As filed with the Securities and Exchange Commission on July 1, 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. 20 [ X ]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ X ]
Amendment No. 21
(Check appropriate box or boxes.)
AMERICAN AADVANTAGE FUNDS
(Exact name of Registrant as Specified in Charter)
4333 Amon Carter Boulevard, MD 5645
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, MD 5645
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, D.C. 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)
[ ] on (date) pursuant to paragraph (a)(1)
[ X ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485.
Registrant has filed a notice pursuant to Rule 24f-2 under the
Investment Company Act of 1940, as amended, on or about December
20, 1996.
Registrant has adopted a Hub and Spoke (R) operating structure
for each of its series except the American AAdvantage Short-Term
Income Fund. This Post-Effective Amendment includes a signature
page for the AMR Investment Services Trust, the Hub trust.
AMERICAN AADVANTAGE FUNDS
CONTENTS OF REGISTRATION STATEMENT
This registration statement is comprised of the following:
Cover Sheet
Contents of Registration Statement
Cross Reference Sheet
Prospectus for the AMR Class of the American AAdvantage
Intermediate Bond Fund
Prospectus for the Institutional Class of the American
AAdvantage Intermediate Bond Fund
Statement of Additional Information for the AMR Class
and Institutional Class of the American AAdvantage
Intermediate Bond Fund
Part C
Signature Pages
Exhibits
The sole purpose of this filing is to add a new series to the
American AAdvantage Funds, the American AAdvantage Intermediate
Bond Fund ("Fund"). The Fund will offer two classes of shares,
the Institutional Class and the AMR Class.
AMERICAN AADVANTAGE INTERMEDIATE BOND FUND
INSTITUTIONAL CLASS AND AMR CLASS
FORM N-1A CROSS-REFERENCE SHEET
Part A
FORM N-1A
ITEM NO. PROSPECTUS CAPTION
1 Cover Page
2 Table of Fees and Expenses
3 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 Not Applicable
Part B
FORM N-1A STATEMENT OF ADDITIONAL
ITEM NO. INFORMATION CAPTION
10 Cover Page
11 Table of Contents
12 Not Applicable
13 Investment Restrictions; Other
Information
14 Trustees and Officers of the Trust and
the AMR Trust
15 Not Applicable
16 Management, Administrative Services and
Distribution Fees; Investment Advisory Agreements
17 Portfolio Securities Transactions
18 Description of the Trust; Other
Information
19 Redemptions in Kind
20 Tax Information
21 Not Applicable
22 Yield and Total Return Quotations
23 Not Applicable
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.
AMERICAN AADVANTAGE INTERMEDIATE BOND FUND
-- AMR CLASS --
SEPTEMBER 15, 1997
This Prospectus contains important information about the AMR
Class of the American AAdvantage Intermediate Bond Fund(SM)
("Fund"), a series of the American AAdvantage Funds ("Trust"), an
open-end management investment company. The Fund seeks income and
capital appreciation by investing all of its investable assets in
the Intermediate Bond Portfolio ("Portfolio") of the AMR
Investment Services Trust ("AMR Trust"), which in turn primarily
invests in debt obligations. The investment experience of the
Fund will correspond directly with the investment experience of
the Portfolio. The Fund consists of two classes of shares
designed to meet the needs of different groups of investors. AMR
Class shares are offered to tax exempt retirement and benefit
plans of AMR Corporation and its affiliates. Prospective
investors in the AMR Class should read this Prospectus carefully
before making an investment decision and retain it for future
reference.
In addition to this Prospectus, a Statement of Additional
Information ("SAI") dated September 15, 1997 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 (817)-967-3509. For
further information about the AMR Class or for information on the
other class of shares of the Fund, 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.
Under a Hub and Spoke(1) operating structure, the Fund seeks
its investment objective by investing all of its investable
assets in the Portfolio as described above. The Portfolio's
investment objective is identical to that of the 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
the Fund will be the Fund's interest in the Portfolio. AMR
Investment Services, Inc. ("Manager") provides investment
management and administrative services to the Portfolio and
administrative services to the Fund. This Hub and Spoke 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 Objective, Policies and Risks --
Additional Information About the Portfolio." The Fund may
withdraw its investment in the Portfolio at any time if the
Trust's Board of Trustees ("Board") determines that it would be
in the best interest of the Fund and its shareholders to do so.
Upon any such withdrawal, the 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......................... 2
Introduction....................................... 2
Investment Objective, Policies and Risks........... 3
Investment Restrictions............................ 7
Yields and Total Returns........................... 8
Management and Administration of the Trusts........ 8
Investment Advisers................................ 10
Purchase, Redemption and Valuation of Shares....... 10
Dividends, Other Distributions and Tax Matters..... 12
General Information................................ 13
Shareholder Communications......................... 13
</TABLE>
TABLE OF FEES AND EXPENSES
Shown below are all AMR Class expenses expected to be
incurred by the Fund during its initial fiscal year. Because the
Fund's shares were not offered for sale prior to the date of this
Prospectus, annual operating expenses are based on estimated
expenses.
Annual Operating Expenses (as a percentage of average net
assets):
<TABLE>
<S> <C>
Management Fees 0.25%
Other Expenses 0.13%
Total Operating Expenses 0.38%
</TABLE>
The above expenses reflect the estimated expenses of the
Fund and the Portfolio. The Board believes that the aggregate per
share expenses of the Fund (including its proportionate share of
the Portfolio's expenses) will be approximately equal to the per
share expenses that the Fund would incur if its assets were
invested directly in the type of securities held by the
Portfolio.
Example
An AMR Class investor in the Fund would directly or
indirectly pay on a cumulative basis the following expenses on a
$1,000 investment assuming a 5% annual return:
<TABLE>
<S> <C>
1 Year $4
3 Years $12
</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 the Fund. Additional information may be found under
"Management and Administration of the Trusts" and "Investment
Advisers."
THE FOREGOING EXAMPLE 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 EXAMPLE.
INTRODUCTION
The Trust is an open-end, diversified management investment
company organized as a Massachusetts business trust on January
16, 1987. The Fund is a separate investment portfolio of the
Trust. The Fund invests all of its investable assets in the
Portfolio, which has an identical investment objective. The
Manager provides the Portfolio with business and asset management
services, including the evaluation and monitoring of the
investment adviser and it provides the Fund with administrative
services. The Fund consists of two classes of shares, including
the "Institutional Class," which is primarily for large
institutional investors investing at least $2 million in the
Fund, and the "AMR Class," which is available to tax-exempt
retirement and benefit plans of AMR Corporation and its
affiliates. For further information about the Institutional Class
call (800) 967-9009.
Although each class of shares is designed to meet the needs
of different categories of investors, all classes of the Fund
share the same portfolio of investments and share a common
investment objective. See "Investment Objectives, Policies and
Risks." There is no guarantee that the Fund will achieve its
investment objective. Based on its value, a share of the 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 Portfolio are allocated by the Manager
between the Manager and another investment adviser. The Manager
and the other investment adviser each have 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."
AMR Class shares are sold without any sales charges at the
next share price calculated after an investment is received and
accepted. Shares will be redeemed at the next share price
calculated after receipt of a redemption order. See "Purchase,
Redemption and Valuation of Shares."
INVESTMENT OBJECTIVE, POLICIES AND RISKS
The Fund has a fundamental investment policy which allows it
to invest all of its investable assets in the Portfolio. All
other fundamental investment policies and the non-fundamental
investment policies of the Fund and the Portfolio are identical.
Therefore, although the following discusses the investment
policies of the Portfolio and the AMR Trust's Board of Trustees
("AMR Trust Board"), it applies equally to the Fund and the
Board.
The 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 Portfolio, which invests primarily in debt
obligations. Permissible investments include securities of the
U.S. Government and its agencies and instrumentalities, including
separately traded registered principal and interest securities
("STRIPS") and other zero coupon obligations; corporate bonds,
notes and debentures; non-convertible preferred stocks; mortgage-
backed securities; asset-backed securities; domestic,
Yankeedollar and Eurodollar certificates of deposit, bank deposit
notes, and bank notes; other investment companies; and cash or
cash equivalents including investment grade short-term
obligations. Such obligations may have a fixed, variable or
floating rate of interest. At the time of purchase, all such
securities will be rated in one of the four highest rating
categories by all 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 Manager or the investment adviser. Obligations
rated in the fourth highest rating category are limited to 25% of
the Portfolio's total assets. 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. 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.
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 risks that differ
from investments in securities of domestic issuers. 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. 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. 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 market value of fixed rate securities, and thus the net
asset value of the 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.
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 purchase contracts,
financing leases and sales agreements entered into by
municipalities, are being securitized in pass-through structures
similar to the mortgage pass-through structures described above.
Consistent with the Fund's and the Portfolio's investment
objective, policies and quality standards, the Portfolio may
invest in these and other types of asset-backed securities which
may be developed in the future.
Asset-backed securities involve certain risks that do not
exist with mortgage-related securities, resulting mainly from the
fact that asset-backed securities do not usually contain the
benefit of a complete security interest in the related
collateral. For example, credit card receivables generally are
unsecured and the debtors are entitled to the protection of a
number of state and federal consumer credit laws, some of which
may reduce the ability to obtain full payment. In the case of
automobile receivables, due to various legal and economic
factors, proceeds from repossessed collateral may not always be
sufficient to support payments on the securities. The risks
associated with asset-backed securities are often reduced by the
addition of credit enhancements such as a letter of credit from a
bank, excess collateral or a third-party guarantee.
Although investments will not be restricted by either
maturity or duration of the securities purchased, under normal
circumstances, the Portfolio will seek to maintain a dollar
weighted average duration of 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.
Except as otherwise indicated, the investment policies of
the Fund may be changed at any time by the Board to the extent
that such changes are consistent with the investment objective of
the Fund. 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 the shareholder's
meeting, or (b) more than 50% of the shares of the Fund
(hereinafter, "majority vote"). The Portfolio's investment
objective may not be changed without a majority vote of the
Portfolio's interest holders.
Other Investment Policies -- In addition to the investment
policies described above, the Portfolio may also lend its
securities, enter into fully collateralized repurchase
agreements, and invest in private placement offerings.
Securities Lending. The 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 the Portfolio of would exceed 33 1/3% of its total assets. The
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 Portfolio seeks 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 the Portfolio's investment policies
and restrictions, collateral received in connection with
securities loans will be deemed an asset of the 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 the Portfolio's securities. The
Securities and Exchange Commission ("SEC") has granted exemptive
relief that permits the Portfolio to invest cash collateral
received from securities lending transactions in shares of one or
more private 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 Portfolio
from a securities dealer or bank subject to resale at an agreed
upon price on a later date. The 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 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. 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
Portfolio 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 Portfolio through or with the
assistance of the issuer or dealers that make a market in the
Section 4(2) securities, thus providing liquidity. The Portfolio
will not invest more than 15% of its 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, that any Section 4(2) securities held by
the Portfolio in excess of this level are at all times liquid.
The AMR Trust Board and the applicable investment adviser,
pursuant to the guidelines approved by the AMR Trust Board, will
carefully monitor the Portfolio's 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 the Portfolio's
liquidity to the extent that qualified institutional buyers no
longer wish to purchase these restricted securities.
Brokerage Practices and Portfolio Turnover -- The Portfolio
normally will not incur any brokerage commissions on its
transactions because debt instruments are generally traded on a
"net" basis with dealers acting as principal for their own
accounts without a stated commission. The price of the
obligation, however, usually includes a profit to the dealer.
Obligations purchased in underwritten offerings include a fixed
amount of compensation to the underwriter, generally referred to
as the underwriter's concession or discount. No commissions or
discounts are paid when securities are purchased directly from an
issuer. The Manager and the investment adviser will each place
its own orders to execute securities transactions which are
designed to implement the Portfolio's investment objective and
policies. In placing such orders, the Manager and the investment
adviser will seek the best available price and most favorable
execution. The full range and quality of services offered by the
executing broker or dealer is considered when making these
determinations.
Additional Information About the Portfolio -- As previously
described, investors should be aware that the 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 the Portfolio, which is
a separate investment company. Since the Fund will invest only in
the Portfolio, the Fund's shareholders will acquire only an
indirect interest in the investments of the Portfolio.
The Manager expects, although it cannot guarantee, that the
Fund will achieve economies of scale by investing in the
Portfolio. In addition to selling its interests to the Fund, the
Portfolio may sell its interests to other nonaffiliated
investment companies and/or other institutional investors. All
institutional investors in the Portfolio will pay a proportionate
share of the Portfolio's expenses and will invest in the
Portfolio on the same terms and conditions. However, if another
investment company invests all of its assets in the Portfolio, it
would not be required to sell its shares at the same public
offering price as the Fund and would be allowed to charge
different sales commissions. Therefore, investors in the Fund may
experience different returns from investors in another investment
company that invests exclusively in the Portfolio.
The Fund's investment in the Portfolio may be materially
affected by the actions of large investors in the Portfolio, if
any. For example, as with all open-end investment companies, if a
large investor were to redeem its interest in the Portfolio, the
Portfolio's remaining investors could experience higher pro rata
operating expenses, thereby producing lower returns. As a result,
the Portfolio's security holdings may become less diverse,
resulting in increased risk. Institutional investors in the
Portfolio that have a greater pro rata ownership interest in the
Portfolio than the Fund could have effective voting control over
the operation of the Portfolio. A change in the Portfolio's
fundamental objective, policies and restrictions, that is not
approved by the shareholders of the Fund could require the 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, the 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 the Fund and could
affect adversely its liquidity.
The Portfolio's and the Fund's investment objectives and
policies are described above. See "Investment Restrictions" for a
description of their investment restrictions. The investment
objective of the Fund can be changed only with shareholder
approval. The approval of the Fund and of other investors in the
Portfolio, if any, is not required to change the investment
objective, policies or limitations of the Portfolio, unless
otherwise specified. Written notice shall be provided to
shareholders of the Fund within thirty days prior to any changes
in the Portfolio's investment objective. If the investment
objective of the Portfolio changes and the shareholders of the
Fund do not approve a parallel change in the Fund's investment
objective, the Fund would seek an alternative investment vehicle
or the investment advisers would actively manage the Fund.
See "Management and Administration of the Trust" for a
complete description of the investment management fee and other
expenses associated with the Fund's investment in the Portfolio.
This Prospectus and the SAI contain more detailed information
about the Fund and the Portfolio, including information related
to (1) the investment objective, policies and restrictions of the
Fund and the Portfolio, (2) the Board of Trustees and officers of
the Trust and the AMR Trust (3) brokerage practices, (4) the
Fund's 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 the Fund's shares.
INVESTMENT RESTRICTIONS
The following fundamental investment restrictions and the
non-fundamental investment restriction are identical for the Fund
and the Portfolio. Therefore, although the following discusses
the investment restrictions of the Portfolio and the AMR Trust
Board, it applies equally to the Fund and Board. The following
fundamental investment restrictions may be changed with respect
to the Fund by the majority vote of the Fund's outstanding shares
or with respect to the Portfolio by the majority vote of the
Portfolio's interest holders. The Portfolio may not:
- 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 the Portfolio's total assets.
- Invest more than 25% of its total assets in the securities
of companies primarily engaged in any one industry other
than the U.S. Government, its agencies and
instrumentalities. Finance companies as a group are not
considered a single industry for purposes of this policy.
Further, wholly owned finance company subsidiaries will be
considered to be in the industries of their parent
companies if their activities are primarily related to
financing the activities of their parent companies.
The following non-fundamental investment restriction may be
changed with respect to the Fund by a vote of a majority of the
Board or with respect to the Portfolio by a vote of a majority of
the AMR Trust Board: the Portfolio may not invest more than 15%
of its net assets in illiquid securities, including time deposits
and repurchase agreements that mature in more than seven days.
The above percentage limits are based upon asset values at
the time of the applicable transaction; accordingly, a subsequent
change in asset values will not affect a transaction that was in
compliance with the investment restrictions at the time such
transaction was effected. See the SAI for other investment
limitations.
YIELDS AND TOTAL RETURNS
Each class of the Fund has different expenses which will
impact its performance. Advertised yields for the AMR Class of
the Fund will be computed by dividing the net investment income
earned per share during the relevant time period by the maximum
offering price per class on the last day of the period. Total
return quotations for the AMR Class of 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. The AMR Class of the 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 the Fund. The Fund will at
times compare its performance to applicable published indices,
and may also 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 TRUSTS
Fund Management Agreement -- The Board has general
supervisory responsibility over the Trust's affairs. 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 Portfolio are allocated between the Manager and the
investment adviser by the Manager. See "Investment Advisers." As
of June 30, 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 Fund.
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 the
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 the Portfolio, 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 adviser of the Fund
and the Portfolio. As compensation for paying the investment
advisory fees and for providing the Portfolio 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 0.25% of the net assets of the Portfolio. The
advisory fee is payable quarterly in arrears. To the extent that
the Fund invests all of its investable assets in the 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 the Portfolio
lends its portfolio securities and receives cash collateral from
the borrower, the Manager will 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 will receive up to 25% of
the loan fees posted by borrowers. The Manager also is
compensated through the Administrative Services Agreement, as
described below, for other services provided.
The 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 the Fund's
shareholders or the Portfolio's interest holders. The Management
Agreement may be terminated with respect to the Fund or the
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. The
Management Agreement will automatically terminate in the event of
its "assignment" as defined in the 1940 Act.
The Trust is responsible for the following expenses: audits
by independent auditors; transfer agency, custodian, dividend
disbursing agent and shareholder recordkeeping services; taxes,
if any, and the preparation of the 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
Fund's 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 -- The investment adviser has
entered into separate investment advisory agreements with the
Manager to provide investment advisory services to the Fund and
the Portfolio. To the extent that the Fund invests all of its
investable assets in the Portfolio, however, the investment
adviser will receive an advisory fee only on behalf of the
Portfolio and not on behalf of its the Fund. The assets of the
Portfolio are allocated between the Manager and the investment
adviser for the Portfolio and described in this Prospectus in
"Investment Advisers." The Manager is permitted to enter into new
or modified advisory agreements with existing or new investment
advisers without approval of Fund shareholders or Portfolio
interest holders, but subject to approval of the Board and the
AMR Trust Board. The SEC 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 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 to the investment
adviser may be changed at any time by the Manager. In general,
the allocation will vary based upon a variety of factors,
including the overall investment performance of the investment
adviser, the Portfolio's cash flow needs and market conditions.
The investment adviser can be terminated without penalty to the
AMR Trust by the Manager and the AMR Trust Board or the interest
holders of the 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.
The Manager and the investment adviser have discretion to
purchase and sell securities for their segment of the Portfolio's
assets in accordance with the Portfolio's objective, policies and
restrictions and the more specific strategies provided by the
Manager. Although the investment adviser is subject to general
supervision by the AMR Trust Board and the Manager, these parties
do not evaluate the investment merits of specific securities
transactions. As compensation for its services, the investment
adviser 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 Fund 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 0.05% of the
net assets of the Fund. To the extent that the Fund invests all
of its investable assets in the Portfolio, however, the Manager
will receive no fee under this Agreement.
Allocation of Fund Expenses -- Expenses of the Fund
generally are allocated equally among the shares of that Fund,
regardless of class. However, certain expenses approved by the
Board will be allocated solely to the class to which they relate.
Principal Underwriter -- Brokers Transaction Services, Inc.
("BTS"), 7001 Preston Road, Dallas, Texas, 75205 serves as the
principal underwriter of the Trust.
Custodian and Transfer Agent -- NationsBank of Texas, N.A.,
Dallas, Texas, serves as custodian for the Portfolio and the
Fund, and as transfer agent for the AMR Class.
Independent Auditor -- The independent auditor for the Trust
and the AMR Trust is Ernst & Young LLP, Dallas, Texas.
INVESTMENT ADVISERS
Set forth below is a brief description of the investment
advisers for the Fund and the Portfolio. References to the
investment advisers retained by a Portfolio also apply to the
Fund.
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 Fund and the Portfolio. These responsibilities
include oversight of the investment adviser, regular review of
the investment adviser's performance and asset allocations
between the Manager and the investment adviser.
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 June 30, 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. 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. Solely for the purpose of
determining the applicable percentage rates when calculating
Barrow's fees, there shall be included all other assets or trust
assets of American Airlines, Inc. also under management by Barrow
(except assets managed under the HALO Bond Program). The
inclusion of any such assets will result in lower overall fee
rates being applied to the Portfolio. Barrow provides no services
to the Fund or the Portfolio except for portfolio investment
management and related recordkeeping services, and has no
affiliation with the Trust, the AMR Trust or the Manager.
PURCHASE, REDEMPTION AND VALUATION OF SHARES
Purchasing Shares of the Trust -- AMR Class shares are
offered to tax-exempt retirement and benefit plans of AMR
Corporation and its affiliates. Shares are sold without a sales
charge at the next share price calculated after the acceptance of
a purchase order. AMR Class shares are offered and orders
accepted until 4:00 p.m. Eastern time on each day on which the
New York Stock Exchange ("Exchange") is open for trading, which
excludes the following business holidays: New Year's Day,
President's Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day ("Business Day").
The Trust reserves the right to reject any order for the purchase
of shares and to limit or suspend, without prior notice, the
offering of shares.
AMR Class shares may be purchased and redeemed as follows:
By Wire -- Purchases may be made by wiring funds. To ensure
prompt receipt of a transmission by wire, the investor should:
telephone the transfer agent at (214) 508-5038 or (800) 658-5811
and specify the Fund whose shares are to be purchased; provide
the name, address, telephone number and account number of the
investor; and identify the amount being wired and by which bank.
If the investor is opening a new account, the transfer agent will
provide the investor with an account number. The investor should
instruct its bank to designate the account number which the
transfer agent has assigned to the investor and to transmit the
federal funds to: Federal Reserve Bank, Dallas, for NationsBank
of Texas, N.A. ABA Routing # 111-000-025, Corporate Trust
Suspense Account No. 0180019810, reference American AAdvantage
Funds, attention: Fund Account Services.
By Depositing Securities -- Shares of the Fund may be
purchased in exchange for an investor's securities if the
securities are acceptable to the Portfolio and satisfy applicable
investment objectives and policies. Investors interested in
exchanging securities must first contact the Manager and acquire
instructions regarding submission of a written description of the
securities which the investor wishes to exchange. The investor
must represent that all such securities offered to 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 ascertainable
value as evidenced by a listing on the Exchange, the American
Stock Exchange or Nasdaq. Securities are valued in the manner
described for valuing Portfolio assets in the section entitled
"Valuation of Shares." Acceptance of such orders may occur on any
day during the five-day period afforded the Manager to review the
acceptability of the securities. Upon notice of acceptance of
such orders, the securities must be delivered in fully negotiable
form within three days. The Manager will provide delivery
instructions at the time of acceptance. A gain or loss for
federal income tax purposes may be realized by the investor upon
the securities exchange, depending upon the adjusted tax basis
and value of the securities tendered. The Fund will accept
securities in this manner only for investment by the Portfolio,
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
applicable Fund to "NationsBank of Texas, N.A., 11th Floor, Elm
Place, P.O. Box 830840, Dallas, Texas 75283-0840, Attn.: American
AAdvantage Funds -- AMR Class." An additional purchase of shares
should be accompanied by the shareholder's account number.
Purchase checks are accepted subject to collection at full face
value in U.S. funds and must be drawn in U.S. dollars on a U.S.
bank.
Redemption of Shares -- Fund shares may be redeemed on any
Business Day by writing directly to NationsBank of Texas, N.A. at
the address above under "Purchasing Shares of the Trust -- By
Mail." The redemption price will be the net asset value per share
next determined after receipt by NationsBank of Texas, N.A. of
all required documents in good order. "Good order" means that the
request must include a letter of instruction or stock assignment
specifying the number of shares or dollar amount to be redeemed,
signed by an authorized signatory for the owners of the shares in
the exact names in which they appear on the account, and
accompanied by such other supporting legal documents, if
required, in the case of estates, trusts, guardianships,
custodians, corporations, IRAs and welfare, pension and profit-
sharing plans. In addition, any share certificates being redeemed
must be returned duly endorsed or accompanied by a stock
assignment with signatures guaranteed by a bank, trust company or
member of a recognized stock exchange.
Payment for redeemed shares will be made in cash within
seven days after the receipt of a redemption request in good
order. However, the Fund reserves the right to suspend
redemptions or postpone the date of payment (a) for any periods
during which the Exchange is closed (other than for customary
weekend and holiday closings), or when trading on the Exchange is
restricted, (b) at such time as an emergency exists as determined
by the SEC 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 SEC by order
may permit for protection of the Fund's' shareholders. Shares
purchased by check may not be redeemed until the funds have
cleared, which may take up to 15 days. 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 held by the Portfolio. See the SAI for
further information concerning redemptions in kind.
Distribution of Trust Shares -- Shares are distributed
through the Fund's principal underwriter, BTS. BTS is compensated
by the Manager, and not the Trust. The Trust does not incur any
direct distribution expenses. However, the Trust has adopted a
Distribution Plan in accordance with Rule 12b-1 under the 1940
Act which authorizes the use of any fees received by the Manager
in accordance with the Administrative Services and the Management
Agreements and any fees received by the investment advisers
pursuant to their Advisory Agreements with the Manager, to be
used for distribution purposes.
Valuation of Shares -- The net asset value of each share
(share price) of the Fund is determined as of 4:00 p.m. Eastern
time on each Business Day. The net asset value of all outstanding
shares of all classes will be determined based on a pro rata
allocation of the value of the Portfolio's assets (net of
liabilities) and the 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 Fund may compute
differing share prices as a result of Class Expenses.
Debt securities (other than short-term securities) normally
are 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. Investment grade
short-term obligations with 60 days or less to maturity held by
the Portfolio 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 the Fund's shares are
calculated at the same time and in the same manner. Dividends
consisting of substantially all of the net investment income of
the Fund, which are paid monthly, normally are declared on each
Business Day immediately prior to the determination of the
class's net asset value per share and are payable to shareholders
of record as of the close of business on the day on which
declared. The Fund's net investment income attributable to the
AMR Class consists of that class's pro rata share of the Fund's
share of dividends and interest (including discount) accrued on
the Portfolio's securities, less applicable expenses of the Fund
(including its share of the Portfolio's expenses allocable to the
AMR Class). Distributions of the Fund's share of the Portfolio's
realized net short-term capital gain and net capital gain (the
excess of net long-term capital gain over net short-term capital
loss), if any, normally are made annually.
Unless a shareholder elects otherwise on the account
application, all dividends and other distributions on the Fund's
AMR Class shares are automatically declared and paid in
additional AMR Class shares of the Fund. However, a shareholder
may choose to have distributions of realized net short-term
capital gain and net capital gain paid in shares and dividends
paid in cash or to have all such distributions and dividends paid
in cash. An election may be changed at any time by delivering
written notice that is received by the transfer agent at least
ten days prior to the payment date for a dividend or other
distribution.
Tax Information -- The Fund is treated as a separate
corporation for federal income tax purposes and intends to
qualify for treatment as a regulated investment company 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, taxable net
investment income plus any net short-term capital gain) 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 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 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 Portfolio has
received an opinion of counsel that it should be classified for
federal income tax purposes as a partnership; accordingly, the
Portfolio should not 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 Fund and its 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 Fund. For further
tax information, see the SAI.
GENERAL INFORMATION
The Trust currently is comprised of ten separate investment
portfolios. The Fund is comprised of two classes of shares, which
can be issued in an unlimited number. Each share represents an
equal proportionate beneficial interest in the Fund and is
entitled to one vote. Only shares of a particular class may vote
on matters affecting that class. Only 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 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 the Portfolio's
interest holders, as required by the 1940 Act, the 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 the Portfolio interest holder's votes are
proportionate to its percentage interests in the Portfolio, one
or more other Portfolio investors could, in certain instances,
approve an action against which a majority of the outstanding
voting securities of the Fund had voted. This could result in the
Fund's redeeming its investment in the Portfolio, which could
result in increased expenses for the Fund. Whenever the
shareholders of the Fund are called to vote on matters related to
the 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 the Portfolio in the Portfolio's report to
shareholders will be provided to the shareholders of the 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.
SHAREHOLDER COMMUNICATIONS
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 of the Fund 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 Fund at P.O. Box 619003, MD 5645, Dallas/Fort
Worth Airport, Texas 75261-9003 or by calling (800) 388-3344.
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 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. AMR Class and American AAdvantage Intermediate
Bond Fund are service marks of AMR Investment Services, Inc.
(1) Hub and Spoke is a registered service mark of Signature
Financial Group, Inc.
American AAdvantage 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
AMERICAN AADVANTAGE INTERMEDIATE BOND FUND
--INSTITUTIONAL CLASS--
SEPTEMBER 15, 1997
This Prospectus contains important information about the
Institutional Class of the American AAdvantage Intermediate Bond
Fund(SM) ("Fund"), a series of the American AAdvantage Funds
("Trust"), an open-end management investment company. The Fund
seeks income and capital appreciation by investing all of its
investable assets in the Intermediate Bond Portfolio
("Portfolio") of the AMR Investment Services Trust ("AMR Trust")
which in turn primarily invests in debt obligations . The
investment experience of the Fund will correspond directly with
the investment experience of the Portfolio. The Fund consists of
two 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 Fund. Prospective investors in the Institutional
Class 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 September 15, 1997 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 (817)-967-3509. For
further information about the Institutional Class or for
information on the other class of shares of the Fund, 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.
Under a Hub and Spoke(1) operating structure, the Fund seeks
its investment objective by investing all of its investable
assets in the Portfolio as described above. The Portfolio's
investment objective is identical to that of the 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
the Fund will be the Fund's interest in the Portfolio. AMR
Investment Services, Inc. ("Manager") provides investment
management and administrative services to the Portfolio and
administrative services to the Fund. This Hub and Spoke 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 Objective, Policies and
Risks -- Additional Information About the Portfolio." The Fund
may withdraw its investment in the Portfolio at any time if the
Trust's Board of Trustees ("Board") determines that it would be
in the best interest of the Fund and its shareholders to do so.
Upon any such withdrawal, the 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................................... 2
Introduction................................................. 3
Investment Objective, Policies and Risks..................... 3
Investment Restrictions...................................... 7
Yields and Total Returns..................................... 8
Management and Administration of the Trusts.................. 8
Investment Advisers.......................................... 10
Purchase, Redemption and Valuation of Shares................. 11
Dividends, Other Distributions and Tax Matters............... 13
General Information.......................................... 14
Shareholder Communications................................... 14
</TABLE>
TABLE OF FEES AND EXPENSES
Shown below are all Institutional Class expenses expected to
be incurred by the Fund during its initial fiscal year. Because
the Fund's shares were not offered for sale prior to the date of
this Prospectus, annual operating expenses are based on estimated
expenses.
Annual Operating Expenses (as a percentage of average net
assets):
<TABLE>
<S> <C>
Management Fees 0.25%
12b-1 Fees 0.00%
Other Expenses 0.38%
Total Operating Expenses 0.63%
</TABLE>
The above expenses reflect the estimated expenses of the
Fund and the Portfolio. The Board believes that the aggregate per
share expenses of the Fund (including its proportionate share of
the Portfolio's expenses) will be approximately equal to the per
share expenses that the Fund would incur if its assets were
invested directly in the type of securities held by the
Portfolio.
Example
An Institutional Class investor in the Fund would directly
or indirectly pay on a cumulative basis the following expenses on
a $1,000 investment assuming a 5% annual return:
<TABLE>
<S> <C>
1 Year $6
3 Years $20
</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 the Fund. Additional information may be
found under "Management and Administration of the Trusts" and
"Investment Advisers."
THE FOREGOING EXAMPLE 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
EXAMPLE.
INTRODUCTION
The Trust is an open-end, diversified management investment
company organized as a Massachusetts business trust on January
16, 1987. The Fund is a separate investment portfolio of the
Trust. The Fund invests all of its investable assets in the
Portfolio, which has an identical investment objective. The
Manager provides the Portfolio with business and asset management
services, including the evaluation and monitoring of the
investment adviser, and it provides the Fund with administrative
services. The Fund consists of two classes of shares, including
the "AMR Class", which is available to tax exempt retirement and
benefit plans of AMR Corporation and its affiliates, and the
"Institutional Class", which is primarily for institutional
investors investing at least $2 million in the Fund. For further
information about the AMR Class, call (800) 967-9009.
Although each class of shares is designed to meet the needs
of different categories of investors, both classes of the Fund
share the same portfolio of investments and share a common
investment objective. See "Investment Objective, Policies and
Risks." There is no guarantee that the Fund will achieve its
investment objective. Based on its value, a share of the 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 Portfolio are allocated by the Manager
between the Manager and another investment adviser. The Manager
and the other investment adviser each have 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 sold without any sales
charges at their 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 OBJECTIVE, POLICIES AND RISKS
The Fund has a fundamental investment policy which allows it
to invest all of its investable assets in the Portfolio. All
other fundamental investment policies and the non-fundamental
investment policies of the Fund and the Portfolio are identical.
Therefore, although the following discusses the investment
policies of the Portfolio and the AMR Trust's Board of Trustees
("AMR Trust Board"), it applies equally to the Fund and the
Board.
The 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 Portfolio, which invests primarily in debt
obligations. Permissible investments include securities of the
U.S. Government and its agencies and instrumentalities, including
separately traded registered principal and interest securities
("STRIPS") and other zero coupon obligations; corporate bonds,
notes and debentures; non-convertible preferred stocks; mortgage-
backed securities; asset-backed securities; domestic,
Yankeedollar and Eurodollar certificates of deposit, bank deposit
notes, and bank notes; other investment companies; and cash or
cash equivalents, including investment grade short-term
obligations. Such obligations may have a fixed, variable or
floating rate of interest. At the time of purchase, all such
securities will be rated in one of the four highest rating
categories by all 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 Manager or the investment adviser. Obligations
rated in the fourth highest rating category are limited to 25% of
the Portfolio's total assets. 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. 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.
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 risks that differ
from investments in securities of domestic issuers. 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. 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. 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 market value of fixed rate securities, and thus the net
asset value of the 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.
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 purchase contracts,
financing leases and sales agreements entered into by
municipalities, are being securitized in pass-through structures
similar to the mortgage pass-through structures described above.
Consistent with the Fund's and the Portfolio's investment
objective, policies and quality standards, the Portfolio may
invest in these and other types of asset-backed securities which
may be developed in the future.
Asset-backed securities involve certain risks that do not
exist with mortgage-related securities, resulting mainly from the
fact that asset-backed securities do not usually contain the
benefit of a complete security interest in the related
collateral. For example, credit card receivables generally are
unsecured and the debtors are entitled to the protection of a
number of state and federal consumer credit laws, some of which
may reduce the ability to obtain full payment. In the case of
automobile receivables, due to various legal and economic
factors, proceeds from repossessed collateral may not always be
sufficient to support payments on the securities. The risks
associated with asset-backed securities are often reduced by the
addition of credit enhancements such as a letter of credit from a
bank, excess collateral or a third-party guarantee.
Although investments will not be restricted by either
maturity or duration of the securities purchased, under normal
circumstances, the Portfolio will seek to maintain a dollar
weighted average duration of 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.
Except as otherwise indicated, the investment policies of
the Fund may be changed at any time by the Board to the extent
that such changes are consistent with the investment objective of
the Fund. 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 the shareholder's
meeting, or (b) more than 50% of the shares of the Fund
(hereinafter, "majority vote"). The Portfolio's investment
objective may not be changed without a majority vote of the
Portfolio's interest holders.
Other Investment Policies -- In addition to the investment
policies described above, the Portfolio also may lend its
securities, enter into fully collateralized repurchase
agreements, and invest in private placement offerings.
Securities Lending. The 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 the Portfolio would exceed 33 1/3% of its total assets. The
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 Portfolio seeks 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 the Portfolio's investment policies
and restrictions, collateral received in connection with
securities loans will be deemed an asset of the 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 the Portfolio's securities. The
Securities and Exchange Commission ("SEC") has granted exemptive
relief that permits the Portfolio to invest cash collateral
received from securities lending transactions in shares of one or
more private 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 Portfolio
from a securities dealer or bank subject to resale at an agreed
upon price on a later date. The 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 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. 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
Portfolio, 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 Portfolio through or with the
assistance of the issuer or dealers that make a market in the
Section 4(2) securities, thus providing liquidity. The Portfolio
will not invest more than 15% of its 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, 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 applicable investment adviser,
pursuant to the guidelines approved by the AMR Trust Board, will
carefully monitor the Portfolio's 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 the Portfolio's
liquidity to the extent that qualified institutional buyers no
longer wish to purchase these restricted securities.
Brokerage Practices and Portfolio Turnover -- The Portfolio
normally will not incur any brokerage commissions on its
transactions because debt instruments are generally traded on a
"net" basis with dealers acting as principal for their own
accounts without a stated commission. The price of the
obligation, however, usually includes a profit to the dealer.
Obligations purchased in underwritten offerings include a fixed
amount of compensation to the underwriter, generally referred to
as the underwriter's concession or discount. No commissions or
discounts are paid when securities are purchased directly from an
issuer. The Manager and the investment adviser will each place
its own orders to execute securities transactions which are
designed to implement the Portfolio's investment objective and
policies. In placing such orders, the Manager and the investment
adviser will seek the best available price and most favorable
execution. The full range and quality of services offered by the
executing broker or dealer is considered when making these
determinations.
Additional Information About the Portfolio -- As previously
described, investors should be aware that the 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 the Portfolio, which is
a separate investment company. Since the Fund will invest only in
the Portfolio, the Fund's shareholders will acquire only an
indirect interest in the investments of the Portfolio.
The Manager expects, although it cannot guarantee, that the
Fund will achieve economies of scale by investing in the
Portfolio. In addition to selling its interests to the Fund, the
Portfolio may sell its interests to other non-affiliated
investment companies and/or other institutional investors. All
institutional investors in the Portfolio will pay a proportionate
share of the Portfolio's expenses and will invest in the
Portfolio on the same terms and conditions. However, if another
investment company invests all of its assets in the Portfolio, it
would not be required to sell its shares at the same public
offering price as the Fund and would be allowed to charge
different sales commissions. Therefore, investors in the Fund may
experience different returns from investors in another investment
company that invests exclusively in the Portfolio.
The Fund's investment in the Portfolio may be materially
affected by the actions of large investors in the Portfolio, if
any. For example, as with all open-end investment companies, if a
large investor were to redeem its interest in the Portfolio, the
Portfolio's remaining investors could experience higher pro rata
operating expenses, thereby producing lower returns. As a result,
the Portfolio's security holdings may become less diverse,
resulting in increased risk. Institutional investors in the
Portfolio that have a greater pro rata ownership interest in the
Portfolio than the Fund could have effective voting control over
the operation of the Portfolio. A change in the Portfolio's
fundamental objective, policies and restrictions, that is not
approved by the shareholders of the Fund could require the 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, the 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 the Fund and could
affect adversely its liquidity.
The Portfolio's and Fund's investment objectives and
policies are described above. See "Investment Restrictions" for a
description of their investment restrictions. The investment
objective of the Fund can be changed only with shareholder
approval. The approval of the Fund and of other investors in the
Portfolio, if any, is not required to change the investment
objective, policies or limitations of the Portfolio, unless
otherwise specified. Written notice shall be provided to
shareholders of the Fund within thirty days prior to any changes
in the Portfolio's investment objective. If the investment
objective of the Portfolio changes and the shareholders of the
Fund do not approve a parallel change in the Fund's investment
objective, the Fund would seek an alternative investment vehicle
or the investment advisers would actively manage the Fund.
See "Management and Administration of the Trust" for a
complete description of the investment management fee and other
expenses associated with the Fund's investment in the Portfolio.
This Prospectus and the SAI contain more detailed information
about the Fund and the Portfolio, including information related
to (1) the investment objective, policies and restrictions of the
Fund and the Portfolio, (2) the Board of Trustees and officers of
the Trust and the AMR Trust, (3) brokerage practices, (4) the
Fund's 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 the Fund's shares.
INVESTMENT RESTRICTIONS
The following fundamental investment restrictions and the
non-fundamental investment restriction are identical for the Fund
and the Portfolio. Therefore, although the following discusses
the investment restrictions of the Portfolio and the AMR Trust
Board, it applies equally to the Fund and the Board. The
following fundamental investment restrictions may be changed with
respect to the Fund by the majority vote of the Fund's
outstanding shares or with respect to the Portfolio by the
majority vote of the Portfolio's interest holders. The Portfolio
may not:
- 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 the 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. Municipal governments and their
agencies and authorities are not deemed to be industries.
Finance companies as a group are not considered a single
industry for purposes of this policy. Further, wholly
owned finance companies will be considered to be in the
industries of their parent companies if their activities
are primarily related to financing the activities of their
parent companies.
The following non-fundamental investment restriction may be
changed with respect to the Fund by a vote of a majority of the
Board or with respect to the Portfolio by a vote of a majority of
the AMR Trust Board: the Portfolio may not invest more than 15%
of its net assets in illiquid securities, including time deposits
and repurchase agreements that mature in more than seven days.
The above percentage limits are based upon asset values at
the time of the applicable transaction; accordingly, a subsequent
change in asset values will not affect a transaction that was in
compliance with the investment restrictions at the time such
transaction was effected. See the SAI for other investment
limitations.
YIELDS AND TOTAL RETURNS
Each class of the Fund has different expenses which will
impact its performance. Advertised yields for the Institutional
Class of the Fund will be computed by dividing the net investment
income per share earned by the class during the relevant time
period by the maximum offering price per share for the class 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,
each class of the 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 the Fund. The Fund will 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 TRUSTS
Fund Management Agreement -- The Board has general
supervisory responsibility over the Trust's affairs. 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 Portfolio are allocated between the Manager and the
investment adviser for the Portfolio by the Manager. See
"Investment Advisers." As of June 30, 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 Fund.
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 the
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 the Portfolio, 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 adviser of the Fund
and the Portfolio. As compensation for paying the investment
advisory fees and for providing the Portfolio 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 0.25% of the net assets of the Portfolio. To
the extent that the Fund invests all of its investable assets in
the 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
the Portfolio lends its portfolio securities and receives cash
collateral from the borrower, the Manager will 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 will receive up to 25% of
the loan fees posted by borrowers. The Manager also is
compensated through the Administrative Services Agreement, as
described below, for other services provided.
The 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 the Fund's
shareholders or the Portfolio's interest holders. The Management
Agreement may be terminated with respect to the Fund or the
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. The
Management Agreement will automatically terminate in the event of
its "assignment" as defined in the 1940 Act.
The Trust is responsible for the following expenses: audits
by independent auditors; transfer agency, custodian, dividend
disbursing agent and shareholder recordkeeping services; taxes,
if any, and the preparation of the 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
Fund's 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 -- The investment adviser has
entered into separate investment advisory agreements with the
Manager to provide investment advisory services to the Fund and
the Portfolio. To the extent that the Fund invests all of its
investable assets in the Portfolio, however, the investment
adviser will receive an advisory fee only on behalf of the
Portfolio and not on behalf of the Fund. The assets of the
Portfolio are allocated between the Manager and the investment
adviser for the Portfolio as described in this Prospectus in
"Investment Advisers." The Manager is permitted to enter into new
or modified advisory agreements with existing or new investment
advisers without approval of Fund shareholders or Portfolio
interest holders, but subject to approval of the Board and the
AMR Trust Board. The SEC 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 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 to the investment
adviser may be changed at any time by the Manager. In general,
the allocation will vary based upon a variety of factors,
including the overall investment performance of the investment
adviser, the Portfolio's cash flow needs and market conditions.
The investment adviser can be terminated without penalty to the
AMR Trust by the Manager, the AMR Trust Board or the interest
holders of the 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 the existing investment adviser is
terminated.
The Manager and the investment adviser have discretion to
purchase and sell securities for their segment of the Portfolio's
assets in accordance with the Portfolio's objectives, policies
and restrictions and the more specific strategies provided by the
Manager. Although the investment adviser is subject to general
supervision by the AMR Trust Board and the Manager, these parties
do not evaluate the investment merits of specific securities
transactions. As compensation for its services, the investment
adviser 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 Fund 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 Fund.
Allocation of Fund Expenses -- Expenses of the Fund
generally are allocated equally among the shares of the Fund,
regardless of class. However, certain expenses approved by the
Board will be allocated solely to the class to which they relate.
Principal Underwriter -- Brokers Transaction Services, Inc.
("BTS"), 7001 Preston Road, Dallas, Texas 75205, serves as the
principal underwriter of the Trust.
Custodian and Transfer Agent -- NationsBank of Texas, N.A.,
Dallas, Texas, serves as custodian for the Portfolio and the
Fund, and as transfer agent for the Institutional Class.
Independent Auditor -- The independent auditor for the Fund
and the AMR Trust is Ernst & Young LLP, Dallas, Texas.
INVESTMENT ADVISERS
Set forth below is a brief description of the investment
advisers of the Fund and the Portfolio. References to the
investment advisers retained by the Portfolio also apply to the
Fund.
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 Fund and the Portfolio. These responsibilities
include oversight of the investment adviser, regular review of
the investment adviser's performance and asset allocations
between the Manager and the investment adviser.
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 June 30, 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. 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. Solely for the purpose of
determining the applicable percentage rates when calculating
Barrow's fees, there shall be included all other assets or trust
assets of American Airlines, Inc. also under management by Barrow
(except assets managed under the HALO Bond Program). The
inclusion of any such assets will result in lower overall fee
rates being applied to the Portfolio. Barrow provides no services
to the Fund or the Portfolio except for portfolio investment
management and related recordkeeping services, and has no
affiliation with the Trust, the AMR Trust or the Manager.
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.
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 Fund are offered and purchase orders
accepted until 4:00 p.m. Eastern time on each day on which the
New York Stock Exchange (the "Exchange") is open for trading
which excludes the following business holidays: New Year's Day,
President's Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day ("Business Day").
The Trust reserves the right to reject any order for the purchase
of shares and to limit or suspend, without prior notice, the
offering of shares.
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 the transfer agent at (214) 508-5038 or (800)
658-5811 and specify the Fund whose shares are to be purchased;
provide the name, address, telephone number and account number of
the investor; and identify the amount being wired and by which
bank. The transfer agent 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:
Federal Reserve Bank, Dallas, for NationsBank of Texas, N.A. ABA
Routing # 111-000-025, Corporate Trust Suspense Account No.
0180019810, reference American AAdvantage Funds, attention: Fund
Account Services.
By Depositing Securities -- Shares of the Fund may be
purchased in exchange for an investor's securities if the
securities are acceptable to the Portfolio and satisfy applicable
investment objectives and policies. Investors interested in
exchanging securities must first contact the Manager and acquire
instructions regarding submission of a written description of the
securities which the investor wishes to exchange. The investor
must represent that all such securities offered to 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 ascertainable
value as evidenced by a listing on the Exchange, American Stock
Exchange or Nasdaq. Securities are valued in the manner described
for valuing Portfolio assets in the section entitled "Valuation
of Shares." Acceptance of such orders may occur on any day during
the five-day period afforded the Manager to review the
acceptability of the securities. Upon notice of acceptance of
such orders, the securities must be delivered in fully negotiable
form within three days. The Manager will provide delivery
instructions at the time of acceptance. A gain or loss for
federal income tax purposes may be realized by the investor upon
the securities exchange, depending upon the adjusted tax basis
and value of the securities tendered. The Fund will accept
securities in this manner only for purposes of investment by the
Portfolio, 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 "NationsBank of Texas, N.A., 11th Floor, Elm Place, P.O.
Box 830840, Dallas, Texas 75283-0840, Attn.: American AAdvantage
Funds -- Institutional Class." An additional purchase of shares
should be accompanied by the shareholder's account number.
Purchase checks are accepted subject to collection at full face
value in U.S. funds and must be drawn in U.S. dollars on a U.S.
bank.
Redemption of Shares -- Fund shares may be redeemed on any
Business Day by writing directly to NationsBank of Texas, N.A. at
the address above under "Purchasing Shares of the Trust -- By
Mail." The redemption price will be the net asset value per share
next determined after receipt by NationsBank of Texas, N.A. of
all required documents in good order. "Good order" means that the
request must include a letter of instruction or stock assignment
specifying the number of shares or dollar amount to be redeemed,
signed by an authorized signatory for the owners of the shares in
the exact names in which they appear on the account, and
accompanied by such other supporting legal documents, if
required, in the case of estates, trusts, guardianships,
custodians, corporations, IRAs and welfare, pension and profit-
sharing plans. In addition, any share certificates being redeemed
must be returned duly endorsed or accompanied by a stock
assignment with signatures guaranteed by a bank, trust company or
member of a recognized stock exchange.
Payment for redeemed shares will be made in cash within
seven days after the receipt of a redemption request in good
order. However, the Fund reserves the right to suspend
redemptions or postpone the date of payment (a) for any periods
during which the Exchange is closed (other than for customary
weekend and holiday closings), or when trading on the Exchange is
restricted, (b) at such time as an emergency exists as determined
by the SEC 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 SEC by order
may permit for protection of the Fund's shareholders. Shares
purchased by check may not be redeemed until the funds have
cleared, which may take up to 15 days. 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 held by the Portfolio. See the SAI for
further information concerning redemptions in kind.
Distribution of Trust Shares -- Shares are distributed
through the Fund's principal underwriter, BTS. BTS is compensated
by the Manager, and not the Trust. The Trust does not incur any
direct distribution expenses. However, the Trust has adopted a
Distribution Plan in accordance with Rule 12b-1 under the 1940
Act which authorizes the use of any fees received by the Manager
in accordance with the Administrative Services and Management
Agreements and any fees received by the investment advisers
pursuant to their Advisory Agreements with the Manager, to be
used for distribution purposes.
Valuation of Shares -- The net asset value of each share
(share price) of the Fund is determined as of 4:00 p.m. Eastern
time on each Business Day. 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 net assets, which in turn
is based on the Fund's pro rata allocation of the value of the
Portfolio's assets (net of liabilities) and the 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 Fund may compute differing share prices as a result of Class
Expenses.
Debt securities (other than short-term securities) normally
are 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. Investment grade
short-term obligations with 60 days or less to maturity 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 the Fund's shares are
calculated at the same time and in the same manner. Dividends
consisting of substantially all of the net investment income of
the Fund, which are paid monthly, normally are declared on each
Business Day immediately prior to the determination of the
class's net asset value per share and are payable to shareholders
of record as of the close of business on the day on which
declared. The 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 Portfolio's securities, less applicable expenses
of the Fund (including its share of the Portfolio's expenses
allocable to the Institutional Class). Distributions of the
Fund's share of the Portfolio's realized net short-term capital
gain, and net capital gain (the excess of net long-term capital
gain over net short-term capital loss), if any, normally are made
annually.
Unless a shareholder elects otherwise on the account
application, all dividends and other distributions on the Fund's
Institutional Class shares are automatically declared and paid in
additional Institutional Class shares of the Fund. However, a
shareholder may choose to have distributions of realized net
short-term capital gain and net capital gain paid in shares and
dividends paid in cash or to have all such distributions and
dividends paid in cash. An election may be changed at any time by
delivering written notice that is received by the transfer agent
at least ten days prior to the payment date for a dividend or
other distribution.
Tax Information -- The Fund is treated as a separate
corporation for federal income tax purposes and intends to
qualify for treatment as a regulated investment company under the
Code. 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
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 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 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 Portfolio has received an opinion of counsel that it should
be classified for federal income tax purposes as a partnership;
accordingly, the Portfolio should not subject to federal income
tax.
Dividends from the Fund's investment company taxable income
are taxable to its shareholders as ordinary income to the extent
of its 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 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 the Fund may be offset by capital losses from other sources.
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 notifies its shareholders following the end of each
calendar year of the amounts of dividends and capital gain
distributions paid (or deemed paid) that year.
The Fund is required to withhold 31% of all dividends,
capital gain distributions and redemption proceeds payable to any
individuals and certain other non-corporate shareholders who do
not provide the Fund with a correct taxpayer identification
number or (except with respect to redemption proceeds) who
otherwise are subject to back-up withholding.
The foregoing is only a summary of some of the important tax
considerations generally affecting the Fund and its 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 Fund. For further
tax information, see the SAI.
GENERAL INFORMATION
The Trust currently is comprised of ten separate investment
portfolios. The Fund is comprised of two classes of shares, which
can be issued in an unlimited number. Each share represents an
equal proportionate beneficial interest in the Fund and is
entitled to one vote. Only shares of a particular class may vote
on matters affecting that class. Only 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 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 the Portfolio's
interest holders, as required by the 1940 Act, the 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 the Portfolio interest holder's votes are
proportionate to its percentage interests in the Portfolio, one
or more other Portfolio investors could, in certain instances,
approve an action against which a majority of the outstanding
voting securities of the Fund had voted. This could result in the
Fund redeeming its investment in the Portfolio, which could
result in increased expenses for the Fund. Whenever the
shareholders of the Fund are called to vote on matters related to
the 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 the Portfolio in the Portfolio's report to
shareholders will be provided to the shareholders of the 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.
SHAREHOLDER COMMUNICATIONS
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 of the Fund 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 in writing to the Fund at P.O. Box 619003, MD
5645, Dallas/Fort Worth Airport, Texas 75261-9003, or by calling
(800) 388-3344.
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 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. American AAdvantage Intermediate Bond Fund is a
service mark of AMR Investment Services, Inc.
(1) Hub and Spoke is a registered service mark of Signature
Financial Group, Inc.
American AAdvantage Funds(R)
-- Institutional Class --
P.O. Box 619003
Dallas/Fort Worth Airport, Texas 75261-9003
(800) 967-9009
-- AMR Class --
P.O. Box 619003
Dallas/Fort Worth Airport, Texas 75261-9003
(800) 967-9009
STATEMENT OF ADDITIONAL INFORMATION
AMERICAN AADVANTAGE INTERMEDIATE BOND FUND(SM)
-- AMR Class --
-- Institutional Class --
September 15, 1997
The American AAdvantage Intermediate Bond Fund(SM) (the
"Fund") is one of ten separate investment portfolios of the
American AAdvantage Funds (the "Trust"), a no-load, open-end,
diversified management investment company. The Fund consists of
two classes of shares, the AMR Class and the Institutional Class,
designed to meet the needs of different groups of investors.
The Fund seeks its investment objective by investing all of
its investable assets in the Intermediate Bond Portfolio (the
"Portfolio") of the AMR Investment Services Trust ("AMR Trust").
The Portfolio has an investment objective identical to the
Fund's. The AMR Trust is a separate investment company managed by
AMR Investment Services, Inc. (the "Manager").
This Statement of Additional Information ("SAI") should be
read in conjunction with an AMR Class or Institutional Class
prospectus, dated September 15, 1997, (individually, a
"Prospectus"), copies of which may be obtained without charge by
calling (817) 967-3509.
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
The Fund has the following fundamental investment policy that
enables it to invest in the Portfolio:
Notwithstanding any other limitation, the Fund may invest
all of its investable assets in an open-end management
investment company with substantially the same investment
objectives, policies and limitations as the Fund. For
this purpose, "all of the Fund's investable assets" means
that the only investment securities that will be held by
the Fund will be the Fund's interest in the investment
company.
All other fundamental investment policies and the non-
fundamental policies of the Fund and the Portfolio are identical.
Therefore, although the following discusses the investment
policies of the Portfolio and the AMR Trust's Board of Trustees
("AMR Trust Board"), it applies equally to the Fund and the
Trust's Board of Trustees ("Board").
In addition to the investment limitations noted in the
Prospectus, the following seven restrictions have been adopted by
the Portfolio, and may be changed with respect to the Portfolio
only by the majority vote of the 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 the
Fund is requested to vote on a change in the investment
restrictions 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
the Fund's shareholders not voting will be voted by the Board in
the same proportion as those Fund shareholders who do, in fact,
vote.
The Portfolio may not:
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 the 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.
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 Portfolio intends 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 Portfolio and may be changed by a majority vote of the AMR
Trust Board: the Portfolio may not 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.
The Portfolio may invest in the securities of other
investment companies to the extent permitted by law. The
Portfolio may incur duplicate advisory or management fees when
investing in another mutual fund.
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 Each Principal Occupation During
Name, Age and Address Trust Past 5 Years
<S> <C> <C>
William F. Quinn* (49) Trustee and President, AMR Investment
President 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,
1700 Pacific Strauss, Hauer & Feld, LLP
Avenue (1960-Present)#; Director,
Suite 4100 Clear Channel
Dallas, Texas Communications (1984-
75201 Present); Director,
CenterPoint Properties,
Inc. (1994-Present);
Trustee, American
AAdvantage Mileage Funds
(1996-Present).
Ben J. Fortson (65) Trustee President and CEO, Fortson
301 Commerce Street Oil Company (1958-Present);
Suite 3301 Director, Kimbell Art
Fort Worth, Texas Foundation (1964-Present);
76102 Director, Burnett
Foundation (1987-Present);
Honorary Trustee, Texas
Christian University (1986-
Present); Trustee, American
AAdvantage Mileage Funds
(1996-Present).
John S. Justin (81) Trustee Chairman and Chief
2821 W. Seventh St. Executive Officer, Justin
Fort Worth, Texas Industries, Inc. (a
76107 diversified holding
company) (1969-Present);
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* Trustee Consultant (1994-Present);
(61) Vice President and
Controller (1985-1994),
American Airlines, Inc.;
Trustee, American
AAdvantage Mileage Funds
(1995-Present).
Roger T. Staubach (55) Trustee Chairman of the Board and
6750 LBJ Freeway Chief Executive Officer of
Dallas, Texas 75240 The Staubach Company (a
commercial 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 Mileage
Funds (1995-Present).
Kneeland Youngblood, Trustee Physician (1982-Present);
M.D.(40) President, Youngblood
2305 Cedar Springs Enterprises, Inc. (a health
Road care investment and
Suite 401 management firm) (1983-
Dallas, Texas Present); Trustee, Teachers
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).
Nancy A. Eckl (34) Vice Vice President, AMR
President Investment Services, Inc.
(1990-Present).
Michael W. Fields (43) Vice Vice President, AMR
President Investment Services, Inc.
(1988-Present).
Barry Y. Greenberg Vice Director, Legal and
(34) President Compliance, AMR Investment
and Services, Inc. (1995-
Assistant Present); Branch Chief
Secretary (1992-1995), Securities and
Exchange Commission.
Rebecca L. Harris (30) Treasurer Director of Finance (1995-
Present), Controller (1991-
1995), AMR Investment
Services, Inc.
John B. Roberson (39) Vice Vice President, AMR
President Investment Services, Inc.
(1991-Present).
Thomas E. Jenkins, Jr. Assistant Senior Compliance Analyst,
(30) Secretary AMR Investment Services,
Inc. (1996-Present); Staff
Accountant (1994-1996) and
Compliance Examiner (1991-
1994), Securities and
Exchange Commission.
Adriana R. Posada (43) Assistant Senior Compliance Analyst
Secretary (1996-Present) and
Compliance Analyst (1993-
Present), AMR Investment
Services, Inc.; Special
Sales Representative,
American Airlines, Inc.
(1991-1993).
Clifford J. Alexander Secretary Partner, Kirkpatrick &
(53) Lockhart LLP (law firm)
Robert J. Zutz (44) Assistant Partner, Kirkpatrick &
Secretary 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)
<TABLE>
<CAPTION>
Pension or
Retirement
Benefits Estimated Total
Aggregate Accrued as Annual Compensation
Compensation Part of the Benefits From American
From Trust's Upon AAdvantage
Name of Trustee the Trust Expenses Retirement Funds Complex
<S> <C> <C> <C> <C>
William F. Quinn $0 $0 $0 $0
John S. Justin $373 $0 $0 $1,492
Stephen D. O'Sullivan $458 $0 $0 $1,832
Roger T. Staubach $2,832 $0 $0 $11,330
</TABLE>
(1) Messrs. Feld and Fortson and Dr. Youngblood did not serve as Trustees
during this period
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. 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 Fund.
Brokers Transaction Services, Inc. ("BTS") is the distributor
of the Fund'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.
REDEMPTIONS 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 held by
the 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 transactions costs.
INVESTMENT ADVISORY AGREEMENTS
The Manager and the investment adviser entered into separate
investment advisory agreements with the Fund and the Portfolio,
as described in the Prospectus. The Manager provides investment
advisory services pursuant to a Management Agreement dated April
3, 1987, and amended on July 25, 1997, as approved by the Board
and the AMR Trust Board. The Advisory Agreement with the
investment adviser was approved by the Board and the AMR Trust
Board and became effective as of November 1, 1995.
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 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.
In selecting brokers or dealers to execute particular
transactions, Manager and the investment adviser ("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 Portfolio 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 fees of
the investment advisers are not reduced by reason of receipt of
such brokerage and research services. However, with disclosure
to and pursuant to written guidelines approved by the Board, an
investment adviser of the 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 Portfolio anticipates that it will experience high
portfolio turnover rate. High portfolio turnover can increase
the Portfolio's transaction costs and generate additional capital
gains or losses.
TAX INFORMATION
Taxation of the Fund
To qualify as a regulated investment company ("RIC") under
the Internal Revenue Code of 1986, as amended ("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 ("Income Requirement");
- Derive less than 30% of its gross income each taxable year
from the sale or other disposition of securities that are
held for less than three months ("Short-Short Limitation");
- Diversify its investments in securities within certain
statutory limits; and
- Distribute annually to its shareholders at least 90% of its
investment company taxable income (generally, net investment
income plus net short-term capital gain) ("Distribution
Requirement").
Certain other funds of the Trust have received a ruling from
the Internal Revenue Service ("IRS") that each such fund, as an
investor in the AMR Trust, will be deemed to own a proportionate
share of that portfolio's assets and to be entitled to the income
of that portfolio attributable to that share for purposes of
determining whether the fund satisfies the first three
requirements described above to qualify as a RIC. Although that
ruling may not be relied upon as a precedent by the Fund, the
Manager believes that the reasoning and, hence, the conclusion
thereof apply to the Fund as well.
See the next section for a discussion of the tax consequences
to the Fund of distributions to it from the Portfolio and certain
investments by the Portfolio.
Taxation of the Portfolio
The other portfolios of the AMR Trust have received rulings
from the IRS to the effect that, among other things, for federal
income tax purposes, each such portfolio will be treated as a
separate entity and will be classified as a partnership that will
not be a "publicly traded partnership." Although these rulings
may not be relied on as precedent by the Portfolio, the Manager
believes that the reasoning thereof and, hence, their conclusion
apply to the Portfolio as well. As a result, the Portfolio is
not subject to federal income tax; instead, each investor in the
Portfolio, such as the Fund, is required to take into account in
determining its federal income tax liability its share of the
Portfolio's income, gains, losses, deductions and credits without
regard to whether it has received any cash distributions from the
Portfolio.
Because, as noted above, the Fund is deemed to own a
proportionate share of the Portfolio's assets and income for
purposes of determining whether the Fund satisfies the
requirements to qualify as a RIC, the Portfolio intends to
conduct its operations so that the Fund will be able to satisfy
all those requirements.
Distributions to the Fund from the 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. The Fund's basis for its interest
in the Portfolio generally will equal the amount of cash the Fund
invests in the Portfolio, increased by the Fund's share of the
Portfolio's net income and capital 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 Portfolio may acquire zero coupon or other securities
issued with original issue discount. As an investor in the
Portfolio that holds those securities, the 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 the 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 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 the 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
indirectly increase or decrease the Fund's investment company
taxable income and/or net capital gain (the excess of net long-
term capital gain over net short-term capital loss). In
addition, any such gains might be realized on the disposition of
securities held for less than three months. Because of the Short-
Short Limitation applicable to the Fund, any such gains would
reduce the Portfolio's ability to sell other securities held for
less than three months that it might wish to sell in the ordinary
course of its portfolio management.
The foregoing is only a summary of some of the important
federal income 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,
local and foreign taxes.
YIELD AND TOTAL RETURN QUOTATIONS
The advertised yield for each class of the Fund is 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 the 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)/cd}+1) -1}
where, with respect to a particular class of 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 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.
Each class of the Fund may also advertise a monthly
distribution rate. The distribution rate gives the return of the
class based solely on the dividend payout to that class if
someone was entitled to the dividends for an entire month. A
monthly distribution rate is calculated from the following
formula:
monthly distribution rate = A/P*(365/N)
where, with respect to a particular class of shares, "A" is the
dividend accrual per share during the month, "P" is the share
price at the end of the month and "N" is the number of days in
the month. The "monthly dividend rate" is a non-standardized
performance calculation and when used in an advertisement will be
accompanied by the appropriate standardized SEC calculations.
The advertised total return for a class of a Fund would be
calculated by equating an initial amount invested in a class of a
Fund to the ending redeemable value, according to the following
formula:
n
P(1 + T) = ERV
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.
Each class of the Fund may also use "aggregate" total return
figures for various periods which represent the cumulative change
in value of an investment in a class for the specific period.
Such total returns reflect changes in share prices of a class and
assume reinvestment of dividends and distributions.
In reports or other communications to shareholders or in
advertising material, each class of the 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 the 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.
The 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 Fund may compare the Fund 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.
From time to time, the Manager may use contests as a means of
promoting the American AAdvantage Funds. Prizes may include free
air travel and/or hotel accommodations. Listings for certain of
the Funds may be found in newspapers under the heading "Amer
AAdvant."
DESCRIPTION OF THE TRUST
The Trust is an entity of the type commonly known as a
"Massachusetts business trust." Under Massachusetts law,
shareholders of such a trust may, under certain circumstances, be
held personally liable for its obligations. However, the Trust's
Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of the Trust and
provides for indemnification and reimbursement of expenses out of
Trust property for any shareholder held personally liable for the
obligations of the Trust. The Declaration of Trust also provides
that the Trust may maintain appropriate insurance (for example,
fidelity bonding) for the protection of the Trust, its
shareholders, Trustees, officers, employees and agents to cover
possible tort and other liabilities. Thus, the risk of a
shareholder incurring financial loss due to shareholder liability
is limited to circumstances in which both inadequate insurance
existed and the Trust itself was unable to meet its obligations.
The Trust has not engaged in any other business.
The Trust was originally created to manage money for large
institutional investors, including pension and 401(k) plans for
American Airlines, Inc. The 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.
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.
Cash Equivalents-Cash equivalents include certificates of
deposit, bearer deposit notes, bankers' acceptances, government
obligations, commercial paper, short-term corporate debt
securities and repurchase agreements.
Certificates of Deposit-Certificates of deposit are issued
against funds deposited in an eligible bank (including its
domestic and foreign branches, subsidiaries and agencies), are
for a definite period of time, earn a specified rate of return
and are normally negotiable.
Commercial Paper-Commercial paper refers to promissory notes
representing an unsecured debt of a corporation or finance
company with a fixed maturity of no more than 270 days. A
variable amount master demand note (which is a type of commercial
paper) represents a direct borrowing arrangement involving
periodically fluctuating rates of interest under a letter
agreement between a commercial paper issuer and an institutional
lender pursuant to which the lender may determine to invest
varying amounts.
Debentures-Debentures are unsecured debt securities. The
holder of a debenture is protected only by the general
creditworthiness of the issuer.
Derivatives-Generally, a derivative is a financial
arrangement, the value of which is based on, or "derived" from, a
traditional security, asset or market index. Some "derivatives"
such as mortgage-related and other asset-backed securities are in
many respects like any other investment, although they may be
more volatile or less liquid than more traditional debt
securities. There are, in fact, many different types of
derivatives and many different ways to use them. There are a
range of risks associated with those uses.
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.
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
Investment Advisors Act of 1933 Act ("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 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 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
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 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 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.
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 economic stress. Obligations
rated BBB have below average protection factors with considerable
variability in risk during economic cycles, but are still
considered sufficient for prudent investment.
Thomson BankWatch ("BankWatch") long-term debt ratings apply
to specific issues of long-term debt and preferred stock. They
specifically assess the likelihood of an untimely repayment of
principal or interest over the term to maturity of the rated
instrument. BankWatch's four highest ratings for long-term
obligations are AAA, AA, A and BBB. Obligations rated AAA
indicate that the ability to repay principal and interest on a
timely basis is very high. Obligations rated AA indicate a
superior ability to repay principal and interest on a timely
basis, with limited incremental risk compared to issues rated in
the highest category. Obligations rated A indicate the ability
to repay principal and interest is strong. Issues rated A could
be more vulnerable to adverse developments (both internal and
external) than obligations with higher ratings. BBB is the
lowest investment grade category and indicates an acceptable
capacity to repay principal and interest. Issues rated BBB are,
however, more vulnerable to adverse developments (both internal
and external) than obligations with higher ratings.
Fitch Investors Service, Inc. ("Fitch") investment grade bond
ratings provide a guide to investors in determining the credit
risk associated with a particular security. The ratings
represent Fitch's assessment of the issuer's ability to meet the
obligations of a specific debt issue or class of debt in a timely
manner. Obligations rated AAA are considered to be investment
grade and of the highest credit quality. The obligor has an
exceptionally strong ability to pay interest and repay principal,
which is unlikely to be affected by reasonable foreseeable
events. Bonds rated AA are considered to be investment grade and
of very high credit quality. The obligor's ability to pay
interest and repay principal is very strong, although not quite
as strong as bonds rated AAA. Bonds rated A are considered to be
investment grade and of high credit quality. The obligor's
ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
Bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay
interest and repay principal is considered to be adequate.
Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds,
and therefore impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher
than for bonds with higher ratings.
IBCA's four highest long term obligation ratings are AAA, AA,
A and BBB. Obligations rated AAA are those for which there is
the lowest expectation of investment risk. Capacity for timely
repayment of principal and interest is substantial such that
adverse changes in business, economic or financial conditions are
unlikely to increase investment risk substantially. AA
obligations have a very low expectation of investment risk.
Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic, or financial
conditions may increase investment risk albeit not very
significantly. Obligations rated A have a low expectation of
investment risk. Capacity for timely repayment of principal and
interest is strong, although adverse changes in business,
economic, or financial conditions may lead to increased
investment risk. Obligations rated BBB have a low expectation of
investment risk. Capacity for timely repayment of principal and
interest is adequate, although adverse changes in business,
economic, or financial conditions are more likely to lead to
increased investment risk than for obligations in other
categories.
Standard & Poor's, Duff & Phelps and Fitch apply indicators,
such as "+","-," or no character, to indicate relative standing
within the major rating categories.
Ratings of Short-term Obligations-The rating P-1 is the
highest short-term rating assigned by Moody's. Among the factors
considered by Moody's in assigning ratings are the following:
(1) evaluations of the management of the issuer; (2) economic
evaluation of the issuer's industry or industries and an
appraisal of speculative-type risks which may be inherent in
certain areas; (3) evaluation of the issuer's products in
relation to competition and customer acceptance; (4) liquidity;
(5) amount and quality of long-term debt; (6) trend of earnings
over a period of ten years; (7) financial strength of a parent
company and the relationships which exist with the issuer; and
(8) recognition by the management of obligations which may be
present or may arise as a result of public interest questions and
preparations to meet such obligations.
Short-term obligations (or issuers thereof) rated A-1 by
Standard & Poor's have the following characteristics. Liquidity
ratios are adequate to meet cash requirements. The issuer has
access to at least two additional channels of borrowing. Basic
earnings and cash flow have an upward trend with allowance made
for unusual circumstances. Typically, the issuer's industry is
well established and the issuer has a strong position within the
industry. The reliability and quality of management are
unquestioned. Relative strength or weakness of the above factors
determines whether the issuer's short-term obligation is rated A-
1, A-2, or A-3.
IBCA's short-term rating of A-1 indicates obligations
supported by the highest capacity for timely repayment. Where
issues possess particularly strong credit features, a rating of A-
1+ is assigned. Obligations rated A-2 are supported by a good
capacity for timely repayment.
The distinguishing feature of Duff & Phelps Credit Ratings'
short-term rating is the refinement of the traditional 1
category. The majority of short-term debt issuers carry the
highest rating, yet quality differences exist within that tier.
Obligations rated D-1+ indicate the highest certainty of timely
payment. Safety is just below risk-free U.S. Treasury
obligations. Obligations rated D-1 have a very high certainty of
timely payment. Risk factors are minor. Obligations rated D-1-
have a high certainty of timely payment. Risk factors are very
small. Obligations rated D-2 have good certainty of timely
payment. Liquidity factors and company fundamentals are sound.
Although ongoing funding needs may enlarge total financing
requirements, access to capital markets is good. Risk factors
are small.
Thomson BankWatch short-term ratings are intended to assess
the likelihood of an untimely or incomplete payment of principal
or interest. Obligations rated TBW-1 indicate a very high
likelihood that principal and interest will be paid on a timely
basis. While the degree of safety regarding timely payment of
principal and interest is strong for an obligation rated TBW-2,
the relative degree of safety is not as high as for issues rated
TBW-1.
Fitch's short-term ratings apply to debt obligations that are
payable on demand or have original maturities of generally up to
three years, including commercial paper, certificates of deposit,
medium-term notes, and municipal and investment notes. A rating
of F-1+ indicates exceptionally strong credit quality. Issues
assigned this rating are regarded as having the strongest degree
of assurance for timely payment. Obligations rated F-1 have
very strong credit quality. Issues assigned this rating reflect
an assurance of timely payment only slightly less in degree than
issues rated F-1+. Issues assigned a rating of F-2 indicate good
credit quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety
is not as great as for issues assigned F-1+ and F-1 ratings.
Repurchase Agreements-A repurchase agreement, which provides
a means to earn income on funds for periods as short as
overnight, is an arrangement under which the purchaser (e.g., the
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.
The 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. The 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,
the 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 the 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 Portfolio may borrow funds
for temporary purposes by entering into reverse repurchase
agreements. Pursuant to such agreements, the 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 Portfolio intends 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 the 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
the Portfolio may decline below the price at which it is
obligated to repurchase the securities. Reverse repurchase
agreements are considered to be borrowings by an investment
company under the 1940 Act.
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.
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 the Federal Housing Administration,
Farmers Home Administration, Export-Import Bank of the United
States, Small Business Administration, GNMA, General Services
Administration, Central Bank for Cooperatives, Federal Home Loan
Banks, FHLMC, Federal Intermediate Credit Banks, Federal Land
Banks, Maritime Administration, Tennessee Valley Authority,
District of Columbia Armory Board, Inter-American Development
Bank, Asian-American Development Bank, Agency for International
Development, Student Loan Marketing Association and International
Bank of Reconstruction and Development.
Obligations of U.S. Government agencies and instrumentalities
may or may not be supported by the full faith and credit of the
United States. Some are backed by the right of the issuer to
borrow from the Treasury; others are supported by discretionary
authority of the U.S. Government to purchase the agencies'
obligations; while still others, such as the Student Loan
Marketing Association, are supported only by the credit of the
instrumentality. In the case of securities not backed by the
full faith and credit of the United States, the investor must
look principally to the agency issuing or guaranteeing the
obligation for ultimate repayment, and may not be able to assert
a claim against the United States itself in the event the agency
or instrumentality does not meet its commitment.
U.S. Treasury Obligations-U.S. Treasury obligations include
bills, notes and bonds issued by the U.S. Treasury and 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.
As used above, an obligation is "subject to a demand feature"
when the 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.
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
the Portfolio until settlement takes place. The 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.
TABLE OF CONTENTS
<TABLE>
<S> <C>
Investment Restrictions..........................................
Trustees and Officers of the Trust and the AMR Trust.............
Management, Administrative Services and Distribution Fees........
Redemptions in Kind..............................................
Investment Advisory Agreements...................................
Portfolio Securities Transactions................................
Tax Information..................................................
Yield and Total Return Quotations................................
Description of the Trust.........................................
Other Information................................................
</TABLE>
Supplemental Terms and Conditions to
the Management Agreement between
the American AAdvantage Funds
and
AMR Investment Services, Inc.
with respect to the
American AAdvantage Intermediate Bond Fund
The attached amended Schedule A is hereby incorporated into
the Management Agreement dated April 3, 1987, as supplemented on
November 1, 1995 and December 17, 1996, (the "Agreement") between
the American AAdvantage Funds and AMR Investment Services, Inc.
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.
Dated: July 25, 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
Amended
Schedule A
to the
Management Agreement
between
AMR Investment Services, Inc.
and the
American AAdvantage Funds
I. Base Fee
As compensation pursuant to section 6 of the Management
Agreement between AMR Investment Services, Inc. (the "Manager")
and the American AAdvantage Funds (the "AAdvantage Trust"), the
AAdvantage Trust shall pay to the Manager a fee, computed daily
and paid monthly, at the following rate:
(1) 0.10% of the net assets of the Balanced Portfolio,
the Growth and Income Portfolio and the International
Equity Portfolio plus all fees payable by the Manager
with respect to such Portfolios pursuant to any
Investment Advisory Agreement entered into pursuant to
Paragraph 2(d) of said Management Agreement; and
(2) 0.15% of the net assets of the Money Market
Portfolio, the Municipal Money Market Portfolio and the
U.S. Government Money Market Portfolio; and
(3) 0.25% of the net assets of the Intermediate Bond
Portfolio and the Limited-Term Income Portfolio.
II. Securities Lending Duties and Fees
A. Manager Duties
The Manager agrees to provide the following services in
connection with the investment of cash collateral received
from the securities lending activities of each Portfolio of
the AAdvantage Trust: (a) assist the securities lending
agent (the "Agent") in determining which specific securities
are available for loan, (b) monitor the Agent to ensure that
securities loans are effected in accordance with its
instructions and within the procedures adopted by the Board
of Trustees of the AAdvantage Trust, (c) prepare appropriate
periodic reports for, and seek appropriate approvals from,
the Board of Trustees of the AAdvantage Trust with respect
to securities lending activities, (d) respond to Agent
inquiries concerning Agent's compliance with applicable
guidelines, and (e) perform such other duties as necessary.
B. Securities Lending Fees
As compensation for services provided by the Manager in
connection with securities lending activities of each
Portfolio of the AAdvantage Trust, the lending Portfolio
shall pay to the Manager, with respect to cash collateral
posted by borrowers, a fee equal to 25% of the net monthly
interest income (the gross interest income earned by the
investment of cash collateral, less the amount paid to
borrowers as well as related expenses) from such activities
and, with respect to loan fees paid by borrowers when a
borrower posts collateral other than cash, a fee equal to
25% of such loan fees.
DATED: July 25, 1997
Supplemental Terms and Conditions to
the Administrative Services Agreement between the
American AAdvantage Funds
and
AMR Investment Services, Inc.
with respect to the
American AAdvantage Intermediate Bond 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 Intermediate Bond 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 to (1) 0.05% of the net assets of
the AMR Class 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, 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. To
the extent that a Fund invests all of its investable
assets (i.e., securities and cash) in another
registered investment company, however, 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, 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.
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: July 25, 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
