0.78% 1.17% 1.90%(12)
Net investment income % 1.76%(6) 2.08% 1.86% 2.74% 2.00% 2.04% 0.38%(12)
Portfolio turnover rate(13) % 19% 21% 37% 37% 61% 21% 2%
Average commission rate paid(13) $ $0.0192 -- -- -- -- -- --
</TABLE>
(1) The International Equity Fund commenced active operations on August 7,
1991. The PlanAhead 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 the close of
business on 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) Net investment income per share was calculated by subtracting class
expenses per share from net investment income per share for the Fund before
class expenses.
(6) The per share amounts and ratios reflect income and expenses assuming
inclusion of the Fund's proportionate share of the income and expenses of
the International Equity Portfolio.
(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 0.30% (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 period ended October 31, 1994 reflects Institutional
Class returns from November 1, 1993 through July 31, 1994 and returns of
the PlanAhead Class for the period August 1, 1994 (commencement of
operations) through October 31, 1994. Due to the different expense
structures between the classes, total return for the PlanAhead 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.
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.
(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.
(12) Estimated based on expected annual expenses and actual average net assets.
(13) On November 1, 1995 the International Equity Fund began investing all of
its investable assets in the International Equity Portfolio. Portfolio
turnover rate and average commission rate paid for the years ended October
31, 1996 and 1997 are those of the International Equity Portfolio.
Calculation and disclosure of the average commission rate paid was not
required prior to 1996.
PROSPECTUS
7
<PAGE> 57
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
SHORT-TERM BOND FUND
--------------------------------------------------------------------------
PLANAHEAD CLASS INSTITUTIONAL CLASS
----------------------------------------- ------------------------------
YEAR ENDED OCTOBER 31, PERIOD ENDED YEAR ENDED OCTOBER 31,
-------------------------- OCTOBER 31, ------------------------------
1997 1996 1995 1994(1)(3) 1994(3) 1993 1992
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ $9.82 $9.68 $9.78 $10.23 $10.13 $10.07
--- --- --- ------ --- --- ---
Income from investment operations:
Net investment income 0.60(4) 0.59 0.13 0.52 0.58 0.75
Net gains (losses) on securities (both realized
and unrealized) (0.14)(4) 0.14 (0.10) (0.46) 0.15 0.06
--- --- --- ------ --- --- ---
Total from investment operations 0.46 0.73 0.03 0.06 0.73 0.81
--- --- --- ------ --- --- ---
Less distributions:
Dividends from net investment income (0.60) (0.59) (0.13) (0.52) (0.58) (0.75)
Distributions from net realized gains on
securities -- -- -- (0.10) (0.05) --
--- --- --- ------ --- --- ---
Total distributions (0.60) (0.59) (0.13) (0.62) (0.63) (0.75)
--- --- --- ------ --- --- ---
Net asset value, end of period $ $9.68 $9.82 $9.68 $9.67 $10.23 $10.13
=== === === ====== === === ===
Total return (annualized)(5)(6) % 4.83% 7.83% 0.45%(6) 0.42% 7.20% 7.94%
=== === === ====== === === ===
Ratios/supplemental data:
Net assets, end of period (in thousands) $ $3,399 $1,576 $403 $112,141 $238,874 $209,928
Ratios to average net assets(7)(8)(9)(10):
Expenses % 0.85%(4) 0.83% 0.79% 0.31% 0.26% 0.27%
Net investment income % 6.11%(4) 6.16% 5.10% 5.26% 5.76% 7.40%
Portfolio turnover rate(11) % 304% 183% 94% 94% 176% 133%
<CAPTION>
SHORT-TERM BOND FUND
-------------------------------------------
INSTITUTIONAL CLASS
-------------------------------------------
YEAR ENDED OCTOBER 31, PERIOD ENDED
---------------------------- OCTOBER 31,
1991(2) 1990 1989 1988(1)
-------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $9.76 $9.94 $10.12 $10.00
--- --- ---
Income from investment operations:
Net investment income 0.83 0.92 0.96 0.64
Net gains (losses) on securities (both realized
and unrealized) 0.31 (0.18) (0.12) 0.05
--- --- --- ------
Total from investment operations 1.14 0.74 0.84 0.69
--- --- --- ------
Less distributions:
Dividends from net investment income (0.83) (0.92) (1.02) (0.57)
Distributions from net realized gains on
securities -- -- -- --
--- --- --- ------
Total distributions (0.83) (0.92) (1.02) (0.57)
--- --- --- ------
Net asset value, end of period $10.07 $9.76 $9.94 $10.12
=== === === ======
Total return (annualized)(5)(6) 11.87% 7.51% 7.62% 7.41%
=== === === ======
Ratios/supplemental data:
Net assets, end of period (in thousands) $141,629 $83,265 $60,507 $40,855
Ratios to average net assets(7)(8)(9)(10):
Expenses 0.35% 0.48% 0.59% 0.50%
Net investment income 8.42% 9.44% 9.77% 8.01%
Portfolio turnover rate(11) 165% 156% 158% 127%
</TABLE>
(1) The Short-Term Bond Fund commenced active operations on December 3, 1987.
Prior to March 1, 1998, the Short-Term Bond Fund was known as the
Limited-Term Income Fund. The PlanAhead Class commenced active operations
on August 1, 1994 and at that time existing shares of the Short-Term Bond
Fund were designated as Institutional Class shares.
(2) AMR Investment Services, Inc. began portfolio management of the Short-Term
Bond 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) The per share amounts and ratios reflect income and expenses assuming
inclusion of the Fund's proportionate share of the income and expenses of
the Limited-Term Income Portfolio.
(5) 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 0.30% (for periods prior to August 1, 1994) and a sale at
net asset value on the last day of each period reported.
(6) Total return for the period ended October 31, 1994 reflects Institutional
Class returns from November 1, 1993 through July 31, 1994 and returns of
the PlanAhead Class for the period August 1, 1994 (commencement of
operations) through October 31, 1994. Due to the different expense
structures between the classes, total return for the PlanAhead Class would
vary from the results shown had it been in operation for the entire year.
(7) 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.
(8) 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.
(9) Operating results of the PlanAhead Class exclude fees waived by the
Manager. Had the PlanAhead Class paid such fees during the period, the
ratio of expenses and net investment income to average net assets would
have been 1.00% and 4.89%, respectively, for the period ended October 31,
1994, 1.06% and 5.94%, respectively, for the year ended October 31, 1995,
and 0.94% and 6.02%, respectively, for the year ended October 31, 1996.
(10) Annualized.
(11) On November 1, 1995 the Short-Term Bond Fund began investing all of its
investable assets in the Short-Term Bond Portfolio. Portfolio turnover rate
for the years ended October 31, 1996 and 1997 is that of the Short-Term
Bond Portfolio.
PROSPECTUS
8
<PAGE> 58
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
MONEY MARKET FUND
----------------------------------------------------------------------------------------------
PLANAHEAD CLASS INSTITUTIONAL CLASS
-------------------------------------------- -----------------------------------------------
YEAR ENDED OCTOBER 31, PERIOD ENDED YEAR ENDED OCTOBER 31,
----------------------------- OCTOBER 31, -----------------------------------------------
1997 1996 1995 1994(1)(2) 1994(2) 1993 1992 1991
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
--- --- --- ------ --- --- --- ---
Net investment income 0.05(3) 0.05 0.01 0.04 0.03 0.04 0.07
Less dividends from net investment
income (0.05) (0.05) (0.01) (0.04) (0.03) (0.04) (0.07)
--- --- --- ------ --- --- --- ---
Net asset value, end of period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
=== === === ====== === === === ===
Total return (annualized) % 5.21% 5.60% 3.73%(4) 3.85% 3.31% 4.41% 7.18%
=== === === ====== === === === ===
Ratios/supplemental data:
Net assets, end of period (in
thousands) $ $106,890 $41,989 $25 $1,893,144 $2,882,974 $2,223,829 $715,280
Ratios to average net
assets(5)(6)(7):
Expenses % 0.58%(3) 0.55% 0.70% 0.21% 0.23% 0.26% 0.24%
Net investment income % 5.06%(3) 5.56% 4.42% 3.63% 3.23% 4.06% 6.93%
<CAPTION>
MONEY MARKET FUND
------------------------------
INSTITUTIONAL CLASS
------------------------------
YEAR ENDED OCTOBER 31,
------------------------------
1990 1989 1988
------------------------------
<S> <C> <C> <C>
Net asset value, beginning of
period $1.00 $1.00 $1.00
--- --- ---
Net investment income 0.08 0.09 0.08
Less dividends from net investment
income (0.08) (0.09) (0.08)
--- --- ---
Net asset value, end of period $1.00 $1.00 $1.00
=== === ===
Total return (annualized) 8.50% 9.45% 7.54%
=== === ===
Ratios/supplemental data:
Net assets, end of period (in
thousands) $745,405 $385,916 $330,230
Ratios to average net
assets(5)(6)(7):
Expenses 0.20% 0.22% 0.28%
Net investment income 8.19% 9.11% 7.54%
</TABLE>
(1) The Money Market Fund commenced active operations on September 1, 1987 and
on November 1, 1991, the existing shares of the Fund were designated as
Institutional Class shares. The PlanAhead Class commenced active operations
on August 1, 1994.
(2) Average shares outstanding for the period rather than end of period shares
were used to compute net investment income per share.
(3) The per share amounts and ratios reflect income and expenses assuming
inclusion of the Fund's proportionate share of the income and expenses of
the Money Market Portfolio.
(4) Total return for the period ended October 31, 1994 reflects Institutional
Class returns from November 1, 1993 through July 31, 1994 and returns of the
PlanAhead Class for the period August 1, 1994 (commencement of operations)
through October 31, 1994. Due to the different expense structures between
the classes, total return for the PlanAhead Class would vary from the
results shown had it been in operation for the entire year.
(5) The method of determining average net assets was changed from a monthly
average to a daily average starting with the year ended October 31, 1992.
(6) Effective October 1, 1990, 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.
(7) Annualized.
PROSPECTUS
9
<PAGE> 59
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
MUNICIPAL MONEY MARKET FUND U.S. GOVERNMENT MONEY MARKET FUND
-------------------------------------------------------- -----------------------------------------
PLANAHEAD CLASS INSTIT. CLASS PLANAHEAD CLASS
---------------------------------------- ------------- -----------------------------------------
YEAR ENDED OCTOBER 31, PERIOD ENDED PERIOD ENDED YEAR ENDED OCTOBER 31, PERIOD ENDED
------------------------- OCTOBER 31, OCTOBER 31, -------------------------- OCTOBER 31,
1997 1996 1995 1994(1) 1994(1) 1997 1996 1995 1994(1)(2)
-------------------------------------------------------- -----------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
--- --- --- ------ ------ --- --- --- ------
Net investment income 0.03(3) 0.03 0.01 0.02 0.05(3) 0.05 0.01
Less dividends from net
investment income (0.03) (0.03) (0.01) (0.02) (0.05) (0.05) (0.01)
--- --- --- ------ ------ --- --- --- ------
Net asset value, end of
period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
=== === === ====== ====== === === === ======
Total return (annualized) % 3.27% 3.39% 2.35%(4) 2.44% % 4.94% 5.19% 3.58%(4)
=== === === ====== ====== === === === ======
Ratios/supplemental data:
Net assets, end of period
(in thousands) $ $2,340 $129 $0 $9,736 $ $1,822 $530 $0
Ratios to average net
assets(5)(6)(7):
Expenses % 0.62%(3) 0.72% 0.77% 0.30% % 0.67%(3) 0.76% 0.75%
Net investment income % 3.12%(3) 3.32% 2.49% 2.38% % 4.74%(3) 5.19% 3.94%
<CAPTION>
U.S. GOVERNMENT MONEY MARKET FUND
-------------------------------------
INSTITUTIONAL CLASS
-------------------------------------
YEAR ENDED OCTOBER 31, PERIOD ENDED
---------------------- OCTOBER 31,
1994(2) 1993 1992(1)
-------------------------------------
<S> <C> <C> <C>
Net asset value, beginning
of period $1.00 $1.00 $1.00
---- ---- -------
Net investment income 0.04 0.03 0.02
Less dividends from net
investment income (0.04) (0.03) (0.02)
---- ---- -------
Net asset value, end of
period $1.00 $1.00 $1.00
==== ==== =======
Total return (annualized) 3.70% 3.07% 3.61%
==== ==== =======
Ratios/supplemental data:
Net assets, end of period
(in thousands) $67,607 $136,813 $91,453
Ratios to average net
assets(5)(6)(7):
Expenses 0.25% 0.23% 0.27%(8)
Net investment income 3.44% 2.96% 3.46%(8)
</TABLE>
(1) The U.S. Government Money Market Fund commenced active operations on March
2, 1992. The PlanAhead Class of the U.S. Government Money Market Fund
commenced active operations on August 1, 1994. The Institutional Class of
the Municipal Money Market Fund commenced active operations on November 10,
1993 and the PlanAhead Class commenced active operations on August 1, 1994.
(2) Average shares outstanding for the period rather than end of period shares
were used to compute net investment income per share.
(3) The per share amounts and ratios reflect income and expenses assuming
inclusion of the Fund's proportionate share of the income and expenses of
the Fund's corresponding Portfolio.
(4) Total return for the period ended October 31, 1994 reflects Institutional
Class returns from the beginning of the period through July 31, 1994 and
returns of the PlanAhead Class for the period August 1, 1994 (commencement
of operations) through October 31, 1994. Due to the different expense
structures between the classes, total return for the PlanAhead Class would
vary from the results shown had it been in operation for the entire year.
(5) 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.
(6) Annualized.
(7) Operating results for the Municipal Money Market Fund exclude fees waived by
the Manager. Had the Fund paid such fees, the ratio of expenses and net
investment income to average net assets would have been 0.97% and 2.29%,
respectively, for the period ended October 31, 1994, 0.92% and 3.12%,
respectively, for the year ended October 31, 1995, and 0.67% and 3.07%,
respectively, for the year ending October 31, 1996 for the PlanAhead Class,
and 0.50% and 2.18%, respectively, for the Institutional Class for the
period ended October 31, 1994.
(8) Estimated based on expected annual expenses and actual average net assets.
PROSPECTUS
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<PAGE> 60
INTRODUCTION
The Trust is an open-end, diversified management investment company
organized as a Massachusetts business trust on January 16, 1987. The Funds are
nine 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 which 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 with 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, and it
provides the Funds with administrative services. BT provides the Equity 500
Index Portfolio with investment advisory, administrative and other services. The
Balanced Fund, the Growth and Income Fund, the International Equity Fund, the
S&P 500 Index Fund, the Intermediate Bond Fund and the Short-Term Bond Fund
(collectively, the "Variable NAV Funds") currently consist of three classes of
shares, including 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 primarily for large
institutional investors investing at least $2 million in the Funds. The Money
Market Funds also consist of three classes of shares, including the PlanAhead
Class, the Institutional Class and the "Platinum Class" which is available to
customers of certain broker-dealers as an investment for cash balances in their
brokerage accounts. For further information about the Institutional Class and
the Platinum Class, including eligibility requirements, call (800) 967-9009.
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 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 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 assets of the Intermediate Bond
Portfolio are allocated by the Manager between the Manager and another
investment adviser. Investment decisions for the Short-Term Bond Portfolio and
the Money Market Portfolios are made directly by the Manager. 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, the SAI, and specific
investment strategies developed by the Manager. See "Investment Advisers."
PlanAhead Class shares are offered without a sales charge at the net asset
value next determined after an investment is received and accepted. Shares will
be redeemed at the next share price calculated after receipt of a redemption
order. See "How to Purchase Shares" and "How to Redeem 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.
PROSPECTUS
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<PAGE> 61
The investment objective of the Equity 500 Index Portfolio is not a fundamental
policy. Shareholders of the S&P 500 Index Fund will receive thirty days' prior
written notice with respect to any change in the investment objective of the
Equity 500 Index Portfolio.
Each Fund has a fundamental investment policy which allows it to invest all
of its investable assets in its corresponding Portfolio. All other fundamental
investment policies and the non-fundamental investment policies of each Fund and
its corresponding Portfolio are identical. Therefore, although the following
discusses the investment policies of each Portfolio, the AMR Trust's Board of
Trustees ("AMR Trust Board") and the Equity 500 Index Portfolio's Board of
Trustees ("Equity 500 Index Portfolio Board"), it applies equally to each Fund
and each Board.
AMERICAN AADVANTAGE BALANCED FUND -- This Fund's investment objective is to
realize both income and capital appreciation. This Fund seeks its investment
objective by investing all of its investable assets in the Balanced Portfolio,
which invests primarily in equity and debt securities. Although equity
securities (such as stocks) will be purchased primarily for capital appreciation
and debt securities (such as bonds) will be purchased primarily for income
purposes, income and capital appreciation potential will be considered in
connection with all such investments. Excluding collateral for securities
loaned, ordinarily the Portfolio will have a minimum of 30% and a maximum of 70%
of its assets invested in equity securities and a minimum of 30% and a maximum
of 70% of its assets invested in debt securities which, at the time of purchase,
are rated in one of the four highest rating categories by all nationally
recognized statistical rating organizations ("Rating Organizations") rating that
security such as Standard & Poor's ("S&P") 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 cash or cash equivalents,
including obligations that are permitted investments for the Money Market
Portfolio and 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
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 Intermediate Bond Fund."
The Portfolio also may engage in dollar rolls or purchase or sell securities
on a "when-issued" or "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
PROSPECTUS
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<PAGE> 62
the transaction. Dollar rolls are a type of forward commitment transaction.
Purchases and sales of securities on a forward commitment basis involve a
commitment to purchase or sell securities with payment and delivery to take
place at some future date, normally one to two months after the date of the
transaction. As with when-issued securities, these transactions involve certain
risks, but they also enable 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 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 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. 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. 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 traded in the United States on exchanges and in the
over-the-counter market. When purchasing equity securities, primary emphasis
will be placed on undervalued securities with above average growth expectations.
In order to seek either above average current income or capital appreciation
when interest rates are expected to decline, the Portfolio may invest in debt
securities which, at the time of purchase, are rated in one of the four highest
rating categories by all Rating Organizations rating that security or, if
unrated, are deemed to be of comparable quality by the applicable investment
adviser. Obligations rated in the fourth highest rating category are limited to
25% of the Portfolio's debt allocation. See "American AAdvantage Balanced Fund"
for a description of the risks involved with these obligations. See the SAI for
definitions of the foregoing securities and for a description of debt ratings.
The Portfolio also may invest in other investment companies or in cash and cash
equivalents, including obligations that are permitted investments for the Money
Market Portfolio. 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 forward commitment basis. See "American
AAdvantage Balanced Fund" for a description of these transactions.
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. 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
PROSPECTUS
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<PAGE> 63
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 obligations that are permitted investments for the Money
Market Portfolio or in other investment companies. However, when its investment
advisers deem that market conditions warrant, the Portfolio may, for temporary
defensive purposes, invest up to 100% of its assets in cash, cash equivalents,
other investment companies and investment grade short-term obligations.
The investment advisers select securities based upon a country's economic
outlook, market valuation and potential changes in currency exchange rates. When
purchasing equity securities, primary emphasis will be placed on undervalued
securities with above average growth expectations.
Overseas investing carries potential risks not associated with domestic
investments. Such risks include, but are not limited to: (1) political and
financial instability abroad, including risk of nationalization or expropriation
of assets and the risk of war; (2) less liquidity and greater volatility of
foreign investments; (3) less public information regarding foreign companies;
(4) less government regulation and supervision of foreign stock exchanges,
brokers and listed companies; (5) lack of uniform accounting, auditing and
financial reporting standards; (6) delays in transaction settlement in some
foreign markets; (7) possible 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)
possible 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, Portugal, 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 also are entered into to set the exchange rate for a future
transaction. In this manner, the Portfolio may protect itself against a possible
loss resulting from an adverse change in the relationship between the U.S.
dollar or other currency which is being used for the security purchase and the
foreign currency in which the security is denominated during the period between
the date on which the security is purchased or sold and the date on which
payment is made or received. Forward contracts involve certain risks which
include, but are not limited to: (1) imperfect correlation between the
securities hedged and the contracts themselves; and (2) possible decrease in the
total return of the Portfolio. Forward contracts are discussed in greater detail
in the SAI.
The Portfolio also may trade currency futures for the same reasons as for
entering into forward contracts as set forth above. Currency futures are traded
on U.S. and foreign currency exchanges. The use of currency futures also entails
certain risks which include, but are not limited to: (1) less liquidity due to
daily limits on price fluctuation; (2) imperfect correlation between the
securities hedged and the contracts themselves; (3) possible decrease in the
total return of the Portfolio due to hedging; (4) possible reduction in value
for both the contracts
PROSPECTUS
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<PAGE> 64
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. See "Investment Advisers."
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 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.
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-
PROSPECTUS
15
<PAGE> 65
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
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 or outstanding commercial paper
or bank obligations rated Prime-1 by Moody's or A-1 by S&P; 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 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.
PROSPECTUS
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<PAGE> 66
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.
AMERICAN AADVANTAGE INTERMEDIATE BOND 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
Intermediate Bond Portfolio, which invests primarily in debt obligations.
Permissible investments include securities of the U.S. Government and its
agencies and instrumentalities, including STRIPS and other zero coupon
obligations; corporate bonds, notes and debentures; non-convertible preferred
stocks; mortgage-backed securities; asset-backed securities; domestic,
Yankeedollar and Eurodollar certificates of deposit, bank deposit notes, and
bank notes; other investment companies; and cash or cash equivalents including
obligations that are permitted investments for the Money Market Portfolio. 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 Manager or 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 and the investment adviser, 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.
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 three to seven 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.
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
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securities guaranteed by the Government National Mortgage Association ("GNMA"))
or guaranteed by agencies or instrumentalities of the U.S. Government (in the
case of securities guaranteed by the Federal National Mortgage Association
("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC"), which are
supported only by the discretionary authority of the U.S. Government to purchase
the agency's obligations). Mortgage pass-through securities created by
non-governmental issuers (such as commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers and other
secondary market issuers) may be supported with various credit enhancements such
as pool insurance, guarantees issued by governmental entities, a letter of
credit from a bank or senior/subordinated structures.
Collateralized mortgage obligations ("CMOs") are hybrid instruments with
characteristics of both mortgage-backed bonds and mortgage pass-through
securities. Similar to a mortgage pass-through, interest and prepaid principal
on a CMO are paid, in most cases, monthly. 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.
Investments in Yankeedollar and Eurodollar bonds, notes and certificates of
deposit involve risks that differ from investments in securities of domestic
issuers. See "American AAdvantage Money Market Fund" for a description of these
risks. 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
should 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.
The Manager and Barrow, Hanley, Mewhinney & Strauss, Inc. currently manage
the assets of the Intermediate Bond Portfolio. See "Investment Advisers."
AMERICAN AADVANTAGE SHORT-TERM BOND 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
Short-Term Bond Portfolio, which invests primarily in debt obligations.
Permissible investments include securities of the U.S. Government and
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its agencies and instrumentalities, including STRIPS and other zero coupon
obligations; corporate bonds, notes and debentures; non-convertible preferred
stocks; mortgage-backed securities; asset-backed securities; domestic,
Yankeedollar and Eurodollar certificates of deposit, bank deposit notes, and
bank notes; other investment companies; and cash or cash equivalents including
obligations that are permitted investments for the Money Market Portfolio. 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 Manager. Obligations rated in
the fourth highest rating category are limited to 25% of the Portfolio's total
assets. See "American AAdvantage Balanced Fund" and "American AAdvantage
Intermediate Bond 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 Yankeedollar and Eurodollar bonds, notes and certificates of
deposit involve risks that differ from investments in securities of domestic
issuers. See "American AAdvantage Money Market Fund" for a description of these
risks. See "American AAdvantage Intermediate Bond Fund" for a description of the
risks associated with investments in mortgage-backed securities, CMOs and
asset-backed securities and for an explanation of how the value of the
Portfolio's debt instruments will vary in response to interest rate changes. The
Portfolio also may engage in dollar rolls and purchase or sell securities on a
when issued or forward commitment basis as described under "American AAdvantage
Balanced Fund."
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 Short-Term
Bond Portfolio.
MONEY MARKET FUNDS -- The investment objectives of the Money Market Funds are to
seek current income, liquidity and the maintenance of a stable $1.00 price per
share. The Money Market Funds seek to achieve these objectives by investing all
of their investable assets in the Money Market Portfolios, which invest in high
quality, U.S. dollar-denominated short-term obligations that have been
determined by the Manager or the AMR Trust Board to present minimal credit
risks. Portfolio investments are valued based on the amortized cost valuation
technique pursuant to Rule 2a-7 under the Investment Company Act of 1940 ("1940
Act"). See the SAI for an explanation of the amortized cost valuation method.
Obligations in which the Money Market Portfolios invest generally have remaining
maturities of 397 days or less, although instruments subject to repurchase
agreements and certain variable and floating rate obligations may bear longer
final maturities. The average dollar-weighted portfolio maturity of each Money
Market Portfolio will not exceed 90 days. The Manager serves as the sole
investment adviser to the Money Market Funds. See "Management and Administration
of the Trust."
AMERICAN AADVANTAGE MONEY MARKET FUND -- The Fund's corresponding Portfolio may
invest in obligations permitted to be purchased under Rule 2a-7 of the 1940 Act
including, but not limited to, (1) obligations of the U.S. Government or its
agencies or instrumentalities; (2) loan participation interests, medium-term
notes, funding agreements and asset-backed securities; (3) domestic,
Yankeedollar and Eurodollar certificates of deposit, time deposits, bankers'
acceptances, commercial paper, bank deposit notes and other promissory notes,
including floating or variable rate obligations issued by U.S. or foreign bank
holding companies and their bank subsidiaries, branches and agencies; and (4)
repurchase agreements involving the obligations listed above. The Money Market
Portfolio will invest only in issuers or instruments that at the time of
purchase (1) have received the highest short-term rating by two Rating
Organizations such as "A-1" by S&P and "P-1" by Moody's; (2) are single rated
and have received the highest short-term rating by a Rating Organization; or (3)
are unrated, but are
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determined to be of comparable quality by the Manager pursuant to guidelines
approved by the AMR Trust Board and subject to ratification by the AMR Trust
Board. See the SAI for definitions of the foregoing instruments and rating
systems. The Portfolio may invest in other investment companies. The Portfolio
also may purchase or sell securities on a when-issued or forward commitment
basis as described under "American AAdvantage Balanced Fund."
The Portfolio will invest more than 25% of its assets in obligations issued
by the banking industry. However, for temporary defensive purposes during
periods when the Manager believes that maintaining this concentration may be
inconsistent with the best interest of shareholders, the Portfolio may not
maintain this concentration.
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 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.
Variable amount master demand notes in which the Portfolio may invest are
unsecured demand notes that permit the indebtedness thereunder to vary, and
provide for periodic adjustments in the interest rate. Because master demand
notes are direct lending arrangements between the Portfolio and the issuer, they
are not normally publicly traded. There is no secondary market for the notes;
however, the period of time remaining until payment of principal and accrued
interest can be recovered under a variable amount master demand note generally
will not exceed seven days. To the extent this period is exceeded, the note in
question would be considered illiquid. Issuers of variable amount master demand
notes must satisfy the same criteria as set forth for other promissory notes
(e.g. commercial paper). The Portfolio will invest in variable amount master
demand notes only when such notes are determined by the Manager, pursuant to
guidelines established by the AMR Trust Board, to be of comparable quality to
rated issuers or instruments eligible for investment by the Portfolio. In
determining average dollar weighted portfolio maturity, a variable amount master
demand note will be deemed to have a maturity equal to the longer of the period
of time remaining until the next readjustment of the interest rate or the period
of time remaining until the principal amount can be recovered from the issuer on
demand.
AMERICAN AADVANTAGE MUNICIPAL MONEY MARKET FUND -- The Fund's corresponding
Portfolio may invest in municipal obligations issued by or on behalf of the
governments of states, territories, or possessions of the United States; the
District of Columbia; and their political subdivisions, agencies and
instrumentalities if the interest these obligations provide is generally exempt
from federal income tax. The Municipal Money Market Portfolio will invest only
in issuers or instruments that at the time of purchase (1) are guaranteed by the
U.S. Government, its agencies, or instrumentalities; (2) are secured by letters
of credit that are irrevocable and issued by banks which qualify as authorized
issuers for the Money Market Portfolio (see "American AAdvantage Money Market
Fund"); (3) are guaranteed by one or more municipal bond insurance policies that
cannot be canceled and are issued by third-party guarantors possessing the
highest claims- paying rating from a Rating Organization; (4) have received one
of the two highest short-term ratings from at least two Rating Organizations;
(5) are single rated and have received one of the two highest short-term ratings
from that Rating Organization; (6) have no short-term rating but the instrument
is comparable to the issuer's rated short-term debt; (7) have no short-term
rating (or comparable rating) but have received one of the top two long-term
ratings from all Rating Organizations rating the issuer or instrument; or (8)
are unrated, but are determined to be of comparable quality by the Manager
pursuant to guidelines approved by, and subject to the oversight of, the AMR
Trust Board. The Portfolio also may invest in other investment companies.
Ordinarily at least 80% of the Portfolio's net assets will be invested in
municipal obligations the interest from which is exempt from federal income tax.
However, should market conditions warrant, the Portfolio may invest up to 20%
(or for temporary defensive purposes, up to 100%) of its assets in eligible
investments for the Money Market Portfolio which are subject to federal income
tax.
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The Portfolio may invest in certain municipal obligations which have rates
of interest that are adjusted periodically according to formulas intended to
minimize fluctuations in the values of these instruments. These instruments,
commonly known as variable rate demand obligations, are long-term instruments
which allow the purchaser, at its discretion, to redeem securities before their
final maturity at par plus accrued interest upon notice (typically 7 to 30
days).
Municipal obligations may be backed by the full taxing power of a
municipality ("general obligations"), or by the revenues from a specific project
or the credit of a private organization ("revenue obligations"). Some municipal
obligations are collateralized as to payment of principal and interest by an
escrow of U.S. Government or federal agency obligations, while others are
insured by private insurance companies, while still others may be supported by
letters of credit furnished by domestic or foreign banks. The Portfolio's
investments in municipal obligations may include fixed, variable, or floating
rate general obligations and revenue obligations (including municipal lease
obligations and resource recovery obligations); zero coupon and asset-backed
obligations; variable rate auction and residual interest obligations; tax,
revenue, or bond anticipation notes; tax-exempt commercial paper; and purchase
obligations that are subject to restrictions on resale. See the SAI for a
further discussion of the foregoing obligations. The Portfolio may purchase or
sell obligations on a when-issued or forward commitment basis, as described
under "American AAdvantage Balanced Fund."
The Portfolio may invest more than 25% of the value of its total assets in
municipal obligations which are related in such a way that an economic, business
or political development or change affecting one such security would also affect
the other securities; for example, securities the interest of which is paid from
revenues of similar types of projects, or securities whose issuers are located
in the same state. As a result, the Portfolio may be subject to greater risk
compared to a fund that does not follow this practice. However, the Manager
believes this risk is mitigated because it is anticipated that most of the
Portfolio's assets will be insured or backed by bank letters of credit.
Additionally, the Portfolio may invest more than 25% of the value of its total
assets in industrial development bonds which, although issued by industrial
development authorities, may be backed only by the assets and revenues of the
non-governmental users.
The Portfolio also may invest in municipal obligations that constitute
"private activity obligations." These include obligations that finance student
loans, residential rental projects, and solid waste disposal facilities. To the
extent the Portfolio earns interest income on private activity obligations,
shareholders will be required to treat the portion of the Fund's distributions
attributable to its share of such interest as a "tax preference item" for
purposes of determining their liability for the federal alternative minimum tax
("AMT") and, as a result, may become subject to (or increase their liability
for) the AMT. Shareholders should consult their own tax advisers to determine
whether they may be subject to the AMT. The Portfolio may invest in private
activity obligations without limitation and it is anticipated that a substantial
portion of the Portfolio's assets will be invested in these obligations. As a
result, a substantial portion of the Fund's distributions may be a tax
preference item, which will reduce the net return from the Fund for taxpayers
subject to the AMT. Interest on "qualified" private activity obligations is
exempt from federal income tax.
AMERICAN AADVANTAGE U.S. GOVERNMENT MONEY MARKET FUND -- The Fund's
corresponding Portfolio will invest exclusively in obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities and
repurchase agreements which are collateralized by such obligations. U.S.
Government securities include direct obligations of the U.S. Treasury (such as
Treasury bills, Treasury notes and Treasury bonds). The Fund may invest in
securities issued by the Agency for International Development, Farmers Home
Administration, Farm Credit Banks, Federal Home Loan Bank, Federal Intermediate
Credit Bank, Federal Financing Bank, Federal Land Bank, FNMA, GNMA, General
Services Administration, Rural Electrification Administration, Small Business
Administration, Tennessee Valley Authority, and others. Some of these
obligations, such as those issued by the Federal Home Loan Bank and FHLMC, are
supported only by the credit of the agency or instrumentality issuing the
obligation and the discretionary authority of the U.S. Government to purchase
the agency's obligations. See the SAI for a further discussion of the foregoing
obligations. Counterparties for repurchase agreements must be approved by the
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AMR Trust Board. The Portfolio may purchase or sell securities on a
"when-issued" or "forward commitment" basis, as described under "American
AAdvantage Balanced Fund."
OTHER INVESTMENT POLICIES -- In addition to the investment policies described
previously, each Portfolio also may 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 1/3% of its
total assets. A Portfolio continues to receive interest on the securities loaned
and simultaneously earns either interest on the investment of the cash
collateral or fee income if the loan is otherwise collateralized. 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. Except for the Equity 500 Index Portfolio, the Manager
will receive compensation for administrative and oversight functions with
respect to securities lending. The amount of such compensation will depend on
the income generated by the loan of each Portfolio's securities. The SEC has
granted exemptive relief that permits the Portfolios to invest cash collateral
received from securities lending transactions in shares of one or more private
investment companies managed by the Manager. Subject to receipt of exemptive
relief from the SEC, the Portfolios also may invest cash collateral received
from securities lending transactions in shares of one or more registered
investment companies managed by the Manager. See the SAI for further information
regarding loan transactions.
REPURCHASE AGREEMENTS. A repurchase agreement is an agreement under which
securities are acquired by a Portfolio from a securities dealer or bank subject
to resale at an agreed upon price on a later date. The acquiring Portfolio bears
a risk of loss in the event that the other party to a repurchase agreement
defaults on its obligations and the Portfolio is delayed or prevented from
exercising its rights to dispose of the collateral securities. However, the
investment advisers or the Manager attempt to minimize this risk by entering
into repurchase agreements only with financial institutions which are deemed to
be of good financial standing and which have been approved by the AMR Trust
Board or the Equity 500 Index Portfolio Board, as appropriate. See the SAI for
more information regarding repurchase agreements.
PRIVATE PLACEMENT OFFERINGS. Investments in private placement offerings are
made in reliance on the "private placement" exemption from registration afforded
by Section 4(2) of the Securities Act of 1933 (the "1933 Act"), and resold to
qualified institutional buyers under Rule 144A under the 1933 Act ("Section 4(2)
securities"). Section 4(2) securities are restricted as to disposition under the
federal securities laws, and generally are sold to institutional investors, such
as the Portfolios, that agree they are purchasing the securities for investment
and not with an intention to distribute to the public. Any resale by the
purchaser must be pursuant to an exempt transaction and may be accomplished in
accordance with Rule 144A. Section 4(2) securities normally are resold to other
institutional investors such as the Portfolios through or with the assistance of
the issuer or dealers that make a market in the Section 4(2) securities, thus
providing liquidity. The Money Market Portfolios will not invest more than 10%
(and the Variable NAV Funds' respective Portfolios, no 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.
The AMR Trust Board or the Equity 500 Index Portfolio Board and the
applicable investment adviser, pursuant to the guidelines approved by their
Boards, will carefully monitor the Portfolios' investments in
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Section 4(2) securities offered and sold under Rule 144A, 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 will be 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 1940 Act) for doing so.
The Money Market Portfolios, the Intermediate Bond Portfolio and the
Short-Term Bond Portfolio normally will not incur any brokerage commissions on
their transactions because money market and debt instruments are generally
traded on a "net" basis with dealers acting as principal for their own accounts
and 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 Short-Term Bond Portfolio, currently expects
its portfolio turnover rate to exceed 100%. The portfolio turnover rate for the
Limited-Term Income Fund for the fiscal year ended October 31, 1997 was %.
A Portfolio's turnover rate, or the frequency of portfolio transactions, will
vary from year to year depending on market conditions and the Portfolio's cash
flows. High portfolio activity increases a Portfolio's transaction costs,
including brokerage commissions and may result in a greater number of taxable
transactions.
ADDITIONAL INFORMATION ABOUT THE PORTFOLIOS -- As previously described,
investors should be aware that each Fund, unlike mutual funds that 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, 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.
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 sell their interests to other non-affiliated investment companies
and/or other institutional investors. All institutional investors in a Portfolio
pay a proportionate share of the Portfolio's expenses and invest in that
Portfolio on the same terms and conditions. However, other investment companies
investing all of their assets in a Portfolio are not required to sell their
shares at the same public offering price as a Fund and are 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 affected materially 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
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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 its
liquidity adversely.
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 will 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 the 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 of each Fund's shares.
INVESTMENT RESTRICTIONS
The following fundamental investment restrictions and the non-fundamental
investment restriction are identical for each Fund and its corresponding
Portfolio. Therefore, although the following discusses the investment
restrictions of each Portfolio, it applies equally to each Fund. 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. In addition, although not a fundamental
investment restriction and therefore subject to change without shareholder
vote, the Money Market Portfolio and the U.S. Government Money Market
Portfolio apply this restriction with respect to 100% of their assets.
- Invest more than 25% of its total assets in the securities of companies
primarily engaged in any one industry, provided that: (i) this limitation
does not apply to obligations issued or guaranteed by the U.S. Government,
its agencies and instrumentalities; (ii) municipalities and their agencies
and authorities are not deemed to be industries; and (iii) financial
service companies are classified according to the end users of their
services (for example, automobile finance, bank finance, and diversified
finance will be considered separate industries). With respect to the Money
Market Portfolio, this restriction does not apply to the banking industry.
The following non-fundamental investment restriction 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 invest more
than 15% (or, with respect to any Money Market Portfolio, 10%) of its net assets
in illiquid securities, including time deposits and repurchase agreements that
mature in more than seven days.
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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
From time to time each class of the Money Market Funds may advertise their
"current yield" and "effective yield." Both yield figures are based on
historical earnings and are not intended to indicate future performance. The
current yield refers to the investment income generated over a seven
calendar-day period (which period will be stated in the advertisement). This
yield is then annualized by assuming the amount of investment income generated
during that week is earned each week over a one-year period and is shown as a
percentage of the investment. The effective yield is calculated similarly but,
when annualized, the investment income earned is assumed to be reinvested. The
effective yield will be slightly higher than the current yield because of the
compounding effect of this assumed reinvestment. The Municipal Money Market Fund
also may quote "tax equivalent yields," which show the taxable yields a
shareholder would have to earn before federal income taxes to equal this Fund's
tax-exempt yields. The tax equivalent yield is calculated by dividing the Fund's
tax-exempt yield by the result of one minus a stated federal income tax rate. If
only a portion of the Fund's income was tax-exempt, only that portion is
adjusted in the calculation. As stated earlier, the Fund considers interest on
private activity obligations to be exempt from federal income tax. Each class of
a Fund has different expenses which will impact its performance.
Advertised yields for the PlanAhead Class of the Variable NAV Funds will be
computed by dividing the net investment income per share earned by the
applicable class during the relevant time period by the maximum offering price
per share for that class on the last day of the period. Additionally, each class
of the Intermediate Bond Fund and the Short-Term Bond 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 each
class of this Fund. Total return quotations advertised by 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. The Funds will at
times compare their performance to applicable published indices, and also may
disclose their performance as ranked by certain ranking entities. 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 the
Equity 500 Index Portfolio are subject to the supervision of their respective
Board of Trustees. The Manager provides or oversees all administrative,
investment advisory and portfolio management services for the Trust pursuant to
a Management Agreement dated April 3, 1987, as amended July 25, 1997, together
with the Administrative Services Agreement described below. The AMR Trust and
the Manager also entered into a Management Agreement dated October 1, 1995, as
amended July 25, 1997, 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
investment 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
multiple investment advisers designated for that Portfolio. The assets of the
Intermediate Bond Portfolio are allocated by the Manager between the Manager and
another investment adviser. BT serves as investment adviser and administrator
of, and provides custody and transfer agency services to, the Equity 500 Index
Portfolio. See "Investment Advisers." The Manager serves as the sole active
investment adviser to the Money Market Portfolios and the Short-Term Bond
Portfolio. In addition, with the exception of the International Equity Portfolio
and the Equity 500 Index Portfolio, if so requested by any investment adviser,
the Manager will make the investment decisions with respect to assets allocated
to that
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investment adviser which the investment adviser determines should be invested in
short-term obligations of the type permitted for investment by the Money Market
Portfolio. As of December 31, 1996, the Manager had assets under management
totaling approximately $ billion including approximately $ billion under
active management and $ billion as named fiduciary or fiduciary adviser. Of the
total, approximately $ billion of assets are related to AMR. American Airlines,
Inc. is not responsible for investments made in the American AAdvantage Funds.
The Manager provides the Trusts 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 oversees each Portfolio's participation in securities lending activities
and any actions taken by securities lending agents in connection with those
activities to ensure compliance with all applicable regulatory and investment
guidelines. 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) 0.15% of the net assets of the Money Market
Portfolios, (2) 0.25% of the net assets of the Intermediate Bond Portfolio and
the Short-Term Bond Portfolio, (3) 0.10% of the net assets of the other
Portfolios of the AMR Trust, plus (4) all fees payable by the Manager to the
investment advisers of the Balanced, the Growth and Income and the International
Equity Portfolios 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. The Manager
receives compensation in connection with securities lending activities. If a
Portfolio lends its portfolio securities and receives cash collateral from the
borrower, the Manager may receive up to 25% of the net annual interest income
(the gross interest earned by the investment less the amount paid to the
borrower as well as related expenses) received from the investment of such cash.
If a borrower posts collateral other than cash, the borrower will pay to the
lender a loan fee. The Manager may receive up to 25% of the loan fees posted by
borrowers. Currently, the Manager receives 10% of the net annual interest income
from the investment of cash collateral or 10% of the loan fees posted by
borrowers. In addition, the Manager is compensated through the Administrative
Services Agreement as described below for other services provided.
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 not otherwise assumed by
the Manager, including: 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
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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.
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 the 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. As
described below, the assets of the Balanced, the Growth and Income and the
International Equity Portfolios are allocated among the investment advisers
designated for each Portfolio and the assets of the Intermediate Bond Portfolio
are allocated between the Manager and another investment adviser. The Manager is
permitted to enter into new or modified advisory agreements with existing or new
investment advisers without the approval of Fund shareholders or Portfolio
interest holders, but subject to approval of the Board and the AMR Trust Board.
The Securities and Exchange Commission issued an exemptive order which
eliminates the need for shareholder/interest holder approval, subject to
compliance with certain conditions. These conditions include the requirement
that within 90 days of hiring a new adviser or implementing a material change
with respect to an advisory contract, the applicable Fund send a notice to
shareholders containing information about the change that would be included in a
proxy statement. The Manager recommends investment advisers to the Board and the
AMR Trust Board based upon its continuing quantitative and qualitative
evaluation of the investment advisers' skill in managing assets using specific
investment styles and strategies. The allocation of assets among investment
advisers may be changed at any time by the Manager. Allocations among investment
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, 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
objectives, 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 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 AGREEMENT -- 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. As compensation for
these services, the Manager receives an annualized fee of 0.25% of the net
assets of the PlanAhead Class of the Variable NAV Funds and 0.05% of the net
assets of the PlanAhead Class of the Money Market Funds. The fee is payable
quarterly in arrears.
BT serves as the administrator to the Equity 500 Index Portfolio. Under an
Administration and Services Agreement with the Portfolio, BT calculates the
value of the assets of the Portfolio and generally assists the Equity 500 Index
Portfolio Board in all aspects of the administration and operation of the
Portfolio. The Administration and Services Agreement provides for the Portfolio
to pay BT a fee, computed daily and paid monthly, at the rate of 0.05% of the
average daily net assets of the Portfolio. Under the Administration and
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Services Agreement, BT may delegate one or more of its responsibilities to
others, including Federated Services Company, at BT's expense.
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 relating to the
PlanAhead Class. 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.
SERVICE PLAN -- The PlanAhead Class has adopted a service plan ("Service Plan")
which provides that each Fund's PlanAhead Class will pay 0.25% per annum of its
average daily net assets to the Manager (or another entity approved by the
Board). The Manager or these approved entities may spend such amounts on any
activities or expenses primarily intended to result in or relate to the
servicing of PlanAhead Class shares including but not limited to payment of
shareholder service fees and transfer agency or sub-transfer agency expenses.
The fee, which is included as part of a Fund's "Other Expenses" in the Table of
Fees and Expenses of this Prospectus, will be payable monthly in arrears without
regard to whether the amount of the fee is more or less than the actual expenses
incurred in a particular month by the entity for the services provided pursuant
to the Service Plan. The primary expenses expected to be incurred under the
Service Plan are transfer agency fees and servicing fees paid to financial
intermediaries such as plan sponsors and discount brokers.
The Service Plan will continue in effect so long as its continuance is
approved at least annually by a majority of the Trustees, including the
affirmative votes of a majority of the Trustees of the Board who are not parties
to the Service Plan 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. The Service Plan may be
terminated with respect to a particular PlanAhead Class at any time, without the
payment of any penalty, by a vote of a majority of the Independent Trustees or
by a vote of a majority of the outstanding voting securities of the applicable
Fund's PlanAhead Class.
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 -- STATE STREET BANK & TRUST COMPANY ("State Street"), Boston,
Massachusetts, serves as custodian for the Portfolios of the AMR Trust and the
Funds. BANKERS TRUST COMPANY, New York, New York, serves as custodian and
transfer agent for the assets of the Equity 500 Index Portfolio.
TRANSFER AGENT -- State Street serves as transfer agent and provides transfer
agency services for Fund shareholders through its affiliate NATIONAL FINANCIAL
DATA SERVICES, ("NFDS"), Kansas City, Missouri.
INDEPENDENT AUDITOR -- The independent auditor for the Funds 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., Kansas City, Missouri.
INVESTMENT ADVISERS
Set forth below is a brief description of the investment advisers for each
Fund and its corresponding Portfolio, except for the Money Market Funds and
their corresponding Portfolios, whose sole investment adviser is the Manager.
References to the investment advisers retained by a Portfolio also apply to the
corresponding
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Fund. Except for the Manager and BT, none of the investment advisers provides
any services to the Funds or the Portfolios except for portfolio investment
management and related recordkeeping services, or has 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 discussion of those services.
William F. Quinn has served as President of the Manager since it was founded
in 1986, and Nancy A. Eckl serves as Vice President - Trust Investments of the
Manager. Ms. Eckl 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, the
Intermediate Bond Fund and their corresponding Portfolios. These
responsibilities include oversight of the investment advisers, regular review of
each investment adviser's performance and asset allocations among them.
Michael W. Fields is responsible for the portfolio management oversight of
the Short-Term Bond Fund and its corresponding Portfolio. Mr. Fields has been
with the Manager since it was founded in 1986 and serves as Vice President-Fixed
Income Investments. Benjamin L. Mayer is responsible for the day-to-day
portfolio management of the Short-Term Bond Portfolio. Mr. Mayer has served as
Senior Portfolio Manager of the Manager since May 1995. Prior to that time, he
was a Vice President of 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. Fields also is responsible for the portfolio management oversight of the
portion of the Intermediate Bond Fund and its corresponding Portfolio, allocated
to the Manager. Mr. Mayer is responsible for its day-to-day portfolio
management.
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 September 30, 1997, Bankers Trust New York Corporation
was the seventh largest bank holding company in the United States with total
assets of approximately $ billion and approximately $ billion in
assets under management globally. Of that total, approximately $ 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 December 31, 1997, Barrow had discretionary investment management authority
with respect to approximately $ billion of assets, including
approximately $ billion of assets of AMR and its subsidiaries and
affiliated entities. Barrow serves as an investment adviser to the Balanced
Portfolio, the Growth and Income Portfolio, the Intermediate Bond Portfolio and
the Short-Term Bond Portfolio, although the Manager does not presently intend to
allocate any of the assets in the Short-Term Bond 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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BRANDYWINE ASSET MANAGEMENT, INC., ("Brandywine"), 201 North Walnut Street,
Wilmington, Delaware 19801, is a professional investment counseling firm founded
in 1986. Brandywine is a wholly owned subsidiary of Legg Mason, Inc. As of
December 31, 1997, Brandywine had assets under management totaling approximately
$ billion, including approximately $ million of assets of AMR and its
subsidiaries and affiliated entities. Brandywine serves as an investment adviser
to the Balanced and the Growth and Income 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 AMR Trust assets under its discretionary management, .225% of the next $100
million on all assets and .20% on all excess assets.
GSB INVESTMENT MANAGEMENT, INC. ("GSB"), 301 Commerce Street, Fort Worth,
Texas 76102, is a professional investment management firm which was founded in
1987 by Frank P. Ganucheau, Mark J. Stupfel, and Lyle E. Brumley. GSB is wholly
owned by United Asset Management Corporation, a Delaware corporation. As of
December 31, 1997, GSB managed approximately $ billion of assets, including
approximately $ million of assets of AMR and its subsidiaries and affiliated
entities. GSB serves as an investment adviser to the Balanced Portfolio and the
Growth and Income Portfolio. The Manager pays GSB an annualized fee equal to
.30% of the first $100 million in AMR Trust assets under its discretionary
management, .25% of the next $100 million, .20% of the next $100 million and
.15% on all excess assets.
HOTCHKIS AND WILEY, 800 West Sixth Street, 5th Floor, Los Angeles,
California 90017, is a professional investment counseling firm which was founded
in 1980 by John F. Hotchkis and George Wiley. Hotchkis and Wiley is a division
of Merrill Lynch Capital Management Group, a wholly owned subsidiary of Merrill
Lynch & Co., Inc. Assets under management as of December 31, 1997 were
approximately $ billion, which included approximately $ 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 Manager pays Hotchkis and
Wiley an annualized fee equal to .60% of the first $10 million of AMR Trust
assets under its discretionary management, .50% of the next $140 million of
assets, .30% on the next $50 million of assets, .20% of 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 December 31, 1997,
including funds managed for its parent company, were approximately $
billion, which included approximately $ million of assets of AMR and its
subsidiaries and affiliated entities. IIA serves as an investment adviser to the
Balanced Portfolio and the Growth and Income Portfolio. The Manager pays IIA an
annualized fee equal to .50% of the first $30 million of AMR Trust assets under
its discretionary management, .25% of the next $70 million of assets and .20% of
all excess assets.
MORGAN STANLEY ASSET MANAGEMENT INC. ("MSAM"), 25 Cabot Square, London,
United Kingdom, E14 4QA, is a wholly owned subsidiary of Morgan Stanley, Dean
Witter, Discover & Co. 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. At September 30, 1997, MSAM had assets under management totaling
approximately $ billion, including approximately $ billion under active
management and $ billion as named fiduciary or fiduciary adviser. As of
December 31, 1997, MSAM had investment authority over approximately $
million of assets of AMR and its subsidiaries and affiliated entities. MSAM
serves as an investment adviser to the International Equity Portfolio. The
Manager pays MSAM an annual fee equal to .80% of the first $25 million of AMR
Trust assets under its discretionary management, .60% of the next $25 million in
assets, .50% of the next $25 million in assets and .40% on all excess assets.
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 December 31,
1997, Templeton had
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discretionary investment management authority with respect to approximately
$ billion of assets, including approximately $ million of assets of AMR
and its subsidiaries and affiliated entities. Templeton serves as an investment
adviser to the International Equity Portfolio. The Manager pays Templeton an
annualized fee equal to .50% of the first $100 million of AMR Trust assets under
its discretionary management, .35% of the next $50 million of assets, .30% of
the next $250 million of 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 and BT, 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.
HOW TO PURCHASE SHARES
Shares are offered on a continuous basis. Purchase orders should be directed
to NFDS either by mail, by pre-authorized investment or by wire as described
below. The minimum initial purchase for each Fund is $2,500, except for IRA
accounts for which a $2,000 minimum applies. The Funds have no obligation to
accept purchase requests or maintain accounts which do not meet minimum purchase
requirements. Accounts opened through financial intermediaries may be subject to
lower or higher minimums. The minimum for subsequent purchases is $50, except
for wire purchases for which a $500 minimum applies. Shares purchased through
financial intermediaries may be subject to transaction fees. The management of
the Fund reserves the right to waive or change the minimum investment
requirements and to charge an annual fee of $12 (to offset the costs of
servicing accounts with low balances) if an account balance falls below certain
asset levels.
An order to purchase shares of a Variable NAV Fund will be executed at the
next share price calculated Monday through Friday on each day on which the
Exchange is open for trading, which excludes the following business holidays:
New Year's Day, Martin Luther King's Birthday, President's Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day
("Business Day"). Shares of the Variable NAV Funds are offered and purchase
orders are accepted until the close of the Exchange, generally 4:00 p.m. Eastern
time, on each Business Day. An order to purchase shares of the Money Market
Funds will be executed at the Fund's next determined net asset value per share
on any day on which the Exchange is open for business except for Columbus Day
and Veteran's Day ("Money Market Business Day") and during which federal funds
become available to the Fund. Shares are offered and orders are accepted for the
Municipal Money Market Fund until 12:00 p.m. Eastern time, or the close of the
Exchange (whichever comes first) and for the U.S. Government Money Market Fund
until 2:00 p.m. Eastern time, or the close of the Exchange (whichever comes
first) and for the Money Market Fund until 3:00 p.m. Eastern time, or the close
of the Exchange (whichever comes first), on each Money Market 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. "Federal funds"
are funds deposited by a commercial bank in an account at a federal reserve bank
that can be transferred to a similar account of another bank in one day and thus
may be made immediately available to a Money Market Fund through its custodian.
OPENING AN ACCOUNT -- A completed and signed PlanAhead Class application is
required for each new account opened, regardless of the method chosen for making
an initial investment. If assistance is required in filling out the application,
or if extra applications are required, call (800) 388-3344. See "Retirement
Accounts" for information on opening retirement accounts.
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PURCHASING BY MAIL -- To open an account by mail, complete the application form,
include a check payable to the American AAdvantage Funds ($2,500 minimum) and
mail both to:
American AAdvantage Funds
c/o NFDS
P.O. Box 419643
Kansas City, MO 64141-6643
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. For subsequent
purchases by mail make your check payable to the American AAdvantage Funds ($50
minimum) and include your account number on your check. Mail to the address
printed above. Include either the detachable form from your account statement,
the deposit slips from your checkbook (if you have a Money Market account and
opted for checking) or a letter with the account name and number.
SUBSEQUENT PURCHASES BY PRE-AUTHORIZED AUTOMATIC INVESTMENT -- Pre-Authorized
Automatic Investment allows you to make regular, automatic transfers ($50
minimum) from your bank account to purchase shares in the Fund of your choice
after an account has been open. To establish this option, provide the
appropriate information on the application form and attach a voided check from
your bank account. Funds will be transferred automatically from your bank
account via Automated Clearing House ("ACH") on the 5th day of each month.
PURCHASES BY WIRE -- A completed application form must precede an initial
purchase by wire. Call (800) 388-3344 to wire funds. Federal funds ($2,500 for
initial purchases and $500 for subsequent purchases) should be wired to:
State Street Bank & Trust Co.
ABA Routing #0110-0002-8, Account #9905-342-3
Attention: American AAdvantage Funds, and specify the Fund to be
purchased.
You will be responsible for any charges assessed by your bank to handle
wire transfers.
HOW TO REDEEM SHARES
Shares of the Variable NAV Funds may be redeemed by telephone, by
pre-authorized automatic redemption or by mail on any Business Day. Shares of
the Money Market Funds may be redeemed by telephone, by writing a check, by
pre-authorized automatic redemption or by mail on any Money Market Business Day.
Shares will be redeemed at the net asset value next calculated after the
applicable Fund has received and accepted the redemption request. Proceeds from
a redemption of shares purchased by check or pre-authorized automatic purchase
may be withheld until the funds have cleared, which may take up to 15 days.
Although the Funds intend to redeem shares in cash, each Fund 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.
Redemption proceeds generally will be sent within one Business Day or Money
Market Business Day, as applicable. However, if making immediate payment could
affect a Fund adversely, it may take up to seven days to send payment.
A minimum of $2,500 is required in order to maintain an account in a Fund.
Otherwise, a Fund may give a shareholder 60 days' notice to increase the account
balance to this level in order to avoid the imposition of an account fee or
account closure. If a shareholder does not increase the account balance to
$2,500 within the 60 day period, the Fund is entitled to close the account and
mail the proceeds to the address of record.
To ensure timely acceptance of a redemption request, please adhere to the
following procedures.
REDEEMING BY TELEPHONE -- Shares may be redeemed by telephone if your account
application reflects that option. Telephone redemptions in any 30 day period
shall not exceed $25,000 without the express written consent of the
PROSPECTUS
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<PAGE> 82
Trust. In order to redeem by telephone, you should call NFDS at (800) 388-3344.
Redemption proceeds will be mailed only to the address of record or mailed or
wired to a commercial bank account designated on the account application.
By establishing the telephone redemption service, you authorize the Funds or
their agent to act upon verbal instructions to redeem shares for any account for
which such service has been authorized. In an effort to prevent unauthorized or
fraudulent redemption requests by telephone, the transfer agent will employ
reasonable procedures specified by the Funds to confirm that such instructions
are genuine. For instance, all telephone redemption requests will be recorded
and proceeds of telephone redemption requests will be sent only to the address
or account designated in the application. Neither the Funds, the Trusts, the
Equity 500 Index Portfolio, the Manager, NFDS, or their trustees, directors or
officers will be liable for any unauthorized or fraudulent redemption
instructions received by telephone. If reasonable procedures as described above
are not implemented, these parties may be liable for any loss due to
unauthorized or fraudulent transactions. Due to the volume of calls or other
unusual circumstances, telephone redemptions may be difficult to implement
during certain time periods. This service may be amended or terminated at any
time by the transfer agent or the Trust without prior notice.
REDEEMING BY CHECK -- If you elect so on the application, shares of the Money
Market Funds may be redeemed through the check writing feature. There is no
limit on the number of checks written per month and no check redemption fees.
Checks must be written in amounts of $100 or more. Check drafts however, are not
returned to you. If copies of drafts are required, a service charge of $2 per
check will be assessed to you.
PRE-AUTHORIZED AUTOMATIC REDEMPTIONS -- You can arrange to have a pre-authorized
amount ($100 or more) redeemed from your account and automatically deposited
into a bank account, via ACH, on the 15th day of each month. For more
information regarding pre-authorized automatic redemptions, contact NFDS at
(800) 388-3344.
REDEEMING BY MAIL -- Except for certain intermediary accounts, a letter of
instruction may be mailed to American AAdvantage Funds -- PlanAhead Class, c/o
NFDS, P.O. Box 419643, Kansas City, MO 64141-6643. It should specify the Fund
(Balanced, Growth and Income, International Equity, S&P 500 Index, Intermediate
Bond, Short-Term Bond, Money Market, Municipal Money Market or U.S. Government
Money Market Fund), the number of shares or dollar amount to be redeemed, the
shareholder's name and account number. The letter of instruction must be signed
by all persons required to sign for the account, exactly as it is registered.
For redemptions over $25,000, authorization to send redemption proceeds to an
address other than the address of record or to a commercial bank account other
than the account designated on the application, or redemptions on an account
whose address of record has been changed within thirty days, the letter of
instruction must be accompanied by a signature guarantee by a financial
institution satisfying the standards established by State Street.
REDEEMING BY WIRE -- In order to redeem shares by wire you must sign up for this
option before using it. Redemption proceeds will be transmitted directly to your
predesignated account at a domestic bank upon request, for amounts of at least
$500. To verify that this option is in place, call (800) 388-3344. Your account
will be charged $12 for wire redemptions to cover transaction costs.
FULL REDEMPTIONS -- Unpaid dividends credited to an account up to the date of
redemption of all shares of a Money Market Fund generally will be paid at the
time of redemption.
RETIREMENT ACCOUNTS
Individual retirement accounts, including SEPs and Keoghs, are eligible
investors in the PlanAhead Class. State Street generally serves as custodian for
retirement accounts in the PlanAhead Class. A special retirement account
application is required in order to open this type of account. Each shareholder
is charged an administrative fee of $12.00 per year for each retirement account
regardless of the number of Funds. To receive a retirement account application,
or if you have any questions about establishing this type of account, call NFDS
at (800) 388-3344.
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<PAGE> 83
EXCHANGE PRIVILEGE
PlanAhead Class shares which have been registered in a shareholder's name
for at least 15 days may be exchanged into shares of the PlanAhead Class of
another Fund. A minimum exchange of $50 is required into existing accounts. If a
shareholder wishes to establish a new account in the PlanAhead Class of another
Fund by making an exchange, a $2,500 minimum is required.
Except for certain intermediary accounts, shareholders may exchange shares
by sending the Funds a written request or by calling NFDS at (800) 388-3344. The
exchange will be processed at the next share price calculated after the request
is received in good order by the Funds. In establishing a telephone exchange
service, shareholders authorize the Funds or their agent to act upon verbal
instructions to exchange shares from any account for which such service is
authorized to any identically registered PlanAhead Class account(s). NFDS will
use reasonable procedures specified by the Funds to confirm that such
instructions are genuine such as the recording of all telephone exchange
requests. If reasonable procedures as described above are implemented, neither
the Funds, the Trusts, the Equity 500 Index Portfolio, the Manager, NFDS, nor
their trustees, directors or officers will be liable for any unauthorized or
fraudulent instructions.
The general redemption policies apply to redemptions by telephone exchange.
The exchange privilege may be modified or terminated at any time by the Funds.
The Funds reserve the right to limit the number of exchanges an investor may
exercise.
VALUATION OF SHARES
The net asset value of each share (share price) of the Variable NAV Funds is
determined as of the close of the Exchange, generally 4:00 p.m. Eastern time, on
each Business Day and the net asset value of each share of the Money Market
Funds is determined as of the close of the Exchange, generally 4:00 p.m. Eastern
time, on each Money Market Business Day. The net asset value of all outstanding
shares of a Fund will be determined by computing the Fund's total assets (which
is the value of the Fund's investment in its corresponding Portfolio),
subtracting all of the Fund's liabilities, and dividing the result by the total
number of Fund shares outstanding at such time. The net asset value of shares of
the PlanAhead Class will be determined based on a pro rata allocation of the
value of the Fund's corresponding Portfolio's investment income, expenses and
total capital gains and losses. The allocation will be based on comparative net
asset value at the beginning of the day except for expenses related solely to
one class of shares ("Class Expenses") which will be borne only by the
appropriate class of shares. Because of the Class Expenses, the net income
attributable to and the dividends payable may be different for each class of
shares. Additionally, the Variable NAV 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
PROSPECTUS
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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. Portfolio obligations held
by the Money Market Portfolios are valued in accordance with the amortized cost
method, which is designed to enable those Portfolios and their corresponding
Funds to maintain a consistent $1.00 per share net asset value. Investment grade
short-term obligations with 60 days or less to maturity held by all other
Portfolios also are valued using the amortized cost method as described in the
SAI.
DIVIDENDS, OTHER DISTRIBUTIONS AND TAX MATTERS
DIVIDENDS AND OTHER 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 normally are declared
annually. Dividends consisting of substantially all of the net investment income
of the Intermediate Bond Fund and the Short-Term Bond 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 and
October. In December, the S&P 500 Index Fund will distribute another income
dividend, plus any capital gains. Each Fund may make an additional dividend or
other distribution, if necessary, to avoid a 4% excise tax on certain
undistributed income and gain. A Fund's net investment income attributable to
the PlanAhead Class consists of that class's pro rata share of the Fund's share
of dividends and interest (including discount) accrued on its corresponding
Portfolio's securities, less applicable expenses of the Fund and the Portfolio
attributable to the PlanAhead 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.
All of each Money Market Fund's net investment income and net short-term
capital gain, if any, generally is declared as dividends on each Money Market
Business Day immediately prior to the determination of the net asset value.
Dividends generally will be paid on the first day of the following month. Each
Money Market Fund's net investment income attributable to the PlanAhead Class
will consist of (1) that class' pro rata share of the Fund's share of interest
accrued and discount earned on its corresponding Portfolio's securities less
amortization of premium and expenses of both the Portfolio and (2) the Fund's
expenses attributable to the PlanAhead Class. The Money Market Portfolios do not
expect to realize net capital gain, and, therefore, the Money Market Funds do
not foresee paying any capital gain distributions. If any Money Market Fund
(either directly or indirectly through its corresponding portfolio) incurs or
anticipates any unusual expenses, loss or depreciation that would affect its net
asset value or income for a particular period adversely, the Board would at that
time consider whether to adhere to the dividend policy described above or to
revise it in the light of the then prevailing circumstances.
Unless a shareholder elects otherwise on the account application, all
dividends and other distributions on a Fund's PlanAhead Class shares will be
automatically paid in additional PlanAhead Class shares of that Fund. However, a
shareholder may choose to have distributions of net capital gain (and, if
applicable, net foreign currency gains) 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, 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
PROSPECTUS
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<PAGE> 85
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 or an opinion of counsel that it is or should be
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 are 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 are 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. Under the Taxpayer Relief Act of 1997,
different maximum tax rates apply to a noncorporate taxpayer's net capital gain
depending on the taxpayer's holding period and marginal rate of federal income
tax -- generally, 28% for gain recognized on securities held for more than one
year but not more than 18 months and 20% (10% for taxpayers in the 15% marginal
tax bracket) for gain recognized on securities held for more than 18 months.
Pursuant to an Internal Revenue Service notice, the Fund may divide each net
capital gain distribution into a 28% rate gain distribution and a 20% rate gain
distribution (in accordance with the Fund's holding periods for the securities
it sold that generated the distributed gain) and its shareholders must treat
those portions accordingly.
Some foreign countries may impose income or withholding taxes on certain
dividends payable to the International Equity Portfolio. The International
Equity Fund's share of any such withheld taxes may be treated by that Fund as a
deduction or, if it satisfies certain requirements, it may elect to flow the tax
through to its shareholders, who in turn may deduct the taxes or use them in
calculating credits against their federal income tax.
A portion of the income dividends paid by the Balanced Fund, the Growth and
Income Fund and the S&P 500 Index Fund is eligible for the dividends-received
deduction allowed to corporations. The eligible portion may not exceed the
respective Fund's aggregate dividends received from U.S. corporations. However,
dividends received by a corporate shareholder and deducted by it pursuant to the
dividends-received deduction may be subject indirectly to the AMT. The
International Equity Fund's dividends most likely will not qualify for the
dividends-received deduction because none of the dividends received by that Fund
are expected to be paid by U.S. corporations.
Distributions by the Municipal Money Market Fund that it designates as
"exempt-interest dividends" generally may be excluded from gross income by its
shareholders. If the Municipal Money Market Portfolio earns taxable income from
any of its investments, the Municipal Money Market Fund's share of income will
be distributed to its shareholders as a taxable dividend. To the extent that
Portfolio invests in certain private activity obligations, that Fund's
shareholders will be required to treat a portion of its dividends as a "tax
preference item" in determining their liability for the AMT. Exempt-interest
dividends also may be subject to state and local income tax laws. Because some
states exempt from income tax the interest on their own obligations and
obligations of governmental agencies of and municipalities in the state,
shareholders will receive tax information each year regarding the Municipal
Money Market Fund's exempt-interest income by state. Interest on indebtedness
incurred or continued by a shareholder to purchase or carry shares of that Fund
is not deductible.
Redemption of Fund shares (other than shares of the Money Market Funds) may
result in taxable gain or loss to the redeeming shareholder, depending upon
whether the redemption proceeds exceed or are less than the shareholder's
adjusted basis for the redeemed shares. An exchange of shares of a Fund for
shares of any other Fund (see "Exchange Privileges") generally will have similar
tax consequences. If shares of a Fund are sold at a loss after
PROSPECTUS
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<PAGE> 86
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)
(and for the International Equity Fund, if it satisfies the requirements and
makes the election referred to above, their share of that Fund's share of any
foreign taxes paid by the International Equity Portfolio) that year and of any
portion of those dividends that qualifies for the corporate dividends-received
deduction. The information regarding capital gain distributions designates the
portions thereof subject to the different maximum rates of tax applicable to
noncorporate taxpayers' net capital gain indicated above. The notice sent by the
Municipal Money Market Fund specifies the amounts of exempt-interest dividends
(and the portion thereof, if any, that is a tax preference item for purposes of
the AMT) and any taxable dividends.
Each Fund is required to withhold 31% of all taxable dividends, and, for all
Funds other than the Money Market Funds, 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 ten separate investment portfolios. Each
Fund included in this Prospectus is comprised of three classes of shares, which
can be issued in an unlimited number. Each share represents an equal
proportionate beneficial interest in that Fund and is entitled to one vote. Only
shares of a particular class may vote on matters affecting that class. Only
shares of a particular Fund may vote on matters affecting that Fund. All shares
of the Trust vote on matters affecting the Trust as a whole. Share voting rights
are not cumulative, and shares have no preemptive or conversion rights. Shares
of the Trust are nontransferable. Each series in the Trust will not be involved
in any vote involving a Portfolio in which it does not invest its assets.
Shareholders of all of the series of the Trust, however, will vote together to
elect Trustees of the Trust and for certain other matters. Under certain
circumstances, the shareholders of one or more series could control the outcome
of these votes.
On most issues subjected to a vote of a Portfolio's interest holders, as
required by the 1940 Act, its corresponding Fund will solicit proxies from its
shareholders and will vote its interest in the Portfolio in proportion to the
votes cast by that Fund's shareholders. Because a Portfolio interest holder's
votes are proportionate to its percentage interests in that Portfolio, one or
more other Portfolio investors could, in certain instances, approve an action
against which a majority of the outstanding voting securities of its
corresponding Fund had voted. This could result in that Fund's redeeming its
investment in its corresponding Portfolio, which could result in increased
expenses for that Fund. Whenever the shareholders of a Fund are called to vote
on matters related to its corresponding Portfolio, the Board shall vote shares
for which they receive no voting instructions in the same proportion as the
shares for which they do receive voting instructions. Any information received
from a Portfolio in the Portfolio's report to shareholders will be provided to
the shareholders of its corresponding Fund.
PROSPECTUS
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<PAGE> 87
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 January 31, 1998:
<TABLE>
<S> <C>
AMERICAN AADVANTAGE BALANCED FUND
AMR Corporation and subsidiary companies and Employee
Benefit Trusts thereof %
AMERICAN AADVANTAGE GROWTH AND INCOME FUND
AMR Corporation and subsidiary companies and Employee
Benefit Trusts thereof %
AMERICAN AADVANTAGE INTERNATIONAL EQUITY FUND
AMR Corporation and subsidiary companies and Employee
Benefit Trusts thereof %
AMERICAN AADVANTAGE SHORT-TERM BOND FUND
AMR Corporation and subsidiary companies and Employee
Benefit Trusts thereof %
</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 Funds
will be audited by the 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, MD5645, Dallas/Fort Worth Airport, Texas 75261-9003, or by
calling (800) 388-3344. Shareholder inquiries and requests for information
regarding the other investment companies that also invest in the Equity 500
Index Portfolio should be made by calling (800) 730-1313.
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 PLANAHEAD 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.
PlanAhead Class is a registered service mark and Platinum Class, American
AAdvantage Balanced Fund, American AAdvantage Growth and Income Fund, American
AAdvantage International Equity Fund, American AAdvantage Intermediate Bond
Fund, American AAdvantage Short-Term Bond Fund, American AAdvantage Money Market
Fund, American AAdvantage Municipal Money Market Fund and American AAdvantage
U.S. Government Money Market Fund are service marks of AMR Investment Services,
Inc.
PROSPECTUS
38
<PAGE> 88
-- NOTES --
<PAGE> 89
American Advantage Funds(R) Logo
- PLANAHEAD CLASS(R) -
P.O. Box 419643
Kansas City, MO 64141-6643
(800) 388-3344
- PLATINUM 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
<PAGE> 90
THIS PROSPECTUS contains important information about the AMR Class of the
AMERICAN AADVANTAGE FUNDS ("Trust"), an open-end management investment company,
which consists of multiple investment portfolios. This Prospectus pertains only
to the six 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 Corporation and its affiliates. Prospective AMR Class investors should read
this Prospectus carefully before making an investment decision and retain it
for future reference.
IN ADDITION TO THIS PROSPECTUS, a Statement of Additional Information ("SAI")
dated March 1, 1998 has been filed with the Securities and Exchange Commission
and is incorporated herein by reference. The SAI contains more detailed
information about the Funds. For a free copy of the SAI, call 817-967-3509. For
further information about the AMR Class or for information on the other classes
of shares, please refer to the appropriate address and phone number on the back
cover of this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY SUCH STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
PROSPECTUS
March 1, 1998
[AMERICAN AADVANTAGE LOGO]
- AMR Class -
BALANCED FUND
GROWTH AND INCOME FUND
INTERNATIONAL EQUITY FUND
S&P 500 INDEX FUND
INTERMEDIATE BOND FUND
SHORT-TERM BOND FUND
Managed by AMR Investment Services, Inc.
<PAGE> 91
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 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.
The AMERICAN AADVANTAGE INTERMEDIATE BOND FUND(SM) ("Intermediate Bond Fund")
seeks income and capital appreciation by investing all of its investable assets
in the Intermediate Bond Portfolio of the AMR Trust ("Intermediate Bond
Portfolio"), which in turn primarily invests in debt obligations and seeks to
maintain a dollar weighted average duration of three to seven years.
The AMERICAN AADVANTAGE SHORT-TERM BOND FUND(SM) ("Short-Term Bond Fund,"
formerly the American AAdvantage Limited-Term Income Fund) seeks income and
capital appreciation by investing all of its investable assets in the Short-Term
Bond Portfolio of the AMR Trust ("Short-Term Bond Portfolio," formerly the
Limited-Term Income Portfolio) which in turn primarily invests in debt
obligations and seeks to maintain a dollar weighted average duration of one to
three years.
Under 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. ("Manager") provides investment management and
administrative services to the
- - ---------------
(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.
PROSPECTUS
2
<PAGE> 92
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 master-feeder structure is different from that of many other investment
companies which directly acquire and manage their own portfolios of securities.
Accordingly, investors should carefully consider this investment approach. See
"Investment Objectives, Policies and Risks -- Additional Information About the
Portfolios." A Fund may withdraw its investment in a corresponding Portfolio at
any time if the Trust's Board of Trustees ("Board") determines that it would be
in the best interest of that Fund and its shareholders to do so. Upon any such
withdrawal, that Fund's assets would be invested in accordance with the
investment policies and restrictions described in this Prospectus and the SAI.
<TABLE>
<S> <C>
Table of Fees and Expenses................ 3
Financial Highlights...................... 4
Introduction.............................. 9
Investment Objectives, Policies and
Risks.................................... 10
Investment Restrictions................... 24
Yields and Total Returns.................. 25
Management and Administration of the Trusts... 25
Investment Advisers....................... 29
Purchase, Redemption and Valuation of
Shares................................... 32
Dividends, Other Distributions and Tax
Matters.................................. 35
General Information....................... 37
Shareholder Communications................ 38
</TABLE>
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 INTERMEDIATE SHORT-TERM INDEX
BALANCED FUND INCOME FUND EQUITY FUND BOND FUND(1) BOND FUND FUND
<S> <C> <C> <C> <C> <C> <C>
Management Fees (net of
waiver) 0.33% 0.33% 0.48% 0.25% 0.25% 0.08%(2)
12b-1 Fees 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Other Expenses (net of
waiver) 0.04% 0.03% 0.09% 0.13% 0.08% 0.12%(3)
------- ------ ------- ------ ------ ----
Total Operating Expenses
(net of waiver) 0.37% 0.36% 0.57% 0.38% 0.33% 0.20%(4)
------- ------ ------- ------- ------ ----
------- ------ ------- ------ ------
</TABLE>
(1) Because the Intermediate Bond Fund had not commenced active operations prior
to October 31, 1997, its Annual Operating Expenses are based on estimates.
(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 0.14%.
(4) "Total Operating Expenses" before fee waivers are 0.24%.
PROSPECTUS
3
<PAGE> 93
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
Intermediate Bond Fund 4 12 21 48
Short-Term Bond 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 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 financial highlights for each Fund except
the S&P 500 Index Fund and the Intermediate Bond Fund, have been audited by
Ernst & Young LLP, independent auditors. The financial highlights of the S&P 500
Index Fund have been audited by Coopers & Lybrand, L.L.P., independent auditors.
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 Intermediate Bond Fund because as
of October 31, 1997 it had not commenced active operations.
PROSPECTUS
4
<PAGE> 94
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
Balanced Fund
-------------------------------------------------------------------------------------
AMR Class Institutional Class
-------------------------------------------------- ------------------------------
Period
Year Ended October 31, Ended Year Ended October 31,
------------------------------------ October 31, ------------------------------
1997 1996(5)(6) 1995(4)(5) 1994 (1)(3) 1994(3) 1993 1992
-------------------------------------------------------------------------------------
<S> <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
----- ------ ------ ------ ---- ---- ----
Income from investment
operations:
Net investment income 0.63(7) 0.58 0.14 0.57 0.49 0.55
Net gains (losses) on securities (both
realized and unrealized) 1.61(7) 1.71 (0.13) (0.54) 1.57 0.41
----- ------ ------ ------ ---- ---- ----
Total from investment
operations 2.24 2.29 0.01 0.03 2.06 0.96
----- ------ ------ ------ ---- ---- ----
Less distributions:
Dividends from net
investment income (0.60) (0.53) -- (0.56) (0.52) (0.56)
Distributions from net realized gains on
securities (0.44) (0.14) -- (0.34) (0.30) (0.01)
----- ------ ------ ------ ---- ---- ----
Total distributions (1.04) (0.67) -- (0.90) (0.82) (0.57)
----- ------ ------ ------ ---- ---- ----
Net asset value, end
of period $ 15.18 $ 13.98 $ 12.36 $ 12.36 $ 13.23 $ 11.99
===== ====== ====== ====== ==== ==== ====
Total return (annualized)(8) 16.77% 19.77% (0.08)%(9) (0.08)% 19.19% 8.75%
===== ====== ====== ====== ==== ==== ====
Ratios/supplemental data:
Net assets, end of period
(in thousands) $576,673 $542,619 $393,504 $222,873 $532,543 $370,087
Ratios to average net assets(10)(11)(12):
Expenses 0.37%(7) 0.38% 0.36% 0.36% 0.34% 0.35%
Net investment income 4.26%(7) 4.54% 4.65% 4.77% 4.91% 5.31%
Portfolio turnover rate(13) 76% 73% 48% 48% 83% 80%
Average commission rate paid(13) $ 0.0409 -- -- -- -- --
<CAPTION>
Balanced Fund
-----------------------------------------
Institutional Class
-----------------------------------------
Year Ended October 31,
-----------------------------------------
1991 1990(2) 1989 1988
-----------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning
of period $ 9.87 $ 11.05 $ 10.13 $ 9.08
---- ---- ---- -----
Income from investment
operations:
Net investment income 0.58 0.57 0.53 0.56
Net gains (losses) on securities (both
realized and unrealized) 1.79 (1.18) 0.90 0.73
---- ---- ---- -----
Total from investment
operations 2.37 (0.61) 1.43 1.29
---- ---- ---- -----
Less distributions:
Dividends from net
investment income (0.64) (0.51) (0.51) (0.24)
Distributions from net realized gains on
securities -- (0.06) -- --
---- ---- ---- -----
Total distributions (0.64) (0.57) (0.51) (0.24)
---- ---- ---- -----
Net asset value, end
of period $ 11.60 $ 9.87 $ 11.05 $ 10.13
==== ==== ==== =====
Total return (annualized)(8) 25.35% (5.24)% 15.49% 14.63%
==== ==== ==== =====
Ratios/supplemental data:
Net assets, end of period
(in thousands) $311,906 $233,702 $210,119 $147,581
Ratios to average net assets(10)(11)(12):
Expenses 0.37% 0.44% 0.47% 0.52%
Net investment income 6.06% 6.50% 6.32% 6.25%
Portfolio turnover rate(13) 55% 62% 78% 77%
Average commission rate paid(13) -- -- -- --
</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) The per share amounts and ratios reflect income and expenses assuming
inclusion of the Fund's proportionate share of the income and expenses of
the Balanced Portfolio.
(8) 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.
(9) 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.
(10) 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.
(11) 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.
(12) Annualized.
(13) On November 1, 1995 the Balanced Fund began investing all of its investable
assets in the Balanced Portfolio. Portfolio turnover rate and average
commission rate paid for the years ended October 31, 1996 and 1997 are
those of the Balanced Portfolio. Calculation and disclosure of the average
commission rate paid was not required prior to 1996.
PROSPECTUS
5
<PAGE> 95
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
Growth and Income Fund
---------------------------------------------------------------------------------------------------
AMR Class Institutional Class
-------------------------------------------------- --------------------------------------------
Period
Year Ended October 31, Ended Year Ended October 31,
------------------------------------ October 31, --------------------------------------------
1997 1996(5)(6) 1995(5) 1994(1)(4) 1994(4) 1993 1992(3) 1991
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $ 15.95 $ 14.20 $ 13.99 $ 14.63 $ 12.79 $ 12.10 $ 9.47
----- ----- ---- ------- ------ ---- ---- ----
Income from investment
operations:
Net investment income 0.47(7) 0.44 0.11 0.43 0.36 0.39 0.42
Net gains (losses) on
securities (both realized
and unrealized) 3.15(7) 2.30 0.10 0.08 2.21 0.77 2.70
----- ----- ---- ------- ------ ---- ---- ----
Total from investment
operations 3.62 2.74 0.21 0.51 2.57 1.16 3.12
----- ----- ---- ------- ------ ---- ---- ----
Less distributions:
Dividends from net investment
income (0.44) (0.45) -- (0.41) (0.37) (0.39) (0.49)
Distributions from net
realized gains on securities (0.57) (0.54) -- (0.54) (0.36) (0.08) --
----- ----- ---- ------- ------ ---- ---- ----
Total distributions (1.01) (0.99) -- (0.95) (0.73) (0.47) (0.49)
----- ----- ----- ------- ------ ---- ---- ----
Net asset value, end of period $ 18.56 $ 15.95 $ 14.20 $ 14.19 $ 14.63 $ 12.79 $ 12.10
===== ===== ==== ====== ====== ==== ==== ====
Total return (annualized)(8) 23.66% 21.03% 3.43%(9) 3.36% 21.49% 10.00% 33.83%
===== ===== ==== ====== ====== ==== ==== ====
Ratios/supplemental data:
Net assets, end of period (in
thousands) $1,008,518 $706,884 $505,892 $ 22,737 $477,088 $339,739 $264,628
Ratios to average net
assets(10)(11)(12):
Expenses 0.36%(7) 0.38% 0.37% 0.33% 0.34% 0.36% 0.37%
Net investment income 2.80%(7) 3.20% 3.18% 3.28% 3.12% 3.57% 4.19%
Portfolio turnover rate(13) 40% 26% 23% 23% 30% 35% 52%
Average commission rate
paid(13) $ 0.0412 -- -- -- -- -- --
<CAPTION>
Growth and Income Fund
------------------------------
Institutional Class
------------------------------
Year Ended October 31,
------------------------------
1990(2) 1989 1988
------------------------------
<S> <C> <C> <C>
Net asset value, beginning of
period $ 11.59 $ 9.96 $ 8.30
---- ---- ----
Income from investment
operations:
Net investment income 0.42 0.42 0.42
Net gains (losses) on
securities (both realized
and unrealized) (1.94) 1.59 1.40
---- ---- ----
Total from investment
operations (1.52) 2.01 1.82
---- ---- ----
Less distributions:
Dividends from net investment
income (0.43) (0.38) (0.16)
Distributions from net
realized gains on securities (0.17) -- --
---- ---- ----
Total distributions (0.60) (0.38) (0.16)
---- ---- ----
Net asset value, end of period $ 9.47 $ 11.59 $ 9.96
==== ==== ====
Total return (annualized)(8) (13.52)% 20.94% 22.20%
==== ==== ====
Ratios/supplemental data:
Net assets, end of period (in
thousands) $182,430 $187,869 $140,073
Ratios to average net
assets(10)(11)(12):
Expenses 0.45% 0.45% 0.53%
Net investment income 4.49% 4.40% 4.20%
Portfolio turnover rate(13) 41% 50% 56%
Average commission rate
paid(13) -- -- --
</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) The per share amounts and ratios reflect income and expenses assuming
inclusion of the Fund's proportionate share of the income and expenses of
the Growth and Income Portfolio.
(8) 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.
(9) 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.
(10) 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.
(11) 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.
(12) Annualized.
(13) On November 1, 1995 the Growth and Income Fund began investing all of its
investable assets in the Growth and Income Portfolio. Portfolio turnover
rate and average commission rate paid for the years ended October 31, 1996
and 1997 are those of the Growth and Income Portfolio. Calculation and
disclosure of the average commission rate paid was not required prior to
1996.
PROSPECTUS
6
<PAGE> 96
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY FUND
-----------------------------------------------------
AMR CLASS
-----------------------------------------------------
YEAR ENDED OCTOBER 31, PERIOD ENDED
------------------------------------ OCTOBER 31,
1997 1996(5) 1995(5) 1994(1)(3)(4)
-----------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 13.31 $ 12.87 $ 12.61
----- ----- ----- --------
Income from investment operations:
Net investment income 0.31(6) 0.30 0.05
Net gains (losses) on securities
(both realized and unrealized) 1.98(6) 0.68 0.21
----- ----- ----- --------
Total from investment operations 2.29 0.98 0.26
----- ----- ----- --------
Less distributions:
Dividends from net investment
income (0.30) (0.22) --
Distributions from net realized
gains on securities (0.24) (0.32) --
----- ----- ----- --------
Total distributions (0.54) (0.54) --
----- ----- ----- --------
Net asset value, end of period $ 15.06 $ 13.31 $ 12.87
===== ===== ===== ========
Total return (annualized)(7) 17.72% 8.18% 11.77%
===== ===== ===== ========
Ratios/supplemental data:
Net assets, end of period (in
thousands) $330,898 $227,939 $165,524
Ratios to average net
assets(9)(10)(11):
Expenses 0.57%(6) 0.60% 0.63%
Net investment income 2.49%(6) 2.65% 1.41%
Portfolio turnover rate(13) 19% 21% 37%
Average commission rate paid(13) $ 0.0192 -- --
<CAPTION>
S&P
500
INDEX
INTERNATIONAL EQUITY FUND FUND
-------------------------------------------------- ------------
INSTITUTIONAL CLASS
-------------------------------------------------- AMR CLASS
YEAR ENDED OCTOBER 31, PERIOD ENDED YEAR ENDED
---------------------------------- OCTOBER 31, DECEMBER 31,
1994(3)(4) 1993(2) 1992 1991(1) 1997(1)
-------------------------------------------------- ------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 12.07 $ 8.93 $ 10.13 $ 10.00 $
------ ---- ---- ------- -------
Income from investment operations:
Net investment income 0.32 0.17 0.12 --
Net gains (losses) on securities
(both realized and unrealized) 1.10 3.09 (1.31) 0.13
------ ---- ---- -------
Total from investment operations 1.42 3.26 (1.19) 0.13
------ ---- ---- ------- -------
Less distributions:
Dividends from net investment
income (0.17) (0.12) (0.01) --
Distributions from net realized
gains on securities (0.45) -- -- --
------ ---- ---- ------- -------
Total distributions (0.62) (0.12) (0.01) --
------ ---- ---- ------- -------
Net asset value, end of period $ 12.87 $ 12.07 $ 8.93 $ 10.13 $
====== ==== ==== ======= =======
Total return (annualized)(7) 11.77%(8) 36.56% (12.07)% 5.69% %
====== ==== ==== ======= =======
Ratios/supplemental data:
Net assets, end of period (in
thousands) $23,115 $66,652 $38,837 $10,536
Ratios to average net
assets(9)(10)(11):
Expenses 0.61% 0.78% 1.17% 1.90%(12)
Net investment income 2.74% 2.00% 2.04% 0.38%(12)
Portfolio turnover rate(13) 37% 61% 21% 2%
Average commission rate paid(13) -- -- -- -- $
</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) The per share amounts and ratios reflect income and expenses assuming
inclusion of the Fund's proportionate share of the income and expenses of
the International Equity Portfolio.
(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.
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.
(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.
(12) Estimated based on expected annual expenses and actual average net assets.
(13) On November 1, 1995 the International Equity Fund began investing all of
its investable assets in the International Equity Portfolio. Portfolio
turnover rate and average commission rate paid for the years ended October
31, 1996 and 1997 are those of the International Equity Portfolio.
Calculation and disclosure of the average commission rate paid was not
required prior to 1996.
PROSPECTUS
7
<PAGE> 97
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
SHORT-TERM BOND FUND
--------------------------------------------------------------------------
AMR CLASS INSTITUTIONAL CLASS
----------------------------------------- ------------------------------
PERIOD
YEAR ENDED OCTOBER 31, ENDED YEAR ENDED OCTOBER 31,
--------------------------- OCTOBER 31, ------------------------------
1997 1996 1995 1994(1)(3) 1994(3) 1993 1992
--------------------------------------------------------------------------
<S> <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
Income from investment
operations:
Net investment income 0.65(4) 0.64 0.14 0.52 0.58 0.75
Net gains (losses) on
securities (both realized
and unrealized) (0.14)(4) 0.13 (0.10) (0.46) 0.15 0.06
---- ---- ---- ------ ---- ---- ----
Total from investment
operations 0.51 0.77 0.04 0.06 0.73 0.81
---- ---- ---- ------ ---- ---- ----
Less distributions:
Dividends from net
investment income (0.65) (0.64) (0.14) (0.52) (0.58) (0.75)
Distributions from net
realized gains on
securities -- -- -- (0.10) (0.05) --
---- ---- ---- ------ ---- ---- ----
Total distributions (0.65) (0.64) (0.14) (0.62) (0.63) (0.75)
---- ---- ---- ------ ---- ---- ----
Net asset value, end of
period $ $ 9.67 $ 9.81 $ 9.68 $ 9.67 $ 10.23 $ 10.13
==== ==== ==== ====== ==== ==== ====
Total return (annualized)(5) % 5.38% 8.22% 0.59%(6) 0.42% 7.20% 7.94%
==== ==== ==== ====== ==== ==== ====
Ratios/supplemental data:
Net assets, end of period
(in thousands) $ $59,526 $64,595 $53,445 $112,141 $238,874 $209,928
Ratios to average net
assets(7)(8)(9):
Expenses % 0.33%(4) 0.36% 0.33% 0.31% 0.26% 0.27%
Net investment income % 6.66%(4) 6.60% 5.77% 5.26% 5.76% 7.40%
Portfolio turnover rate(10) % 304% 183% 94% 94% 176% 133%
<CAPTION>
SHORT-TERM BOND FUND
------------------------------------------
INSTITUTIONAL CLASS
------------------------------------------
PERIOD
YEAR ENDED OCTOBER 31, ENDED
---------------------------- OCTOBER 31,
1991(2) 1990 1989 1988(1)
------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of
period $ 9.76 $ 9.94 $ 10.12 $ 10.00
Income from investment
operations:
Net investment income 0.83 0.92 0.96 0.64
Net gains (losses) on
securities (both realized
and unrealized) 0.31 (0.18) (0.12) 0.05
---- ---- ---- ------
Total from investment
operations 1.14 0.74 0.84 0.69
---- ---- ---- ------
Less distributions:
Dividends from net
investment income (0.83) (0.92) (1.02) (0.57)
Distributions from net
realized gains on
securities -- -- -- --
---- ---- ---- ------
Total distributions (0.83) (0.92) (1.02) (0.57)
---- ---- ---- ------
Net asset value, end of
period $ 10.07 $ 9.76 $ 9.94 $ 10.12
==== ==== ==== ======
Total return (annualized)(5) 11.87% 7.51% 7.62% 7.41%
==== ==== ==== ======
Ratios/supplemental data:
Net assets, end of period
(in thousands) $141,629 $83,265 $60,507 $40,855
Ratios to average net
assets(7)(8)(9):
Expenses 0.35% 0.48% 0.59% 0.50%
Net investment income 8.42% 9.44% 9.77% 8.01%
Portfolio turnover rate(10) 165% 156% 158% 127%
</TABLE>
(1) The Short-Term Bond Fund commenced active operations on December 3, 1987.
Prior to March 1, 1998, the Short-Term Bond Fund was known as the
Limited-Term Income Fund. The AMR Class commenced active operations on
August 1, 1994 and at that time existing shares of the Short-Term Bond Fund
were designated as Institutional Class shares.
(2) AMR Investment Services, Inc. began portfolio management of the Short-Term
Bond 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) The per share amounts and ratios reflect income and expenses assuming
inclusion of the Fund's proportionate share of the income and expense of
the Short-Term Bond Portfolio.
(5) 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.
(6) 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.
(7) 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.
(8) 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.
(9) Annualized.
(10) On November 1, 1995 the Short-Term Bond Fund began investing all of its
investable assets in the Limited-Term Portfolio. Portfolio turnover rate
for the years ended October 31, 1996 and 1997 is that of the Limited-Term
Income Portfolio.
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INTRODUCTION
The Trust is an open-end, diversified management investment company
organized as a Massachusetts business trust on January 16, 1987. The Funds are
six 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, and it
provides the Funds with administrative services. BT provides the Equity 500
Index Portfolio with investment advisory, administrative and other services.
The Funds are comprised of three 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. 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 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 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 assets of the Intermediate Bond
Portfolio are allocated by the Manager between the Manager and another
investment adviser. Investment decisions for the Short-Term Bond Portfolio are
made directly by the Manager. 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 and in the SAI and by specific investment strategies
developed by the Manager. See "Investment Advisers."
PROSPECTUS
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<PAGE> 99
AMR Class shares are offered without sales charge at the net asset value
next determined after an investment is received and accepted. Shares will be
redeemed at the net asset value next determined after receipt of a redemption
order. See "Purchase, Redemption and Valuation of Shares."
INVESTMENT OBJECTIVES, POLICIES AND RISKS
The investment objective and policies of each Fund and its corresponding
Portfolio are described below. Except as otherwise indicated, the investment
policies of any Fund may be changed at any time by the Board to the extent that
such changes are consistent with the investment objective of the applicable
Fund. However, each Fund's investment objective may not be changed without a
majority vote of that Fund's outstanding shares, which is defined as the lesser
of (a) 67% of the shares of the applicable Fund present or represented if the
holders of more than 50% of the shares are present or represented at the
shareholders' meeting, or (b) more than 50% of the shares of the applicable Fund
(hereinafter, "majority vote"). Except for the Equity 500 Index Portfolio, a
Portfolio's investment objective may not be changed without a majority vote of
that Portfolio's interest holders. The investment objective of the Equity 500
Index Portfolio is not a fundamental policy. Shareholders of the S&P 500 Index
Fund will receive thirty days' prior written notice with respect to any change
in the investment objective of the Equity 500 Index Portfolio.
Each Fund has a fundamental investment policy which allows it to invest all
of its investable assets in its corresponding Portfolio. All other fundamental
investment policies and the non-fundamental investment policies of each Fund and
its corresponding Portfolio are identical. Therefore, although the following
discusses the investment policies of each Portfolio, the AMR Trust's Board of
Trustees ("AMR Trust Board") and the Equity 500 Index Portfolio's Board of
Trustees ("Equity 500 Index Portfolio Board"), it applies equally to each Fund
and each Board.
AMERICAN AADVANTAGE BALANCED FUND -- This Fund's investment objective is to
realize both income and capital appreciation. This Fund seeks its investment
objective by investing all of its investable assets in the Balanced Portfolio,
which invests primarily in equity and debt securities. Although equity
securities (such as stocks) will be purchased primarily for capital appreciation
and debt securities (such as bonds) will be purchased primarily for income
purposes, income and capital appreciation potential will be considered in
connection with all such investments. Excluding collateral for securities
loaned, ordinarily the Portfolio will have a minimum of 30% and a maximum of 70%
of its assets invested in equity securities and a minimum of 30% and a maximum
of 70% of its assets invested in debt securities which, at the time of purchase,
are rated in one of the four highest rating categories by all nationally
recognized statistical rating organizations ("Rating Organizations") rating that
security such as Standard & Poor's ("S&P") or Moody's Investor Services, Inc.
("Moody's") or, if unrated, are deemed to be of comparable quality by the
applicable investment adviser. Obligations
PROSPECTUS
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<PAGE> 100
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 Intermediate Bond Fund."
The Portfolio also may engage in dollar rolls or purchase or sell securities
on a "when-issued" or "forward commitment" basis. The purchase or sale of
when-issued securities enables an investor to hedge against anticipated changes
in interest rates and prices by locking in an attractive price or yield. The
price of when-issued securities is fixed at the time the commitment to purchase
or sell is made, but delivery and payment for the when-issued securities take
place at a later date, normally one to two months after the date of purchase.
During the period between purchase and settlement, no payment is made by the
purchaser to the issuer and no interest accrues to the purchaser. Such
transactions therefore involve a risk of loss if the value of the security to be
purchased declines prior to the settlement date or if the value of the security
to be sold increases prior to the settlement date. A sale of a when-issued
security also involves the risk that the other party will be unable to settle
the transaction. Dollar rolls are a type of forward commitment transaction.
Purchases and sales of securities on a forward commitment basis involve a
commitment to purchase or sell securities with payment and delivery to take
place at some future date, normally one to two months after the date of the
transaction. As with when-issued securities, these transactions involve certain
risks, but they also enable an investor to hedge against anticipated changes in
interest rates and prices. Forward commitment transactions are executed for
PROSPECTUS
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<PAGE> 101
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 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. 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 traded in the United States on exchanges and in the
over-the-counter market. When purchasing equity securities, primary emphasis
will be placed on undervalued securities with above average growth expectations.
In order to seek either above average current income or capital appreciation
when interest rates are expected to decline, the Portfolio may invest in debt
securities which, at the time of purchase, are rated in one of the four highest
rating categories by all Rating Organizations rating that security or, if
unrated, are deemed to be of comparable quality by the applicable investment
adviser. Obligations rated in the fourth highest rating category are limited to
25% of the Portfolio's debt allocation. See "American AAdvantage Balanced Fund"
for a description of the risks involved with these obligations. See the SAI for
definitions of the foregoing securities and for a description of debt ratings.
The Portfolio also may invest in other investment companies or in cash and cash
equivalents, including investment grade short-term obligations. However, when
its investment advisers deem that market conditions warrant, the Portfolio may,
PROSPECTUS
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<PAGE> 102
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 "forward
commitment" basis. See "American AAdvantage Balanced Fund" for a description of
these transactions.
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. See "Investment Advisers."
AMERICAN AADVANTAGE INTERNATIONAL EQUITY FUND -- This Fund's investment
objective is to realize long-term capital appreciation. This Fund seeks its
investment objective by investing all of its investable assets in the
International Equity Portfolio, which invests primarily in equity securities of
issuers based outside the United States. Ordinarily the Portfolio will invest at
least 65% of its assets in common stocks and securities convertible into common
stocks of issuers in at least three different countries located outside the
United States. However, excluding collateral for securities loaned, the
Portfolio generally invests in excess of 80% of its assets in such securities.
The remainder of the Portfolio's assets will be invested in non-U.S. debt
securities which, at the time of purchase, are rated in one of the three highest
rating categories by any Rating Organization or, if unrated, are deemed to be of
comparable quality by the applicable investment adviser and traded publicly on a
world market, or in cash or cash equivalents, including investment grade
short-term obligations, or in other investment companies. However, when its
investment advisers deem that market conditions warrant, the Portfolio may, for
temporary defensive purposes, invest up to 100% of its assets in cash, cash
equivalents, other investment companies and investment grade short-term
obligations.
The investment advisers select securities based upon a country's economic
outlook, market valuation and potential changes in currency exchange rates. When
purchasing equity securities, primary emphasis will be placed on undervalued
securities with above average growth expectations.
Overseas investing carries potential risks not associated with domestic
investments. Such risks include but are not limited to: (1) political and
financial instability abroad, including risk of nationalization or expropriation
of assets and the risk of war; (2) less liquidity and greater volatility of
foreign investments; (3) less public information regarding foreign companies;
(4) less government regulation and supervision of foreign stock exchanges,
brokers and listed companies; (5) lack of uniform accounting, auditing and
financial reporting standards; (6) delays in transaction settlement in some
foreign markets; (7) possible 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
PROSPECTUS
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<PAGE> 103
in foreign countries; and (13) possible 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, Portugal, 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; (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.
PROSPECTUS
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<PAGE> 104
HOTCHKIS AND WILEY, MORGAN STANLEY ASSET MANAGEMENT INC. and TEMPLETON
INVESTMENT COUNSEL, INC. currently serve as investment advisers to the
International Equity 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 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
PROSPECTUS
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<PAGE> 105
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.
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
PROSPECTUS
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<PAGE> 106
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 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 or outstanding commercial paper
or bank obligations rated Prime-1 by Moody's or A-1 by S&P; 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 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
PROSPECTUS
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<PAGE> 107
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.
AMERICAN AADVANTAGE INTERMEDIATE BOND 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
Intermediate Bond 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 Manager or 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 and the investment adviser, 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.
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 three to seven 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.
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-
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through securities (arising from prepayments of principal due to sale of the
underlying property, refinancing, or foreclosure, net of fees and costs which
may be incurred) may expose the Portfolio to a lower rate of return upon
reinvestment of principal. Also, if a security subject to prepayment has been
purchased at a premium, in the event of prepayment, the value of the premium
would be lost. Like other debt securities, when interest rates rise, the value
of mortgage-related securities generally will decline; however, when interest
rates decline, the value of mortgage-related securities with prepayment features
may not increase as much as other debt securities.
Payment of principal and interest on some mortgage pass-through securities
(but not the market value of the securities themselves) may be guaranteed by the
full faith and credit of the U.S. Government (in the case of securities
guaranteed by the Government National Mortgage Association ("GNMA")) or
guaranteed by agencies or instrumentalities of the U.S. Government (in the case
of securities guaranteed by the Federal National Mortgage Association ("FNMA")
or the Federal Home Loan Mortgage Corporation ("FHLMC"), which are supported
only by the discretionary authority of the U.S. Government to purchase the
agency's obligations). Mortgage pass-through securities created by
non-governmental issuers (such as commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers and other
secondary market issuers) may be supported with various credit enhancements such
as pool insurance, guarantees issued by governmental entities, a letter of
credit from a bank or senior/subordinated structures.
Collateralized mortgage obligations ("CMOs") are hybrid instruments with
characteristics of both mortgage-backed bonds and mortgage pass-through
securities. Similar to a mortgage pass-through, interest and prepaid principal
on a CMO are paid, in most cases, monthly. 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
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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.
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 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.
The Manager and Barrow, Hanley, Mewhinney & Strauss, Inc. currently manage
the assets of the Intermediate Bond Portfolio. See "Investment Advisers."
AMERICAN AADVANTAGE SHORT-TERM BOND 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
Short-Term Bond 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; assets-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
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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 Yankeedollar and Eurodollar bonds, notes and certificates of
deposit involve risks that differ from investments in securities of domestic
issuers. See "American AAdvantage Intermediate Bond Fund" for a description of
these risks and of the risks associated with investments in mortgage-backed
securities, CMOs and asset-backed securities. The value of the Portfolio's debt
instruments will vary in response to interest rate changes as described in
"American AAdvantage Intermediate Bond Fund." The Portfolio also may engage in
dollar rolls and purchase or sell securities on a "when issued" or "forward
commitment" basis as described "American AAdvantage Balanced Fund."
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 Short-Term
Bond Portfolio.
OTHER INVESTMENT POLICIES -- In addition to the investment policies described
previously, each Portfolio also may 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 1/3% of its
total assets. A Portfolio continues to receive interest on the securities loaned
and
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simultaneously earns either interest on the investment of the cash collateral or
fee income if the loan is otherwise collateralized. 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.
Except for the Equity 500 Index Portfolio, the Manager will receive compensation
for administrative and oversight functions with respect to securities lending.
The amount of such compensation will depend on the income generated by the loan
of each Portfolio's securities. The SEC has granted exemptive relief that
permits the Portfolios to invest cash collateral received from securities
lending transactions in shares of one or more private investment companies
managed by the Manager. Subject to receipt of exemptive relief from the SEC, the
Portfolios also may invest cash collateral received from securities lending
transactions in shares of one or more registered investment companies managed by
the Manager. See the SAI for further information regarding loan transactions.
REPURCHASE AGREEMENTS. A repurchase agreement is an agreement under which
securities are acquired by a Portfolio from a securities dealer or bank subject
to resale at an agreed upon price on a later date. The acquiring Portfolio bears
a risk of loss in the event that the other party to a repurchase agreement
defaults on its obligations and the Portfolio is delayed or prevented from
exercising its rights to dispose of the collateral securities. However, the
investment advisers or the Manager attempt to minimize this risk by entering
into repurchase agreements only with financial institutions which are deemed to
be of good financial standing and which have been approved by the AMR Trust
Board or the Equity 500 Index Portfolio Board, as appropriate. See the SAI for
more information regarding repurchase agreements.
PRIVATE PLACEMENT OFFERINGS. Investments in private placement offerings are
made in reliance on the "private placement" exemption from registration afforded
by Section 4(2) of the Securities Act of 1933 (the "1933 Act"), and resold to
qualified institutional buyers under Rule 144A under the 1933 Act ("Section 4(2)
securities"). Section 4(2) securities are restricted as to disposition under the
federal securities laws and generally are sold to institutional investors, such
as the Portfolios, that agree they are purchasing the securities for investment
and not with an intention to distribute to the public. Any resale by the
purchaser must be pursuant to an exempt transaction and may be accomplished in
accordance with Rule 144A. Section 4(2) securities normally are resold to other
institutional investors such as the Portfolios through or with the assistance of
the issuer or dealers that make a market in the Section 4(2) securities, thus
providing liquidity. The Portfolios will not invest more than 15% of their
respective net assets in Section 4(2) securities and illiquid securities unless
the applicable investment adviser determines, by continuous reference to the
appropriate
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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.
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 Section
4(2) securities offered and sold under Rule 144A, 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 will be 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 Intermediate Bond Portfolio and the Short-Term Bond Portfolio normally
will not incur any brokerage commissions on their transactions because debt
instruments are generally traded on a "net" basis with dealers acting as
principal for their own accounts and 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 Short-Term Bond Portfolio, currently expects
its portfolio turnover rate to exceed 100%. The portfolio turnover rate for the
Short-Term Bond Portfolio for the fiscal year ended October 31, 1997 was %.
A Portfolio's turnover rate, or the frequency of portfolio transactions, will
vary from year to year depending on market conditions and the Portfolio's cash
flows. High portfolio activity increases a Portfolio's transaction costs,
including brokerage commissions, and may result in a greater number of taxable
transactions.
ADDITIONAL INFORMATION ABOUT THE PORTFOLIOS -- As previously described,
investors should be aware that each Fund, unlike mutual funds that directly
acquire and manage their own portfolios of securities, seeks to achieve its
investment objective by investing all of its
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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.
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 sell their interests to other nonaffiliated investment companies
and/or other institutional investors. All institutional investors in a Portfolio
pay a proportionate share of the Portfolio's expenses and invest in that
Portfolio on the same terms and conditions. However, other investment companies
investing all of their assets in a Portfolio are not required to sell their
shares at the same public offering price as a Fund and are 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 affected materially 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 its liquidity adversely.
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 will 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
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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 restriction 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, provided that: (i) this limitation does
not apply to obligations issued or guaranteed by the U.S. Government, its
agencies and instrumentalities; (ii) municipalities and their agencies and
authorities are not deemed to be industries; and (iii) financial service
companies are classified according to the end users of their services (for
example, automobile finance, bank finance, and diversified finance will be
considered separate industries).
The following non-fundamental investment restriction 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 invest more than 15% of its
net assets in
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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
Intermediate Bond Fund and the Short-Term Bond 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 also may 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 the
Equity 500 Index Portfolio are subject to the supervision of their respective
Board of Trustees. The Manager provides or oversees all administrative,
investment advisory and portfolio management services for the Trust pursuant to
a Management Agreement dated April 3, 1987, as amended July 25, 1997, together
with the Administrative Services Agreement described below. The AMR Trust and
the Manager also entered into a Management Agreement dated October 1, 1995, as
amended July 25, 1997, 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
investment 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
multiple investment advisers designated for that Portfolio. The assets of the
Intermediate Bond Portfolio are allocated by the Manager
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between the Manager and another investment adviser. 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 Short-Term Bond 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 December 31, 1997,
the Manager had assets under management totaling approximately $ billion,
including approximately $ billion under active management and $ billion as
named fiduciary or fiduciary adviser. Of the total, approximately $ billion of
assets are related to AMR. American Airlines, Inc. is not responsible for
investments made in the American AAdvantage Funds.
The Manager provides the Trust and the AMR Trust with office space, office
equipment and personnel necessary to manage and administer the Trusts'
operations. This includes complying with reporting requirements; corresponding
with shareholders; maintaining internal bookkeeping, accounting and auditing
services and records; and supervising the provision of services to the Trusts by
third parties. The Manager also oversees each Portfolio's participation in
securities lending activities and any actions taken by securities lending agents
in connection with those activities to ensure compliance with all applicable
regulatory and investment guidelines. 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 Intermediate Bond
Portfolio and the Short-Term Bond Portfolio, (2) 0.10% of the net assets of the
other Portfolios of the AMR Trust, plus (3) all fees payable by the Manager to
the AMR Trust's investment advisers as described in "Investment Advisers." The
advisory fee is payable quarterly in arrears. To the extent that a Fund invests
all of its investable assets in its corresponding Portfolio, the Manager will
not receive an advisory fee under its Management Agreement with the Trust. The
Manager receives compensation in connection with securities lending activities.
If a Portfolio lends its portfolio securities and receives cash collateral from
the borrower, the Manager may receive up to 25% of the net annual interest
income (the gross interest earned by the investment less the amount paid to the
borrower as
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well as related expenses) received from the investment of such cash. If a
borrower posts collateral other than cash, the borrower will pay to the lender a
loan fee. The Manager may receive up to 25% of the loan fees posted by
borrowers. Currently, the Manager receives 10% of the net annual interest income
from the investment of cash collateral or 10% of the loan fees posted by
borrowers. In addition, the manager is compensated through the Administrative
Services Agreement described below for other services provided.
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 expenses not otherwise assumed by the Manager,
including 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. As described below,
the assets of the Balanced, the Growth and Income and the International Equity
Portfolios are allocated among the investment advisers designated for each
Portfolio and the assets of the Intermediate
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Bond Portfolio are allocated between the Manager and another investment adviser.
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 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, 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 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
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in all aspects of the administration and operation of the Portfolio. The
Administration and Services Agreement provides for the Portfolio to pay BT a
fee, computed daily and paid monthly, at the rate of 0.05% of the average daily
net assets of the Portfolio. Under the Administration and Services Agreement, BT
may delegate one or more of its responsibilities to others, including Federated
Services Company, at BT's expense.
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 related to AMR
Class shares. 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.
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 -- STATE STREET BANK & TRUST COMPANY, Boston,
Massachusetts, serves as custodian for the Portfolios of the AMR Trust and the
Funds as transfer agent for the AMR Class. 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 Funds, 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., Kansas City, Missouri.
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 has 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 discussion of those services.
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William F. Quinn has served as President of the Manager since it was founded
in 1986 and Nancy A. Eckl serves as Vice President - Trust Investments of the
Manager. Ms. Eckl 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, the
Intermediate Bond Fund and their corresponding Portfolios. These
responsibilities include oversight of the investment advisers to these Funds,
regular review of their performance and asset allocations among them.
Michael W. Fields is responsible for the portfolio management oversight of
the Short-Term Bond Fund and its corresponding Portfolio. Mr. Fields has been
with the Manager since it was founded in 1986 and serves as Vice
President - Fixed Income Investments. Benjamin L. Mayer is responsible for the
day-to-day portfolio management of the Short-Term Bond 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. Fields also is responsible for the portfolio management oversight of the
portion of the Intermediate Bond Fund and its corresponding Portfolio, allocated
to the Manager. Mr. Mayer is responsible for its day-to-day portfolio
management.
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 September 30, 1997, Bankers Trust New York Corporation
was the seventh largest bank holding company in the United States with total
assets of approximately $ billion and approximately $ billion in assets
under management globally. Of that total, approximately $ 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.
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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 December 31, 1997, Barrow had discretionary investment management authority
with respect to approximately $ billion of assets, including approximately
$ billion of assets of AMR and its subsidiaries and affiliated entities.
Barrow serves as an investment adviser to the Balanced Portfolio, the Growth and
Income Portfolio, the Intermediate Bond Portfolio and the Short-Term Bond
Portfolio, although the Manager does not presently intend to allocate any of the
assets in the Short-Term Bond 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.
BRANDYWINE ASSET MANAGEMENT, INC. ("Brandywine"), 201 North Walnut Street,
Wilmington, Delaware 19801, is a professional investment counseling firm founded
in 1986. Brandywine is a wholly owned subsidiary of Legg Mason, Inc. As of
December 31, 1997, Brandywine had assets under management totaling approximately
$ billion, including approximately $ 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. 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 AMR Trust assets under its discretionary management, .225% of the next $100
million on all assets and .20% on all excess assets.
GSB INVESTMENT MANAGEMENT, INC. ("GSB"), 301 Commerce Street, Fort Worth,
Texas 76102, is a professional investment management firm which was founded in
1987 by Frank P. Ganucheau, Mark J. Stupfel, and Lyle E. Brumley. GSB is wholly
owned by United Asset Management Corporation, a Delaware corporation. As of
December 31, 1997, GSB managed approximately $ billion of assets, including
approximately $ million of assets of AMR and its subsidiaries and affiliated
entities. GSB serves as an investment adviser to the Balanced Portfolio and the
Growth and Income Portfolio. The Manager pays GSB an annualized fee equal to
.30% of the first $100 million in AMR Trust assets under its discretionary
management, .25% of the next $100 million, .20% of the next $100 million, and
.15% 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 is a division
of Merrill Lynch Capital Management Group, a wholly owned subsidiary of Merrill
Lynch & Co., Inc. Assets under management as of December 31, 1997 were
approximately $ billion, which included approximately $ billion of
assets of AMR and its
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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 Manager pays Hotchkis and Wiley an
annualized fee equal to .60% of the first $10 million of AMR Trust assets under
its discretionary management, .50% of the next $140 million of assets, .30% of
the next $50 million of assets, .20% of 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 December 31, 1997,
including funds managed for its parent company, were approximately $
billion, which included approximately $ million of assets of AMR and its
subsidiaries and affiliated entities. IIA serves as an investment adviser to the
Balanced Portfolio and the Growth and Income Portfolio. The Manager pays IIA an
annualized fee equal to .50% of the first $30 million of AMR Trust assets under
its discretionary management, .25% of the next $70 million of assets, and .20%
of all excess assets.
MORGAN STANLEY ASSET MANAGEMENT INC. ("MSAM"), 25 Cabot Square, London,
United Kingdom, E14 4QA, is a wholly owned subsidiary of Morgan Stanley, Dean
Witter, Discover & Co. 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, 1997, MSAM had assets under management totaling
approximately $ billion, including approximately $ billion under active
management and $ billion as named fiduciary or fiduciary adviser. As of
September 30, 1997, MSAM had investment authority over approximately $
million of assets of AMR and its subsidiaries and affiliated entities. MSAM
serves as an investment adviser to the International Equity Portfolio. The
Manager pays MSAM an annual fee equal to .80% of the first $25 million of 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.
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 December 31,
1997, Templeton had discretionary investment management authority with respect
to approximately $ billion of assets, including approximately $ million
of assets of AMR and its subsidiaries and affiliated entities. Templeton serves
as an investment adviser to the International Equity Portfolio. The Manager pays
Templeton an annualized fee equal to .50% of the first $100 million of 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.
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Solely for the purpose of determining the applicable percentage rates when
calculating the fees for each investment adviser other than MSAM and BT, 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 the close of the Exchange, generally 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, Martin Luther King's Birthday, 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.
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 (800)
492-9063 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 you are opening a new account, the
transfer agent will provide you with an account number. You should instruct your
bank to designate the account number which the transfer agent has assigned to
you and to transmit the federal funds to: State Street Bank & Trust Co., ABA
Routing #0110-0002-8, Account No. 0002-888-6, reference American AAdvantage
Funds.
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. If you are
interested in exchanging securities you must first contact the Manager and
acquire instructions regarding submission of a written description of the
securities which you wish to exchange. You 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 you 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
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readily ascertainable value as evidenced by a listing on the Exchange, the
American Stock Exchange or The Nasdaq Stock Market. 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. You may realize gain or loss for federal
income tax purposes 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 "State Street Bank
& Trust Co., P.O. Box 1978, Boston, MA 02105-1978, Attn.: American AAdvantage
Funds -- AMR Class." An additional purchase of shares should be accompanied by
your 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.
Courier and overnight deliveries should be addressed to State Street Bank &
Trust Co., Transfer Agency Operations, One Heritage Drive, MSP-5 South, North
Quincy, MA, 02171.
REDEMPTION OF SHARES -- Shares of the Funds may be redeemed by telephone or by
mail on any Business Day.
BY TELEPHONE -- Shares may be redeemed by telephone. Proceeds from redemption
orders received by 4:00 p.m. Eastern Time generally will be transmitted to
shareholders the next Business Day.
BY MAIL -- Fund shares may be redeemed on any Business Day by writing directly
to State Street Bank & Trust Co. 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 State Street Bank & Trust Co. of all
required documents in good order. "Good order" means that the request must
include a letter of instruction or stock assignment specifying (1) the account
number and Fund name; (2) the number of shares or dollar amount to be redeemed;
(3) signature of an authorized signatory for the owners of the shares in the
exact names in which they appear on the account; (4) other supporting legal
documents, if required, in the case of estates, trusts, guardianships,
custodians, corporations, IRAs and welfare, pension and profit-sharing plans;
and (5) 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
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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.
VALUATION OF SHARES -- The net asset value of each share (share price) of the
Funds is determined as of the close of the Exchange, generally 4:00 p.m. Eastern
time on each Business Day. The net asset value of all outstanding shares of all
classes will be determined based on a pro rata allocation of the value of the
Fund's corresponding Portfolio's investment income, expenses and total capital
gains and losses. The allocation will be based on comparative net asset value at
the beginning of the day except for expenses related solely to one class of
shares ("Class Expenses") which will be borne only by the appropriate class of
shares. Because of the Class Expenses, the net income attributable to and the
dividends payable for each class of shares may be different. Additionally, the
Funds may compute differing share prices as a result of Class Expenses.
Equity securities listed on securities exchanges, including all but United
Kingdom securities of the International Equity Portfolio, are valued at the last
quoted sales price on a designated exchange prior to the close of trading on the
Exchange or, lacking any sales, on the basis of the last current bid price prior
to the close of trading on the Exchange. Securities of the United Kingdom held
in the International Equity Portfolio are priced at the last jobber price (mid
of the bid and offer prices quoted by the leading stock jobber in the security)
prior to close of trading on the Exchange. Trading in foreign markets is usually
completed each day prior to the close of the Exchange. However, events may occur
which affect the values of such securities and the exchange rates between the
time of valuation and the close of the Exchange. Should events materially affect
the value of such securities during this period, the securities are priced at
fair value, as determined in good faith and pursuant to procedures approved by
the AMR Board. Over-the-counter equity securities are valued on the basis of the
last bid price on that date prior to the close of trading. Debt securities
(other than short-term securities) will normally be valued on the basis of
prices provided by a pricing service and may take into account appropriate
factors such as institution-size trading in similar groups of securities, yield,
quality, coupon rate, maturity, type of issue, trading characteristics and other
market data. In some cases, the prices of debt securities may be determined
using quotes obtained from brokers. Securities for which market
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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 OTHER 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 normally are declared
annually. Dividends consisting of substantially all of the net investment income
of the Intermediate Bond Fund and the Short-Term Bond 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 and
October. In December, the S&P 500 Index Fund will distribute another income
dividend, plus any capital gains. Each Fund may make an additional dividend or
other distribution, if necessary, to avoid a 4% excise tax on certain
undistributed income and gain. A Fund's net investment income attributable to
the AMR Class consists of that class's share of the Fund's share of dividends
and interest (including discount) accrued on its corresponding Portfolio's
securities, less expenses of the Fund and the Portfolio attributable to the AMR
Class. Distributions of a Fund's share of its corresponding Portfolio's realized
net short-term capital gain, net capital gain (the excess of net long-term
capital gain over net short-term capital loss), and net gains from foreign
currency transactions, if any, normally will be made annually.
Unless a shareholder elects otherwise on the account application, all
dividends and other distributions on a Fund's AMR Class shares will be
automatically paid in additional AMR Class shares of that Fund. However, a
shareholder may choose to have distributions of net capital gain (and, if
applicable, net foreign currency gains) 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
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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.
The qualified retirement and benefit plans of AMR Corporation and its
affiliates ("Plans"), which are the AMR Class shareholders, pay no federal
income tax. Individual participants in the Plans should consult the Plans'
governing documents and their own tax advisers for information on the tax
consequences associated with participating in the Plans.
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 ten separate investment portfolios. Each
Fund in this Prospectus is comprised of three classes of shares, which can be
issued in an unlimited number. 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 January 31, 1998:
<TABLE>
<S> <C>
AMERICAN AADVANTAGE BALANCED FUND
AMR Corporation and subsidiary companies and Employee
Benefit Trusts thereof %
AMERICAN AADVANTAGE GROWTH AND INCOME FUND
AMR Corporation and subsidiary companies and Employee
Benefit Trusts thereof %
AMERICAN AADVANTAGE INTERNATIONAL EQUITY FUND
AMR Corporation and subsidiary companies and Employee
Benefit Trusts thereof %
AMERICAN AADVANTAGE INTERMEDIATE BOND FUND
Retirement Advisors of America, Inc. %
AMERICAN AADVANTAGE SHORT-TERM BOND FUND
AMR Corporation and subsidiary companies and Employee
Benefit Trusts thereof %
</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 Funds
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. Shareholder inquiries and requests for information regarding the other
investment companies that also invest in the Equity 500 Index Portfolio should
be made by calling (800) 730-1313.
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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.
American AAdvantage Balanced Fund, American AAdvantage Growth and Income Fund,
American AAdvantage International Equity Fund, American AAdvantage Intermediate
Bond Fund and American AAdvantage Short-Term Bond Fund are service marks and
PlanAhead Class is a registered service mark of AMR Investment Services, Inc.
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American Advantage Funds(R)
- AMR CLASS -
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 419643
Kansas City, MO 64141-6643
(800) 388-3344
<PAGE> 131
THIS PROSPECTUS contains important information about the Platinum Class of the
AMERICAN AADVANTAGE FUNDS ("AAdvantage Trust") and the AMERICAN AADVANTAGE
MILEAGE FUNDS ("Mileage Trust"), each an open-end management investment company
which consists of multiple investment portfolios. This Prospectus pertains only
to the four funds listed on this cover page (individually referred to as a
"Fund" and, collectively, the "Funds"). EACH FUND SEEKS ITS INVESTMENT
OBJECTIVE BY INVESTING ALL OF ITS INVESTABLE ASSETS IN A CORRESPONDING
PORTFOLIO (INDIVIDUALLY REFERRED TO AS A "PORTFOLIO" AND, COLLECTIVELY,
"PORTFOLIOS") OF THE AMR INVESTMENT SERVICES TRUST ("AMR TRUST") WHICH 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 consists of multiple classes of shares designed to meet
the needs of different groups of investors. Platinum Class shares are offered
exclusively to customers of certain broker-dealers. Prospective Platinum Class
investors should read this Prospectus carefully before making an investment
decision and retain it for future reference.
IN ADDITION TO THIS PROSPECTUS, a Statement of Additional Information ("SAI")
for the Platinum Class dated March 1, 1998 has been filed with the Securities
and Exchange Commission and is incorporated herein by reference. The SAI
contains more detailed information about the Funds. For a free copy of the SAI,
call 800-973-7977. For further information on the Funds, refer to the address
and phone number on the back cover.
AN INVESTMENT IN THE FUNDS IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT AND THERE CAN BE NO ASSURANCE THAT THEY WILL BE ABLE TO MAINTAIN A
STABLE PRICE OF $1.00 PER SHARE.
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 STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
Prospectus
March 1, 1998
[AMERICAN AADVANTAGE FUNDS LOGO]
Platinum Class
MONEY MARKET FUND
MUNICIPAL MONEY MARKET FUND
U.S. GOVERNMENT MONEY MARKET FUND
[AMERICAN AADVANTAGE MILEAGE FUNDS LOGO]
MONEY MARKET MILEAGE FUND
Available through
[SOUTHWEST SECURITIES LOGO]
<PAGE> 132
The AMERICAN AADVANTAGE MONEY MARKET FUNDSM ("Money Market Fund"), AMERICAN
AADVANTAGE MUNICIPAL MONEY MARKET FUNDSM ("Municipal Money Market Fund") and
AMERICAN AADVANTAGE U.S. GOVERNMENT MONEY MARKET FUNDSM ("U.S. Government Money
Market Fund") (collectively, "AAdvantage Funds") and the AMERICAN AADVANTAGE
MONEY MARKET MILEAGE FUNDSM ("Mileage Fund") each seeks current income,
liquidity, and the maintenance of a stable price per share of $1.00. The Money
Market Fund and the Mileage Fund each seeks its investment objective by
investing all of its investable assets in the Money Market Portfolio of the AMR
Trust ("Money Market Portfolio"); the Municipal Money Market Fund seeks its
investment objective by investing all of its investable assets in the Municipal
Money Market Portfolio of the AMR Trust ("Municipal Money Market Portfolio");
and the U.S. Government Money Market Fund seeks its investment objective by
investing all of its investable assets in the U.S. Government Money Market
Portfolio of the AMR Trust ("U.S. Government Money Market Portfolio"),
(collectively, the "Portfolios"), which in turn invest in high quality,
short-term obligations. The Municipal Money Market Portfolio invests primarily
in municipal obligations and the U.S. Government Money Market Portfolio invests
exclusively in obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities and in repurchase agreements that are
collateralized by such obligations.
Under 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. ("Manager") provides investment management and
administrative services to the Portfolios and administrative services to the
Funds. This master-feeder operating structure is different from that of many
other investment companies which directly acquire and manage their own
portfolios of securities. Accordingly, investors should carefully consider this
investment approach. See "Investment Objectives, Policies and
Risks -- Additional Information About the Portfolios." An AAdvantage Fund or the
Mileage Fund may withdraw its investment in a corresponding Portfolio at any
time if the applicable 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...................... 3
FINANCIAL HIGHLIGHTS............................ 4
INTRODUCTION.................................... 7
INVESTMENT OBJECTIVES, POLICIES AND RISKS....... 8
INVESTMENT RESTRICTIONS......................... 16
YIELDS AND TOTAL RETURNS........................ 17
MANAGEMENT AND ADMINISTRATION OF THE TRUSTS..... 17
AADVANTAGE(R) MILES............................. 20
HOW TO PURCHASE SHARES.......................... 21
HOW TO REDEEM SHARES............................ 23
VALUATION OF SHARES............................. 24
DIVIDENDS AND TAX MATTERS....................... 25
GENERAL INFORMATION............................. 26
SHAREHOLDER COMMUNICATIONS...................... 27
</TABLE>
PROSPECTUS
2
<PAGE> 133
TABLE OF FEES AND EXPENSES
Annual Operating Expenses (as a percentage of average net assets):
<TABLE>
<CAPTION>
MUNICIPAL U.S. GOVERNMENT MONEY
MONEY MONEY MONEY MARKET
MARKET MARKET MARKET MILEAGE
FUND FUND FUND FUND
<S> <C> <C> <C> <C>
Management Fees 0.15% 0.15% 0.15% 0.15%
12b-1 Fees 0.25% 0.25% 0.25% 0.25%(1)
Other Expenses 0.53% 0.65% 0.60% 0.69%
---- ------ --------- -----
Total Operating Expenses 0.93% 1.05% 1.00% 1.09%
==== ====== ========= =====
</TABLE>
(1) The Mileage Trust anticipates that a portion of the "12b-1 Fees" charged for
the current fiscal year will be used to pay for AAdvantage miles. See
"AAdvantage Miles." The Manager anticipates waiving a portion of the 12b-1
fees of the Mileage Fund.
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
A Platinum 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 3 5 10
YEAR YEARS YEARS YEARS
<S> <C> <C> <C> <C>
Money Market Fund 9 30 51 114
Municipal Money Market Fund 11 33 58 128
U.S. Government Money Market Fund 10 32 55 122
Money Market Mileage Fund 11 35 60 133
</TABLE>
The purpose of the table above is to assist a potential investor in
understanding the various costs and expenses expected to be incurred directly or
indirectly as a Platinum Class shareholder in a Fund. Additional information may
be found under "Management and Administration of the Trusts."
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.
PROSPECTUS
3
<PAGE> 134
FINANCIAL HIGHLIGHTS
The financial highlights in the following tables for the AAdvantage Funds and
the Mileage Fund have been derived from financial statements of the AAdvantage
Trust and the Mileage Trust, respectively. The information has been audited by
Ernst & Young LLP, independent auditor. Such information should be read in
conjunction with the financial statements and the report of the independent
auditor appearing in the Annual Report of the AAdvantage Trust and the Mileage
Trust incorporated by reference in the SAI, which contains further information
about performance of the Funds and can be obtained by investors without charge.
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
MONEY MARKET FUND
-------------------------------------------------------------------------------------------
PLATINUM CLASS
---------------------- INSTITUTIONAL CLASS
YEAR PERIOD ----------------------------------------------------------------
ENDED ENDED YEAR ENDED OCTOBER 31,
OCT. 31, OCT. 31, ----------------------------------------------------------------
1997 1996(1) 1996 1995 1994(2) 1993 1992
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------ ---- ----- ----- ----- ----- -----
Net investment income 0.05(3) 0.05(3) 0.06 0.04 0.03 0.04
Less dividends from net
investment income (0.05) (0.05) (0.06) (0.04) (0.03) (0.04)
------ ---- ----- ----- ----- ----- -----
Net asset value, end of
period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
====== ==== ===== ===== ===== ===== =====
Total return (annualized) % 4.85%(4) 5.57% 5.96% 3.85% 3.31% 4.41%
====== ==== ===== ===== ===== ===== =====
Ratios/supplemental data:
Net assets, end of period
(in thousands) $119,981 $1,406,939 $1,206,041 $1,893,144 $2,882,947 $2,223,829
Ratios to average net
assets (annualized)(5)(6):
Expenses 0.94%(3) 0.24%(3) 0.23% 0.21% 0.23% 0.26%
Net investment income 4.63%(3) 5.41%(3) 5.79% 3.63% 3.23% 4.06%
<CAPTION>
MONEY MARKET FUND
-----------------------------------------
INSTITUTIONAL CLASS
-----------------------------------------
YEAR ENDED OCTOBER 31,
-----------------------------------------
1991 1990 1989 1988
-----------------------------------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00
---- ---- ---- ----
Net investment income 0.07 0.08 0.09 0.08
Less dividends from net
investment income (0.07) (0.08) (0.09) (0.08)
---- ---- ---- ----
Net asset value, end of
period $ 1.00 $ 1.00 $ 1.00 $ 1.00
==== ==== ==== ====
Total return (annualized) 7.18% 8.50% 9.45% 7.54%
==== ==== ==== ====
Ratios/supplemental data:
Net assets, end of period
(in thousands) $715,280 $745,405 $385,916 $330,230
Ratios to average net
assets (annualized)(5)(6):
Expenses 0.24% 0.20% 0.22% 0.28%
Net investment income 6.93% 8.19% 9.11% 7.54%
</TABLE>
(1) The Money Market Fund commenced active operations on September 1, 1987. The
Platinum Class commenced active operations on November 7, 1995.
(2) Average shares outstanding for the period rather than end of period shares
were used to compute net investment income per share.
(3) The per share amounts and ratios reflect income and expenses assuming
inclusion of the Fund's proportionate share of the income and expenses of
the Money Market Portfolio.
(4) Total return for the Platinum Class for the period ended October 31, 1996,
reflects Institutional Class returns from November 1, 1995 through November
6, 1995 and returns of the Platinum Class through October 31, 1996. Due to
the different expense structures between the classes, total return would
vary from the results shown had the Platinum Class been in operation for the
entire year.
(5) The method of determining average net assets was changed from a monthly
average to a daily average starting with the year ended October 31, 1992.
(6) Effective October 1, 1990, 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.
PROSPECTUS
4
<PAGE> 135
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
MUNICIPAL MONEY MARKET FUND
----------------------------------------------------------------------------
PLATINUM CLASS INSTITUTIONAL CLASS
----------------------------- ---------------------------------------
YEAR ENDED PERIOD ENDED YEAR ENDED OCT. 31, PERIOD ENDED
OCT. 31, OCT. 31, --------------------- OCT. 31,
1997 1996(1) 1996 1995 1994(1)
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- --------- --- ---- -------
Net investment income 0.03(2) 0.04(3) 0.04 0.02
Less dividends from net investment income (0.03) (0.04) (0.04) (0.02)
------- --------- --- ---- -------
Net asset value, end of period $1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ========= === ==== =======
Total return (annualized) % 2.88%(3) 3.59% 3.75% 2.44%
======= ========= === ==== =======
Ratios/supplemental data:
Net assets, end of period (in thousands) $49,862 $ 6 $ 7 $9,736
Ratios to average net assets (annualized)(4)(5):
Expenses 0.97%(2) 0.27%(2) 0.35% 0.30%
Net investment income 2.72%(2) 3.49%(2) 3.70% 2.38%
</TABLE>
(1) The Municipal Money Market Fund commenced active operations on November 10,
1993. The Platinum Class commenced active operations on November 7, 1995.
(2) The per share amounts and ratios reflect income and expenses assuming
inclusion of the Fund's proportionate share of the income and expenses of
its corresponding Portfolio.
(3) Total return for the Platinum Class for the period ended October 31, 1996,
reflects Institutional Class returns from November 1, 1995 through November
6, 1995 and returns of the Platinum Class through October 31, 1996. Due to
the different expense structures between the classes, total return would
vary from the results shown had the Platinum Class been in operation for the
entire year.
(4) Operating results of the Municipal Money Market Fund exclude management and
administrative services fees waived by the Manager. Had the Fund paid such
fees, the ratio of expenses and net investment income to average net assets
of the Institutional Class would have been 0.50% and 2.18%, respectively for
the period ended October 31, 1994; 0.55% and 3.50%, respectively, for the
year ended October 31, 1995, and 0.33% and 3.43%, respectively for the year
ended October 31, 1996. The ratio of expenses and net investment income to
average net assets of the Platinum Class would have been 1.02% and 2.67%,
respectively for the period ended October 31, 1996.
(5) The method of determining average net assets was changed from a monthly
average to a daily average starting with the period ended October 31, 1994.
PROSPECTUS
5
<PAGE> 136
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
U.S. GOVERNMENT MONEY MARKET FUND
-------------------------------------------------------------------------------------------------
PLATINUM CLASS INSTITUTIONAL CLASS
------------------------- -------------------------------------------------
YEAR ENDED PERIOD ENDED YEAR ENDED OCTOBER 31, PERIOD ENDED
OCT. 31, OCT. 31, ------------------------------------------------- OCT. 31,
1997 1996(1) 1996 1995 1994(2) 1993 1992(1)
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------ -------- ----- ----- ----- ----- --------
Net investment income 0.04(3) 0.05(3) 0.06 0.04 0.03 0.02
Less dividends from net
investment income (0.04) (0.05) (0.06) (0.04) (0.03) (0.02)
------ -------- ----- ----- ----- ----- --------
Net asset value, end of period $1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
====== ======== ===== ===== ===== ===== ========
Total return (annualized) % 4.58%(4) 5.29% 5.67% 3.70% 3.07% 3.61%
====== ======== ===== === ===== ===== ========
Ratios/supplemental data:
Net assets, end of period (in
thousands) $52,153 $25,595 $ 47,184 $67,607 $136,813 $91,453
Ratios to average net assets
(annualized)(5)(6):
Expenses 1.00%(3) 0.32%(3) 0.32% 0.25% 0.23% 0.27%(7)
Net investment income 4.35%(3) 5.16%(3) 5.49% 3.44% 2.96% 3.46%(7)
</TABLE>
(1) Prior to March 1, 1997 the U.S. Government Money Market Fund was known as
the American AAdvantage U.S. Treasury Money Market Fund and operated under
different investment policies. The American AAdvantage U.S. Treasury Money
Market Fund commenced active operations on March 2, 1992. The Platinum Class
commenced active operations on November 7, 1995.
(2) Average shares outstanding for the period rather than end of period shares
were used to compute net investment income per share.
(3) The per share amounts and ratios reflect income and expenses assuming
inclusion of the Fund's proportionate share of the income and expenses of
its corresponding Portfolio.
(4) Total return for the Platinum Class for the period ended October 31, 1996,
reflects Institutional Class returns from November 1, 1995 through November
6, 1995 and returns of the Platinum Class through October 31, 1996. Due to
the different expense structures between the classes, total return would
vary from the results shown had the Platinum Class been in operation for the
entire year.
(5) Operating results of the Municipal Money Market Fund exclude management and
administrative services fees waived by the Manager. Had the Fund paid such
fees, the ratio of expenses and net investment income to average net assets
of the Institutional Class would have been 0.50% and 2.18%, respectively for
the period ended October 31, 1994; 0.55% and 3.50%, respectively, for the
year ended October 31, 1995, and 0.33% and 3.43%, respectively for the year
ended October 31, 1996. The ratio of expenses and net investment income to
average net assets of the Platinum Class would have been 1.02% and 2.67%,
respectively for the period ended October 31, 1996.
(6) The method of determining average net assets was changed from a monthly
average to a daily average starting with the period ended October 31, 1994.
(7) Estimated based on expected annual expenses and actual average net assets.
PROSPECTUS
6
<PAGE> 137
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
MONEY MARKET MILEAGE FUND
---------------------------------------------------------------
PLATINUM CLASS
------------------------------------------ MILEAGE CLASS
YEAR ENDED PERIOD ENDED -----------------
------------------- ------------------- YEAR ENDED
OCTOBER 31, 1997(1) OCTOBER 31, 1996(1) OCTOBER 31, 1996
------------------- ------------------- -----------------
<S> <C> <C> <C>
Net asset value, beginning
of period $ 1.00 $ 1.00 $ 1.00
------ ------ -------
Net investment income 0.03 0.05
Less dividends from net
investment income (0.03) (0.05)
------ ------ -------
Net asset value, end of
period $ 1.00 $ 1.00 $ 1.00
====== ====== =======
Total return (annualized) % 4.78%(2) 5.12%
====== ====== =======
Ratios/supplemental data:
Net assets, end of period
(in thousands) $15,429 $106,709
Ratios to average net
assets
(annualized)(3)(4):
Expenses 1.09% 0.67%
Net investment income 4.48% 5.02%
</TABLE>
(1) The Platinum Class of the Money Market Mileage Fund commenced active
operations on January 29, 1996, and at that time the existing shares of the
Fund were designated as Mileage Class shares.
(2) Total return for the Platinum Class for the period ended October 31, 1996,
reflects Mileage Class returns from November 1, 1995 through January 27,
1996 and returns of the Platinum Class through October 31, 1996. Due to the
different expense structures between the classes, total return would vary
from the results shown had the Platinum Class been in operation for the
entire year.
(3) The per share amounts reflect income and expenses assuming inclusion of the
Fund's proportionate share of the income and expenses of the Money Market
Portfolio.
(4) Operating results exclude expenses reimbursed by the Manager. Had the Fund
paid such fees, the ratio of expenses and net investment income to average
net assets would have been 1.24% and 4.33%, respectively for the Platinum
Class for the period ended October 31, 1996 and 0.78% and 4.91%,
respectively for the Mileage Class for the year ended October 31, 1996.
PROSPECTUS
7
<PAGE> 138
INTRODUCTION
The AAdvantage Trust and the Mileage Trust are open-end, diversified
management investment companies, organized as Massachusetts business trusts on
January 16, 1987 and February 22, 1995, respectively. The AAdvantage Funds are
three of the several investment portfolios of the AAdvantage Trust and the
Mileage Fund is a separate investment portfolio of the Mileage Trust. Each Fund
has the same investment objective but may have different investment policies.
Each Fund invests all of its investable assets in a corresponding Portfolio of
the AMR Trust with an identical investment objective. Each AAdvantage Fund
currently consists of three classes of shares, including: the "Platinum Class,"
which is available to customers of certain broker-dealers as an investment for
cash balances in their brokerage accounts; the "Institutional Class," which is
available to institutional investors investing at least $2 million in the Funds;
and 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 and self-
employed individual retirement plans. The Money Market Mileage Fund currently
consists of two classes of shares: the "Platinum Class," as described above; and
the "Mileage Class." The Money Market Mileage Fund is available only to
individuals and certain grantor trusts. Qualified retirement plans (i.e, IRAs,
Keogh, profit sharing plans) and institutional investors are not eligible to
invest in the Money Market Mileage Fund. This Prospectus relates only to the
Platinum Class. For further information about the other classes, or to obtain a
prospectus free of charge, call (800) 967-9009 or write to P.O. Box 619003, MD
5645, Dallas/Ft. Worth Airport, Texas 75261.
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 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
(or 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 are allocated separately to each class of shares.
The Manager provides the Funds and their corresponding Portfolios with
investment advisory and administrative services. Investment decisions for the
Portfolios are made by the Manager in accordance with the investment objectives,
policies and restrictions described in this Prospectus and in the SAI.
Shares are sold without a sales charge 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 "How to
Purchase Shares" and "How to Redeem Shares."
PROSPECTUS
8
<PAGE> 139
Each shareholder in the Mileage Fund will receive American Airlines(R)
AAdvantage(R) travel awards program ("AAdvantage") miles.((1)) AAdvantage miles
will be posted monthly to each shareholder's AAdvantage account at an annual
rate of one mile for every $10 invested in the Fund. See "AAdvantage Miles."
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 applicable 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"). A Portfolio's investment
objective may not be changed without a majority vote of that Portfolio's
interest holders.
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 and the AMR Trust's Board of
Trustees ("AMR Trust Board"), it applies equally to each Fund and the applicable
Board.
INVESTMENT OBJECTIVE OF THE FUNDS -- The investment objective of each of the
Funds is to seek current income, liquidity and the maintenance of a stable $1.00
price per share. The Funds seek to achieve this objective by investing all of
their investable assets in their corresponding Portfolios, which invest in high
quality, U.S. dollar-denominated short-term obligations that have been
determined by the Manager or the AMR Trust Board to present minimal credit
risks. Portfolio investments are valued based on the amortized cost valuation
technique pursuant to Rule 2a-7 under the Investment Company Act of 1940 ("1940
Act"). See the SAI for an explanation of amortized cost. Obligations in which
the Portfolios invest generally have remaining maturities of 397 days or less,
although instruments subject to repurchase agreements and certain variable and
floating rate obligations may bear longer final maturities. The average
dollar-weighted portfolio maturity of each Portfolio will not exceed 90 days.
- - ---------------
(1) American Airlines and AAdvantage are registered trademarks of American
Airlines, Inc.
PROSPECTUS
9
<PAGE> 140
AMERICAN AADVANTAGE MONEY MARKET FUND AND AMERICAN AADVANTAGE MONEY MARKET
MILEAGE FUND -- The Funds' corresponding Portfolio may invest in obligations
permitted to be purchased under Rule 2a-7 of the 1940 Act including, but not
limited to, (1) obligations of the U.S. Government or its agencies or
instrumentalities; (2) loan participation interests, medium-term notes, funding
agreements and asset-backed securities; (3) domestic, Yankeedollar and
Eurodollar certificates of deposit, time deposits, bankers' acceptances,
commercial paper, bank deposit notes and other promissory notes including
floating or variable rate obligations issued by U.S. or foreign bank holding
companies and their bank subsidiaries, branches and agencies; and (4) repurchase
agreements involving the obligations listed above. The Money Market Portfolio
will invest only in issuers or instruments that at the time of purchase (1) have
received the highest short-term rating by two nationally recognized statistical
rating organizations ("Rating Organizations") such as "A-1" by Standard & Poor's
and "P-1" by Moody's Investor Services, Inc.; (2) are single rated and have
received the highest short-term rating by a Rating Organization; or (3) are
unrated, but are determined to be of comparable quality by the Manager pursuant
to guidelines approved by the AMR Trust Board and subject to ratification by the
AMR Trust Board. See the SAI for definitions of the foregoing instruments and
rating systems. The Portfolio may invest in other investment companies.
The Portfolio will invest more than 25% of its assets in obligations issued
by the banking industry. However, for temporary defensive purposes during
periods when the Manager believes that maintaining this concentration may be
inconsistent with the best interests of shareholders, the Portfolio may not
maintain this concentration.
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 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.
Variable amount master demand notes in which the Portfolio may invest are
unsecured demand notes that permit the indebtedness thereunder to vary, and
provide for periodic adjustments in the interest rate. Because master demand
notes are direct lending arrangements between the Portfolio and the issuer, they
are not normally traded. There is no secondary market for the notes; however,
the period of time remaining until payment of principal and accrued interest can
be recovered under a variable amount master demand note generally will not
exceed seven days. To the extent this period is exceeded, the note in question
would be considered illiquid. Issuers of
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variable amount master demand notes must satisfy the same criteria as set forth
for other promissory notes (e.g. commercial paper). The Portfolio will invest in
variable amount master demand notes only when such notes are determined by the
Manager, pursuant to guidelines established by the AMR Trust Board, to be of
comparable quality to rated issuers or instruments eligible for investment by
the Portfolio. In determining average dollar-weighted portfolio maturity, a
variable amount master demand note will be deemed to have a maturity equal to
the longer of the period of time remaining until the next readjustment of the
interest rate or the period of time remaining until the principal amount can be
recovered from the issuer on demand.
The Portfolio also may engage in dollar rolls or purchase or sell securities
on a "when-issued" or "forward commitment" basis. The purchase or sale of
when-issued securities enables an investor to hedge against anticipated changes
in interest rates and prices by locking in an attractive price or yield. The
price of when-issued securities is fixed at the time the commitment to purchase
or sell is made, but delivery and payment for the when-issued securities take
place at a later date, normally one to two months after the date of purchase.
During the period between purchase and settlement, no payment is made by the
purchaser to the issuer and no interest accrues to the purchaser. Such
transactions therefore involve a risk of loss if the value of the security to be
purchased declines prior to the settlement date or if the value of the security
to be sold increases prior to the settlement date. A sale of a when-issued
security also involves the risk that the other party will be unable to settle
the transaction. Dollar rolls are a type of forward commitment transaction.
Purchases and sales of securities on a forward commitment basis involve a
commitment to purchase or sell securities with payment and delivery to take
place at some future date, normally one to two months after the date of the
transaction. As with when-issued securities, these transactions involve certain
risks, but they also enable 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 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.
AMERICAN AADVANTAGE MUNICIPAL MONEY MARKET FUND -- The Fund's corresponding
Portfolio may invest in municipal obligations issued by or on behalf of the
governments of states, territories, or possessions of the United States; the
District of Columbia; and their political subdivisions, agencies and
instrumentalities if the interest these obligations provide is generally exempt
from federal income tax. The Municipal Money Market Portfolio will invest only
in issuers or instruments that at the time of purchase (1) are guaranteed by the
U.S. Government, its agencies, or instrumentalities; (2) are secured by letters
of credit that are irrevocable and issued by banks which qualify as authorized
issuers for the Money Market Portfolio (see "American AAdvantage Money Market
Fund"); (3) are guaranteed by one or more municipal bond insurance policies that
cannot be canceled and are issued by third-party guarantors possessing the
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highest claims-paying rating from a Rating Organization; (4) have received one
of the two highest short-term ratings from at least two Rating Organizations;
(5) are single rated and have received one of the two highest short-term ratings
from that Rating Organization; (6) have no short-term rating but the instrument
is comparable to the issuer's rated short-term debt; (7) have no short-term
rating (or comparable rating) but have received one of the top two long-term
ratings from all Rating Organizations rating the issuer or instrument; or (8)
are unrated, but are determined to be of comparable quality by the Manager
pursuant to guidelines approved by, and subject to the oversight of, the AMR
Trust Board. The Portfolio also may invest in other investment companies.
Ordinarily at least 80% of the Portfolio's net assets will be invested in
municipal obligations, the interest from which is exempt from federal income
tax. However, should market conditions warrant, the Portfolio may invest up to
20% (or for temporary defensive purposes, up to 100%) of its assets in eligible
investments for the Money Market Portfolio which are subject to federal income
tax.
The Portfolio may invest in certain municipal obligations which have rates
of interest that are adjusted periodically according to formulas intended to
minimize fluctuations in the values of these instruments. These instruments,
commonly known as variable rate demand obligations, are long-term instruments
which allow the purchaser, at its discretion, to redeem securities before their
final maturity at par plus accrued interest upon notice (typically 7 to 30
days).
Municipal obligations may be backed by the full taxing power of a
municipality ("general obligations"), or by the revenues from a specific project
or the credit of a private organization ("revenue obligations"). Some municipal
obligations are collateralized as to payment of principal and interest by an
escrow of U.S. Government or federal agency obligations, while others are
insured by private insurance companies, while still others may be supported by
letters of credit furnished by domestic or foreign banks. The Portfolio's
investments in municipal obligations may include fixed, variable, or floating
rate general obligations and revenue obligations (including municipal lease
obligations and resource recovery obligations); zero coupon and asset-backed
obligations; variable rate auction and residual interest obligations; tax,
revenue, or bond anticipation notes; and tax-exempt commercial paper. See the
SAI for a further discussion of the foregoing obligations. The Portfolio may
purchase or sell securities on a when-issued or forward commitment basis as
described under "American AAdvantage Money Market Fund and American AAdvantage
Money Market Mileage Fund."
The Portfolio may invest more than 25% of the value of its total assets in
municipal obligations which are related in such a way that an economic, business
or political development or change affecting one such security would also affect
the other securities; for example, securities the interest of which is paid from
revenues of similar types of projects, or securities whose issuers are located
in the same state. As a result, the Portfolio may be subject to greater risk
compared to a fund that does not follow
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this practice. However, this risk is mitigated because it is anticipated that
most of the Portfolio's assets will be insured or backed by bank letters of
credit. Additionally, the Portfolio may invest more than 25% of the value of its
total assets in industrial development bonds which, although issued by
industrial development authorities, may be backed only by the assets and
revenues of the non-governmental users.
The Portfolio also may invest in municipal obligations that constitute
"private activity obligations." These include obligations that finance student
loans, residential rental projects, and solid waste disposal facilities. To the
extent the Portfolio earns interest income on private activity obligations,
shareholders will be required to treat the portion of the Fund's distributions
attributable to its share of such interest as a "tax preference item" for
purposes of determining their liability for the federal alternative minimum tax
("AMT") and, as a result, may become subject to (or increase their liability
for) the AMT. Shareholders should consult their own tax advisers to determine
whether they may be subject to the AMT. The Portfolio may invest in private
activity obligations without limitation and it is anticipated that a substantial
portion of the Portfolio's assets will be invested in these obligations. As a
result, a substantial portion of the Fund's distributions may be a tax
preference item, which will reduce the net return from the Fund for taxpayers
subject to the AMT. Interest on "qualified" private activity obligations is
exempt from federal income tax.
AMERICAN AADVANTAGE U.S. GOVERNMENT MONEY MARKET FUND -- The Fund's
corresponding Portfolio will invest exclusively in obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities and
repurchase agreements which are collateralized by such obligations. U.S.
Government securities include direct obligations of the U.S. Treasury (such as
Treasury bills, Treasury notes and Treasury bonds). The Fund may invest in
securities issued by the Agency for International Development, Farmers Home
Administration, Farm Credit Banks, Federal Home Loan Bank, Federal Intermediate
Credit Bank, Federal Financing Bank, Federal Land Bank, FNMA, GNMA, General
Services Administration, Rural Electrification Administration, Small Business
Administration, Tennessee Valley Authority and others. Some of these
obligations, such as those issued by the Federal Home Loan Bank and FHLMC, are
supported only by the credit of the agency or instrumentality issuing the
obligation and the discretionary authority of the U.S. Government to purchase
the agency's obligations. See the SAI for a further discussion of the foregoing
obligations. Counterparties for repurchase agreements must be approved by the
AMR Trust Board. The Portfolio may purchase or sell securities on a when-issued
or forward commitment basis as described under "American AAdvantage Money Market
Fund and American AAdvantage Money Market Mileage Fund."
OTHER INVESTMENT POLICIES -- In addition to the investment policies described
previously, each Portfolio also may lend its securities, enter into fully
collateralized repurchase agreements and invest in private placement offerings.
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SECURITIES LENDING. Each 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 would exceed 33 1/3% of its
total assets. A Portfolio continues to receive interest on the securities loaned
and simultaneously earns either interest on the investment of the cash
collateral or fee income if the loan is otherwise collateralized. 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. The Manager will receive compensation for administrative
and oversight functions with respect to securities lending. The amount of such
compensation will depend on the income generated by the loan of each Portfolio's
securities. The SEC has granted exemptive relief that permits the Portfolios to
invest cash collateral received from securities lending transactions in shares
of one or more private investment companies managed by the Manager. Subject to
receipt of exemptive relief from the SEC, the Portfolios also may invest cash
collateral received from securities lending transactions in shares of one or
more registered investment companies managed by the Manager. 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
Manager attempts 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. 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
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may be accomplished in accordance with Rule 144A. Section 4(2) securities
normally are resold to other institutional investors such as the Portfolios
through or with the assistance of the issuer or dealers that make a market in
the Section 4(2) securities, thus providing liquidity. The Portfolios will not
invest more than 10% of their respective net assets in Section 4(2) securities
and other illiquid securities unless the Manager determines, by continuous
reference to the appropriate trading markets and pursuant to guidelines approved
by the AMR Trust Board, that any Section 4(2) securities held by such Portfolio
in excess of this level are at all times liquid.
The AMR Trust Board and the Manager, pursuant to the guidelines approved by
the AMR Trust Board, will carefully monitor the Portfolios' investments in
Section 4(2) securities offered and sold under Rule 144A, 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 -- The Portfolios normally will not incur any brokerage
commissions on their transactions because money market instruments are generally
traded on a "net" basis with dealers acting as principal for their own accounts
and 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.
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. 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.
The Manager expects, although it cannot guarantee, that the AAdvantage Trust
and the Mileage Trust will achieve economies of scale by investing in the AMR
Trust. In addition to selling their interests to the Funds, the Portfolios sell
their interests to other non-affiliated investment companies and/or other
institutional investors. All institutional investors in a Portfolio pay a
proportionate share of the Portfolio's expenses and invest in that Portfolio on
the same terms and conditions. However, other investment companies investing all
of their assets in a Portfolio are not required to sell their shares at the same
public offering price as a Fund and are allowed to charge different sales
commissions. Therefore, investors in a Fund may experience different
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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 affected materially 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 material 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 its liquidity adversely.
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 would 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 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 AAdvantage Trust, the Mileage Trust and the AMR
Trust, (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 of each Fund's shares.
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INVESTMENT RESTRICTIONS
The following fundamental investment restrictions and the non-fundamental
investment restriction are identical for each Fund and its corresponding
Portfolio. Therefore, although the following discusses the investment
restrictions of each Portfolio and the AMR Trust Board, it applies equally to
each Fund and its respective 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. In addition, although not a fundamental
investment restriction and therefore subject to change without shareholder
vote, the Money Market Portfolio and the U.S. Government Money Market
Portfolio apply this restriction with respect to 100% of their assets.
- Invest more than 25% of its total assets in the securities of companies
primarily engaged in any one industry, provided that: (i) this limitation
does not apply to obligations issued or guaranteed by the U.S. Government,
its agencies and instrumentalities; (ii) municipalities and their agencies
and authorities are not deemed to be industries; and (iii) financial
service companies are classified according to the end users of their
services (for example, automobile finance, bank finance, and diversified
finance will be considered separate industries). With respect to the Money
Market Portfolio, this restriction does not apply to the banking industry.
The following non-fundamental investment restriction may be changed with
respect to a particular Fund by a vote of a majority of its respective Board or
with respect to a Portfolio by a vote of a majority of the AMR Trust Board: no
Portfolio may invest more than 10% 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.
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YIELDS AND TOTAL RETURNS
From time to time the Platinum Class of the Funds may advertise its "current
yield" and "effective yield." Both yield figures are based on historical
earnings and are not intended to indicate future performance. The current yield
refers to the investment income generated by an investment over a seven
calendar-day period (which period will be stated in the advertisement). This
yield is then annualized by assuming the amount of investment income generated
during that week is earned each week over a one-year period, and is shown as a
percentage of the investment. The effective yield is calculated similarly but,
when annualized, the investment income earned is assumed to be reinvested. The
effective yield will be slightly higher than the current yield because of the
compounding effect of this assumed reinvestment. The Municipal Money Market Fund
also may quote "tax equivalent yields," which show the taxable yields a
shareholder would have to earn before federal income taxes to equal this Fund's
tax-exempt yields. The tax equivalent yield is calculated by dividing the Fund's
tax-exempt yield by the result of one minus a stated federal income tax rate. If
only a portion of the Fund's income was tax-exempt, only that portion is
adjusted in the calculation. As stated earlier, the Fund considers interest on
private activity obligations to be exempt from federal income tax. Total return
quotations advertised by 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. The Funds will at times compare their performance to
applicable published indices, and also may 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 AAdvantage Trust's Board and the Mileage
Trust's Board have general supervisory responsibility over their respective
Trust's affairs. The Manager provides or oversees all administrative, investment
advisory and portfolio management services for the AAdvantage Trust pursuant to
a Management Agreement, dated April 3, 1987, as amended on July 25, 1997,
together with the Administrative Services Agreement described below. The Manager
provides or oversees all administrative, investment advisory and portfolio
management services for the Mileage Trust pursuant to a Management Agreement,
dated October 1, 1995 as amended November 21, 1997. The AMR Trust and the
Manager also entered into a Management Agreement dated, October 1, 1995, as
amended July 25, 1997, which 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
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Airlines, Inc., and was organized in 1986 to provide investment management,
advisory, administrative and asset management consulting services. The Manager
serves as the sole investment adviser to the Portfolios. As of December 31,
1997, the Manager had assets under management totaling approximately $
billion, including approximately $ billion under active management and
$ billion as named fiduciary or fiduciary adviser. Of the total,
approximately $ billion of assets are related to AMR. American Airlines,
Inc. is not responsible for investments made in the American AAdvantage Funds or
the American AAdvantage Mileage Funds.
The Manager provides the AAdvantage Trust, the Mileage 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 oversees each Portfolio's
participation in securities lending activities and any actions taken by a
securities lending agent in connection with those activities to ensure
compliance with all applicable regulatory and investment guidelines. The Manager
also develops the investment programs for each Portfolio.
The Manager bears the expense of providing the above services. As
compensation for providing the Portfolios with advisory services, the Manager
receives from the AMR Trust an annualized advisory fee that is calculated and
accrued daily, equal to 0.15% of the net assets of the Portfolios. To the extent
that a Fund invests all of its investable assets in its corresponding Portfolio,
the Manager receives no advisory fee from the AAdvantage Trust or the Mileage
Trust. The Manager receives compensation in connection with securities lending
activities. If a Portfolio lends its portfolio securities and receives cash
collateral from the borrower, the Manager may receive up to 25% of the net
annual interest income (the gross interest earned by the investment less the
amount paid to the borrower as well as related expenses) received from the
investment of such cash. If a borrower posts collateral other than cash, the
borrower will pay to the lender a loan fee. The Manager may receive up to 25% of
the loan fees posted by borrowers. Currently, the Manager receives 10% of the
net annual interest income from the investment of cash collateral or 10% of the
loan fees posted by borrowers. The fees received by the Manager from the AMR
Trust are payable quarterly in arrears. In addition, the Manager is compensated
through the Administrative Services Agreement as described below for other
services provided.
Each Management Agreement will continue in effect provided that annually
such continuance is specifically approved by a vote of the applicable 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
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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 AAdvantage Trust, the Mileage Trust or the AMR Trust. A Management Agreement
will automatically terminate in the event of its "assignment" as defined in the
1940 Act.
The AAdvantage Trust and the Mileage Trust each is responsible for expenses
not otherwise assumed by the Manager, including 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 each Board has adopted written
procedures reasonably appropriate to deal with potential conflicts of interest
between the AAdvantage Trust or the Mileage Trust and the AMR Trust.
ADMINISTRATIVE SERVICES PLAN -- The Manager has entered into separate
Administrative Services Plans with the AAdvantage Trust and the Mileage Trust
which obligate the Manager to provide the Platinum Class with administrative
services either directly or through the various broker-dealers that offer
Platinum Class shares. These services include, but are not limited to, the
payment of fees for record maintenance, forwarding shareholder communications to
the shareholders and aggregating and processing orders for the purchase and
redemption of Platinum Class shares. As compensation for these services, the
Manager receives an annualized fee of up to 0.50% and 0.55% of the net assets of
the Platinum Class of the AAdvantage Funds and the Mileage Fund, respectively.
The fee is payable quarterly in arrears.
DISTRIBUTION PLAN -- The AAdvantage Trust and the Mileage Trust have each
adopted a Platinum Class distribution plan (the "Plans") pursuant to Rule 12b-1
under the 1940 Act, which will continue in effect so long as approved at least
annually by a majority of the applicable Board's Trustees, including the
affirmative votes of a majority of the Independent Trustees of the applicable
Board, cast in person at a meeting called for the purpose of considering such
approval, or by the vote of shareholders of the Platinum Class. The Plans may be
terminated with respect to a particular Platinum Class at any time, without
payment of any penalty, by a vote of a majority of the Independent Trustees of
the applicable Board or by a vote of a majority of the outstanding voting
securities of that class.
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The Plans provide that each Platinum Class will pay 0.25% per annum of its
average daily net assets to the Manager (or another entity approved by the
applicable Board) for distribution-related services. The fee will be payable
quarterly in arrears without regard to whether the amount of the fee is more or
less than the actual expenses incurred in a particular quarter by the entity for
the services provided pursuant to the Plans. The Plans authorize the Manager, or
any other entity approved by the applicable Board, to spend Rule 12b-1 fees on
any activities or expenses intended to result in the sale or servicing of
Platinum Class shares including but not limited to, advertising, expenses of
various broker-dealers relating to selling efforts, transfer agency fees and the
preparation and distribution of advertising material and sales literature. In
addition, the Mileage Fund's Plan authorizes expenses incurred in connection
with participation in the AAdvantage program.
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 applicable 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
AAdvantage Trust and the Mileage Trust.
CUSTODIAN AND TRANSFER AGENT -- STATE STREET BANK & TRUST COMPANY, Boston,
Massachusetts, serves as custodian for the Portfolios and the Funds and as
transfer agent for the Platinum Class.
INDEPENDENT AUDITOR -- The independent auditor for the Funds and the AMR Trust
is ERNST & YOUNG LLP, Dallas, Texas.
AADVANTAGE(R) MILES
The AAdvantage program offers the opportunity to obtain free upgrades and
travel awards on American Airlines and AAdvantage airline participants, as well
as upgrades and discounts on car rentals and hotel accommodations. For more
information about the AAdvantage program, call American Airlines at (800)
433-7300.
AAdvantage miles will be posted monthly in arrears to each shareholder's
AAdvantage account based on the shareholder's average daily account balance
during the previous month. Miles are posted at an annual rate of one mile per
$10 maintained in the Mileage Fund. Mileage is calculated on the average daily
balance and posted monthly. The average daily balance is calculated by adding
each day's balance and dividing by the number of days in the month. For example,
the average daily balance on a $50,000 account funded on the 16th day of a month
having 30 days (and
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maintained at that balance through the end of the month) would be $25,000.
Mileage received for that month would be 208 miles. If the same balance were
maintained through the next month, the average daily balance would be $50,000,
and the mileage would be 417 miles that month and every month the $50,000
investment was maintained in the Mileage Fund. These miles appear on subsequent
AAdvantage program statements.
In the case of Trust Accounts, AAdvantage miles will be posted only in a
trustee's individual name, and not in the name of the Trust Account. Before
investing in a Fund, trustees of the Trust Accounts should consult their own
legal and tax advisers as to the tax effect of this arrangement and whether this
arrangement is consistent with their legal duties as trustees. American Airlines
has informed the Funds that in administering an AAdvantage member's AAdvantage
account, it shall not be required to distinguish between AAdvantage miles
accumulated by the individual in his/her capacity as trustee to a Trust Account
from AAdvantage miles accumulated in an individual capacity or from other
sources.
The Manager reserves the right to discontinue the posting of AAdvantage
miles or to change the mileage calculation at any time upon notice to
shareholders. See also "Dividends and Tax Matters."
American Airlines may find it necessary to change AAdvantage program rules,
regulations, travel awards and special offers at any time. This means that
American Airlines may initiate changes impacting, for example, participant
affiliations, rules for earning mileage credit, mileage levels and rules for the
use of travel awards, continued availability of travel awards, blackout dates
and limited seating for travel awards, and the features of special offers.
American Airlines reserves the right to end the AAdvantage program with six
months' notice. AAdvantage travel awards, mileage accrual and special offers are
subject to governmental regulations.
HOW TO PURCHASE SHARES
Platinum Class shares are offered on a continuous basis at net asset value
through selected financial services firms. The Platinum Class has established a
minimum initial investment of $1,000 and $100 minimum for subsequent
investments, but these minimums may be changed at any time at the AAdvantage
Trust's or the Mileage Trust's discretion.
An order to purchase Platinum Class shares received by wire transfer in the
form of federal funds will be effected at the next determined net asset value.
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<PAGE> 153
Orders for purchase accompanied by a check or other negotiable bank draft
will be accepted and effected as of 3:00 p.m. Eastern time on the next Business
Day following receipt and such shares will receive the dividend for the Business
Day following the day the purchase is effected. If an order is accompanied by a
check drawn on a foreign bank, funds must normally be collected from such check
before shares will be purchased. The AAdvantage Trust and the Mileage Trust
reserve the right to reject any order for the purchase of shares and to limit or
suspend, without prior notice, the offering of shares.
Shares are offered and orders are accepted for the Money Market Fund, and
the Mileage Fund until 3:00 p.m. Eastern time, or the close of the Exchange
(whichever comes first) Monday through Friday, excluding the following business
holidays: New Year's Day, Martin Luther King's Birthday, President's Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans Day,
Thanksgiving Day and Christmas Day ("Business Day"). Shares are offered and
orders are accepted for the U.S. Government Money Market Fund until 2:00 p.m.
Eastern time, or the close of the Exchange (whichever comes first) on each
Business Day and for the Municipal Money Market Fund until 12:00 p.m. Eastern
time, or close of the Exchange (whichever comes first) on each Business Day.
These purchases will receive that day's dividend.
Firms provide varying arrangements for their clients with respect to the
purchase and redemption of Platinum Class shares and the confirmation thereof
and may arrange with their clients for other investment or administrative
services. Such firms are responsible for the prompt transmission of purchase and
redemption orders. Some firms may establish higher or lower minimum investment
requirements than set forth above. Such firms may independently establish and
charge additional amounts to their clients for their services, which charges
would reduce their clients' yield or return. Firms also may hold Platinum Class
shares in nominee or street name as agent for and on behalf of their clients. In
such instances, the transfer agent will have no information with respect to or
control over the accounts of specific shareholders. Such shareholders may obtain
access to their accounts and information about their accounts only from their
firm. Certain of these firms may receive compensation from the Manager for
recordkeeping and other expenses relating to these nominee accounts. In
addition, certain privileges with respect to the purchase and redemption of
shares (such as check writing or a debit card) may not be available through such
firms or may only be available subject to certain conditions or limitations.
Some firms may participate in a program allowing them access to their clients'
accounts for servicing, including, without limitation, transfers of registration
and dividend payee changes, and may perform functions such as generation of
confirmation statements and disbursements of cash dividends.
PROSPECTUS
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<PAGE> 154
HOW TO REDEEM SHARES
Shareholders should contact the firm through which their shares were
purchased for redemption instructions. Shares of a Fund may be redeemed by
telephone, by writing a check, by pre-authorized automatic redemption or by mail
on any Business Day. Shares will be redeemed at the net asset value next
calculated after the applicable Fund has received and accepted the redemption
request. Proceeds from a redemption of shares purchased by check or
pre-authorized automatic purchase may be withheld until the funds have cleared,
which may take up to 15 days. Although the Funds intend to redeem shares in
cash, each Fund 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.
Firms may charge a fee for wire redemptions to cover transaction costs.
Redemption proceeds generally will be sent within one Business Day. However, if
making immediate payment could affect a Fund adversely, it may take up to seven
days to send payment.
To ensure acceptance of a redemption request, be sure to adhere to the
following procedures.
REDEEMING BY CHECK -- Upon request, shareholders will be provided with drafts to
be drawn on the shareholder's Fund account ("Redemption Checks"). Redemption
Checks may be made payable to the order of any person for an amount not less
than $250 and not more than $5 million. When a Redemption Check is presented for
payment, a sufficient number of full and fractional shares in the shareholder's
account will be redeemed at the next determined net asset value to cover the
amount of the Redemption Check. This will enable the shareholder to continue
earning dividends until the Fund receives the Redemption Check. A shareholder
wishing to use this method of redemption must complete and file an account
application which is available from the Funds or firm through which shares were
purchased. Redemption Checks should not be used to close an account since the
account normally includes accrued but unpaid dividends. The Funds reserve the
right to terminate or modify this privilege at any time. This privilege may not
be available through some firms that distribute shares of the Funds. In
addition, firms may impose minimum balance requirements in order to obtain this
feature. Firms also may impose fees on investors for this privilege or, if
approved by the Funds, establish variations on minimum check amounts.
Unless only one signature is authorized on the account application,
Redemption Checks must be signed by all shareholders. Any change in the
signature authorization must be made by written notice to the firm. Shares
purchased by check or through an Automated Clearing House ("ACH") transaction
may not be redeemed by
PROSPECTUS
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<PAGE> 155
Redemption Check until the shares have been on the Fund's books for at least 15
days. The Funds reserve the right to terminate or modify this privilege at any
time.
The Funds may refuse to honor Redemption Checks whenever the right of
redemption has been suspended or postponed, or whenever the account is otherwise
impaired. A $15 service fee will be charged when a Redemption Check is presented
to redeem Fund shares in excess of the value of that Fund account or for an
amount less than $250 or when a Redemption Check is presented that would require
redemption of shares that were purchased by check or ACH transaction within 15
days. A fee of $12 will be charged when "stop payment" of a Redemption Check is
requested. Firms may charge different service fees in place of or in addition to
these fees.
PRE-AUTHORIZED AUTOMATIC REDEMPTIONS -- Shareholders purchasing through some
firms can arrange to have a pre-authorized amount ($100 or more) redeemed from
their shareholder account and automatically deposited into a bank account on one
or more specified day(s) of each month. For more information regarding
pre-authorized automatic redemptions, contact your firm.
FULL REDEMPTIONS -- Unpaid dividends credited to an account up to the date of
redemption of all shares of a Fund generally will be paid at the time of
redemption.
VALUATION OF SHARES
The net asset value of each share (share price) of the Funds is determined
as of the close of the Exchange, generally 4:00 p.m. Eastern time, on each
Business Day. The net asset value of Platinum Class Shares of the Funds will be
determined based on a pro rata allocation of the Fund's corresponding
Portfolio's investment income, expenses and total capital gains and losses. The
allocation will be based on comparative net asset value at the beginning of the
day except for expenses related solely to one class of shares ("Class Expenses")
which will be borne only by the appropriate class of shares. Because of Class
Expenses, the net income attributable to and the dividends payable may be
different for each class of shares.
Obligations held by the Portfolios are valued in accordance with the
amortized cost method, which is designed to enable those Portfolios and their
corresponding Funds to maintain a consistent $1.00 per share net asset value.
The amortized cost method is described in the SAI.
PROSPECTUS
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<PAGE> 156
DIVIDENDS AND TAX MATTERS
Dividends paid on each class of a Fund's shares are calculated at the same
time and in the same manner. All of each Fund's net investment income and net
short-term capital gain, if any, generally will be declared as dividends on each
Business Day immediately prior to the determination of the net asset value.
Dividends generally are paid on the first day of the following month. A Fund's
net investment income attributable to the Platinum Class consists of that class'
pro rata share of the Fund's share of interest accrued and discount earned on
its corresponding Portfolio's securities, less amortization of premium, and the
estimated expenses of both the Portfolio and the Fund attributable to the
Platinum Class. The Portfolios do not expect to realize net capital gain,
therefore the Funds do not foresee paying any capital gain distributions. If any
Fund (either directly or indirectly through its corresponding Portfolio)
incurred or anticipated any unusual expenses, loss or depreciation that would
adversely affect its net asset value or income for a particular period, the
Board would at that time consider whether to adhere to the dividend policy
described above or to revise it in the light of the then prevailing
circumstances.
Unless a shareholder elects otherwise on the account application, all
dividends on a Fund's Platinum Class shares will be automatically paid in
additional Platinum Class shares of that Fund. However, a shareholder may choose
to have dividends paid in cash. An election may be changed at any time by
delivering written notice to your firm at least ten days prior to the payment
date for a dividend.
Each Fund is treated as a separate corporation for federal income tax
purposes and intends 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) that it distributed 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 net capital gain for the one-year period ending on October
31 of that year, plus certain other amounts. For these and other purposes,
dividends declared by a Fund in December of any year and payable to shareholders
of record on a date in that month 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 are 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 Platinum Class shares.
Distributions by
PROSPECTUS
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<PAGE> 157
the Municipal Money Market Fund that it designates as "exempt-interest
dividends" generally may be excluded from gross income by its shareholders. If
the Municipal Money Market Portfolio earns taxable income from any of its
investments, the Municipal Money Market Fund's share of that income will be
distributed to its shareholders as a taxable dividend. To the extent that
Portfolio invests in certain private activity obligations, that Fund's
shareholders will be required to treat a portion of its dividends as a "tax
preference item" in determining their liability for the AMT. Exempt-interest
dividends also may be subject to tax under state and local income tax laws.
Because some states exempt from income tax the interest on their own obligations
and obligations of governmental agencies and municipalities in the state,
shareholders will receive tax information each year regarding the Municipal
Money Market Fund's exempt-interest income by state. Interest on indebtedness
incurred or continued by a shareholder to purchase or carry shares of that Fund
is not deductible.
Each Fund notifies its shareholders following the end of each calendar year
of the amounts of dividends paid (or deemed paid) that year. The notice sent by
the Municipal Money Market Fund specifies the amounts of exempt-interest
dividends (and the portion thereof, if any, that is a tax preference item for
purposes of the AMT) and any taxable dividends. The Mileage Fund's notice also
might include in taxable dividends a nominal amount reflecting the value of
AAdvantage Miles credited to the shareholders' accounts, which are deemed by the
Internal Revenue Service to constitute taxable distributions by the Fund. Each
Fund is required to withhold 31% of all taxable dividends payable to any
individuals and certain other non-corporate shareholders who do not provide the
Fund with a correct taxpayer identification number or 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
AAdvantage Trust or the Mileage Trust or any tax consequences as a result of the
receipt of AAdvantage miles. For further tax information, see the SAI.
GENERAL INFORMATION
The AAdvantage Trust currently is comprised of ten separate investment
portfolios and the Mileage Trust currently is comprised of nine separate
investment portfolios. Each AAdvantage Fund included in this Prospectus is
comprised of three classes of shares. The Mileage Fund is comprised of two
classes of shares. Shares of each AAdvantage Fund and each Mileage Fund can be
issued in an unlimited number. Each AAdvantage Fund and Mileage Fund share
represents an equal proportionate beneficial interest in that Fund and is
entitled to one vote. Only shares of a particular
PROSPECTUS
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<PAGE> 158
class may vote on matters affecting that class. Only shares of a particular Fund
may vote on matters affecting that Fund. All shares of a Trust vote on matters
affecting that Trust as a whole. Share voting rights are not cumulative, and
shares have no preemptive or conversion rights. Shares of the AAdvantage Trust
and the Mileage Trust are nontransferable.
On most issues subjected to a vote of a Portfolio's interest holders, as
required by the 1940 Act, its corresponding Fund will solicit proxies from its
shareholders and will vote its interest in the Portfolio in proportion to the
votes cast by the 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 Massachusetts business trusts, the AAdvantage Trust and the Mileage Trust
are not obligated to conduct annual shareholder meetings. However, the Trusts
will hold special shareholder meetings whenever required to do so under the
federal securities laws or their Declarations of Trust or By-Laws. Trustees of
either Trust can be removed by a shareholder vote at special shareholder
meetings.
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 Funds
and the AMR Trust will be audited by Ernst & Young LLP, independent auditor, at
least annually. Shareholder inquiries and requests for information regarding the
other investment companies which also invest in the AMR Trust should be made by
contacting your firm or by calling (800) 388-3344 or by writing to the Funds at
P.O. Box 619003, MD 5645, Dallas/Fort Worth Airport, Texas 75261-9003.
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 AADVANTAGE TRUST AND THE
MILEAGE TRUST FOR USE IN CONNECTION WITH THE OFFER OF ANY FUND'S 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.
PROSPECTUS
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<PAGE> 159
American AAdvantage Funds and American AAdvantage Mileage Funds are registered
service marks of AMR Corporation. Mileage Class, American AAdvantage Money
Market Fund and PlanAhead Class are registered service marks and Platinum Class,
American AAdvantage Money Market Mileage Fund, American AAdvantage Municipal
Money Market Fund and American AAdvantage U.S. Government Money Market Fund are
service marks of AMR Investment Services, Inc.
PROSPECTUS
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<PAGE> 160
[AMERICAN ADVANTAGE FUNDS LOGO]
P.O. BOX 619003
DALLAS/FORT WORTH AIRPORT, TEXAS
75261-9003
Available through
[SOUTHWEST SECURITIES LOGO]
1201 Elm Street, Suite 3500
Dallas, Texas
75270
(800) 973-7977
<PAGE> 161
AMERICAN AADVANTAGE SHORT-TERM INCOME FUND
Prospectus
March 1, 1998
This Prospectus contains important information about the American
AAdvantage Short-Term Income Fund (the "Fund"), a portfolio of the American
AAdvantage Funds(R) (the "Trust"). The Trust is a no-load, open-end management
investment company organized as a Massachusetts business trust on January 16,
1987, consisting of ten separate investment portfolios. The Fund is a
non-diversified portfolio which seeks current income and relative principal
stability through investments in high quality money market obligations and
variable rate obligations. There is no guarantee that the Fund will achieve its
investment objective. Prospective investors considering the purchase of the Fund
should read this Prospectus carefully before making an investment decision and
retain it for future reference.
In addition to this Prospectus, a Statement of Additional Information
("SAI") dated March 1, 1998 has been filed with the Securities and Exchange
Commission and is incorporated herein by reference. The SAI contains more
detailed information about the Fund. For a free copy of the SAI, call AMR
Investment Services, Inc. (the "Manager") at (817) 967-3509.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY SUCH STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<S> <C>
--------------------------------------------------------------------- --------
Table of Fees and Expenses 2
Investment Objective, Policies and Risks 2
Investment Restrictions 8
Yields and Total Returns 8
Management and Administration of the Trust 9
Purchase, Redemption and Valuation of shares 10
Information Concerning Shares of the Fund 12
General Information 13
--------------------------------------------------------------------- --------
</TABLE>
TABLE OF FEES AND EXPENSES
Annual Operating Expenses (as a percentage of average net assets):
<TABLE>
<S> <C>
Management Fees 0.10%
Other Expenses (1) 0.05%
Total Fund Operating Expenses 0.15%
</TABLE>
<PAGE> 162
(1) Due to the Fund's lack of an operating history, other expenses have been
estimated.
<TABLE>
<CAPTION>
Examples 1 yr. 3 yrs.
<S> <C> <C>
An investor in the Fund would pay on a cumulative basis the following
expenses on a $1,000 investment assuming a 5% annual return:
$ 1 $ 5
</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 the Fund. Additional information may be found
under "Management and Administration of the Trust" .
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.
INVESTMENT OBJECTIVE, POLICIES AND RISKS
The investment objective and the policies of the Fund are described below.
The investment policies may be changed at any time by the Trust's Board of
Trustees ("Board"). However, the Fund's investment objective may not be changed
without a majority vote of the Fund's outstanding shares, which is defined as
the lesser of (a) 67% of the shares of the Fund present or represented if the
holders of more than 50% of the shares are present or represented at a
shareholders meeting, or (b) more than 50% of the shares of the Fund
(hereinafter "majority vote").
The Fund's investment objective is to seek current income and relative
principal stability. The Fund seeks its investment objective by investing
primarily in high quality money market obligations and variable rate long-term
obligations.
Portfolio Maturity
The maximum permissible maturity of any fixed rate obligation in which the
Fund may invest is 397 days, except that fixed rate obligations with maturities
greater than 397 days may be purchased if the Fund simultaneously enters into an
interest rate swap transaction in order for the obligation to have the same
characteristics as a variable rate obligation. The maximum permissible final
maturity or "expected life" (i.e. anticipated maturity of obligations which
reduce principal) of any variable rate obligation is five years and the maximum
permissible dollar-weighted average maturity of the Fund is 90 days. For
purposes of determining dollar-weighted average maturity, the maturity of any
obligation is deemed to be the shortest of the following: (1) the stated
maturity date or "expected life" of the obligation; (2) the next interest reset
for variable rate obligations which will have a rate of interest based on a
leading money market index of not greater than three months.; or (3) the next
put exercise date (for
<PAGE> 163
obligations with put features). For purposes of determining maturity of
repurchase agreements, the end date of the agreement, and not the maturity of
the underlying obligations, will be used.
Money Market Obligations
Money market obligations are debt securities with maturities of 397 days or
less. The Fund may invest in high quality, U.S. dollar-denominated money market
obligations, which include, but are not limited to: (1) obligations of the U.S.
Government and its agencies and instrumentalities; (2) loan participation
interests, and structured notes (3) domestic, Yankeedollar and Eurodollar
certificates of deposit, time deposits, bankers' acceptances, commercial paper,
bearer deposit notes and other promissory notes, including floating or variable
rate obligations issued by U.S. or foreign bank holding companies and their bank
subsidiaries, branches and agencies; and (4) repurchase agreements involving the
obligations listed above. These issuers or instruments at the time of purchase
will: (1) have received one of the two highest short-term ratings by at least
two nationally recognized statistical rating organizations ("NRSROs"), such as
A-1 or A-2 by Standard & Poor's or P-1 or P-2 by Moody's Investors Service,
Inc.; (2) be single rated and have received one of the two highest short-term
ratings by that NRSRO; or (3) be unrated, but are determined to be of comparable
quality by the Manager. See the SAI for definitions of certain of the foregoing
securities and a description of debt ratings. All money market obligations which
do not possess the highest short-term rating by at least two NRSROs will be
limited to a maturity of 91 days or less.
Long-Term Obligations
Long-term obligations are obligations deemed to have maturities greater
than 397 days. The Fund may invest in long-term obligations which include, but
are not limited to: (1) obligations of the U.S. Government and its agencies and
instrumentalities; (2) municipal, corporate, trust or bank obligations; (3)
mortgage-backed securities, asset-backed securities, medium-term notes, master
notes, and other promissory notes (including structured notes); and (4) funding
agreements and interest rate swap agreements. Such obligations may have a fixed
or variable rate of interest and: (1) will be rated "A" or better by at least
two NRSROs at the time of purchase; (2) will be single rated and have received a
rating of "A" or better by that NRSRO; or (3) if unrated, will be deemed to be
of comparable quality by the Manager. See the SAI for definitions of certain of
the foregoing securities and for a description of debt ratings. Principal and/or
interest payments for obligations of U.S. Government agencies or
instrumentalities may or may not be backed by the full faith and credit of the
U.S. Government.
Other Investment Companies
The Fund may invest in the securities of other investment companies to the
extent permitted by law.
Non-Diversification
The Fund is "non-diversified" as defined in the Investment Company Act of
1940 (the "1940 Act"), but intends to qualify as a "regulated investment
company" ("RIC") for federal income tax purposes. This means, in general, that
more than 5% of the Fund's total assets may be invested in the securities of a
single issuer, but only if, at the close of each quarter of
<PAGE> 164
the Fund's taxable year, the aggregate amount of such holdings does not exceed
50% of the value of its total assets and no more than 25% of the value of its
total assets is invested in the securities of a single issuer. Although
"non-diversified", the Fund will not invest more than 10% of its total assets
(taken at market value) in obligations of any one issuer, other than obligations
issued by the U.S. Government, its agencies and instrumentalities. However, up
to 25% of the Fund's total assets may be invested in issuers holding over 10% of
the Fund's total assets. To the extent that it holds the securities of fewer
issuers than if it were "diversified", the Fund will be subject to greater risk
than a fund that invests in a broader range of securities because changes in the
financial condition or market valuation of a single issuer may cause greater
fluctuations in the Fund's total return and the net asset value of its shares.
Foreign Investments
The Fund may invest in U.S. dollar-denominated obligations of foreign
issuers. The Fund may also invest up to 25% of its total assets at the time of
purchase in obligations denominated in foreign currencies. The Fund typically
will hedge its foreign currency exposure. See "Strategic Transactions" below for
a further description of foreign currency hedging instruments. Investing in
foreign issuers carries potential risks not associated with domestic
investments. Such risks include but are not limited to: (1) political and
financial instability abroad, including risk of nationalization or expropriation
of assets and the risk of war; (2) less liquidity and greater volatility of
foreign investments; (3) less public information regarding foreign issuers; (4)
lack of uniform accounting, auditing and financial reporting standards; (5)
delays in transaction settlement in some foreign markets; (6) possible
imposition of confiscatory foreign taxes; (7) possible limitation on the removal
of securities or other assets of the Fund; (8) restrictions on foreign
investments and repatriation of capital; (9) currency fluctuations; (10) costs
and possible restrictions of currency conversion; and (11) withholding taxes on
interest in foreign countries. These risks are often greater for investments in
emerging or developing countries.
Funding Agreements
The Fund may enter into funding agreements which are contracts with
insurance companies that return principal and interest at a guaranteed rate or
fixed spread to an index. Generally, funding agreements pay interest at set
intervals and mature on specified dates. Funding agreements generally allow for
certain withdrawals to be made without penalty and are otherwise
non-surrenderable. Funding agreements are considered to be illiquid securities
and accordingly will be subject to the Fund's limitation on investing in
illiquid securities.
Strategic Transactions
The Fund may implement strategies using instruments described below as
hedging instruments to reduce various market risks of its investments, to alter
their duration, or to enhance specific return characteristics. The Fund's
ability to use these instruments may be limited by market conditions, regulatory
limits and tax considerations.
<PAGE> 165
In pursuing these strategies, the Fund may: purchase and sell financial
futures contracts and options thereon; purchase and sell forward contracts;
enter into swap agreements, including interest rate swaps and caps, collars and
floors; and enter into various currency transactions, including currency futures
contracts, options on currency futures, currency options, currency forward
contracts and currency swaps, caps, collars and floors (collectively, "Strategic
Transactions"). Strategic transactions may be used without limit in altering the
exposure of a particular investment or portion of the Fund's portfolio to
fluctuations in interest rates or currency exchange rates, to preserve a return
or spread, to lock in unrealized market value gains or losses, to facilitate the
sale or purchase of securities, to manage the duration of securities, to uncap a
capped security, or to convert a fixed rate security to a variable rate
security.
Any, all or none of these strategies may be used at any time and in any
combination, and no assurance can be given that any strategy used will succeed.
If the Manager incorrectly forecasts interest rates, currency exchange rates,
market values or other economic factors, the use of strategic transactions might
have more adverse results than if the Fund had not used such transactions. The
Fund will enter into swaps, caps, collars and floors only with banks and
recognized securities dealers believed by the Manager to present minimal credit
risks in accordance with guidelines established by the Board. If there is a
default by the other party, the Fund will have to rely on its contractual
remedies (which may be limited by bankruptcy, insolvency or similar laws)
pursuant to the agreement relating to the transaction. See the SAI for a further
discussion of Strategic Transactions. Strategic Instruments may be referred to
as "derivative instruments".
The Fund will comply with SEC guidelines regarding cover for Strategic
Instruments and will, if the guidelines so require, set aside cash, U.S.
Government securities or other liquid, high-grade debt securities in a
segregated account with its custodian in the prescribed amount. Assets used as
cover or held in a segregated account cannot be sold while the position in the
corresponding Strategic Instrument is open, unless they are replaced with other
appropriate assets. As a result, the commitment of a large portion of the Fund's
assets to cover or segregated accounts could impede portfolio management or the
Fund's ability to meet redemption requests or other current obligations.
Mortgage-related Securities
The Fund is permitted to invest in mortgage-related securities, subject to
the quality requirements specified above. Mortgage pass-through 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 Fund to a lower rate of return upon reinvestment
of principal. Also, if a security subject to prepayment has been purchased at a
premium, the value of the premium would be lost in the event of prepayment. Like
other fixed-
<PAGE> 166
income securities, when interest rates rise, the value of mortgage-related
securities generally will decline; however, when interest rates decline, the
value of the mortgage-related securities with prepayment features may not
increase as much as other fixed-income securities. In recognition of this
prepayment risk to investors, the Public Securities Association (the "PSA") has
standardized the method of measuring the rate of mortgage loan principal
prepayments. The PSA formula, the Constant Prepayment Rate and other similar
models that are standard in the industry will be used by the Fund in calculating
maturity for purposes of investment in mortgage-related 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 institutions,
private mortgage insurance companies, mortgage bankers and other secondary
market issuers) may be supported by various credit enhancements such as pool
insurance, a guarantee issued by a governmental entity, or a letter of credit
from a bank or senior/subordinated structures.
Collateralized mortgage obligations ("CMOs") are hybrid instruments with
characteristics of both mortgage-backed bonds and mortgage pass-through
securities. Similar to mortgage pass-through securities, 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.
Asset-backed Securities
The Fund is permitted to invest in asset-backed securities, subject to its
rating and quality requirements. Through the use of trusts and special purpose
subsidiaries, various types of assets, primarily home equity loans, automobile
and credit card receivables, and other types of receivables or other assets as
well as purchase contracts, financing leases and sales agreements entered into
by municipalities, are being securitized in pass-through structures similar to
the mortgage pass-through structures described above.
Asset-backed securities involve certain risks that are not posed by
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
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collateral may not always be sufficient to support payments on the securities.
The risks associated with asset-based 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.
Master Notes
Master notes in which the Fund may invest are unsecured notes that permit
the indebtedness thereunder to vary, and provide for periodic adjustments in the
interest rate. Because master notes are direct lending arrangements between the
Fund and the issuer, there is no secondary market for the notes. However,
generally either the maturity of a master note shall not exceed seven days or
the master note will have a put feature which will permit payment of principal
and accrued interest within seven days. To the extent this period is exceeded,
the note in question would be considered illiquid and will be subject to the
Fund's limitation on illiquid investments. Issuers of master notes must satisfy
the same creditworthiness criteria as set forth for other promissory notes
(e.g., commercial paper). The Fund will invest in master notes only when such
notes are determined by the Manager to be of comparable quality to rated issuers
or instruments eligible for investment by the Fund.
Structured Notes
Structured notes are debt instruments for which the interest rate and/or
the principal are indexed to an unrelated indicator. The Fund will only utilize
structured notes that have the characteristics of permissible variable rate
notes and that have a rate of interest based on a leading money market index not
greater than three months. Structured notes are often issued by high-grade
corporate issuers. An underlying swap is often entered into in connection with a
structured note pursuant to which the issuer will receive payments that match
its obligations under the structured note (usually from an investment bank that
puts the transaction together) and, in turn, makes more "traditional" payments
to the investment bank (e.g., fixed-rate or ordinary floating rate payments). In
such cases the Fund would not be involved in the swap and the issuer of the note
would remain obligated even if its counterparty defaulted. Structured notes are
considered a type of derivative investment.
Trust Obligations
Trust obligations are debt instruments issued by a trust established solely
for the purpose of owning the underlying assets purchased from the selling
company ("originator"). The trust is structured to ensure assets sold to the
trust are not subject to bankruptcy proceedings against the originators. The
debt instruments issued by the trust represent a pro rata undivided interest in
the trust assets.
When-Issued Securities and Forward Commitment Transactions
The Fund may purchase or sell securities on a "when-issued" basis or
"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 a favorable 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
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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.
Purchase and sale of securities on a "forward commitment" basis involve a
commitment to purchase or sell securities with payment and delivery to take
place at some future date, normally one to two months after the date of the
transaction. As with when-issued securities, these transactions involve certain
risks, but they also enable an investor to hedge against anticipated changes in
interest rates and prices. When purchasing securities on a when-issued or
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.
Securities Lending
The Fund 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 approved bank letters of credit that at all times equals 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 the
Fund would exceed 33 1/3% of its total assets. The Fund normally pays lending
fees and related expenses from the interest earned on invested collateral, but
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. Should the borrower of the securities fail
financially, there is a risk of delay in recovery of the securities or loss of
rights in the collateral. However, loans are made only to borrowers which are
deemed by the Manager to be of good financial standing and which have been
approved by the Board. For purposes of complying with the Fund's investment
policies and restrictions, collateral received in connection with securities
loans will be deemed an asset of the Fund to the extent required by law. The
Manager will receive compensation for administrative and oversight functions
with respect to securities lending. The amount of such compensation will depend
on the income generated by the loan of securities. The SEC has granted exemptive
relief that permits the Fund to invest cash collateral received from securities
lending transactions in one or more private investment companies managed by the
Manager. Subject to receipt of exemptive relief from the SEC, the Portfolios
also may invest cash collateral received from securities lending transactions in
shares of one or more registered investment companies managed by the Manager.
See the SAI for further information regarding loan transactions.
Repurchase Agreements
A repurchase agreement is an agreement under which securities are acquired
by the Fund from financial institutions such as banks and broker/dealers subject
to resale at an agreed upon date and price. The Fund bears the risk of loss in
the event that the other party to a repurchase
<PAGE> 169
agreement defaults on its obligations and the Fund is delayed or prevented from
exercising its rights to dispose of the collateral securities. However, the
Manager will enter into repurchase agreements only with financial institutions
that are deemed to be of good financial standing and that have been approved by
the Board. See the SAI for more information regarding repurchase agreements.
Reverse Repurchase Agreements
The Fund may borrow funds for temporary purposes by entering into reverse
repurchase agreements. Pursuant to such agreements, the Fund 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. At the
time the Fund 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 the Fund may decline below the
price at which the Fund is obligated to repurchase the securities. Reverse
repurchase agreements are considered to be borrowings by an investment company
under the 1940 Act.
Portfolio Transactions
The Manager will place its own orders to execute securities transactions of
the Fund. In placing such orders, the Manager 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.
High portfolio activity increases the Fund's transaction costs. The Fund
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.
INVESTMENT RESTRICTIONS
The following investment restrictions of the Fund may be changed only by
the majority vote of the Fund's outstanding shares. The Fund may not:
-Invest more than 25% of its total assets in the obligations of companies
primarily engaged in any one industry, provided that: (i) this limitation
does not apply to obligations issued or guaranteed by the U.S. Government,
its agencies and instrumentalities; (ii) municipalities and their agencies
and authorities are not deemed to be industries; and (iii) financial
service companies are classified according to the end users of their
services (for example, automobile finance, bank finance, and diversified
finance will be considered separate industries).
<PAGE> 170
-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.
As a non-fundamental investment restriction which may be changed only by a
vote of the Board, the Fund may not invest more than 15% of its net assets in
illiquid securities, including master notes, time deposits and repurchase
agreements which 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 which 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
Advertised yield for the Fund will be computed by dividing the net
investment income per share earned during the relevant time period by the
offering price per share on the last day of the period. Total return quotations
advertised by the Fund 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 Fund may advertise a "monthly
distribution rate". This rate is based on an annualized monthly dividend accrual
rate per share compared with the Fund's month-end net asset value per share. The
Fund may at times compare its performance to applicable published indices, and
also may disclose its performance as ranked by certain ranking entities. See the
SAI for more information about the calculation of yields and total returns.
MANAGEMENT AND ADMINISTRATION OF THE TRUST
Management Agreement
The Trust is governed by its Board which provides broad supervision over
the Trust's affairs. The Trust and the Manager entered into a Management
Agreement (the "Agreement") which obligates the Manager to provide or oversee
all administrative, investment advisory and portfolio management services for
the Fund. The Agreement was approved with respect to the Fund by the Fund's sole
initial shareholder on November 28, 1995. The Manager provides the Trust with
office space, office equipment and personnel necessary to manage and administer
Trust 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 Trust by third parties. The Manager also develops and implements the
investment program for the Fund. The Manager, located at 4333 Amon Carter
Boulevard, MD5645, 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
<PAGE> 171
provide business management, advisory, administrative and asset management
consulting services to the American AAdvantage Funds and other investors. As of
December 31, 1997, the Manager had assets under management of approximately $___
billion including approximately $___ billion under active management and $___
billion as named fiduciary or fiduciary adviser. Of the total, approximately
$___ billion of assets are related to AMR and its primary subsidiary, American
Airlines, Inc.
As compensation for providing these services to the Fund, the Manager
receives from the Trust an annualized fee ("Management Fee"), which is
calculated and accrued daily, equal to .10% of the net assets of the Fund. Such
fees are payable quarterly in arrears.
The Agreement will continue in effect provided that annually such
continuance is specifically approved by a vote of the Board, 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. The Agreement may be terminated at any time,
without penalty, by a majority vote of outstanding Fund shares on sixty (60)
days' written notice to the Manager, or by the Manager, on sixty (60) days'
written notice to the Trust. The Agreement will automatically terminate in the
event of its "assignment" as defined in the 1940 Act.
Portfolio Managers
Michael W. Fields is responsible for the portfolio management oversight of
the Fund. Mr. Fields has been with AMR Investment Services, Inc. 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
Fund. Mr. Mayer has served as Senior Portfolio Manager of AMR Investment
Services since May 1995. Prior to that time, he was a Vice President of
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.
Fund Expenses
Expenses paid by the Fund may include, but are not limited to audits by
independent auditors; transfer agent, custodian, dividend disbursing agent and
shareholder recordkeeping services; obtaining quotations for calculating the
value of the Fund's net assets; taxes, if any, and the preparation of the Fund's
tax returns; brokerage fees and commissions; 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 Trust's existence; legal fees; fees to federal and state authorities for
the registration of Fund shares; fees and expenses of Trustees who are not
directors, officers, employees or stockholders of the Manager or its affiliates;
insurance and fidelity bond premiums; and any extraordinary expenses of a
non-recurring nature.
Custodian and Transfer Agent
State Street Bank & Trust Company, Boston Massachusetts, serves as
custodian for the Trust and transfer agent for the Fund.
<PAGE> 172
Independent Auditor
The independent auditor for the Fund is Ernst & Young LLP, Dallas, Texas.
Principal Underwriter
Brokers Transaction Services, Inc. ("BTS"), 7001 Preston Road, Dallas,
Texas 75205, serves as principal underwriter of the Trust.
PURCHASE, REDEMPTION AND VALUATION OF SHARES
Purchasing Shares of the Fund
Shares of the Fund are offered without a sales charge and are sold on a
continuous basis. Shares are sold at the net asset value next determined after
acceptance by the transfer agent of a purchase order. Shares are offered and
purchase orders are accepted for the Fund on each day the Federal Reserve System
and the custodian/transfer agent are open for business ("Business Day"). The
Trust reserves the right to reject any order for the purchase of shares and to
limit or suspend, without prior notice, the offering of shares. The minimum
investment required to open an account is generally $50 million.
Payment for the purchase of shares must be in the form of federal funds.
Purchase orders are only accepted on a Business Day by 3:00 p.m. Eastern time
and will be executed on that same day if accompanied by payment. Certificates
representing shares ordinarily will not be issued.
Fund shares may be purchased and redeemed as follows:
By Wire--Purchases may be made by wiring federal funds. To ensure prompt
receipt of a transmission by wire, the investor should: telephone the transfer
agent at (800) 658-5811 and specify that it will be purchasing shares of the
Short-Term Income Fund; provide the name, address, telephone number, and account
number of the investor; and identify the amount being wired and by which bank.
If you are opening a new account, the transfer agent will provide you with an
account number. You should instruct your bank to designate the account number
which the transfer agent has assigned to you and to transmit the federal funds
to: State Street Bank & Trust Co., ABA #111-000-025, Corporate Trust Suspense
No. 0180019810, reference American AAdvantage Short-Term Income Fund, Attention:
Fund Account Services.
By Depositing Securities--Shares of the Fund may be purchased in exchange
for an investor's securities if the Manager determines that the securities are
acceptable and satisfy the Fund's investment objective and policies. Investors
interested in exchanging securities must first contact the Manager and obtain
instructions regarding submission of a written description of the securities
that the investor wishes to exchange. The investor must represent that all such
securities offered to the 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 the Fund
must have a readily
<PAGE> 173
ascertainable value. Securities are valued in the manner described for valuing
Fund 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 acceptance of such orders, the
securities must be delivered in fully negotiable form within five 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. The Fund will accept securities in this manner only for
investment purposes, and not for resale.
By Mail--Share purchases of the Fund may be made by mail by sending a check
or other negotiable bank draft payable to the Fund to "State Street Bank & Trust
Co.,P.O. Box 1978, Boston, MA 02105-1978, Attention: American AAdvantage
Short-Term Income Fund". Subsequent purchases 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. Courier and overnight deliveries should be addressed to State
Street Bank & Trust Co., Transfer Agency Operations, One Heritage Drive, MSP-5
South, North Quincy, MA, 02171.
Redemption of Shares
Fund shares may be redeemed on any Business Day by writing directly to
State Street Bank & Trust Co. at the address above under "Purchase of Shares--By
Mail". The redemption price will be the net asset value per share next
determined after receipt by State Street Bank & Trust Co. of all required
documents in good order. "Good order" means that the request must include a
letter of instruction or stock assignment specifying (1) the account number and
Fund name; (2) the number of shares or dollar amount to be redeemed; (3)
signature of an authorized signatory for the owner of the shares in the exact
names in which they appear on the account; (4) other supporting legal documents,
if required, in the case of estates, trusts, guardianships, custodians,
corporations, IRAs and welfare, pension and profit-sharing plans; and (5) and
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. The Fund's yield will less
likely by adversely affected if the Fund receives redemption notification seven
days prior to the redemption. However, the Fund reserves the right to suspend
redemptions or postpone the date of payment (a) for any periods during which the
Federal Reserve System or the transfer agent are closed (other than for
customary weekend and holiday closings), (b) at such time as an emergency exists
as determined by the Securities and Exchange Commission so that disposal of the
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 Fund's shareholders. Shares
purchased by check may not be
<PAGE> 174
redeemed until the funds have cleared, which may take up to 15 days. During
periods when there are substantial redemption requests, the Fund will generally
take the full seven days to make payment.
Redemption in Kind
Although the Fund intends to redeem shares in cash, it reserves the right
to pay the redemption price in whole or in part by a distribution of readily
marketable securities from the Fund's portfolio. However, shareholders always
will be entitled to redeem shares for cash up to the lesser of $250,000 or 1% of
the 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 transaction costs.
Valuation of Shares
The net asset value of the Fund's shares is determined as of 4:00 p.m.
Eastern time on each Business Day. Debt securities (other than short-term
securities) are normally 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 and other assets for which market quotations are not readily
available are valued at fair value, as determined in good faith and pursuant to
procedures approved by the Board. Obligations with 60 days or less to maturity
held by the Fund are valued using the amortized cost method as described in the
SAI.
INFORMATION CONCERNING SHARES OF THE FUND
Dividends and Capital Gain Distributions
Dividends, consisting of substantially all of the Fund's net investment
income, are normally declared on each Business Day immediately prior to the
determination of net asset value. Any net short-term capital gain may be
distributed over a period of time, as determined by the Manager. Dividends
generally are paid monthly, in cash or in Fund shares, on the first day of the
following month. Any net capital gain (the excess of net long-term capital gain
over net short-term capital loss) that may be realized will be distributed once
every year. Should the Fund anticipate or incur any unusual expenses, loss or
depreciation that would adversely affect the net asset value per share or income
for a particular period, the Board may at that time consider whether to adhere
to the dividend policy described above or to revise it in the light of the
prevailing circumstances.
Unless a shareholder otherwise elects on the account application, all
dividends and other distributions are automatically declared and paid in
additional Fund shares based on the net asset value per share next determined on
the payment date. 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 which is received by
<PAGE> 175
the transfer agent at least ten days prior to the payment date for a dividend or
other distribution.
Tax Information
The Fund is treated as a separate corporation for federal income tax
purposes and intends to qualify for treatment as a RIC under the Internal
Revenue Code of 1986, as amended. In each taxable year that the 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, net
investment income plus any net short-term capital gain and gain from certain
foreign currency transactions) and net capital gain that it distributes to its
shareholders. However, the 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 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 the 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. The Fund intends to satisfy the above described distribution
requirements.
Dividends from the 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 the Fund's net capital gain (whether received in cash or paid
in additional Fund shares), when designated as such, generally will be taxable
to those shareholders as long-term capital gain, regardless of how long they
have held their Fund shares. A capital gain distribution from the Fund may also
be offset by capital losses from other sources. If shares are purchased shortly
before the record date for a 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. The Fund will notify its shareholders following the end of
each calendar year of the amount of dividends and other distributions paid (or
deemed paid) during that year.
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 the 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.
The Fund is required to withhold 31% of all dividends, capital gain
distributions and redemption proceeds payable to 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 Fund and its shareholders.
<PAGE> 176
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 Fund. For further tax information, see the SAI.
GENERAL INFORMATION
The Fund is comprised of one class of shares that may be issued in an
unlimited number. Each share represents an equal proportionate beneficial
interest in the Fund and each is entitled to one vote. Shares of the Fund may
vote on matters affecting the 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
non-transferable.
Shares are distributed through the Trust's principal underwriter, BTS. BTS
is compensated by the Manager and not the Trust. Any distribution expenses
incurred by the Manager related to the Fund are borne by the Manager. The Trust
does not intend to compensate the Manager or any other party, either directly or
indirectly, for the distribution of Fund shares.
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.
Shareholders will receive periodic reports, including annual and
semi-annual reports, which will include financial statements showing the results
of the Fund's operations and other information. The financial statements
relating to the Fund will be audited by Ernst & Young LLP, independent auditor,
at least annually. Shareholder inquiries should be made by writing to the Fund
at P.O. Box 619003, DFW Airport, TX 75261-9003, or by calling (800) 730-1313.
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 Fund shares, and, if given or made, such other information
or representations must not be relied upon as having been authorized by the
Fund. 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.
<PAGE> 177
STATEMENT OF ADDITIONAL INFORMATION
AMERICAN AADVANTAGE FUNDS(R)
-- AMR CLASS --
-- INSTITUTIONAL CLASS --
-- PLANAHEAD CLASS(R) --
MARCH 1, 1998
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 S&P 500 Index
Fund (the "S&P 500 Index Fund"), American AAdvantage Intermediate Bond Fund(sm)
(the "Intermediate Bond Fund"), American AAdvantage Short-Term Bond Fund(sm),
formerly the American AAdvantage Limited-Term Income Fund (the "Short-Term Bond
Fund"), American AAdvantage Money Market Fund(sm) (the "Money Market Fund"),
American AAdvantage Municipal Money Market Fund(sm) (the "Municipal Money Market
Fund") and American AAdvantage U.S. Government Money Market Fund(sm), formerly
the American AAdvantage U.S. Treasury Money Market Fund (the "U.S. Government
Money Market Fund"), (individually, a "Fund" and collectively, the "Funds") are
nine 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 is comprised of multiple
classes of shares designed to meet the needs of different groups of investors.
This Statement of Additional Information ("SAI") 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") that has a similar name and an
identical investment objective to the investing Fund. The S&P 500 Index Fund
invests all of its investable assets in the Equity 500 Index Portfolio, which
has an identical investment objective. 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 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 SAI should be read in conjunction with an AMR Class, an
Institutional Class or a PlanAhead Class prospectus, dated March 1, 1998,
(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 SAI 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.
<PAGE> 178
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 restriction applies 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 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.
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.
2
<PAGE> 179
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).
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
<PAGE> 180
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 has determined that the commercial paper is equivalent quality and
is liquid.
8. Invest more than 10% of the Portfolio's total assets (taken at the
greater of cost or market value) in securities that are restricted as to
resale under the 1933 Act (other than Rule 144A securities deemed liquid
by the Equity 500 Index Portfolio Board).
9. No more than 5% of the Portfolio's total assets are invested in
securities issued by issuers which (including predecessors) have been in
operation less than three years.
10. With respect to 75% of the Portfolio's total assets, purchase
securities of any issuer if such purchase at the time thereof would cause
the Portfolio to hold more than 10% of any class of securities of such
issuer, for which purposes all indebtedness of an issuer shall be deemed
a single class and all preferred stock of an issuer shall be deemed a
single class, except that futures or option contracts shall not be
subject to this restriction.
11. If the Portfolio is a "diversified" fund with respect to 75% of its
assets, invest more than 5% of its total assets in the securities
(excluding U.S. Government securities) of any one issuer.
12. Purchase or retain in the Portfolio's portfolio any securities issued
by an issuer any of whose officers, directors, trustees or security
holders is an officer or Trustee of the Equity 500 Index Portfolio, or is
an officer or partner of BT, if after the purchase of the securities of
such issuer for the Portfolio one or more of such persons owns
beneficially more than 1/2 of 1% of the shares or securities, or both,
all taken at market value, of such issuer, and such persons owning more
than 1/2 of 1% of such shares or securities together own beneficially
more than 5% of such shares or securities, or both, all taken at market
value.
4
<PAGE> 181
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.
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* (50) Trustee and President President, AMR Investment Services, Inc. (1986-Present);
Chairman, American Airlines Employees Federal Credit Union
(1989-Present); Trustee, American Performance Funds
(1990-1994); Director, Crescent Real Estate Equities, Inc.
(1994-Present); Trustee, American AAdvantage Mileage Funds
(1995-Present).
Alan D. Feld (60) Trustee Partner, Akin, Gump, Strauss, Hauer & Feld, LLP (1960-Present)#;
1700 Pacific Avenue Director, Clear Channel Communications (1984-Present);
Suite 4100 Director, CenterPoint Properties, Inc. (1994-Present); Trustee,
Dallas, Texas 75201 American AAdvantage Mileage Funds (1996-Present).
</TABLE>
5
<PAGE> 182
<TABLE>
<S> <C> <C>
Ben J. Fortson (65) Trustee President and CEO, Fortson Oil Company (1958-Present);
301 Commerce Street Director, Kimbell Art Foundation (1964-Present);
Suite 3301 Director, Burnett Foundation (1987-Present); Honorary
Fort Worth, Texas 76102 Trustee, Texas Christian University (1986-Present);
Trustee, American AAdvantage Mileage Funds (1996-Present).
John S. Justin (81) 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
(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* (62) Trustee Consultant (1994-Present); Vice President and Controller
(1985-1994), American Airlines, Inc.; Trustee, American
AAdvantage Mileage Funds (1995-Present).
Roger T. Staubach (56) Trustee Chairman of the Board and Chief Executive Officer of The
6750 LBJ Freeway Staubach Company (a commercial real estate company)
Dallas, Texas 75240 (1982-Present); 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; 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.(41) Trustee Physician (1982-Present); President, Youngblood
2305 Cedar Springs Road Enterprises, Inc. (a health care investment and management
Suite 401 firm) (1983-Present); Trustee, Teachers Retirement System
Dallas, Texas 75201 of Texas (1993-Present); Director, United States Enrichment
Corporation (1993-Present), Director, Just For the Kids
(1995-Present); Member, Council on Foreign Relations
(1995-Present); Trustee, American AAdvantage Mileage Funds
(1996-Present).
Nancy A. Eckl (35) Vice President Vice President, AMR Investment Services, Inc. (1990-Present).
Michael W. Fields (44) Vice President Vice President, AMR Investment Services, Inc. (1988-Present).
Barry Y. Greenberg (34) Vice President and Director, Legal and Compliance, AMR Investment Services,
Assistant Secretary Inc. (1995-Present); Branch Chief (1992-1995) and Staff
Attorney (1988-1992), Securities and Exchange Commission.
</TABLE>
6
<PAGE> 183
<TABLE>
<S> <C> <C>
Rebecca L. Harris (31) Treasurer Director of Finance (1995-Present), Controller (1991-1995),
AMR Investment Services, Inc.
John B. Roberson (39) Vice President Vice President, AMR Investment Services, Inc. (1991-Present).
Thomas E. Jenkins, Jr. (31) Assistant Secretary Senior Compliance Analyst, AMR Investment Services, Inc.
(1996-Present); Staff Accountant (1994-1996) and Compliance
Examiner (1991-1994), Securities and Exchange Commission.
Adriana R. Posada (43) Assistant Secretary Senior Compliance Analyst (1996-Present) and Compliance Analyst
(1993-1996), AMR Investment Services, Inc.; Special Sales
Representative, American Airlines, Inc. (1991-1993).
Clifford J. Alexander (54) Secretary Partner, Kirkpatrick & Lockhart LLP (law firm)
1800 Massachusetts Ave. NW
Washington, D.C. 20036
Robert J. Zutz (45) Assistant Secretary Partner, Kirkpatrick & Lockhart LLP (law firm)
1800 Massachusetts Ave. NW
Washington, D.C. 20036
</TABLE>
# 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, 1997.
7
<PAGE> 184
<TABLE>
<CAPTION>
Aggregate Pension or Retirement Total Compensation
Compensation Benefits Accrued as Part Estimated Annual From American
From the of the Benefits Upon AAdvantage Funds
Name of Trustee Trust Trust's Expenses Retirement Complex
- - --------------- ----- ---------------- ---------------- -------------------
<S> <C> <C> <C> <C>
William F. Quinn $ $0 $0 $
Alan D. Feld $15,962 $0 $0 $63,850
Ben J. Fortson $ 6,802 $0 $0 $27,209
John S. Justin $ 225 $0 $0 $ 901
Stephen D. O'Sullivan $ 493 $0 $0 $ 1,973
Roger T. Staubach $ 8,269 $0 $0 $33,076
Kneeland Youngblood, M.D $ 9,525 $0 $0 $38,099
</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.
S. Leland Dill (65) Trustee Retired; Director, Coutts Group, Coutts (U.S.A.)
5070 North Ocean Drive International, and Coutts Trust Holdings Ltd.; Director,
Singer Island, FL 33404 Zweig Series Trust; formerly Partner of KPMG Peat Marwick;
Director, Vinters International Company Inc.; General
Partner of Pemco (an investment company registered under
the 1940 Act).
</TABLE>
8
<PAGE> 185
<TABLE>
<S> <C> <C>
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, ederated Services Company ("FSC");
formerly Director of Proprietary Client Services, Federated
Administrative Services ("FAS") and formerly 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>
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 following table reflects fees paid to the Trustees of the Equity 500
Index Portfolio for their services to that Portfolio and to certain other
investment companies advised by BT (the "BT Funds Complex") for the year ended
December 31, 1997.
<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>
Charles P. Biggar $ $
S. Leland Dill $ $
Philip Saunders, Jr. $ $
</TABLE>
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: 1995, $7,603,000 of which approximately $3,985,000 was
paid by the Manager to the other investment advisers; 1996, $10,853,000 of which
approximately $5,403,000 was paid by the Manager to the other investment
advisers and 1997, $13,730,443 of which $7,061,014 was paid by the Manager to
the other investment advisers. Management fees in the amount of approximately
$29,000, $44,000 and $7,309 were waived by the Manager during the fiscal years
ended October 31, 1995, 1996 and 1997.
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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 interest 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.
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: 1995, $2,731,000;
1996, $2,893,400 and 1997, $4,538,345. Administrative service fees in the amount
of approximately $9,000 were waived by the Manager during the fiscal year ended
October 31, 1995.
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 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, 1995, 1996 and 1997, BT earned,
$385,265, $752,981 and $XXX,XXX, respectively, as compensation for
administrative and other services provided to the Equity 500 Index Portfolio.
Brokers Transaction Services, Inc. ("BTS") is the distributor of the
Funds' shares, and, as such, began receives an annualized fee of $50,000 from
the Manager for distributing the shares of the Trust and the American AAdvantage
Mileage Funds.
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<PAGE> 187
APPROACH TO STOCK SELECTION
Investment advisers to the corresponding Portfolios of the Balanced, the
Growth and Income and the 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.
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 exception of Investment Advisory Agreements ("Advisory
Agreements") with Brandywine Asset Management, Inc. ("Brandywine"), separate
Advisory Agreements between the investment advisers of the Balanced, the Growth
and Income, the International Equity, the Intermediate Bond and the Short-Term
Bond Funds and their corresponding Portfolios, 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. Brandywine was approved as an investment adviser to the
Balanced Fund and the Growth and Income Fund and their corresponding Portfolios
effective April 1, 1996. Following the acquisition of Hotchkis and Wiley
("Hotchkis") by Merrill Lynch, Pierce, Fenner & Smith, Inc., a new Advisory
Agreement with Hotchkis was approved, effective November 12, 1996. Following the
merger of Morgan Stanley Group Inc. and Dean, Witter, Discover & Co., a new
Advisory Agreement with Morgan Stanley Asset Management Inc. was approved,
effective May 31, 1997.
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 has agreed
to: (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, 1995, 1996 and 1997, BT earned $770,530,
$1,505,963 and $XXX,XXX, respectively, as compensation for investment advisory
services provided to the Equity 500 Index Portfolio. During the same periods, BT
reimbursed $418,814, $870,024 and $XXX,XXX, respectively, to the Equity 500
Index Portfolio to cover expenses.
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<PAGE> 188
BT may have deposit, loan and other commercial banking relationships with
the issuers of obligations that may be purchased on behalf of the Equity 500
Index Portfolio, including outstanding loans to such issuers that could be
repaid in whole or in part with the proceeds of securities so purchased. Such
affiliates deal, trade and invest for their own accounts in such obligations and
are among the leading dealers of various types of such obligations. BT has
informed the Equity 500 Index Portfolio that, in making its investment
decisions, it does not obtain or use material inside information in its
possession or in the possession of any of its affiliates. In making investment
recommendations for the Equity 500 Index Portfolio, BT will not inquire or take
into consideration whether an issuer of securities proposed for purchase or sale
by the Equity 500 Index Portfolio is a customer of BT, its parent or its
subsidiaries or affiliates and, in dealing with its customers, BT, its parent,
subsidiaries and affiliates will not inquire or take into consideration whether
securities of such customers are held by any fund managed by BT or any such
affiliate.
Each Investment Advisory Agreement will automatically terminate if
assigned, and may be terminated without penalty at any time by the Manager, by a
vote of a majority of the Trustees or by a vote of a majority of the outstanding
voting securities of the applicable Fund on no less than thirty (30) days' nor
more than sixty (60) days' written notice to the investment adviser, or by the
investment adviser upon sixty (60) days' written notice to the Trust. The
Investment Advisory Agreements 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 year ended October 31, 1995, the following brokerage
commissions were paid by the Funds, and for 1996 and 1997, by their
corresponding Portfolios.
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<TABLE>
<CAPTION>
Fund/Portfolio 1995 1996 1997
- - -------------- ---- ---- ----
<S> <C> <C> <C>
Balanced $388,253 $503,947 $ 562,493
Growth and Income $590,364 $956,767 $1,192,792
International Equity $422,670 $544,844 $ 956,160
Intermediate Bond (2) N/A N/A $ 0
Short-Term Bond $ 0 $ 0 $ 0
Money Market Funds $ 0 $ 0 $ 0
</TABLE>
(2) The Intermediate Bond Portfolio commenced operations on September 15, 1997.
The commissions listed above were paid directly by the Funds for the
fiscal year ended October 31, 1995. For the fiscal years ended October 31, 1996
and October 31, 1997, the commissions were paid by the corresponding Portfolios
of the AMR Trust, and shareholders of the Funds bear only the pro-rata portion
of brokerage commissions.
For the years ended December 31, 1995, 1996 and 1997 the Equity 500 Index
Portfolio paid the following brokerage commissions: $172,924, $289,791 and
$XXX,XXX. The S&P 500 Index Fund was not operational during 1995 and 1996.
Shareholders of the S&P 500 Index Fund bear only their pro-rata portion of the
brokerage commissions paid during 1997.
Following is the portfolio turnover rate for the Funds for the fiscal
year ended October 31, 1995 and portfolio turnover rate for the corresponding
Portfolios of the Funds for the fiscal years ended October 31, 1996 and 1997.
The portfolio turnover rate for the Intermediate Bond Portfolio is for the
period from September 15, 1997 through October 31, 1997. The portfolio turnover
rate for the Equity 500 Index Portfolio is for its fiscal years ended December
31, 1995, 1996 and 1997.
<TABLE>
<CAPTION>
Fund/Portfolio 1995 1996 1997
- - -------------- ---- ---- ----
<S> <C> <C> <C>
Balanced 73% 76% %
Growth and Income 26% 40% %
International Equity 21% 19% %
Intermediate Bond N/A N/A %
Short-Term Bond 183% 304% %
Equity 500 Index Portfolio 6% 15% %
</TABLE>
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<PAGE> 190
High portfolio turnover can increase a Fund's transaction costs and
generate additional capital gains or losses. The increase in portfolio turnover
for the Short-Term Bond Portfolio was due to repositioning the portfolio to a
different internal benchmark.
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 AMR Trust Board, or the Equity
500 Index Portfolio Board, 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. During the fiscal year ended October 31, 1997, the
Balanced Portfolio and the Growth and Income Portfolio paid $XXXX and $XXXX.
respectively, in brokerage commissions to XXXXXXXXX. The percentages of total
commissions of the Balanced Portfolio and the Growth and Income Portfolio paid
to XXXXXX in 1997 were 0.XX% and 0.XX%, respectively. The transactions
represented 0.0XX% of the Balanced Portfolio and 0.XX% of the Growth and
Income Portfolio's total dollar value of portfolio transactions for the fiscal
year ended October 31, 1997. During the fiscal year ended October 31, 1997, the
International Equity Portfolio paid $XXXX, $XXXX, $XXXX and $XXXX, 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 $XXXX 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 1997 was X.XX%. The
transactions represented XX% of the International Equity Portfolio's total
dollar value of portfolio transactions for the fiscal year ending October 31,
1997.
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
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<PAGE> 191
for one or more clients when one or more clients are selling that same security.
Some simultaneous transactions are inevitable when several clients receive
investment advice from the same investment adviser, particularly when the same
security is suitable for the investment objectives of more than one client. When
two or more clients are simultaneously engaged in the purchase or sale of the
same security, the securities are allocated among clients in a manner believed
to be equitable to each. It is recognized that in some cases this system could
have a detrimental effect on the price or volume of the security as far as the
Equity 500 Index Portfolio is concerned. However, it is believed that the
ability of the Equity 500 Index Portfolio to participate in volume transactions
will produce better executions for the Portfolio.
NET ASSET VALUE
It is the policy of the Money Market Fund, the Municipal Money Market
Fund and the U.S. Government 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. The corresponding
portfolios of the Money Market Funds may invest in issuers or instruments that
at the time of purchase have received the highest short-term rating by two
Rating Organizations, such as "D-1" by Duff & Phelps and "F-1" by Fitch IBCA,
Inc., and have received the next highest short-term rating by other Rating
Organizations, such as "A-2" by Standard & Poors and "P-2" by Moody's Investors
Service, Inc. See "Ratings of Municipal Obligations" and "Ratings of Short-Term
Obligations" for further information concerning ratings.
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 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 and, in the case of the
International Equity Fund, net gains from foreign currency
transactions) 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
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<PAGE> 192
earn the income on that share for purposes of determining whether the Fund
satisfies the income and diversification 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
Each Portfolio has received a ruling from the IRS or an opinion of
counsel, to the effect that, among other things, each Portfolio is or should be
classified as a separate partnership for federal income tax purposes and is not
a "publicly traded partnership." As a result, each Portfolio is or should not be
subject to federal income tax; instead, each investor in a Portfolio, such as a
Fund, is required to take into account in determining its federal income tax
liability its share of the Portfolio's income, gains, losses, deductions,
credits and tax preference items, without regard to whether it has received any
cash distributions from the Portfolio.
Because, as noted above, each Fund is deemed to own a proportionate share
of its corresponding Portfolio's assets and to earn a proportionate share of its
corresponding Portfolio's 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).
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 amount, character and timing of
recognition
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<PAGE> 193
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 that Fund.
Dividends and interest received by the International Equity Portfolio,
and gains realized thereby, may be subject to income, withholding or other taxes
imposed by foreign countries and U.S. possessions that would reduce the yield
and/or total return 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 Fund's share of the aggregate dividends
received by 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,
the Intermediate Bond Fund or the Short-Term Bond Fund are expected to be
eligible for this deduction.
Distributions by the Municipal Money Market Fund of the amount by which
the Fund's share of its corresponding Portfolio's income on tax-exempt
securities exceeds certain amounts disallowed as deductions, designated by the
Fund 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 state and local 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.
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<PAGE> 194
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
IRS that will enable the Fund's shareholders, in effect, to receive the benefit
of the foreign tax credit with respect to the Fund's share of any foreign and
U.S. possessions income taxes paid by the Portfolio. If the Fund makes this
election, the Fund will treat those taxes as dividends paid to its shareholders
and each shareholder will be required to (1) include in gross income, and treat
as paid by him, his proportionate share of those taxes, (2) treat his share of
those taxes and of any dividend paid by the Fund that represents income from
foreign or U.S. possessions sources as his own income from those sources and (3)
either deduct the taxes deemed paid by him in computing his taxable income or,
alternatively, use the foregoing information in calculating the foreign tax
credit against his federal income tax. If the election is made, the Fund will
report to its shareholders shortly after each taxable year their respective
share of the Portfolio's income from foreign and U.S. possessions sources and
the taxes paid by the Portfolio to foreign countries and U.S. possessions.
Pursuant to that election, individuals who have no more than $300 ($600 for
married persons filing jointly) of creditable foreign taxes included on Forms
1099 and all of whose foreign source income is "qualified passive income" may
elect each year to be exempt from the extremely complicated foreign tax credit
limitation and will be able to claim a foreign tax credit without having to file
the detailed Form 1116 that otherwise is required.
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. Income other than investment
income and 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. However,
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:
(365/7)
EFFECTIVE YIELD = [ (BASE PERIOD RETURN + 1) ] - 1
Based on these formulas, the current and effective yields were as follows
for the periods and Funds indicated:
18
<PAGE> 195
<TABLE>
<CAPTION>
Current yield for Effective yield for
Current daily yield the 7 day period the 7 day period
as of ended ended
October 31, 1997 October 31, 1997 October 31, 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Institutional Class
Money Market Fund 5.54% 5.54% 5.69%
Municipal Money Market Fund 3.41% 3.42% 3.47%
U.S. Government Money Market Fund 5.44% 5.36% 5.51%
PlanAhead Class
Money Market Fund 5.22% 5.22% 5.36%
Municipal Money Market Fund 3.12% 3.15% 3.20%
U.S. Government Money Market Fund 5.15% 5.06% 5.19%
</TABLE>
The Municipal Money Market Fund also may advertise a tax equivalent
current and effective yield. The tax equivalent yields are calculated as
follows:
CURRENT YIELD/(1-APPLICABLE TAX RATE) = CURRENT TAX EQUIVALENT YIELD
EFFECTIVE YIELD/(1-APPLICABLE TAX RATE) = EFFECTIVE TAX EQUIVALENT YIELD
Based on these formulas, the current and effective tax equivalent yields for the
Municipal Money Market Fund for the seven day periods ending October 31, 1997
were:
<TABLE>
<CAPTION>
Current Effective
Class Tax Equivalent Yield Tax Equivalent Yield
- - ----- -------------------- --------------------
<S> <C> <C>
Institutional (based on a 35.0% corporate tax rate) 5.26% 5.34%
PlanAhead (based on a 39.6% personal tax rate) 5.22% 5.30%
</TABLE>
The advertised yields for each class of the Variable NAV Funds (as
defined in the Prospectus) 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
YIELD = 2{(A-B +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, 1997 for the Short-Term Bond Fund was
6.07%, 5.44% and 5.19%, for the AMR, Institutional and PlanAhead Classes,
respectively. The estimated 30-day yield for the period ended October 31, 1997
for the Institutional Class of the Intermediate Bond Fund was 4.90%.
19
<PAGE> 196
Each class of the Intermediate Bond and the Short-Term Bond Fund also may
advertise a monthly distribution rate. The distribution rate gives the return of
the class based solely on the dividend payout to that class if someone was
entitled to the dividends for an entire month. A monthly distribution rate is
calculated from the following formula:
MONTHLY DISTRIBUTION RATE = A/P*(365/N)
where, with respect to a particular class of shares, "A" is the dividend accrual
per share during the month, "P" is the share price at the end of the month and
"N" is the number of days in the month. Based on this formula, the monthly
distribution rate for the AMR, Institutional and PlanAhead Classes of the
Short-Term Bond Fund for the month of October 1997 was 6.50%, 6.18% and 6.07%,
respectively. The monthly distribution rate for the Institutional Class of the
Intermediate Bond Fund for the month of October 1997 was 5.61%. The "monthly
distribution 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 is 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
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
For the For the from commencement
For the one-year five-year period ten-year of active
period ended ended period ended operations through
October 31, October 31, October 31, October 31,
1997(1) 1997(1)(2) 1997(1) 1997(1)(3)
------- ---------- ------- ----------
<S> <C> <C> <C> <C>
AMR Class
Balanced Fund 20.36% 14.92% 13.11% 11.66%
Growth and Income Fund 28.40% 19.28% 16.34% 13.77%
International Equity Fund 19.39% 18.34% N/A(2) 12.36%
Short-Term Bond Fund 6.57% 5.56% N/A(2) 6.99%
S&P 500 Index Fund N/A(2) N/A(2) N/A(2) 25.19%
Institutional Class
Balanced Fund 20.04% 14.73% 13.02% 11.57%
Growth and Income Fund 28.05% 19.08% 16.24% 13.67%
International Equity Fund 19.08% 18.13% N/A(2) 12.20%
Intermediate Bond N/A(2) N/A(2) N/A(2) 2.41%
Short-Term Bond Fund 6.29% 5.40% N/A(2) 6.91%
Money Market Fund 5.60% 4.85% 6.12% 6.13%
Municipal Money Market Fund (4) 3.52% N/A(2) N/A(2) 3.33%
U.S. Government Money Market Fund 5.36% 4.61% N/A(2) 4.50%
PlanAhead Class
Balanced Fund (5) 19.75% 14.50% 12.91% 11.46%
Growth and Income Fund 27.64% 18.78% 16.10% 13.54%
International Equity Fund 18.71% 17.83% N/A(2) 11.98%
Short-Term Bond Fund (5) 6.01% 5.23% N/A(2) 6.82%
Money Market Fund 5.28% 4.62% 6.00% 6.01%
Municipal Money Market Fund (4) 3.24% N/A(2) N/A(2) 3.07%
U.S. Government Money Market Fund 5.08% 4.37% N/A(2) 4.28%
</TABLE>
20
<PAGE> 197
(1) The Institutional Class is the initial class for each Fund, except for
the S&P 500 Index Fund. Except for the S&P 500 Index Fund, total returns
for the PlanAhead and AMR Classes 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 from the commencement of
operations of the new classes through October 31, 1997. 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.
(2) The Fund was not operational during this period.
Inception dates are as follows:
<TABLE>
<CAPTION>
Fund Institutional Class AMR Class PlanAhead Class
---- ------------------- --------- ---------------
<S> <C> <C> <C>
Balanced 7/17/87 8/1/94 8/1/94
Growth and Income 7/17/87 8/1/94 8/1/94
International Equity 8/7/91 8/1/94 8/1/94
S&P 500 Index 1/1/98
Intermediate Bond 9/15/97
Short-Term Bond 12/3/87 8/1/94 8/1/94
Money Market 9/1/87 8/1/94 8/1/94
Municipal Money Market 11/10/93 8/1/94 8/1/94
U.S. Government Money Market 3/2/92 8/1/94 8/1/94
</TABLE>
See Appendix A for historical performance of the S&P 500 Composite Stock Price
Index.
(4) A portion of the Management and Administrative Services fees has been
waived for the Municipal Money Market Fund since its inception.
(5) A portion of the Service Plan Fees of the PlanAhead Class has been
waived for the Balanced, the Growth and Income and the Short-Term Bond
Funds since August 1, 1994.
Each class of a Fund also may use "aggregate" total return figures for
various periods which represent the cumulative change in value of an investment
in a class of a Fund for the specific period. Such total returns reflect changes
in share prices of a class of a Fund and assume reinvestment of dividends and
distributions.
Each Fund may give total returns from inception using the date when the
current managers began active management as the inception date. However, returns
using the actual inception date of the Fund will also be provided.
In reports or other communications to shareholders or in advertising
material, each class of a Fund may from time to time compare its performance
with that of other mutual funds in rankings prepared by Lipper Analytical
Services, Inc., Morningstar, Inc., IBC Financial Data, Inc. and other similar
independent services which monitor the performance of mutual funds or
publications such as the "New York Times," "Barrons" and the "Wall Street
Journal." Each class of a Fund may also compare its performance with various
indices prepared by independent services such as Standard & Poor's, Morgan
Stanley or Lehman Brothers or to unmanaged indices that may assume reinvestment
of dividends but generally do not reflect deductions for administrative and
management costs.
Each Fund may advertise the standard deviation of its returns for various
time periods and compare its standard deviation to that of various indices.
Standard deviation of returns over time is a measure of volatility. It indicates
the spread of a Fund's returns about their central tendency or mean. In theory,
a Fund that is more volatile should receive a higher return in exchange for
taking extra risk. Standard deviation is a well-accepted statistic to gauge the
riskiness of an investment strategy and measure its historical volatility as a
predictor of risk, although the measure is subject to time selection bias.
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. Advertisements for the International Equity Fund may compare the
differences between domestic and foreign 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."
21
<PAGE> 198
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
AMR Class is offered to tax-exempt retirement and benefit plans of AMR
Corporation and its affiliates. The following individuals are eligible for
purchasing shares of the Institutional Class with an initial investment of less
than $2 million: (i) employees of the Manager, (ii) officers and directors of
AMR and (iii) members of the Trust's Board of Trustees. 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 and the Intermediate Bond 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
January 31, 1998:
<TABLE>
<S> <C>
American AAdvantage Balanced Fund
AMR Corporation and subsidiary companies and Employee Benefit Trusts thereof.............................................%
4333 Amon Carter Boulevard
Fort Worth, Texas 76155
American AAdvantage Growth and Income Fund
AMR Corporation and subsidiary companies and Employee Benefit Trusts thereof.............................................%
4333 Amon Carter Boulevard
Fort Worth, Texas 76155
American AAdvantage International Equity Fund
AMR Corporation and subsidiary companies and Employee Benefit Trusts thereof.............................................%
4333 Amon Carter Boulevard
Fort Worth, Texas 76155
American AAdvantage Short-Term Bond Fund
Retirement Advisors of America...........................................................................................%
5005 LBJ Freeway, Suite 1350
Dallas, Texas 75244
AMR Corporation and subsidiary companies and Employee Benefit Trusts thereof.............................................%
4333 Amon Carter Boulevard
Fort Worth, Texas 76155
</TABLE>
22
<PAGE> 199
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 Short-Term Bond Fund.
In addition, the following persons own 5% or more of the outstanding
shares of a Fund or Class as of January 31, 1998:
<TABLE>
<CAPTION>
Total Institutional PlanAhead
American AAdvantage Balanced Fund Fund Class Class
- - --------------------------------- ---- ----- -----
<S> <C> <C> <C>
Retirement Advisors of America % %
5005 LBJ Freeway, Suite 1350
Dallas, TX 75244
Sky Chefs Master Trust % %
601 Ryan Plaza Drive
Arlington, Texas 76011
NA Bank & Co. % %
P.O. Box 2180
Tulsa, Oklahoma 74101
Berg Electronics Inc. Savings Plan % %
4 New York Plaza - EBS 4th. Floor
New York, New York 10004-2413
International Wire Retirement Savings Plan % %
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 % %
5005 LBJ Freeway, Suite 1350
Dallas, Texas 75244
Coca-Cola Retirement Plan % %
Hamill and Company (Trust Operations)
P.O. Box 6558
Houston, TX 77252-2558
Wachovia Bank of North Carolina % %
P.O. Box 3002
Winston-Salem, North Carolina 27102
Clarence Arthur & Co. % %
AmeriTrust, Texas N.A.
P.O. Box 951405
Dallas, TX 75395-1405
Calhoun & Co. % %
Comerica Bank
P.O. Box 7500
Detroit, Michigan 48275-3454
Berg Electronics Inc. Savings Plan % %
4 New York Plaza - EBS 4th. Floor
New York, New York 10004-2413
Crowe & Dunlevy Profit Sharing and Thrift Plan % %
20 N. Broadway, Suite 1800
Oklahoma City, Oklahoma 73102-8203
Technical Products Group Inc. Retirement & Savings Plan % %
2929 Allen Parkway, Suite 2500
Houston, Texas 77019
</TABLE>
23
<PAGE> 200
<TABLE>
<CAPTION>
Total Institutional PlanAhead
American AAdvantage International Equity Fund Fund Class Class
- - --------------------------------------------- ---- ----- -----
<S> <C> <C> <C>
NA Bank & Co. % %
P.O. Box 2180
Tulsa, Oklahoma 74101
Retirement Advisors of America % %
5005 LBJ Freeway, Suite 1350
Dallas, Texas 75244
Wachovia Bank of North Carolina % %
P.O. Box 3002
Winston-Salem, North Carolina 27102
Clarence Arthur & Co. % %
AmeriTrust, Texas N.A.
P.O. Box 951405
Dallas, TX 75395-1405
York Health System % %
1001 S. George St.
York, PA 17405
IBJ Distributors Inc. % %
237 Park Ave. Suite 910
New York, NY 10017-3140
DLJ Securities Corp. % %
P.O. Box 2052
Jersey City, NJ 07303-2052
Patricia G. Burke Charitable Unitrust % %
650 Smithfield St., Suite 250
Pittsburgh, PA 15222-3907
<CAPTION>
Total Institutional PlanAhead
American AAdvantage Short-Term Bond Fund Fund Class Class
- - ---------------------------------------- ---- ----- -----
<S> <C> <C> <C>
Retirement Advisors of America % %
5005 LBJ Freeway, Suite 1350
Dallas, Texas 75244
Wachovia Bank of North Carolina % %
P.O. Box 3002
Winston-Salem, North Carolina 27102
Technical Products Group Inc. Retirement and Savings Plan % %
2929 Allen Parkway, Suite 2500
Houston, Texas 77019
Crowe & Dunlevy Profit Sharing and Thrift Plan % %
20 N. Broadway, Suite 1800
Oklahoma City, Oklahoma 73102-8203
RIW Limited Partnership % %
13155 Noel Rd., 24th. Floor
Dallas, TX 75240-5090
</TABLE>
24
<PAGE> 201
<TABLE>
<S> <C> <C> <C>
Berg Electronics Inc. Savings Plan % %
4 New York Plaza - EBS 4th. Floor
New York, New York 10004-2413
Chancellor Limited Partnership % %
13155 Noel Rd., 24th. Floor
Dallas, TX 75240-5090
EPR Limited Partnership % %
13155 Noel Rd., 24th. Floor
Dallas, TX 75240-5090
Gale Force Limited Partnership % %
13155 Noel Rd., 24th. Floor
Dallas, TX 75240-5090
William N. Hoffman % %
3515 Davis Rd.
Granbury, TX 76049-5469
<CAPTION>
Total Institutional PlanAhead
American AAdvantage Money Market Fund Fund Class Class
- - ------------------------------------- ---- ----- -----
<S> <C> <C> <C>
Seagate Technology Inc. % %
920 Disk Dr.
Scotts Valley, CA 95066
City of Chicago International Airport Revenue Bonds % %
Harris Trust and Savings Bank(Indenture Trust Division)
P.O. Box 755
Chicago, Illinois 60690
Alliance Airport Authority % %
Bank One, Texas, NA (Corporate Trust Department)
500 Throckmorton
Fort Worth, Texas 76113-2604
Shell Oil Company % %
Two Shell Plaza
P.O. Box 2099
Houston, TX 77252
Hewlett Packard Finance Co. % %
3000 Hanover St.
Palo Alto, CA 94304-1185
<CAPTION>
Total Institutional PlanAhead
American AAdvantage Municipal Money Market Fund Fund Class Class
- - ----------------------------------------------- ---- ----- -----
<S> <C> <C> <C>
Merit Energy Co. % %
12222 Merit Dr., Suite 1500
Dallas, TX 75251
Goddess Agency Inc. % %
P.O. Box 9141
Seattle, WA 98109-0141
Itech Systems, LP % %
1013 Centre Rd.
Wilmington, DE 19805-1265
Roger A. & Joann Wallis % %
194 Olentangy Rd.
Powell, OH 43065-9694
Jerome Reed Schusterman Irrevocable Trust % %
P.O. Box 699
Tulsa, OK 74101-0699
</TABLE>
25
<PAGE> 202
<TABLE>
<S> <C> <C> <C>
Crowe & Dunlevy Profit Sharing and Thrift Plan % %
20 N. Broadway, Suite 1800
Oklahoma City, Oklahoma 73102-8203
Brenda J. Pyle % %
59 Crystal Court
Bel Air, MD 21014-5608
Crisostomo B. Garcia Trust % %
P.O. Box 9248
Rancho Santa Fe, CA 92067-4248
Jean-Marie & Marie Nadia Girardot % %
5328 N. Peachtree Rd.
Dunwoody, GA 30338-3102
<CAPTION>
Total Institutional PlanAhead
American AAdvantage U.S. Government Money Market Fund Fund Class Class
- - ----------------------------------------------------- ---- ----- -----
<S> <C> <C> <C>
Hare & Co. % % %
Bank of New York
One Wall Street
New York, NY 10286
Lone Star Airport Improvement Authority % %
First National Bank of Chicago
One First National Place
Chicago, Illinois 60670
Grapevine Industrial Development Corp. % %
First National Bank of Chicago
One First National Place
Chicago, Illinois 60670
British American Insurance Company % %
P.O. Box 1590
Dallas, Texas 75221-1590
Family Orthopedic Association Profit Sharing Plan % %
8953 Bath Road
Byron, MI 48418-9785
Leone C. Campbell Intervivo Trust % %
4000 N. Federal Highway, Suite 206
Boca Raton, FL 33431-45865
</TABLE>
OTHER INFORMATION
American Depository Receipts (ADRs), European Depository Receipts
(EDRs)-ADRs are depository receipts for foreign issuers in registered form
traded in U.S. securities markets, whereas, EDRs are in bearer form and traded
in European securities markets. These securities are not denominated in the same
currency as the securities into which they may be converted. Investing in ADRs
and EDRs involves greater risks than are normally present in domestic
investments. There is generally less publicly available information about
foreign companies and there may be less governmental regulation and supervision
of foreign stock exchanges, brokers and listed companies. In addition, such
companies may use different accounting and financial standards (and certain
currencies may become unavailable for transfer from a foreign currency),
resulting in a Fund's possible inability to convert 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.
26
<PAGE> 203
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 for these instruments and will,
if the guidelines so require, set aside cash, receivables, or liquid assets in a
segregated account with its custodian in the prescribed amount.
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 or 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.
27
<PAGE> 204
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 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.
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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.
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
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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, the
fact that there are contractual or legal restrictions on resale of such
investments to the general public or to certain institutions may not be
indicative of their liquidity.
Index Futures Contracts and Options on Index Futures Contracts-The Equity
500 Index Portfolio may invest in index futures contracts, options on index
futures contracts and options on securities indices.
Index Futures Contracts-U.S. futures contracts have been designed by
exchanges which have been designated "contracts markets" by the CFTC and must be
executed through a futures commission merchant, or brokerage firm, which is a
member of the relevant contract market. Futures contracts trade on a number of
exchange markets, and through their clearing corporations.
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.
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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 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.
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Options on Stock Indices-The Portfolio may purchase and write put and
call options on stock indices listed on stock exchanges. A stock index
fluctuates with changes in the market values of the stocks included in the
index. Options on stock indices generally are similar to options on stock except
that the delivery requirements are different. Instead of giving the right to
take or make delivery of stock at a specified price, an option on a stock index
gives the holder the right to receive a cash "exercise settlement amount" equal
to (a) the amount, if any, by which the fixed exercise price of the option
exceeds (in the case of a put) or is less than (in the case of a call) the
closing value of the underlying index on the date of exercise, multiplied by (b)
a fixed "index multiplier." 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.
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Mortgage-Backed Securities-Mortgage-backed securities consist of both
collateralized mortgage obligations and mortgage pass-through certificates.
Collateralized Mortgage Obligations ("CMOs")-CMOs and interests in
real estate mortgage investment conduits ("REMICs") are debt securities
collateralized by mortgages, or mortgage pass-through securities. CMOs divide
the cash flow generated from the underlying mortgages or mortgage pass-through
securities into different groups referred to as "tranches," which are then
retired sequentially over time in order of priority. The principal governmental
issuers of such securities are the Federal National Mortgage Association
("FNMA"), a government sponsored corporation owned entirely by private
stockholders and the Federal Home Loan Mortgage Corporation ("FHLMC"), a
corporate instrumentality of the United States created pursuant to an act of
Congress which is owned entirely by Federal Home Loan Banks. The issuers of CMOs
are structured as trusts or corporations established for the purpose of issuing
such CMOs and often have no assets other than those underlying the securities
and any credit support provided. A REMIC is a mortgage securities vehicle that
holds residential or commercial mortgages and issues securities representing
interests in those mortgages. A REMIC may be formed as a corporation,
partnership, or segregated pool of assets. The REMIC itself is generally exempt
from federal income tax, but the income from the mortgages is reported by
investors. For investment purposes, interests in REMIC securities are virtually
indistinguishable from CMOs.
Mortgage Pass-Through Certificates-Mortgage pass-through certificates
are issued by governmental, government-related and private organizations which
are 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 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
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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.
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
34
<PAGE> 211
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 IBCA, 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.
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.
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.
35
<PAGE> 212
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 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.
36
<PAGE> 213
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.
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.
37
<PAGE> 214
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
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, 1997 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.
38
<PAGE> 215
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 YEAR TOTAL RETURN
---- ------------ ---- ------------ ---- ------------
<S> <C> <C> <C> <C> <C>
1997 1973 -14.66% 1949 18.79%
1996 23.03% 1972 18.98% 1948 5.50%
1995 37.49% 1971 14.31% 1947 5.71%
1994 1.32% 1970 4.01% 1946 -8.07%
1993 9.99% 1969 -8.51% 1945 36.44%
1992 7.67% 1968 11.06% 1944 19.75%
1991 30.55% 1967 23.98% 1943 25.90%
1990 -3.17% 1966 -10.06% 1942 20.34%
1989 31.49% 1965 12.45% 1941 -11.59%
1988 16.81% 1964 16.48% 1940 -9.78%
1987 5.23% 1963 22.08% 1939 -0.41%
1986 18.47% 1962 -8.73% 1938 31.12%
1985 32.16% 1961 26.89% 1937 -35.03%
1984 6.27% 1960 0.47% 1936 33.92%
1983 22.51% 1959 11.96% 1935 47.67%
1982 21.41% 1958 43.36% 1934 -1.44%
1981 -4.91% 1957 -10.78% 1933 53.99%
1980 32.42% 1956 6.56% 1932 -8.19%
1979 18.44% 1955 31.56% 1931 -43.34%
1978 6.56% 1954 52.62% 1930 -24.90%
1977 -7.18% 1953 -0.99% 1929 -8.42%
1976 23.84% 1952 18.73% 1928 43.61%
1975 37.20% 1951 24.02% 1927 37.49%
1974 -26.47% 1950 31.71% 1926 11.62%
</TABLE>
A-1
<PAGE> 216
TABLE OF CONTENTS
<TABLE>
<S> <C>
Investment Restrictions..................................................................................................1
Trustees and Officers of the Trust and the AMR Trust.....................................................................5
Trustees and Officers of the Equity 500 Index Portfolio..................................................................8
Management, Administrative Services and Distribution Fees................................................................9
Approach to Stock Selection.............................................................................................10
Redemptions in Kind.....................................................................................................10
Investment Advisory Agreements..........................................................................................10
Portfolio Securities Transactions.......................................................................................11
Net Asset Value.........................................................................................................13
Tax Information.........................................................................................................13
Yield and Total Return Quotations.......................................................................................16
Description of the Trust................................................................................................20
Control Persons and 5% Shareholders.....................................................................................20
Other Information.......................................................................................................24
Financial Statements....................................................................................................36
Appendix A.............................................................................................................A-1
</TABLE>
<PAGE> 217
STATEMENT OF ADDITIONAL INFORMATION
AMERICAN AADVANTAGE FUNDS(R)
AMERICAN AADVANTAGE MILEAGE FUNDS(sm)
-- PLATINUM CLASS(sm) --
MARCH 1, 1998
The American AAdvantage Money Market Fund(sm) (the "Money Market Fund"),
the American AAdvantage Municipal Money Market Fund(sm) (the "Municipal Money
Market Fund"), and the American AAdvantage U.S. Government Money Market
Fund(sm), formerly the American AAdvantage U.S. Treasury Money Market Fund (the
"U.S. Government Money Market Fund"), are three separate investment portfolios
of the American AAdvantage Funds (the "AAdvantage Trust"). The American
AAdvantage Money Market Mileage Fund (the "Mileage Fund") is a separate
investment portfolio of the American AAdvantage Mileage Funds (the "Mileage
Trust") (individually, a "Fund" and, collectively, the "Funds"). The
AAdvantage Trust and the Mileage Trust (collectively the "Trusts") are
open-end, diversified management investment companies. Each Fund consists of
multiple classes of shares designed to meet the needs of different groups of
investors. This Statement of Additional Information ("SAI") relates only to
the Platinum Class of the Funds.
Each Fund seeks its investment objective by investing all of its
investable assets in a corresponding portfolio (individually, a "Portfolio"
and, collectively, the "Portfolios") of the AMR Investment Services Trust ("AMR
Trust") that has a similar name and an identical investment objective to the
investing Fund.
This SAI should be read in conjunction with the Platinum Class prospectus
dated March 1, 1998 ("Prospectus"), a copy of which may be obtained without
charge by calling (800) 388-3344.
This SAI 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 a corresponding Portfolio of the AMR Trust:
Notwithstanding any other limitation, the Fund may invest all of
its investable assets in an open-end management investment company
with substantially the same investment objectives, policies and
limitations as the Fund. For this purpose, "all of the Fund's
investable assets" means that the only investment securities that
will be held by the Fund will be the Fund's interest in the
investment company.
All other fundamental investment policies and the non-fundamental
policies of each Fund and its corresponding Portfolio are identical.
Therefore, although the following discusses the investment policies of each
Portfolio and the AMR Trust's Board of Trustees ("AMR Trust Board"), it applies
equally to each Fund and the AAdvantage Trust's Board of Trustees ("AAdvantage
Board") and the Mileage Trust's Board of Trustees ("Mileage Trust Board"), as
applicable.
In addition to the investment limitations noted in the Prospectus, the
following seven restrictions have been adopted by each Portfolio and may be
changed with respect to any 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 AAdvantage Board and the Mileage Trust Board in the same
proportion as those Fund shareholders who do, in fact, vote.
<PAGE> 218
No Portfolio 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 investment 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 AMR 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 and forward commitment transactions.
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 restriction applies to each
Portfolio and may be changed with respect to a Portfolio by a majority vote of
the AMR Trust Board: no Portfolio may 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.
All Portfolios may invest up to 10% of their total assets in the
securities of other investment companies to the extent permitted by law. A
Portfolio may incur duplicate advisory or management fees when investing in
another mutual fund.
TRUSTEES AND OFFICERS OF THE TRUSTS AND THE AMR TRUST
The AAdvantage Board, the Mileage Trust Board and the AMR Trust Board
provide broad supervision over each Trust's affairs. AMR Investment Services,
Inc. (the "Manager") is responsible for the management and the administration
of each Trust's assets, and each Trust's officers are responsible for the
respective Trust's operations. The Trustees and officers of the Trusts and the
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.
2
<PAGE> 219
<TABLE>
<CAPTION>
POSITION WITH
NAME, AGE AND ADDRESS EACH TRUST PRINCIPAL OCCUPATION DURING PAST 5 YEARS
--------------------- ------------- ----------------------------------------
<S> <C> <C>
William F. Quinn* (50) Trustee and President, AMR Investment Services, Inc. (1986-
President Present); Chairman, American Airlines Employees
Federal Credit Union (October 1989-Present);
Trustee, American Performance Funds (1990-1994);
Director, Crescent Real Estate Equities, Inc.
(1994 - Present); Trustee, American AAdvantage
Funds (1987-Present); Trustee, American
AAdvantage Mileage Funds (1995-Present).
Alan D. Feld (60) Trustee Partner, Akin, Gump, Strauss, Hauer & Feld, LLP
1700 Pacific Avenue (1960-Present)#; Director, Clear Channel
Suite 4100 Communications (1984-Present); Director,
Dallas, Texas 75201 CenterPoint Properties, Inc. (1994-Present);
Trustee, American AAdvantage Funds (1993-
Present); Trustee, American AAdvantage
Funds(1996- Present); Trustee American
AAdvantage Mileage Funds (1996-Present).
Ben J. Fortson (65) Trustee President and CEO, Fortson Oil Company (1958-
301 Commerce Street Present); Director, Kimbell Art Foundation
Suite 3301 (1964-Present); Director, Burnett Foundation
Fort Worth, Texas 76102 (1987-Present); Honorary Trustee, Texas
Christian University (1986-Present); Trustee,
American AAdvantage Funds (1996-Present);
Trustee, American AAdvantage Mileage Funds
(1996-Present).
John S. Justin (81) Trustee Chairman and Chief Executive Officer, Justin
2821 West Seventh Street Industries, Inc. (a diversified holding company)
Fort Worth, Texas 76107 (1969-Present); 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 Funds (1989-Present); Trustee,
American AAdvantage Mileage Funds (1995-
Present).
Stephen D. O'Sullivan* (62) Trustee Consultant (1994-Present); Vice President and
Controller (1985-1994), American Airlines, Inc.;
Trustee, American AAdvantage Funds (1987-
Present); Trustee, American AAdvantage Mileage
Funds (1995-Present).
</TABLE>
3
<PAGE> 220
<TABLE>
<CAPTION>
POSITION WITH
NAME, AGE AND ADDRESS EACH TRUST PRINCIPAL OCCUPATION DURING PAST 5 YEARS
--------------------- ------------- ----------------------------------------
<S> <C> <C>
Roger T. Staubach (56) Trustee Chairman of the Board and Chief Executive
6750 LBJ Freeway Officer of The Staubach Company (a commercial
Dallas, TX 75240 real estate company) (1982-present); 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; Trustee,
Institute for Aerobics Research; Member of
Executive Council, Daytop/Dallas; former
quarterback of the Dallas Cowboys professional
football team; Trustee, American AAdvantage
Funds (1995-Present); Trustee, American
AAdvantage Mileage Funds (1995-Present).
Kneeland Youngblood, M.D. (41) Trustee Physician (1982-Present); President, Youngblood
2305 Cedar Springs Road Enterprises, Inc. (a health care investment and
Suite 401 management firm) (1983-Present); Trustee,
Dallas, Texas 75201 Teachers Retirement System of Texas (1993-
Present); Director, United States Enrichment
Corporation (1993-Present), Director, Just For
the Kids (1995-Present); Member, Council on
Foreign Relations (1995-Present); Trustee,
=
American AAdvantage Funds (1996-Present);
Trustee, American AAdvantage Mileage Funds
(1996-Present).
Nancy A. Eckl (35) Vice President Vice President, AMR Investment Services, Inc.
(December 1990-Present).
Michael W. Fields (44) Vice President Vice President, AMR Investment Services, Inc.
(August 1988-Present).
Barry Y. Greenberg (34) Vice President Director, Legal and Compliance, AMR Investment
and Assistant Services, Inc. (1995-Present); Branch Chief
Secretary (1992-1995) and Staff Attorney (1988-1992),
Securities and Exchange Commission.
Rebecca L. Harris (31) Treasurer Director of Finance (1995-Present), Controller
(1991-1995), AMR Investment Services, Inc.
John B. Roberson (39) Vice President Vice President, AMR Investments Services, Inc.
(1991-Present).
Thomas E. Jenkins, Jr. (31) Assistant Senior Compliance Analyst, AMR Investment
Secretary Services, Inc. (1996-Present); Staff Accountant
(1994-1996) and Compliance Examiner (1991-1994),
Securities and Exchange Commission.
</TABLE>
4
<PAGE> 221
<TABLE>
<CAPTION>
POSITION WITH
NAME, AGE AND ADDRESS EACH TRUST PRINCIPAL OCCUPATION DURING PAST 5 YEARS
--------------------- ------------- ----------------------------------------
<S> <C> <C>
Adriana R. Posada (43) Assistant Senior Compliance Analyst (1996-Present) and
Secretary Compliance Analyst (1993- 1996), AMR Investment
Services, Inc.; Special Sales Representative,
American Airlines, Inc. (1991-1993).
Clifford J. Alexander (54) Secretary Partner, Kirkpatrick & Lockhart LLP (law firm)
1800 Massachusetts Ave. NW
Washington, D.C. 20036
Robert J. Zutz (45) Assistant Partner, Kirkpatrick & Lockhart LLP (law firm)
1800 Massachusetts Ave. NW Secretary
Washington, D.C. 20036
</TABLE>
# 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 each Trust and the 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 Trusts and the AMR Trust, the
Independent Trustees and their spouses receive free air travel from American
Airlines, Inc., an affiliate of the Manager. The Trusts and the AMR Trust do
not pay for these travel arrangements. However, the Trusts and the AMR Trust
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, whom 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, 1997.
<TABLE>
<CAPTION>
Pension or
Retirement
Aggregate Aggregate Benefits
Compensation Compensation Accrued as Part Estimated Total
From the From the of the Annual Compensation
AAdvantage Mileage Trusts' Benefits Upon From AAdvantage
Name of Trustee Trust Trust Expenses Retirement Funds Complex
--------------- ------------ ------------ --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
William F. Quinn $ 0 $ 0 $ 0 $ 0 $ 0
Alan D. Feld $ 15,962 $ 15,962 $ 0 $ 0 $ 63,850
Ben J. Fortson $ 6,802 $ 6,802 $ 0 $ 0 $ 27,209
John S. Justin $ 225 $ 225 $ 0 $ 0 $ 901
Stephen D. O'Sullivan $ 493 $ 493 $ 0 $ 0 $ 1,973
Roger T. Staubach $ 8,269 $ 8,269 $ 0 $ 0 $ 33,076
Kneeland Youngblood, M.D. $ 9,525 $ 9,525 $ 0 $ 0 $ 38,099
</TABLE>
5
<PAGE> 222
MANAGEMENT, ADMINISTRATIVE SERVICES AND DISTRIBUTION FEES
As described more fully in the Prospectus, the Manager is paid a
management fee as compensation for its administrative services, for paying
investment advisory fees and for providing the Portfolios with advisory and
asset allocation services. Management fees for the AAdvantage Trust for the
fiscal years ended October 31 were approximately as follows: 1995, $7,603,000
of which approximately $3,985,000 was paid by the Manager to the other
investment advisers; 1996, $10,853,000 of which approximately $5,403,000 was
paid by the Manager to the other investment advisers; and 1997, $13,730,443 of
which approximately $7,061,014 was paid by the Manager to the other investment
advisers. Management fees in the amount of approximately $29,000, $44,000 and
$7,309 were waived by the Manager during the fiscal years ended October 31,
1995 , 1996 and 1997, respectively. These amounts include payments by
Portfolios in the AAdvantage Trust other than the Funds.
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 AAdvantage Trust for the fiscal years ended October 31 were approximately
as follows: 1995, $2,731,000; 1996, $2,893,400; and 1997, $4,538,345.
Administrative service fees in the amount of approximately $9,000 were waived
by the Manager during the fiscal year ended October 31, 1995. These amounts
include payments by Portfolios in the AAdvantage Trust other than the Funds.
Brokers Transaction Services, Inc. ("BTS"), is the distributor of the
Funds' shares and, as such, receives an annualized fee of $50,000 from the
Manager for distributing the shares of the Trusts.
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.
NET ASSET VALUE
It is the policy of the 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 each Fund's
corresponding Portfolio 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 Funds' corresponding Portfolios 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 AMR Trust Board to be of high quality with minimal credit
risks. The corresponding portfolios of the Money Market Funds may invest in
issuers or instruments that at the time of purchase have received the highest
short-term rating by two Rating Organizations, such as "D-1" by Duff & Phelps
and "F-1" by Fitch IBCA, Inc., and have received the next highest short-term
rating by other Rating Organizations, such as "A-2" by Standard & Poors and
"P-2" by Moody's Investors Service, Inc. See "Ratings of Municipal
Obligations" and "Ratings of Short-Term Obligations" for further information
concerning ratings.
6
<PAGE> 223
TAX INFORMATION
TAXATION OF THE FUNDS
To qualify for treatment as a regulated investment company ("RIC") under
the Internal Revenue Code of 1986, as amended ("Code"), each Fund (each of
which is treated as a separate corporation for these purposes) must, among
other requirements:
Derive at least 90% of its gross income each taxable year from dividends,
interest, payments with respect to securities loans and gains from the
sale or other disposition of securities or certain other income;
Diversify its investments in securities within certain statutory limits;
and
Distribute annually to its shareholders at least 90% of its investment
company taxable income (generally, taxable net investment income plus net
short-term capital gain) plus, in the case of the Municipal Money Market
Fund, net interest income excludable from gross income under Section
103(a) of the Code ("Distribution Requirement").
Each Fund has received either a ruling from the Internal Revenue Service
("IRS") or an opinion of counsel that the Fund, as an investor in its
corresponding Portfolio, is deemed to own a proportionate share of the
Portfolio's assets and to earn the income on that share for purposes of
determining whether the Fund satisfies the income and diversification
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
Each Portfolio has received a ruling from the IRS or an opinion of
counsel to the effect that, among other things, each Portfolio is or should be
classified as a separate partnership for federal income tax purposes and is not
a "publicly traded partnership." As a result, each Portfolio is not or should
not be subject to federal income tax; instead, each investor in a Portfolio,
such as a Fund, is required to take into account in determining its federal
income tax liability its share of the Portfolio's income, gains, losses,
deductions, credits and tax preference items, without regard to whether it has
received any cash distributions from the Portfolio.
Because, as noted above, each Fund is deemed to own a proportionate share
of its corresponding Portfolio's assets and to earn a proportionate share of
its corresponding Portfolio's 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.
The Municipal Money Market Fund's corresponding Portfolio may acquire
zero coupon or other securities issued with original issue discount. As an
investor in the Portfolio that holds those securities, the Municipal
7
<PAGE> 224
Money Market 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, the Municipal
Money Market 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 Municipal Money Market
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 Municipal Money
Market 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 held for less than three months that it might wish to
sell in the ordinary course of its portfolio management.
TAXATION OF THE FUNDS' SHAREHOLDERS
Distributions by the Municipal Money Market Fund of the amount by which
the Fund's share of its corresponding Portfolio's income on tax-exempt
securities exceeds certain amounts disallowed as deductions, designated by the
Fund as "exempt-interest dividends," generally may be excluded from gross
income by its shareholders. Dividends paid by the Municipal Money Market 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 Municipal Money Market Fund intends to continue to satisfy this
requirement. The aggregate dividends excludable from shareholders' gross
income may not exceed the Municipal Money Market Fund's net tax-exempt income.
The shareholders' treatment of dividends from the Municipal Money Market Fund
under state and local 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 Municipal Money Market 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.
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
The Platinum Class of the AAdvantage Trust commenced operations on
November 7, 1995 and the Platinum Class of the Mileage Trust commenced
operations on January 29, 1996. For purposes of advertising performance, and
in accordance with Securities and Exchange Commission staff interpretations,
the Funds in the AAdvantage Trust have adopted the performance of the
Institutional Class of the Funds in the AAdvantage Trust for periods prior to
the inception date. The Mileage Fund has adopted the performance of the
American AAdvantage Money Market Mileage Fund - Mileage Class for periods prior
to its inception date. The performance results for the Platinum Class will be
lower, because the figures for the other classes (except for the Mileage
8
<PAGE> 225
Fund) do not reflect the 12b-1 fees, Administrative Services Plan fees or other
class expenses that will be borne by the Platinum Class.
A quotation of yield on shares of the 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 Funds, and the applicable Fund'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 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. Income other than
investment income and 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.
However, this calculation includes the aggregate fees and other expenses
that are charged to all shareholder accounts in 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 Fund will compute the "base period return" in the same manner
used to compute the "current yield" over a 7 calendar-day period as
described above. One is then added to the base period return and the sum
is raised to the 365/7 power. One is subtracted from the result,
according to the following formula:
EFFECTIVE YIELD = [ (BASE PERIOD RETURN + 1)365/7 ] - 1
The current and effective yields for the Funds are as follows:
<TABLE>
<CAPTION>
Current yield for Effective yield for
Current daily the seven-day period the seven-day period
yield as of ended ended
Platinum Class October 31, 1997 October 31, 1997 October 31, 1997
-------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
Money Market Fund 4.83% 4.82% 4.94%
Municipal Money Market Fund 2.79% 2.79% 2.83%
U.S. Government Money Market Fund 4.72% 4.64% 4.75%
Mileage Fund 4.69% 4.68% 4.79%
</TABLE>
The Municipal Money Market Fund also may advertise a tax-equivalent
current and effective yield. The tax- equivalent yields are calculated as
follows:
CURRENT YIELD/(1 - APPLICABLE TAX RATE) = CURRENT TAX-EQUIVALENT YIELD
EFFECTIVE YIELD/(1 - APPLICABLE TAX RATE) = EFFECTIVE TAX-EQUIVALENT YIELD
9
<PAGE> 226
Based on these formulas, the current and effective tax-equivalent yields
for the Municipal Money Market Fund for the seven day period ending October 31,
1997 were 4.62% and 4.69%, respectively (based upon a 39.6% personal tax
rate).
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
where "P" is a hypothetical initial payment of $1,000; "T" is the average
annual total return for the Fund; "n" is the number of years involved; and
"ERV" is the ending redeemable value of a hypothetical $1,000 payment made in
the Fund at the beginning of the investment period covered.
Based on this formula, annualized total returns were as follows for the
periods indicated:
<TABLE>
<CAPTION>
For the period
For the one- For the five- from commencement
year period year period For the ten-year of operations
ended October ended October period ended through October
31, 1997(1) 31, 1997(1) October 31, 31, 1997(1)
1997(1)
<S> <C> <C> <C> <C>
Platinum Class
Money Market Fund 4.88% 4.59% 5.95% 5.98%
Municipal Money Market Fund 2.82% N/A(2) N/A(2) 2.97%
U. S. Government Money Mkt. Fund (3) 4.63% 4.35% N/A(2) 4.25%
Mileage Fund 4.72% 4.36% 5.81% 5.84%
</TABLE>
(1) Performance of the Funds of the AAdvantage Trust represents total returns
achieved by the Institutional Class from the inception date of each Fund up to
the inception date of the Platinum Class on 11/7/95. Performance of the
Mileage Fund represents total return of the Money Market Fund-Institutional
Class (9/1/87-10/31/91); the Money Market Fund- Mileage Class
(11/1/91-10/31/95); the Money Market Mileage Fund-Mileage Class
(11/1/95-1/28/96) and the Money Market Mileage Fund-Platinum Class since its
1/29/96 inception. Total returns have not been adjusted for any difference
between the fees and expenses of each Fund and the historical fees and expenses
of the predecessor Funds. Inception dates are: Money Market Fund-Institutional
Class, 9/1/87; Municipal Money Market Fund-Institutional Class, 11/10/93; U.S.
Government Money Market Fund-Institutional Class, 3/1/92.
(2) The Fund was not operational during this period.
(3) Prior to March 1, 1997, the U.S. Government Money Market Fund was known as
the U.S. Treasury Money Market Fund and operated under different investment
policies.
Each Fund also may use "aggregate" total return figures for various
periods which represent the cumulative change in value of an investment in a
Fund for the specific period. Such total returns reflect changes in share
prices of a Fund and assume reinvestment of dividends and distributions.
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 Fund also may 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.
10
<PAGE> 227
Advertisements for the Funds may mention that the Funds offer a variety
of investment options. They also may 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 also may compare the historical rate of return of different
types of investments. Information concerning broker-dealers who sell the Funds
also may 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 and the American AAdvantage Mileage 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.
Each Fund may advertise the standard deviation of its returns for various
time periods and compare its standard deviation to that of various indices.
Standard deviation of returns over time is a measure of volatility. It
indicates the spread of returns about their central tendency or mean. In
theory, a Fund that is more volatile should receive a higher return in exchange
for taking extra risk. Standard deviation is a well-accepted statistic to
gauge the riskiness of an investment strategy and measure its historical
volatility as a predictor of risk, although the measure is subject to time
selection bias.
DESCRIPTION OF THE TRUST
The AAdvantage Trust, organized on January 16, 1987 and the Mileage
Trust, organized on February 22, 1995, (originally named American AAdvantage
Funds II) are entities 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,
each 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 Trusts 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 Platinum Class was created as an
investment vehicle for cash balances of customers of certain broker-dealers.
CONTROL PERSONS AND 5% SHAREHOLDERS
There are no persons deemed to control any Funds by virtue of their
ownership of more than 25% of the outstanding shares of a Fund as of January
31, 1998:
OTHER INFORMATION
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.
11
<PAGE> 228
Cash Equivalents-Cash equivalents include certificates of deposit, bearer
deposit notes, bankers' acceptances, government obligations, commercial paper,
short-term corporate debt securities and repurchase agreements.
Certificates of Deposit-Certificates of deposit are issued against funds
deposited in an eligible bank (including its domestic and foreign branches,
subsidiaries and agencies), are for a definite period of time, earn a specified
rate of return and are normally negotiable.
Commercial Paper-Commercial paper refers to promissory notes representing
an unsecured debt of a corporation or finance company with a fixed maturity of
no more than 270 days. A variable amount master demand note (which is a type
of commercial paper) represents a direct borrowing arrangement involving
periodically fluctuating rates of interest under a letter agreement between a
commercial paper issuer and an institutional lender pursuant to which the
lender may determine to invest varying amounts.
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.
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.
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, the fact that there are contractual or legal restrictions on resale of
such investments to the general public or to certain institutions may not be
indicative of their liquidity.
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 also may 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.
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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 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 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 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.
Mortgage-Backed Securities-Mortgage-backed securities consist of both
collateralized mortgage obligations and mortgage pass-through certificates.
Collateralized Mortgage Obligations ("CMOs")-CMOs and interests in real
estate mortgage investment conduits ("REMICs") are debt securities
collateralized by mortgages, or mortgage pass-through securities. CMOs divide
the cash flow generated from the underlying mortgages or mortgage pass-through
securities into different groups referred to as "tranches," which are then
retired sequentially over time in order of priority. The principal governmental
issuers of such securities are the Federal National Mortgage Association
("FNMA"), a government sponsored corporation owned entirely by private
stockholders and the Federal Home Loan Mortgage Corporation ("FHLMC"), a
corporate instrumentality of the United States created pursuant to an act of
Congress which is owned entirely by Federal Home Loan Banks. The issuers of CMOs
are structured as trusts or corporations established for the purpose of issuing
such CMOs and often have no assets other than those underlying the securities
and any credit support provided. A REMIC is a mortgage securities vehicle that
holds residential or commercial mortgages and issues securities representing
interests in those mortgages. A REMIC may be formed as a corporation,
partnership, or segregated pool of assets. The REMIC itself is generally exempt
from federal income tax, but the income from the mortgages is reported by
investors. For investment purposes, interests in REMIC securities are virtually
indistinguishable from CMOs.
Mortgage Pass-Through Certificates-Mortgage pass-through certificates are
issued by governmental, government- related and private organizations which are
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
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because of the size of the market and the active participation in the secondary
market of security dealers and a variety of investors.
(2) FHLMC Mortgage Participation Certificates ("Freddie Macs")-Freddie
Macs represent interests in groups of specified first lien residential
conventional mortgages underwritten and owned by the FHLMC. Freddie Macs
entitle the holder to timely payment of interest, which is guaranteed by the
FHLMC. The FHLMC guarantees either ultimate collection or timely payment of
all principal payments on the underlying mortgage loans. In cases where the
FHLMC has not guaranteed timely payment of principal, the FHLMC may remit the
amount due because of its guarantee of ultimate payment of principal at any
time after default on an underlying mortgage, but in no event later than one
year after it becomes payable. Freddie Macs are not guaranteed by the United
States or by any of the Federal Home Loan Banks and do not constitute a debt or
obligation of the United States or of any Federal Home Loan Bank. The
secondary market for Freddie Macs is highly liquid because of the size of the
market and the active participation in the secondary market of the FHLMC,
security dealers and a variety of investors.
(3) FNMA Guaranteed Mortgage Pass-Through Certificates ("Fannie
Maes")-Fannie Maes represent an undivided interest in a pool of conventional
mortgage loans secured by first mortgages or deeds of trust, on one family or
two to four family, residential properties. The FNMA is obligated to
distribute scheduled monthly installments of principal and interest on the
mortgages in the pool, whether or not received, plus full principal of any
foreclosed or otherwise liquidated mortgages. The obligation of the FNMA under
its guarantee is solely its obligation and is not backed by, nor entitled to,
the full faith and credit of the United States.
(4) Mortgage-Related Securities Issued by Private Organizations-Pools
created by non-governmental issuers generally offer a higher rate of interest
than government and government-related pools because there are no direct or
indirect government guarantees of payments in such pools. However, timely
payment of interest and principal of these pools is often partially supported
by various enhancements such as over-collateralization and senior/subordination
structures and by various forms of insurance or guarantees, including
individual loan, title, pool and hazard insurance. The insurance and
guarantees are issued by government entities, private insurers or the mortgage
poolers. Although the market for such securities is becoming increasingly
liquid, securities issued by certain private organizations may not be readily
marketable.
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.
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The two highest Moody's Investors Service, Inc. ("Moody's") ratings for
long-term obligations (or issuers thereof) are Aaa and Aa. 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. 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 two highest Standard & Poor's ratings for long-term obligations are
AAA and AA. 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.
Duff & Phelps' two highest ratings for long-term obligations are AAA and
AA. 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.
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 two highest ratings for
long-term obligations are AAA and AA. 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.
Fitch IBCA, 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.
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
also may 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.
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
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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.
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 presents a
minimum risk of bankruptcy during the term of the agreement based upon
guidelines that periodically are reviewed by the AMR Trust 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 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
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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.
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.
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.
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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.
FINANCIAL STATEMENTS
The American AAdvantage Money Market Funds' and the American AAdvantage
Mileage Funds' Annual Reports to Shareholders for the fiscal year ended October
31, 1997, as audited by Ernst & Young, LLP, are supplied with the SAI, and the
financial statements and accompanying notes appearing therein are incorporated
by reference in this SAI.
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TABLE OF CONTENTS
<TABLE>
<S> <C>
Investment Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Trustees and Officers of the Trust and the AMR Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Management, Administrative Services and Distribution Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Redemptions in Kind . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Net Asset Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Tax Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Yield and Total Return Quotations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Description of the Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Control Persons and 5% Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
</TABLE>
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STATEMENT OF ADDITIONAL INFORMATION
AMERICAN AADVANTAGE SHORT-TERM INCOME FUND
MARCH 1, 1998
The American AAdvantage Short-Term Income Fund (the "Fund") is a no-load,
non-diversified portfolio of the American AAdvantage Funds (the "Trust"). The
Fund consists of one class of shares. The Trust currently consists of ten
separate investment portfolios, each with distinct investment objectives,
purposes and strategies. This Statement of Additional Information ("SAI")
pertains solely to the Fund and is authorized for distribution to prospective
investors only if preceded or accompanied by a current Prospectus ("Prospectus")
dated March 1, 1998. This SAI should be read in conjunction with the Prospectus
of the Fund . A Prospectus may be obtained without charge by calling AMR
Investment Services, Inc. (the "Manager") at (817) 967-3509.
INVESTMENT RESTRICTIONS
In addition to the investment limitations noted in the Prospectus, the
following restrictions have been adopted by the Fund and may be changed only by
the majority vote of the Fund's outstanding shares, which as used herein means
the lesser of (a) 67% of the shares of the Fund present at the shareholders'
meeting if the holders of more than 50% of the shares are present and
represented at the meeting or (b) more than 50% of the shares of the Fund. The
Fund may not:
1. Purchase or sell real estate or real estate limited partnership
interests, provided, however, that the Fund 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 that the Fund
may purchase and sell financial futures contracts (such as interest rate,
bond index and foreign currency futures contracts), options (such as
options on securities, indices, foreign currencies and futures
contracts), forward currency contracts, swaps, caps, collars and floors,
and may engage in transactions in foreign currencies and "when-issued"
securities.
3. Engage in the business of underwriting securities issued by others
except to the extent that, in connection with disposition of securities,
the Fund may be deemed an underwriter under federal securities laws.
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
the Fund may lend its portfolio securities to broker-dealers or other
institutional investors in accordance with the guidelines stated in the
Prospectus and SAI.
5. Purchase from or sell portfolio securities to its officers, Trustees
or other "interested persons" of the AMR 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 Fund may purchase and sell
financial futures contracts (such as interest rate, bond index and
foreign currency futures contracts), options (such as options on
securities, indices, foreign currencies and futures contracts), forward
currency contracts, swaps, caps, collars and floors, and engage in
when-issued securities and forward commitment transactions.
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
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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 restriction applies to the Fund
and may be changed with respect to the Fund only by a majority vote of the Board
of Trustees of the Trust ("Board"): the Fund may not purchase securities on
margin or effect short sales (except that the Fund may (i) obtain such
short-term credits as may be necessary for the clearance of purchases or sales
of securities) and (ii) make margin deposits and short sales and maintain short
positions in connection with its use of options, futures contracts, forward
currency contracts, swaps, caps, collars and floors and options on futures
contracts.
2. Invest more than 10% of its total assets in the securities of other
investment companies.
TRUSTEES AND OFFICERS
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
are listed below together with their principal occupations during the past five
years. All Trustees are also Trustees of the AMR Investment Services Trust and
the American AAdvantage Mileage Funds. All officers of the Trust are also
officers of the AMR Investment Services Trust and the American AAdvantage
Mileage Funds. 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, ADDRESS AND AGE THE TRUST PRINCIPAL OCCUPATION DURING PAST 5 YEARS
- - --------------------- --------- ----------------------------------------
<S> <C> <C>
William F. Quinn*(50) Trustee and President, AMR Investment Services, Inc. (November
President 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(60) 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).
</TABLE>
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<PAGE> 238
<TABLE>
<S> <C> <C>
Ben J. Fortson(65) Trustee President and CEO, Fortson Oil Company
301 Commerce Street (1958-Present); Director, Kimbell Art Foundation
Suite 3301 (1964-Present); Director, Burnett Foundation
Fort Worth, Texas 76102 (1987-Present); Honorary Trustee, Texas Christian
University (1986-Present); Trustee, American
AAdvantage Mileage Funds (1996-Present).
John S. Justin(80) Trustee Chairman and Chief Executive Officer, Justin
2821 West Seventh Street Industries, Inc. (a diversified holding company)
Fort Worth, Texas 76107 (1969-Present); 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*(62) Trustee Consultant (July 1994-Present); Vice President and
5730 E 105th Street Controller (April 1985-June 1994), American Airlines,
Tulsa, Oklahoma 74137 Inc.; Trustee, American AAdvantage Mileage Funds
(1995-Present).
Roger T. Staubach(56) Trustee Chairman of the Board and Chief Executive Officer of
6750 LBJ Freeway The Staubach Company (a commercial real estate
Dallas, Texas 75240 company) (1983-present); 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; Trustee, Institute for Aerobic 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.(41) Trustee Physician (1982-Present); President (1983-Present),
2305 Cedar Springs Road Youngblood Enterprises, Inc. (a health care
Suite 401 investment and management firm); Trustee, Teachers
Dallas, Texas 75201 Retirement System of Texas (1993-Present); Director,
United States Enrichment Corporation (1993-Present),
Director, Just For the Kids (1995-Present); Member,
Council on Foreign Relations (1995-Present);
Trustee, American AAdvantage Mileage Funds
(1996-Present).
</TABLE>
3
<PAGE> 239
<TABLE>
<S> <C> <C>
Nancy A. Eckl(35) Vice President Vice President AMR Investment Services,
Inc.(1990-Present).
Michael W. Fields(44) Vice President Vice President, AMR Investment Services, Inc.
(1988-Present).
Barry Y. Greenberg(34) Vice President and Director - Legal and Compliance, AMR Investment
Assistant Secretary Services, Inc. (1995-Present); Branch Chief (1992-
1995) and Staff Attorney (1988- 1992), Securities and
Exchange Commission.
Rebecca L. Harris(31) Treasurer Director of Finance, 1995-Present), Controller,
(1991- 1995), AMR Investment Services, Inc.
John B. Roberson(39) Vice President Vice President (1991-Present), AMR Investment
Services, Inc.
Thomas E. Jenkins, Jr.(31) Assistant Secretary Senior Compliance Analyst, AMR Investment Services,
Inc. (1996-Present); Staff Accountant (1994-1996) and
Compliance Examiner (1991-1994), Securities and
Exchange Commission.
Adriana R. Posada(43) Assistant Secretary Senior Compliance Analyst (1996-Present) and
Compliance Analyst (1993-Present), AMR Investment
Services, Inc.; Special Sales Representative,
American Airlines, Inc. (1991-1993).
Clifford J. Alexander(54) Secretary Partner, Kirkpatrick & Lockhart LLP (law firm)
Robert J. Zutz(45) Assistant Secretary Partner, Kirkpatrick & Lockhart LLP (law firm)
</TABLE>
# 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 the Fund.
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)
- - ---------------------------
(1) Messrs. Feld and Fortson and Dr. Youngblood did not serve as Trustees during
this period.
4
<PAGE> 240
<TABLE>
<CAPTION>
Pension or Retirement
Aggregate Benefits Accrued as Total Compensation From AAdvantage
Compensation Part of the Estimated Annual Fund Complex
Name of Trustee From the Trust Trust's Expenses Benefits Upon Retirement
--------------- -------------- ---------------- ------------- ----------
<S> <C> <C> <C> <C>
William F. Quinn $ $0 $0 $
Alan D. Feld $15,962 $0 $0 $63,850
Ben J. Fortson $6,802 $0 $0 $27,209
John S. Justin $225 $0 $0 $901
Stephen D. O'Sullivan $493 $0 $0 $1,973
Roger T. Staubach $8,269 $0 $0 $33,076
Kneeland Youngblood, M.D. $9,525 $0 $0 $38,099
</TABLE>
DISTRIBUTION FEES
Brokers Transaction Services, Inc. ("BTS"), is the distributor of the
Trust's Shares and, as such, receives an annualized fee of $50,000 from the
Manager for distributing the Shares of the Trust and the American AAdvantage
Mileage Funds.
PORTFOLIO SECURITIES TRANSACTIONS
The Manager provides, in substance, that in executing portfolio
transactions and selecting brokers or dealers, the principal objective of the
Manager 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, the Manager shall consider
all factors it deems relevant, including the breadth of the market in the
security, the price of the security and the financial condition and execution
capability of the broker or dealer, for the specific transaction and on a
continuing basis.
In selecting brokers or dealers to execute particular transactions, the
Manager is authorized to consider "brokerage and research services" (as those
terms are defined in Section 28(e) of the Securities Exchange Act of 1934), the
provision of statistical quotations (including the quotations necessary to
determine the Fund's net asset value), the sale of Trust shares by such broker
or the servicing of Trust shareholders by such broker, and other information
provided to the Fund and to the
5
<PAGE> 241
Manager, provided, however, that the Manager determines that it has received the
best net price and execution available.
NET ASSET VALUE
The net asset value of the Fund is computed by dividing the value of the
Fund's assets, less its liabilities, by the number of shares outstanding. The
net asset value is computed each day on which shares are offered and purchase or
redemption orders are accepted in accordance with procedures outlined in the
Prospectus.
The Fund's investment grade short-term obligations with 60 days or less
to maturity are valued based on the amortized cost valuation technique. 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.
TAX INFORMATION
To qualify for treatment as a regulated investment company under the
Internal Revenue Code of 1986, as amended (the "Code"), the Fund (which is
treated as a separate corporation for these purposes) must, among other
requirements:
- Derive at least 90% of its gross income each taxable year from
dividends, interest, payments with respect to securities loans and
gains from the sale or other disposition of securities or foreign
currencies or certain other income, including gains from options,
futures and forward contracts ("Income Requirement");
- Diversify its investments in securities within certain statutory
limits; and
- Distribute annually to its shareholders at least 90% of its
investment company income (generally, net investment income plus net
short-term capital gain and gains from certain foreign currency
transactions).
Hedging strategies, such as entering into forward contracts, swap
transactions and purchasing and selling options and futures contracts, involve
complex rules that determine for income tax purposes the amount, character and
timing of recognition of gains and losses the Fund realizes in connection
therewith. Income from foreign currencies (with the exception of certain gains
that may be excluded by future regulations), and income from options, futures
and forward contracts derived with respect to the Fund's business of investing
in securities or foreign currencies, qualify as allowable income under the
Income Requirement. However, income from the disposition of options or futures
(other than those on foreign currencies) will be subject to the Short-Short
Limitation if they are held for less than three months. Income from the
disposition of foreign currencies, (and options, futures and forward contracts
on foreign currencies), that are not directly related to the Fund's principal
business of investing in securities (or options and futures with respect to
securities) also will be subject to the Short-Short Limitation if held for less
than three months.
6
<PAGE> 242
Interest received by the Fund 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.
The foregoing is only a summary of some of the important federal tax
considerations affecting the Fund and its 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 and local
taxes.
YIELD AND TOTAL RETURN QUOTATIONS
A quotation of yield of the Fund 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 Fund, and the Fund'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 advertised yield for the Fund is computed by dividing the net
investment income earned during a 30-day (or one month) period less 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
Fund by the maximum offering price per share on the last day of the period,
according to the following formula:
6
YIELD = 2((a-b)/(c*d)) +1) - 1
where, with respect to the 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; "c" is the average daily number of shares
outstanding during the period that were entitled to receive dividends; and "d"
is the maximum offering price per share on the last day of the period.
The Fund may also advertise a monthly distribution rate. The distribution
rate gives the return of the Fund based solely on the dividend payout if someone
was entitled to the dividends for an entire month. A monthly distribution rate
is calculated from the following formula:
MONTHLY DISTRIBUTION RATE = A/P*(365/n)
where, "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. 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 the Fund would be calculated by equating
an initial amount invested in the Fund to the ending redeemable value, according
to the following formula:
n
P(1 + T) = ERV
where "P" is a hypothetical initial payment of $1,000; "T" is the average annual
total return for the Fund; "n" is the number of years involved; and "ERV" is the
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<PAGE> 243
ending redeemable value of a hypothetical $1,000 payment made in the Fund at the
beginning of the investment period covered.
The Fund may also use "aggregate" total return figures for various
periods which represent the cumulative change in value of an investment in the
Fund for the specific period. Such total returns reflect changes in share prices
of the Fund and assume reinvestment of dividends and distributions.
In reports or other communications to shareholders or in advertising
material, the Fund may from time to time compare its performance with that of
other mutual funds in rankings prepared by IBC Financial Data, Inc., Lipper
Analytical Services, Inc., Morningstar, Inc., and other similar independent
services which monitor the performance of mutual funds, or publications such as
the "New York Times" and the "Wall Street Journal". The Fund may also compare
its performance with various indices prepared by reporting services such as
those of Morgan Stanley or Lehman Brothers.
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.
OTHER INFORMATION
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 bank holding company corporate debt.
Bankers' Acceptances-Bankers' acceptances are short-term credit
instruments used to finance the import, export, transfer or storage of goods.
They are termed "accepted" when a bank guarantees their payment at maturity.
Certificates of Deposit-Certificates of deposit are issued against funds
deposited in an eligible bank (including its domestic and foreign branches,
subsidiaries and agencies), are for a definite period of time, earn a specified
rate of return and are normally negotiable.
Commercial Paper-Commercial paper refers to promissory notes representing
unsecured debt of a corporation or finance company with a fixed maturity of no
more than 270 days.
Eurodollar and Yankeedollar Obligations-Eurodollar obligations are U.S.
dollar obligations issued outside the United States by domestic or foreign
branches of U.S. banks. Yankeedollar obligations are U.S. dollar obligations
issued inside the United States by foreign entities.
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
8
<PAGE> 244
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 Fund must receive at least 100% collateral in the form of
cash or cash equivalents, securities of the U.S. Government, its agencies or
instrumentalities, and 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 Fund must be able to
terminate the loan after notice, at any time; (4) the Fund 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 Fund 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
Board must be able to terminate the loan and vote proxies or enter into an
alternative arrangement with the borrower to enable the Board 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 Board 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 SAI 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 Board.
Mortgage-backed Securities-Mortgage-backed securities consist of both
collateralized mortgage obligations and mortgage pass-through certificates.
Collateralized Mortgage Obligations ("CMOs")-CMOs and 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") and Federal
Home Loan Mortgage Corporation ("FHLMC"). 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. REMICs are a mortgage securities vehicle, authorized by the Tax Reform
Act of 1986, 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, REMIC securities are virtually
indistinguishable from CMOs.
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<PAGE> 245
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 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 and the mortgage poolers. Although the
market for such securities is becoming increasingly liquid, securities issued by
certain private organizations may not be readily marketable.
Ratings of Long-term Obligations-The Fund utilizes ratings provided by
the following nationally recognized statistical rating organizations in order to
determine eligibility of long-term obligations.
The three highest Moody's Investors Service, Inc. ("Moody's") ratings for
long-term obligations (or issuers thereof) are Aaa, Aa and A. 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
10
<PAGE> 246
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". 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 three highest Standard & Poor's ("Standard & Poor's") ratings for
long-term obligations are AAA, AA and A. 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.
Duff & Phelps' three highest ratings for long-term obligations are AAA,
AA and A. 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 protections factors. However, risk factors are more variable and
greater in periods of economic stress.
Thomson 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 three highest ratings for long-term obligations
are AAA, AA and A. 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.
Fitch IBCA, Inc. 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.
Standard & Poor's, Duff & Phelps and Fitch apply indicators "+","-," and
no character to indicate relative standing within the major rating categories.
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Ratings of Short-term Obligations-The ratings P-1 and P-2 by Moody's are
judged by Moody's to be of the "highest" quality and "higher" quality
respectively on the basis of relative repayment capacity. 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.
The distinguishing feature of Duff & Phelps Credit Rating's 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 indicated 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 IBCA'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-1 indicated 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 (i.e., the Fund) 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.
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<PAGE> 248
The Fund may enter into repurchase agreements with any bank or registered
broker-dealer who, in the opinion of the Board, presents a minimum risk of
bankruptcy during the term of the agreement based upon guidelines which
periodically are reviewed by the Board. The Fund 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 Board
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 Fund 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, the Fund 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 the Fund
may incur a loss if the proceeds to the Fund from the sale of the securities to
a third party are less than the repurchase price.
Strategic Transactions-As discussed in the Prospectus, the Fund may use
financial instruments ("Strategic Instruments"), such as financial futures
contracts (such as interest rate, bond index and foreign currency futures
contracts), options (such as options on securities, indices, foreign currencies
and futures contracts), forward currency contracts and interest rate and
currency swaps, caps, collars and floors. Such Strategic Instruments may be used
without limit in altering the exposure of a particular investment or portion of
the Fund's portfolio to fluctuations in interest rates or currency rates, to
preserve a return or spread, to lock in unrealized market value gains or losses,
to facilitate the sale or purchase of securities, to manage the duration of
securities, to uncap a capped security or to convert a fixed rate security into
a variable rate security.
Strategic Instruments on securities generally are used to hedge against
price movements in one or more particular securities positions that the Fund
owns or intends to acquire. Strategic Instruments on debt securities may be used
to hedge either individual securities or broad fixed-income market sectors.
The use of these strategies involves certain risks, including (1) the
fact that skills used are different from those needed to select securities, (2)
possible imperfect correlation between price movements of the investments being
hedged, (3) the fact that, while hedging strategies can reduce the risk of loss,
they can also reduce the opportunity for gain, or even result in losses, by
offsetting favorable price movements in hedged investments, and (4) the possible
inability of the Fund to purchase or sell a security at a time when it would be
advantageous to do so, or the possible need for the Fund to sell a security due
to the need for the Fund to "cover" or segregate securities in connection with
those transactions and the possible inability of the Fund to close out or
liquidate its position.
The use of Strategic Instruments is subject to applicable regulations of
the SEC, the several options and futures exchanges upon which they are traded,
the (CFTC) and various state regulatory authorities. In addition, the Fund's
ability to use Strategic Instruments will be limited by tax considerations. See
"Tax Information."
In addition to the products, strategies and risks described below and in
the Prospectus, the Manager expects to discover additional opportunities in
connection with other Strategic Instruments. These new opportunities may become
available as the Manager develops new techniques, as regulatory authorities
broaden the range of permitted transactions and as new techniques are developed.
The Manager may utilize these opportunities to the extent that they are
consistent with the Fund's investment objective and permitted by the Fund's
investment limitations and applicable regulatory authorities. The Fund's
Prospectus or SAI will be supplemented to the extent that new products or
techniques involve materially different risks than those described below or in
the Prospectus.
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<PAGE> 249
Cover for Strategic Instruments-Transactions using Strategic Instruments
may expose the Fund to an obligation to another party. The Fund will not enter
into any such transactions unless it owns either (1) an offsetting ("covered")
position in securities, futures, options, currencies or forward contracts or (2)
cash and short-term liquid debt securities with a value sufficient at all times
to cover its potential obligations to the extent not covered as provided in (1)
above.
Futures Contracts and Options on Futures Contracts-Futures contracts
obligate a purchaser to take delivery of a specific amount of an obligation
underlying the futures contract at a specified time in the future for a
specified price. Likewise, the seller incurs an obligation to deliver the
specified amount of the underlying obligation. Futures are traded on both U.S.
and foreign commodities exchanges.
The purchase of futures or call options on futures can serve as a long
hedge, and the sale of futures or the purchase of put options on futures can
serve as a short hedge. Writing call options on futures contracts can serve as a
limited short hedge, using a strategy similar to that used for writing call
options on securities or indices. Similarly, writing put options on futures
contracts can serve as a limited long hedge.
Futures strategies also can be used to manage the average duration of the
Fund's fixed-income portfolio. If the Manager wishes to shorten the average
duration of the Fund's fixed-income portfolio, the Fund may sell a futures
contract or a call option thereon, or purchase a put option on that futures
contract. If the Manager wishes to lengthen the average duration of the Fund's
fixed-income portfolio, the Fund may buy a futures contract or a call option
thereon, or sell a put option thereon.
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract the Fund is required to deposit "initial margin"
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 Fund at the
termination of the transaction if all contractual obligations have been
satisfied. Under certain circumstances, such as periods of high volatility, the
Fund may be required by an exchange to increase the level of its initial margin
payment.
Subsequent "variation margin" payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
"marking-to-market." Variation margin does not involve borrowing, but rather
represents a daily settlement of the Fund's obligations to or from a futures
broker. When the Fund purchases an option on a futures contract, the premium
paid plus transaction costs is all that is at risk. In contrast, when the Fund
purchases or sells a futures contract or writes a call or put option thereon, it
is subject to daily variation margin calls that could be substantial in the
event of adverse price movements. If the Fund 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 and options thereon can enter
into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, an instrument identical to the
instrument purchased or sold. Positions in futures contracts and options thereon
may be closed only on an exchange or board of trade that provides a secondary
market. The Fund intends to enter into futures contracts and options on futures
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 or options position.
Under certain circumstances, futures exchanges may establish daily limits
on the amount that the price of a futures contract or option thereon 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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<PAGE> 250
If the Fund were unable to liquidate a futures contract or options
thereon due to the absence of a liquid secondary market or the imposition of
price limits, it could incur substantial losses. The Fund would continue to be
subject to market risk with respect to the position. In addition, except in the
case of purchased options on futures , the Fund would continue to be required to
make daily variation margin payments and might be required to maintain the
position being hedged by the futures contract or option thereon or to maintain
cash or securities in a segregated account.
To the extent that the Fund enters into futures contracts, options on
futures contracts, or options on foreign currencies traded on an exchange
regulated by the Commodities Futures Trading Commission ("CFTC"), in each case
other than for bona fide hedging purposes (as defined by the CFTC), the
aggregate initial margin and premiums required to establish those positions
(excluding the amount by which options are "in-the-money" at the time of
purchase) will not exceed 5% of the liquidation value of the Fund's portfolio,
after taking into account unrealized profits and unrealized losses on any
contracts that the Fund has entered into. This policy does not limit to 5% the
percentage of the Fund's assets that are at risk in futures contracts and
options on futures contracts.
Foreign Currency Strategies - Special Considerations-The Fund may use
Strategic Instruments on foreign currencies, to hedge against movements in the
values of the foreign currencies in which the Fund's securities are denominated.
Such currency hedges can protect against price movements in a security that the
Fund owns or intends to acquire that are attributable to changes in the value of
the currency in which it is denominated. Such hedges do not, however, protect
against price movements in the securities that are attributable to other causes.
The Fund might seek to hedge against changes in the value of particular
currency when no Strategic Instruments on that currency are available or such
Strategic Instruments are more expensive than certain other Strategic
Instruments. In such cases, the Fund may hedge against price movements in that
currency by entering into transactions using Strategic Instruments on another
currency or a basket of currencies, the values of which the Manager believes
will have a high degree of positive correlation to the value of the currency
being hedged. The risk that movements in the price of the Strategic Instrument
will not correlate perfectly with movements in the price of the currency being
hedged is magnified when this strategy is used.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information generally is representative of very large transactions in the
interbank market and thus might not reflect odd-lot transactions where rates
might be less favorable. The interbank market in foreign currencies is a global,
round-the-clock market.
Settlement of transactions involving foreign currencies might be required
to take place within the country issuing the underlying currency. Thus, the Fund
might be required to accept or make delivery of the underlying foreign currency
in accordance with any U.S. or foreign regulations regarding the maintenance of
foreign banking arrangements by U.S. residents and might be required to pay any
fees, taxes and charges associated with such delivery assessed in the issuing
country.
Forward 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 future movements in foreign exchange
rates. The 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 Fund may
purchase a forward contract to lock in the U.S. dollar price of a security
denominated in a foreign currency that the Fund intends to acquire. Forward
contracts may also serve as short hedges -- for example, the Fund 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
anticipated dividend or interest payments denominated in a foreign currency. The
Manager may seek to hedge
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<PAGE> 251
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 Fund 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 a
principal basis, no fees or commissions are involved. When the Fund 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 Fund 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 Fund might be unable to close out a
forward contract at any time prior to maturity. In either event, the Fund 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 Fund might need to purchase or sell
foreign currencies in the spot (cash) market to the extent such foreign
currencies are not covered by forward contracts. The projection of short-term
currency market movements is extremely difficult, and the successful execution
of a short-term hedging strategy is highly uncertain.
Swaps, Caps, Collars and Floors-Swap agreements, including interest rate
and currency swaps, caps, collars and floors, may be individually negotiated and
structured to include exposure to a variety of different types of investments or
market factors. Swaps involve two parties exchanging a series of cash flows at
specified intervals. In the case of an interest rate swap, the parties exchange
interest payments based on an agreed upon principal amount (referred to as the
"notional principal amount"). Under the most basic scenario, Party A would pay a
fixed rate on the notional principal amount to Party B, which would pay a
floating rate on the same notional principal amount to Party A. Depending on
their structure, swap agreements may increase or decrease the Fund's exposure to
long or short-term interest rates (in the U.S. or abroad), foreign currency
values, mortgage securities, corporate borrowing rates, or other factors. Swap
agreements can take many different forms and are known by a variety of names.
In a typical cap or floor agreement, one party agrees to make payments
only under specified circumstances, usually in return for payment of a fee by
the other party. For example, the buyer of an interest rate cap obtains the
right to receive payments to the extent that a specified interest rate exceeds
an agreed-upon level, while the seller of an interest rate floor is obligated to
make payments to the extent that a specified interest rate falls below an
agreed-upon level. An interest rate collar combines elements of buying a cap and
selling a floor.
The Fund will set aside cash or appropriate liquid assets to cover its
current obligations under swap transactions. If the Fund enters into a swap
agreement on a net basis (that is, the two payment streams are netted out, with
the Fund receiving or paying, as the case may be, only the net amount of the two
payments), the Fund will maintain cash or liquid assets with a daily value at
least equal to the excess, if any, of the Fund's accrued obligations under the
swap agreement over the accrued amount the Fund is entitled to receive under the
agreement. If the Fund enters into a swap agreement on other than a net basis or
writes a cap, collar or floor, it will maintain cash or liquid assets with a
value equal to the full amount of the Fund's accrued obligations under the
agreement.
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<PAGE> 252
The most important factor in the performance of swap agreements is the
change in the specific interest rate, currency exchange rate or other factor(s)
that determine the amounts of payments due to and from the Fund. If a swap
agreement calls for payments by the Fund, the Fund must be prepared to make such
payments when due. In addition, if the contra party's creditworthiness declines,
the value of a swap agreement would likely decline, potentially resulting in
losses.
The Fund will enter into swaps, caps, collars and floors only with banks
and recognized securities dealers believed by the Manager to present minimal
credit risks in accordance with guidelines established by the Board. If there is
a default by the other party to such a transaction, the Fund will have to rely
on its contractual remedies (which may be limited by bankruptcy, insolvency or
similar laws) pursuant to the agreement relating to the transaction.
The swap market has grown substantially in recent years with a large
number of banks and investment banking firms acting both as principals and as
agents utilizing standardized swap documentation. Caps, collars and floors are
more recent innovations for which documentation is less standardized and,
accordingly, they are less liquid than swaps.
U.S. Government Securities-U.S. Government securities are issued or
guaranteed by the U.S. Government and include U.S. Treasury obligations (see
definition below) and securities issued by U.S. agencies and instrumentalities.
U. S. Government agencies or instrumentalities which 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, Government National Mortgage Association, General
Services Administration, Central Bank for Cooperatives, Federal Home Loan Banks,
Federal Home Loan Mortgage Corporation, 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 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 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. A
floating rate obligation is one whose terms provide for the adjustment of its
interest rate whenever a specified interest rate changes.
17
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<TABLE>
<CAPTION>
TABLE OF CONTENTS
- - -----------------
<S> <C>
Investment Restrictions Page 1
Trustees and Officers Page 2
Distribution Fees Page 5
Portfolio Securities Transactions Page 5
Net Asset Value. Page 5
Tax Information Page 6
Yield and Total Return Quotations Page 7
Description of the Trust Page 8
Other Information Page 8
</TABLE>
18
<PAGE> 254
AMERICAN AADVANTAGE FUNDS
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements included as a part of this Registration
Statement:
Included in Part A: Financial Highlights -
AMR Class: Balanced Fund and Growth and Income Fund: for the
period August 1, 1994 (commencement of offering of AMR Class
shares) to October 31, 1994, for the two years ended October
31, 1996. International Equity Fund and Short-Term Bond Fund:
for the period August 1, 1994 (commencement of offering of AMR
Class shares) to October 31, 1994, for the two years ended
October 31, 1996.
Institutional Class: Balanced Fund and Growth and Income Fund:
for each of the nine years ended October 31, 1996.
International Equity Fund: for the period from August 7, 1991
(commencement of operations) to October 31, 1991 and for the
five years ended October 31, 1996. Short-Term Bond Fund: for
the period from December 3, 1987 (commencement of operations)
to October 31, 1988, for each of the eight years ended October
31, 1996. Money Market Fund: for each of the nine years ended
October 31, 1996. Municipal Money Market Fund: for the period
November 10, 1993 (commencement of operations) to October 31,
1994, for the two years ended October 31, 1996. U.S.
Government Money Market Fund: for the period March 2, 1992
(commencement of operations) to October 31, 1992, for the four
years ended October 31, 1996.
PlanAhead Class: Balanced Fund, Growth and Income Fund,
International Equity Fund, Short-Term Bond Fund, Money Market
Fund, Municipal Money Market Fund and U.S. Government Money
Market Fund: for the period August 1, 1994 (commencement of
offering PlanAhead Class shares) to October 31, 1994 and for
the two years ended October 31, 1996.
Platinum Class: Money Market Fund, Municipal Money Market Fund
and U.S. Government Money Market Fund: for the period November
7, 1995 (commencement of offering Platinum Class shares) to
October 31, 1996.
Platinum Class: American AAdvantage Money Market Mileage Fund:
for the period January 29, 1996 (commencement of offering
Platinum Class shares) to October 31, 1996.
Included in Part B: None.
(b) Exhibits:
(1) Declaration of Trust -- filed herewith
<PAGE> 255
(2) Bylaws -- filed herewith
(3) Voting trust agreement -- none
(4) Specimen security -- none
(5) (a)(i) Fund Management Agreement between American
AAdvantage Funds and AMR Investment
Services, Inc. dated April 3, 1987 - filed
herewith
(a)(ii) Supplement to Fund Management Agreement
dated October 1, 1990 - filed herewith
(a)(iii) Supplement to Fund Management Agreement
dated August 1, 1994 - filed herewith
(a)(iv) Supplement to Fund Management Agreement
dated August 1, 1995 - filed herewith
(a)(v) Amendment to Schedule A of Fund Management
Agreement dated December 1, 1995 (i)
(a)(vi) Supplement to Fund Management Agreement
dated December 16, 1996 (iii)
(a)(vii) Supplement to the Fund Management Agreement
dated July 15, 1997 (iv)
(b)(i) Investment Advisory Agreement between AMR
Investment Services, Inc. and Independence
Investment Associates, Inc. dated November 1,
1995 - filed herewith
(b)(ii) Investment Advisory Agreement between AMR
Investment Services, Inc. and Morgan Stanley
Asset Management Inc. dated November 1, 1995
- filed herewith
(b)(iii) Investment Advisory Agreement between AMR
Investment Services, Inc. and Templeton
Investment Counsel, Inc. dated November 1,
1995 - filed herewith
(b)(iv) Investment Advisory Agreement between AMR
Investment Services, Inc. and Barrow,
Hanley, Mewhinney & Strause, Inc. dated
November 1, 1995 - filed herewith
(b)(v) Investment Advisory Agreement between AMR
Investment Services, Inc. and GSB Investment
Management, Inc. dated November 1, 1995 -
filed herewith
(b)(vi) Investment Advisory Agreement between AMR
Investment Services, Inc. and Brandywine
Asset Management, Inc. dated April 1, 1996 -
(ii)
(b)(vii) Investment Advisory Agreement between AMR
Investment Services, Inc. and Hotchkis and
Wiley, a division of the Capital Management
Group of Merrill Lynch Asset Management,
L.P. dated November 12, 1996 -- (iii)
2
<PAGE> 256
(c) Administrative Services Agreement between
the American AAdvantage Funds and AMR
Investment Services, Inc. dated November 21,
1997 - filed herewith
(d) Administrative Services Plan for the
Platinum Class - filed herewith
(e) Administrative Services Agreement with S&P
500 Index Fund - filed herewith
(6) Distribution Agreement among the American AAdvantage
Funds, the American AAdvantage Mileage Funds and
Brokers Transaction Services, Inc. dated September 1,
1995 - filed herewith
(7) Bonus, profit sharing or pension plans -- none
(8) Custodian Agreement between the American AAdvantage
Funds and NationsBank Texas, N.A.. dated April 3,
1987 - filed herewith
(9) (a) Transfer Agency and Service Agreement
between the American AAdvantage Funds and
NationsBank Texas, N.A. dated April 3, 1987
-- filed herewith
(b)(i) Transfer Agency and Registrar Agreement among
American AAdvantage Funds, AMR Investment
Services, Inc. and Goldman, Sachs & Co.
dated June 7, 1993 - filed herewith
(b)(ii) Amended Fee Schedule to Transfer Agency
Agreement among the American AAdvantage
Funds, AMR Investment Services, Inc. and
Goldman, Sachs & Co. dated November 1, 1995
-- (i)
(c) Service Plan Agreement for the American
AAdvantage Funds PlanAhead Class dated
August 1, 1994 - filed herewith
(10) Opinion and consent of counsel - filed herewith
(11) Consent of Independent Auditors - none
(12) Financial statements omitted from prospectus - none
(13) Letter of investment intent - filed herewith
(14) Prototype retirement plan -- none
(15) (a) Plan pursuant to Rule 12b-1 for the
Institutional, PlanAhead and AMR Classes -
filed herewith
(b) Plan pursuant to Rule 12b-1 for the Platinum
Class - filed herewith
(16) Schedule for Computation of Performance Quotations -
filed herewith
(17) Financial Data Schedules - none
(18) Amended and Restated Plan pursuant to Rule 18f-3 -
filed herewith
Other Exhibits - Powers of Attorney for all Trustees - (iii)
- - ----------------------
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<PAGE> 257
(i) Incorporated by reference to PEA No. 15 to the registration
statement of the Trust on Form N-1A as filed with the SEC on
December 22, 1995.
(ii) Incorporated by reference to PEA No. 16 to the registration
statement of the Trust on Form N-1A as filed with the SEC on
May 1, 1996.
(iii) Incorporated by reference to PEA No. 19 to the registration
statement of the Trust on Form N-1A as filed with the SEC on
February 13, 1997.
(iv) Incorporated by reference to PEA No. 20 to the registration
statement of the Trust on Form N-1A as filed with the SEC on
July 1, 1997.
Item 25. Persons Controlled by or under Common Control with Registrant
None.
Item 26. Number of Holders of Securities
<TABLE>
<CAPTION>
Number of Record Holders as of November 30, 1997
------------------------------------------------
Inst'l PlanAhead AMR Platinum
Fund Class Class Class Class
---- ------ ------- ----- --------
<S> <C> <C> <C> <C>
Balanced Fund 32 339 5 -
Growth and Income Fund 33 628 3 -
Intermediate Bond Fund 2 - - -
International Equity Fund 68 353 5 -
Short -Term Income Fund - - - -
Money Market Fund 212 2,872 - 2,597
Municipal Money Market 4 79 - 145
Fund
Short-Term Bond Fund 23 49 2 -
S&P 500 Index Fund - - 2 -
U.S. Government Money 16 105 - 183
Market Fund
</TABLE>
Item 27. Indemnification
Article XI, Section 2 of the Declaration of Trust of the Trust
provides that:
(a) Subject to the exceptions and limitations contained in
paragraph (b) below:
(i) every person who is, or has been, a Trustee or
officer of the Trust (hereinafter referred to as "Covered Person") shall be
indemnified by the appropriate portfolios to the fullest extent permitted by
law against liability and against all expenses reasonably incurred or paid by
him in connection with any claim, action, suit or proceeding in which he
becomes involved as a party or otherwise by virtue of
4
<PAGE> 258
his being or having been a Trustee or officer and against amounts paid or
incurred by him in the settlement thereof;
(ii) the words "claim," "action," "suit," or "proceeding"
shall apply to all claims, actions, suits or proceedings (civil, criminal or
other, including appeals), actual or threatened while in office or thereafter,
and the words "liability" and "expenses" shall include, without limitation,
attorneys' fees, costs, judgments, amounts paid in settlement, fines, penalties
and other liabilities.
(b) No indemnification shall be provided hereunder to a Covered
Person:
(i) who shall have been adjudicated by a court or body
before which the proceeding was brought (A) to be liable to the Trust or its
Shareholders by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office or (B)
not to have acted in good faith in the reasonable belief that his action was in
the best interest of the Trust; or
(ii) in the event of a settlement, unless there has been a
determination that such Trustee or officer did not engage in willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office (A) by the court or other body approving
the settlement; (B) by at least a majority of those Trustees who are neither
interested persons of the Trust nor are parties to the matter based upon a
review of readily available facts (as opposed to a full trial-type inquiry); or
(C) by written opinion of independent legal counsel based upon a review of
readily available facts (as opposed to a full trial-type inquiry); provided,
however, that any Shareholder may, by appropriate legal proceedings, challenge
any such determination by the Trustees, or by independent counsel.
(c) The rights of indemnification herein provided may be insured
against by policies maintained by the Trust, shall be severable, shall not be
exclusive of or affect any other rights to which any Covered Person may now or
hereafter be entitled, shall continue as to a person who has ceased to be such
Trustee or officer and shall inure to the benefit of the heirs, executors and
administrators of such a person. Nothing contained herein shall affect any
rights to indemnification to which Trust personnel, other than Trustees and
officers, and other persons may be entitled by contract or otherwise under law.
(d) Expenses in connection with the preparation and presentation
of a defense to any claim, action, suit, or proceeding of the character
described in paragraph (a) of this Section 2 may be paid by the applicable
Portfolio from time to time prior to final disposition thereof upon receipt of
an undertaking by or on behalf of such Covered Person that such amount will be
paid over by him to the Trust if it is ultimately determined that he is not
entitled to indemnification under this Section 2; provided, however, that:
(i) such Covered Person shall have provided appropriate
security for such undertaking;
(ii) the Trust is insured against losses arising out of
any such advance payments; or
(iii) either a majority of the Trustees who are neither
interested persons of the Trust nor parties to the matter, or independent legal
counsel in a written opinion, shall have determined, based upon a review of
readily available facts (as opposed to a trial-type inquiry or full
investigation), that there is reason to believe that such Covered Person will
be found entitled to indemnification under this Section 2.
5
<PAGE> 259
According to Article XII, Section 1 of the Declaration of Trust, the
Trust is a trust, not a partnership. Trustees are not liable personally to any
person extending credit to, contracting with or having any claim against the
Trust, a particular Portfolio or the Trustees. A Trustee, however, is not
protected from liability due to willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office.
Article XII, Section 2 provides that, subject to the provisions of
Section 1 of Article XII and to Article XI, the Trustees are not liable for
errors of judgment or mistakes of fact or law, or for any act or omission in
accordance with advice of counsel or other experts or for failing to follow
such advice.
Item 28. I. Business and Other Connections of Investment Manager
AMR Investment Services, Inc. (the "Manager"), 4333 Amon Carter
Boulevard, MD 5645, Fort Worth, Texas 76155, offers investment management and
administrative services. Information as to the officers and directors of the
Manager is included in its current Form ADV filed with the SEC and is
incorporated by reference herein.
II. Business and Other Connections of Investment Advisers
The investment advisers listed below provide investment advisory
services to the Trust.
Barrow, Hanley, Mewhinney & Strauss, 3232 McKinney Avenue, 15th Floor,
Dallas, Texas 75204.
Brandywine Asset Management, Inc., 201 North Walnut Street,
Wilmington, Delaware 19801.
GSB Investment Management, Inc., 301 Commerce Street, Suite 1501, Fort
Worth, Texas 76102.
Hotchkis and Wiley, 800 West Sixth Street, 5th Floor, Los Angeles,
California 90017.
Independence Investment Associates, Inc., 53 State Street, Boston,
Massachusetts 02109.
Morgan Stanley Asset Management Inc., 1221 Avenue of the Americas,
21st Floor, New York, New York 10020.
Templeton Investment Counsel, Inc. 500 East Broward Blvd., Ft.
Lauderdale, Florida 33394.
Information as to the officers and directors of each of the above
investment advisers is included in that adviser's current Form ADV filed with
the SEC and is incorporated by reference herein.
Item 29. Principal Underwriter
(a) Brokers Transaction Services, Inc., 7001 Preston
Road, Dallas, TX 75205 is the principal underwriter for the Trust and the
American AAdvantage Mileage Funds.
(b) The directors and officers of the Trust's principal
underwriter are:
6
<PAGE> 260
<TABLE>
<CAPTION>
Positions & Offices Position
Name with Underwriter with Registrant
- - ---- ------------------ ---------------
<S> <C> <C>
Don A. Buckholz Chairman, Director None
Raymond E. Wooldridge Chief Executive Officer, None
Director
William D. Felder Executive Vice None
President, Director
Sue H. Peden President None
</TABLE>
Item 30. Location of Accounts and Records
The books and other documents required by Rule 31a-1 under the
Investment Company Act of 1940 are maintained as follows:
31a-1(b)(1) - in the physical possession of the Trust's custodian (NationsBank
of Texas, NA);
31a-1(b)(2)(i),(ii)&(iii) - in the physical possession of the Trust's custodian
31a-1(b)(2)(iv) - in the physical possession of the Trust's transfer agents
(NationsBank NA and Goldman Sachs)
31a-1(b)(4) - in the physical possession of the Trust's Manager
31a-1(b)(5) - in the physical possession of the Trust's investment advisers
31a-1(b)(6) - A record of other purchases or sales etc. - in the physical
possession of the Trust's Manager, investment advisers and custodian
31a-1(b)(7) - in the physical possession of the Trust's custodian
31a-1(b)(8) - in the physical possession of the Trust's custodian
31a-1(b)(9) - in the physical possession of the Trust's investment advisers.
31a-1(b)(10) - in the physical possession of the Trust's Manager
31a-1(b)(11) - in the physical possession of the Trust's Manager
31a-1(b)(12) - in the physical possession of the Trust's Manager, investment
advisers and custodian
Item 31. Management Services
All substantive provisions of any management-related service
contract are discussed in Part A or Part B.
Item 32. Undertakings
Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of its latest annual report to
Shareholders, upon request and without charge.
7
<PAGE> 261
Registrant hereby undertakes to carry out all indemnification
provisions of its Declaration of Trust in accordance with Investment Company
Act Release No. 11330 (September 4, 1980) and successor releases.
Insofar as indemnification for liability arising under the Securities
Act of 1933, as amended ("1933 Act"), may be permitted to trustees, officers
and controlling persons of the Registrant pursuant to the provisions under Item
27 herein, or otherwise, the Registrant has been advised that in the opinion of
the SEC such indemnification is against public policy as expressed in the 1933
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a trustee, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such trustee, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the 1933
Act and will be governed by the final adjudication.
8
<PAGE> 262
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, the Registrant has duly
caused this Post-Effective Amendment No. 23 to its Registration Statement on
Form N-1A to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Fort Worth and the State of Texas on December 15,
1997.
AMERICAN AADVANTAGE FUNDS
By: /s/ William F. Quinn
-----------------------
William F. Quinn
President
Attest:
/s/ Barry Y. Greenberg
- - ------------------------------------------
Barry Y. Greenberg
Vice President and Assistant Secretary
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Post-Effective Amendment No. 23 to the Registration Statement has been
signed below by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
Signature Title Date
- - --------- ----- ----
<S> <C> <C>
/s/ William F. Quinn President and December 15, 1997
- - ------------------------ Trustee
William F. Quinn
Alan D. Feld* Trustee December 15, 1997
- - ------------------------
Alan D. Feld
Ben J. Fortson* Trustee December 15, 1997
- - ------------------------
Ben J. Fortson
John S. Justin* Trustee December 15, 1997
- - ------------------------
John S. Justin
Stephen D. O'Sullivan* Trustee December 15, 1997
- - ------------------------
Stephen D. O'Sullivan
Roger T. Staubach* Trustee December 15, 1997
- - -------------------------
Roger T. Staubach
Dr. Kneeland Youngblood * Trustee December 15, 1997
- - -------------------------
Dr. Kneeland Youngblood
*By /s/ William F. Quinn
----------------------------------
William F. Quinn, Attorney-In-Fact
</TABLE>
<PAGE> 263
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, AMR Investment Services
Trust has duly caused this Post-Effective Amendment No. 23 to the Registration
Statement on Form N-1A as it relates to the AMR Investment Services Trust to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Fort Worth and the State of Texas on December 15, 1997.
AMR INVESTMENT SERVICES TRUST
By: /s/ William F. Quinn
------------------------------
William F. Quinn
President
Attest:
/s/ Barry Y. Greenberg
- - ------------------------------------------
Barry Y. Greenberg
Vice President and Assistant Secretary
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Post-Effective Amendment No. 23 to the Registration Statement for the
American AAdvantage Funds has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- - --------- ----- ----
<S> <C> <C>
/s/ William F. Quinn President and December 15, 1997
- - ------------------------ Trustee
William F. Quinn
Alan D. Feld* Trustee December 15, 1997
- - ------------------------
Alan D. Feld
Ben J. Fortson* Trustee December 15, 1997
- - ------------------------
Ben J. Fortson
John S. Justin* Trustee December 15, 1997
- - ------------------------
John S. Justin
Stephen D. O'Sullivan* Trustee December 15, 1997
- - ------------------------
Stephen D. O'Sullivan
Roger T. Staubach* Trustee December 15, 1997
- - ------------------------
Roger T. Staubach
Dr. Kneeland Youngblood * Trustee December 15, 1997
- - ---------------------------
Dr. Kneeland Youngblood
*By /s/ William F. Quinn
--------------------------------------
William F. Quinn, Attorney-In-Fact
</TABLE>
<PAGE> 264
SIGNATURES
Equity 500 Index Portfolio has duly caused this Post-Effective
Amendment No. 23 to the Registration Statement on Form N-1A of the American
AAdvantage Funds, as it relates to the American AAdvantage S&P 500 Index Fund,
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Pittsburgh and the Commonwealth of Pennsylvania on December 15, 1997.
EQUITY 500 INDEX PORTFOLIO
By: Ronald M. Petnuch*
-----------------------
Ronald M. Petnuch
President
This Post-Effective Amendment No. 23 to the Registration Statement on
Form N-1A of American AAdvantage Funds has been signed below by the following
persons in the capacities indicated with respect to the Equity 500 Index
Portfolio and on December 15, 1997.
<TABLE>
<CAPTION>
Signature Title
- - --------- -----
<S> <C>
Charles P Biggar* Trustee
- - --------------------------
Charles P. Biggar
Leland Dill* Trustee
- - --------------------------
S. Leland Dill
Philip Saunders, Jr.* Trustee
- - --------------------------
Philip Saunders, Jr.
Ronald M. Petnuch* President and Treasurer (Chief Executive Officer,
- - -------------------------- Principal Financial and Accounting Officer)
Ronald M. Petnuch
By: /s/ Jay S. Neuman
-----------------------
Jay S. Neuman, Secretary of the Equity 500 Index Portfolio,
as Attorney-in-Fact pursuant to a Power of Attorney
</TABLE>
<PAGE> 265
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- - ------ -----------
<S> <C>
(1) Declaration of Trust -- filed herewith
(2) Bylaws -- filed herewith
(3) Voting trust agreement - none
(4) Specimen security -- none
(5) (a)(i) Fund Management Agreement between American AAdvantage Funds and
AMR Investment Services, Inc. dated April 3, 1987 - filed herewith
(a)(ii) Supplement to Fund Management Agreement dated October 1, 1990 -
filed herewith
(a)(iii) Supplement to Fund Management Agreement dated August 4, 1994 -
filed herewith
(a)(iv) Supplement to Fund Management Agreement dated November 1, 1995
- filed herewith
(a)(v) Amendment to Schedule A of Fund Management Agreement dated
December 1, 1995 (i)
(a)(vi) Supplement to Fund Management Agreement dated December 16, 1996
(iii)
(a)(vii) Supplement to the Fund Management Agreement dated July 15, 1997
(iv)
(b)(i) Investment Advisory Agreement between AMR Investment Services,
Inc. and Independence Investment Associates, Inc. dated November
1, 1995 - filed herewith
(b)(ii) Investment Advisor Agreement between AMR Investment Services,
Inc. and Morgan Stanley Asset Management Inc. dated November 1,
1995 - filed herewith
(b)(iii) Investment Advisory Agreement between AMR Investment Services,
Inc. and Templeton Investment Counsel, Inc. dated November 1,
1995 - filed herewith
(b)(iv) Investment Advisory Agreement between AMR Investment Services,
Inc. and Barrow, Hanley, Mewhinney & Strause, Inc. dated
November 1, 1995 - filed herewith
(b)(v) Investment Advisory Agreement between AMR Investment Services,
Inc. and GSB Investment Management, Inc. dated November 1, 1995
- filed herewith
(b)(vi) Investment Advisory Agreement between AMR Investment Services,
Inc. and Brandywine Asset Management, Inc. dated April 1, 1996
- (ii)
(b)(vii) Investment Advisory Agreement between AMR Investment Services,
Inc. and Hotchkis and Wiley, a division of the Capital
Management Group of Merrill Lynch Asset Management, L.P. dated
November 12, 1996 -- (iii)
(c) Administrative Services Agreement between the American
AAdvantage Funds and AMR Investment Services, Inc. dated
November 21, 1997 - filed herewith
(d) Administrative Services Plan for the Platinum Class - filed
herewith
(e) Administrative Agreement with S&P 500 Index Fund - filed
herewith
(6) Distribution Agreement among the American AAdvantage Funds, the American
AAdvantage Mileage Funds and Brokers Transaction Services, Inc. dated
September 1, 1995 - filed herewith
</TABLE>
<PAGE> 266
<TABLE>
<S> <C>
(7) Bonus, profit sharing or pension plans - none
(8) Custodian Agreement between the American AAdvantage Funds and NationsBank
Texas, N.A.. dated April 3, 1987 - filed herewith
(9) (a) Transfer Agency and Service Agreement between the American AAdvantage
Funds and NationsBank Texas, N.A. dated April 3, 1987 -- filed herewith
(b)(i) Transfer Agency and Registrar Agreement among American
AAdvantage Funds, AMR Investment Services, Inc. and Goldman,
Sachs & Co. dated June 7, 1993 - filed herewith
(b)(ii) Amended Fee Schedule to Transfer Agency Agreement among the
American AAdvantage Funds, AMR Investment Services, Inc. and
Goldman, Sachs & Co. dated November 1, 1995 -- (i)
(c) Service Plan Agreement for the American AAdvantage Funds
PlanAhead Class dated August 1, 1994 - filed herewith
(10) Opinion and consent of counsel - filed herewith
(11) Consent of Independent Auditors - none
(12) Financial statements omitted from prospectus - none
(13) Letter of investment intent - filed herewith
(14) Prototype retirement plan - none
(15) (a) Plan pursuant to Rule 12b-1 for the Institutional, PlanAhead and AMR
Classes - filed herewith
(b) Plan pursuant to Rule 12b-1 for the Platinum Class - filed herewith
(16) Schedule for Computation of Performance Quotations - filed herewith
(17) Financial Data Schedules - none
(18) Amended and Restated Plan pursuant to Rule 18f-3 - filed herewith
Other Exhibits - Powers of Attorney for all Trustees - (iii)
- - -------------------------
(i) Incorporated by reference to PEA No. 15 to the registration
statement of the Trust on Form N-1A as filed with the SEC on
December 22, 1995.
(ii) Incorporated by reference to PEA No. 16 to the registration
statement of the Trust on Form N-1A as filed with the SEC on
May 1, 1996.
(iii) Incorporated by reference to PEA No. 19 to the registration
statement of the Trust on Form N-1A as filed with the SEC on
February 13, 1997.
(iv) Incorporated by reference to PEA No. 20 to the registration
statement of the Trust on Form N-1A as filed with the SEC on
July 1, 1997.
</TABLE>
<PAGE> 1
Exhibit 99.b.1
AMERICAN EAGLE FUNDS
DECLARATION OF TRUST
This DECLARATION OF TRUST is made on January 16, l987, by William F.
Quinn, the sole initial Trustee hereunder, and by the holders of Shares of
beneficial interest to be issued hereunder as hereinafter provided.
WITNESSETH that
WHEREAS, this Trust has been formed to carry on the business of an
investment company; and
WHEREAS the initial Trustee has agreed to manage all property coming
into their hands as trustees of a Massachusetts voluntary association with
transferable Shares in accordance with the provisions hereinafter set forth.
NOW, THEREFORE, the Trustee hereby declares that he will hold all
cash, securities and other assets, which he may from time to time acquire in
any manner as Trustees hereunder IN TRUST to manage and dispose of the same
upon the following terms and conditions for the pro rata benefit of the holders
from time to time of Shares in this Trust as hereinafter set forth.
ARTICLE I
NAME AND DEFINITIONS
Name
Section 1. This Trust shall be known as the "American Eagle
Funds" and the Trustee(s) shall conduct the business of the Trust under that
name or any other name as they may from time to time determine.
Definitions
Section 2. Wherever used herein, unless otherwise required by
the context or specifically provided:
(a) The terms "Affiliated Person," "Assignment,"
"Commission," "Interested Person," "Majority Shareholder Vote" (the
67% or 50% requirement of the third sentence of Section 2(42) of the
1940 Act, whichever may be applicable) and "Principal Underwriter"
shall have the meanings given them in the 1940 Act, as amended from
time to time;
(b) The "Trust" refers to American Eagle Funds;
(c) "Net Asset Value" means the net asset value of each
Trust series as determined in the manner provided in Article X,
Section 3;
(d) "Shareholder" means a record owner of Shares of the
Trust;
(e) The "Trustees" refers to the individual trustees in
their capacity as trustees hereunder of the Trust and their successor
or successors for the time being in office as such trustee or
trustees;
1
<PAGE> 2
(f) "Shares" means the equal proportionate, transferable
units of interest into which the beneficial interest of the Trust
shall be divided from time to time, and includes fractions of shares
as well as whole shares consistent with the requirements of federal
and/or other securities laws;
(g) The "1940 Act" refers to the Investment Company Act
of 1940, as amended from time to time;
(h) "Declaration of Trust" shall mean this Declaration of
Trust as amended or restated from time to time; and
(i) "Bylaws" shall mean the Bylaws of the Trust as
amended from time to time.
ARTICLE II
PURPOSE OF TRUST
The purpose of this Trust is to provide investors, through one or more
investment portfolios or series as designated by the Trustees, with a
continuous source of managed investments in securities.
ARTICLE III
BENEFICIAL INTEREST
Shares of Beneficial Interest
Section 1. The Shares of the Trust shall be issued in one or
more series and/or classes as the Trustees may, without shareholder approval,
authorize. Each series shall be preferred over all other series in respect of
the assets allocated to that series. The beneficial interest in each series
shall at all times be divided into Shares, with or without par value as the
Trustees may specify, each of which shall represent an equal proportionate
interest in the series with each other Share of the same series, none having
priority or preference over another. Each series shall be represented by one or
more classes of Shares, with each class possessing such rights (including,
notwithstanding any contrary provision herein, voting rights) as the Trustees
may, without Shareholder approval, authorize. The number of Shares authorized
shall be unlimited, and the Shares so authorized may be represented in part by
fractional Shares. The Trustees may from time to time and without Shareholder
approval divide or combine the Shares of any series or class into a greater or
lesser number without thereby changing the proportionate beneficial interests
in the series.
Ownership of Shares
Section 2. The ownership of Shares shall be recorded in the
books of the Trust. The Trustees may make such rules as they consider
appropriate for the transfer of Shares and similar matters. The record books of
the Trust shall be conclusive as to who are the holders of Shares and as to the
number of Shares held from time to time by each Shareholder.
Investment in the Trust
Section 3. The Trustees shall accept investments in the Trust
from such persons and on such terms as they may from time to time authorize. As
determined by guidelines established by the Trustees, such investments may be
in the form of cash or securities in which the Trust
2
<PAGE> 3
(or each designated portfolio or series) is authorized to invest, valued as
provided in Article X, Section 3. Investments in the Trust shall be credited
to each Shareholder's account in the form of full or fractional Shares at the
Net Asset Value per Share next determined after the investment is received;
provided, however, that the Trustees may, in their sole discretion: (a) impose
a sales charge upon investments in the Trust and (b) issue fractional Shares.
Assets and Liabilities of the Trust
Section 4. All consideration received by the Trust for the issue
or sale of Shares, together with all assets in which such consideration is
invested or reinvested, all income, earnings, profits, and proceeds thereof,
including any proceeds derived from the sale, exchange or liquidation of such
assets, and any funds or payments derived from any reinvestment of such
proceeds in whatever form the same may be, shall be referred to as "assets
belonging to" the Trust and shall be held by the Trustees in Trust for the
benefit of the Shareholders. The Trust's assets shall be charged with its
liabilities. Any creditor of the Trust may look only to the assets of the Trust
to satisfy such creditor's debt.
No Preemptive Rights
Section 5. Shareholders shall have no preemptive or other right
to subscribe to any additional Shares or other securities issued by the Trust
or the Trustees.
Limitation on Personal Liability
Section 6. The Trustees shall have no power to bind any
Shareholder personally or to call upon any Shareholder for the payment of any
sum of money or assessment whatsoever other than such as the Shareholder may at
any time personally agree to pay by way of subscription for any Shares or
otherwise. Every note, bond, contract or other undertaking issued by or on
behalf of the Trust or the Trustees relating to the Trust shall include a
recitation limiting the obligation represented thereby to the Trust and its
assets (but the omission of such a recitation shall not operate to bind any
Shareholder).
ARTICLE IV
THE TRUSTEES
Management of the Trust
Section 1. The business and affairs of the Trust shall be
managed by the Trustees, and they shall have all powers necessary and desirable
to carry out that responsibility.
Election: Initial Trustees
Section 2. On a date fixed by the initial Trustee, the
Shareholders shall elect not less than three Trustees. A Trustee shall not be
required to be a Shareholder of the Trust. The initial Trustee shall be William
F. Quinn and such other individuals as the Board of Trustees shall appoint
pursuant to Section 4 of Article IV.
Term of Office of Trustees
Section 3. The Trustees shall hold office during the lifetime of
this Trust, and until its termination as hereinafter provided, except:
3
<PAGE> 4
(a) that any Trustee may resign his trust by written instrument signed by him
and delivered to the Trust's President or the other Trustees, which resignation
shall take effect upon such delivery or upon such later date as is specified
therein; (b) that any Trustee may be removed at any time by written instrument,
signed by at least two-thirds of the number of Trustees prior to such removal,
specifying the date when such removal shall become effective; and (c) a Trustee
may be removed at any Special Meeting of Shareholders of the Trust by a vote of
two-thirds of the outstanding Shares.
Resignation and Appointment of Trustees
Section 4. In case any vacancy of a Trustee position shall exist
for any reason, including, but not limited to, declination to assume office,
death, resignation, removal, or by reason of an increase in the number of
Trustees authorized, the remaining Trustees shall fill such vacancy by
appointing such other person as they in their discretion shall see fit,
consistent with the limitations under the l940 Act. Such appointment shall be
evidenced by a written instrument signed by a majority of the Trustees in
office or by recording in the records of the Trust, whereupon the appointment
shall take effect. An appointment of a Trustee may be made by the Trustees then
in office in anticipation of a vacancy to occur by reason of retirement,
resignation or increase in number of Trustees effective at a later date,
provided that said appointment shall become effective only at or after the
effective date of said retirement, resignation or increase in number of
Trustees. As soon as any Trustee so appointed shall have accepted this trust,
the trust estate shall vest in the new Trustee or Trustees, together with the
continuing Trustees, without any further act or conveyance, and he or she shall
be deemed a Trustee hereunder. The power of appointment of Trustees is subject
to the provisions of Section 16(a) of the 1940 Act.
Temporary Absence of Trustee
Section 5. Any Trustee may, by power of attorney, delegate his
or her power for a period not exceeding six months at any one time to any other
Trustee or Trustees, provided that in no case shall less than two Trustees
personally exercise the other powers hereunder, except as herein otherwise
expressly provided.
Number of Trustees
Section 6. The number of Trustees serving hereunder at any time
shall be determined by the Trustees themselves and, following the appointment
of additional Trustees by the sole initial Trustee, shall not be less than
three (3) nor more than twelve (12).
Effect of Death, Resignation, Etc. of a Trustee
Section 3. The death, declination, resignation, retirement,
removal, incapacity, or inability of the Trustees, or any one of them, shall
not operate to annul the Trust or to revoke any existing agency created
pursuant to the terms of this Declaration of Trust.
Ownership of Trust Assets
Section 8. The assets of the Trust shall be held separate and
apart from any assets now or hereafter held in any capacity other than as
Trustee hereunder by the Trustees or any successor Trustees. All of the assets
of the Trust shall at all times be considered as vested in the Trustees. No
Shareholder shall be deemed to have a severable
4
<PAGE> 5
ownership in any individual asset of the Trust or any right of partition or
possession thereof, but each Shareholder shall have a proportionate undivided
beneficial interest in the Trust.
ARTICLE V
POWERS OF THE TRUSTEES
Powers
Section 1. The Trustees in all instances shall act as
principals, and are and shall be free from the control of the Shareholders. The
Trustees shall have full power and authority to do any and all acts and to make
and execute any and all contracts and instruments that they may consider
necessary or appropriate in connection with the management of the Trust. The
Trustees shall not in any way be bound or limited by present or future laws or
customs in regard to trust investments, but shall have full authority and power
to make any and all investments which they, in their uncontrolled discretion,
shall deem proper to accomplish the purpose of this Trust. Without limiting the
foregoing, but subject to any applicable limitation in the Declaration of Trust
or the Bylaws of the Trust, the Trustees shall have power and authority:
(a) To invest and reinvest cash and other property and to
hold cash or other property uninvested, without in any event being
bound or limited by any present or future law or custom in regard to
investments by Trustees, and to sell, exchange, lend, pledge mortgage,
hypothecate write options on and lease any or all of the assets of the
Trust.
(b) To adopt Bylaws not inconsistent with this
Declaration of Trust providing for the conduct of the business of the
Trust and to amend and repeal them to the extent that the rights of
amendment and repeal are not reserved to Shareholders.
(c) To elect and remove such officers and appoint and
terminate such agents as they consider appropriate.
(d) To employ a bank or trust company as Custodian of any
assets of the Trust subject to any conditions set forth in this
Declaration of Trust or in the Bylaws, if any.
(e) To retain a transfer agent and Shareholder servicing
agent, or both.
(f) To provide for the distribution of interests of the
Trust either through a principal underwriter in the manner hereinafter
provided for or by the Trust itself, or both.
(g) To set record dates in the manner hereinafter
provided.
(h) To delegate such authority as they consider desirable
to any officers of the Trust and to any agent, Custodian or
underwriter,
(i) To sell or exchange any or all of the assets of the
Trust, subject to the provisions of Article XII, section 4(b) hereof.
(j) To vote or give assent, or exercise any rights of
ownership with respect to stock or other securities or property;
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and to execute and deliver powers of attorney to such person or
persons as the Trustees shall deem proper, granting to such person or
persons such power and discretion with relation to securities or
property as the Trustees shall deem proper.
(k) To exercise powers and rights of subscription or
otherwise which in any manner arise out of ownership of securities.
(l) To hold any security or property in a form not
indicating any trust, whether in bearer, unregistered or other
negotiable form; or in its own name or in the name of a Custodian or a
nominee or nominees, subject in whichever case to proper safeguards
according to the usual practice of Massachusetts trust companies or
investment companies.
(m) To consent to or participate in any plan for the
reorganization, consolidation or merger of any corporation or concern,
any security of which is held in the Trust; to consent to any
contract, lease, mortgage, purchase, or sale of property by such
corporation or concern; and to pay calls or subscriptions with respect
to any security held in the Trust.
(n) To compromise, arbitrate or otherwise adjust claims
in favor of or against the Trust or any matter in controversy
including, but not limited to, claims for taxes.
(o) To make distributions of income and of capital gains
to Shareholders in the manner hereinafter provided.
(p) To borrow money from a bank for temporary or
emergency purposes and not for investment purposes. The Trustees shall
not pledge, mortgage or hypothecate the assets of the Trust except
that, to secure borrowings, the Trustees may pledge securities.
(q) To establish, from time to time, a minimum total
investment for Shareholders, and to require redemption of the Shares
of any Shareholders whose investment is less than such minimum upon
giving notice to such Shareholder. No one dealing with the Trustees
shall be under any obligation to make any inquiry concerning the
authority of the Trustees, or to see to the application of any
payments made or property transferred to the Trustees or upon their
order.
(r) To retain an administrator, manager, investment
advisers and/or investment subadvisers.
(s) To establish separate and distinct series of shares
with separately defined investment objectives, policies and purposes,
and to allocate assets, liabilities and expenses of the Trust to a
particular series of Shares or to apportion the same among two or more
series, provided that any liability or expense incurred by a
particular series of Shares shall be payable solely out of the assets
of that series.
(t) To establish separate and distinct classes of Shares
for one or more series, with each class having such rights and
differences as determined by the Trustees.
(u) To purchase and pay for entirely out of Trust
property such insurance as they may deem necessary or appropriate for
the
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conduct of the business, including, without limitation, insurance
policies insuring the assets of the trust and payment of distributions
and principal on its portfolio investments, and insurance policies
insuring the Shareholders, Trustees, officers, employees, agents,
investment advisers or managers, principal underwriters, or
independent contractors of the Trust individually against all claims
and liabilities of every nature arising by reason of holding, being or
having held any such office or position, or by reason of any action
alleged to have been taken or omitted by any such person as
Shareholder, Trustee, officer, employee, agent, investment adviser or
manager, principal underwriter, or independent contractor, including
any action taken or omitted that may be determined to constitute
negligence, whether or not the Trust would have the power to indemnify
such person against such liability.
Trustees and Officers as Shareholders
Section 2. Subject only to the general limitations herein
contained as to the sale and purchase of Trust Shares and any restrictions that
may be contained in the Bylaws:
(a) Any Trustee, officer or other agent of the Trust may
acquire, own and dispose of Shares to the same extent as if he were
not a Trustee, officer or agent;
(b) The Trustees may issue and sell or cause to be issued
and sold Shares to (and buy such Shares from) any such person or firm
or company in which such person is interested.
Action by the Trustees
Section 3. The Trustees shall act by majority vote at a meeting
duly called or by unanimous written consent without a meeting or by telephone
consent provided a quorum of Trustees participate in any such telephonic
meeting, unless the 1940 Act requires that a particular action be taken only at
a meeting of the Trustees. At any meeting of the Trustees, a majority of the
Trustees shall constitute a quorum. Meetings of the Trustees may be called
orally or in writing by the Chairman of the Trustees or by any two other
Trustees. Notice of the time, date and place of all meetings of the Trustees
shall be given to each Trustee as provided in the Bylaws.
Notice need not be given to any Trustee who attends the meeting
without objecting to the lack of notice or who executes a written waiver of
notice with respect to the meeting. Subject to the requirements of the 1940
Act, the Trustees by majority vote may delegate to any one of their number the
authority to approve particular matters or take particular actions on behalf of
the Trust.
Chairman of the Trustees
Section 4. The Trustees may appoint one of their number to be
Chairman of the Board of Trustees and to perform such duties as the Trustees
may designate.
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ARTICLE VI
EXPENSES OF THE TRUST
Payment of Expenses by the Trust
Section 1. Subject to the provisions of Article III, Section 4,
the Trustees are authorized to have paid from the Trust estate or the assets
belonging to the Trust, as they deem fair and appropriate, expenses and
disbursements of the Trust, including, without limitation, fees and expenses of
Trustees who are not Interested Persons of the Trust, interest expenses, taxes,
fees and commissions of every kind, expenses of pricing Trust portfolio
securities, expenses of issue, repurchase and redemption of Shares including
expenses attributable to a program of periodic repurchases or redemptions,
expenses of registering and qualifying the Trust and its Shares under federal
and state laws and regulations, charges of Custodians, transfer agents, and
registrars, expenses of preparing and setting up in type Prospectuses and
Statements of Additional Information, expenses of printing and distributing
prospectuses sent to existing Shareholders, auditing and legal expenses,
reports to Shareholders, expenses of meetings of Shareholders and proxy
solicitations therefor, insurance expenses, association membership dues and for
such non-recurring items as may arise, including litigation to which the Trust
is a party, and for all losses and liabilities from them incurred in
administering the Trust, and for the payment of such expenses, disbursements,
losses and liabilities the Trustees shall have a lien on the assets belonging
to the Trust prior to any rights or interests of the shareholders thereto. This
section shall not preclude the Trust from directly paying any of the
aforementioned fees and expenses.
ARTICLE VII
INVESTMENT ADVISER, PRINCIPAL UNDERWRITER AND TRANSFER AGENT
Investment Adviser
Section 1. Subject to a Majority Shareholder Vote when required
by the 1940 Act, the Trustees may in their discretion from time to time enter
into an investment advisory or similar agreement(s) with respect to the Trust
whereby the other party(ies) to such agreement(s) shall undertake to furnish
the Trustees such investment advisory, statistical and research facilities and
services and such other facilities and services, if any, and all upon such
terms and conditions as the Trustees may in their discretion determine.
Notwithstanding any provisions of this Declaration of Trust, the Trustees may
authorize the investment adviser(s) (subject to such general or specific
instructions as the Trustees may from time to time adopt) to effect purchases,
sales or exchanges of portfolio securities and other investment instruments of
the Trust on behalf of the Trustees or may authorize any officer, agent, or
Trustee to effect such purchases, sales or exchanges pursuant to
recommendations of the investment adviser (and all without further action by
the Trustees). Any such purchases, sales and exchanges shall be deemed to have
been authorized by all of the Trustees.
The Trustees may, subject to applicable requirements of the 1940 Act,
including those relating to Shareholder approval, authorize the investment
adviser to employ one or more subadvisers from time to time to perform such of
the acts and services of the investment adviser, and upon such terms and
conditions, as may be agreed upon between the investment adviser and
subadviser.
Notwithstanding any contrary provisions herein, the Trustees can enter
into investment advisory or investment subadvisory agreements without
Shareholder approval permitted by an exemptive order of the U.S. Securities and
Exchange Commission ("SEC") or similar relief granted by the SEC or its staff,
including a staff no-action position.
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Principal Underwriter
Section 2. The Trustees may in their discretion from time to
time enter into an agreement(s) providing for the sale of the Shares, whereby
the Trust may either agree to sell the Shares to the other party to the
agreement or appoint such other party its sales agent for such Shares. In
either case, the agreement shall be on such terms and conditions as may be
prescribed in the Bylaws, if any, and such further terms and conditions as the
Trustees may in their discretion determine to be not inconsistent with the
provisions of this Article VII or of the Bylaws, if any; and such agreement may
also provide for the repurchase or sale of Shares by such other party as
principal or as agent of the Trust. Alternatively, or in addition thereto, the
Trust can directly distribute its Shares and, if necessary in connection with
such distribution, register as a broker-dealer in appropriate jurisdictions.
Transfer Agent
Section 3. The Trustees may in their discretion from time to
time enter into a transfer agency and Shareholder service agreement whereby the
other party shall undertake to furnish the Trust with transfer agency and
Shareholder services. The agreement shall be on such terms and conditions as
the Trustees may in their discretion determine are not inconsistent with the
provisions of this Declaration of Trust or of the Bylaws, if any. Such services
may be provided by one or more entities.
Parties to Contract
Section 4. Any agreement of the character described in Sections
1, 2 and 3 of this Article VII or in Article IX hereof may be entered into with
any corporation, firm, partnership, trust or association, although one or more
of the Trustees or officers of the Trust may be an officer, director, trustee,
shareholder, or member of such other party to the agreement, and no such
agreement shall be invalidated or rendered voidable by reason of the existence
of any relationship, nor shall any person holding such relationship be liable
merely by reason of such relationship for any loss or expense to the Trust
under or by reason of said agreement or accountable for any profit realized
directly or indirectly therefrom, provided that the agreement when entered into
was reasonable and fair and not inconsistent with the provisions of this
Article VII or the Bylaws, if any. The same person (including a firm,
corporation, partnership, trust, or association) may be the other party to
agreements entered into pursuant to Sections 1, 2 and 3 above or Article IX,
and any individual may be financially interested or otherwise affiliated with
persons who are parties to any or all of the agreements mentioned in this
Section 4.
Provisions and Amendments
Section 5. To the extent that Section 15 of the 1940 Act is
applicable, any contract entered into pursuant to Sections 1 and 2 of this
Article VII shall be consistent with and subject to the requirements of Section
15 of the 1940 Act with respect to its continuance in effect, its termination,
and the method of authorization and approval of such agreement or renewal or
amendment thereof, subject to any exemptive or similar relief granted by the
SEC or its Staff, including a staff no-action position.
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ARTICLE VIII
SHAREHOLDERS' VOTING POWERS AND MEETlNGS
Voting Powers
Section 1. The Shareholders shall have power to vote: (i) for
the election of Trustees as provided in Article IV, Section 2, (ii) for the
removal of Trustees as provided in Article IV, Section 3(c), (iii) with respect
to any investment advisory or subadvisory contract to the extent provided in
sections 1 and 5 of Article VII, (iv) with respect to the amendment of this
Declaration of Trust as provided in Article XII, Section 7, (v) to the same
extent as the shareholders of a Massachusetts business corporation, as to
whether or not a court action, proceeding or claim should be brought or
maintained derivatively or as a class action on behalf of the Trust or the
Shareholders, and (vi) with respect to such additional matters relating to the
Trust as may be required or authorized by law, by this Declaration of Trust, or
the Bylaws of the Trust if any, or any registration of the Trust with the
Commission or any state, as the Trustees may consider desirable. On any matter
submitted to a vote of the Shareholders, each whole Share shall be entitled to
one vote as to any matter on which it is entitled to vote, and each fractional
Share shall be entitled to a proportionate fractional vote. There shall be no
cumulative voting in the election of Trustees. Shares may be voted in person or
by proxy. Until Shares are issued, the Trustees may exercise all rights of
Shareholders and may take any action required or permitted by law, this
Declaration of Trust or any Bylaws of the Trust to be taken by Shareholders.
Meetings
Section 2. Special meetings of the Shareholders may be called by
the Trustees and may be held at the principal office of the Trust or such other
place as the Trustees may designate. Special meetings also shall be called by
the Trustees for the purpose of removing one or more Trustees upon the written
request for such a meeting by Shareholders owning at least 10 percent of the
outstanding Shares entitled to vote. Whenever ten or more Shareholders meeting
the qualifications set forth in Section 16(c) of the 1940 Act, as the same may
be amended from time to time, seek the opportunity of furnishing materials to
the other Shareholders with a view to obtaining signatures on such a request
for a meeting, the Trustees shall comply with the provisions of said Section
16(c) with respect to providing such Shareholders access to the list of the
Shareholders of record of the Trust or the mailing of such materials to such
Shareholders of record. Shareholders shall be entitled to at least 15 days'
notice of any meeting.
Quorum and Required Vote
Section 3. A majority of Shares entitled to vote in person or by
proxy shall constitute a Quorum for the transaction of business at a
Shareholders' meeting. Any lesser number shall be sufficient for adjournments.
Any adjourned session or sessions may be held within a reasonable time after
the date set for the original meeting, without the necessity of further notice.
Except when a larger vote is required by any provision of this Declaration of
Trust, the Bylaws or law, a majority of the Shares voted in person or by proxy
shall decide any questions and a plurality shall elect a Trustee.
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ARTICLE IX
CUSTODIAN
Appointment and Duties
Section 1. The Trustees shall at all times employ a bank or
trust company having capital, surplus and undivided profits of at least two
million dollars ($2,000,000) as Custodian on such basis of compensation as may
be agreed upon between the Trustees and the Custodian. The Custodian shall have
authority as agent for the Trust, but subject to such restrictions, limitations
and other requirements, if any, as may be contained in the Bylaws of the Trust:
(a) to hold the securities owned by the Trust and deliver
the same upon written order;
(b) to receive and receipt for any moneys due to the
Trust and deposit the same in its own banking department or elsewhere
as the Trustees may direct;
(c) to disburse such funds upon orders or vouchers;
(d) to keep the books and accounts of the Trust and
furnish clerical and accounting services and
(e) to compute, if authorized to do so by the Trustees,
the Trust's Net Asset Value in accordance with the provisions hereof.
If so directed by a Majority Shareholder Vote, the Custodian shall
deliver and Pay over all property of the Trust held by it as specified in such
vote.
Employment of Sub-Custodian
Section 2. The Trustees may also authorize the Custodian to
employ one or more sub-Custodians from time to time to perform such of the acts
and services of the Custodian, and upon such terms and conditions, as may be
agreed upon between the Custodian and such sub-Custodian and approved by the
Trustees, provided that in every case such sub- Custodian shall be (i) a bank
or trust company organized under the laws of the United States or one of the
states thereof and having capital, surplus and undivided profits of at least
two million dollars ($2,000,000) or such other person as may be permitted by
the Commission, or otherwise in accordance with the 1940 Act as from time to
time amended, or (ii) an eligible foreign custodian in accordance with Rule
17f-5 under the 1940 Act or any such applicable successor regulation.
Central Certificate System
Section 3. Subject to such rules, regulations and orders as the
Commission may adopt, the Trustees may direct the Custodian to deposit all or
any part of the securities owned by the Trust in a system for the central
handling of securities established by a national securities exchange or a
national securities association registered with the Commission under the
Securities Exchange Act of 1934, as amended, or such other person as may be
permitted by the Commission, or otherwise in accordance with the 1940 Act as
from time to time amended, pursuant to which system all securities of any
particular class of any issuer deposited within the system are treated as
fungible and may be transferred or pledged by bookkeeping entry without
physical delivery of such securities, provided that all such deposits shall be
subject to withdrawal only upon the order of the Trust.
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ARTICLE X
DISTRIBUTIONS AND REDEMPTIONS
Distributions
Section 1.
(a) The Trustees may from time to time declare and pay
dividends. The amount of such dividends and the payment of them shall
be wholly in the discretion of the Trustees,
(b) The Trustees shall have power, to the fullest extent
permitted by the laws of Massachusetts, at any time to declare and
cause to be paid dividends on Shares from Trust assets, which
dividends, at the election of the Trustees, may be paid daily or
otherwise pursuant to a standing resolution or resolutions adopted
only once or with such frequency as the Trustees may determine, and
may be Payable in Shares at the election of each Shareholder.
(c) Anything in this Declaration of Trust to the contrary
notwithstanding, the Trustees may at any time declare and distribute
pro rata among the Shareholders a "stock dividend."
Redemptions
Section 2. In case any Shareholder of record desires to dispose
of his Shares, he may deposit at the office of the transfer agent or other
authorized agent of the Trust a written request or such other form of request
as the Trustees may from time to time authorize, requesting that the Trust
purchase the Shares in accordance with this section 2; and the Shareholder so
requesting shall be entitle to require the Trust to purchase, and the Trust or
the principal underwriter of the Trust shall purchase, said Shares, but only at
the Net Asset Value thereof (as described in Section 3 hereof). The Trust shall
make payment for any such Shares to be redeemed, as aforesaid, in cash to the
extent required by federal law, and securities from Trust assets, and payment
for such Shares shall be made by the Trust or the principal underwriter to the
Shareholder of record within seven (7) days after the date upon which the
request is effective.
Determination of Net Asset Value and Valuation of Portfolio Assets
Section 3. The term "Net Asset Value" shall mean that amount by
which the assets of the Trust or any series or portfolio thereof exceed its
liabilities, all as determined by or under the direction of the Trustees. Such
value shall be determined on such days and at such times as the Trustees may
determine. Such determination shall be made with respect to securities for
which market quotations are readily available, at the market value of such
securities; and with respect to other securities and assets, at the fair value
as determined in good faith by the Trustees, provided, however, that the
Trustees, without Shareholder approval, may alter the method of appraising
portfolio securities insofar as permitted under the 1940 Act and the rules,
regulations and interpretations thereof promulgated or issued by the Commission
or insofar as permitted by any Order of the Commission. The Trustees may
delegate any powers and duties under this Section 3 with respect to appraisal
of assets and liabilities. At any time the Trustees may cause the value per
Share last determined to be determined again in similar manner and may fix the
time when such redetermined value shall become effective.
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Suspension of the Right of Redemption
Section 1. The Trustees may declare a suspension of the right of
redemption or postpone the date of payment to the extent as permitted under the
1940 Act. Such suspension shall take effect at such time as the Trustees shall
specify but not later than the close of business on the business day next
following the declaration of suspension, and thereafter there shall be no right
of redemption or payment until the Trustees shall declare the suspension at an
end. In the case of a suspension of the right of redemption, a Shareholder may
either withdraw his request for redemption or receive payment based on the Net
Asset value per Share existing after the termination of the suspension.
ARTICLE XI
LIMITATION OF LIABILITY AND INDEMNIFICATION
Limitation of Liability
Section 1. Provided they have exercised reasonable care and have
acted under the reasonable belief that their actions are in the best interest
of the Trust, the Trustees shall not be responsible for or liable in any event
for neglect or wrongdoing of them or any officer, agent, employee or investment
adviser of the Trust, but nothing contained herein shall protect any Trustee
against any liability to which he would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office.
Indemnification
Section 2.
(a) Subject to the exceptions and limitations contained
in paragraph (b) below:
(i) every person who is, or has been, a Trustee
or officer of the Trust (hereinafter referred to as "Covered
Person") shall be indemnified by the Trust to the fullest
extent permitted by law against liability and against all
expenses reasonably incurred or paid by him in connection with
any claim, action, suit or proceeding in which he becomes
involved as a party or otherwise by virtue of his being or
having been a Trustee or officer and against amounts paid or
incurred by him in the settlement thereof;
(ii) the words "claim," "action," "suit," or
"proceeding" shall apply to all claims, actions, suits or
proceedings (civil, criminal or other, including appeals),
actual or threatened while in office or thereafter, and the
words "liability" and "expenses" shall include, without
limitation, attorneys' fees, costs, judgments, amounts paid in
settlement, fines, penalties and other liabilities.
(b) No indemnification shall be provided hereunder to a
Covered Person:
(i) who shall have been adjudicated by a court or
body before which the proceeding was brought (A) to be liable
to the Trust or its Shareholders by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his office or (B) not
to have acted in good faith in the
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reasonable belief that his action was in the best interest of
the Trust; or
(ii) in the event of a settlement, unless there
has been a determination that such Trustee or officer did not
engage in willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of
his officer, (A) by the court or other body approving the
settlement (B) by at least a majority of those Trustees who
are neither interested persons of the Trust nor are parties to
the matter based upon a review of readily available facts (as
opposed to a full trial-type inquiry); or (C) by written
opinion of independent legal counsel based upon a review of
readily available facts (as opposed to a full trial-type
inquiry); provided, however, that any Shareholder may, by
appropriate legal proceedings, challenge any such
determination by the Trustees, or by independent counsel.
(c) The rights of indemnification herein provided may be
insured against by policies maintained by the Trust shall be
severable, shall not be exclusive of or affect any other rights to
which any Covered Person may now or hereafter be entitled, shall
continue as to a person who has ceased to be such Trustee or officer
and shall inure to the benefit of the heirs, executors and
administrators of such a person. Nothing contained herein shall affect
any rights to indemnification to which Trust personnel, other than
Trustees and officers, and other persons may be entitled by contract
or otherwise under law.
(d) Expenses in connection with the preparation and
presentation of a defense to any claim, action, suit or proceeding of
the character described in paragraph (a) of this Section 2 may be paid
by the Trust from time to time prior to final disposition thereof upon
receipt of an undertaking by or on behalf of such Covered Person that
such amount will be paid over by him to the Trust if it is ultimately
determined that he is not entitled to indemnification under this
Section 2; provided, however, that:
(i) such Covered Person shall have provided
appropriate security for such undertaking,
(ii) the Trust is insured against losses arising
out of any such advance payments or
(iii) either a majority of the neither interested
persons of the Trust nor parties to the matter, or independent
legal counsel in a written opinion, shall have determined,
based upon a review of readily available facts (as opposed to
a trial type inquiry or full investigation), that there is
reason to believe that such Covered Person will be found
entitled to indemnification under this Section 2.
Shareholders
Section 3. In case any Shareholder or former Shareholder of the
Trust shall be held to be personally liable solely by reason of his being or
having been a Shareholder and not because of his acts or omissions or for some
other reason the Shareholder or former Shareholder (or his heirs, executors,
administrators or other legal representatives or in the case of a corporation
or other entity, its corporate or other
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general successor) shall be entitled out of the Trust assets to be held
harmless from and indemnified against any loss and expense arising from such
liability. The Trust shall, upon request by the Shareholder, assume the defense
of any claim made against the Shareholder for any act or obligation of the
Trust and satisfy any judgment thereon.
ARTICLE XII
MISCELLANEOUS
Trust Not A Partnership
Section 1. It is hereby expressly declared that a trust and not
a partnership is created hereby. No Trustee hereunder shall have any power to
bind personally either the Trust's officers or any Shareholder. All persons
extending credit to, contracting with or having any claim against the Trust or
the Trustees shall look only to the assets of the Trust for payment under such
credit, contract or claim; and neither the Shareholders nor the Trustees, nor
any of their agents, whether past, present or future, shall be personally
liable therefor. Nothing in this Declaration of Trust shall protect a Trustee
against any liability to which the Trustee would otherwise be subject by reason
of willful misfeasance, bad faith, gross negligence or reckless disregard of
the duties involved in the conduct of the office of Trustee hereunder.
Trustee's Good Faith Action, Expert Advice, No Bond or Surety
Section 2. The exercise by the Trustees of their powers and
discretion hereunder in good faith and with reasonable care under the
circumstances then prevailing, shall be binding upon everyone interested.
Subject to the provisions of Section 1 of this Article XII and to Article XI,
the Trustees shall not be liable for errors of judgment or mistakes of fact or
law. The Trustees may take advice of counsel or other experts with respect to
the meaning and operation of this Declaration of Trust, and subject to the
provisions of Section 1 of this Article XII and to Article XI, shall be under
no liability for any act or omission in accordance with such advice or for
failing to follow such advice. The Trustees shall not be required to give any
bond as such, nor any surety if a bond is obtained.
Establishment of Record Dates
Section 3. The Trustees may close the stock transfer books of
the Trust for a period not exceeding 60 days preceding the date of any meeting
of Shareholders, or the date for the payment of any dividends, or the date for
the allotment of rights, or the date when any change or conversion or exchange
of Shares shall go into effect; or in lieu of closing the stock transfer books
as aforesaid, the Trustees may fix in advance a date, not exceeding 60 days
preceding the date of any meeting of Shareholders, or the date for payment of
any dividend, or the date for the allotment of rights, or the date when any
change or conversion or exchange of Shares shall go into effect as a record
date for the determination of the Shareholders entitled to notice of, and to
vote at, any such meeting or entitled to receive payment of any such dividend,
or to any such allotment of rights, or to exercise the rights in respect of any
such change, conversion or exchange of Shares, and in such case such
Shareholders and only such Shareholders as shall be Shareholders of record on
the date so fixed shall be entitled to such notice of, and to vote at such
meeting, or to receive payment of such dividend, or to receive such allotment
or rights, or to exercise such rights as the case may be, notwithstanding any
transfer of any Shares on the books of the Trust after any such record date
fixed as aforesaid.
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Termination of Trust
Section 4.
(a) This Trust shall continue without limitation of time
but subject to the provisions of paragraph (b) of this Section 4.
(b) Subject to a Majority Shareholder Voter the Trustees
may:
(i) sell and convey the assets of the Trust to
another trust, partnership, association or corporation
organized under the laws of any state which is a diversified
open-end management investment company as defined in the 1940
Act for adequate consideration which may include the
assumption of all outstanding obligations, taxes and other
liabilities accrued or contingent, of the Trust and which may
include shares of beneficial interest or stock of such trust,
partnership, association or corporation; or
(ii) at any time sell and convert into money all
of the assets of the Trust. Upon making provision for the
payment of all such liabilities in either (i) or (ii), by such
assumption or otherwise, the Trustees shall distribute the
remaining proceeds or assets (as the case may be) ratably
among the Shareholders.
(c) Upon completion of the distribution of the remaining
assets as provided in paragraph (b), the Trust shall terminate and the
Trustees shall be discharged of any and all further liabilities and
duties hereunder and the right, title and interest of all parties
shall be canceled and discharged.
Filing of Copies, References, Headings
Section 5. The original or a copy of this instrument and of each
declaration of trust supplemental hereto shall be kept at the office of the
Trust where it may be inspected by any Shareholder. A copy of this instrument
and of each supplemental declaration of trust shall be filed by the Trustees
with the Secretary of the Commonwealth of Massachusetts and the Boston City
Clerk, as well as any other governmental office where such filing may from time
to time be required. Anyone dealing with the Trust may rely on a certificate by
an officer or Trustee of the Trust as to whether or not any such supplemental
declarations of trust have been made and as to any matters in connection with
the Trust hereunder, and with the same effect as if it were the original may
rely on a copy certified by any officer or Trustee of the Trust to be a copy of
this instrument or of any such supplemental declaration of trust. In this
instrument or in any such supplemental declaration of trust, references to this
instrument, and the expressions "herein," "hereof" and "hereunder," shall be
deemed to refer to this instrument as amended or affected by any such
supplemental declaration of trust. Headinqs are placed herein for convenience
of reference only and in case of any conflict the text of this instrument,
rather than the headings shall control. This instrument may be executed in any
number of counterparts each of which shall be deemed an original.
16
<PAGE> 17
Applicable Law
Section 6. The trust set forth in this instrument is made in the
Commonwealth of Massachusetts, and it is created under and is to be governed by
and construed and administered according to the laws of said Commonwealth. The
Trust shall be of the type commonly called a Massachusetts business trust, and
without limiting the provisions hereof, the Trust may exercise all powers which
are ordinarily exercised by such a Trust.
Amendments
Section 7. If authorized by votes of the Trustees and a Majority
Shareholder Vote, or by any larger vote which may be required by applicable law
or this Declaration of Trust in any particular case, the Trustees shall amend
or otherwise supplement this instrument, by making a declaration of trust
supplemental hereto, which thereafter shall form a part hereof, Amendments
having the purpose of changing the name of the Trust or of supplying any
omission, curing any ambiguity or curing, correcting or supplementing any
defective or inconsistent provision contained herein shall not require
authorization by Shareholder vote. Copies of the supplemental declaration of
trust shall be filed as specified in Section 5 of this Article XII.
Fiscal Year
Section 8. The fiscal year of the Trust shall end on a specified
date as determined by the Trustees; provided, however, that the Trustees may,
without Shareholder approval, change the fiscal year of the Trust.
Use of the Words "American Eagle" and "American Airlines"
Section 9. American Airlines, Inc. has consented to the use by
the Trust of the identifying words "American Eagle." Such consent is
conditioned upon the employment of AMR Investment Services, Inc., its
successors or its affiliated companies as investment adviser or manager of the
Trust. As between the Trust and itself, American Airlines, Inc. controls the
use of the name of the Trust insofar as such name contains the identifying
words "American Eagle." American Airlines, Inc. may from time to time use the
identifying words "American Eagle" in other connections and for other purposes
including, without limitation, in the names of other investment companies,
corporations or businesses which it may manage, advise, sponsor or own, or in
which it may have a financial interest. American Airlines, Inc., may require
the Trust to cease using the identifying words "American Eagle" in the name of
the Trust if the Trust ceases to employ AMR investment Services, Inc., or
another subsidiary or affiliate of American Airlines, Inc. as investment
adviser or Manager.
Notice to other Parties
Section 10. Every note, bond, contract, instrument, certificate
or undertaking made or issued by the Trustees or by any officers or officer
shall give notice that this Declaration of Trust is on file with the Secretary
of the Commonwealth of Massachusetts and shall recite that the same was
executed or made by or on behalf of the Trust or by them as Trustees or Trustee
or as officers or officer and not individually and that the obligations of such
instrument are not binding upon any of them or the Shareholders individually
but are binding only upon the assets and property of the Trust, and may contain
such further recital as he and she or they may deem appropriate, but the
omission thereof shall not operate to bind any Trustees or Trustee or officers
or officer or Shareholders or Shareholder individually.
17
<PAGE> 18
IN WITNESS WHEREOF, the undersigned, being the sole initial Trustee of
American Eagle Funds, has executed this instrument.
1/14/87 /s/William F. Quinn//
- - ---------------- ---------------------
DATE William F. Quinn
Trustee
STATE OF TEXAS
COUNTY OF TARRANT
I, the undersigned authority, hereby certify that the foregoing is a true and
correct copy of the instrument presented to me by William F. Quinn as the
original of such instrument.
[Notary]
/s/Carol C. Zimmerman
---------------------
Carol C. Zimmerman
Notary Public - Tarrant County, Texas
Resident Agent:
James E. Howard
Kirkpatrick & Lockhart
Exchange Place, 53 State Street
Boston, MA 02109
(617) 227-6000
18
<PAGE> 1
Exhibit 99.b.2
AMERICAN EAGLE FUNDS
BY LAWS
These Bylaws of the American Eagle Funds (the "Trust"), a
Massachusetts business trust, are subject to the Trust's Declaration of Trust
as from time to time amended.
ARTICLE I
OFFICERS AND THEIR ELECTION
Officers
Section 1. The officers of the Trust shall be a President, a
Treasurer, a Secretary, and such other officers as the Trustees may from time
to time elect. It shall not be necessary for any Trustee or other officer to be
a holder of shares in the Trust.
Election of Officers
Section 2. The President, Treasurer and Secretary shall be chosen
annually by the Trustees. Two or mor offices may be held by a single person
except the officers shall hold office until their successors are chosen and
qualified.
Resignations and Removals
Section 3. Any officer of the Trust may resign by filing a written
resignation with the President, the Trustees or the Secretary, which
resignation shall take effect on being so filed or at such time as may be
therein specified. The Trustees may at any meeting remove any officer by a
majority vote of the voting Trustees.
ARTICLE II
POWERS AND DUTIES OF OFFICERS AND TRUSTEES
Management Of The Trust-General
Section 1. The business and affairs of the Trust shall be managed by
the Trustees, and they shall have all powers necessary and desirable to carry
out their responsibilities, so far as such powers are not inconsistent with the
laws of the Commonwealth of Massachusetts, the Declaration of Trust, or with
these Bylaws.
Executive and Other Committees
Section 2. The Trustees may elect from their own number an executive
committee to consist of not less than three nor more than five members, which
shall have the power and duty to conduct the current and ordinary business of
the Trust, including the purchase and sale of securities, while the Trustees
are not in session, and such other powers and duties as the Trustees may from
time to time delegate to such committee. The Trustees may also elect from
their own number other committees from time to time. The number composing such
committees and the powers conferred upon the same are to be determined by vote
of the Trustees.
Chairman Of The Trustees
Section 3. The Trustees may, but need not, appoint from among their
number a Chairman. He shall perform such duties as the Trustees may from time
to time designate.
<PAGE> 2
President
Section 4. The President shall be the chief executive officer of the
Trust and, subject to the Trustees shall have general supervision over the
business and policies of the Trust. When present, he shall preside at all
meetings of the Shareholders and the Trustees, and he may, subject to the
approval of the Trustees, appoint a Trustee to preside at such meetings in his
absence. The President shall perform such duties additional to all of the
foregoing as the Trustees may from time to time designate.
Treasurer
Section 5. The Treasurer shall be the principal financial and
accounting officer of the Trust. He or she shall deliver all funds and
securities of the Trust which may came into his or her hands to such bank or
trust company as the Trustees shall employ as Custodian in accordance with
Article IX of the Declaration of Trust. He or she shall have the custody of
the seal of the Trust. He or she shall make annual reports regarding the
business and condition of the Trust, which reports shall be preserved in Trust
records, and he or she shall furnish such other reports regarding the business
and condition of the Trust as the Trustees may from time to time require. The
Treasurer shall perform such additional duties as the Trustees may from time to
time designate.
Secretary
Section 6. The Secretary shall record in books kept for the purpose
all votes and proceedings of the Trustees and the Shareholders at their
respective meetings. The Secretary shall perform such additional duties as the
Trustees may from time to time designate.
Vice President
Section 7. Any Vice President of the Trust shall perform such duties
as the Trustees may from time to time designate.
Assistant Treasurer
Section 8. Any Assistant Treasurer of the Trust shall perform such
duties as the Trustees may from time to time designate.
Assistant Secretary
Section 9. Any Assistant Secretary of the Trust shall perform such
duties as the Trustees may from time to time designate.
ARTICLE III
SHAREHOLDERS' MEETINGS
Special Meetings
Section 1. A special meeting of the Shareholders shall be called by
the Secretary whenever (i) ordered by the Trustees or (ii) requested, for the
purpose of removing a Trustee from office, in writing by the holder or holders
of at least 10% of the outstanding Shares entitled to vote. If the Secretary,
when so ordered or requested, refuses or neglects for more than 30 days to call
such special meeting, the Trustees or the shareholders so requesting may, in
the name of the Secretary, call the meeting by giving notice thereof in the
manner required when notice is given by the Secretary. If the meeting is a
meeting of the shareholders of one or more series of shares, but not a meeting
of all shareholders of the Trust, then only the shareholders of such one or
more series shall be entitled to notice of and to vote at such meeting.
Notices
Section 2 Except as above provided, notices of any special meeting of
the Shareholders shall be given by the Secretary by
<PAGE> 3
delivering or mailing, postage prepaid, to each Shareholder entitled to vote at
said meeting, a Written or printed notification of such meeting, at least 10
days before the meeting, to such address as may be registered with the Trust by
the Shareholder.
Place Of Meeting
Section 3. All special meetings of the Shareholders shall be held at
the principal place of business or the Trust or at such other place in the
United States as the Trustees may designate.
ARTICLE IV
TRUSTEES' MEETINGS
Special Meetings
Section 1. Special meetings of the Trustees shall be called by the
Secretary at the written request of the President, the Treasurer, or any two
Trustees, and if the Secretary, when so requested , refuses or fails for more
than 24 hours to call such meeting, the President, the Treasurer, or such two
Trustees may, in the name of the Secretary, call such meeting by giving due
notice in the manner required when notice is to be given by the Secretary.
Regular Meetings
Section 2. Regular meetings of the Trustees may be held without call
or notice at such places and at such times as the Trustees may from time to
time determine, provided that any Trustee who is absent when such determination
is made shall be given notice of the determination.
Quorum
Section 3. A majority of the Trustees shall constitute a quorum for
the transaction of business.
Notice
Section 4. Except as otherwise provided, notice of any special
meeting of the Trustees shall be given by the Secretary to each Trustee orally
or by mail, hand delivery or telegram. A notice may be mailed, postage prepaid,
addressed to him at his address as registered on the books of the Trust or, if
not so registered, at his last known address at least three days before the
meeting or delivered to him at least two days before the meeting, provided
orally by telephone at least 24 hours before the meeting or sent to him at
least 24 hours before the meeting, by prepaid telegram addressed to him at said
registered address, if any, or if he has no such registered address, at his
last known address.
Place Of Meeting
Section 5. All special meetings of the Trustees shall be held at the
principal place of business of the Trustees or such other place in the United
States as the person or persons requesting said meeting to be called may
designate, but any meeting may adjourn to any other place.
Special Action
Section 6. When all the Trustees shall be present at any meeting,
however called or wherever held, or shall assent to the holding of the meeting
without notice, or after the meeting shall sign a written assent thereto on the
record of such meeting, the acts of such meeting shall be valid as if such
meeting had been regularly held.
Action By Consent
Section 7. Any action by the Trustees may be taken without a meeting
if a written consent thereto is signed by all the Trustees and
<PAGE> 4
filed with the records of the Trustees' meeting, or by telephone consent
provided a quorum of Trustees participate in any such telephone meeting. Such
consent shall be treated as a vote of the Trustees far all purposes.
ARTICLE V
SHARES OF BENEFICIAL INTEREST
Beneficial Interest
Section 1. The beneficial interest in the Trust shall at all times be
divided into an unlimited number of transferable Shares without par value each
of which shall represent an equal proportionate interest in the class with each
other Share of the class outstanding, none having priority or preference over
another.
Transfer Of Shares
Section 2. The Shares of the Trust shall be transferable, so as to
affect the rights of the Trust, only by transfer recorded on the books of the
Trust, in person or by attorney.
Equitable Interest Not Recognized
Section 3. The Trust shall be entitled to treat the holder of record
of any Share or Shares of stock as the holder in fact thereof, and shall not be
bound to recognize any equitable or other claim or interest in such Share or
Shares on the part of any other person except as may be otherwise expressly
provided by law.
ARTICLE VI
INSPECTION OF BOOKS
The Trustees shall from time to time determine whether and to what
extent, and at what times and places, and under what conditions and regulations
the accounts and books of the Trust or any of them shall be open to the
inspection of the Shareholders; and no Shareholder shall have any right to
inspect any account or book or document of the Trust except as conferred by law
or otherwise by the Trustees or by resolution of the Shareholders.
ARTICLE VII
PROVISIONS RELATING TO THE CONDUCT OF THE TRUST'S BUSINESS
Dealings with Affiliates
Section 1. The Trust shall not purchase or retain securities issued
by any issuer if one or more of the holders of the securities of such issuer or
one or more of the officers or directors of such issuer is an officer or
Trustee of the Trust or officer or director of any organization, association or
corporation with which the Trust has an investment advisory or management
contract ("investment adviser" or manager"), if to the knowledge of the Trust
one or more of such officers or Trustees of the Trust or such officers or
directors of such investment adviser or manager who own beneficially more than
one-half of one percent of the shares or securities together own beneficially
more than five percent of such outstanding shares or securities. Each Trustee
and officer of the Trust shall give notice to the President or Treasurer of the
Trust of the identity of all issuers whose securities are held by the Trust of
which such officer or Trustee owns as much as one-half of one percent of the
outstanding securities and the Trust shall not be charged with the knowledge of
such holdings in the absence of receiving such notice if the Trust has
requested such information not less often than quarterly.
Subject to the provisions of the preceding paragraph, no officer,
Trustee or agent of the Trust and no officer, director or agent of any
investment adviser or manager shall deal for or on behalf of the Trust
<PAGE> 5
with himself as principal or agent, or with any partnership, association or
corporation in which he has a material financial interest; provided that the
foregoing provisions shall not prevent (a) officers and Trustees of the Trust
from buying, holding or selling shares in the Trust, or from being partners,
officers or directors of or financially interested in any investment adviser or
manager to the Trust or in any corporation, firm or association which may at
any time have a distributor's or principal underwriter's contract with the
Trust; (b) purchases or sales of securities or other property if such
transaction is permitted by or is exempt or exempted from the provisions of the
Investment Company Act of 1940 or any rule or regulation thereunder and if such
transaction does not involve any commission or profit to any security dealer
who is, or one of more of whose partners, shareholders officers or directors
is, an officer or Trustee of the Trust or an officer or director of the
investment adviser, manager or principal underwriter of the Trust; (c)
employment of legal counsel, registrar, transfer agent, shareholder services
agent, dividend disbursing agent or custodian who is, or has a partner,
stockholder, officer or director who is, an officer or Trustee of the Trust;
(d) sharing statistical, research and management expenses, including personnel
and services, with any other company in which an officer or Trustee of the
Trust is an officer or director or financially interested.
Right to Engage in Business
Section 2. Any officer or Trustee of the Trust, the investment
adviser, the manager, and any officers or directors of the investment adviser
or manager may have personal business interests and may engage in personal
business activities.
Dealings in Securities of the Trust
Section 3. The Trust, the investment adviser, the manager, any
corporation, firm or association which may at any time have an exclusive
distributor's or principal underwriter's contract with the Trust (the
"distributor") and the officers and Trustees of the Trust and officers and
directors of every investment adviser, manager and distributor, shall not take
long or short positions in the securities of the Trust, except that:
(a) the distributor may place orders with the Trust for its shares
equivalent to orders received by the distributor;
(b) shares of the Trust may be purchased at not less than net
asset value for investment by the investment adviser, manager, and officers and
directors of the distributor, profit-sharing or other benefit plan for such
persons, no such purchase to be in contravention of any applicable state or
federal requirements.
Limitation on Certain Loans
Section 4. The Trust shall not make loans to any officer, Trustee or
employee of the Trust or any investment adviser, manager or distributor or
their respective officers directors or partners or employees.
Custodian
Section 5. All securities and cash owned by the Trust shall be
maintained in the custody of one or more banks or trust companies having
(according to its last published report) not less than two million dollars
($2,000,000) aggregate capital, surplus and undivided profits or eligible
foreign custodians in accordance with Rule 17f-5 under the Investment Company
Act of 1940 (hereinafter, collectively referred to as the "custodian");
provided, however, the custodian may deliver securities as collateral on
borrowings effected by the Trust, provided, that such delivery shall be
conditioned upon receipt of the borrowed funds by the custodian except where
additional collateral is being
<PAGE> 6
pledged on an outstanding loan and the custodian may deliver securities lent by
the Trust against receipt of initial collateral specified by the Trust. Subject
to such rules, regulations and orders, if any, as the Securities and Exchange
Commission (the "Commission") may adopt, the Trust may or may permit any
custodian to, deposit all or any part of the securities owned by the Trust in a
system for the central handling of securities operated by the Federal Reserve
Banks, or established by a national securities exchange or national securities
association registered with the Commission under the Securities Exchange Act of
1934, or such other person as may be permitted by the Commission, pursuant to
which system all securities of any particular class or series of any issue
deposited with the system are treated as fungible and may be transferred or
pledged by bookkeeping entry, without physical delivery of such securities.
The Trust shall upon the resignation or inability to serve of its
custodian or upon change of the custodian: (a) use its best efforts to obtain a
successor custodian; (b) require that the cash and securities owned by this
Trust be delivered directly to the successor custodian; and (c) in the event
that no successor custodian can be found, submit to the shareholders, before
permitting delivery of the cash and securities owned by this Trust otherwise
than to a successor custodian the question whether or not this Trust shall be
liquidated or shall function without a custodian.
ARTICLE VIII
SEAL
The seal of the Trust shall be circular in form and shall bear an
appropriate inscription.
ARTICLE IX
FISCAL YEAR
The fiscal year of the Trust shall end on such date as the Trustees
shall from time to time determine.
ARTICLE X
AMENDMENTS
These Bylaws may be amended at any meeting of the Trustees of the
Trust by a majority vote.
ARTICLE XI
REPORTS TO SHAREHOLDERS
The Trustees shall at least semi-annually submit to the Shareholders a
written financial report of the transactions of the Trust including financial
statements which shall be certified at least annually by independent certified
public accountants.
<PAGE> 1
Exhibit 99.b.5.a.i
AMERICAN AADVANTAGE FUNDS
MANAGEMENT AGREEMENT
AGREEMENT made this 3rd day of April, 1987, by and between AMERICAN
AADVANTAGE FUNDS (the "Trust"), and AMR INVESTMENT SERVICES, INC. (the
"Manager");
WHEREAS the Trust, a Massachusetts Business Trust, is an open-end,
diversified management investment company registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), consisting of several series
(portfolios) of shares, each having its own investment policies; and
WHEREAS, the Trust desires to avail itself of the services,
information, advice, assistance and facilities of a fund manager and to have a
fund manager provide or: perform for it various administrative, management,
advisory, statistical, research, asset allocation, portfolio manager selection
and other services;and
WHEREAS, the Manager, an investment adviser registered under the
Investment Advisers Act of 1940, as amended, is willing to furnish such
services to the Trust with respect to its existing portfolios and such other
portfolios as the Trust and the Manager shall agree upon (collectively, the
"Portfolios") on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, the Trust and Manager agree as follows:
1. Appointment of the Manager. The Trust hereby appoints the
Manager to provide management services to the Trust in the manner set forth in
Section 2 of this Agreement, subject to the direction of the Trust's Board of
Trustees and officers, for the period in the manner and in the terms
hereinafter set forth. The Manager hereby accepts such appointment and agrees
during such period to render the services and assume the obligations herein set
forth. The Manager shall for all purposes herein be deemed to be an independent
contractor and shall, except as expressly provided or authorized (whether
herein or otherwise), have no authority to act for or represent the Trust in
any way or otherwise be deemed an agent of the Trust.
2. Duties of and Services to be Provided by the Manager. The
Manager undertakes to provide the services hereinafter set forth and to assume
the following obligations:
A. Corporate Management and Administrative Services.
(a) The Manager shall furnish to the Trust
adequate (i) office space, which may be space within the offices of the Manager
or in such other place as may be agreed upon from time-to-time, and (ii) office
furnishings, facilities and
<PAGE> 2
equipment as may be reasonably required for managing and administering the
operations and conducting the business of the Trust.
(b) The Manager shall take all necessary steps to
assist the Trust in complying with the securities, tax and other laws and
regulations of the United States and the various states and other jurisdictions
in which the Trust does business, conducting correspondence and other
communications with the shareholders of the Trust, and maintaining or
supervising the maintenance of all internal bookkeeping, accounting and
auditing services and records in connection with the Trust's investment and
business activities. In compliance with the requirements of Rule 31a-3 under
the 1940 Act, the Manager hereby agrees that all records which it maintains for
the Trust are the property of the Trust and further agrees to surrender
promptly to the Trust any such records upon the Trust's request. The Manager
further agrees to preserve for the periods prescribed by Rule 31a-2 under the
1940 Act the records required to be maintained by Rule 31a-1 under the 1940
Act.
(c) The Manager shall employ or provide and
compensate the executive, administrative, secretarial and clerical personnel
necessary to supervise the provision of the services set forth in Subparagraph
2(A)(b), and shall bear the expense of providing such services, except as may
otherwise be provided in Paragraph 4 of this Agreement. The Manager shall also
compensate all Trustees, officers or employees of the Trust who are directors,
officers or employees of the Manager or any of its affiliates.
B. Investment Management Services.
(a) The Manager shall have responsibility for the
management and investment of the assets and portfolio securities of each
Portfolio, subject to and in accordance with the Declaration of Trust and
By-Laws of the Trust as currently in effect, the current investment objectives
and policies of each Portfolio, and any directions which the Trust's Board of
Trustees may issue to the Manager from time-to-time.
(b) The Manager shall provide a continuous
investment program for each Portfolio, shall revise each such program as
necessary, and shall monitor implementation of the program.
(c) The Manager shall oversee the maintenance of
all books and records with respect to the securities transactions of each
Portfolio and the keeping of each Portfolio's books of account, and shall
provide to the Trust's Board of Trustees such periodic and special reports as
the Board may request.
(d) The Manager may delegate any or all of its
duties under this Paragraph 2(B) and Paragraph 3 with respect to any Portfolio
to one or more persons or companies ("Advisers"),
2
<PAGE> 3
pursuant to an agreement between the Manager and each such Adviser providing
such services to a Portfolio ("Investment Advisory Agreement"). Each Investment
Advisory Agreement may provide that the Adviser which is a party thereto,
subject to the control and supervision of the Trust's Board of Trustees and the
Manager, shall have full investment discretion for the affected Portfolio and
shall make all determinations with respect to the investment of that
Portfolio's assets or any portion thereof specified by the Manager and the
purchase and sale of portfolio securities for that Portfolio. Any delegation of
duties pursuant to this Paragraph shall comply with any applicable provisions
of Section 15 of the 1940 Act, except to the extent permitted by any exemptive
order of the Securities and Exchange Commission or similar relief.
(e) The Manager shall evaluate Advisers and shall
advise the Trustees of the Trust of the Advisers which the Manager believes are
best suited to invest the assets of each Portfolio; shall monitor and evaluate
the investment performance of each Adviser employed by the Manager which
manages any portion of a Portfolio's assets; shall allocate the portion of each
Portfolio's assets to be managed by each Adviser; shall recommend changes of or
additional Advisers when appropriate; shall coordinate the investment
activities of the Advisers; and shall compensate the Advisers in the manner
specified in each Investment Advisory Agreement.
(f) The Trust shall provide the Manager with a
statement of the investment objectives and policies of each Portfolio and any
specific investment restrictions applicable thereto as established by the
Trust. The Trust will promptly notify the Manager of any modifications to such
objectives, policies or restrictions or of any specific instructions which the
Trust's Board of Trustees may adopt.
C. Provision of Information Necessary for Preparation of
Securities Registration, Statements, Amendments and Other Materials. The
Manager will make available and provide to the Trust: (i) financial, accounting
and statistical information required by the Trust in the preparation of
registration statements, reports and other documents required by federal
securities laws and the securities laws of the states and other jurisdictions
in which the Trust's shares are sold; (ii) such information as the Trust may
reasonably request for use in the preparation of registration statements,
reports and other documents required by federal securities laws and the
securities laws of the states and other jurisdictions in which the Trust's
shares are sold; and (iii) such information as the Trust may reasonably request
for use in the preparation of such documents or of other materials necessary or
helpful for the distribution of the Trust's shares.
D. Other Obligations and Services. The Manager shall
make available its officers and employees to the Trustees and officers of the
Trust for consultation and discussions regarding the administration and
management of the Trust and its investment activities.
3
<PAGE> 4
3. Execution and Allocation of Portfolio Transactions.
A. The Manager, subject to the control and direction of
the Trust's Board of Trustees, shall have authority and discretion to select
brokers and dealers to execute portfolio transactions for each Portfolio, and
for the selection of the markets on or in which the transactions will be
executed.
B. In acting pursuant to Subparagraph 3(A) of this
Agreement, the primary objective of the Manager shall be to obtain the best net
price and most favorable execution of its orders for the Trust. However, this
responsibility shall not be deemed to obligate the Manager to solicit
competitive bids for each transaction, and the Manager shall have no obligation
to seek the lowest available commission cost to the Trust, so long as the
Manager determines that the broker or dealer is able to obtain the best price
on a particular transaction and that the commission cost is reasonable in
relation to the total quality and reliability of the brokerage and research
services made available by the broker to the Manager viewed in terms of either
that particular transaction or of the Manager's overall responsibility to the
Trust or its other clients. Accordingly, the Trust and the Manager agree that
the Manager and the Advisers may select brokers and dealers for the execution
of the Trust's portfolio transactions from among:
(a) Those brokers and dealers who provide
brokerage and research services or statistical quotations and other information
to the Trust, including the quotations necessary to determine the value of each
Portfolio's net assets, in such amount as may reasonably be required in light
of such services; and
(b) Those brokers and dealers who supply
brokerage and research services to the Manager or the Advisers of any Portfolio
which relate directly to the portfolio securities, actual or potential, of the
Portfolio, or which place the Manager or Advisers in a better position to make
decisions in connection with the management of the Portfolio's assets, whether
or not such data may also be useful to the Manager and its affiliates, or the
Advisers and their affiliates, in managing other Portfolios or advising other
clients, in such amount as may reasonably be required.
C. The Manager shall provide such reports to the Trust
as may reasonably be requested by the Trust's Board of Trustees of the total
brokerage business placed and the manner in which the allocation of brokerage
transactions has been accomplished.
4
<PAGE> 5
D. The Manager agrees that no investment decision will
be made or influenced by a desire to provide brokerage for allocation in
accordance with the foregoing, and that the right to make such allocation of
brokerage shall not interfere with the Manager's primary duty to obtain the
best net price and execution for the Trust.
E. The Manager agrees that no securities of any
Portfolio will be purchased from or sold to the Manager or any of its
affiliates except in accordance with the 1940 Act and rules thereunder.
4. Expenses of the Trust. It is understood that the Trust will
pay all of its expenses other than those expressly assumed by the Manager
herein, which expenses payable by the Trust shall include: expenses of all
audits by independent public accountants; expenses of each transfer agent,
registrar, dividend disbursing agent, shareholder recordkeeping agent and
custodian (including recordkeeping services provided by each custodian);
expenses of obtaining quotations for calculating the value of each Portfolio's
net assets; salaries and other compensation of any of the Trust's officers and
employees, who are not officers, directors or employees of the Manager or its
affiliates; taxes and the preparation of the Fund's tax returns; brokerage fees
and commissions in connection with the purchase and sale of portfolio
securities for each Portfolio; costs, including the interest expense, of
borrowing money; costs and/or fees incident to meetings of the Trust's
shareholders, Board of Trustees and any committees thereof, the preparation and
mailing of prospectuses and reports of the Trust to its shareholders, the
filing of reports with regulatory bodies, the maintenance of the Trust's
existence as a Massachusetts business trust, and the registration of Trust
shares with federal and other securities authorities as required; legal fees,
including the legal fees related to the registration and continued
qualification of the Trust's shares for sale and fees of separate counsel; for
the Trust's independent Trustees, costs of printing any stock certificates
representing shares of the Trust, trustees' fees and expenses of Trustees who
are not directors, officers or employees of the Manager or any of its
affiliates; costs of the fidelity bond required by Section 17(g) of the 1940
Act and any other insurance premiums; and any extraordinary expenses of a
non-recurring nature.
5. Activities and Affiliates of the Manager. The services of the
Manager hereunder are not to be deemed exclusive, and the Manager and any of
its affiliates shall be free to render similar services to others so long as
its services under this Agreement are not impaired thereby. Subject to and in
accordance with the Declaration of Trust and By-Laws of the Trust as currently
in effect and the 1940 Act and the rules thereunder, it is understood that the
Trustees, officers, agents and shareholders of the Trust are or may be
interested in the Manager or its affiliates as directors, officers, agents or
stockholders of the Manager or its affiliates; directors, officers, agents and
stockholders of the Manager or its affiliates are or may be interested in the
Trust as Trustees, officers, agents,
5
<PAGE> 6
shareholders or otherwise; the Manager or its affiliates may be interested in
the Trust as shareholders or otherwise; and the effect of any such interests
shall be governed by said Declaration of Trust, By-Laws and the 1940 Act and
the rules thereunder.
6. Compensation of the Manager. In consideration of the Manager's
services as specified in this Agreement, the Manager shall receive a fee as
specified in the Schedule(s) attached hereto. Such fee constitutes the
Manager's compensation solely with respect to the investment advisory and
portfolio allocation services performed pursuant Paragraphs 2(B) and 3 of this
Agreement. In addition, the Trust acknowledges that the Manager will charge,
and expressly authorizes the Manager to charge, a Shareholder Fee to each
investor in Trust pursuant to Shareholder Service Agreements entered into
between the Manager and each Investor. The shareholder Fee represents the
Manager's compensation for all services performed under this Agreement other
than investment advisory and portfolio allocation services specified in
Paragraphs 2(B) and 3.
7. Liabilities of the Manager. In the absence of willful
misfeasance or bad faith, gross negligence or reckless disregard of its
obligations and duties hereunder, the Manager shall not be subject to liability
to the Trust or to any shareholder of the Trust for any act or omission in the
course of or connected with rendering services hereunder. Any person, even
though also an officer, director, employee or agent of Manager, who may be or
become a Trustee, officer, employee or agent of the Trust shall be deemed, when
rendering services to the Trust or acting with respect to any business of the
Trust, to be rendering such services to or acting solely for the Trust and not
as an officer, director, employee or agent or one under the control of the
Manager even though paid by it.
8. Renewal and Termination. This Agreement shall become effective
on the date written above and, unless sooner terminated as provided herein,
shall continue in effect for two years. This Agreement may be continued
annually thereafter for successive one year periods, provided that such
continuance is specifically approved at least annually with respect to any
Portfolio, (a) by a vote of a majority of the outstanding voting securities of
that Portfolio, or (b) by a vote of a majority of the Trustees of the Trust,
and, in either case by a majority of the Trustees who are not parties to this
Agreement or interested persons of any parties to this Agreement (other than as
Trustees of the Trust) cast in person at a meeting called for the purpose of
voting on this Agreement. Notwithstanding the foregoing, this Agreement may be
terminated at any time with respect to any Portfolio by either party hereto,
without payment of any penalty, on sixty (60) days' written notice, by vote of
the Trust's Board of Trustees or by vote of a majority of the outstanding
voting securities of that Portfolio and will terminate automatically in the
event of its assignment. Any notice under this Agreement shall be given in
writing addressed and delivered or mailed postpaid to the other
6
<PAGE> 7
party to this Agreement at its principal place of business. As used in this
Agreement the terms "assignment," "interested person," and "vote of a majority
of the outstanding voting securities" shall have the meanings set forth in the
1940 Act.
9. Severability. If any provision of this Agreement shall be held
or made invalid by a court decision, statute, rule or otherwise, the remainder
of this Agreement shall not be affected thereby.
10. Governing Law. To the extent that state Law has not been
preempted by the provisions of any law of the United States heretofore or
hereafter enacted, as the same may be amended from time to time, this Agreement
shall be administered, construed and enforced according to the laws of The
State of Texas.
11. Notice. Notice hereby is given that the Trust's Declaration of
Trust is on file with the Secretary of State of the Commonwealth of
Massachusetts and that the Declaration of Trust and this Agreement are executed
by the Trust's Trustees and/or officers in their capacities as Trustees and/or
officers, and the obligations of the Declaration of Trust and this Agreement
are not binding upon any of them or the Shareholders individually; rather, they
are binding only upon the assets and property of the Trust.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as of the day and year first written above.
AMERICAN AADVANTAGE FUNDS
By /s/ William F. Quinn
-------------------------------
William F. Quinn
Title President
-------------------------
AMR INVESTMENT SERVICES, INC.
By /s/ M. E. Devine
-------------------------------
Matthew E. Devine
Title Vice President & Treasurer
--------------------------
7
<PAGE> 8
Schedule A
to the
Management Agreement
between
AMR Investment Services, Inc.
and
American AAdvantage Funds
As compensation pursuant to section 6 of the Management Agreement between AMR
Investment Services, Inc. and American AAdvantage Funds, American AAdvantage
Funds shall pay to AMR Investment Services, Inc. an annualized fee equal to the
sum of (i) .15% of the net assets of the American AAdvantage Money Market Fund;
and (ii) .05% of the net assets of the American AAdvantage Balanced, Equity and
Fixed Income Funds, plus all fees payable by the Manager with respect to such
Funds pursuant to any Investment Advisory Agreement entered into pursuant to
Paragraph 2(B)(d) of said Management Agreement. The above described
compensation shall be calculated and accrued daily and be payable monthly.
8
<PAGE> 1
Exhibit 99.b.5.a.ii
Supplemental Terms and Conditions
of
Management Agreement between
American AAdvantage Funds
and
AMR Investment Services, Inc.
The following terms and conditions hereby are incorporated into the
Management Agreement (the "Agreement") dated April 3, 1987 between American
AAdvantage Funds (the "Trust") and AMR Investment Services, Inc. (the
"Manager") with respect to the American AAdvantage Money Market Fund and such
other portfolios of the Trust as the Trust and the Manager may hereafter agree
upon (collectively, the "Funds"). To the extent that there is any conflict
between the terms of the Agreement and these Supplemental Terms and Conditions
("Supplement"), this supplement shall govern.
1. The Trust and the Manager hereby acknowledge that the Manager
will henceforth provide administrative services to the Trust, with respect to
the Funds, pursuant to a separate Administrative Services Agreement dated
October 1, 1990, between the Trust and the Manager (the "Administrative
Services Agreement"). These administrative services shall include all services
currently provided by the Manager to the Trust other than those specified in
paragraphs 2(B) and 3 of the Management Agreement.
2. Paragraph 6 of the Management Agreement is hereby amended to
read, in its entirety, as follows:
6. Compensation of the Manager. In consideration of the
Manager's services as specified in this Agreement, the Manager shall
receive a fee as specified in the Schedule(s) attached hereto. This
fee constitutes the Manager's compensation solely with respect to the
investment advisory and portfolio allocation services performed
pursuant to Paragraphs 2(B) and 3 of this Agreement. In addition, the
Trust agrees to pay to the Manager a fee pursuant to the
Administrative Services Agreement. The Trust and the Manager each
acknowledge that this fee represents the Manager's compensation for
all services performed under this Agreement other than the investment
advisory and portfolio allocation services specified in Paragraphs
2(B) and 3.
3. Notice is hereby given that the Management Agreement and this
supplement are executed on behalf of the Trustees of the Trust and not
individually and that the obligations of the Agreement and Supplement are not
binding upon any of the Trustees, officers, or shareholders of the Trust
individually, but are binding only upon the assets and property of the Fund to
which the Agreement and this Supplement relate.
Dated: October 1, 1990
American AAdvantage Funds
By: /s/ M.W. Fields
---------------
Title: Vice President
AMR Investment Services, Inc.
By: /s/ William F. Quinn
--------------------
Title: President
<PAGE> 1
Exhibit 99.b.5.a.iii
Supplemental Terms and Conditions
of
Management Agreement between
American AAdvantage Funds
and
AMR Investment Services, Inc.
with respect to the American AAdvantage Balanced,
Growth and Income, International Equity and
Limited-Term Income Funds
The following terms and conditions hereby are incorporated into the
Management Agreement (the "Agreement") dated April 3, 1987 between American
AAdvantage Funds (the "Trust") and AMR Investment Services, Inc. (the
"Manager") with respect to the American AAdvantage Balanced Fund, the American
AAdvantage Growth and Income Fund, the American AAdvantage International Equity
Fund, the American AAdvantage Limited-Term Income Fund and such other
portfolios of the Trust as the Trust and the Manager may hereafter agree upon
(collectively, the "Funds"). To the extent that there is any conflict between
the terms of the Agreement and these Supplemental Terms and Conditions
("Supplement"), this Supplement shall govern.
1. The Trust and the Manager hereby acknowledge that the Manager
will henceforth provide administrative services to the Trust, with respect to
the Funds, pursuant to a separate Administrative Services Agreement dated
August 1, 1994, between the Trust and the Manager (the "Administrative Services
Agreement"). These administrative services shall include all services
currently provided by the Manager to the Trust other than those specified in
Paragraphs 2(B) and 3 of the Management Agreement.
2. Paragraph 6 of the Management Agreement is hereby amended to
read, with respect to the Funds, in its entirety, as follows:
6. Compensation of the Manager. In consideration of the
Manager's services as specified in this Agreement, the Manager shall
receive a fee as specified in the Schedule(s) attached hereto. This
fee constitutes the Manager's compensation solely with respect to the
investment advisory and portfolio allocation services performed
pursuant to Paragraphs 2(B) and 3 of this Agreement. In addition, the
Trust agrees to pay the Manager a fee pursuant to the Administrative
Services Agreement. The Trust and the Manager each acknowledge that
this fee represents the Manager's compensation for all services
performed under this Agreement other than the investment advisory and
portfolio allocation services specified in Paragraphs 2(B) and 3.
3. Notice is hereby given that the Management Agreement and this
Supplement are executed on behalf of the Trustees of the Trust and not
individually and that the obligations of the Agreement and Supplement are not
binding upon any of the Trustees, officers, or shareholders of the Trust
individually, but are binding only upon the assets and property of the Fund to
which the Agreement and this Supplement relate.
Dated: August 1, 1994
AMR INVESTMENT SERVICES, INC.
By: /s/ W.F. Quinn
-------------------------------
Title: President
AMERICAN AADVANTAGE FUNDS
By: /s/ Nancy Eckl
-------------------------------
Title: Vice President, Treasurer and
Assistant Secretary
<PAGE> 1
Exhibit 99.b.5.a.iv
SUPPLEMENTAL TERMS AND CONDITIONS OF
THE MANAGEMENT AGREEMENT BETWEEN
THE AMERICAN AADVANTAGE FUNDS
AND
AMR INVESTMENT SERVICES, INC.
The following terms and conditions hereby are incorporated into the
Management Agreement dated April 3, 1987, as supplemented August 1, 1994
("Agreement") between American AAdvantage Funds (the "Trust") and AMR
Investment Services, Inc. (the "Manager") on behalf of the American AAdvantage
Balanced Fund, the American AAdvantage Growth and Income Fund, the American
AAdvantage International Equity Fund, the American AAdvantage Limited-Term
Income Fund, the American AAdvantage Money Market Fund, the American AAdvantage
Municipal money Market Fund, the American AAdvantage U.S. Treasury Money
Market Fund and such other portfolios of the Trust as the Trust and the Manager
may hereafter agree upon (each a "Fund" and collectively, the "Funds"). To the
extent that there is any conflict between the terms of the Agreement and these
Supplemental Terms and Conditions ("Supplement"), this Supplement shall govern.
1. Paragraph 6 of the Management Agreement is hereby amended, in
its entirety, by replacing paragraph 6 with the following:
6. Compensation of the Manager. In consideration of the
Manager's services as specified in this Agreement, the Manager shall
receive a fee as specified in the Schedule(s) attached hereto. This
fee constitutes the Manager's compensation solely with respect to the
investment advisory and portfolio allocation services performed
pursuant to Paragraphs 2(B) and 3 of this Agreement. In addition, the
Trust agrees to pay the Manager a fee pursuant to the Administrative
Services Agreement. To the extent that a Fund invests all of its
investable assets (i.e., securities and cash) in another registered
investment company, however, no portion of the advisory fee
attributable to that Fund as specified in the Schedule(s) attached
hereto shall be paid for the period that such Fund's assets are so
invested. In addition, the Trust agrees to pay to the Manager an
administrative fee pursuant to the Administrative Services Agreement.
The Trust and the Manager each acknowledge that this fee represents
the Manager's compensation for all services performed under this
Agreement other than the investment advisory and portfolio allocation
services specified in Paragraphs 2(B) and 3.
3. Notice is hereby given that the Management Agreement and this
Supplement are executed on behalf of the Trustees of the Trust and not
individually and that the obligations of the Agreement and Supplement are not
binding upon any of the Trustees, officers, or shareholders of the Trust
individually, but are binding only upon the assets and property of the Fund to
which the Agreement and this Supplement relate.
Dated: August 1, 1995
AMR INVESTMENT SERVICES, INC.
By: /s/ W.F. Quinn
-----------------------------------
Title: President
AMERICAN AADVANTAGE FUNDS
By: /s/ Nancy Eckl
-----------------------------------
Title: Vice President, Treasurer and
Assistant Secretary
<PAGE> 1
Exhibit 99.b.5.b.i
AMERICAN AADVANTAGE FUNDS
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made this 1 day of November , 1995 by and between AMR
Investment Services, Inc., a Delaware Corporation, (the "Manager") and
Independence Investment Associates, Inc. (the "Adviser");
WHEREAS, American AAdvantage Funds (the "Trust"), a Massachusetts
Business Trust, is an open-end, diversified management investment company
registered under the Investment Company Act of 1940, as amended, consisting of
several series (portfolios) of shares, each having its own investment policies;
and
WHEREAS, the Trust has retained the Manager to provide the Trust with
business and asset management services, subject to the control of the Board of
Trustees;
WHEREAS, the Trust's agreement with the Manager permits the Manager to
delegate to other parties certain of its asset management responsibilities; and
WHEREAS, the Manager desires to retain the Adviser to render
investment management services to the Trust with respect to certain of its
investment portfolios and such other investment portfolios as the Trust and the
Adviser may agree upon and so specify in the Schedule(s) attached hereto
(collectively the "Portfolios") and as described in the Trust's registration
statement on Form N-1A as amended from time to time, and the Adviser is willing
to render such services;
NOW, THEREFORE, in consideration of mutual covenants herein contained,
the parties hereto agree as follows:
1. DUTIES OF THE ADVISER. The Manager employs the Adviser to manage
the investment and reinvestment of such portion, if any, of the Portfolios'
assets as is designated by the Manager from time to time, and with respect to
such assets, to continuously review, supervise and administer the investment
program of the Portfolios, to determine in the Advisers discretion the
securities to be purchased or sold, to provide the Manager and the Trust with
records concerning the Adviser's activities which the Trust is required to
maintain, and to render regular reports to the Manager and to the Trust's
officers and Trustees concerning the Adviser's discharge of the foregoing
responsibilities. The Adviser shall discharge the foregoing
<PAGE> 2
responsibilities subject to the Manager's oversight and the control of the
officers and the Trustees of the Trust and in compliance with such policies as
the Trustees may from time to time establish, and in compliance with the
objectives, policies, and limitations for each such Portfolio set forth in the
Trust's current registration statement as amended from time to time and
applicable laws and regulations. The Adviser accepts such employment and agrees
to render the services for the compensation specified herein and to provide at
its own expense the office space, furnishings and equipment and the personnel
required by it to perform the services on the terms and for the compensation
provided herein. The Manager will instruct the Trust's Custodian(s) to hold
and/or transfer the Portfolios' assets in accordance with Proper Instructions
received from the Adviser. (For this purpose the term "Proper Instructions"
shall have the meaning(s) specified in the applicable agreements(s) between the
Trust and its Custodian(s).) The Adviser will not be responsible for the cost
of securities or brokerage commissions or any other Trust expenses except as
specified in this Agreement.
2. PORTFOLIO TRANSACTIONS. The Adviser is authorized to select the
brokers or dealers (including, to the extent permitted by law and applicable
Trust guidelines, the Adviser or any of its affiliates) that will execute the
purchases and sales of portfolio securities for the Portfolios and is directed
to use its best efforts to obtain the best net results with respect to brokers'
commissions and discounts as described in the Trust's current registration
statement as amended from time to time. In selecting brokers or dealers, the
Adviser may give consideration to factors other than price, including, but not
limited to, research services and market information. Any such services or
information which the Adviser receives in connection with activities for the
Trust may also be used for the benefit of other clients and customers of the
Adviser or any of its affiliates. The Adviser will promptly communicate to the
Manager and to the officers and the Trustees of the Trust such information
relating to portfolio transactions as they may reasonably request.
3. COMPENSATION OF THE ADVISER. For the services to be rendered by the
Adviser as provided in Sections 1 and 2 of this Agreement, the Manager shall
pay to the Adviser compensation at the rate specified in Schedule(s) attached
hereto and made a part of this Agreement. Such compensation shall be paid to
the Adviser quarterly in arrears, and shall be calculated by applying the
annual percentage rate(s) as specified in the attached Schedule(s) to the
average month- end assets of the specified portfolios during the relevant
quarter. Solely for the purpose of calculating the applicable annual percentage
rates specified
<PAGE> 3
in the attached Schedule(s), there shall be included such other assets as are
specified in said Schedule(s).
4. OTHER SERVICES. At the request of the Trust or the Manager, the
Adviser in its discretion may make available to the Trust office facilities,
equipment, personnel, and other services. Such office facilities, equipment,
personnel and services shall be provided for or rendered by the Adviser and
billed to the Trust or the Manager at a price to be agreed upon by the Adviser
and the Trust or the Manager.
5. REPORTS. The Manager (on behalf of the Trust) and the Adviser agree
to furnish to each other, if applicable, current prospectuses, proxy
statements, reports to shareholders, certified copies of their financial
statements, and such other information with regard to their affairs as each may
reasonably request.
6. STATUS OF ADVISER. The services of the Adviser to the Trust are not
to be deemed exclusive, and the Adviser and its directors, officers, employees
and affiliates shall be free to render similar services to others so long as
its services to the Trust are not impaired thereby. The Adviser shall be deemed
to be an independent contractor and shall, unless otherwise expressly provided
or authorized, have no authority to act for or represent the Manager or the
Trust in any way or otherwise be deemed an agent to the Manager or the Trust.
7. CERTAIN RECORDS. Any records required to be maintained and
preserved pursuant to the provisions of Rule 31a- 1 and Rule 31a-2 promulgated
under the Investment Company Act of 1940 which are prepared or maintained by
the Adviser on behalf of the Manager or the Trust are the property of the
Manager or the Trust and will be surrendered promptly to the Manager or Trust
on request.
8. LIABILITY OF ADVISER. No provision of this Agreement shall be
deemed to protect the Adviser against any liability to the Trust or its
shareholders to which it might otherwise be subject by reason of any willful
misfeasance, bad faith, or gross negligence in the performance of its duties or
the reckless disregard of its obligations under this Agreement.
9. PERMISSIBLE INTERESTS. To the extent permitted by law, Trustees,
agents, and shareholders of the Trust are or may be interested in the Adviser
(or any successor thereof) as directors, partners, officers, or shareholders,
or otherwise; directors, partners, officers, agents, and shareholders of the
Adviser are or may be interested in the Trust as Trustees, shareholders or
otherwise; and the Adviser (or any successor
<PAGE> 4
thereof) is or may be interested in the Trust as a
shareholder or otherwise; provided that all such interests shall be fully
disclosed between the parties on an ongoing basis and in the Trust's
registration statement as required by law.
10. DURATION AND TERMINATION. This Agreement, unless sooner terminated
as provided herein, shall continue for two years after its initial approval as
to each Portfolio and thereafter for periods of one year for so long as such
continuance thereafter is specifically approved at least annually (a) by the
vote of a majority of those Trustees of the Trust who are not parties to this
Agreement or interested persons of any such party, cast in person at a meeting
called for the purpose of voting on such approval, and (b) by the Trustees of
the Trust or by vote of a majority of the outstanding voting securities of each
Portfolio; provided, however, that if the shareholders of any Portfolio fail to
approve the Agreement as provided herein, the Adviser may continue to serve
hereunder in the manner and to the extent permitted by the Investment Company
Act of 1940 and rules thereunder. The foregoing requirement that continuance of
this Agreement be "specifically approved at least annually" shall be construed
in a manner consistent with the Investment Company Act of 1940 and the rules
and regulations thereunder. This Agreement may be terminated as to any
Portfolio at any time, without the payment of any penalty, by the Manager, by
vote of a majority of the Trustees of the Trust or by vote of a majority of the
outstanding voting securities of the Portfolio on not less than 30 days nor
more than 60 days written notice to the Adviser, or by the Adviser at any time
without the payment of any penalty, on 60 days written notice to the Trust.
This Agreement will automatically and immediately terminate in the event of its
assignment. Any notice under this Agreement shall be given in writing,
addressed and delivered, or mailed postpaid, to the other party at the primary
office of such party, unless such party has previously designated another
address.
As used in this Section 10, the terms "assignment", "interested
persons", and a "vote of a majority of the outstanding voting securities" shall
have the respective meanings set forth in the Investment company Act of 1940
and the rules and regulations thereunder, subject to such exemptions as may be
granted by the Securities and Exchange Commission under said Act.
11. SEVERABILITY. If any provision of this Agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby.
A copy of the Declaration of Trust of the Trust is on file with the
Secretary of the Commonwealth of Massachusetts, and
<PAGE> 5
notice is hereby given that this instrument is not binding upon any of the
Trustees, officers, or shareholders of the Trust individually.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as of the day and year first written above.
Independence Investment
Associates Inc. AMR INVESTMENT SERVICES INC.
- - ----------------------------
By /s/Mark C. Lapman By /s/ W.F. Quinn
------------------------- --------------------------
William F. Quinn
Its Executive Vice President Its President
------------------------ -------------------------
<PAGE> 6
Schedule A
to the
American AAdvantage Funds
Investment Advisory Agreement
between
AMR Investment Services, Inc.
and
Independence Investment Associates, Inc.
AMR Investment Services, Inc. shall pay compensation to Independence
Investment Associates, Inc. pursuant to section 3 of the Investment Advisory
Agreement between said parties in accordance with the following annual
percentage rates:
0.50% per annum on the first $30 million
0.25% per annum on the next $70 million
0.20% per annum on all excess assets
In calculating the amount of assets under management solely for the
purposes of determining the applicable percentage rate, there should be
included all American Airlines Trust Funds under management by the Adviser.
DATED: November 1, 1995
<PAGE> 1
Exhibit 99.b.5.b.ii
AMERICAN AADVANTAGE FUNDS
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made this 1 day of November , 1995 by and between AMR
Investment Services, Inc., a Delaware Corporation, (the "Manager") and Morgan
Stanley Asset Management Inc. (the "Adviser");
WHEREAS, American AAdvantage Funds (the "Trust"), a Massachusetts
Business Trust, is an open-end, diversified management investment company
registered under the Investment Company Act of 1940, as amended, consisting of
several series (portfolios) of shares, each having its own investment policies;
and
WHEREAS, the Trust has retained the Manager to provide the Trust with
business and asset management services, subject to the control of the Board of
Trustees;
WHEREAS, the Trust's agreement with the Manager permits the Manager to
delegate to other parties certain of its asset management responsibilities; and
WHEREAS, the Manager desires to retain the Adviser to render
investment management services to the Trust with respect to certain of its
investment portfolios and such other investment portfolios as the Trust and the
Adviser may agree upon and so specify in the Schedule(s) attached hereto
(collectively the "Portfolios") and as described in the Trust's registration
statement on Form N-1A as amended from time to time, and the Adviser is willing
to render such services;
NOW, THEREFORE, in consideration of mutual covenants herein contained,
the parties hereto agree as follows:
1. DUTIES OF THE ADVISER. The Manager employs the Adviser to manage
the investment and reinvestment of such portion, if any, of the Portfolios'
assets as is designated by the Manager from time to time, and with respect to
such assets, to continuously review, supervise and administer the investment
program of the Portfolios, to determine in the Advisers discretion the
securities to be purchased or sold, to provide the Manager and the Trust with
records concerning the Adviser's activities which the Trust is required to
maintain, and to render regular reports to the Manager and to the Trust's
officers and Trustees concerning the Adviser's discharge of the foregoing
responsibilities. The Adviser shall discharge the foregoing
<PAGE> 2
responsibilities subject to the Manager's oversight and the control of the
officers and the Trustees of the Trust and in compliance with such policies as
the Trustees may from time to time establish, and in compliance with the
objectives, policies, and limitations for each such Portfolio set forth in the
Trust's current registration statement as amended from time to time and
applicable laws and regulations. The Adviser accepts such employment and agrees
to render the services for the compensation specified herein and to provide at
its own expense the office space, furnishings and equipment and the personnel
required by it to perform the services on the terms and for the compensation
provided herein. The Manager will instruct the Trust's Custodian(s) to hold
and/or transfer the Portfolios' assets in accordance with Proper Instructions
received from the Adviser. (For this purpose the term "Proper Instructions"
shall have the meaning(s) specified in the applicable agreements(s) between the
Trust and its Custodian(s).) The Adviser will not be responsible for the cost
of securities or brokerage commissions or any other Trust expenses except as
specified in this Agreement.
2. PORTFOLIO TRANSACTIONS. The Adviser is authorized to select the
brokers or dealers (including, to the extent permitted by law and applicable
Trust guidelines, the Adviser or any of its affiliates) that will execute the
purchases and sales of portfolio securities for the Portfolios and is directed
to use its best efforts to obtain the best net results with respect to brokers'
commissions and discounts as described in the Trust's current registration
statement as amended from time to time. In selecting brokers or dealers, the
Adviser may give consideration to factors other than price, including, but not
limited to, research services and market information. Any such services or
information which the Adviser receives in connection with activities for the
Trust may also be used for the benefit of other clients and customers of the
Adviser or any of its affiliates. The Adviser will promptly communicate to the
Manager and to the officers and the Trustees of the Trust such information
relating to portfolio transactions as they may reasonably request.
3. COMPENSATION OF THE ADVISER. For the services to be rendered by the
Adviser as provided in Sections 1 and 2 of this Agreement, the Manager shall
pay to the Adviser compensation at the rate specified in Schedule(s) attached
hereto and made a part of this Agreement. Such compensation shall be paid to
the Adviser quarterly in arrears, and shall be calculated by applying the
annual percentage rate(s) as specified in the attached Schedule(s) to the
average month- end assets of the specified portfolios during the relevant
quarter. Solely for the purpose of calculating the applicable annual percentage
rates specified
<PAGE> 3
in the attached Schedule(s), there shall be included such other assets as are
specified in said Schedule(s).
The Adviser agrees that the fee charged to the Manager will be no more
than that charged for any other client of similar size receiving comparable
services. Furthermore, the Adviser agrees to notify the Manager on a timely
basis of any fee schedule it enters into with any other client of similar size
which is lower than the fee paid by the Manager.
4. OTHER SERVICES. At the request of the Trust or the Manager, the
Adviser in its discretion may make available to the Trust office facilities,
equipment, personnel, and other services. Such office facilities, equipment,
personnel and services shall be provided for or rendered by the Adviser and
billed to the Trust or the Manager at a price to be agreed upon by the Adviser
and the Trust or the Manager.
5. REPORTS. The Manager (on behalf of the Trust) and the Adviser agree
to furnish to each other, if applicable, current prospectuses, proxy
statements, reports to shareholders, certified copies of their financial
statements, and such other information with regard to their affairs as each may
reasonably request.
6. STATUS OF ADVISER. The services of the Adviser to the Trust are not
to be deemed exclusive, and the Adviser and its directors, officers, employees
and affiliates shall be free to render similar services to others so long as
its services to the Trust are not impaired thereby. The Adviser shall be deemed
to be an independent contractor and shall, unless otherwise expressly provided
or authorized, have no authority to act for or represent the Manager or the
Trust in any way or otherwise be deemed an agent to the Manager or the Trust.
7. CERTAIN RECORDS. Any records required to be maintained and
preserved pursuant to the provisions of Rule 31a- 1 and Rule 31a-2 promulgated
under the Investment Company Act of 1940 which are prepared or maintained by
the Adviser on behalf of the Manager or the Trust are the property of the
Manager or the Trust and will be surrendered promptly to the Manager or Trust
on request.
8. LIABILITY OF ADVISER. No provision of this Agreement shall be
deemed to protect the Adviser against any liability to the Trust or its
shareholders to which it might otherwise be subject by reason of any willful
misfeasance, bad faith, or gross negligence in the performance of its duties or
the reckless disregard of its obligations under this Agreement.
<PAGE> 4
9. PERMISSIBLE INTERESTS. To the extent permitted by law, Trustees,
agents, and shareholders of the Trust are or may be interested in the Adviser
(or any successor thereof) as directors, partners, officers, or shareholders,
or otherwise; directors, partners, officers, agents, and shareholders of the
Adviser are or may be interested in the Trust as Trustees, shareholders or
otherwise; and the Adviser (or any successor thereof) is or may be interested
in the Trust as a shareholder or otherwise; provided that all such interests
shall be fully disclosed between the parties on an ongoing basis and in the
Trust's registration statement as required by law.
10. DURATION AND TERMINATION. This Agreement, unless sooner terminated
as provided herein, shall continue for two years after its initial approval as
to each Portfolio and thereafter for periods of one year for so long as such
continuance thereafter is specifically approved at least annually (a) by the
vote of a majority of those Trustees of the Trust who are not parties to this
Agreement or interested persons of any such party, cast in person at a meeting
called for the purpose of voting on such approval, and (b) by the Trustees of
the Trust or by vote of a majority of the outstanding voting securities of each
Portfolio; provided, however, that if the shareholders of any Portfolio fail to
approve the Agreement as provided herein, the Adviser may continue to serve
hereunder in the manner and to the extent permitted by the Investment Company
Act of 1940 and rules thereunder. The foregoing requirement that continuance of
this Agreement be "specifically approved at least annually" shall be construed
in a manner consistent with the Investment Company Act of 1940 and the rules
and regulations thereunder. This Agreement may be terminated as to any
Portfolio at any time, without the payment of any penalty, by the Manager, by
vote of a majority of the Trustees of the Trust or by vote of a majority of the
outstanding voting securities of the Portfolio on not less than 30 days nor
more than 60 days written notice to the Adviser, or by the Adviser at any time
without the payment of any penalty, on 60 days written notice to the Trust.
This Agreement will automatically and immediately terminate in the event of its
assignment. Any notice under this Agreement shall be given in writing,
addressed and delivered, or mailed postpaid, to the other party at the primary
office of such party, unless such party has previously designated another
address.
As used in this Section 10, the terms "assignment", "interested
persons", and a "vote of a majority of the outstanding voting securities" shall
have the respective meanings set forth in the Investment company Act of 1940
and the rules and regulations thereunder, subject to such exemptions as may be
granted by the Securities and Exchange Commission under said Act.
<PAGE> 5
11. SEVERABILITY. If any provision of this Agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby.
A copy of the Declaration of Trust of the Trust is on file with the
Secretary of the Commonwealth of Massachusetts, and notice is hereby given that
this instrument is not binding upon any of the Trustees, officers, or
shareholders of the Trust individually.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as of the day and year first written above.
Morgan Stanley Asset Management AMR INVESTMENT SERVICES INC.
Inc.
By /s/ A. MACDONALD CAPUTO By /s/ W.F. Quinn
---------------------------- ------------------------------
William F. Quinn
Its Managing Director Its President
---------------------------- -----------------------------
<PAGE> 6
Schedule A
to the
American AAdvantage Funds
Investment Advisory Agreement
between
AMR Investment Services, Inc.
and
Morgan Stanley Asset Management Inc.
AMR Investment Services, Inc. shall pay compensation to Morgan Stanley
Asset Management Inc. pursuant to section 3 of the Investment Advisory
Agreement between said parties in accordance with the following annual
percentage rates:
0.80% per annum on the first $25 million
0.60% per annum on the next $25 million
0.50% per annum on the next $25 million
0.40% per annum on all excess assets
In calculating the amount of assets under management solely for the
purposes of determining the applicable percentage rate, there should be
included all American Airlines Trust Funds under management by the Adviser.
DATED: November 1, 1995
<PAGE> 1
Exhibit 99.b.5.b.iii
AMERICAN AADVANTAGE FUNDS
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made this 1 day of November , 1995 by and between AMR
Investment Services, Inc., a Delaware Corporation, (the "Manager") and
Templeton Investment Counsel, Inc. (the "Adviser");
WHEREAS, American AAdvantage Funds (the "Trust"), a Massachusetts
Business Trust, is an open-end, diversified management investment company
registered under the Investment Company Act of 1940, as amended, consisting of
several series (portfolios) of shares, each having its own investment policies;
and
WHEREAS, the Trust has retained the Manager to provide the Trust with
business and asset management services, subject to the control of the Board of
Trustees;
WHEREAS, the Trust's agreement with the Manager permits the Manager to
delegate to other parties certain of its asset management responsibilities; and
WHEREAS, the Manager desires to retain the Adviser to render
investment management services to the Trust with respect to certain of its
investment portfolios and such other investment portfolios as the Trust and the
Adviser may agree upon and so specify in the Schedule(s) attached hereto
(collectively the "Portfolios") and as described in the Trust's registration
statement on Form N-1A as amended from time to time, and the Adviser is willing
to render such services;
NOW, THEREFORE, in consideration of mutual covenants herein contained,
the parties hereto agree as follows:
1. DUTIES OF THE ADVISER. The Manager employs the Adviser to manage
the investment and reinvestment of such portion, if any, of the Portfolios'
assets as is designated by the Manager from time to time, and with respect to
such assets, to continuously review, supervise and administer the investment
program of the Portfolios, to determine in the Advisers discretion the
securities to be purchased or sold, to provide the Manager and the Trust with
records concerning the Adviser's activities which the Trust is required to
maintain, and to render regular reports to the Manager and to the Trust's
officers and Trustees concerning the Adviser's discharge of the foregoing
responsibilities. The Adviser shall discharge the foregoing
<PAGE> 2
responsibilities subject to the Manager's oversight and the control of the
officers and the Trustees of the Trust and in compliance with such policies as
the Trustees may from time to time establish, and in compliance with the
objectives, policies, and limitations for each such Portfolio set forth in the
Trust's current registration statement as amended from time to time and
applicable laws and regulations. The Adviser accepts such employment and agrees
to render the services for the compensation specified herein and to provide at
its own expense the office space, furnishings and equipment and the personnel
required by it to perform the services on the terms and for the compensation
provided herein. The Manager will instruct the Trust's Custodian(s) to hold
and/or transfer the Portfolios' assets in accordance with Proper Instructions
received from the Adviser. (For this purpose the term "Proper Instructions"
shall have the meaning(s) specified in the applicable agreements(s) between the
Trust and its Custodian(s).) The Adviser will not be responsible for the cost
of securities or brokerage commissions or any other Trust expenses except as
specified in this Agreement.
2. PORTFOLIO TRANSACTIONS. The Adviser is authorized to select the
brokers or dealers (including, to the extent permitted by law and applicable
Trust guidelines, the Adviser or any of its affiliates) that will execute the
purchases and sales of portfolio securities for the Portfolios and is directed
to use its best efforts to obtain the best net results with respect to brokers'
commissions and discounts as described in the Trust's current registration
statement as amended from time to time. In selecting brokers or dealers, the
Adviser may give consideration to factors other than price, including, but not
limited to, research services and market information. Any such services or
information which the Adviser receives in connection with activities for the
Trust may also be used for the benefit of other clients and customers of the
Adviser or any of its affiliates. The Adviser will promptly communicate to the
Manager and to the officers and the Trustees of the Trust such information
relating to portfolio transactions as they may reasonably request.
3. COMPENSATION OF THE ADVISER. For the services to be rendered by the
Adviser as provided in Sections 1 and 2 of this Agreement, the Manager shall
pay to the Adviser compensation at the rate specified in Schedule(s) attached
hereto and made a part of this Agreement. Such compensation shall be paid to
the Adviser quarterly in arrears, and shall be calculated by applying the
annual percentage rate(s) as specified in the attached Schedule(s) to the
average month- end assets of the specified portfolios during the relevant
quarter. Solely for the purpose of calculating the applicable annual percentage
rates specified
<PAGE> 3
in the attached Schedule(s), there shall be included such other assets as are
specified in said Schedule(s).
The Adviser shall be paid as its fee and as its compensation for
services rendered under this Agreement an amount computed and billed in
accordance with the billing procedure attached hereto as "Appendix A" and made
a part hereof. The Adviser agrees that the fee charged to the Manager will be
no more than that charged for any other client of similar size regardless of
type except that the Adviser's clients before November 1, 1995 are excluded
from this provision. Furthermore, the Adviser agrees to notify the Manager on a
timely basis of any fee schedule it enters into with any other client of
similar size which is lower than the fee paid by the Manager.
4. OTHER SERVICES. At the request of the Trust or the Manager, the
Adviser in its discretion may make available to the Trust office facilities,
equipment, personnel, and other services. Such office facilities, equipment,
personnel and services shall be provided for or rendered by the Adviser and
billed to the Trust or the Manager at a price to be agreed upon by the Adviser
and the Trust or the Manager.
5. REPORTS. The Manager (on behalf of the Trust) and the Adviser agree
to furnish to each other, if applicable, current prospectuses, proxy
statements, reports to shareholders, certified copies of their financial
statements, and such other information with regard to their affairs as each may
reasonably request.
6. STATUS OF ADVISER. The services of the Adviser to the Trust are not
to be deemed exclusive, and the Adviser and its directors, officers, employees
and affiliates shall be free to render similar services to others so long as
its services to the Trust are not impaired thereby. The Adviser shall be deemed
to be an independent contractor and shall, unless otherwise expressly provided
or authorized, have no authority to act for or represent the Manager or the
Trust in any way or otherwise be deemed an agent to the Manager or the Trust.
7. CERTAIN RECORDS. Any records required to be maintained and
preserved pursuant to the provisions of Rule 31a- 1 and Rule 31a-2 promulgated
under the Investment Company Act of 1940 which are prepared or maintained by
the Adviser on behalf of the Manager or the Trust are the property of the
Manager or the Trust and will be surrendered promptly to the Manager or Trust
on request.
8. LIABILITY OF ADVISER. No provision of this Agreement shall be
deemed to protect the Adviser against any liability to
<PAGE> 4
the Trust or its shareholders to which it might otherwise be subject by reason
of any willful misfeasance, bad faith, or gross negligence in the performance
of its duties or the reckless disregard of its obligations under this
Agreement.
9. PERMISSIBLE INTERESTS. To the extent permitted by law, Trustees,
agents, and shareholders of the Trust are or may be interested in the Adviser
(or any successor thereof) as directors, partners, officers, or shareholders,
or otherwise; directors, partners, officers, agents, and shareholders of the
Adviser are or may be interested in the Trust as Trustees, shareholders or
otherwise; and the Adviser (or any successor thereof) is or may be interested
in the Trust as a shareholder or otherwise; provided that all such interests
shall be fully disclosed between the parties on an ongoing basis and in the
Trust's registration statement as required by law.
10. DURATION AND TERMINATION. This Agreement, unless sooner terminated
as provided herein, shall continue for two years after its initial approval as
to each Portfolio and thereafter for periods of one year for so long as such
continuance thereafter is specifically approved at least annually (a) by the
vote of a majority of those Trustees of the Trust who are not parties to this
Agreement or interested persons of any such party, cast in person at a meeting
called for the purpose of voting on such approval, and (b) by the Trustees of
the Trust or by vote of a majority of the outstanding voting securities of each
Portfolio; provided, however, that if the shareholders of any Portfolio fail to
approve the Agreement as provided herein, the Adviser may continue to serve
hereunder in the manner and to the extent permitted by the Investment Company
Act of 1940 and rules thereunder. The foregoing requirement that continuance of
this Agreement be "specifically approved at least annually" shall be construed
in a manner consistent with the Investment Company Act of 1940 and the rules
and regulations thereunder. This Agreement may be terminated as to any
Portfolio at any time, without the payment of any penalty, by the Manager, by
vote of a majority of the Trustees of the Trust or by vote of a majority of the
outstanding voting securities of the Portfolio on not less than 30 days nor
more than 60 days written notice to the Adviser, or by the Adviser at any time
without the payment of any penalty, on 60 days written notice to the Trust.
This Agreement will automatically and immediately terminate in the event of its
assignment. Any notice under this Agreement shall be given in writing,
addressed and delivered, or mailed postpaid, to the other party at the primary
office of such party, unless such party has previously designated another
address.
As used in this Section 10, the terms "assignment", "interested
persons", and a "vote of a majority of the
<PAGE> 5
outstanding voting securities" shall have the respective meanings set forth in
the Investment company Act of 1940 and the rules and regulations thereunder,
subject to such exemptions as may be granted by the Securities and Exchange
Commission under said Act.
11. SEVERABILITY. If any provision of this Agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby.
A copy of the Declaration of Trust of the Trust is on file with the
Secretary of the Commonwealth of Massachusetts, and notice is hereby given that
this instrument is not binding upon any of the Trustees, officers, or
shareholders of the Trust individually.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as of the day and year first written above.
Templeton Investment Counsel AMR INVESTMENT SERVICES INC.
By /s/Gary P. Motyl By /s/ W.F. Quinn
--------------------------- -------------------------
Gary P. Moyl William F. Quinn
Executive Vice President &
Its Director President
-------------------------- -------------------------
<PAGE> 6
Schedule A
to the
American AAdvantage Funds
Investment Advisory Agreement
between
AMR Investment Services, Inc.
and
Templeton Investment Counsel, Inc.
AMR Investment Services, Inc. shall pay compensation to Templeton
Investment Counsel, Inc. pursuant to section 3 of the Investment Advisory
Agreement between said parties in accordance with the following annual
percentage rates:
0.50% per annum on the first $100 million
0.35% per annum on the next $50 million
0.30% per annum on the next $250 million
0.25% per annum on the excess over $400 million
In calculating the amount of assets under management solely for the
purposes of determining the applicable percentage rate, there should be
included all American Airlines Trust Funds under management by the Adviser.
DATED: November 1, 1995
<PAGE> 1
Exhibit 99.b.5.b.iv
AMERICAN AADVANTAGE FUNDS
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made this 1 day of November , 1995 by and between AMR
Investment Services, Inc., a Delaware Corporation, (the "Manager") and Barrow,
Hanley, Mewhinney & Strauss, Inc. (the "Adviser");
WHEREAS, American AAdvantage Funds (the "Trust"), a Massachusetts
Business Trust, is an open-end, diversified management investment company
registered under the Investment Company Act of 1940, as amended, consisting of
several series (portfolios) of shares, each having its own investment policies;
and
WHEREAS, the Trust has retained the Manager to provide the Trust with
business and asset management services, subject to the control of the Board of
Trustees;
WHEREAS, the Trust's agreement with the Manager permits the Manager to
delegate to other parties certain of its asset management responsibilities; and
WHEREAS, the Manager desires to retain the Adviser to render
investment management services to the Trust with respect to certain of its
investment portfolios and such other investment portfolios as the Trust and the
Adviser may agree upon and so specify in the Schedule(s) attached hereto
(collectively the "Portfolios") and as described in the Trust's registration
statement on Form N-1A as amended from time to time, and the Adviser is willing
to render such services;
NOW, THEREFORE, in consideration of mutual covenants herein contained,
the parties hereto agree as follows:
1. DUTIES OF THE ADVISER. The Manager employs the Adviser to manage
the investment and reinvestment of such portion, if any, of the Portfolios'
assets as is designated by the Manager from time to time, and with respect to
such assets, to continuously review, supervise and administer the investment
program of the Portfolios, to determine in the Advisers discretion the
securities to be purchased or sold, to provide the Manager and the Trust with
records concerning the Adviser's activities which the Trust is required to
maintain, and to render regular reports to the Manager and to the Trust's
officers and Trustees concerning the Adviser's discharge of the foregoing
responsibilities. The Adviser shall discharge the foregoing
<PAGE> 2
responsibilities subject to the Manager's oversight and the control of the
officers and the Trustees of the Trust and in compliance with such policies as
the Trustees may from time to time establish, and in compliance with the
objectives, policies, and limitations for each such Portfolio set forth in the
Trust's current registration statement as amended from time to time and
applicable laws and regulations. The Adviser accepts such employment and agrees
to render the services for the compensation specified herein and to provide at
its own expense the office space, furnishings and equipment and the personnel
required by it to perform the services on the terms and for the compensation
provided herein. The Manager will instruct the Trust's Custodian(s) to hold
and/or transfer the Portfolios' assets in accordance with Proper Instructions
received from the Adviser. (For this purpose the term "Proper Instructions"
shall have the meaning(s) specified in the applicable agreements(s) between the
Trust and its Custodian(s).) The Adviser will not be responsible for the cost
of securities or brokerage commissions or any other Trust expenses except as
specified in this Agreement.
2. PORTFOLIO TRANSACTIONS. The Adviser is authorized to select the
brokers or dealers (including, to the extent permitted by law and applicable
Trust guidelines, the Adviser or any of its affiliates) that will execute the
purchases and sales of portfolio securities for the Portfolios and is directed
to use its best efforts to obtain the best net results with respect to brokers'
commissions and discounts as described in the Trust's current registration
statement as amended from time to time. In selecting brokers or dealers, the
Adviser may give consideration to factors other than price, including, but not
limited to, research services and market information. Any such services or
information which the Adviser receives in connection with activities for the
Trust may also be used for the benefit of other clients and customers of the
Adviser or any of its affiliates. The Adviser will promptly communicate to the
Manager and to the officers and the Trustees of the Trust such information
relating to portfolio transactions as they may reasonably request.
3. COMPENSATION OF THE ADVISER. For the services to be rendered by the
Adviser as provided in Sections 1 and 2 of this Agreement, the Manager shall
pay to the Adviser compensation at the rate specified in Schedule(s) attached
hereto and made a part of this Agreement. Such compensation shall be paid to
the Adviser quarterly in arrears, and shall be calculated by applying the
annual percentage rate(s) as specified in the attached Schedule(s) to the
average month- end assets of the specified portfolios during the relevant
quarter. Solely for the purpose of calculating the applicable annual percentage
rates specified
<PAGE> 3
in the attached Schedule(s), there shall be included such other assets as are
specified in said Schedule(s).
4. OTHER SERVICES. At the request of the Trust or the Manager, the
Adviser in its discretion may make available to the Trust office facilities,
equipment, personnel, and other services. Such office facilities, equipment,
personnel and services shall be provided for or rendered by the Adviser and
billed to the Trust or the Manager at a price to be agreed upon by the Adviser
and the Trust or the Manager.
5. REPORTS. The Manager (on behalf of the Trust) and the Adviser agree
to furnish to each other, if applicable, current prospectuses, proxy
statements, reports to shareholders, certified copies of their financial
statements, and such other information with regard to their affairs as each may
reasonably request.
6. STATUS OF ADVISER. The services of the Adviser to the Trust are not
to be deemed exclusive, and the Adviser and its directors, officers, employees
and affiliates shall be free to render similar services to others so long as
its services to the Trust are not impaired thereby. The Adviser shall be deemed
to be an independent contractor and shall, unless otherwise expressly provided
or authorized, have no authority to act for or represent the Manager or the
Trust in any way or otherwise be deemed an agent to the Manager or the Trust.
7. CERTAIN RECORDS. Any records required to be maintained and
preserved pursuant to the provisions of Rule 31a- 1 and Rule 31a-2 promulgated
under the Investment Company Act of 1940 which are prepared or maintained by
the Adviser on behalf of the Manager or the Trust are the property of the
Manager or the Trust and will be surrendered promptly to the Manager or Trust
on request.
8. LIABILITY OF ADVISER. No provision of this Agreement shall be
deemed to protect the Adviser against any liability to the Trust or its
shareholders to which it might otherwise be subject by reason of any willful
misfeasance, bad faith, or gross negligence in the performance of its duties or
the reckless disregard of its obligations under this Agreement.
9. PERMISSIBLE INTERESTS. To the extent permitted by law, Trustees,
agents, and shareholders of the Trust are or may be interested in the Adviser
(or any successor thereof) as directors, partners, officers, or shareholders,
or otherwise; directors, partners, officers, agents, and shareholders of the
Adviser are or may be interested in the Trust as Trustees, shareholders or
otherwise; and the Adviser (or any successor
<PAGE> 4
thereof) is or may be interested in the Trust as a shareholder or otherwise;
provided that all such interests shall be fully disclosed between the parties
on an ongoing basis and in the Trust's registration statement as required by
law.
10. DURATION AND TERMINATION. This Agreement, unless sooner terminated
as provided herein, shall continue for two years after its initial approval as
to each Portfolio and thereafter for periods of one year for so long as such
continuance thereafter is specifically approved at least annually (a) by the
vote of a majority of those Trustees of the Trust who are not parties to this
Agreement or interested persons of any such party, cast in person at a meeting
called for the purpose of voting on such approval, and (b) by the Trustees of
the Trust or by vote of a majority of the outstanding voting securities of each
Portfolio; provided, however, that if the shareholders of any Portfolio fail to
approve the Agreement as provided herein, the Adviser may continue to serve
hereunder in the manner and to the extent permitted by the Investment Company
Act of 1940 and rules thereunder. The foregoing requirement that continuance of
this Agreement be "specifically approved at least annually" shall be construed
in a manner consistent with the Investment Company Act of 1940 and the rules
and regulations thereunder. This Agreement may be terminated as to any
Portfolio at any time, without the payment of any penalty, by the Manager, by
vote of a majority of the Trustees of the Trust or by vote of a majority of the
outstanding voting securities of the Portfolio on not less than 30 days nor
more than 60 days written notice to the Adviser, or by the Adviser at any time
without the payment of any penalty, on 60 days written notice to the Trust.
This Agreement will automatically and immediately terminate in the event of its
assignment. Any notice under this Agreement shall be given in writing,
addressed and delivered, or mailed postpaid, to the other party at the primary
office of such party, unless such party has previously designated another
address.
As used in this Section 10, the terms "assignment", "interested
persons", and a "vote of a majority of the outstanding voting securities" shall
have the respective meanings set forth in the Investment company Act of 1940
and the rules and regulations thereunder, subject to such exemptions as may be
granted by the Securities and Exchange Commission under said Act.
11. SEVERABILITY. If any provision of this Agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby.
A copy of the Declaration of Trust of the Trust is on file with the
Secretary of the Commonwealth of Massachusetts, and
<PAGE> 5
notice is hereby given that this instrument is not binding upon any of the
Trustees, officers, or shareholders of the Trust individually.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as of the day and year first written above.
Barrow, Hanley, Mewhinney &
Strauss, Inc. AMR INVESTMENT SERVICES INC.
By /s/Bryant M. Hanley By /s/ W.F. Quinn
------------------------- -------------------------
William F. Quinn
Its President Its President
------------------------ ------------------------
<PAGE> 6
Schedule A
to the
American AAdvantage Funds
Investment Advisory Agreement
between
AMR Investment Services, Inc.
and
Barrow, Hanley, Mewhinney & Strauss, Inc.
AMR Investment Services, Inc. shall pay compensation to Barrow,
Hanley, Mewhinney & Strauss, Inc. pursuant to section 3 of the Investment
Advisory Agreement between said parties in accordance with the following annual
percentage rates:
0.30% per annum on the first $200 million
0.20% per annum on the next $300 million
0.15% per annum on the next $500 million
0.125% per annum on all excess over $1 billion
In calculating the amount of assets under management solely for the
purposes of determining the applicable percentage rate, there should be
included all American Airlines Trust Funds under management by the Adviser.
DATED: November 1, 1995
<PAGE> 1
Exhibit 99.b.5.b.v
AMERICAN AADVANTAGE FUNDS
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made this 1 day of November , 1995 by and between AMR
Investment Services, Inc., a Delaware Corporation, (the "Manager") and GSB
Investment Management, Inc. (the "Adviser");
WHEREAS, American AAdvantage Funds (the "Trust"), a Massachusetts
Business Trust, is an open-end, diversified management investment company
registered under the Investment Company Act of 1940, as amended, consisting of
several series (portfolios) of shares, each having its own investment policies;
and
WHEREAS, the Trust has retained the Manager to provide the Trust with
business and asset management services, subject to the control of the Board of
Trustees;
WHEREAS, the Trust's agreement with the Manager permits the Manager to
delegate to other parties certain of its asset management responsibilities; and
WHEREAS, the Manager desires to retain the Adviser to render
investment management services to the Trust with respect to certain of its
investment portfolios and such other investment portfolios as the Trust and the
Adviser may agree upon and so specify in the Schedule(s) attached hereto
(collectively the "Portfolios") and as described in the Trust's registration
statement on Form N-1A as amended from time to time, and the Adviser is willing
to render such services;
NOW, THEREFORE, in consideration of mutual covenants herein contained,
the parties hereto agree as follows:
1. DUTIES OF THE ADVISER. The Manager employs the Adviser to manage
the investment and reinvestment of such portion, if any, of the Portfolios'
assets as is designated by the Manager from time to time, and with respect to
such assets, to continuously review, supervise and administer the investment
program of the Portfolios, to determine in the Advisers discretion the
securities to be purchased or sold, to provide the Manager and the Trust with
records concerning the Adviser's activities which the Trust is required to
maintain, and to render regular reports to the Manager and to the Trust's
officers and Trustees concerning the Adviser's discharge of the foregoing
responsibilities. The Adviser shall discharge the foregoing
<PAGE> 2
responsibilities subject to the Manager's oversight and the control of the
officers and the Trustees of the Trust and in compliance with such policies as
the Trustees may from time to time establish, and in compliance with the
objectives, policies, and limitations for each such Portfolio set forth in the
Trust's current registration statement as amended from time to time and
applicable laws and regulations. The Adviser accepts such employment and agrees
to render the services for the compensation specified herein and to provide at
its own expense the office space, furnishings and equipment and the personnel
required by it to perform the services on the terms and for the compensation
provided herein. The Manager will instruct the Trust's Custodian(s) to hold
and/or transfer the Portfolios' assets in accordance with Proper Instructions
received from the Adviser. (For this purpose the term "Proper Instructions"
shall have the meaning(s) specified in the applicable agreements(s) between the
Trust and its Custodian(s).) The Adviser will not be responsible for the cost
of securities or brokerage commissions or any other Trust expenses except as
specified in this Agreement.
2. PORTFOLIO TRANSACTIONS. The Adviser is authorized to select the
brokers or dealers (including, to the extent permitted by law and applicable
Trust guidelines, the Adviser or any of its affiliates) that will execute the
purchases and sales of portfolio securities for the Portfolios and is directed
to use its best efforts to obtain the best net results with respect to brokers'
commissions and discounts as described in the Trust's current registration
statement as amended from time to time. In selecting brokers or dealers, the
Adviser may give consideration to factors other than price, including, but not
limited to, research services and market information. Any such services or
information which the Adviser receives in connection with activities for the
Trust may also be used for the benefit of other clients and customers of the
Adviser or any of its affiliates. The Adviser will promptly communicate to the
Manager and to the officers and the Trustees of the Trust such information
relating to portfolio transactions as they may reasonably request.
3. COMPENSATION OF THE ADVISER. For the services to be rendered by the
Adviser as provided in Sections 1 and 2 of this Agreement, the Manager shall
pay to the Adviser compensation at the rate specified in Schedule(s) attached
hereto and made a part of this Agreement. Such compensation shall be paid to
the Adviser quarterly in arrears, and shall be calculated by applying the
annual percentage rate(s) as specified in the attached Schedule(s) to the
average month- end assets of the specified portfolios during the relevant
quarter. Solely for the purpose of calculating the applicable annual percentage
rates specified
<PAGE> 3
in the attached Schedule(s), there shall be included such other assets as are
specified in said Schedule(s).
4. OTHER SERVICES. At the request of the Trust or the Manager, the
Adviser in its discretion may make available to the Trust office facilities,
equipment, personnel, and other services. Such office facilities, equipment,
personnel and services shall be provided for or rendered by the Adviser and
billed to the Trust or the Manager at a price to be agreed upon by the Adviser
and the Trust or the Manager.
5. REPORTS. The Manager (on behalf of the Trust) and the Adviser agree
to furnish to each other, if applicable, current prospectuses, proxy
statements, reports to shareholders, certified copies of their financial
statements, and such other information with regard to their affairs as each may
reasonably request.
6. STATUS OF ADVISER. The services of the Adviser to the Trust are not
to be deemed exclusive, and the Adviser and its directors, officers, employees
and affiliates shall be free to render similar services to others so long as
its services to the Trust are not impaired thereby. The Adviser shall be deemed
to be an independent contractor and shall, unless otherwise expressly provided
or authorized, have no authority to act for or represent the Manager or the
Trust in any way or otherwise be deemed an agent to the Manager or the Trust.
7. CERTAIN RECORDS. Any records required to be maintained and
preserved pursuant to the provisions of Rule 31a- 1 and Rule 31a-2 promulgated
under the Investment Company Act of 1940 which are prepared or maintained by
the Adviser on behalf of the Manager or the Trust are the property of the
Manager or the Trust and will be surrendered promptly to the Manager or Trust
on request.
8. LIABILITY OF ADVISER. No provision of this Agreement shall be
deemed to protect the Adviser against any liability to the Trust or its
shareholders to which it might otherwise be subject by reason of any willful
misfeasance, bad faith, or gross negligence in the performance of its duties or
the reckless disregard of its obligations under this Agreement.
9. PERMISSIBLE INTERESTS. To the extent permitted by law, Trustees,
agents, and shareholders of the Trust are or may be interested in the Adviser
(or any successor thereof) as directors, partners, officers, or shareholders,
or otherwise; directors, partners, officers, agents, and shareholders of the
Adviser are or may be interested in the Trust as Trustees, shareholders or
otherwise; and the Adviser (or any successor
<PAGE> 4
thereof) is or may be interested in the Trust as a shareholder or otherwise;
provided that all such interests shall be fully disclosed between the parties
on an ongoing basis and in the Trust's registration statement as required by
law.
10. DURATION AND TERMINATION. This Agreement, unless sooner terminated
as provided herein, shall continue for two years after its initial approval as
to each Portfolio and thereafter for periods of one year for so long as such
continuance thereafter is specifically approved at least annually (a) by the
vote of a majority of those Trustees of the Trust who are not parties to this
Agreement or interested persons of any such party, cast in person at a meeting
called for the purpose of voting on such approval, and (b) by the Trustees of
the Trust or by vote of a majority of the outstanding voting securities of each
Portfolio; provided, however, that if the shareholders of any Portfolio fail to
approve the Agreement as provided herein, the Adviser may continue to serve
hereunder in the manner and to the extent permitted by the Investment Company
Act of 1940 and rules thereunder. The foregoing requirement that continuance of
this Agreement be "specifically approved at least annually" shall be construed
in a manner consistent with the Investment Company Act of 1940 and the rules
and regulations thereunder. This Agreement may be terminated as to any
Portfolio at any time, without the payment of any penalty, by the Manager, by
vote of a majority of the Trustees of the Trust or by vote of a majority of the
outstanding voting securities of the Portfolio on not less than 30 days nor
more than 60 days written notice to the Adviser, or by the Adviser at any time
without the payment of any penalty, on 60 days written notice to the Trust.
This Agreement will automatically and immediately terminate in the event of its
assignment. Any notice under this Agreement shall be given in writing,
addressed and delivered, or mailed postpaid, to the other party at the primary
office of such party, unless such party has previously designated another
address.
As used in this Section 10, the terms "assignment", "interested
persons", and a "vote of a majority of the outstanding voting securities" shall
have the respective meanings set forth in the Investment company Act of 1940
and the rules and regulations thereunder, subject to such exemptions as may be
granted by the Securities and Exchange Commission under said Act.
11. SEVERABILITY. If any provision of this Agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby.
A copy of the Declaration of Trust of the Trust is on file with the
Secretary of the Commonwealth of Massachusetts, and
<PAGE> 5
notice is hereby given that this instrument is not binding upon any of the
Trustees, officers, or shareholders of the Trust individually.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as of the day and year first written above.
GSB Investment Management, Inc. AMR INVESTMENT SERVICES INC.
By /s/Frank P. Ganucheau III By /s/ W.F. Quinn
-------------------------- --------------------------
William F. Quinn
Its President Its President
------------------------- -------------------------
<PAGE> 6
Schedule A
to the
American AAdvantage Funds
Investment Advisory Agreement
between
AMR Investment Services, Inc.
and
GSB Investment Management, Inc.
AMR Investment Services, Inc. shall pay compensation to GSB Investment
Management, Inc. pursuant to section 3 of the Investment Advisory Agreement
between said parties in accordance with the following annual percentage rates:
0.30% per annum on the first $100 million
0.25% per annum on the next $100 million
0.20% per annum on the next $100 million
0.15% per annum on all excess over $300 million
In calculating the amount of assets under management solely for the
purposes of determining the applicable percentage rate, there should be
included all American Airlines Trust Funds under management by the Adviser.
DATED: November 1, 1995
<PAGE> 1
Exhibit 99.b.5.c
SUPPLEMENTAL TERMS AND CONDITIONS TO
THE ADMINISTRATIVE SERVICES AGREEMENT BETWEEN THE
AMERICAN AADVANTAGE FUNDS
AND
AMR INVESTMENT SERVICES, INC.
The following terms and conditions hereby are incorporated into the
Administrative Services Agreement ("Agreement") dated November 1, 1995 as
supplemented July 25, 1997, between the American AAdvantage Funds ("Trust") and
AMR Investment Services, Inc. ("Manager") as they relate to the American
AAdvantage S&P 500 Index Fund. To the extent that there is any conflict between
the terms and conditions of the Agreement and these Supplemental Terms and
conditions ("Supplement"), this Supplement shall govern.
1. Paragraph 3 of the Agreement is hereby amended to read, in its
entirety, as follows:
3. Fees for Administrative Services. As compensation for its
administrative services pursuant to Section 2 of this Agreement, the
Trust shall pay AMR an annualized fee equal as follows:
a. If a Fund manages its assets directly or invests all of its
investable assets (i.e., securities and cash) in another registered
investment company where AMR does not act as Manager and
Administrator, the Trust shall pay AMR an annualized fee equal to: (1)
0.05% of the net assets of the AMR Class of the Balanced Fund, the
Growth and Income Fund, the International Equity Fund, the
Intermediate Bond Fund, the Limited-Term Income Fund, and the S&P 500
Index Fund and 0.30% of the net assets of all other classes of the
Balanced Fund, the Growth and Income Fund, the International Equity
Fund, the Intermediate Bond Fund the Limited-Term Income Fund and the
S&P 500 Index Fund; (2) 0.05% of the net assets of the Money Market
Fund, the Municipal Money Market Fund and the U.S. Government Money
Market Fund; and (3) such percentage of any other class or Fund
encompassed by this Agreement as specified by one or more schedules
attached hereto.
b. If a Fund invests all of its investable assets (i.e.,
securities and cash) in another registered investment company for
which AMR acts as Manager and Administrator, the Trust shall pay AMR
an annualized fee equal to: (1) 0.00% of the net assets of the AMR
Class and 0.25% of the net assets of all other classes of the Balanced
Fund, the Growth and Income Fund, the International Equity Fund, the
Intermediate Bond Fund, the Limited-Term Income Fund and the S&P 500
Index Fund; (2) 0.05% of the net assets of the Money Market Fund, the
Municipal Money Market Fund and the U.S. Government Money Market Fund;
and (3) such percentage of any other class or Fund encompassed by this
Agreement as specified by one or more schedules attached hereto.
<PAGE> 2
The above-described compensation shall be calculated and accrued daily
and be payable quarterly. The Trust acknowledges that none of the compensation
paid pursuant to this Agreement is compensation for portfolio allocation or
investment advisory functions performed by AMR pursuant to its separate
Management Agreement with the Trust; rather, AMR is compensated for those
services pursuant to a separate Management Agreement between the Trust and AMR.
2. Notice is hereby given that the Agreement and this Supplement
are executed on behalf of the Trustees of the Trust and not individually and
that the obligations of the Agreement and the Supplement are not binding upon
any of the Trustees, officers, or shareholders of the Trust, but are binding
only upon the assets and property of the Fund to which the Agreement and this
Supplement relate.
Dated: November 21, 1997
AMERICAN AADVANTAGE FUNDS
By: /s/ Barry Y. Greenberg
--------------------------------------
Barry Y. Greenberg
Vice President and Assistant Secretary
AMR INVESTMENT SERVICES, INC.
By: /s/ William F. Quinn
-------------------------------------
William F. Quinn
President
<PAGE> 1
Exhibit 99.b.5.d
AMERICAN AADVANTAGE FUNDS - PLATINUM CLASS
ADMINISTRATIVE SERVICES AGREEMENT
AGREEMENT made this 1st day of November , 1995, by and between
AMERICAN AADVANTAGE FUNDS (the "Trust") and AMR INVESTMENT SERVICES, INC.
("AMR").
WHEREAS, the Trust is a Massachusetts business trust and an open-end,
management investment company registered under the Investment Company Act of
1940, as amended (the "1940 Act"), consisting of several series (portfolios) of
shares (collectively the "Funds", individually a "Fund"), each having its own
investment policies;
WHEREAS, the Trust's Board of Trustees ("Board") has authorized each
of the Funds to issue multiple classes of shares, including a class to be
designated as the Platinum Class, and in the future may authorize new Funds to
issue multiple classes, including such Platinum Class;
WHEREAS, the Trust desires to adopt an Administrative Services Plan
("Plan") with respect to the Platinum Class;
NOW, THEREFORE, the Trust hereby adopts this Plan with respect to the
Platinum Class.
1. A Fund is authorized to pay to AMR Investment Services, Inc.
("AMR"), or to such other entities as approved by the Board, as compensation
for administrative services provided by such entities to Platinum Class
shareholders, an aggregate fee at the rate of up to 0.45% on an annualized
basis of the average daily net assets of the Platinum Class of each such Fund
which has approved this Plan in accordance with the conditions of approval set
forth herein. Such fee shall be calculated and accrued daily and paid
quarterly or at such other intervals as the Board shall determine.
2. AMR or any other entity approved by the Board may spend such
amounts as it deems appropriate on any activities or expenses primarily
intended to result in or relate to the administration of a participating Fund's
Platinum Class shares, including, but not limited to, the payment of fees for
the purposes of record maintenance, forwarding Fund and shareholder
communications, and expenses related to aggregating and processing orders for
the purchase and redemption of shares.
3. This Plan shall not take effect with respect to the Platinum
Class of a Fund unless it first has been approved, together with any related
agreements, by votes of a majority of both (a) the Board and (b) those Trustees
of the Trust who are not "interested persons" of the Trust and have no direct
or indirect financial interest in the operation of this Plan or any agreements
related thereto ("Independent Trustees"), cast in person or at a meeting (or
meetings) called for the purpose of voting on such approval.
4. After approval as set forth in paragraph 3, this Plan shall
take effect and continue in full force and effect with respect to the Platinum
Class of a Fund for so long as such continuance is specifically approved at
least annually in the manner provided for approval of this Plan in paragraph 3.
5. AMR and any other recipient of payments hereunder shall
provide to the Board and the Board shall review, at least quarterly, a written
report of the amounts expended with respect to the Platinum Class of each
applicable Fund under this Plan and the purposes for which such expenditures
were made.
6. This Plan may be terminated with respect to the Platinum Class
of any Fund at any time by vote of the Board, or by vote of a majority of the
Independent Trustees.
- 1 -
<PAGE> 2
7. This Plan may not be amended to increase materially the amount
of fees provided for in paragraph 1 hereof unless such amendment is approved in
the manner provided for initial approval in paragraph 3 hereof, and no material
amendment to the Plan shall be made unless approved in the manner provided for
approval and annual renewal in paragraph 4 hereof.
8. The amount of the fees payable by a Fund to AMR or any other
authorized entity under paragraph 1 hereof is not related directly to expenses
incurred by such entities on behalf of such Fund in providing shareholder
services hereunder, and paragraph 2 hereof does not obligate such Fund to
reimburse any such entity for such expenses. The fees set forth in paragraph 1
hereof will be paid by such Fund to such entities until the Plan is either
terminated or not renewed. If the Plan is terminated or not renewed with
respect to a Fund, any shareholder servicing expenses incurred by such entities
on behalf of such Fund in excess of payments of the fees specified in paragraph
1 hereof which have been received and accrued through the termination date are
the sole responsibility and liability of the entity incurring the expenses, and
are not obligations of such Fund.
9. While this Plan is in effect, the selection and nomination of
the Independent Trustees shall be committed to the discretion of the
Independent Trustees.
10. As used in this Plan, the term "interested person" shall have
the same meaning as that term has in the 1940 Act.
11. The Trust shall preserve copies of this Plan (including any
amendments thereto) and any related agreements and all reports made pursuant of
paragraph 5 hereof for a period of not less than six years from the date of
this Plan, the first two years in an easily accessible place.
12. The Trustees of the Trust and the shareholders of the Funds
shall not be liable for an obligations of the Trust or the Fund under this
Plan, and AMR or any other person, in asserting any rights or claims under this
Plan, shall look only to the assets and property of the Trust or the Funds in
settlement of such right or claim, and not to such Trustees or shareholders.
- 2 -
<PAGE> 1
Exhibit 99.b.5.e
SUPPLEMENTAL TERMS AND CONDITIONS TO
THE ADMINISTRATIVE SERVICES AGREEMENT BETWEEN THE
AMERICAN AADVANTAGE FUNDS
AND
AMR INVESTMENT SERVICES, INC.
WITH RESPECT TO THE
S&P 500 INDEX FUND
The following terms and conditions hereby are incorporated into the
Administrative Services Agreement ("Agreement") dated November 1, 1995 between
the American AAdvantage Funds ("Trust") and AMR Investment Services, Inc.
("Manager") as they relate to the American AAdvantage S&P 500 Index Fund. To
the extent that there is any conflict between the terms and conditions of the
Agreement and these Supplemental Terms and conditions ("Supplement"), this
Supplement shall govern.
1. Paragraph 3 of the Agreement is hereby amended to read, in its
entirety, as follows:
3. Fees for Administrative Services. As compensation for its
administrative services pursuant to Section 2 of this Agreement, the
Trust shall pay AMR an annualized fee equal as follows:
a. If a Fund manages its assets directly or invests all of its
investable assets (i.e., securities and cash) in another registered
investment company where AMR does not act as Manager and Administrator,
the Trust shall pay AMR an annualized fee equal to: (1) 0.05% of the
net assets of the AMR Class of the Balanced Fund, the Growth and Income
Fund, the International Equity Fund, the Limited-Term Income Fund, and
the S&P 500 Index Fund and 0.30% of the net assets of all other classes
of the Balanced Fund, the Growth and Income Fund, the International
Equity Fund, and the Limited-Term Income Fund; (2) 0.05% of the net
assets of the Money Market Fund, the Municipal Money Market Fund and
the U.S. Government Money Market Fund and (3) such percentage of any
other class or Fund encompassed by this Agreement as specified by one
or more schedules attached hereto.
b. If a Fund invests all of its investable assets (i.e.,
securities and cash) in another registered investment company for
which AMR acts as Manager and Administrator, the Trust shall pay AMR
an annualized fee equal to: (1) 0.00% of the net assets of the AMR
Class and 0.25% of the net assets of all other classes of the Balanced
Fund, the Growth and Income Fund, the International Equity Fund, and
the Limited-Term Income Fund; (2) 0.05% of the net assets of the Money
Market Fund, the Municipal Money Market Fund and the U.S. Government
Money Market Fund and (3) such percentage of any other class or Fund
encompassed by this Agreement as specified by one or more schedules
attached hereto.
The above-described compensation shall be calculated and accrued daily
and be payable quarterly. The Trust acknowledges that none of the
compensation paid pursuant to this Agreement is compensation for
portfolio allocation or investment advisory functions performed by AMR
pursuant to its separate Management Agreement with the Trust; rather,
AMR is compensated for those services pursuant to a separate Management
Agreement between the Trust and AMR.
<PAGE> 2
2. Notice is hereby given that the Agreement and this Supplement
are executed on behalf of the Trustees of the Trust and not individually and
that the obligations of the Agreement and the Supplement are not binding upon
any of the Trustees, officers, or shareholders of the Trust, but are binding
only upon the assets and property of the Fund to which the Agreement and this
Supplement relate.
Dated: January 1, 1997
AMERICAN AADVANTAGE FUNDS
By:/s/ BARRY Y. GREENBERG
-------------------------------
Barry Y. Greenberg
Vice President and
Assistant Secretary
AMR INVESTMENT SERVICES, INC.
By:/s/ WILLIAM F. QUINN
-------------------------------
William F. Quinn
President
<PAGE> 1
Exhibit 99.b.6
DISTRIBUTION AGREEMENT
This Distribution Agreement is made this 1st day of September, 1995,
by and among American AAdvantage Funds and American AAdvantage Mileage Funds,
both Massachusetts business trusts (the "Trusts"), Brokers Transaction
Services, Inc. ("BTS" or the "Distributor"), a Texas corporation, and AMR
Investment Services, Inc. ("AMR"), a Delaware corporation.
WHEREAS, the Trusts are registered as open-end, diversified
management investment companies under the Investment Company Act of 1940, as
amended (the "1940 Act"), and have registered and intend to continue to
register their shares of beneficial interest (the "Shares") for sale to the
public under the Securities Act of 1933, as amended (the "1933 Act"), and
various state securities laws; and
WHEREAS, the Trusts offer for public sale one or more distinct series
of shares of beneficial interest, each corresponding to a distinct portfolio
("Portfolio"); and
WHEREAS, the Trusts wish to retain BTS as the Trust's Distributor in
connection with the offering and sale of the Shares of each current Portfolio
and such other Portfolios as agreed upon between the Trusts and BTS from time
to time and to furnish certain other services to the Trusts as specified in
this Agreement;
WHEREAS, this Agreement has been approved by a vote of the Board of
Trustees of each Trust in conformity with Paragraph (b)(2) of Rule l2b-1 under
the 1940 Act;
WHEREAS, AMR is the Manager of each Trust; and
WHEREAS, BTS is willing to act as Distributor and to furnish such
services on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. APPOINTMENT OF BTS. The Trusts hereby appoints BTS as
Distributor of their Shares. As such, BTS agrees to act as agent for the
Trusts and, subject to applicable federal and state laws and the Declaration of
Trust, By-Laws and current Prospectus and Statement of Additional Information
of each Trust, (a) to solicit orders for the purchase of the Shares, subject to
such terms and conditions as each Trust may specify, (b) to hold itself
available to receive orders for the purchase and redemption of the Shares, and
to accept such orders on behalf of each Trust as of the time of receipt of such
orders and promptly transmit such orders as are accepted to the Trust and its
transfer agents, and (c) to make Shares available through the National
Securities Clearing Corporation's FundServ system. Orders shall be deemed
effective at the time and in the manner set forth in the Registration
Statement. BTS shall offer the Shares of each Portfolio on an agency or "best
efforts" basis under which each Trust shall only issue such Shares as are
actually sold. The public offering price of the Shares of each Portfolio
shall be the net asset value per share (as determined by each Trust) of the
outstanding Shares of the Portfolio as set forth in the Registration Statement.
The Trusts reserve the right at any time to withdraw all offerings of the
Shares of any or all Portfolios by notice to BTS.
2. TRUST OBLIGATIONS. Each Trust shall keep BTS fully informed
of its affairs and shall make available to BTS copies of all information,
financial statements and other papers that BTS may reasonably request for use
- 1 -
<PAGE> 2
in connection with the distribution of shares, including, without limitation,
such reasonable number of copies of the most current prospectus, statement of
additional information, and annual and interim reports of a Portfolio as BTS
may request, and each Trust shall cooperate fully in the efforts of BTS to sell
and arrange for the sale of the Shares.
3. SALES TO DEALERS. BTS, with the consent of the Trusts or AMR,
may enter into agreements to sell shares to registered and qualified retail
dealers.
4. SALES MATERIALS. BTS shall provide to investors and
potential investors only such information regarding the Trusts as is permitted
by applicable law. To the extent reasonably requested by AMR, BTS will file
proposed advertisements and sales literature with appropriate regulators and
consult with AMR regarding any comments provided by regulators with respect to
such materials.
5. COMPENSATION. As compensation for providing services under
this agreement, AMR (and not the Trusts) shall pay to BTS the sum of (a)
$50,000 annually, payable monthly in arrears, (b) the ongoing licensing fees
and incidental costs of those employees of AMR who are designated by AMR to
become registered representatives of BTS, (c) the compensation paid by BTS to
such registered representatives in accordance with compensation schedules, as
agreed upon by BTS and AMR from time to time; (d) the reasonable fees
associated with listing and maintaining shares on the National Securities
Clearing Corporation's FundServ system, as agreed upon by BTS and AMR; and (e)
incidental expenses associated with printing and distributing advertising and
sales literature.
6. TRUST EXPENSES. Each Trust agrees, at its own expense, to
register Shares with the Securities and Exchange Commission ("SEC"), state and
other regulatory bodies, and to prepare and file from time to time such
registration statements, amendments, reports and other documents as may be
necessary to offer and sell Shares. Each Portfolio shall bear all expenses
related to preparing and typesetting Prospectuses, Statements of Additional
Information and other materials required by law and such other expenses,
including printing and mailing expenses, related to the Portfolio's
communications with persons who are shareholders of that Portfolio. Except as
specifically provided in this Agreement, the Trusts and the Portfolios shall
bear none of the expenses of BTS in connection with its offer and sale of the
Shares.
7. INDEMNIFICATION BY THE TRUSTS AND AMR. The Trusts and AMR
will indemnify, defend and hold harmless BTS, its officers and directors, and
any person who controls BTS within the meaning of Section 15 of the 1933 Act
(collectively, "BTS Indemnified Persons") from and against any and all claims,
demands, liabilities and expenses (including the reasonable cost of
investigating or defending such claims, demands or liabilities) that any BTS
Indemnified Person may incur under the 1933 Act, common law or otherwise
arising out of or based upon any (a) untrue statement of a material fact in the
Registration Statement, (b) omission to state a material fact in the
Registration Statement, or (c) failure by the Trusts or AMR to comply with the
terms of this Agreement, provided that this Agreement shall not protect any BTS
Indemnified Person from liability to which such person otherwise would be
subject by reason of willful misfeasance, bad faith, or gross negligence in the
performance of its duties, or by reason of its reckless disregard of its duties
under this Agreement.
8. INDEMNIFICATION BY BTS. BTS will indemnify, defend and hold
harmless the Trusts and their Portfolios, AMR, their several officers,
directors and Trustees, and any person who controls the Trusts or AMR within
the meaning of Section 15 of the 1933 Act (collectively, "AMR Indemnified
Persons") from and against any and all claims, demands, liabilities and
- 2 -
<PAGE> 3
expenses (including the reasonable cost of investigating or defending such
claims, demands or liabilities) that any AMR Indemnified Person may incur under
the 1933 Act, common law or otherwise arising out of or based upon any (a)
untrue statement of a material fact furnished by a BTS Indemnified Person for
use in the Registration Statement, (b) failure by such a person to state a
material fact therein as necessary to make the statements therein not
misleading, or (c) failure by BTS to comply with the terms of this Agreement or
applicable law, provided that this Agreement shall not protect any AMR
Indemnified Person from liability to which such person otherwise would be
subject by reason of willful misfeasance, bad faith, or gross negligence in the
performance of its duties, or by reason of its reckless disregard of its
obligations and duties under this Agreement.
9. SHARE CERTIFICATES. The Trusts shall not issue certificates
representing Shares unless requested to do so by a shareholder. If such
request is transmitted through BTS, the Trusts will cause certificates
evidencing the Shares owned to be issued in such names and denominations as BTS
shall from time to time direct.
10. STATUS OF BTS. BTS is an independent contractor and shall be
agent for the Trusts only with respect to the sale and redemption of Shares.
11. NON-EXCLUSIVE SERVICES. The services of BTS to the Trusts
under this Agreement are not to be deemed exclusive, and BTS shall be free to
render similar services or other services to others so long as its services
hereunder are not impaired thereby.
12. REPORTS BY BTS. BTS shall prepare reports for the Trustees
regarding its activities under this Agreement as from time to time shall be
reasonably requested by the Trustees.
13. DEFINITIONS. As used herein: the term "Registration
Statement" shall mean the registration statement filed by the Trust with the
SEC and effective under the 1933 Act, as such Registration Statement is amended
or supplemented from time to time; the terms "Prospectus" and "Statement of
Additional Information" shall mean the current form of prospectus(es) and
statement(s) of additional information filed by the Trusts as part of the
Registration Statement; the term "net asset value" shall have the meaning
ascribed to it in each Trust's Declaration of Trust; the term "Trustees" shall
refer to the Board of Trustees of each Trust; and the terms "affiliated
person," "assignment," "interested person," and "majority of the outstanding
voting securities" shall have the meanings given to them by Section 2(a) of the
1940 Act, subject to such exemptions as may be granted by the SEC by any rule,
regulation or order.
14. EFFECTIVENESS OF AGREEMENT. This Agreement shall become
effective upon the date hereinabove written, provided that, with respect to a
Portfolio, this Agreement shall not take effect unless such action has first
been approved by vote of a majority of the Trustees of each Trust and by vote
of a majority of those Trustees who are not interested persons of the Trusts or
BTS (all such Trustees collectively being referred to herein as the
"Independent Trustees"), cast in person at a meeting called for the purpose of
voting on such action.
15. TERMINATION OF AGREEMENT. Unless sooner terminated as
provided herein, this Agreement shall continue in effect for one year from the
above written date. Thereafter, if not terminated, this Agreement shall
continue automatically for successive periods of twelve months each, provided
that such continuance is approved at least annually (a) by a vote of a majority
of the Independent Trustees, cast in person at a meeting called for the purpose
of voting on such approval, and (b) by the Board of Trustees of each Trust or,
with respect to any given series, by vote of a majority of the outstanding
voting securities of such Portfolio. Notwithstanding the foregoing, with
- 3 -
<PAGE> 4
respect to any Portfolio, this Agreement may be terminated at any time, without
the payment of any penalty, by vote of the Board of Trustees of a Trust, by
vote of a majority of the Independent Trustees of a Trust or by vote of a
majority of the outstanding voting securities of such Portfolio on 180 days'
written notice to BTS or by BTS at any time, without the payment of any
penalty, on 180 days' written notice to the Trust or such Portfolio.
Termination of this Agreement with respect to any given Portfolio shall not
affect the continued validity of this Agreement or the performance thereunder
with respect to any other Portfolio. This Agreement automatically will
terminate in the event of its assignment.
16. AMENDMENTS. No provision of this Agreement may be changed,
waived, discharged or terminated orally, but only by an instrument in writing
signed by the party against which enforcement of the change, waiver, discharge
or termination is sought.
17. GOVERNING LAW. This Agreement shall be construed in
accordance with the laws of the State of Texas, without giving effect to the
conflicts of laws principles thereof, and the 1940 Act. To the extent that the
applicable laws of the State of Texas conflict with the applicable provisions
of the 1940 Act, however, the 1940 Act shall control.
18. REPRESENTATIONS. BTS represents and warrants that it (a) is
duly authorized to enter into this Agreement, (b) is duly registered and
licensed as a broker-dealer and in good standing with the National Association
of Securities Dealers, Inc. and all applicable state securities regulators and
that it is duly authorized and qualified to perform the services set forth in
this Agreement, and (c) promptly will notify AMR and each Trust if BTS or any
of its affiliated persons become subject to a legal proceeding which, if
adversely decided, could impair BTS's ability to satisfy its obligations under
this Agreement.
19. NOTICE. Any notice required or permitted to be given by
either party to the other shall be deemed sufficient upon receipt in writing at
the other party's principal offices.
20. MISCELLANEOUS. The captions in this Agreement are included
for convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect.
21. MASSACHUSETTS BUSINESS TRUST. The Trusts are Massachusetts
business trusts. A copy of each Trust's Declaration of Trust of the Trust is
on file with the Secretary of the Commonwealth of Massachusetts. This
Agreement is not binding upon any of the Trustees, officers or shareholders of
the Trusts individually, and no such person shall be individually liable with
respect to any action or inaction resulting from this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their officers thereunto duly authorized.
Attest: AMERICAN AADVANTAGE FUNDS
By: /s/Barry Y. Greeneberg By: /s/ William F. Quinn
---------------------- -----------------------------
Title: President
--------------------------
Attest: AMERICAN AADVANTAGE MILEAGE FUNDS
By: /s/Barry Y. Greeneberg By: /s/ William F. Quinn
---------------------- ------------------------------
Title: President
--------------------------
- 4 -
<PAGE> 5
Attest: BROKERS TRANSACTION SERVICES, INC.
By:/s/ Dana Prentice By: /s/ Sue H. Peden
----------------- ------------------------------
Title: Sr. Vice President
--------------------------
Attest: AMR INVESTMENT SERVICES, INC.
By: /s/Barry Y. Greeneberg By: /s/ William F. Quinn
---------------------- ------------------------------
Title: President
--------------------------
- 5 -
<PAGE> 1
Exhibit 99.b.8
CUSTODIAN CONTRACT
Between
AMERICAN AADVANTAGE FUNDS
and
FIRST REPUBLICBANK DALLAS, N.A.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
1. Employment of Custodian and Property to be Held by It 1
2. Duties of the Custodian with Respect to Property of the Fund Held by the
Custodian 2
2.1 Holding Securities 2
2.2 Delivery of Securities 2
2.3 Registration of Securities 5
2.4 Bank Accounts 5
2.5 Investment and Availability of Federal Funds 6
2.6 Collection of Income 6
2.7 Payment of Fund Monies 7
2.8 Liability for Payment in Advance of Receipt of Securities Purchased 9
2.9 Appointment of Agents 9
2.10 Deposit of Securities in Security System 9
2.11 Segregated Account 11
2.12 Ownership Certificates for Tax Purposes 12
2.13 Proxies 12
2.14 Communications Relating to Fund Portfolio Securities 13
2.15 Reports to Fund by Independent Public Accountants 13
3. Proper Instructions 14
4. Actions Permitted Without Express Authority 14
5. Evidence of Authority 15
6. Duties of Custodian with Respect to the Books of Account and Calculation of
Net Asset Value and Net Income 15
7. Records 15
8. Opinion of Fund's Independent Accountant 16
9. Compensation of Custodian 16
10. Responsibility of Custodian 16
11. Effective Period, Termination and Amendment 17
12. Successor Custodian 18
13. Interpretive and Additional Provisions 19
14. Texas Law to Apply 20
15. Prior Contracts 21
</TABLE>
<PAGE> 3
CUSTODIAN CONTRACT
AGREEMENT made as of the 3rd day of April, 1987, between American AAdvantage
Funds, a Massachusetts business trust, having its principal place of business
at 4200 American Boulevard, Fort Worth, Texas 76155, hereinafter called the
"Trust", and First RepublicBank Dallas, N.A., a national banking association,
having its principal place of business at 350 North St. Paul Street, Dallas,
Texas 75201, hereinafter called the "Custodian",
WITNESSETH: That in consideration of the mutual covenants and agreements
hereinafter contained, the parties hereto agree as follows:
1. Employment of Custodian and Property to be Held by It
The Trust hereby employs the Custodian as the custodian of the assets of each
of the Trust's series of shares of beneficial interest. The term "Fund" as used
hereinafter shall mean each and all such series in existence as of the date
hereof and, if mutually agreed by the Trust and the Custodian at such time,
each such series hereafter designated by the Trust.
The Fund agrees to deliver to the Custodian all securities and cash owned by
it, and all payments of income, payments of principal or capital distributions
received by it with respect to all securities owned by the Fund from time to
time, and the cash consideration received by it for such shares of beneficial
interest ("Shares") of the Fund as may be issued or sold from time to time. The
Custodian shall not be responsible for any property of the Fund held or
received by the Fund and not delivered to the Custodian.
Upon receipt of "Proper Instructions" (within the meaning of Article 3), the
Custodian shall from time to time employ one or more sub-custodians located in
the United States, provided that the Custodian shall have no more or less
responsibility or liability to the Fund on account of any actions or omissions
of any sub-custodian so employed than any such sub-custodian has to the
Custodian.
2. Duties of the Custodian with Respect to Property of the Fund Held By
the Custodian.
2.1 Holding Securities. The Custodian shall hold and physically segregate
for the account of the Fund all non-cash property, to be held by it in the
United States, including all domestic securities owned by the Fund, other than
securities which are maintained pursuant to Section 2.10 in a clearing agency
which acts as a securities depository or in a book-entry system authorized by
the U. S. Department of the Treasury, collectively referred to herein as
"Securities System."
2.2 Delivery of Securities. The Custodian shall release and deliver
domestic securities owned by the Fund held by the Custodian or in a Securities
System account of the Custodian only upon receipt of Proper Instructions, which
may be continuing
<PAGE> 4
instructions when deemed appropriate by the parties, and only in the following
cases:
1) Upon sale of such securities for the account of the Fund and
receipt of payment therefor;
2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the Fund;
3) In the case of a sale effected through a Securities System, in
accordance with the provisions of Section 2.10 hereof;
4) To the depository agent in connection with tender or other
similar offers for portfolio securities of the Fund;
5) To the issuer thereof or its agent when such securities are
called, redeemed, retired or otherwise become payable;
provided that, in any such case, the cash or other
consideration is to be delivered to the Custodian;
6) To the issuer thereof, or its agent, for transfer into the
name of the Fund or into the name of any nominee or nominees
of the Custodian or into the name or nominee name of any agent
appointed Pursuant to Section 2.9 or into the name or nominee
name of any sub-custodian appointed pursuant to Article 1; or
for exchange for a different number of bonds, certificates or
other evidence representing the same aggregate face amount or
number of units; provided that, in any such case, the new
securities are to be delivered to the Custodian;
7) To the broker selling the same or its clearing agent, for
examination in accordance with the "street delivery" custom;
8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or
readjustment of the securities of the issuer of such
securities, or pursuant to provisions for conversion contained
in such securities, or pursuant to any deposit agreement,
provided that, in any such case, the new securities and cash,
if any, are to be delivered to the Custodian;
9) In the case of warrants, rights or similar securities, the
surrender thereof in the exercise of such warrants, rights or
similar securities or the surrender of interim receipts or
temporary securities for definitive securities; provided that,
in any such case, the new securities and cash, if any, are to
be delivered to the Custodian;
10) For delivery in connection with any loans of securities made
by the Fund, but only against receipt of adequate collateral
as agreed upon from time to time by the Custodian and the
Fund, which may be in the form of cash or obligations issued
by the United States government, its agencies or
instrumentalities, except that in connection with any loans
for which collateral is to be credited to the Custodian's
account in the book-entry system authorized by the U. S.
Department of the Treasury, the Custodian will not be held
liable or
<PAGE> 5
responsible for the delivery of securities owned by the Fund
prior to the receipt of such collateral;
11) For delivery as security in connection with any borrowings by
the Fund requiring a pledge of assets by the Fund, but only
against receipt of amounts borrowed;
12) For delivery in accordance with the provisions of any
agreement among the Fund, the Custodian and a broker-dealer
registered under the Securities Exchange Act of 1934 (the
"Exchange Act") and a member of The National Association of
Securities Dealers, Inc. ("NASD"), relating to compliance
with the rules of The Options Clearing Corporation and of any
registered national securities exchange, or of any similar
organizations, regarding escrow or other arrangements in
connection with transactions by the Fund;
13) For delivery in accordance with the provisions of any
agreement among the Fund, the Custodian, and a Futures
Commission Merchant registered under the Commodity Exchange
Act, relating to compliance with the rules of the Commodity
Futures Trading Commission and/or any Contract Market, or any
similar organization or organizations, regarding account
deposits in connection with transactions by the Fund;
14) Upon receipt of instructions from the transfer agent
("Transfer Agent") for the Fund, for delivery to such Transfer
Agent or to the holders of shares in connection with
distributions in kind, as may be described from time to time
in the Fund's currently effective prospectus and statement of
additional information I "prospectus"), in satisfaction of
requests by holders of Shares for repurchase or redemption;
and
15) For any other proper corporate purpose, but only upon receipt
of, in addition to Proper Instructions, a properly executed
copy of a resolution of the Trustees of the Trust, specifying
the securities to be delivered, setting forth the purpose for
which such delivery is to be made, declaring such purposes to
be proper Fund purposes, and naming the person or persons to
whom delivery of such securities shall be made.
2.3 Registration of Securities. Domestic securities held by the Custodian
(other than bearer securities) shall be registered in the name of the Fund or
in the name of any nominee of the Fund or of any nominee of the Custodian (such
nominee may be used in common with other Funds and other registered investment
companies having the same investment adviser as the Fund), or in the name or
nominee name of any agent appointed pursuant to Section 2.9 or in the name or
nominee name of any sub-custodian appointed pursuant to Article 1. All
securities accepted by the Custodian on behalf of the Fund under the terms of
this Contract shall be in "street name" or other good delivery form.
2.4 Bank Accounts. The Custodian shall open and maintain a separate bank
account or accounts in the United States in the name of the Fund, subject only
to draft or order by the Custodian
<PAGE> 6
acting pursuant to the terms of this Contract, and shall hold in such account
or accounts, subject to the provisions hereof, all cash received by it from or
for the account of the Fund, other than cash maintained by the Fund in a bank
account established and used in accordance with Rule 17f-3 under the Investment
Company Act of 1940. Funds held by the Custodian for the Fund may be deposited
by it to its credit as Custodian in the Banking Department of the Custodian or
in such other banks or trust companies as it may in its discretion deem
necessary or desirable; provided, however, that every such bank or trust
company shall be qualified to act as a custodian under the Investment Company
Act of l940 and that each such bank or trust company and the funds to be
deposited with each such bank or trust company shall be approved by the
Trustees of the Trust. Such funds shall be deposited by the Custodian in its
capacity as Custodian and shall be withdrawable by the Custodian only in that
capacity.
2.5 Investment and Availability of Federal Funds. Upon mutual agreement
between the Fund and the Custodian, the Custodian shall, upon the receipt of
Proper Instructions,
1) invest in such instruments as may be set forth in such instructions
on the same day as received all federal funds received after a time
agreed upon between the Custodian and the Fund; and
2) make federal funds available to the Fund as of specified times
agreed upon from time to time by the Fund and the Custodian in the
amount of checks received in payment for Shares of the Fund which
are deposited into the Fund's account.
2.6 Collection of Income. The Custodian shall collect on a timely basis
all income and other payments with respect to United States registered
securities held hereunder to which the Fund shall be entitled either by law or
pursuant to custom in the securities business, and shall collect on a timely
basis all income and other payments with respect to United States bearer
securities if, on the date of payment by the issuer, such securities are held by
the Custodian or agent thereof and shall credit such income, as collected, to
the Fund's custodian account. Without limiting the generality of the foregoing,
the Custodian shall detach and present for payment all coupons and other income
items requiring presentation as and when they become due and shall collect
interest when due on securities held hereunder. Income due the Fund on United
States securities loaned pursuant to the provisions of Section 2.2 (10) shall be
the responsibility of the Fund. The Custodian will have no duty or
responsibility in connection therewith, other than to provide the Fund with such
information or data as may be necessary to assist the Fund in arranging for the
timely delivery to the Custodian of the income to which the Fund is properly
entitled.
2.7 Payment of Fund Moneys. Upon receipt of Proper Instructions which may
be continuing instructions when deemed appropriate by the parties, the Custodian
shall pay out moneys of the Fund in the following cases only:
<PAGE> 7
l) Upon the purchase of domestic securities, futures contracts or
options on futures contracts for the account of the Fund but
only (a) against the delivery of such securities, or evidence
of title to futures contracts or options on futures contracts,
to the Custodian (or any bank, banking firm or trust company
doing business in the United States or abroad which is
qualified under the Investment Company Act of 1940, as
amended, to act as a custodian and has been designated by the
Custodian as its agent for this purpose) registered in the
name of the Fund or in the name of a nominee of the Custodian
referred to in Section 2.3 hereof or in proper form for
transfer; (b) in the case of a purchase effected through a
Securities System, in accordance with the conditions set forth
in Section 2.10 hereof or (c) in the case of repurchase
agreements entered into between the Fund and the Custodian, or
another bank, or a broker dealer which is a member of NASD,
(i) against delivery of the securities either in certificate
form or through an entry crediting the Custodian's account at
the Federal Reserve Bank with such securities (notwithstanding
that: the written confirmation of such repurchase transaction
will be received subsequently) or (ii) against delivery of the
receipt evidencing purchase by the Fund of securities owned by
the Custodian along with written evidence of the agreement by
the Custodian to repurchase such securities from the Fund;
2) In connection with conversion, exchange or surrender of
securities owned by the Fund as set forth in Section 2.2
hereof;
3) For the redemption or repurchase of Shares issued by the Fund
as set forth in Article 4 hereof;
4) For the payment of any expense or liability incurred by the
Fund, including but not limited to the following payments for
the account of the Fund: interest, taxes, management,
accounting, transfer agent and legal fees, and operating
expenses of the Fund whether or not such expenses are to be
in whole or part capitalized or treated as deferred expenses;
5) For the payment of any dividends declared pursuant to the
governing documents of the Fund;
6) For payment of the amount of dividends received in respect of
securities sold short;
7) For any other proper purpose, but only upon receipt of, in
addition to Proper Instructions, a properly executed copy of a
resolution of the Trustees of the Trust, specifying the amount
of such payment, setting forth the purpose for which such
payment is to be made, declaring such purpose to be a proper
purpose, and naming the person or persons to whom such payment
is to be made.
2.8 Liability for Payment in Advance of Receipt of Securities Purchased.
In any and every case where payment for purchase of domestic securities for the
account of the Fund is made by the
<PAGE> 8
Custodian in advance of receipt of the securities purchased in the absence of
specific written instructions from the Fund to so pay in advance, the Custodian
shall be absolutely liable to the Fund for such securities to the same extent
as if the securities had been received by the Custodian.
2.9 Appointment of Agents. The Custodian may at any time or times in its
discretion appoint (and may at any time remove) any other bank or trust company
which is itself qualified under the Investment Company Act of 1940, as amended,
to act as a custodian, as its agent to carry out such of the provisions of this
Article 2 as the Custodian may from time to time direct; provided, however,
that the appointment of any agent shall not relieve the Custodian of its
responsibilities or liabilities hereunder.
2.10 Deposit of Securities in Securities Systems. The Custodian may deposit
and/or maintain domestic securities owned by the Fund in a clearing agency
registered with the Securities and Exchange Commission under Section 17A of the
Securities Exchange Act of 1934, which acts as a securities depository, or in
the book-entry system authorized by the U. S. Department of the Treasury and
certain federal agencies, collectively referred to herein as "Securities
System" in accordance with applicable Federal Reserve Board and Securities and
Exchange Commission rules and regulations, if any, and subject to the following
provisions:
1) The Custodian may keep domestic securities of the Fund in a
Securities System provided that such securities are
represented in an account ("Account") of the Custodian in the
Securities System which shall not include any assets of the
Custodian other than assets held as a fiduciary custodian or
otherwise for customers;
2) The records of the Custodian with respect to domestic
securities of the Fund which are maintained in a Securities
System shall identify by book-entry those securities belonging
to the Fund;
3) The Custodian shall pay for domestic securities purchased for
the account of the Fund upon (i) receipt of advice from the
Securities System that such securities have been transferred
to the Account, and (ii) the making of an entry on the records
of the Custodian to reflect such payment and transfer for the
account of the Fund. The Custodian shall transfer domestic
securities sold for the account of the Fund upon (i) receipt
of advice from the Securities System that payment for such
securities has been transferred to the Account, and ( ii ) the
making of an entry on the records of the Custodian to reflect
such transfer and payment for the account of the Fund. Copies
of all advises from the Securities System of transfers of
domestic securities for the account of the Fund shall identify
the Fund, be maintained for the Fund by the Custodian and be
provided to the Fund at its request. Upon request, the
Custodian shall furnish the Fund
<PAGE> 9
confirmation of each transfer to or from the account of the
Fund in the form of a written advice or notice and shall
furnish to the Fund copies of daily transaction sheets
reflecting each day's transactions in the Securities System
for the account of the Fund.
(4) The Custodian shall provide the Fund with any report obtained
by the Custodian on the Securities System's accounting system,
internal accounting control and procedures for safeguarding
domestic securities deposited in the Securities System;
5) The Custodian shall have received the initial or annual
certificate, as the case may be, required by Article 11
hereof;
6) Anything to the contrary in this Contract notwithstanding, the
Custodian shall be liable to the Fund for any loss or damage
to the Fund resulting from use of the Securities System by
reason of any negligence, misfeasance or misconduct of the
Custodian or any of its agents or of any of its or their
employees or from failure of the Custodian or any such agent
to enforce effectively such rights as it may have against the
Securities System; at the election of the Fund, it shall be
entitled to be subrogated to the rights of the Custodian with
respect to any claim against the Securities System or any
other person which the Custodian may have as a consequence of
any such loss or damage if and to the extent that the Fund has
not been made whole for any such loss or damage.
2.11 Segregated Account. The Custodian shall upon receipt of Proper
Instructions establish and maintain a segregated account or accounts for and on
behalf of the Fund, into which account or accounts may be transferred cash
and/or securities, including securities maintained in an account by the
Custodian pursuant to Section 2.10 hereof, (i) in accordance with the
provisions of any agreement among the Fund, the Custodian and a broker-dealer
registered under the Exchange Act and a member of the NASD (or any futures
commission merchant registered under the Commodity Exchange Act), relating to
compliance with the rules of The Options Clearing Corporation and of any
registered national securities exchange (or the Commodity Futures Trading
Commission or any registered contract market), or of any similar organization
or organizations, regarding escrow or other arrangements in connection with
transactions by the Fund, (ii) for purposes of segregating cash or government
securities in connection with options purchased, sold or written by the Fund or
commodity futures contracts or options thereon purchased or sold by the Fund,
(iii) for the purposes of compliance by the Fund with the procedures required
by Investment Company Act Release No. 10666, or any subsequent release or
releases of the Securities and Exchange Commission relating to the maintenance
of segregated accounts by registered investment companies and (iv) for other
proper corporate purposes, but only, in the case of clause (iv), upon receipt
of, in addition to Proper Instructions, a properly executed copy of a
resolution of the Trustees of the Trust, setting forth the purpose or purposes
of such segregated
<PAGE> 10
account and declaring such purposes to be proper corporate purposes.
2.12 Ownership Certificates for Tax Purposes. The Custodian shall execute
ownership and other certificates and affidavits for all federal and state tax
purposes in connection with receipt of income or other payments with respect to
domestic securities of the Fund held by it and in connection with transfers of
such securities.
2.13 Proxies. The Custodian shall, with respect to the domestic securities
held hereunder, cause to be promptly executed by the registered holder of such
securities, if the securities are registered otherwise than in the name of the
Fund or a nominee of the Fund, all proxies, without indication of the manner in
which such proxies are to be voted, and shall Promptly deliver to the Fund such
proxies, all proxy soliciting materials and all notices relating to such
securities.
2.14 Communications Relating to Fund Portfolio Securities. The Custodian
shall transmit promptly to the Fund all written information (including, without
limitation, pendency of calls and maturities of domestic securities and
expirations of rights in connection therewith and notices of exercise of call
and put options written by the Fund and the maturity of futures contracts
purchased or sold by the Fund) received by the Custodian from issuers of the
domestic securities being held for the Fund. With respect to tender or exchange
offers, the Custodian shall transmit promptly to the Fund all written
information received by the Custodian from issuers of the domestic securities
whose tender or exchange is sought and from the party (or his agents making the
tender or exchange offer. If the Fund desires to take action with respect to
any tender offer, exchange offer or any other similar transaction, the Fund
shall notify the Custodian at least three business days prior to the date on
which the Custodian is to take such action.
2.15 Reports to Fund by Independent Public Accountants. Custodian shall
provide the Fund, at such times as the Fund may reasonably require, with
reports by independent public accountants on the accounting system, internal
accounting control and procedures for safeguarding securities, futures
contracts and options on futures contracts, including domestic securities
deposited and/or maintained in a Securities System, relating to the services
provided by the Custodian under this Contract; such reports, which shall be of
sufficient scope and in sufficient detail, as may reasonably be required by the
Fund, to provide reasonable assurance that any material inadequacies would be
disclosed by such examination, and, if there are no such inadequacies, shall so
state.
3. Proper Instructions
Proper Instructions as used herein means a writing signed or initialed by one
or more person or persons as the Trustees of the Trust shall have from time to
time authorized. Each such writing shall set forth the specific transaction or
type of transaction
<PAGE> 11
involved, including a specific statement of the purpose for which such action
is requested. Oral instructions will be considered Proper Instructions if the
Custodian reasonably believes them to have been given by a person authorized to
give such instructions with respect to the transaction involved. The Fund shall
cause all oral instructions to be confirmed in writing. Upon receipt of a
certificate of the Trustees of the Trust as to the authorization by the Trust's
Trustees accompanied by a detailed description of procedures approved by the
Trust's Trustees, Proper Instructions may include communications effected
directly between electro-mechanical or electronic devices provided that the
Trustees of the Trust and the Custodian are satisfied that such procedures
afford adequate safeguards for the Fund's assets.
4. Actions Permitted without Express Authority
The Custodian may in its discretion, without express authority from the Fund:
1) make payments to itself or others for minor expenses of
handling securities or other similar items relating to its
duties under this Contract, provided that all such payments
shall be accounted for to the Fund;
2) surrender securities in temporary form for securities in
definitive form;
3) endorse for collection, in the name of the Fund, checks,
drafts and other negotiable instruments; and
4) in general, attend to all non-discretionary details in
connection with the sale, exchange, substitution, purchase,
transfer and other dealings with the securities and property
of the Fund except as otherwise directed by the Trustees of
the Fund.
5. Evidence of Authority
The Custodian shall be protected in acting upon any instructions, notice,
request, consent, certificate or other instrument or paper believed by it to be
genuine and to have been properly executed by or on behalf of the Fund. The
Custodian may receive and accept a properly executed copy of a document
evidencing action taken by the Trustees of the Trust as conclusive evidence (a)
of the authority of any person to act in accordance with such action or (b) of
any determination or of any action by the Trustees pursuant to the governing
instrument of the Trust, and such action may be considered as in full force and
effect until receipt by the Custodian of written notice to the contrary.
6. Duties of Custodian with Respect to the Books of Account and
Calculation of Net Asset Value and Net Income
The Custodian shall cooperate with and supply necessary information to the
entity or entities appointed by the Trustees of the Trust to keep the books of
account of the Fund and/or compute the net asset value per share of the
outstanding shares of the Fund or, if directed in writing to do so by the Fund,
shall itself keep such books of account and/or compute such net asset value per
share. If so directed, the Custodian shall also calculate daily the net income
of the Fund as described in the Fund's currently effective prospectus and shall
advise the Fund and the Transfer Agent daily of the total amounts of such net
<PAGE> 12
income and, if instructed in writing by an officer of the Trust to do so, shall
advise the Transfer Agent periodically of the division of such net income among
its various components. The calculations of the net asset value per share and
the daily income of the Fund shall be made at the time or times described from
time to time in the Fund's currently effective prospectus.
7. Records
The Custodian shall create and maintain all records relating to its activities
and obligations under this Contract in such manner as will meet the obligations
of the Fund under the Investment Company Act of 1940, with particular attention
to Section 31 thereof and Rules 31a-1 and 31a-2 thereunder, applicable federal
and state tax laws and any other law or administrative rules or procedures
which may be applicable to the Fund. All such records shall be the property of
the Fund and shall at all times during the regular business hours of the
Custodian be open for inspection by duly authorized employees or agents of the
Fund and employees and agents of the Securities and Exchange Commission. The
Custodian shall, at the Fund's request, supply the Fund with a tabulation of
securities owned by the Fund and held by the Custodian and shall, when
requested to do so by the Fund and for such compensation as shall be agreed
upon between the Fund and the Custodian, include certificate numbers in such
tabulations.
8. Opinion of Fund's Independent Accountant
The Custodian shall take all reasonable action, as the Fund may from time to
time request, to obtain from year to year favorable opinions from the Fund's
independent accountants with respect to its activities hereunder in connection
with the preparation of the Fund's Form N-lA, and Form N-SAR or other annual
reports to the Securities and Exchange Commission and with respect to any other
requirements of such Commission.
9. Compensation of Custodian
The Custodian shall be entitled to reasonable compensation for its services and
expenses as Custodian, as agreed upon from time to time between the Fund and
the Custodian.
10. Responsibility of Custodian
So long as and to the extent that it is in the exercise of reasonable care, the
Custodian shall not be responsible for the title, validity or genuineness of
any property or evidence of title thereto received by it or delivered by it
pursuant to this Contract and shall be held harmless in acting upon any notice,
request, consent, certificate or other instrument reasonably believed by it to
be genuine and to be signed by the proper party or parties . The Custodian
shall be held to the exercise of reasonable care in carrying out the provisions
of this Contract, but shall be kept indemnified by and shall be without
liability to the Fund for any action taken or omitted by it in good faith
without negligence. It shall be entitled to rely on and may act upon advice of
counsel (who may be counsel for the Fund) on all matters, and shall be without
liability for any action reasonably taken or omitted pursuant to such advice.
<PAGE> 13
If the Fund requires the Custodian to take any action with respect to
securities, which action involves the payment of money or which action may, in
the opinion of the Custodian, result in the Custodian or its nominee assigned
to the Fund being liable for the payment of money or incurring liability of
some other form, the Fund, as a prerequisite to requiring the Custodian to take
such action, shall provide indemnity to the Custodian in an amount and form
satisfactory to it.
If the Fund requires the Custodian to advance cash or securities for any
purpose or in the event that the Custodian or its nominee shall incur or be
assessed any taxes, charges, expenses, assessments, claims or liabilities in
connection with the performance of this Contract, except such as may arise from
its or its nominee's own negligent action, negligent failure to act or willful
misconduct, any property at any time held for the account of the Fund shall be
security therefor and should the Fund fail to repay the Custodian promptly, the
Custodian shall be entitled to utilize available cash and to dispose of the
Fund assets to the extent necessary to obtain reimbursement.
11. Effective Period, Termination and Amendment
This Contract shall become effective as of its execution, shall continue in
full force and effect until terminated as hereinafter provided, may be amended
at any time by mutual agreement of the parties hereto and may be terminated by
either party by an instrument in writing delivered or mailed, postage prepaid
to the other party, such termination to take effect not sooner than thirty (30)
days after the date of such delivery or mailing; provided, however that the
Custodian shall not act under Section 2.10 hereof in the absence of receipt of
an initial certificate of the Trustees of the Trust that the Trustees of the
Trust have approved the initial use of a particular Securities System and the
receipt of an annual certificate of the Trustees of the Trust that the Trustees
have reviewed the use by the Fund of such Securities System, as required in
each case by Rule 17f-4 under the Investment Company Act of 1940, as amended;
provided further, however, that the Fund shall not amend or terminate this
Contract in contravention of any applicable federal or state regulations, or
any provision of the governing instrument of the Fund, and further provided,
that the Fund may at any time by action of the Trustees substitute another bank
or trust company for the Custodian by giving notice as described above to the
Custodian, or (ii) immediately terminate this Contract in the event of the
appointment of a conservator or receiver for the Custodian by the Comptroller
of the Currency or upon the happening of a like event at the direction of an
appropriate regulatory agency or court of competent jurisdiction.
Upon termination of the Contract, the Fund shall pay to the Custodian such
compensation as may be due as of the date of such termination and shall
likewise reimburse the Custodian for its costs, expenses and disbursements.
<PAGE> 14
12. Successor Custodian
If a successor custodian shall be appointed by the Trustees of the Trust, the
Custodian shall, upon termination, deliver to such successor custodian at the
office of the Custodian, duly endorsed and in the form for transfer, all
securities then held by it hereunder and shall transfer to an account of the
successor custodian all of the Fund's securities held in a Securities System.
If no such successor custodian shall be appointed, the Custodian shall, in like
manner, upon receipt of a properly executed copy of a document evidencing
action taken by the Trustees of the Trust, deliver at the office of the
Custodian and transfer such securities, funds and other properties in
accordance with such action.
In the event that no written order designating a successor custodian or
properly executed copy of a document evidencing action taken by the Trustees of
the Trust shall have been delivered to the Custodian on or before the date when
such termination shall become effective, then the Custodian shall have the
right to deliver to a bank or trust company, which is a "bank" as defined in
the Investment Company Act of 1940, of its own selection, having an aggregate
capital, surplus, and undivided profits, as shown by its last published report,
of not less than $25,000,000, all securities, funds and other properties held
by the Custodian and all instruments held by the Custodian relative thereto and
all other property held by it under this Contract and to transfer to an account
of such successor custodian all of the Fund's securities held in any Securities
System. Thereafter, such bank or trust company shall be the successor of the
Custodian under this Contract.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the properly executed Copy of a document
evidencing action taken by the Trustees of the Trust or of the Trustees to
appoint a successor custodian, the Custodian shall be entitled to fair
compensation for its services during such period as the Custodian retains
possession of such securities, funds and other properties and the provisions of
this Contract relating to the duties and obligations of the Custodian shall
remain in full force and effect.
13. Interpretive and Additional Provisions
In connection with the operation of this Contract, the Custodian and the Fund
may from time to time agree on such provisions interpretive of or in addition
to the provisions of this Contract as may in their joint opinion be consistent
with the general tenor of this Contract. Any such interpretive or additional
provisions shall be in a writing signed by both parties and shall be annexed
hereto, provided that no such interpretive or additional provisions shall
contravene any applicable federal or state regulations or any provision of the
governing instrument of the Fund. No interpretive or additional provisions made
as
<PAGE> 15
provided in the preceding sentence shall be deemed to be an amendment of this
Contract.
The Custodian agrees that any claims by it against the Trust under this
Contract may be satisfied only from the assets of the Trust; that the person
executing this Contract on behalf of the Trust has executed it in his capacity
as an officer of the Trust and not individually, and that the obligations of
the Trust arising out of this Contract are not binding upon such person or the
Trust's shareholders individually but are binding only upon the assets and
property of the Trust; and that no shareholders, trustees or officers of the
Trust may be held personally liable or responsible for any obligations of the
Trust arising out of this Contract.
The Trust agrees that the person executing this Contract on behalf of the
Custodian has executed it in his capacity as an officer of the Custodian and
not individually, and that the obligations of the Custodian arising out of this
Contract are not binding on such person or the Custodian's officers, directors,
employees or shareholders individually but are binding only upon the Custodian;
and that no officer, director, employee or shareholder of the Custodian may be
held personally liable or responsible for any obligations of the Custodian
arising out of this Contract.
14. Texas Law to Apply
This Contract shall be construed and the provisions thereof interpreted under
and in accordance with laws of the State of Texas.
15. Prior Contracts
This Contract supersedes and terminates, as of the date hereof, all prior
contracts between the Fund and the Custodian relating to the custody of the
Fund's assets.
IN WITNESS WHEREOF, each of the parties has caused this instrument to
be executed in its name and behalf by its duly authorized representative and
its seal to be hereunder affixed as of the ______day of ______ , 1987.
ATTEST AMERICAN AADVANTAGE FUNDS
/s/ Thomas M. Stawicki /s/ William F. Quinn
- - ----------------------------- ----------------------------
Authorized Employee By: William F. Quinn
ATTEST FIRST REPUBLICBANK DALLAS, N.A.
/s/ Paula M. Burford /s/ M.J. Weeland
- - -------------------------- -------------------------
Authorized Officer By: Sr. Vice President and
Trust Officer
<PAGE> 1
Exhibit 99.b.9.a
REGISTRAR,
TRANSFER AGENCY AND SERVICE AGREEMENT
between
AMERICAN AADVANTAGE FUNDS
and
FIRST REPUBLICBANK DALLAS, N.A.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Article 1 Terms of Appointment; Duties of the Bank 1
Article 2 Fees and Expenses 3
Article 3 Representations and Warranties of the Bank 4
Article 4 Representations and Warranties of the Fund 4
Article 5 Indemnification 5
Article 6 Covenants of the Fund and the Bank 8
Article 7 Termination of Agreement 9
Article 8 Assignment 10
Article 9 Amendment 11
Article 10 Texas Law to Apply 11
Article 11 Merger of Agreement 11
</TABLE>
<PAGE> 3
TRANSFER AGENCY AND SERVICE AGREEMENT
between
AMERICAN AADVANTAGE FUNDS
and
FIRST REPUBLICBANK DALLAS, N.A.
REGISTRAR, TRANSFER AGENCY AND SERVICE AGREEMENT
AGREEMENT made as of the 3rd day of April,1987, by and between AMERICAN
AADVANTAGE FUNDS, a Massachusetts business trust, having its principal office
and place of business at 4200 American Boulevard, Fort Worth, Texas 76155 (the
"Trust"), and FIRST REPUBLICBANK DALLAS, N.A., a national banking association,
having its principal office and place of business at 350 North St. Paul Street,
Dallas, Texas 75201 (the "Bank").
WHEREAS, the Trust desires to appoint the Bank as its registrar, transfer
agent, dividend disbursing agent and agent in connection with certain other
activities and the Bank desires to accept such appointment;
NOW, THEREFORE, in consideration of the mutual convenants herein contained, the
parties hereto agree as follows:
Article 1 Terms of Appointment; Duties of the Bank
1.01 Subject to the terms and conditions set forth in this
Agreement, the Trust hereby employs and appoints the Bank to act as, and the
Bank agrees to act as, registrar of each of the Trust's series of units of
beneficial interest ( "Shares '' ) , transfer agent for the Shares, dividend
disbursing agent and agent for the shareholders of the Fund (the
"Shareholders") in connection with any dividend reinvestment plan as set out in
the prospectus and statement of additional information of the Fund. The term
"Fund" as used herein shall mean each and all such series of shares in
existence as of the date hereof, and, if mutually agreed by the Trust and the
Bank at such time, each such series of shares hereafter designated by the
Trust.
1.02 The Bank agrees that it will perform the following services:
(a) In accordance with the Fund's then current prospectus and
statement of additional information, and procedures established from time to
time by agreement between the Fund and the Bank, the Bank shall:
(i) enter on the records of the Bank on behalf of the
Fund the appropriate number of Shares, as authorized
by the Shareholders, and hold such Shares in the
appropriate Shareholder account;
(ii) effect transfers of Shares by the registered owners
thereof upon receipt of appropriate documentation;
(iii) prepare and transmit payments for dividends and
distributions declared by the Fund; and
(iv) act as agent for Shareholders in connection with any
dividend reinvestment plan of the Fund as agreed
between the Fund and the Bank from time to time.
(b) In addition to and not in lieu of the services set forth in
the above paragraph (a), the Bank shall: (i) perform all of the customary
services of a registrar, transfer agent, dividend disbursing agent and agent
for the Shareholders of the Fund in connection with any dividend reinvestment
plan of the Fund as consistent with all applicable regulations in effect as of
the date of this Agreement as more fully described in the attached fee
schedule, including but not limited to: maintaining all Shareholder accounts,
preparing Shareholder meeting lists, mailing proxies, receiving and tabulating
proxies and mailing Shareholder reports to current Shareholders, withholding
taxes on U. S. resident and non-resident alien accounts where applicable,
preparing and filing U. S. Treasury Department Forms 1099 and other appropriate
forms
<PAGE> 4
required with respect to dividends and distributions by federal authorities for
all registered Shareholders, preparing and mailing confirmation forms and
statements of account to Share- holders for all confirmable transactions in
Shareholder accounts, and providing Shareholder account information; and the
Bank shall provide a system which will enable the Fund to monitor the total
number of Shares sold in each State. The Fund shall (i) identify to the Bank in
writing those transactions and assets to be treated as exempt from blue sky
reporting for each State and (ii) verify the establishment of transactions for
each State on the system prior to activation and thereafter monitor the daily
activity for each State. The responsibility of the Bank for the Fund's blue sky
State registration status is solely limited to the initial establishment of
transactions subject to blue sky compliance by the Fund and the reporting of
such transactions to the Fund as provided above. Procedures applicable to
certain of these services described in paragraphs (a) and (b) may be
established from time to time by agreement between the Fund and the Bank and
shall be subject to the review and approval of the Fund. The failure of the
Fund to establish such procedures with respect to any service shall not in any
way diminish the duty and obligation of the Bank to perform such service
described in paragraph (a) and (b).
Article 2 Fees and Expenses
2.01 For the performance by the Bank of the provisions of this
Agreement, the Fund agrees to pay the Bank an annual maintenance fee as set out
in the initial fee schedule attached hereto. Such fee and out-of-pocket
expenses and advances identified under Section 2.02 below may be changed from
time to time subject to mutual written agreement between the Fund and the Bank.
2.02 In addition to the fee paid under Section 2.01 above, the Fund
agrees promptly to reimburse the Bank for reasonable out-of-pocket expenses or
advances incurred by the Bank for the items set out in the fee schedule
attached hereto. In addition, any other expenses incurred by the Bank at the
request of or with the consent of the Fund which are not properly borne by the
Bank as part of its duties and obligations under this Agreement will be
promptly reimbursed by the Fund. Postage and the cost of materials for mailing
of dividends, proxies, Fund reports and other mailings to all Shareholder
accounts shall be advanced to the Bank by the Fund at least seven (7) days
prior to the mailing date of such materials.
Article 3 Representations and Warranties of` the Bank
The Bank represents and warrants to the Fund that:
3.01 It is a national banking association duly organized and
existing and in good standing under the laws of the United States of America.
3.02 It is duly qualified to carry on its business in the State of
Texas.
3.03 It is empowered under applicable laws and by its charter and
by-laws to enter into and perform this Agreement.
3.04 All requisite corporate proceedings have been taken to
authorize it to enter into and perform this Agreement.
3.05 It has and will continue to have access to the necessary
facilities, equipment and personnel to perform its duties and obligations under
this Agreement.
Article 4 Representations and Warranties of the Fund
The Fund represents and warrants to the Bank that:
4.01 It is a duly organized Massachusetts business trust.
4.02 It is empowered under applicable laws and by governing
instrument to enter into and perform this Agreement.
4.03 All necessary actions required by its governing instrument
have been taken to authorize it to enter into and perform this Agreement.
<PAGE> 5
4.04 It is an open-end management investment company registered
under the Investment Company Act of 1940.
4.05 A registration statement under the Securities Act of 1933 is
currently effective and will remain effective and appropriate state securities
law filings have been made and will continue to be made with respect to all
Shares of the Fund being offered for sale; information to the contrary will
result in immediate notification to the Bank.
4.06 To assist the Bank in the performance of its duties hereunder,
the Trust will provide the Bank on a timely basis with the Trust's current
effective prospectus and statement of additional information immediately upon
effectiveness of each post-effective amendment to the Trust's registration
statement.
Article 5 Indemnification
5.01 The Bank shall not be responsible for, and the Fund shall
indemnify and hold the Bank harmless from and against, any and all losses,
damages, costs, charges, counsel fees, payments, expenses and liability arising
out of or attributable to:
(a) All actions of the Bank or its agents or subcontractors
required to be taken pursuant to this Agreement, provided that such actions are
taken in good faith and without negligence or willful misconduct.
(b) The Fund's refusal or failure to comply with the terms of this
Agreement, or which arise out of the Fund's lack of good faith, negligence or
willful misconduct or which arise out of the breach of any representation or
warranty of the Fund hereunder.
(c) The reliance on or use by the Bank or its agents or
subcontractors of information, records and documents which (i) are received by
the Bank or its agents or subcontractors and furnished to it by or on behalf of
the Fund, and (ii) have been prepared and/or maintained by the Fund or any
other person or firm on behalf of the Fund.
(d) The reliance on, or the carrying out by the Bank or its agents
or subcontractors of any written instructions or requests of the Fund's
representative . "Written instructions" means written instructions delivered
by mail, tested telegram, cable, telex or facsimile sending device and received
by the Bank, or its agents or subcontractors, signed by Authorized Persons as
defined in paragraph 5.03.
(e) The offer or sale of shares of Common Stock or of Shares in
violation of any requirement under the federal securities laws or regulations
or the securities laws or regulations of any state that such Shares be
registered in such state or in violation of any stop order or other
determination or ruling by any federal agency or any state with respect to the
offer or sale of such shares of Common Stock or Shares in such state.
(f) Any action or inaction taken by the Bank pursuant to written
instructions given to the Bank by an investment advisor of the Fund.
5.02 The Fund shall not be responsible for, and the Bank shall
indemnify and hold the Fund harmless from and against any and all losses,
damages, costs, charges, counsel fees, expenses and liability arising out of or
attributable to the Bank's failure to comply with the terms of this Agreement
or any action or failure or omission to act by the Bank as a result of the
Bank's lack of good faith, negligence or willful misconduct or which arise out
of the breach of any representation or warranty of the Bank hereunder.
5.03 At any time the Bank may apply to any authorized officer of
the Fund for instructions, and may consult with legal counsel experienced in
securities matters (including counsel to the Fund with respect to any matter
arising in connection with the services to be performed by the Bank under this
Agreement, and the Bank and its agents or subcontractors shall not be liable
and shall be indemnified by the Fund for any action reasonably taken or omitted
by it in reliance upon such instructions or upon the opinion of such counsel.
The Bank, its
<PAGE> 6
agents and subcontractors shall be protected and indemnified in acting upon any
paper or document furnished by or on behalf of the Fund, reasonably believed to
be genuine and to have been signed by the Proper person or persons authorized
by the Fund, as to which notice has been given to the Bank ("Authorized
Persons"), or upon any instruction, information, data, records or documents
provided by Authorized Persons to the Bank or its agents or subcontractors by
telephone, in person, machine readable input, telex, CRT data entry or other
similar means authorized by the Fund, and shall not be held to have notice of
any change of authority of any Authorized Person, until receipt of written
notice thereof from the Fund.
5.04 In the event either party is unable to perform its obligations
under the terms of this Agreement because of acts of God, strikes, equipment or
transmission failure or damage reasonably beyond its control, or other causes
reasonably beyond its control, such party shall not be liable for damages to
the other for any losses, damages, costs, charges, counsel fees, payments,
expenses or liability resulting from such failure to perform or otherwise from
such causes. In addition, the Bank shall use reasonable care to minimize the
likelihood of such damage, loss of data, delays and/or errors and should such
damage, loss of data, delays and/or errors occur, the Bank shall use its best
efforts to mitigate the effects of such occurrence.
5.05 Neither party to this Agreement shall be liable to the other
party for consequential damages under any provision of this Agreement or for
any act or failure to act hereunder.
5.06 In order that the indemnification provisions contained in this
Article 5 shall apply, upon the assertion of a claim or the institution of any
action or investigation for which either party may be required to indemnify the
other, the party seeking indemnification shall promptly notify the other party
of such assertion or institution, and shall keep the other party advised with
respect to all developments concerning such claim. The party who may be
required to indemnify shall have the option to participate with the party
seeking indemnification in the defense of such claim. The party seeking
indemnification shall in no case confess any claim or make any compromise in
any case in which the other party may be required to indemnify it except with
the other party's prior written consent.
Article 6 Covenants of the Fund and the Bank
6.01 The Fund shall promptly furnish to the Bank the following:
(a) A certified copy of the documentation reflecting the action
taken by the Fund's authorizing the appointment of the Bank and the execution
and delivery of this Agreement.
(b) A copy of the governing instrument of the Fund and all
amendments thereto. The Bank represents and warrants that to the best of its
knowledge, the various procedures and systems which the Bank has implemented
with regard to safeguarding from loss or damage the share certificates, check
forms, facsimile signature imprinting devices, and other property used in the
performance of its obligations hereunder are adequate and will enable the Bank
to perform satisfactorily its obligations hereunder and that the Bank will make
such changes therein from time to time as in its judgment are required for the
secure performance of its obligations hereunder.
6.02 The Bank shall keep records relating to the services to be
performed hereunder, in the form and manner as it may deem advisable. To the
extent required by Section 31 of the Investment Company Act of 1940, as
amended, and the Rules thereunder, the Bank agrees that all such records
prepared or maintained by the Bank relating to the services to be performed by
the Bank hereunder are the property of the Fund and will be preserved,
maintained and made available in accordance with such Section and Rules, and
will be surrendered promptly to the Fund on and in accordance with its request.
6.03 The Bank and the Fund agree that all books, records,
information and data pertaining to the business of the other party
<PAGE> 7
which are exchanged or received pursuant to the negotiation or the carrying out
of this Agreement shall remain confidential, and shall not be voluntarily
disclosed to any other person, except as may be required by law.
6.04 In case of any requests or demands for the inspection of the
Shareholder records of the Fund, the Bank will endeavor to notify the Fund and
to secure instructions from an authorized officer of the Fund as to such
inspection. The Bank reserves the right, however, to exhibit the Shareholder
records to any person whenever it is advised by its counsel that it may be held
liable for the failure to exhibit the Shareholder records to such person.
6.05 The Fund shall make all required filings under federal and
state securities laws.
Article 7 Termination of Agreement
7.01 This Agreement may be terminated by either party upon one
hundred twenty (120) days written notice to the other. Any such termination
shall not effect the rights and obligations of the parties under Article 5
hereof.
7.02 Should the Fund exercise its right to terminate, all
out-of-pocket expenses associated with the movement of records and material
will be borne by the Fund. Additionally, the Bank reserves the right to charge
for any other reasonable expenses and for its time at its customary rate
associated with such termination. In the event that the Fund designates a
successor to any of the Bank's obligations hereunder, the Bank shall, at the
expense and direction of the Fund, transfer to such successor a certified list
of the Shareholders of the Fund, a complete record of the account of each
Shareholder, and all other relevant books, records and other data established
or maintained by the Bank hereunder.
Article 8 Assignment
8.01. Neither this Agreement nor any rights or obligations hereunder
may be assigned by either party without the written consent of the other party.
8.02 This Agreement shall inure to the benefit of and be binding
upon the parties and their respective permitted successors and assigns. The
Bank agrees that any claims by it against the Trust under this Agreement may be
satisfied only from the assets of the Trust; that the person executing this
Agreement on behalf of the Trust has executed it in his capacity as an officer
of the Trust and not individually, and that the obligations of the Trust
arising out of this Agreement are not binding upon such person or the Trust's
shareholders individually but are binding only upon the assets and property of
the Trust; and that no shareholders, trustees or officers of the Trust may be
held personally liable or responsible for any obligations of the Trust arising
out of this Agreement.
The Trust agrees that the person executing this Agreement on behalf of
the Bank has executed it in his capacity as an officer of the Bank and not
individually, and that the obligations of the Bank arising out of this
Agreement are not binding on such person or the Bank's officers, directors,
employees or shareholders individually but are binding only upon the Bank; and
that no officer, director, employee or shareholder of the Bank may beheld
personally liable or responsible for any obligations of the Bank arising out of
this Agreement.
Article 9 Amendment
9.01 This Agreement may be amended or modified by a written
agreement executed by both parties and authorized or approved by a resolution
of the Board of Trustees of the Trust.
Article 10 Texas Law to Apply
10.01 This Agreement shall be construed and the provisions thereof
interpreted under and in accordance with the laws of the State of Texas.
<PAGE> 8
Article 11 Merger of Agreement
11.01 This Agreement constitutes the entire agreement between the
parties hereto and supersedes any prior agreement with respect to the subject
hereof whether oral or written.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in their names and on their behalf under their seals by and through
their duly authorized officers, as of the day and year first above written.
AMERICAN AADVANTAGE FUNDS
BY:/s/ William F. Quinn
-----------------------
ATTEST:
/s/ Thomas M. Stawicki
- - -------------------------
Authorized Employee
FIRST REPUBLICBANK DALLAS, N.A.
BY: /s/ M. Weiland
-----------------------------------
Senior Vice President and Trust Officer
ATTEST:
/s/ Paula M. Burford
- - ----------------------
Authorized Officer
<PAGE> 9
FEE SCHEDULE
Shareholder Accounting
$16.00 per year per shareholder account for a money market fund, plus
.75c. for each non-dividend transaction, e.g., purchases and sales of
shares.
$6.00 per year per shareholder account for a regular mutual fund.
Plus $l0.00 for each wire transfer of funds in or out.
Minimum fees -
$1,000 per month on a money market fund.
500 per month on a regular mutual fund.
Fund Accounting
A flat fee of $250 per month per manager of first 50 security
positions per manager; 51 to 100 security positions per manager per
month, $4.25 each; over 100 security positions per manager per month,
$3.50 each will be charged for providing fund accounting services
(including daily pricing).
Out-of-Pocket Expenses
The cost of stationery and supplies, checks, ledgers, postage, taxes,
insurance, courier, fee incurred for legal and auditing services and
other expenses incurred in performing the above services will be
billed separately at cost in addition to the service fee.
Additional Services Requested
1. Writing programs for P.C.'s to provide communications between
AMRISI and RBD for purchases and sales of fund shares.
One time cost $2,500 to $3,000
2. Writing and modifying trust accounting system programs to
systematically generate a 30-60-90 day turnover report for each
manager who invests in fixed income securities.
One time cost To be provided
3. For processing and recordkeeping services associated with the
short term investment fund within each mutual fund.
$250 per month per fund
$35 per purchase, sale or maturity
4. Manual preparation of the 30-60-90 day turnover report (applicable
until report can be systematically generated, at which time the
fee may be re-negotiated) .
$175 per month per manager
5. Weekly market valuation of the Money Market Find and comparison
with amortized cost valuation.
$450 per month
<PAGE> 1
Exhibit 99.b.9.b.i
TRANSFER AGENCY AND REGISTRAR AGREEMENT
AGREEMENT, dated as of June 7, 1993, among American AAdvantage Funds,
(the "Trust"), a Massachusetts business trust having its principal place of
business at 4333 Amon Carter Boulevard, Fort Worth, Texas 76155, AMR Investment
Services, Inc. ("AMR Investments"), the Manager of the Trust, a Delaware
corporation having its principal place of business at 4333 Amon Carter
Boulevard, Fort Worth, Texas 76155 and Goldman, Sachs & Co., a New York limited
partnership (the "Transfer Agent"), with offices at 4900 Sears Tower, Chicago,
Illinois 60606,
WITNESSETH
That for and in consideration of the mutual covenants and promises
hereinafter set forth, the Trust, AMR Investments and the Transfer Agent agree
as follows:
1. Definitions. Whenever used in this Agreement or the Schedules
hereto, the following words and phrases, unless the context otherwise requires,
shall have the following meanings:
(a) "Authorized Person" includes any person, whether or not
such person is an officer or employee of the Trust or AMR Investments, duly
authorized to give Oral Instructions or Written Instructions on behalf of the
Trust or AMR Investments as indicated in a certificate furnished from time to
time to the Transfer Agent in accordance with Section 4(c) hereof.
(b) "Board of Trustees" means the Board of Trustees, Board of
Directors or other governing body, as the case may be, of the Trust.
(c) "Commission" means the Securities and Exchange Commission.
(d) "Custodian" refers to any custodian or sub-custodian of
securities and other property which the Trust may from time to time deposit, or
cause to be deposited or held under the name or account of such a custodian
pursuant to a Custodian Agreement.
(e) "Declaration of Trust" means the Articles of
Incorporation, Declaration of Trust, By-laws or similar organizational
documents as the case may be, of the Trust as the same may be amended from time
to time.
(f) "1933 Act" means the Securities Act of 1933, as amended.
(g) "1934 Act" means the Securities Exchange Act of 1934, as
amended.
(h) "1940 Act" means the Investment Company Act of 1940, as
amended.
(i) "Oral Instructions" means instructions, other than Written
Instructions, actually received by the Transfer Agent from a person reasonably
believed by the Transfer Agent to be an Authorized Person;
<PAGE> 2
(j) "Prospectus" means the most recently dated Prospectus and
Statement of Additional Information, including any supplements thereto if any,
contained in the Trust's registration statement which has been filed with, and
declared effective by, the Commission under the 1933 Act and the 1940 Act.
(k) "Shares" refers collectively to such shares of capital
stock, beneficial interest or limited partnership interests, as the case may
be, of the Trust as may be issued from time to time; provided, however, that if
the Shares of the Trust may be issued in more than one series or class,
"Shares" shall refer to the shares of capital stock, beneficial interest or
limited partnership interest in such class or series.
(l) "Shareholder" means a holder of record of Shares.
(m) "Trust" means the investment company executing this
Agreement, and if it is a series fund, as such term is used in the 1940 Act
and/or multiple class fund, such term shall include each series and/or class of
the Trust hereafter created, except that such series and/or class shall be
listed on Schedule A before this Agreement shall become effective with respect
to each such series and/or class.
(n) "Written Instructions" means a written communication
signed by a person reasonably believed by the Transfer Agent to be an
Authorized Person and actually received by the Transfer Agent. Written
Instructions shall include manually executed originals and authorized
electronic transmissions, including telefacsimile of a manually executed
original or other process.
2. Appointment of the Transfer Agent. The Trust and AMR Investments
hereby appoint and constitute the Transfer Agent as transfer agent, registrar
and dividend disbursing agent for Shares and as shareholder servicing agent for
the Trust. The Transfer Agent accepts such appointments and, subject to the
terms and conditions hereof, agrees to perform the duties hereinafter set
forth. In addition, the Trust and AMR Investments authorize the Transfer Agent
to take such actions as are necessary, including opening of bank accounts for
the Trust, in order to effectuate the obligations of the Transfer Agent under
this Agreement.
3. Compensation
(a) AMR Investments or the Trust will compensate or cause the
Transfer Agent to be compensated for the performance of its obligations
hereunder with respect to the Trust in accordance with the fees set forth in
the written schedule of fees annexed hereto as Schedule A and incorporated
herein. The Transfer Agent will transmit an invoice to AMR Investments as soon
as practicable after the end of each calendar month which will be detailed in
accordance with Schedule A and AMR Investments or the Trust will pay to the
Transfer Agent the amount of such invoice within thirty (30) days after AMR
Investments' receipt of the invoice.
(b) Any compensation agreed to hereunder may be adjusted from
time to time by attaching to Schedule A a revised fee schedule executed and
dated by the parties hereto.
<PAGE> 3
4. Documents. In connection with the appointment of the Transfer
Agent, the Trust shall deliver or cause to be delivered to the Transfer Agent
the following documents on or before the date this Agreement goes into effect
but in any case within a reasonable period of time for the Transfer Agent to
prepare to perform its duties hereunder:
(a) If the Shares are issuable in certificate form, an
adequate supply of certificates for the Shares executed on behalf of the Trust
by the persons specified in the Declaration of Trust and, if required by the
Declaration of Trust, bearing the seal of the Trust.
(b) All account application forms and other documents
relating to Shareholder accounts or to any plan, program or service offered by
the Trust;
(c) A signature card bearing the signatures of any officer of
the Trust or AMR Investments or other Authorized Person who is authorized to
sign Written Instructions or is authorized to give Oral Instructions.
(d) A certified copy of the Declaration of Trust;
(e) A copy of the resolution of the Board of Trustees
authorizing the execution and delivery of this Agreement;
(f) If applicable, a certified list of Shareholders of the
Trust with the name, address and taxpayer identification number of each
Shareholder, and the number of Shares of the Trust (or of each series or class
thereof, as applicable held by each Shareholder, certificate numbers and number
of Shares represented thereby (if any certificates have been issued), lists of
any accounts against which stop transfer orders have been placed, together with
the reasons therefore, the number of Shares redeemed by the Trust, the
information specified in Paragraph I of Schedule B and any other information
reasonably requested by the Transfer Agent with respect to the Trust or
Shareholder accounts that have been opened or Shares outstanding on or before
the date this Agreement becomes effective; and
(g) An opinion of counsel for the Trust with respect to the
validity of the Shares and this Agreement and the status of such Shares under
the 1933 Act, which may be the opinion filed by the Trust with the Commission
pursuant to Rule 24f-2 under the 1940 Act if accompanied by a letter
authorizing the Transfer Agent to rely upon such opinion.
5. Further Documentation. The Trust will also furnish the Transfer
Agent with copies of the following documents promptly after the same shall
become available:
(a) each resolution of the Board of Trustees authorizing the
issuance of Shares;
(b) any post-effective amendments to the registration
statements filed on behalf of the Trust with the Commission;
(c) a certified copy of each amendment to the Declaration of
Trust;
(d) certified copies of each resolution of the Board of
Trustees or other authorization designating Authorized Persons (or
authorization of AMR Investments designating Authorized Persons); and
<PAGE> 4
(e) such other certificates, documents or opinions as the
Transfer Agent may reasonably request in connection with the performance of its
duties hereunder.
6. Representations of the Trust. The Trust represents to the Transfer
Agent that all outstanding Shares are validly issued, fully paid and
non-assessable. When Shares are hereafter issued, such Shares shall be validly
issued, fully paid and nonassessable,
7. Distributions Payable in Shares. In the event that the Board of
Trustees of the Trust shall declare a distribution Payable in Shares with
respect to a series or class designated in Schedule A, the Trust shall deliver
or cause to be delivered to the Transfer Agent written notice of such
declaration signed on behalf of the Trust by an Authorized Person, upon which
notice the Transfer Agent shall be entitled to rely for all purposes. Such
Notice shall certify (i) the identity of the Shares involved, (ii) the number
of Shares involved, (iii) that all appropriate action has been taken and any
other information reasonably requested by the Transfer Agent.
8. Duties of the Transfer Agent. The Transfer Agent shall be
responsible for administering and or performing those functions typically
performed by a transfer agent; for providing clerical and ministerial
assistance to the Trust and AMR Investments in connection with the processing
of orders to purchase Shares; for acting as service agent in connection with
dividend and distribution functions; and for performing shareholder account and
administrative agent functions in connection with the issuance, transfer and
redemption (including coordination with the Custodian) of shares in accordance
with the terms of the Prospectus and applicable law. The operating standards
and procedures to be followed shall be determined from time to time by
agreement between the Trust and the Transfer Agent. In addition, the Trust
shall deliver to the Transfer Agent all notices issued by the Trust with
respect to the Shares and shall perform such other specific duties as are set
forth in the Declaration of Trust including the giving of notice of any special
or annual meetings of shareholders and any other notices required thereby.
9. Record Keeping and Other Information. The Transfer Agent shall
create and maintain all records required of it pursuant to its duties hereunder
in accordance with all applicable laws, rules and regulations, including
records required by Section 31(a) of the 1940 Act. All records shall be
available upon reasonable notice during regular business hours for inspection
and use by the Trust and AMR Investments. Where applicable, such records shall
be maintained by the Transfer Agent for the periods and in the places required
by Rule 31a-2 under the 1940 Act. The Transfer Agent agrees that all such
records prepared or maintained by the Transfer Agent relating to the services
to be performed hereunder are the property of the Trust.
Upon reasonable notice by the Trust, the Transfer Agent shall make
available during regular business hours such of its facilities and premises
employed in connection with the performance of its duties under this Agreement
for reasonable visitation by the Trust or any person retained by the Trust or
AMR Investments as may be necessary for the Trust or AMR Investments to
evaluate the quality of the services performed by the Transfer Agent pursuant
hereto.
<PAGE> 5
10. Other Duties. In addition to the duties set forth in Section 8
hereof and in Schedule B, the Transfer Agent shall perform such other duties
and functions, and shall be paid such amounts therefor, as may from time to
time be agreed upon in writing among the Trust, AMR Investments and the
Transfer Agent. The compensation for such other duties and functions shall be
reflected in a written amendment to Schedule A or B and the duties and
functions shall be reflected in an amendment to Schedule B, both dated and
signed by authorized persons of each of the parties hereto.
11. Reliance by Transfer Agent; Instructions,
(a) The Transfer Agent will have no liability when acting upon
Written or Oral Instructions reasonably believed to have been executed or
communicated by an Authorized Person and will not be held to have any notice of
any change of authority of any person until receipt of a Written Instruction
thereof from the Trust or AMR Investments as applicable pursuant to Section
4(c). The Transfer Agent will also have no liability when processing Share
certificates which it reasonably believes to bear the proper manual or
facsimile signatures of the officers of the Trust and the proper counter-
signature of the Transfer Agent.
(b) At any time, the Transfer Agent may apply to any
Authorized Person of the Trust for Written Instructions and may, at the expense
of the Transfer Agent, seek advice from legal counsel for the Trust, or its own
legal counsel, with respect to any matter arising in connection with this
Agreement, and it shall not be liable and shall be indemnified by the Trust for
any action taken or omitted by it in reliance upon such Written Instructions or
opinion of counsel to the Trust; provided that nothing in this Subsection shall
excuse the Transfer Agent when an action or omission by it constitutes willful
misfeasance, bad faith, gross negligence or reckless disregard of its duties
hereunder. Written Instructions requested by the Transfer Agent shall be
provided by the Trust within a reasonable period of time and the Transfer Agent
shall not be required to take any action under this Agreement that is the
subject of a request for Written instructions Until Written Instructions
responding to the satisfaction of the Transfer Agent to such request are
received by the Transfer Agent. The Transfer Agent, its officers, agents or
employees, shall accept Oral Instructions or Written Instructions given to them
by any person representing or acting on behalf of the Trust only if the
Transfer Agent reasonably believes said representative is an Authorized Person.
The Trust agrees that all Oral Instructions shall be followed within one
business day by confirming Written Instructions. The Trust's failure to so
confirm shall not impair in any respect the Transfer Agent's right to rely on
Oral Instructions. The Transfer Agent shall have no duty or obligation to
inquire into, nor shall the Transfer Agent be responsible for, the legality of
any act done by it upon the request or direction of a person reasonably
believed by the Transfer Agent to be an Authorized Person.
(c) Notwithstanding any of the foregoing provisions of this
Agreement, the Transfer Agent shall be under no duty or obligation to inquire
into, and shall not be liable for and shall be indemnified with respect to any
liability with respect to: (i) the legality of the issuance or sale of any
Shares or the sufficiency of the amount to be received therefor; (ii) the
legality of the redemption of any Shares, or the propriety of the amount to be
paid therefor; (iii) the legality of the declaration of any dividend by the
Board of Trustees, or the
<PAGE> 6
legality of the issuance of any Shares in payment of any dividend; or (iv) the
legality of any recapitalization or readjustment of the Shares.
12. Acts of God, etc. The Transfer Agent will not be liable or
responsible for delays or errors by acts of God or by reason of circumstances
beyond its control, including acts of civil or military authority, national
emergencies, labor difficulties, equipment failure, mechanical breakdown,
insurrection, war, riots, or failure or unavailability of transportation,
communication or power supply, fire, flood or other catastrophe.
13. Duty of Care and Indemnification.
(a) The Transfer Agent, in the performance of its duties
hereunder, shall use the care, skill, prudence and diligence under the
circumstances then prevailing that a prudent person acting in a like capacity
and familiar with such matters would use in the conduct of an enterprise of a
like character and with like aims and shall act in conformity with the Trust's
Declaration of Trust and Prospectus and any Written or Oral Instructions, and
shall, subject to the standard set forth above, comply with and conform to the
requirements of the 1940 Act, the 1934 Act, particularly Section 17A thereof,
and all other applicable federal and state laws, regulations and rulings.
(b) AMR Investments and the Trust hereby agree to indemnify
and hold harmless the Transfer Agent, its officers, partners and employees and
each person, if any, who controls the Transfer Agent against any and all
losses, claims, damages Of liabilities, joint or several, to which any such
person may become subject under the 1940 Act, the 1933 Act, the 1934 Act or
other federal or state statutory law or regulation, at common law or otherwise
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon the Transfer Agent's actions and duties
hereunder. It is understood, however, that nothing in this Section 13 shall
protect the Transfer Agent, its officers, partners and employees and each
person, if any, who controls the Transfer Agent against any liability to AMR
Investments, the Trust or its shareholders and their officers, directors,
trustees and employees and each person, if any, who controls AMR Investments or
the Trust to which such person would otherwise be subject by reason of willful
misfeasance, bad faith, or negligence, in the performance of his duties, or by
reason of his reckless disregard of his obligations and duties under this
Agreement.
(c) The Transfer Agent hereby agrees to indemnify and hold
harmless AMR Investments and the Trust and their officers, directors, trustees
and employees and each person, if any, who controls AMR Investments or the
Trust against any and all losses, claims, damages or liabilities, joint or
several, to which such person may become subject under the 1940 Act, the 1933
Act, the 1934 Act or other federal or state statutory law or regulation, at
common law or otherwise, insofar as such losses, claims, damages or liabilities
(or actions in respect thereof) arise out of or are based upon the Transfer
Agent's willful misfeasance, bad faith, or gross negligence in the performance
of its duties or by reason of its reckless disregard of its obligations and
duties under this Agreement.
(d) The indemnifying party shall reimburse each indemnified
party for any reasonable legal or other expenses incurred by such indemnified
party in connection with investigating defending any such loss, claim, damages,
liability or action. In the case that any such action may be brought against
any indemnified party and such indemnified
<PAGE> 7
party shall notify the indemnifying party, the indemnifying party shall be
entitled to participate therein and, to the extent that it shall wish, to
assume the defense thereof, with counsel reasonably satisfactory to the
indemnified party, and after notice from the indemnifying party to such
indemnified party of its election to assume the defense thereof, the
indemnifying party shall not be liable to such indemnified party for any legal
expense of other counsel, or any other expenses, in each case subsequently
incurred by such indemnified party in connection with the defense of such
action other than the reasonable costs of investigation.
14. Consequential Damages. In no event and under no circumstances
shall any party under this Agreement be liable to any other party for
consequential or indirect loss of profits, reputation or business or any other
special damages under any provision of this Agreement or for any act or failure
to act hereunder.
15. Term and Termination.
(a) This Agreement shall be effective on the date first
written above and shall continue thereafter until terminated in accordance with
this Agreement. This Agreement may be terminated by any party upon written
notice given to each of the other parties at least 150 days prior to the
termination date. In addition, this Agreement may be terminated at any time
upon 30 days' written notice in the event of a material breach of the terms of
this contract by such other party, provided that such breach is not cured
within a reasonable period of time.
(b) In the event a termination notice is given by the Trust,
it shall be accompanied by a resolution of the Board of Trustees, certified by
the Secretary of the Trust. Upon such termination and at the expense of the
Trust, the Transfer Agent will deliver to the successor transfer agent
designated by the Trust a certified list of shareholders of the Trust (with
names and addresses), and all other relevant books, records, correspondence and
other Trust records or data in the possession of the Transfer Agent, and the
Transfer Agent will cooperate with the Trust and any successor transfer agent
or agents in the substitution process.
(c) In the event a termination notice is given by the Transfer
Agent and upon selection of one or more successor transfer agent(s) by the
Trust, the Transfer Agent shall deliver to such successor(s), at the Transfer
Agent's cost, a certified list of Shareholders of the Trust (with names and
addresses) and all other relevant books, records, correspondence and other
Trust records or data in the possession of the Transfer Agent, and the Transfer
Agent shall cooperate with the Trust and any successor transfer agent(s) in the
substitution process.
16. Confidentiality. All parties hereto agree that any nonpublic
information obtained hereunder concerning each of the other parties is
confidential and may not be disclosed to any other person without the consent
of such other party, except as may be required by applicable law or at the
request of the Commission or other governmental agency. The parties further
agree that a breach of this provision would irreparably damage such other party
and accordingly agree that each of them is entitled, without bond or other
security, to an injunction or injunctions to prevent breaches of this
provision.
<PAGE> 8
17. Amendment. This Agreement may only be amended or modified by a
written instrument executed by all the parties hereto.
18. Subcontracting. The Trust and AMR Investments agree that the
Transfer Agent may, in its discretion, subcontract for certain of the services
described under this Agreement or the Schedules hereto; provided that any such
subcontracting shall not relieve the Transfer Agent of its responsibilities
hereunder; and provided, further, that the Transfer Agent shall notify the
Trust and AMR Investments of any such subcontracting agreement.
19. Miscellaneous.
(a) Notices. Any notice or other instrument authorized or
required by this agreement to be given in writing to the Trust, AMR Investments
or the Transfer Agent, shall be sufficiently given if addressed to that party
and received by it at its office set forth below or at such other place as it
may from time to time designate in writing.
To the Trust: To AMR Investments:
American AAdvantage Funds AMR Investment Services, Inc.
4333 Amon Carter Blvd., MD5645 4333 Amon Carter Blvd., MD5645
Fort Worth, Texas 76155 Fort Worth, Texas 76155
Attn.: W. F. Quinn, President Attn.: W.F. Quinn, President
To the Transfer Agent:
Goldman, Sachs & Co.
4900 Sears Tower
Chicago Illinois 60606
Attn.: Pauline Taylor
(b) Successors. This Agreement shall extend to and shall be binding
upon the parties hereto, and their respective successors and assigns, provided,
however, that this Agreement shall not be assigned to any person other than a
person controlling, controlled by or under common control with the assignor
without the written consent of each of the other parties, which consent shall
not be unreasonably withheld.
(c) Governing Law. This Agreement shall be governed exclusively by the
laws of the State of New York without reference to the choice of law provisions
thereof.
(d) Counterparts. This Agreement may be executed in any number of or
counterparts, each of which shall be deemed to be an original; but such
counterparts shall, together, constitute only one instrument.
(e) Captions. The captions of this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect.
(f) Use of Transfer Agent's Name. The Trust and AMR Investments shall
not use the name of the Transfer Agent in any prospectus, statement of
additional information, shareholders' report, sales literature or other
material relating to the Trust in a manner not approved by the Transfer Agent
prior thereto in writing; provided, that the Transfer Agent need only receive
notice of all reasonable uses of its name which merely refer in accurate terms
to its appointment hereunder or which are required by any government agency or
applicable law or rule.
<PAGE> 9
(g) Use of Trust's Name or AMR Investments' Name The Transfer Agent
shall not use the name of the Trust or AMR or Investments or material relating
to the Trust or AMR Investments on any documents or forms for other than
internal use in a manner not approved by the Transfer Agent prior thereto by
the Trust or AMR Investments in writing; provided, that the Trust or AMR
Investments need only receive notice of all reasonable uses of its name which
merely refer in accurate terms to the appointment of the Transfer Agent or
which are required by any government agency or applicable law or rule.
(h) Independent Contractors. The parties agree that they are
independent contractors and not partners or co-venturers.
(i) Entire Agreement; Severability. This Agreement and the Schedules
attached hereto constitute the entire agreement of the parties hereto relating
to the matters covered hereby and supersede any previous agreements. if any
provision is held to be illegal, unenforceable or invalid for any reason, the
remaining provisions shall not be affected or impaired thereby.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their duly authorized officers, as of the day and year first
above written.
AMERICAN AADVANTAGE FUNDS
By: /s/ Nancy Eckl
------------------------------
Title: Vice President & Treasurer
--------------------------
AMR INVESTMENT SERVICES, INC..
By: /s/ William F. Quinn
------------------------------
Title: President
---------------------------
GOLDMAN SACHS & CO.
By: /s/ Pauline Taylor
------------------------------
Title: Vice President
---------------------------
<PAGE> 10
Schedule A
Fee Schedule for American AAdvantage Money Market Fund - Mileage Class
0 - 2,000 accounts All accounts @ $62.50 per year up to
a maximum of $100,000
2,001 - 4,000 accounts All accounts @ $50.00 per year up to
a maximum of $150,000
4,001 - 12, 000 accounts All accounts @ $37.50 per year up to
a maximum of $300,000
over 12,000 accounts All accounts @ $25.00 per year
Balance credits will be used to offset the above fees. There is no minimum
annual charge and the fee is all inclusive with no additional costs for out of
pocket or other expenses incurred by the Transfer Agent.
<PAGE> 11
Schedule B
DUTIES OF THE TRANSFER AGENT
1. Shareholder Information. The Transfer Agent or its agent shall
maintain a record of the number of Shares held by each holder of record which
shall include name, address, taxpayer identification number, the American
AAdvantage number, class of Shares (if applicable), balance of Shares in an
account, beneficial owner code (i.e., male, female, joint tenant, etc.),
dividend code (i.e., reinvestment) and indicate whether such Shares are held in
certificates or uncertificated form.
2. Shareholder Services. The Transfer Agent or its agent shall
investigate all reasonable inquiries from shareholders of the Trust relating to
their Shareholder accounts and shall respond to all communications from
Shareholders and other persons designated by the Trust relating to the Transfer
Agent's duties hereunder and such other correspondence as may from time to time
be mutually agreed upon between the Transfer Agent and the Trust.
3. Share Certificates.
(a) If the Shares are issuable in certificated form, the Trust
shall provide, at the Trust's expense, an adequate supply of certificates for
the Shares executed on behalf of the Trust by the persons specified in the
Declaration of Trust and, if required by the Declaration of Trust, bearing the
seal of the Trust. The Trust agrees that notwithstanding the death,
resignation, or removal of any officer of the Trust whose signature appears on
such certificates, the Transfer Agent or its agent may continue to countersign
certificates which bear such signatures until otherwise directed by Written
Instructions.
(b) The Transfer Agent or its agent shall issue replacement
Share certificates in lieu of certificates which have been lost, stolen or
destroyed, upon receipt by the Transfer Agent or its agent of properly
executed affidavits and lost certificate bonds, in form satisfactory to the
Transfer Agent or its agent, with the Trust and the Transfer Agent or its agent
as obligees under the bond.
(c) The Transfer Agent or its agent shall also maintain a
record of each certificate issued, the number of Shares represented thereby and
the holder of record. With respect to Shares held in open accounts or
uncertificated form (i.e., no certificate being issued with respect thereto),
the Transfer Agent or its agent shall maintain comparable records of the record
holders thereof, including their names, addresses and taxpayer identification.
The Transfer Agent or its agent shall further maintain a stop transfer record
on lost and/or replaced certificates.
4. Mailing Communications to Shareholders; Proxy Materials. The
Transfer Agent or its agent shall address and mail to Shareholders of the
Trust, all reports to Shareholders, dividend and distribution notices and such
prospectuses, statements of additional information (upon request), annual
reports, semi-annual reports, proxy and related material for the Trust's
meetings of Shareholders and any other enclosures requested by the Trust, as
are provided to the Transfer Agent by the Trust. In connection with meetings of
Shareholders, the Transfer Agent or its agent will prepare certified
Shareholder lists, mail and certify as to the mailing of proxy materials,
process and tabulate
<PAGE> 12
returned proxy cards, report on proxies voted prior to meetings, act as
inspector of election at meetings and certify Shares voted at meetings.
5. Sale of Shares.
(a) Suspension of Sale of Shares. The Transfer Agent or its
agent shall not be required to issue any Shares of the Trust if it has received
a Written Instruction from the Trust or official notice from any appropriate
federal or state regulatory authority that the sale of the Shares has been
suspended or discontinued. The existence of such Written Instructions or such
official notice shall be conclusive evidence of the right of the Transfer Agent
or its agent to rely on such Written Instructions or official notice.
(b) Returned Checks. In the event that any check or other
order for the payment of money is returned unpaid for any reason, the Transfer
Agent or its agent shall: (i) give prompt notice of such return to the Trust or
its designee; (ii) place a stop transfer order against all Shares issued as a
result of such check or order; and (iii) take such actions as the Transfer
Agent may from time to time deem appropriate.
6. Purchase, Transfer or Redemption of Shares.
(a) Requirements for Purchase, Transfer or Redemption of
Shares. The Transfer Agent or its agent shall process all requests to purchase,
transfer or redeem Shares in accordance with the purchase, transfer or
redemption procedures set forth in the Trust's Prospectus.
The Transfer Agent or its agent shall purchase, transfer or
redeem Shares upon receipt of Oral or Written Instructions or such other means
of communication as shall be specified in the Prospectus and agreed to by the
Transfer Agent requesting such purchase, transfer or redemption. In the case of
any request for transfer or redemption of Shares in certificated form, the
Transfer Agent shall be entitled to require that the certificate representing
such Shares be surrendered in connection with such transfer or redemption and
shall be properly endorsed for transfer or redemption, accompanied by such
documents as the Transfer Agent or its agent reasonably may deem necessary.
The Transfer Agent or its agent reserves the right to refuse
to transfer or redeem Shares until it is satisfied that the endorsement on the
instructions is valid and genuine. The Transfer Agent or its agent also
reserves the right to refuse to transfer or redeem Shares until it is satisfied
that the requested transfer or redemption is legally authorized, and it shall
incur no liability for the refusal, in good faith, to make transfers or
redemptions which the Transfer Agent or its agent, in its good judgment, deems
improper or unauthorized, or until it is reasonably satisfied that there is no
basis to any claims adverse to such transfer or redemption.
(b) Notice to Custodian and Trust. When Shares are purchased
or redeemed, the Transfer Agent or its agent shall deliver to the Custodian and
the Trust or its designee a notification setting forth the number of Shares
purchased or redeemed. Such purchased or redeemed shares shall be reflected on
appropriate accounts maintained by the Transfer Agent or its agent reflecting
outstanding Shares and Shares attributed to individual accounts.
(c) Payment of Redemption Proceeds. The Transfer Agent or its
agent shall, upon receipt of the moneys paid to it by the Custodian
<PAGE> 13
for the redemption of Shares, pay such moneys as are received from the
Custodian, all in accordance with the procedures described in the written
instruction received by the Transfer Agent or its agent from the Trust. The
Transfer Agent will upon receipt of moneys from shareholders for the purchase
of shares, pay such moneys to the Custodian.
The Transfer Agent or its agent shall not process or effect
any redemption with respect to Shares of the Trust after receipt by the
Transfer Agent or its agent of notification of the suspension of the
determination of the net asset value of the Trust. The Transfer Agent shall
identify redemption requests made with respect to accounts in which Shares have
been purchased within a time period agreed upon between the Transfer Agent and
the Trust for determining whether funds have been collected with respect to
such purchases. Unless otherwise directed by the Trust or AMR Investments, the
Transfer Agent shall not process any redemption so identified unless funds for
the purchase of such Shares have been received.
7. Dividends.
(a) Notice to Agent and Custodian. Upon the declaration of
each dividend, other than dividends declared on a daily basis, and each capital
gains distribution by the Board of Trustees with respect to Shares, the Trust
shall furnish or cause to be furnished to the Transfer Agent or its agent a
copy of a resolution of the Board of Trustees certified by the Secretary of the
Trust setting forth the date of the declaration of such dividend or
distribution, the ex-dividend date, the date of payment thereof, the record
date as of which Shareholders entitled to payment shall be determined, the
amount payable per Share to the Shareholders of record as of that date, the
total amount payable to the Transfer Agent or its agent on the payment date and
whether such dividend or distribution is to be paid in Shares of such class at
net asset value.
(b) Daily Dividend Funds. For daily dividend funds, which
shall be identified by the Trust to the Transfer Agent, the Trust directs the
Transfer Agent to (i) accept the daily dividend accrual rate from the Custodian
and to apply that rate to the outstanding Shares for that day, and (ii) to pay
or reinvest the accumulated daily dividend in accordance with the Prospectus
or, if applicable, written instructions from the Shareholder. On or before the
payment date specified in such resolution of the Board of Trustees, the
Custodian will pay to the Transfer Agent sufficient cash to make payment to the
Shareholders of record as of such payment date.
(c) Insufficient Funds for Payments. If the Transfer Agent or
its agent does not receive sufficient cash from the Custodian to make total
dividend and/or distribution payments to all Shareholders as of the record
date, the Transfer Agent or its agent shall, upon notifying the Trust, withhold
payment to all Shareholders of record as of the record date until sufficient
cash is provided to the Transfer Agent or its agent.
(d) Reports. The Transfer Agent shall compute, prepare and
mail all necessary reports with respect to dividend payments to Shareholders or
authorities as requested by the Trust. The Transfer Agent shall report to the
Trust Purchases of Shares under a dividend reinvestment plan.
<PAGE> 14
8. Customer Service.
The Transfer Agent shall respond to all telephone and written
inquiries received by the Transfer Agent. In response to telephone inquiries,
the Transfer Agent shall provide general, limited information, as agreed to in
writing between the Transfer Agent and the Trust, but shall provide no
investment advice. Notwithstanding anything in this Paragraph 8 to the
contrary, it is agreed that the Transfer Agent shall be acting solely in an
administrative capacity in connection with its duties under this Paragraph 8
and shall not be required to take any action that it reasonably believes could
be deemed to involve the distribution of the Shares. It is also agreed that the
Transfer Agent shall refer all questions regarding the Trust's portfolio
management to the Trust.
9. Blue Sky.
The Transfer Agent will maintain records of Trust sales by state and
provide such reports to the Trust as agreed to by the Trust and the Transfer
Agent, including Blue Sky warning reports.
10. Communication with American Airlines' AAdvantage Travel Awards
Program Department ("AAdvantage")
Using a formula which (a) allocates "miles" to a Shareholders'
investment position, and (b) is provided to the Transfer Agent by the foremost,
the Transfer Agent will provide AAdvantage by the fourth day of each month an
electronic report detailing the miles earned by each Trust Shareholder during
the prior month. For new Shareholders who are not yet members of the AAdvantage
Program, the Transfer Agent and AAdvantage shall communicate in order to enroll
the Shareholder in the AAdvantage Program.
11. Communications to Shareholders Regarding Account Information.
The Transfer Agent will mail a monthly client statement to all
shareholders reflecting their holdings in the Trust, any transaction activity
during the period, and AAdvantage miles accumulated during that month.
Transaction confirmations shall be provided to Shareholders as required by
applicable law.
12. Tax Reports.
The Transfer Agent shall maintain records throughout the year to
enable Transfer Agent to report all necessary information, including but not
limited to Internal Revenue Service filings, total distributions, taxes
withheld and retirement account record keeping and reports. Reports will be
filed with the Internal Revenue Service via magnetic tape and paper reports
mailed to individual shareholders. Transfer Agent's tax reporting
responsibilities are applicable to Shares only and not to AAdvantage Program
miles.
Transfer Agent shall conduct an annual test of the disaster recovery
of the system and operations used to support the Trust, and shall provide the
Trust with results of that test.
13. Disaster Recovery.
The Transfer Agent shall maintain a disaster recovery plan reasonably
designed to keep the records and adequate systems available to the Trust.
<PAGE> 15
14. Compliance.
The Transfer Agent shall maintain and provide to the Trust such
account records and perform all services in connection therewith in order that
such records are in conformity with all legal requirements applicable to its
services hereunder.
15. Taping of Communications with Shareholders.
The Transfer Agent shall, unless otherwise directed by the Trust, make
an audio tape recording of each telephone call from a Shareholder regarding its
account or requesting the purchase, transfer or redemption of Shares.
16. Reconciliation of Bank Accounts.
The Transfer Agent shall provide the Trust and AMR Investments with a
reconciliation of all the Trust's bank accounts employed by the Transfer Agent
in connection with its services hereunder.
17. Management Reports.
The Transfer Agent shall provide the Trust and AMR Investments with
such management reports as the Trust or AMR Investments may reasonably request.
<PAGE> 1
Exhibit 99.b.9.c
SERVICE PLAN FOR THE
AMERICAN AADVANTAGE FUNDS SERVICE CLASS
WHEREAS, the American AAdvantage Funds (the "Trust") is registered
under the Investment Company Act of 1940, as amended ("1940 Act"), as an
open-end management investment company, and offers for public sale distinct
series of shares of beneficial interest, each corresponding to a distinct
portfolio (a "Fund"); and
WHEREAS, the Trust's Board of Trustees has authorized each of the
Funds to issue multiple classes of shares, including a class to be designated
as the Service Class, and in the future may authorize new Funds to issue
multiple classes, including such Service Class; and
WHEREAS, the Trust desires to adopt a Service Plan ("Plan") with
respect to the Service Class;
NOW, THEREFORE, the Trust hereby adopts this Plan with respect to the
Service Class.
1. A Fund is authorized to pay to AMR Investment Services, Inc.
("AMR"), or to such other entities as approved by the Board, as compensation
for shareholder services provided by such entities to Service Class
shareholders, an aggregate fee at the rate of up to 0.25% on an annualized
basis of the average daily net assets of the Service Class of each such Fund
which has approved this Plan in accordance with the conditions of approval set
forth herein. Such fee shall be calculated and accrued daily and paid
quarterly or at such other intervals as the Board shall determine.
2. AMR or any other entity approved by the Board may spend such
amounts as it deems appropriate on any activities or expenses primarily
intended to result in or relate to the servicing of a participating Fund's
Service Class shares, including, but not limited to, the payment of service
fees and transfer agency or subtransfer agency expenses.
3. This Plan shall not take effect with respect to the Service
Class of a Fund unless it first has been approved, together with any related
agreements, by votes of a majority of both (a) the Board and (b) those Trustees
of the Trust who are not "interested persons" of the Trust and have no direct
or indirect financial interest in the operation of this Plan or any agreements
related thereto ("Independent Trustees"), cast in person at a meeting (or
meetings) called for the purpose of voting on such approval; and until the
Trustees who approve the Plan's taking effect with respect to such Fund have
reached the conclusion required by Rule 12b-1(e) under the 1940 Act.
4. After approval as set forth in paragraph 3, this Plan shall
take effect and continue in full force and effect with respect to a Service
Class of a Fund for so long as such continuance is specifically approved at
least annually in the manner provided for approval of this Plan in paragraph 3.
5. AMR and any other recipient of payments hereunder shall
provide to the Board and the Board shall review, at least quarterly, a written
report of the amounts expended with respect to the Service Class of each
applicable Fund under this Plan and the purposes for which such expenditures
were made.
6. This Plan may be terminated with respect to the Service Class
of any Fund at any time by vote of the Board, or by vote of a majority of the
Independent Trustees.
7. This Plan may not be amended to increase materially the amount
of fees provided for in paragraph 1 hereof unless such amendment is approved in
the manner provided for initial approval in paragraph 3 hereof, and no material
amendment to the Plan shall be made unless approved in the manner provided for
approval and annual renewal in paragraph 4 hereof.
8. The amount of the fees payable by a Fund to AMR or any other
authorized entity under paragraph 1 hereof is not related directly to expenses
incurred by such entities on behalf of such Fund in providing shareholder
services hereunder, and paragraph 2 hereof does not obligate such Fund to
<PAGE> 2
reimburse any such entity for such expenses. The fees set forth in paragraph 1
hereof will be paid by such Fund to such entities until the Plan is either
terminated or not renewed. If the Plan is terminated or not renewed with
respect to a Fund, any shareholder servicing expenses incurred by such entities
on behalf of such Fund in excess of payments of the fees specified in paragraph
1 hereof which have been received or accrued through the termination date are
the sole responsibility and liability of the entity incurring the expenses, and
are not obligations of such Fund.
9. While this Plan is in effect, the selection and nomination of
the Trustees who are not interested persons of the Trust shall be committed to
the discretion of the Trustees who are not interested persons of the Trust.
10. As used in this Plan, the term "interested person" shall have
the same meaning as that term has in the 1940 Act.
11. The Trust shall preserve copies of this Plan (including any
amendments thereto) and any related agreements and all reports made pursuant to
paragraph 5 hereof for a period of not less than six years from the date of
this Plan, the first two years in an easily accessible place.
12. The Trustees of the Trust and the shareholders of the Funds
shall not be liable for any obligations of the Trust or the Fund under this
Plan, and AMR or any other person, in asserting any rights or claims under this
Plan, shall look only to the assets and property of the Trust or the Funds in
settlement of such right or claim, and not to such Trustees or shareholders.
IN WITNESS WHEREOF, the Trust has executed this Plan on the day and
year set forth below.
DATE AMERICAN AADVANTAGE FUNDS
August 1, 1994 By: /s/ William F. Quinn
- - -------------- ---------------------
2
<PAGE> 3
Exhibit 99.b.10
December 18, 1997
American AAdvantage Funds
4333 Amon Carter Boulevard MD 5645
Fort Worth, Texas 76155
Ladies and Gentlemen:
You have requested our opinion as to certain matters regarding the
issuance by American AAdvantage Funds (the "Trust") of shares of beneficial
interest (collectively, the "Shares"). The Trust is about to file
Post-Effective Amendment No. 23 to its Registration Statement on Form N-1A
("PEA No. 23") for the purpose of (1) adding PlanAhead Class shares to the
Intermediate Bond Fund, (2) adding Institutional Class and PlanAhead Class
shares to the S&P 500 Index Fund, (3) changing the name of the Limited-Term
Income Fund to the Short-Term Bond Fund, and (4) amending such other
information as appropriate.
We have, as counsel, participated in various business and other matters
relating to the Trust. We have examined copies, either certified or otherwise
proved to be genuine, of the Trust's Declaration of Trust and By-Laws and such
other documents relating to the authorization and issuance of the Shares as we
have deemed relevant, and we generally are familiar with the Trust's business
affairs. Based on the foregoing, it is our opinion that the Shares to be issued
pursuant to PEA No. 23 may be issued in accordance with the Trust's Declaration
of Trust and By-Laws, subject to compliance with the Securities Act of 1933, as
amended, the Investment Company Act of 1940 Act, as amended, and applicable
federal and state laws regulating the distribution of securities, and when so
issued, those Shares will be legally issued, fully paid and non-assessable.
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust. The
Declaration of Trust states that creditors of, contractors with and claimants
against the Trust shall look only to the assets of the Trust for payment. It
also requires that notice of such disclaimer be given in each contract or
instrument made or issued by the officers or the Trustees of the Trust on behalf
of the Trust. The Declaration of Trust further
<PAGE> 4
American AAdvantage Funds
December 17, 1997
Page 2
provides: (1) for the Trust to indemnify and hold each shareholder harmless
from Trust assets for all loss and expense of any shareholder held personally
liable for the obligations of the Trust by virtue of ownership of Shares of the
Trust; and (2) for the Trust to assume the defense of any claim against the
shareholder for any act or obligation of the Trust. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Trust would be unable to meet its
obligations.
We hereby consent to this opinion accompanying the Registration
Statement that you are about to file with the Securities and Exchange
Commission. We also consent to the reference to our firm in the statement of
additional information filed as part of PEA No. 23.
Very truly yours,
KIRKPATRICK & LOCKHART LLP
By
------------------------
Robert J. Zutz
<PAGE> 1
Exhibit 99.b.10
December 18, 1997
American AAdvantage Funds
4333 Amon Carter Boulevard MD 5645
Fort Worth, Texas 76155
Ladies and Gentlemen:
You have requested our opinion as to certain matters regarding the
issuance by American AAdvantage Funds (the "Trust") of shares of beneficial
interest (collectively, the "Shares"). The Trust is about to file
Post-Effective Amendment No. 23 to its Registration Statement on Form N-1A
("PEA No. 23") for the purpose of (1) adding PlanAhead Class shares to the
Intermediate Bond Fund, (2) adding Institutional Class and PlanAhead Class
shares to the S&P 500 Index Fund, (3) changing the name of the Limited-Term
Income Fund to the Short-Term Bond Fund, and (4) amending such other
information as appropriate.
We have, as counsel, participated in various business and other matters
relating to the Trust. We have examined copies, either certified or otherwise
proved to be genuine, of the Trust's Declaration of Trust and By-Laws and such
other documents relating to the authorization and issuance of the Shares as we
have deemed relevant, and we generally are familiar with the Trust's business
affairs. Based on the foregoing, it is our opinion that the Shares to be issued
pursuant to PEA No. 23 may be issued in accordance with the Trust's Declaration
of Trust and By-Laws, subject to compliance with the Securities Act of 1933, as
amended, the Investment Company Act of 1940 Act, as amended, and applicable
federal and state laws regulating the distribution of securities, and when so
issued, those Shares will be legally issued, fully paid and non-assessable.
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust. The
Declaration of Trust states that creditors of, contractors with and claimants
against the Trust shall look only to the assets of the Trust for payment. It
also requires that notice of such disclaimer be given in each contract or
instrument made or issued by the officers or the Trustees of the Trust on behalf
of the Trust. The Declaration of Trust further
<PAGE> 2
American AAdvantage Funds
December 17, 1997
Page 2
provides: (1) for the Trust to indemnify and hold each shareholder harmless
from Trust assets for all loss and expense of any shareholder held personally
liable for the obligations of the Trust by virtue of ownership of Shares of the
Trust; and (2) for the Trust to assume the defense of any claim against the
shareholder for any act or obligation of the Trust. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Trust would be unable to meet its
obligations.
We hereby consent to this opinion accompanying the Registration
Statement that you are about to file with the Securities and Exchange
Commission. We also consent to the reference to our firm in the statement of
additional information filed as part of PEA No. 23.
Very truly yours,
KIRKPATRICK & LOCKHART LLP
By
------------------------
Robert J. Zutz
<PAGE> 1
Exhibit 99.b.13
AMR Investment Services, Inc.
March 30, 1987
Anne H. McNamara
Secretary
American AAdvantage Funds
4200 American Boulevard
Fort Worth, TX 76155
RE: Letter of Investment Intent
Dear Sirs:
Please be advised that the $100,000 investment in American AAdvantage Funds
being made on this date by AMR Investment Services, Inc. is being made as an
investment with no present intention of redeeming or reselling such shares.
The investment should be distributed as follows:
<TABLE>
<CAPTION>
Account
Fund Amount Number
- - ------------------------------------- ------ -------
<S> <C> <C>
American AAdvantage Balanced Fund $45,000 #12892
American AAdvantage Equity Fund $45,000 #12891
American AAdvantage Fixed Income Fund $ 5,000 #12890
American AAdvantage Money Market Fund $ 5,000 #12560
</TABLE>
Very truly yours,
AMR INVESTMENT SERVICES. INC.
By: /s/ William F. Quinn
-----------------------------
William F. Quinn
President
WFQ/bls
cc: R. Zutz - Kirkpatrick & Lockhart
<PAGE> 1
Exhibit 99.b.15.a
AMERICAN AADVANTAGE FUNDS
DISTRIBUTION PLAN
1. This Distribution Plan (the "Plan"), when effective in accordance
with its terms, shall be the written plan contemplated by Rule 12b-1 under the
Investment Company Act of 1940 (the "Act") of American AAdvantage Funds (the
"Fund").
2. The Fund will not make separate payments as a result of this Plan
to its Manager, Investment Advisers or any other party. To the extent that any
payments made by the Fund to its Manager, Investment Advisers, including
payment of advisory and administrative fees, should be deemed to be indirect
financing of any activity primarily intended to result in the sale of shares
issued by the Fund within the context of Rule 12b-1 under the Act, then such
payments shall be deemed to be authorized by this Plan.
3. This Plan shall become effective upon approval by a vote of at
least a "majority of the outstanding voting securities of the Fund" (as defined
in the Act), and upon approval by a vote of a majority of the Board of Trustees
who are not "interested persons" of the Fund (as defined in the Act) and who
have no direct or indirect financial interest in the operation of this Plan or
in any agreements related to this Plan (the "Independent Trustees"), cast in
person at a meeting called for the purpose of voting on this Plan.
4. This Plan shall, unless terminated as hereinafter provided, remain
in effect for one year from the date of shareholder approval specified above,
and from year to year thereafter, provided, however that such continuance is
subject to approval annually by a vote of a majority of the Trustees of the
Fund, including a majority of the Independent Trustees, cast in person at a
meeting called for the purpose of voting on this Plan. This Plan may be
amended at any time by the Independent Trustees, provided that (a) any
amendment to authorize direct payments by the Fund to finance any activity
primarily intended to result in the sale of shares issued by the Fund, and (b)
any material amendments of this Plan shall be effective only upon approval in
the manner provided in the first sentence of this paragraph.
5. This Plan may be terminated at any time, without the payment of
any penalty, by vote of a majority of Independent Trustees or by a vote of a
majority of the outstanding voting securities of the Fund.
6. During the existence of this Plan, the Fund shall require its
Manager and/or Investment Advisers to provide the Fund, for review by the
Fund's Trustees and the Trustees shall review, at least quarterly, a written
report of the amounts expended in
<PAGE> 2
connection with financing any activity primarily intended to result in the sale
of shares issued by the Fund (making estimates of such costs where necessary or
desirable) and the purpose for which such expenditures were made.
7. This Plan does not require the Trust's Manager, Investment
Advisers or any other third party to perform any specific type of level of
distribution activities or to incur any specific level of expenses for
activities primarily intended to result in the sale of shares issued by the
Fund.
8. If any provision of this Plan shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of the Plan shall not
be affected thereby.
<PAGE> 1
Exhibit 99.b.15.b
AMERICAN AADVANTAGE FUNDS
PLATINUM CLASS
DISTRIBUTION PLAN
WHEREAS, the American AAdvantage Funds (the "Trust") is registered
under the Investment Company Act of 1940, as amended ("1940 Act"), as an
open-end management investment company, and offers for public sale distinct
series of shares of beneficial interest, each corresponding to a distinct
portfolio (a "Fund"); and
WHEREAS, the Trust, on behalf of the Platinum Class of its one or more
designated portfolios presently existing or hereafter established (hereinafter
referred to as "Portfolios"), desires to adopt a Distribution Plan pursuant to
Rule l2b-1 under the 1940 Act and the Board of Trustees of the Trust ("Board")
has determined that there is a reasonable likelihood that adoption of this
Distribution Plan will benefit the Platinum Class and its shareholders; and
WHEREAS, the Trust presently intends to retain a registered
broker-dealer ("Distributor") as distributor of the securities of which it is
the issuer;
NOW, THEREFORE, the Platinum Class hereby adopts this Distribution
Plan (the "Plan") in accordance with Rule l2b-1 under the 1940 Act on the
following terms and conditions:
1. A Fund is authorized to pay to the Distributor or to AMR
Investment Services, Inc. ("AMR"), or to such other entities as approved by the
Board, as compensation for the distribution-related and/or shareholder services
provided by such entities, an aggregate fee at the rate of up to 0.25% on an
annualized basis of the average daily net assets of the Platinum Class of each
such Fund which has approved this Plan in accordance with the conditions of
approval set forth herein. Such fee shall be calculated and accrued daily and
paid quarterly or at such other intervals as the Board shall determine.
2. The Distributor, AMR or any other entity approved by the Board
pursuant to paragraph 1 may spend such amounts as it deems appropriate on any
activities or expenses primarily intended to result in or relate to the sale or
servicing of a participating Fund's shares or shareholders, including, but not
limited to, advertising, shareholder servicing fees, transfer agency or
subtransfer agency expenses and distribution and preparation of advertising
materials and sales literature, sales seminars.
3. This Plan shall not take effect with respect to a Fund, unless
it first has been approved by a vote of the then existing shareholder(s) of
such Fund.
4. This Plan shall not take effect with respect to a Fund unless
it first has been approved, together with any related agreements, by votes of a
majority of both (a) the Board and (b) those Trustees of the Trust who are not
"interested persons" of the Trust and have no direct or indirect financial
interest in the operation of this Plan or any agreements related thereto
("Independent Trustees"), cast in person at a meeting (or meetings) called for
the purpose of voting on such approval; and until the Trustees who approve the
Plan's taking effect with respect to such Fund have reached the conclusion
required by Rule 12b-1(e) under the 1940 Act.
- 1 -
<PAGE> 2
5. After approval as set forth in paragraphs 3 and 4, this Plan
shall take effect and continue in full force and effect with respect to a Fund
for so long as such continuance is specifically approved at least annually in
the manner provided for approval of this Plan in paragraph 4.
6. The Distributor, AMR and any other recipient of payments
hereunder shall provide to the Board and the Board shall review, at least
quarterly, a written report of the amounts expended with respect to the
Platinum Class of each applicable Fund by such recipient under this Plan and
the purposes for which such expenditures were made.
7. This Plan may be terminated with respect to the Platinum Class
of any Fund at any time by vote of the Board, by vote of a majority of the
Independent Trustees, or by vote of a majority of the outstanding voting
securities of such Platinum Class.
8. This Plan may not be amended to increase materially the amount
of fees provided for in paragraph 1 hereof unless such amendment is approved in
the manner provided for initial approval in paragraphs 3 and 4 hereof, and no
material amendment to the Plan shall be made unless approved in the manner
provided for approval and annual renewal in paragraph 5 hereof.
9. The amount of the fees payable by a Fund to the Distributor or
to AMR or any other authorized entity under paragraph 1 hereof is not related
directly to expenses incurred by such entities hereunder on behalf of such Fund
in providing distribution-related and/or shareholder services hereunder, and
paragraph 2 hereof does not obligate such Fund to reimburse any such entity for
such expenses. The fees set forth in paragraph 1 hereof will be paid by such
Fund to such entities until the Plan is either terminated or not renewed. If
the Plan is terminated or not renewed with respect to a Fund, any
distribution-related or shareholder servicing expenses incurred by such
entities on behalf of such Fund in excess of payments of the fees specified in
paragraph 1 hereof which have been received or accrued through the termination
date are the sole responsibility and liability of the entity incurring such
expenses, and are not obligations of such Fund.
10. While this Plan is in effect, the selection and nomination of
the Trustees who are not interested persons of the Trust shall be committed to
the discretion of the Trustees who are not interested persons of the Trust.
11. As used in this Plan, the terms "majority of the outstanding
voting securities" and "interested person" shall have the same meaning as those
terms have in the 1940 Act.
12. The Trust shall preserve copies of this Plan (including any
amendments thereto) and any related agreements and all reports made pursuant to
paragraph 6 hereof for a period of not less than six years from the date of
this Plan, the first two years in an easily accessible place.
13. The Trustees of the Trust and the shareholders of the Funds
shall not be liable for any obligations of the Trust or the Fund under this
Plan, and AMR or any other person, in asserting any rights or claims under this
Plan, shall look only to the assets and property of the Trust or the Funds in
settlement of such right or claim, and not to such Trustees or shareholders.
Date: November 1, 1995
- 2 -
<PAGE> 1
EXHIBIT 99.b.16
SCHEDULE OF COMPUTATION OF PERFORMANCE
QUOTATIONS
P (1+T)(n) = ERV
Where: P = Hypothetical Initial Payment of $1000
T = Average Annual Total Return
n = Number of Years
ERV = Ending Redeemable Value of
Hypothetical $1000 Investment Made at
the Beginning of the Year
<TABLE>
<CAPTION>
ONE YEAR PERIOD FIVE YEAR PERIOD TEN YEAR PERIOD
AMR CLASS (11/1/96 - 10/31/97) (11/1/92 - 10/31/97) (11/1/87 - 10/31/97)
- - --------- ------------------------------- --------------------------------- -------------------------------
<S> <C> <C> <C>
BALANCED FUND
Inception date (7/1/87) 1000 (1+ .203600)= 1203.600 1000 (1+ .149249)(5)= 2004.798 1000 (1+ .131129)(10)= 3428.636
(20.36%) (14.92%) (13.11%)
GROWTH AND INCOME FUND
Inception date (7/1/87) 1000 (1+ .284000)= 1284.000 1000 (1+ .192812)(5)= 2414.682 1000 (1+ .163429)(10)= 4543.587
(28.40%) (19.28%) (16.34%)
INTERNATIONAL EQUITY FUND
Inception date (8/7/91) 1000 (1+ .193900)= 1193.900 1000 (1+ .183380)(5)= 2320.711 N/A
(19.39%) (18.34%)
LIMITED-TERM INCOME FUND
Inception date (12/3/87) 1000 (1+ .065730)= 1065.730 1000 (1+ .055595)(5)= 1310.650 N/A
(6.57%) (5.56%)
S & P 500 INDEX FUND N/A N/A N/A
Inception date (12/31/96)
<CAPTION>
AMR CLASS SINCE INCEPTION TO 10/31/97
- - --------- ---------------------------
<S> <C>
BALANCED FUND (10.2932)
Inception date (7/1/87) 1000 (1+ .116593) = 3111.658
(11.66%)
GROWTH AND INCOME FUND (10.2881)
Inception date (7/1/87) 1000 (1+ .137726) = 3771.562
(13.77%)
INTERNATIONAL EQUITY FUND (6.2329)
Inception date (8/7/91) 1000 (1+ .123610) = 2067.673
(12.36%)
LIMITED-TERM INCOME FUND (9.9123)
Inception date (12/3/87) 1000 (1+ .069894) = 1953.594
(6.99%)
S & P 500 INDEX FUND 1000 (1+ .251899) = 1251.899
Inception date (12/31/96) (25.19%)
INSTITUTIONAL CLASS
- - -------------------
BALANCED FUND
Inception date (7/1/87) 1000 (1+.200400)= 1200.400 1000 (1+ .147299)(5)= 1987.848 1000 (1+ .130169)(10)= 3399.648
(20.04%) (14.73%) (13.02%)
BALANCED FUND (10.2904)
Inception date (7/1/87) 1000 (1+ .115705) = 3085.334
(11.57%)
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
ONE YEAR PERIOD FIVE YEAR PERIOD TEN YEAR PERIOD
(11/1/96 - 10/31/97) (11/1/92 - 10/31/97) (11/1/87 - 10/31/97)
--------------------------- --------------------------- ---------------------------
<S> <C> <C> <C>
GROWTH AND INCOME FUND
Inception date (7/1/87) 1000 (1+ .280500)= 1280.500 1000 (1+ .190771)(5)= 2394.094 1000 (1+ .162433)(10)= 4504.839
(28.05%) (19.08%) (16.34%)
INTERNATIONAL EQUITY FUND
Inception date (8/7/91) 1000 (1+ .190800)= 1190.800 1000 (1+ .181255)(5)= 2299.949 N/A
(19.08%) (18.13%)
LIMITED-TERM INCOME FUND
Inception date (12/3/87) 1000 (1+ .062876)= 1062.876 1000 (1+ .054022)(5)= 1300.913 N/A
(6.29%) (5.40%)
INTERMEDIATE BOND FUND N/A N/A N/A
Inception date (9/15/97)
<CAPTION>
SINCE INCEPTION TO 10/31/97
----------------------------
<S> <C>
GROWTH AND INCOME FUND (10.2904)
Inception date (7/1/87) 1000 (1+ .136748) = 3739.443
(13.67%)
INTERNATIONAL EQUITY FUND (6.2329)
Inception date (8/7/91) 1000 (1+ .121991) = 2049.174
(12.20%)
LIMITED-TERM INCOME FUND (9.9123)
Inception date (12/3/87) 1000 (1+ .069089) = 1939.073
(6.91%)
INTERMEDIATE BOND FUND 1000 (1+ .024129) = 1024.129
Inception date (9/15/97) (2.41%)
</TABLE>
SCHEDULE OF COMPUTATION OF PERFORMANCE
QUOTATIONS
<TABLE>
<CAPTION>
ONE YEAR PERIOD FIVE YEAR PERIOD TEN YEAR PERIOD
(11/1/96 - 10/31/97) (11/1/92 - 10/31/97) (11/1/87 - 10/31/97)
--------------------------- --------------------------- ---------------------------
<S> <C> <C> <C>
MONEY MARKET FUND 1000 (1+ .056046)= 1056.046 1000 (1+ .048524)(5)= 1267.336 1000 (1+ .061193)(10)= 1811.106
Inception date (9/1/87) (5.60%) (4.85%) (6.12%)
MUNICIPAL MONEY MARKET
FUND 1000 (1+ .035213)= 1035.213 N/A N/A
Inception date (11/10/93) (3.52%)
U.S. GOVERNMENT MONEY
MARKET FUND 1000 (1+.053639)= 1044.647 1000 (1+ .046144)(5)= 1253.018 N/A
Inception date (3/2/92) (5.36%) (4.61%)
<CAPTION>
SINCE INCEPTION TO 10/31/97
----------------------------
<S> <C>
MONEY MARKET FUND (10.1648)
Inception date (9/1/87) 1000 (1+ .061333)= 1831.374
(6.13%)
MUNICIPAL MONEY MARKET
FUND (3.9731)
Inception date (11/10/93) 1000 (1+ .033308)= 1139.033
(3.33%)
U.S. GOVERNMENT MONEY
MARKET FUND (5.6662)
Inception date (3/2/92) 1000 (1+ .044999)= 1283.259
(4.50%)
</TABLE>
<PAGE> 3
SCHEDULE OF COMPUTATION OF PERFORMANCE
QUOTATIONS
<TABLE>
<CAPTION>
ONE YEAR PERIOD FIVE YEAR PERIOD
PLANAHEAD CLASS (11/1/96 - 10/31/97) (11/1/92 - 10/31/97) SINCE INCEPTION TO 10/31/97
- - ----------------------- --------------------------- --------------------------- ---------------------------
<S> <C> <C> <C>
BALANCED FUND (10.2932)
Inception date (8/1/94) 1000 (1+ .197500)= 1197.500 1000 (1+ .145037)(5)= 1968.329 1000 (1+ .114603) = 3055.046
(19.75%) (14.50%) (11.46%)
GROWTH AND INCOME FUND (10.2881)
Inception date (8/1/94) 1000 (1+ .276400)= 1276.400 1000 (1+ .187838)(5)= 2364.755 1000 (1+ .135418) = 3693.585
(27.64%) (18.78%) (13.54%)
INTERNATIONAL EQUITY FUND (6.2306)
Inception date (8/194) 1000 (1+ .187100)= 1187.100 1000 (1+ .178333)(5)= 2271.644 1000 (1+ .119811) = 2023.956
(18.71%) (17.83%) (11.98%)
LIMITED-TERM INCOME FUND (9.9123)
Inception date (8/1/94) 1000 (1+ .060142)= 1060.142 1000 (1+ .052325)(5)= 1290.475 1000 (1+ .068222) = 1923.542
(6.01%) (5.23%) (6.82%)
(10.1699)
MONEY MARKET FUND 1000 (1+ .052787)= 1052.787 1000 (1+ .046203)(5)= 1253.371 1000 (1+ .060146) = 1811.200
Inception date (8/1/94) (5.28%) (4.62%) (6.01%)
MUNICIPAL MONEY MARKET (3.9753)
FUND 1000 (1+ .032355)= 1032.355 N/A 1000 (1+ .030667) = 1127.585
Inception date (8/1/94) (3.24%) (3.07%)
U.S. GOVERNMENT MONEY (5.6685)
MARKET FUND 1000 (1+.050813)= 1050.813 1000 (1+ .043675)(5)= 1238.302 1000 (1+ .042805) = 1268.190
Inception date (8/1/94) (5.08%) (4.37%) (4.28%)
</TABLE>
<TABLE>
<CAPTION>
TEN YEAR PERIOD
(11/1/87 - 10/31/97)
------------------------
PLANAHEAD CLASS
---------------
<S> <C>
10
BALANCED FUND 1000 (1+.129054) = 3366.256
Inception date (8/1/94) (12.91%)
GROWTH AND INCOME FUND 10
Inception date (8/1/94) 1000 (1+.161001) =4449.651
(16.10%)
INTERNATIONAL EQUITY FUND N/A
Inception date (8/1/94)
LIMITED-TERM INCOME FUND
Inception date (8/1/94) N/A
10
MONEY MARKET FUND 1000 (1+.060017) =1791.135
Inception date (8/1/94) (6.00%)
MUNICIPAL MONEY MARKET
FUND N/A
Inception date (8/1/94)
U.S. GOVERNMENT MONEY
MARKET FUND N/A
Inception date (8/1/94)
</TABLE>
<PAGE> 4
SCHEDULE FOR COMPUTATION OF PERFORMANCE
QUOTATIONS
<TABLE>
<CAPTION>
MONEY MARKET FUNDS - FOR THE 7 DAY PERIOD ENDED 10/31/97
INSTITUTIONAL CLASS CURRENT YIELD EFFECTIVE YIELD
- - ------------------- ------------- ---------------
<S> <C> <C>
MONEY MARKET FUND (.0010617024 x (365/7)) = 5.54% ((.0010617024 + 1)(365/7) -1) = 5.69%
MUNICIPAL MONEY MARKET FUND (.0006552450 x (365/7)) = 3.42% ((.0006552450 + 1)(365/7) -1) = 3.47%
U.S GOVERNMENT MONEY MARKET FUND (.0010283781 x (365/7)) = 5.36% ((.0010283781 + 1)(365/7) -1) = 5.51%
PLANAHEAD CLASS
- - ---------------
MONEY MARKET FUND (.0010010652 x (365/7)) = 5.22% ((.0010010652 + 1)(365/7) -1) = 5.36%
MUNICIPAL MONEY MARKET FUND (.0006036741 x (365/7)) = 3.15% ((.0006036741 + 1)(365/7) -1) = 3.20%
U.S GOVERNMENT MONEY MARKET FUND (.0009707610 x (365/7)) = 5.06% ((.0009707610 + 1)(365/7) -1) = 5.19%
</TABLE>
<TABLE>
<CAPTION>
MUNICIPAL MONEY MARKET FUND - FOR THE 7 DAY PERIOD ENDED 10/31/97
CURRENT TAX EQUIVALENT YIELD EFFECTIVE TAX EQUIVALENT YIELD
---------------------------- ------------------------------
<S> <C> <C>
INSTITUTIONAL CLASS (.0006552450 x (365/7))/(1-.35) = 5.66% ((.0006552450 + 1)(365/7) -1)/(1-.35) = 5.75%
PLANAHEAD CLASS (.0006036741 x (365/7))/(1-.396) = 5.21% ((.0006036741 + 1)(365/7) -1)/(1-.396) = 5.29%
</TABLE>
<PAGE> 5
LIMITED - TERM INCOME FUND - 30 DAY S.E.C. YIELD FOR THE PERIOD ENDING 10/31/97
(6)
30 day yield = 2 x { ((a-b) + 1) - 1}
---
cd
Where: a = Dividends and interest earned during the period.
b = Expenses accrued for the period (net of reimbursements)
c = The average daily number of shares outstanding
during the period that entitled to receive dividends
d = The maximum offering price per share on the last day of
the period.
AMR CLASS 2 x { (( 340,957.140 - 21,961.270 ) + 1 )(6) - 1 } = 6.070%
------------------------
6,640,692.580 x 9.62
INSTITUTIONAL 2 x { (( 118,501.700 - 14,126.560 ) + 1 )(6) - 1 } = 5.440%
CLASS ------------------------
2,419,694.070 x 9.63
PLANAHEAD CLASS 2 x { (( 25,015.810 - 3,510.680 ) + 1 )(6) - 1 } = 5.190%
----------------------
521,645.520 x 9.63
LIMITED - TERM INCOME FUND MONTHLY DISTRIBUTION RATE FROM 10/1/97 TO 10/31/97
Monthly Dividend Rate = A/P*(365/n)
Where: A = Dividend accrual per share during the month
(income distributions)
P = Share price at the end of month
AMR CLASS .0531723281 / 9.62 x ( 365 / 31) = 6.51%
INSTITUTIONAL CLASS .0506051203 / 9.63 x ( 365 / 31) = 6.19%
PLANAHEAD CLASS .0496992300 / 9.63 x ( 365 / 31) = 6.08%
<PAGE> 6
LIMITED TERM INCOME FUND DISTRIBUTION RATE (INCLUDING CAPITAL GAINS) FROM
11/1/96 TO 10/31/97
Distribution Rate = D/P
Where: D = Distributions per share over a 12 month period
(income and capital gain distributions)
P = Share price at the end of 12 month period
AMR CLASS .669760 / 9.62 = 6.96%
INSTITUTIONAL CLASS .644606 / 9.63 = 6.69%
PLANAHEAD CLASS .618765 / 9.63 = 6.43%
INTERMEDIATE BOND FUND - 30 DAY S.E.C. YIELD FOR THE PERIOD ENDING 10/31/97
30 day yield = 2 x { ((a-b) + 1)(6) - 1}
---
cd
Where: a = Dividends and interest earned during the period.
b = Expenses accrued for the period (net of reimbursements)
c = The average daily number of shares outstanding
during the period that entitled to receive dividends
d = The maximum offering price per share on the last day of
the period.
INSTITUTIONAL CLASS 2 x {((1,001,033.630 - 52,103.900) + 1)(6) - 1} = 5.310%
--------------------------
21,327,604.660 x 10.17
<PAGE> 7
SCHEDULE FOR COMPUTATION OF PERFORMANCE
QUOTATIONS
INTERMEDIATE BOND FUND MONTHLY DISTRIBUTION RATE FROM 10/1/97 TO 10/31/97
Monthly Dividend Rate = A/P*(365/n)
Where: A = Dividend accrual per share during the month
(income distributions)
P = Share price at the end of month
INSTITUTIONAL CLASS .0484615322 / 10.17 x (365 / 31) = 5.61%
<PAGE> 1
Exhibit 99.b.18
AMERICAN AADVANTAGE FUNDS
AMENDED AND RESTATED
PLAN PURSUANT TO RULE 18F-3
The American AAdvantage Funds (the "Funds") hereby adopt this Amended
and Restated Plan pursuant to Rule 18f-3 under the Investment Company Act of
1940, as amended (the "1940 Act"), to address the differing requirements and
preferences of potential investors.
A. CLASSES OFFERED. The Funds offer the following classes of
shares:
1. INSTITUTIONAL CLASS. Institutional Class shares
are offered primarily to large institutional investors. The
Institutional Class generally requires an initial investment of at
least $2 million (although this minimum investment requirement may be
waived) and are sold without the imposition of any sales charges.
Institutional Class shareholders incur no fees pursuant to a plan of
distribution pursuant to Rule 12b-1 under the 1940 Act ("12b-1 fees").
2. MILEAGE CLASS. Mileage Class shares are sold to
individuals and certain grantor trusts. Mileage Class shares require
an initial investment of $10,000, except for accounts opened by
employees or retirees of AMR Corporation or one of its subsidiaries
for which a $5,000 minimum applies, and are sold without the
imposition of any sales charges. Share of the Mileage Class, however,
do incur charges of up to 0.25% of average daily Mileage Class net
assets under a distribution plan adopted pursuant to Rule 12b-1 under
the 1940 Act ("12b-1 Plan"). Theses 12b-1 fees are paid to AMR
Investment Services, Inc. ("AMR") as compensation for distribution
-related expenses or shareholder services. The primary expenses
incurred under the 12b-1 Plan are advertising and the purchase of
American Airlines AAdvantage travel award miles. Due to a recent
change in interpretation by the Internal Revenue Service, AMR no
longer will offer AAdvantage miles after October 31, 1995. It is
expected that the Funds will cease to offer the Mileage Class for sale
to the public effective October 31, 1995. In addition, AMR expects to
recommend to the Board that each Fund's Mileage Class be liquidated on
that same date or shortly thereafter.
<PAGE> 2
3. PLANAHEAD CLASS. PlanAhead Class shares are
offered to all investors, including smaller institutional investors,
investors using intermediary organizations such as discount brokers or
plan sponsors, individual retirement accounts and self-employed
individual retirement accounts. PlanAhead Class shares require an
initial investment of $10,000, except for accounts opened by employees
or retirees of AMR Corporation or one of its subsidiaries for which a
$5,000 minimum applies, and are sold without the imposition of any
sales charges. PlanAhead Class shareholders incur no 12b-1 fees but
do incur a fee of 0.25% of average daily net assets for the servicing
of shareholder accounts ("PlanAhead Service Fee").
4. AMR CLASS. AMR Class shares are offered to
tax-exempt retirement and benefit plans of AMR Corporation and its
affiliates. AMR Class shares require no minimum initial investment
and are sold without the imposition of any sales charges. AMR Class
shareholders incur no 12b-1 fees.
5. PLATINUM CLASS. Platinum Class shares are offered to
certain broker-dealers on behalf of their clients. Platinum Class
shares require an initial investment of $1,000 by an individual client
and are sold without the imposition of any sales charges. Shares of
the Platinum Class, however, do incur charges of up to 0.25% of
average daily Platinum Class net assets under a Rule 12b-1 Plan.
These 12b-1 fees are paid to AMR as compensation for
distribution-related expenses or shareholder services. Platinum Class
shares also are subject to an Administrative Services Plan, pursuant
to which AMR is obligated to provide or oversee the provision of
administrative services to the Platinum Class including, but not
limited to, payments of fees for record maintenance, forwarding
shareholder and Fund communications to the applicable broker-dealer
firm, and aggregating and processing orders for the purchase and
redemption of Platinum Class shares. As compensation for these
services, AMR receives a fee of up to 0.45% on an annualized basis of
the average daily net assets of the Platinum Class of the Funds.
B. EXPENSES. The expenses of the Funds that cannot be attributed
to any one Fund generally are allocated to each Fund based on the relative net
assets of the Funds. Certain expenses that may be attributable to a particular
Fund, but not a particular Class, are allocated based on the relative daily net
assets of that Class. Finally, certain expenses may be attributable to a
particular Class of shares of a Fund ("Class Expenses"). Class Expenses are
charged directly to the net
<PAGE> 3
assets of the particular Class and, thus, are borne on a pro rata basis by the
outstanding shares of that Class.
Examples of Class Expenses may include: (1) 12b-1 fees, (2) transfer
agent fees identified as being attributable to a specific Class, (3)
stationery, printing, postage, and delivery expenses related to preparing and
distributing materials such as shareholder reports, prospectuses, and proxy
statements to current shareholders of a Class, (4) Blue Sky registration fees
incurred by a Class, (5) Securities and Exchange Commission registration fees
incurred by a Class, (6) expenses of Administrative Services Agreements or
Administrative Services Plans and other administrative personnel and services
as required to support the shareholders of a Class, (7) trustees' fees or
expenses incurred as a result of issues relating to one Class, (8) accounting
expenses relating solely to one Class, (9) auditors' fees, litigation expenses,
and legal fees and expenses relating to a Class, and (10) expenses incurred in
connection with shareholders meetings as a result of issues relating to one
Class.
C. CLASS DIFFERENCES. Other than the differences as a result of the
Mileage Class and Platinum Class 12b-1 Plans, the Platinum Class Administrative
Services Plan and the PlanAhead Service Fee (as discussed above), there are no
material differences in the services offered each Class.
D. EXCHANGE FEATURES. Exchanges are not permitted between
different Classes. However, the Mileage and PlanAhead Classes offer exchange
privileges within the Class, subject to a minimum of $1,000 exchanged. The
various broker-dealer firms offering Platinum Class shares may choose to offer
exchange privileges within the Class. The Institutional and AMR Classes do not
offer shareholders an exchange privilege.
Dated: April 3, 1995, as amended and restated on August 21, 1995.
