<PAGE> 1
As filed with the Securities and Exchange Commission on December 15, 1998
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. 26 [X]
----
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 27
----
(Check appropriate box or boxes.)
AMERICAN AADVANTAGE FUNDS
(Exact Name of Registrant as Specified in Charter)
4333 Amon Carter Boulevard
Fort Worth, Texas 76155
(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, including Area Code: (817) 967-3509
WILLIAM F. QUINN, PRESIDENT
4333 Amon Carter Boulevard
Fort Worth, Texas 76155
(Name and Address of Agent for Service)
Copy to:
ROBERT J. ZUTZ, ESQ.
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, NW
Washington, DC 20036
Approximate Date of Proposed Public Offering March 1, 1999
------------------------------
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[X] on March 1, 1999 pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485.
Registrant has adopted a master-feeder operating structure for each of its
series. This Post-Effective Amendment includes signature pages for the AMR
Investment Services Trust and the Equity 500 Index Portfolio, the master trusts,
and the American AAdvantage Funds, the feeder trust.
<PAGE> 2
AMERICAN AADVANTAGE FUNDS
CONTENTS OF REGISTRATION STATEMENT
This registration statement is comprised of the following:
Cover Sheet
Contents of Registration Statement
Prospectus for the Institutional Class consisting of the
following American AAdvantage Funds: Balanced Fund, Growth and
Income Fund, International Equity Fund, Small Cap Value Fund,
S&P 500 Index Fund, Intermediate Bond Fund, Short-Term Bond
Fund, Money Market Fund, Municipal Money Market Fund and U.S.
Government Money Market Fund
Prospectus for the PlanAhead Class consisting of the following
American AAdvantage Funds: Balanced Fund, Growth and Income
Fund, International Equity Fund, Small Cap Value Fund, S&P 500
Index Fund, Intermediate Bond Fund, Short-Term Bond Fund, Money
Market Fund, Municipal Money Market Fund and U.S. Government
Money Market Fund
Prospectus for the AMR Class consisting of the following
American AAdvantage Funds: Balanced Fund, Growth and Income
Fund, International Equity Fund, Small Cap Value Fund,
Intermediate Bond Fund, Short-Term Bond Fund and S&P 500 Index
Fund - Institutional Class
Prospectus for the Platinum Class of the American AAdvantage
Money Market Fund, American AAdvantage Municipal Money Market
Fund, American AAdvantage U.S. Government Money Market Fund and
American AAdvantage Money Market Mileage Fund
Statement of Additional Information for the AMR Class,
Institutional Class and PlanAhead Class of the following
American AAdvantage Funds: Balanced Fund, Growth and Income
Fund, International Equity Fund, Small Cap Value Fund, S&P 500
Index Fund, Intermediate Bond Fund, Short-Term Bond Fund, Money
Market Fund, Municipal Money Market Fund and U.S. Government
Money Market Fund
Statement of Additional Information for the Platinum Class of
the American AAdvantage Money Market Fund, American AAdvantage
Municipal Money Market Fund, American AAdvantage U.S. Government
Money Market Fund and American AAdvantage Money Market Mileage
Fund
Part C
Signature Pages
Exhibits
The purposes of this filing are to add the PlanAhead Class to the American
AAdvantage Small Cap Value Fund and to update the prospectuses and statements of
additional information of the Registrant.
<PAGE> 3
[AMERICAN AADVANTAGE FUNDS LOGO]
- Institutional Class -
PROSPECTUS
March 1, 1999
Equity Funds
Balanced
Growth and Income
International Equity
Small Cap Value
S&P 500 Index
Bond Funds
Intermediate Bond
Short-Term Bond
Money Market Funds
Money Market
Municipal Money Market
U.S. Government Money Market
Managed by AMR Investment Services, Inc.
THE SECURITIES AND EXCHANGE COMMISSION DOES NOT GUARANTEE THAT THE INFORMATION
IN THIS PROSPECTUS OR ANY OTHER MUTUAL FUND'S PROSPECTUS IS ACCURATE OR
COMPLETE, NOR DOES IT JUDGE THE INVESTMENT MERIT OF THESE FUNDS. TO STATE
OTHERWISE IS A CRIMINAL OFFENSE.
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ABOUT THE FUNDS
Overview..............................................................X
Balanced Fund.........................................................X
Growth and Income Fund................................................X
International Equity Fund.............................................X
Small Cap Value Fund .................................................XX
S&P 500 Index Fund....................................................XX
Intermediate Bond Fund................................................XX
Short-Term Bond Fund..................................................XX
Money Market Fund.....................................................XX
Municipal Money Market Fund...........................................XX
U.S. Government Money Market Fund.....................................XX
The Manager...........................................................XX
The Investment Advisers...............................................XX
Valuation of Shares...................................................XX
ABOUT YOUR INVESTMENT
Purchase and Redemption of Shares.....................................XX
Distributions and Taxes...............................................XX
ADDITIONAL INFORMATION
Distribution of Fund Shares...........................................XX
Master-Feeder Structure...............................................XX
Year 2000.............................................................XX
Financial Highlights..................................................XX
Additional Information................................................XX
ABOUT THE FUNDS
</TABLE>
OVERVIEW
The American AAdvantage Funds (the "Funds") are managed by AMR
Investment Services, Inc. (the "Manager"), a wholly owned subsidiary of AMR
Corporation.
The Funds operate under a master-feeder structure. This means that each
Fund, except for the S&P 500 Index Fund, seeks its investment objective by
investing all of its investable assets in a corresponding Portfolio of the AMR
Investment Services Trust ("AMR Trust") that has a similar name and identical
investment objective. The S&P 500 Index Fund invests all of its investable
assets in the Equity 500 Index Portfolio, which is a separate investment company
managed by Bankers Trust Company ("BT") with an identical investment objective.
Throughout this Prospectus, statements regarding investments by a Fund refer to
investments made by its corresponding Portfolio. For easier reading, the term
"Fund" is used throughout the Prospectus to refer to either a Fund or its
Portfolio, unless stated otherwise. See "Master-Feeder Structure".
2
<PAGE> 5
AMERICAN AADVANTAGE BALANCED FUND
INVESTMENT OBJECTIVE
Income and capital appreciation.
PRINCIPAL STRATEGIES
This Fund typically invests between 50% and 65% of its assets in equity
securities and between 35% and 50% of its assets in debt securities.
The Fund's equity investments may include common stocks, preferred
stocks, securities convertible into common stocks, and U.S. dollar-denominated
American Depositary Receipts (collectively referred to as "stocks").
The Fund's investment advisers select stocks which, in their opinion,
have most or all of the following characteristics:
o above-average earnings growth potential,
o selling at prices below their perceived economic value,
o low price to earnings ratio,
o low price to book value ratio, and
o generate above-average dividend yields.
Each of the Fund's investment advisers determines the growth prospects
of companies based upon a combination of internal and external research using
fundamental analysis and considering changing economic trends. The decision to
sell a stock is typically based on the belief that the company is no longer
considered undervalued or shows deteriorating fundamentals, or that better
investment opportunities exist in other stocks. The Manager believes that this
strategy will help the Fund outperform other investment styles over the longer
term while minimizing volatility and downside risk.
The Fund's investment in debt securities may include obligations of the
U.S. Government, its agencies and instrumentalities; corporate debt securities,
such as notes and bonds; mortgage-backed securities; asset-backed securities;
master-demand notes; Yankeedollar and Eurodollar bank certificates of deposit,
time deposits, bankers' acceptances, commercial paper and other notes; and other
debt securities. The Fund will only buy debt securities that are investment
grade at the time of purchase. Investment grade securities include securities
issued or guaranteed by the U.S. Government, its agencies and instrumentalities,
as well as securities rated in one of the four highest rating categories by all
nationally recognized statistical rating organizations rating that security
(such as Standard & Poor's or Moody's Investors Service, Inc.). Obligations
rated in the fourth highest rating category are limited to 25% of the Fund's
debt allocation. The Fund, at the discretion of the investment advisers, may
retain a security that has been downgraded below the initial investment
criteria.
In determining which debt securities to buy and sell, the investment
advisers generally use a top-down fixed income review process, as follows:
o Develop overall investment strategy based on a comprehensive
review of macroeconomic conditions and an analysis of leading
economic indicators.
o Set portfolio maturity structure based on U.S. Treasury yield
curve and credit spread analysis.
o Perform sector analysis to determine relative value.
o Select specific debt securities.
o Review and monitor portfolio composition for changes in credit,
risk-return profile and comparisons with benchmarks.
One of the investment advisers to the Fund uses a bottom-up fixed
income strategy in determining which securities to buy and sell, as follows:
o Select individual securities based upon yield to maturity
advantage versus a comparable U.S. Treasury security.
o Evaluate credit quality of the security.
o Perform quantitative analysis of yield premium using empirical
effective duration measures.
Under adverse market conditions, the Fund may, for temporary defensive
purposes, invest up to 100% of its assets in cash or cash equivalents, including
investment grade short-term obligations. To the extent that the Fund invokes
this strategy, its ability to achieve its investment objective may be affected
adversely.
INVESTMENT ADVISERS
The Manager allocates the assets of the Fund among the following
investment advisers:
Barrow, Hanley, Mewhinney & Strauss, Inc.
Brandywine Asset Management, Inc.
GSB Investment Management, Inc.
Hotchkis and Wiley
Independence Investment Associates, Inc.
3
<PAGE> 6
RISK FACTORS
o Market Risk (Stocks)
Since this Fund invests a substantial portion of its assets in
equity securities, it is subject to stock market risk. Market
risk involves the possibility that the value of the Fund's
investments in stocks will decline due to drops in the stock
market. In general, the value of the Fund will move in the same
direction as the overall stock market, which will vary from day
to day in response to the activities of individual companies and
general market and economic conditions.
o Interest Rate Risk (Bonds)
The Fund is subject to the risk that the market value of the
bonds it holds will decline due to rising interest rates. When
interest rates rise, the price of most bonds go down. When
interest rates go down, the bond prices go up. The price of a
bond is also affected by its maturity. Bonds with longer
maturities generally have greater sensitivity to changes in
interest rates.
o Credit Risk (Bonds)
The Fund is subject to the risk that an issuer of a bond will
fail to make timely payment of interest or principal. A decline
in an issuer's credit rating can cause its price to go down. This
risk is somewhat minimized by the Fund's policy of only investing
in bonds that are considered investment grade at the time of
purchase.
o Prepayment Risk (Bonds)
The Fund's investments in asset-backed and mortgage-backed
securities are subject to the risk that the principal amount of
the underlying collateral may be repaid prior to the bond's
maturity date. If this occurs, no additional interest will be
paid on the investment.
o Additional Risks
An investment in the Fund is not a deposit of a bank and is not
insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency. The value of an
investment in the Fund will fluctuate up and down, which means an
investor could lose money.
HISTORICAL PERFORMANCE
The bar chart below provides an indication of risk by showing how the
Fund's performance has varied from year to year. The table shows how the Fund's
performance compares to two broad-based market indices and the Lipper Balanced
Index, a composite of XX funds as of December 31, 1998, with the same investment
objective as the Fund. Past performance is not necessarily indicative of how the
Fund will perform in the future.
TOTAL RETURN FOR THE CALENDAR YEAR ENDED 12/31 OF EACH YEAR
[GRAPH]
Highest Quarterly Return from 1/1/89 through 12/31/98 X Quarter 19XX X.XX%
Lowest Quarterly Return from 1/1/89 through 12/31/98 X Quarter 19XX X.XX%
<TABLE>
<CAPTION>
Average Annual Total Return
==========================================
as of 12/31/98
------------------------------------------
1 Year 5 Years 10 Years
------ ------- --------
<S> <C> <C> <C>
Balanced Fund X.XX% X.XX% X.XX%
S&P 500 Index* X.XX% X.XX% X.XX%
Lehman Bros. Intermediate Gov./Corp. Index** X.XX% X.XX% X.XX%
Lipper Balanced Index X.XX% X.XX% X.XX%
</TABLE>
* The S&P 500 is an unmanaged index of common stocks publicly traded in the
United States.
** The Lehman Brothers Intermediate Gov./Corp. Index is a market value weighted
performance benchmark for government and corporate fixed-rate debt issues
with maturities between one and ten years.
4
<PAGE> 7
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy
and hold shares of the Balanced Fund.(1)
Annual Fund Operating Expenses (expenses that are deducted from Fund
assets)
<TABLE>
<S> <C>
Management Fees......................................0.33%
Distribution (12b-1) Fees............................0.00
Other Expenses.......................................0.27
----
Total Annual Fund Operating Expenses.................0.60%
====
</TABLE>
(1) The expense table and the Example below reflect the expenses of both
the Fund and its corresponding Portfolio.
EXAMPLE
This Example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The Example assumes
that you invest $10,000 in the Fund for the time periods indicated and then
redeem all of your shares at the end of those periods. The Example also assumes
that your investment has a 5% return each year and that the Fund's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$ 61 $ 192 $ 335 $ 750
</TABLE>
5
<PAGE> 8
AMERICAN AADVANTAGE GROWTH AND INCOME FUND
INVESTMENT OBJECTIVE
Long-term capital appreciation and current income.
PRINCIPAL STRATEGIES
Ordinarily at least 80% of the total assets of this Fund are invested
in U.S. equity securities. The Fund's investments may include common stocks,
preferred stocks, securities convertible into common stocks, and U.S.
dollar-denominated American Depositary Receipts (collectively referred to as
"stocks").
The Fund's investment advisers select stocks which, in their opinion,
have most or all of the following characteristics:
o above-average earnings growth potential,
o selling at prices below their perceived economic value,
o low price to earnings ratio,
o low price to book value ratio, and
o generate above-average dividend yields.
Each of the Fund's investment advisers determines the growth prospects
of companies based upon a combination of internal and external research using
fundamental analysis and considering changing economic trends. The decision to
sell a stock is typically based on the belief that the company is no longer
considered undervalued or shows deteriorating fundamentals, or that better
investment opportunities exist in other stocks. The Manager believes that this
strategy will help the Fund outperform other investment styles over the longer
term while minimizing volatility and downside risk.
Under adverse market conditions, the Fund may, for temporary defensive
purposes, invest up to 100% of its assets in cash or cash equivalents, including
investment grade short-term obligations. To the extent that the Fund invokes
this strategy, its ability to achieve its investment objective may be affected
adversely.
INVESTMENT ADVISERS
The Manager allocates the assets of the Fund among the following
investment advisers:
Barrow, Hanley, Mewhinney & Strauss, Inc.
Brandywine Asset Management, Inc.
GSB Investment Management, Inc.
Hotchkis and Wiley
Independence Investment Associates, Inc.
RISK FACTORS
o Market Risk
Since this Fund invests most of its assets in equity securities,
it is subject to stock market risk. Market risk involves the
possibility that the value of the Fund's investments in stocks
will decline due to drops in the stock market. In general, the
value of the Fund will move in the same direction as the overall
stock market, which will vary from day to day in response to the
activities of individual companies and general market and
economic conditions.
o Additional Risks
An investment in the Fund is not a deposit of a bank and is not
insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency. The value of an
investment in the Fund will fluctuate up and down, which means an
investor could lose money.
6
<PAGE> 9
HISTORICAL PERFORMANCE
The bar chart below provides an indication of risk by showing how the
Fund's performance has varied from year to year. The table shows how the Fund's
performance compares to the S&P 500, a widely recognized unmanaged index of
common stocks publicly traded in the United States, and the Lipper Growth and
Income Index, a composite of XX funds as of December 31, 1998, with the same
investment objective as the Fund. Past performance is not necessarily indicative
of how the Fund will perform in the future.
TOTAL RETURN FOR THE CALENDAR YEAR ENDED 12/31 OF EACH YEAR
[GRAPH]
Highest Quarterly Return from 1/1/89 through 12/31/98 X Quarter 19XX X.XX%
Lowest Quarterly Return from 1/1/89 through 12/31/98 X Quarter 19XX X.XX%
<TABLE>
<CAPTION>
Average Annual Total Return
===========================================
as of 12/31/98
-------------------------------------------
1 Year 5 Years 10 Years
------ ------- --------
<S> <C> <C> <C>
Growth and Income Fund X.XX% X.XX% X.XX%
S&P 500 Index X.XX% X.XX% X.XX%
Lipper Growth and Income Index X.XX% X.XX% X.XX%
</TABLE>
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy
and hold shares of the Growth and Income Fund.(1)
Annual Fund Operating Expenses (expenses that are deducted from Fund
assets)
<TABLE>
<S> <C>
Management Fees......................................0.33%
Distribution (12b-1) Fees............................0.00
Other Expenses.......................................0.28
----
Total Annual Fund Operating Expenses.................0.61%
====
</TABLE>
(1) The expense table and the Example below reflect the expenses of both
the Fund and its corresponding Portfolio.
EXAMPLE
This Example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The Example assumes
that you invest $10,000 in the Fund for the time periods indicated and then
redeem all of your shares at the end of those periods. The Example also assumes
that your investment has a 5% return each year and that the Fund's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$ 62 $ 195 $ 340 $ 762
</TABLE>
7
<PAGE> 10
AMERICAN AADVANTAGE INTERNATIONAL EQUITY FUND
INVESTMENT OBJECTIVE
Long-term capital appreciation.
PRINCIPAL STRATEGIES
Under normal circumstances, at least 80% of the Fund's total assets are
invested in common stocks and securities convertible into common stocks
(collectively, "stocks") of issuers based in at least three different countries
located outside the United States.
The current countries in which the Fund may invest are:
<TABLE>
<S> <C> <C> <C> <C> <C>
Australia Denmark Hong Kong Mexico Portugal Sweden
Austria Finland Ireland Netherlands Singapore Switzerland
Belgium France Italy New Zealand South Korea United Kingdom
Canada Germany Japan Norway Spain
</TABLE>
The investment advisers select stocks which, in their opinion, have
most or all of the following characteristics:
o above-average earnings growth potential,
o selling at prices below their perceived economic value,
o low price to earnings ratio,
o low price to book value ratio, and
o generate above-average dividend yields.
The investment advisers will also consider potential changes in
currency exchange rates when choosing stocks. Each of the investment advisers
determines the growth prospects of companies based upon a combination of
internal and external research using fundamental analysis and considering
changing economic trends. The decision to sell a stock is typically based on the
belief that the company is no longer considered undervalued or shows
deteriorating fundamentals, or that better investment opportunities exist in
other stocks. The Manager believes that this strategy will help the Fund
outperform other investment styles over the longer term while minimizing
volatility and downside risk. The Fund may trade forward foreign currency
contracts to hedge currency fluctuations of underlying stock positions when it
is believed that a foreign currency may suffer a decline against the U.S.
dollar.
Under adverse market conditions, the Fund may, for temporary defensive
purposes, invest up to 100% of its assets in cash or cash equivalents, including
investment grade short-term obligations. To the extent that the Fund invokes
this strategy, its ability to achieve its investment objective may be affected
adversely.
INVESTMENT ADVISERS
The Manager allocates the assets of the Fund among the following
investment advisers:
Hotchkis and Wiley
Morgan Stanley Asset Management Inc.
Templeton Investment Counsel, Inc.
RISK FACTORS
o Market Risk
Since this Fund invests most of its assets in equity securities,
it is subject to stock market risk. Market risk involves the
possibility that the value of the Fund's investments in stocks of
a particular country will decline due to drops in that country's
stock market. In general, the value of the Fund will move in the
same direction as the international stock markets it invests in,
which will vary from day to day in response to the activities of
individual companies and general market and economic conditions
of that country.
o Foreign Investing
Overseas investing carries potential risks not associated with
domestic investments. Such risks include, but are not limited to:
(1) currency exchange rate fluctuations, (2) political and
financial instability, (3) less liquidity and greater volatility
of foreign investments, (4) lack of uniform accounting, auditing
and financial reporting standards, (5) less government regulation
and supervision of foreign stock exchanges, brokers and listed
companies, (6) increased price volatility, and (7) delays in
transaction settlement in some foreign markets.
o Additional Risks
An investment in the Fund is not a deposit of a bank and is not
insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency. The value of an
investment in the Fund will fluctuate up and down, which means an
investor could lose money.
8
<PAGE> 11
HISTORICAL PERFORMANCE
The bar chart below provides an indication of risk by showing how the
Fund's performance has varied from year to year. The table shows how the Fund's
performance compares to the Morgan Stanley Eastern AustralAsia Far East (EAFE)
Index, a widely recognized unmanaged index of international stock investment
performance and the Lipper International Index, a composite of X funds as of
December 31, 1998, with the same investment objective as the Fund. Past
performance is not necessarily indicative of how the Fund will perform in the
future.
TOTAL RETURN FOR THE CALENDAR YEAR ENDED 12/31 OF EACH YEAR
[GRAPH]
Highest Quarterly Return from 1/1/92 through 12/31/98 X Quarter 19XX X.XX%
Lowest Quarterly Return from 1/1/92 through 12/31/98 X Quarter 19XX X.XX%
<TABLE>
<CAPTION>
Average Annual Total Return
==============================================
as of 12/31/98
----------------------------------------------
Since Inception
1 Year 5 Years (8/7/91)
------ ------- --------
<S> <C> <C> <C>
International Equity Fund X.XX% X.XX% X.XX%
EAFE Index X.XX% X.XX% X.XX%
Lipper International Index X.XX% X.XX% X.XX%
</TABLE>
FEES AND EXPENSES
This table describes the fees and expenses that you pay if you buy and
hold shares of the International Equity Fund.(1)
Annual Fund Operating Expenses (expenses that are deducted from Fund
assets)
<TABLE>
<S> <C>
Management Fees......................................0.48%
Distribution (12b-1) Fees............................0.00
Other Expenses.......................................0.35
----
Total Annual Fund Operating Expenses.................0.83%
====
</TABLE>
(1) The expense table and the Example below reflect the expenses of
both the Fund and its corresponding Portfolio.
EXAMPLE
This Example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The Example assumes
that you invest $10,000 in the Fund for the time periods indicated and then
redeem all of your shares at the end of those periods. The Example also assumes
that your investment has a 5% return each year and that the Fund's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$ 85 $ 265 $ 460 $ 1,025
</TABLE>
9
<PAGE> 12
AMERICAN AADVANTAGE SMALL CAP VALUE FUND
INVESTMENT OBJECTIVE
Long-term capital appreciation and current income.
PRINCIPAL STRATEGIES
Ordinarily at least 80% of the total assets of the Fund are invested in
equity securities of U.S. companies with market capitalizations of $1 billion or
less at the time of investment. The Fund's investments may include common
stocks, preferred stocks, securities convertible into common stocks, and U.S.
dollar-denominated American Depositary Receipts (collectively, "stocks").
The investment advisers select stocks which, in their opinion, have
most or all of the following characteristics:
o above-average earnings growth potential,
o selling at prices below their perceived economic value,
o low price to earnings ratio,
o low price to book value ratio, and
o generate above-average dividend yields.
Each of the investment advisers determines the growth prospects of
companies based upon a combination of internal and external research using
fundamental analysis and considering changing economic trends. The decision to
sell a stock is typically based on the belief that the company is no longer
considered undervalued or shows deteriorating fundamentals, or that better
investment opportunities exist in other stocks. The Manager believes that this
strategy will help the Fund outperform other investment styles over the longer
term while minimizing volatility and downside risk.
Under adverse market conditions, the Fund may, for temporary defensive
purposes, invest up to 100% of its assets in cash or cash equivalents, including
investment grade short-term obligations. To the extent that the Fund invokes
this strategy, its ability to achieve its investment objective may be affected
adversely.
INVESTMENT ADVISERS
The Manager allocates the assets of the Fund among the following
investment advisers:
Brandywine Asset Management, Inc.
Hotchkis and Wiley
RISK FACTORS
o Market Risk
Since this Fund invests most of its assets in equity securities,
it is subject to stock market risk. Market risk involves the
possibility that the value of the Fund's investments in stocks
will decline due to drops in the stock market. In general, the
value of the Fund will move in the same direction as the overall
stock market, which will vary from day to day in response to the
activities of individual companies and general market and
economic conditions.
o Small Capitalization Companies
Investing in the securities of small capitalization companies
involves greater risk and the possibility of greater price
volatility than investing in larger capitalization and more
established companies, since smaller companies may have limited
operating history, product lines, and financial resources, and
the securities of these companies may lack sufficient market
liquidity.
o Additional Risks
An investment in the Fund is not a deposit of a bank and is not
insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency. The value of an
investment in the Fund will fluctuate up and down, which means an
investor could lose money.
10
<PAGE> 13
HISTORICAL PERFORMANCE
The Small Cap Value Fund began operations on January 1, 1999, and
therefore, long-term historical performance is not available. However,
Brandywine and Hotchkis each have experience managing other accounts with
investment objectives, policies and strategies similar to those of the Fund.
Unlike the Fund, all of the accounts managed by Brandywine include an allocation
to micro-cap companies, which are defined as companies with total market
capitalization of less than $250 million. Thus, the performance below consists
of only the Hotchkis and Wiley Small Cap Fund ("Hotchkis Fund"), an investment
company which has investment objectives, policies and strategies substantially
similar to those of the Fund. The data shown below reflects the total return for
the periods shown, reduced by the actual expenses of the Hotchkis Fund. Applying
the Fund's expense structure to the Hotchkis Fund would have lowered the
performance results shown. THIS PERFORMANCE OF THE HOTCHKIS FUND IS NOT THE
PERFORMANCE OF THE FUND. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF HOW
THE FUND WILL PERFORM IN THE FUTURE.
TOTAL RETURN FOR THE CALENDAR YEAR ENDED 12/31 OF EACH YEAR
[GRAPH]
Highest Quarterly Return from 1/1/88 through 12/31/98 X Quarter 19XX X.XX%
Lowest Quarterly Return from 1/1/88 through 12/31/98 X Quarter 19XX X.XX%
Year-to-Date Return through 9/30/98 X.XX%
<TABLE>
<CAPTION>
Average Annual Total Return
==========================================
as of 12/31/98
------------------------------------------
1 Year 5 Years 10 Years
------ ------- --------
<S> <C> <C> <C>
Hotchkis Fund X.XX% X.XX% X.XX%
Russell 2000 Index* X.XX% X.XX% X.XX%
</TABLE>
* The Russell 2000 Index is an unmanaged index of 2,000 small capitalization
stocks.
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy
and hold shares of the Small Cap Value Fund.(1)
Annual Fund Operating Expenses (expenses that are deducted from Fund
assets)
<TABLE>
<S> <C>
Management Fees...................................... X.X%
Distribution (12b-1) Fees............................0.00
Other Expenses....................................... X.X(2)
----
Total Annual Fund Operating Expenses................. X.X%
====
Fee Waiver and/or Expense Reimbursement.............. X.X%(3)
Net Expenses.........................................0.99%
</TABLE>
(1) The expense table and the Example below reflect the expenses of
both the Fund and its corresponding Portfolio.
(2) Other Expenses are based on estimates for the current fiscal year.
(3) The Manager has contractually agreed to waive a portion of its fee
and to reimburse the Fund for other expenses through October 31,
1999 to the extent that Total Annual Fund Operating Expenses exceed
0.99%.
EXAMPLE
This Example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The Example assumes
that you invest $10,000 in the Fund for the time periods indicated and then
redeem all of your shares at the end of those periods. The Example also assumes
that your investment has a 5% return each year and that the Fund's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
1 YEAR 3 YEARS
------ -------
$ 101 $ XXX
11
<PAGE> 14
AMERICAN AADVANTAGE S&P 500 INDEX FUND(1)
INVESTMENT OBJECTIVE
To track, as closely as possible, (before expenses) the performance of
the Standard & Poor's 500 Composite Stock Price Index (S&P 500 or Index), which
emphasizes stocks of large U.S. companies.
PRINCIPAL STRATEGIES
The Fund invests for growth, not income; any dividend and interest
income is incidental to the pursuit of its objective. While the Fund's
investment adviser gives priority to capital growth, it cannot offer any
assurance of achieving this objective. The Fund's investment objective is not a
fundamental policy. A shareholder vote is not required to change it, but
shareholders must be notified before it is changed.
An index is a group of securities whose overall performance is used as
a standard to measure investment performance. This Fund is not actively managed
by investment advisers who buy and sell securities based on research and
analysis. Instead, this Fund is passively managed in that it tries to match, as
closely as possible, the performance of a target index by holding either all, or
a representative sample, of the securities in the index.
Under normal conditions, the Fund will invest at least 80% of its
assets in common stocks of companies included in the S&P 500, selected on the
basis of computer generated statistical data, that are deemed representative of
the industry diversification of the S&P 500. The Fund holds each stock found in
the S&P 500 Index in roughly the same proportions as represented by the S&P 500
Index itself. For example, if 5% of the S&P 500 Index were made up of the stock
of a particular company, the Fund would invest 5% of its assets in that company.
To track the S&P 500 Index as closely as possible, the Fund attempts to remain
fully invested in stocks.
Because it would be very expensive to buy and sell all of the stocks in
the S&P 500 Index, the Fund uses a "sampling" technique. Using computer models,
the Fund selects stocks that will track the S&P 500 Index, as closely as
possible, in terms of industry, size, and other characteristics.
Under normal conditions, the investment adviser will attempt to invest
as much of the Fund's assets as is practical in common stocks included in the
S&P 500. However, the Fund may maintain up to 20% of its assets in short-term
debt securities and money market instruments hedged with stock index futures and
options. The Fund will not use these derivatives for speculative purposes or as
leveraged investments that magnify the gains or losses of an investment. The
reasons for which the Fund will invest in derivatives are:
o to keep cash on hand to meet shareholder redemptions or other
needs while simulating full investments in stocks, and
o to reduce the Fund's transaction cost or add value when these
instruments are favorably priced.
INVESTMENT ADVISER
Bankers Trust Company
RISK FACTORS
o Market Risk
As with any investment in common stocks, an investment in the
Fund could lose money, or the Fund's performance could trail that
of other investments. For example:
o Stock prices overall could decline over short or even
extended periods. Stock markets tend to move in cycles,
with periods of rising stock prices and periods of falling
stock prices.
o Returns on stocks of large U.S. companies could trail the
returns from the overall stock market. Each type of stock
tends to go through cycles of outperformance and
underperformance in comparison to the overall stock market.
These periods in the past have lasted for several years.
In addition, unlike an index itself, an index fund has operating
expenses. Therefore, while the Fund is expected to track the S&P
500 Index as closely as possible, it will not be able to match
the performance of the index exactly.
o Derivatives
The use of these instruments to pursue the S&P 500 Index returns
requires special skills, knowledge and investment techniques that
differ from those required for normal portfolio management. Gains
or losses from positions in a derivative instrument may be much
greater than the derivative's original cost.
- --------
(1) S&P is a trademark of The McGraw-Hill Companies, Inc. and has been licensed
for use. "Standard and Poor's(R)," "S&P(R)," "Standard & Poor's 500," "S&P
500(R)" and "500" are all trademarks of The McGraw-Hill Companies, Inc. and have
been licensed for use by Bankers Trust Company. The S&P 500 Index Fund is not
sponsored, sold or promoted by Standard & Poor's, and Standard & Poor's makes no
representation regarding the advisability of investing in this Fund.
12
<PAGE> 15
o Futures and Options
Although not one of its principal investment strategies, the Fund
may invest in futures contracts and options on futures contracts.
These investments, when made, are for hedging purposes. If the
Fund invests in futures contracts and options on futures
contracts for non-hedging purposes, the margin and premiums
required to make those investments will not exceed 5% of the
Fund's net asset value after taking into account unrealized
profits and losses on the contracts. Futures contracts and
options on futures contracts used for non-hedging purposes
involve greater risks than stock investments.
o Additional Risks
An investment in the Fund is not a deposit of Bankers Trust
Company or any other bank and is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government
agency. The value of an investment in the Fund will fluctuate up
and down, which means an investor could lose money.
HISTORICAL PERFORMANCE
The bar chart below provides an indication of risk by showing how the
Fund's performance has varied from year to year. The table shows how the Fund's
performance compares to the S&P 500 Index, a widely recognized unmanaged index
of common stocks publicly traded in the United States as of December 31, 1998.
The Fund began offering its shares on January 1, 1997. Prior to March 1, 1998,
the Fund's shares were offered as AMR Class shares. On March 1, 1998, AMR Class
shares of the Fund were designated Institutional Class shares. Past performance
is not necessarily indicative of how the Fund will perform in the future.
TOTAL RETURN FOR THE CALENDAR YEAR ENDED 12/31 OF EACH YEAR
[GRAPH]
Highest Quarterly Return from 1/1/97 through 12/31/98 X Quarter 19XX X.XX%
Lowest Quarterly Return from 1/1/97 through 12/31/98 X Quarter 19XX X.XX%
<TABLE>
<CAPTION>
Average Annual Total Return
====================================
as of 12/31/98
------------------------------------
Since Inception
---------------
1 Year (1/1/97)
------ --------
<S> <C> <C>
S&P 500 Index Fund X.XX% X.XX%
S&P 500 Index X.XX% X.XX%
</TABLE>
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy
and hold shares of the S&P 500 Index Fund.(1)
Annual Fund Operating Expenses (expenses that are deducted from Fund
assets)
<TABLE>
<S> <C>
Management Fees......................................0.10%(2)
Distribution (12b-1) Fees............................0.00
Other Expenses.......................................X.XX(3)
----
Total Annual Fund Operating Expenses.................X.XX%
====
Fee Waiver and/or Expense Reimbursement..............X.XX%
Net Expenses.........................................0.20%
</TABLE>
(1) The expense table and the Example below reflect the expenses of
both the Fund and the Portfolio.
(2) The investment adviser, BT, has voluntarily agreed to waive a
portion of the investment advisory fee. With such waiver, the
Management Fee is 0.05%.
(3) The Manager has contractually agreed to waive a portion of its fee
and to reimburse the Fund for other expenses through October 31,
1999 to the extent that Total Operating Expenses exceed 0.20%.
After such waivers and reimbursements, Other Expenses are X.XX%.
13
<PAGE> 16
EXAMPLE
This Example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The Example assumes
that you invest $10,000 in the Fund for the time periods indicated and then
redeem all of your shares at the end of those periods. The Example also assumes
that your investment has a 5% return each year and that the Fund's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$ 20 $ XX $ XXX $ XXX
</TABLE>
14
<PAGE> 17
AMERICAN AADVANTAGE INTERMEDIATE BOND FUND
INVESTMENT OBJECTIVE
Income and capital appreciation.
PRINCIPAL STRATEGIES
The Fund invests in obligations of the U.S. Government, its agencies
and instrumentalities; corporate debt securities, such as commercial paper,
master demand notes, loan participation interests, medium-term notes and funding
agreements; mortgage-backed securities; asset-backed securities; and
Yankeedollar and Eurodollar bank certificates of deposit, time deposits,
bankers' acceptances and other notes. As an investment policy, the Fund
primarily seeks income and secondarily seeks capital appreciation.
The Fund will only buy debt securities that are investment grade at the
time of purchase. Investment grade securities include securities issued or
guaranteed by the U.S. Government, its agencies and instrumentalities, as well
as securities rated in one of the four highest rating categories by all rating
organizations rating the securities (such as Standard & Poor's or Moody's
Investors Service, Inc.). No more than 25% of assets may be invested in
securities rated in the fourth highest rating category. The Fund, at the
discretion of the investment advisers, may retain a security that has been
downgraded below the initial investment criteria.
In determining which securities to buy and sell, the Manager employs a
top-down fixed income review process, as follows:
o Develop overall investment strategy based on a comprehensive
review of macroeconomic conditions and an analysis of leading
economic indicators.
o Set portfolio maturity structure based on U.S. Treasury yield
curve and credit spread analysis.
o Perform sector analysis to determine relative value.
o Select specific debt securities.
o Review and monitor portfolio composition for changes in credit,
risk-return profile and comparisons with benchmarks.
The other investment adviser to the Fund uses a bottom-up fixed income
strategy in determining which securities to buy and sell, as follows:
o Select individual securities based upon yield to maturity
advantage versus a comparable U.S. Treasury security.
o Evaluate credit quality of the security.
o Perform quantitative analysis of yield premium using empirical
effective duration measures.
Under normal circumstances, the Fund seeks to maintain a dollar
weighted average duration of three to seven years. Under adverse market
conditions, the Fund may, for temporary defensive purposes, invest up to 100% of
its assets in cash or cash equivalents, including investment grade short-term
debt obligations. To the extent that the Fund invokes this strategy, its ability
to achieve its investment objective may be affected adversely.
INVESTMENT ADVISERS
The Manager allocates the assets of the Fund among the following
investment advisers:
AMR Investment Services, Inc.
Barrow, Hanley, Mewhinney & Strauss, Inc.
RISK FACTORS
o Interest Rate Risk
The Fund is subject to the risk that the market value of the
bonds it holds will decline due to rising interest rates. When
interest rates rise, the price of most bonds go down. When
interest rates go down, the bond prices go up. The price of a
bond is also affected by its maturity. Bonds with longer
maturities generally have greater sensitivity to changes in
interest rates.
o Credit Risk
The Fund is subject to the risk that an issuer of a bond will
fail to make timely payment of interest or principal. A decline
in an issuer's credit rating can cause its price to go down. This
risk is somewhat minimized by the Fund's policy of only investing
in bonds that are considered investment grade at the time of
purchase.
o Prepayment Risk
The Fund's investments in asset-backed and mortgage-backed
securities are subject to the risk that the principal amount of
the underlying collateral may be repaid prior to the bond's
maturity date. If this occurs, no additional interest will be
paid on the investment.
15
<PAGE> 18
o Additional Risks
An investment in the Fund is not a deposit of a bank and is not
insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency. The value of an
investment in the Fund will fluctuate up and down, which means an
investor could lose money.
HISTORICAL PERFORMANCE
The bar chart below provides an indication of risk by showing how the
Fund has performed during the past year. The table shows how the Fund's
performance compares to the Lehman Brothers Intermediate Gov./Corp. Index and
the Lipper Intermediate Investment Grade Debt Average, a composite of X funds as
of December 31, 1998, with the same investment objective as the Fund. Past
performance is not necessarily indicative of how the Fund will perform in the
future.
TOTAL RETURN FOR THE CALENDAR YEAR ENDED 12/31/98
[GRAPH]
Highest Quarterly Return from 1/1/98 through 12/31/98 X Quarter 19XX X.XX%
Lowest Quarterly Return from 1/1/98 through 12/31/98 X Quarter 19XX X.XX%
<TABLE>
<CAPTION>
Average Annual Total Return
====================================
as of 12/31/98
------------------------------------
Since Inception
---------------
1 Year (9/15/97)
------ ---------
<S> <C> <C>
Intermediate Bond Fund X.XX% X.XX%
Lehman Bros. Intermediate Gov./Corp. Index* X.XX% X.XX%
Lipper Intermediate Investment Grade Debt Average X.XX% X.XX%
</TABLE>
* The Lehman Brothers Intermediate Gov./Corp. Index is a market value weighted
performance benchmark for government and corporate fixed-rate debt issues with
maturities between one and ten years.
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy
and hold shares of the Intermediate Bond Fund.(1)
Annual Fund Operating Expenses (expenses that are deducted from Fund
assets)
<TABLE>
<S> <C>
Management Fees......................................0.25%
Distribution (12b-1) Fees............................0.00
Other Expenses.......................................0.34
----
Total Annual Fund Operating Expenses.................0.59%
====
</TABLE>
(1) The expense table and the Example below reflect the expenses of
both the Fund and its corresponding Portfolio.
EXAMPLE
This Example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The Example assumes
that you invest $10,000 in the Fund for the time periods indicated and then
redeem all of your shares at the end of those periods. The Example also assumes
that your investment has a 5% return each year and that the Fund's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$ 60 $ 189 $ 329 $ 738
</TABLE>
16
<PAGE> 19
AMERICAN AADVANTAGE SHORT-TERM BOND FUND
INVESTMENT OBJECTIVE
Income and capital appreciation.
PRINCIPAL STRATEGIES
The Fund invests in obligations of the U.S. Government, its agencies
and instrumentalities; corporate debt securities, such as commercial paper,
master demand notes, loan participation interests, medium-term notes and funding
agreements; mortgage-backed securities; asset-backed securities; and
Yankeedollar and Eurodollar bank certificates of deposit, time deposits,
bankers' acceptances and other notes. As an investment policy, the Fund
primarily seeks income and secondarily seeks capital appreciation.
The Fund will only buy debt securities that are investment grade at the
time of purchase. Investment grade securities include securities issued or
guaranteed by the U.S. Government, its agencies and instrumentalities, as well
as securities rated in one of the four highest rating categories by all rating
organizations rating the securities (such as Standard & Poor's or Moody's
Investors Service, Inc.). No more than 25% of assets may be invested in
securities rated in the fourth highest rating category. The Fund, at the
discretion of the investment advisers, may retain a security that has been
downgraded below the initial investment criteria.
In determining which securities to buy and sell, the Manager employs a
top-down fixed income review process, as follows:
o Develop overall investment strategy based on a comprehensive
review of macroeconomic conditions and an analysis of leading
economic indicators.
o Set portfolio maturity structure based on U.S. Treasury yield
curve and business cycle analysis.
o Perform sector analysis to determine relative value.
o Select specific debt securities.
o Review and monitor portfolio composition for changes in credit,
standard deviation and comparisons with benchmarks.
Under normal circumstances, the Fund seeks to maintain a dollar
weighted average duration of one to three years. Under adverse market
conditions, the Fund may, for temporary defensive purposes, invest up to 100% of
its assets in cash or cash equivalents, including investment grade short-term
debt obligations. To the extent that the Fund invokes this strategy, its ability
to achieve its investment objective may be affected adversely.
INVESTMENT ADVISER
AMR Investment Services, Inc.
RISK FACTORS
o Interest Rate Risk
The Fund is subject to the risk that the market value of the
bonds it holds will decline due to rising interest rates. When
interest rates rise, the price of most bonds go down. When
interest rates go down, the bond prices go up. The price of a
bond is also affected by its maturity. Bonds with longer
maturities generally have greater sensitivity to changes in
interest rates.
o Credit Risk
The Fund is subject to the risk that an issuer of a bond will
fail to make timely payment of interest or principal. A decline
in an issuer's credit rating can cause its price to go down. This
risk is somewhat minimized by the Fund's policy of only investing
in bonds that are considered investment grade at the time of
purchase.
o Prepayment Risk
The Fund's investments in mortgage-backed securities are subject
to the risk that the principal amount of the underlying mortgage
may be repaid prior to the bond's maturity date. If this occurs,
no additional interest will be paid on the investment.
o Additional Risks
An investment in the Fund is not a deposit of a bank and is not
insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency. The value of an
investment in the Fund will fluctuate up and down, which means an
investor could lose money.
17
<PAGE> 20
HISTORICAL PERFORMANCE
The bar chart below provides an indication of risk by showing how the
Fund's performance has varied from year to year. The table shows how the Fund's
performance compares to the Lehman Brothers Intermediate Gov./Corp. Index and
the Linked Lipper Investment Grade Debt Averages, benchmarks with the same
investment objective as the Fund. Past performance is not necessarily indicative
of how the Fund will perform in the future.
TOTAL RETURN FOR THE CALENDAR YEAR ENDED 12/31 OF EACH YEAR
[GRAPH]
Highest Quarterly Return from 1/1/89 through 12/31/98 X Quarter 19XX X.XX%
Lowest Quarterly Return from 1/1/89 through 12/31/98 X Quarter 19XX X.XX%
<TABLE>
<CAPTION>
Average Annual Total Return
===========================================
as of 12/31/98
-------------------------------------------
1 Year 5 Years 10 Years
------ ------- --------
<S> <C> <C> <C>
Short-Term Bond Fund X.XX% X.XX% X.XX%
Lehman Bros. Intermediate Gov./Corp. Index* X.XX% X.XX% X.XX%
Linked Lipper Investment Grade Debt Averages** X.XX% X.XX% X.XX%
</TABLE>
* The Lehman Brothers Intermediate Gov./Corp. Index is a market value weighted
performance benchmark for government and corporate fixed-rate debt issues with
maturities between one and ten years.
** The Linked Lipper Investment Grade Debt Averages includes the Lipper
Short-Term Investment Grade Debt Average prior to 1/1/96, the Lipper
Short-Intermediate Investment Grade Debt Average from 1/1/96 through 7/31/96 and
the Lipper Short-Term Investment Grade Debt Average since 8/1/96.
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy
and hold shares of the Short-Term Bond Fund.(1)
Annual Fund Operating Expenses (expenses that are deducted from Fund
assets)
<TABLE>
<S> <C>
Management Fees......................................0.25%
Distribution (12b-1) Fees............................0.00
Other Expenses.......................................0.32
----
Total Annual Fund Operating Expenses.................0.57%
====
</TABLE>
(1) The expense table and the Example below reflect the expenses of
both the Fund and its corresponding Portfolio.
EXAMPLE
This Example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The Example assumes
that you invest $10,000 in the Fund for the time periods indicated and then
redeem all of your shares at the end of those periods. The Example also assumes
that your investment has a 5% return each year and that the Fund's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$ 58 $ 183 $ 318 $ 714
</TABLE>
18
<PAGE> 21
AMERICAN AADVANTAGE MONEY MARKET FUND
INVESTMENT OBJECTIVE
Current income, liquidity and the maintenance of a stable price of $1
per share.
PRINCIPAL STRATEGIES
The Fund invests exclusively in high quality variable or fixed rate,
U.S. dollar denominated short-term money market instruments. These securities
may include obligations of the U.S. Government, its agencies and
instrumentalities; corporate debt securities, such as commercial paper, master
demand notes, loan participation interests, medium-term notes and funding
agreements; Yankeedollar and Eurodollar bank certificates of deposit, time
deposits, and bankers' acceptances; asset-backed securities; and repurchase
agreements involving the foregoing obligations.
The Fund will only buy securities with the following credit qualities:
o rated in the highest short-term categories by two rating
organizations, such as "A-1" by Standard & Poor's Corporation and
"P-1" by Moody's Investors Service, Inc.,
o rated in the highest short-term category by one rating
organization if the securities are rated only by one rating
organization, or
o unrated securities that are determined to be of equivalent
quality by the Manager.
The Fund invests more than 25% of its total assets in obligations
issued by the banking industry. However, for temporary defensive purposes when
the Manager believes that maintaining this concentration may be inconsistent
with the best interests of shareholders, the Fund may not maintain this
concentration.
Securities purchased by the Fund generally have remaining maturities of
397 days or less, although instruments subject to repurchase agreements and
certain variable and floating rate obligations may bear longer final maturities.
The average dollar-weighted maturity of the Fund will not exceed 90 days.
INVESTMENT ADVISER
AMR Investment Services, Inc.
RISK FACTORS
o The yield paid by the Fund is subject to changes in interest
rates. As a result, there is risk that a decline in short-term
interest rates would lower its yield and the overall return on
your investment.
o Although the Fund seeks to preserve the value of your investment
at $1.00 per share, it is possible to lose money by investing in
the Fund.
o As with any money market fund, there is the risk that the issuers
or guarantors of securities owned by the Fund will default on the
payment of principal or interest or the obligation to repurchase
securities from the Fund.
Your investment in the Fund is not insured or guaranteed by the U.S. Government
or any financial or government institution.
19
<PAGE> 22
HISTORICAL PERFORMANCE
The bar chart below provides an indication of risk by showing how the
Fund's performance has varied from year to year. The table shows how the Fund's
performance compares to the Lipper Institutional Money Market Average, an
average of X institutional money market fund returns as of December 31, 1998.
Past performance is not necessarily indicative of how the Fund will perform in
the future. Investors may call 1-800-388-3344 to obtain the Fund's current
seven-day yield.
TOTAL RETURN FOR THE CALENDAR YEAR ENDED 12/31 OF EACH YEAR
[GRAPH]
Highest Quarterly Return from 1/1/89 through 12/31/98 X Quarter 19XX X.XX%
Lowest Quarterly Return from 1/1/89 through 12/31/98 X Quarter 19XX X.XX%
<TABLE>
<CAPTION>
Average Annual Total Return
===========================================
as of 12/31/98
-------------------------------------------
1 Year 5 Years 10 Years
------ ------- --------
<S> <C> <C> <C>
Money Market Fund X.XX% X.XX% X.XX%
Lipper Institutional Money Market Average X.XX% X.XX% X.XX%
</TABLE>
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy
and hold shares of the Money Market Fund.(1)
Annual Fund Operating Expenses (expenses that are deducted from Fund
assets)
<TABLE>
<S> <C>
Management Fees......................................0.10%
Distribution (12b-1) Fees............................0.00
Other Expenses.......................................0.13
----
Total Annual Fund Operating Expenses.................0.23%
====
</TABLE>
(1) The expense table and the Example below reflect the expenses of
both the Fund and its corresponding Portfolio.
EXAMPLE
This Example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The Example assumes
that you invest $10,000 in the Fund for the time periods indicated and then
redeem all of your shares at the end of those periods. The Example also assumes
that your investment has a 5% return each year and that the Fund's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$ 24 $ 74 $ 130 $ 293
</TABLE>
20
<PAGE> 23
AMERICAN AADVANTAGE MUNICIPAL MONEY MARKET FUND
INVESTMENT OBJECTIVE
Current income, liquidity and the maintenance of a stable price of $1
per share.
PRINCIPAL STRATEGIES
Under normal market conditions, the Fund invests at least 80% of net
assets in securities whose interest income is exempt from federal income tax.
These securities may be issued by or on behalf of the governments of U.S.
states, counties, cities, towns, territories, or public authorities. All
securities purchased by the Fund will be guaranteed by the U.S. Government, its
agencies, or instrumentalities; secured by irrevocable letters of credit issued
by qualified banks; or guaranteed by one or more municipal bond insurance
policies.
The Fund will only buy securities with the following credit qualities:
o rated in the highest short-term categories by two rating
organizations, such as "A-1" by Standard & Poor's and "P-1" by
Moody's Investors Service, Inc.,
o rated in the highest short-term category by one rating
organization if the securities are rated only by one rating
organization, or
o unrated securities that are determined to be of equivalent
quality by the Manager.
Securities purchased by the Fund generally have remaining maturities of
397 days or less, although instruments subject to repurchase agreements and
certain variable and floating rate obligations may bear longer final maturities.
The average dollar-weighted maturity of the Fund will not exceed 90 days.
INVESTMENT ADVISER
AMR Investment Services, Inc.
RISK FACTORS
o The yield paid by the Fund is subject to changes in interest
rates. As a result, there is risk that a decline in short-term
interest rates would lower its yield and the overall return on
your investment.
o Although the Fund seeks to preserve the value of your investment
at $1.00 per share, it is possible to lose money by investing in
the Fund.
o As with any money market fund, there is the risk that the issuers
or guarantors of securities owned by the Fund will default on the
payment of principal or interest or the obligation to repurchase
securities from the Fund.
Your investment in the Fund is not insured or guaranteed by the U.S. Government
or any financial or government institution.
21
<PAGE> 24
HISTORICAL PERFORMANCE
The bar chart below provides an indication of risk by showing how the
Fund's performance has varied from year to year. The table shows how the Fund's
performance compares to the Lipper Institutional Tax Exempt Money Market Fund
Average, an average of X tax exempt money market fund returns as of December 31,
1998. Past performance is not necessarily indicative of how the Fund will
perform in the future. Investors may call 1-800-388-3344 to obtain the Fund's
current seven-day yield.
TOTAL RETURN FOR THE CALENDAR YEAR ENDED 12/31 OF EACH YEAR
[GRAPH]
Highest Quarterly Return from 1/1/94 through 12/31/98 X Quarter 19XX X.XX%
Lowest Quarterly Return from 1/1/94 through 12/31/98 X Quarter 19XX X.XX%
<TABLE>
<CAPTION>
Average Annual Total Return
=============================================
as of 12/31/98
---------------------------------------------
Since Inception
---------------
1 Year 5 Years (11/10/93)
------ ------- ----------
<S> <C> <C> <C>
Municipal Money Market Fund X.XX% X.XX% X.XX%
Lipper Inst. Tax-Exempt Money Market Fund Average X.XX% X.XX% X.XX%
</TABLE>
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy
and hold shares of the Municipal Money Market Fund.(1)
Annual Fund Operating Expenses (expenses that are deducted from Fund
assets)
<TABLE>
<S> <C>
Management Fees......................................0.10%
Distribution (12b-1) Fees............................0.00
Other Expenses.......................................0.22
----
Total Annual Fund Operating Expenses.................0.32%
====
</TABLE>
(1) The expense table and the Example below reflect the expenses of
both the Fund and its corresponding Portfolio.
EXAMPLE
This Example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The Example assumes
that you invest $10,000 in the Fund for the time periods indicated and then
redeem all of your shares at the end of those periods. The Example also assumes
that your investment has a 5% return each year and that the Fund's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$ 33 $ 103 $ 180 $ 406
</TABLE>
22
<PAGE> 25
AMERICAN AADVANTAGE U.S. GOVERNMENT MONEY MARKET FUND
INVESTMENT OBJECTIVE
Current income, liquidity and the maintenance of a stable price of $1
per share.
PRINCIPAL STRATEGIES
The Fund invests exclusively in obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities and repurchase agreements
that are collateralized by such obligations. Some of these securities are not
backed by the full faith and credit of the U.S. Government. U.S. Government
securities include direct obligations of the U.S. Treasury (such as Treasury
bills, Treasury notes and Treasury bonds).
Securities purchased by the Fund generally have remaining maturities of
397 days or less, although instruments subject to repurchase agreements and
certain variable and floating rate obligations may bear longer final maturities.
The average dollar-weighted maturity of the Fund will not exceed 90 days.
INVESTMENT ADVISER
AMR Investment Services, Inc.
RISK FACTORS
o The yield paid by the Fund is subject to changes in interest
rates. As a result, there is risk that a decline in short-term
interest rates would lower its yield and the overall return on
your investment.
o Although the Fund seeks to preserve the value of your investment
at $1.00 per share, it is possible to lose money by investing in
the Fund.
Your investment in the Fund is not insured or guaranteed by the U.S. Government
or any financial or government institution.
HISTORICAL PERFORMANCE
The bar chart below provides an indication of risk by showing how the
Fund's performance has varied from year to year. The table shows how the Fund's
performance compares to the Lipper Institutional U.S. Government Money Market
Fund Average, an average of X institutional U.S. Government money market fund
returns as of December 31, 1998. Past performance is not necessarily indicative
of how the Fund will perform in the future. Investors may call 1-800-388-3344 to
obtain the Fund's current seven-day yield.
TOTAL RETURN FOR THE CALENDAR YEAR ENDED 12/31 OF EACH YEAR
[GRAPH]
Highest Quarterly Return from 1/1/93 through 12/31/98 X Quarter 19XX X.XX%
Lowest Quarterly Return from 1/1/93 through 12/31/98 X Quarter 19XX X.XX%
<TABLE>
<CAPTION>
Average Annual Total Return
==============================================
as of 12/31/98
----------------------------------------------
Since Inception
---------------
1 Year 5 Years (3/2/92)
------ ------- --------
<S> <C> <C> <C>
U.S. Government Money Market Fund X.XX% X.XX% X.XX%
Lipper Inst. U.S. Govt. Money Mkt. Fund Average X.XX% X.XX% X.XX%
</TABLE>
23
<PAGE> 26
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy
and hold shares of the U.S. Government Money Market Fund.(1)
Annual Fund Operating Expenses (expenses that are deducted from Fund
assets)
<TABLE>
<S> <C>
Management Fees......................................0.10%
Distribution (12b-1) Fees............................0.00
Other Expenses.......................................0.10
----
Total Annual Fund Operating Expenses.................0.20%
====
</TABLE>
(1) The expense table and the Example below reflect the expenses of
both the Fund and its corresponding Portfolio.
EXAMPLE
This Example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The Example assumes
that you invest $10,000 in the Fund for the time periods indicated and then
redeem all of your shares at the end of those periods. The Example also assumes
that your investment has a 5% return each year and that the Fund's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$20 $64 $113 $255
</TABLE>
24
<PAGE> 27
THE MANAGER
The Trust has retained AMR Investment Services, Inc. to serve as its
Manager. The Manager, located at 4333 Amon Carter Boulevard, Fort Worth, Texas
76155, is a wholly owned subsidiary of AMR Corporation, the parent company of
American Airlines, Inc. The Manager was organized in 1986 to provide investment
management, advisory, administrative and asset management consulting services.
As of December 31, 1998, the Manager had approximately $XX.X billion of assets
under management, including approximately $XX.X billion under active management
and $XX.X billion as named fiduciary or financial adviser. Of the total,
approximately $XX.X of assets are related to AMR Corporation.
The Manager provides or oversees the provision of all administrative,
investment advisory and portfolio management services to the Funds. The Manager
o develops the investment programs for each Fund,
o selects and changes investment advisers (subject to requisite
approvals),
o allocates assets among investment advisers,
o monitors the investment advisers' investment programs and results,
o coordinates the investment activities of the investment
advisers to ensure compliance with regulatory restrictions,
o oversees each Fund's securities lending activities and any
actions taken by the securities lending agent, and
o with the exception of the International Equity Fund and Equity 500
Index Portfolio, invests the portion of Fund assets that the
investment advisers determine should be allocated to high quality
short-term debt obligations.
As compensation for providing management services, the Fund pays the
Manager an annualized advisory fee that is calculated and accrued daily, equal
to the sum of:
o 0.25% of the net assets of the Intermediate Bond Fund and
Short-Term Bond Fund;
o 0.10% of the net assets of all other Funds; plus
o all fees paid to the investment advisers of the Balanced, Growth
and Income, Small Cap Value and International Equity Funds
The Manager also may receive up to 25% of the net annual interest
income or up to 25% of loan fees in regards to securities lending activities.
Currently, the Manager receives 10% of the net annual interest income from the
investment of cash collateral or 10% of the loan fees posted by borrowers. The
Securities and Exchange Commission ("SEC") has granted exemptive relief that
permits the Funds to invest cash collateral received from securities lending
transactions in shares of one or more private investment companies managed by
the Manager. Subject to the receipt of exemptive relief from the SEC, the Funds
may also invest cash collateral received from securities lending transactions in
shares of one or more registered investment companies managed by the Manager.
William F. Quinn and Nancy A. Eckl have primary responsibility for the
day-to-day operations of the Funds, except as indicated otherwise below. These
responsibilities include oversight of the investment advisers, regular review of
each investment adviser's performance and asset allocations among multiple
investment advisers. Mr. Quinn has served as President of the Manager since its
inception in 1986. Ms. Eckl has served as Vice President-Trust Investments since
May 1995. Prior to her current position, Ms. Eckl held the position of Vice
President-Finance and Compliance of the Manager from December 1990 through April
1995.
Michael W. Fields is responsible for the portfolio management of the
Short-Term Bond Fund as well as a portion of the Intermediate Bond Fund. Mr.
Fields has been with the Manager since it was founded in 1986 and serves as
Chief Investment Officer and Vice President-Fixed Income Investments.
The approximate management fees paid by the Funds for the fiscal year
ended October 31, 1998, net of reimbursements, was as follows:
Fund Manager Fees
---- ------------
Balanced XX%
Growth and Income XX%
Intermediate Bond XX%
International Equity XX%
Short-Term Bond XX%
Money Market XX%
Municipal Money Market XX%
U.S. Government Money Market XX%
BT serves as the administrator to the Equity 500 Index Portfolio. Under
an Administration and Services Agreement with the Portfolio, BT calculates the
value of the assets of the Portfolio and generally assists the Equity 500 Index
Portfolio Board in all aspects of the administration and operation of the
Portfolio. The Administration and Services Agreement provides for the Portfolio
to pay BT a fee, computed daily and paid monthly, at the rate of 0.05% of the
average daily net assets of the
25
<PAGE> 28
Portfolio. Under the Administration and Services Agreement, BT may delegate one
or more of its responsibilities to others, including Federated Services Company,
at BT's expense.
THE INVESTMENT ADVISERS
Set forth below is a brief description of the investment advisers for
each Fund. The Manager is the sole investment adviser of the Money Market Funds
and the Short-Term Bond Fund. Except for these Funds, each Fund's assets are
allocated among the investment advisers by the Manager. The assets of the
Intermediate Bond Fund are allocated by the Manager between the Manager and
another investment adviser. Each investment adviser has discretion to purchase
and sell securities for its segment of a Fund's assets in accordance with the
Fund's objectives, policies, restrictions and more specific strategies provided
by the Manager. Pursuant to an exemptive order issued by the SEC, the Manager is
permitted to enter into new or modified investment advisory agreements with
existing or new investment advisers without approval of a Fund's shareholders,
but subject to approval of the Trust's Board of Trustees ("Board") and the AMR
Investment Services Trust Board ("AMR Trust Board"). The Prospectus will be
supplemented if additional investment advisers are retained or the contract with
any existing investment adviser is terminated.
BANKERS TRUST COMPANY (BT), 130 Liberty Street (One Bankers Trust Plaza), New
York, New York 10006, is a New York banking corporation and is a wholly owned
subsidiary of Bankers Trust Corporation. BT provides investment advisory,
administrative and other services to the Equity 500 Index Portfolio. As of
September 30, 1998, Bankers Trust Corporation was the _________ largest bank
holding company in the United States with total assets of approximately $XXX
billion and approximately $XXX billion in assets under management globally. Of
that total, approximately $XXX billion are in U.S. equity index assets alone. BT
serves as investment adviser and administrator to the Equity 500 Index
Portfolio.
BARROW, HANLEY, MEWHINNEY & STRAUSS, INC. (Barrow), 3232 McKinney Avenue, 15th
Floor, Dallas, Texas 75204, is a professional investment counseling firm which
has been providing investment advisory services since 1979. The firm is wholly
owned by United Asset Management Corporation, a Delaware corporation. Barrow's
approach to stock selection reflects the traditional value characteristics: low
price to earnings ratio, low price to book ratio and high dividend yields. As of
December 31, 1998, Barrow had discretionary investment management authority with
respect to approximately $XX.X billion of assets, including approximately $XX.X
billion of assets of AMR and its subsidiaries and affiliated entities. Barrow
serves as an investment adviser to the Balanced, Growth and Income, Intermediate
Bond and Short-Term Bond Funds, although the Manager does not presently intend
to allocate any of the assets in the Short-Term Bond Fund to Barrow.
BRANDYWINE ASSET MANAGEMENT, INC. (Brandywine), 201 North Walnut Street,
Wilmington, Delaware 19801, is a professional investment counseling firm founded
in 1986. Brandywine is a wholly owned subsidiary of Legg Mason, Inc.
Brandywine's investment process involves both fundamental screening to identify
stocks that are undervalued and fundamental analysis to identify undervalued
stocks which have the ability to return to normal value. As of December 31,
1998, Brandywine had assets under management totaling approximately $XX.X
billion, including approximately $XX.X million of assets of AMR and its
subsidiaries and affiliated entities. Brandywine serves as an investment adviser
to the Balanced, Growth and Income and Small Cap Value Funds.
GSB INVESTMENT MANAGEMENT, INC. (GSB), 301 Commerce Street, Fort Worth, Texas
76102, is a professional investment management firm which was founded in 1987 by
Frank P. Ganucheau, Mark J. Stupfel, and Lyle E. Brumley. GSB is wholly owned by
United Asset Management Corporation, a Delaware corporation. GSB utilizes
qualitative and quantitative security selection techniques to estimate the
expected absolute return and provide a basis to compare the relative
attractiveness of one stock against another. As of December 31, 1998, GSB
managed approximately $XX.X billion of assets, including approximately $XX.X
million of assets of AMR and its subsidiaries and affiliated entities. GSB
serves as an investment adviser to the Balanced and Growth and Income Funds.
HOTCHKIS AND WILEY, 725 South Figueroa Street, Suite 4000, Los Angeles,
California 90017, is a professional investment counseling firm which was founded
in 1980 by John F. Hotchkis and George Wiley. Hotchkis and Wiley is a division
of the Capital Management Group of Merrill Lynch Asset Management, L.P., a
wholly owned indirect subsidiary of Merrill Lynch & Co., Inc. Hotchkis and Wiley
utilizes extensive fundamental research to identify significantly undervalued
companies where, in their opinion, actual value clearly exceeds current market
price. Assets under management as of December 31, 1998 were approximately $XX.X
billion, which included approximately $XX.X billion of assets of AMR and its
subsidiaries and affiliated entities. Hotchkis and Wiley serves as an investment
adviser to the Balanced, Small Cap Value, Growth and Income and International
Equity Funds.
INDEPENDENCE INVESTMENT ASSOCIATES, INC. (IIA), 53 State Street, Boston,
Massachusetts 02109, is a professional investment counseling firm which was
founded in 1982. The firm is a wholly owned subsidiary of John Hancock Mutual
Life Insurance Company. IIA's investment philosophy that any stock which
combines low cost and improving fundamentals is attractive, is put into practice
through the use of a quantitative, multifactor stock-ranking model fueled by
earnings and growth rates. Assets under management as of December 31, 1998,
including funds managed for its parent company, were approximately $XX.X
billion, which included approximately $XX.X billion of assets of AMR and its
subsidiaries and affiliated entities. IIA serves as an investment adviser to the
Balanced and Growth and Income Funds.
26
<PAGE> 29
MORGAN STANLEY ASSET MANAGEMENT INC. ("MSAM"), 25 Cabot Square, London, United
Kingdom E14 4QA, is a wholly owned subsidiary of Morgan Stanley, Dean Witter,
Discover & Co. MSAM provides portfolio management and named fiduciary services
to taxable and nontaxable institutions, international organizations and
individuals investing in United States and international equity and debt
securities. As of September 30, 1998, MSAM, together with its other asset
management affiliates, had assets under management (including assets under
fiduciary advisory control) totaling approximately $XXX.X billion, including
approximately $XXX.X billion under active management and $XX.X billion as named
fiduciary or fiduciary adviser. As of December 31, 1997, MSAM had investment
authority over approximately $XXX.X million of assets of AMR and its
subsidiaries and affiliated entities. MSAM serves as an investment adviser to
the International Equity Portfolio.
TEMPLETON INVESTMENT COUNSEL, INC. (Templeton), 500 East Broward Blvd., Suite
2100, Fort Lauderdale, Florida 33394-3091, is a professional investment
counseling firm which has been providing investment services since 1979.
Templeton is indirectly owned by Franklin Resources, Inc. Templeton believes in
a disciplined, yet flexible long-term approach to uncovering value oriented
investments regardless of current market trends on a worldwide scale. As of
December 31, 1998, Templeton had discretionary investment management authority
with respect to approximately $XX.X billion of assets, including approximately
$XXX.X million of assets of AMR and its subsidiaries and affiliated entities.
Templeton serves as an investment adviser to the International Equity Fund.
All other assets of American Airlines, Inc. and its affiliates under
management by each respective investment adviser (except assets managed by
Barrow under the HALO Bond Program) are considered when calculating the fees for
each investment adviser other than MSAM and BT. Including these assets lowers
the investment advisory fees for each applicable Fund.
As compensation for its services, each investment adviser, except BT,
is paid a fee by the Manager out of the proceeds of the management fee received
by the Manager from the AMR Trust.
VALUATION OF SHARES
The price of each Fund's shares is based on its net asset value
("NAV"). Each Fund's NAV is computed by adding total assets, subtracting all of
the Fund's liabilities, and dividing the result by the total number of shares
outstanding. Equity securities are valued based on market value. Debt securities
(other than short-term securities) usually are valued on the basis of prices
provided by a pricing service. In some cases, the price of debt securities is
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 Fund's Board of Trustees.
Securities held by the Money Market Funds are valued in accordance with the
amortized cost method, which is designed to enable those Funds to maintain a
stable NAV of $1.00 per share.
The NAV of Institutional Class shares will be determined based on a pro
rata allocation of the Portfolio's investment income, expenses and total capital
gains and losses. Each Fund's NAV is determined as of the close of the New York
Stock Exchange ("Exchange"), generally 4:00 p.m. Eastern Time, on each day on
which it is open for business. The Money Market Funds are not open and no NAV is
calculated on Columbus Day and Veteran's Day. The NAV of the International
Equity Fund may change on days when shareholders will not be able to purchase or
redeem the Fund's shares.
ABOUT YOUR INVESTMENT
PURCHASE AND REDEMPTION OF SHARES
ELIGIBILITY
Institutional Class shares are offered without a sales charge to investors
who make an initial investment of at least $2 million, including:
o agents or fiduciaries acting on behalf of their clients (such as
employee benefit plans, personal trusts and other accounts for
which a trust company or financial advisor acts as agent or
fiduciary);
o endowment funds and charitable foundations;
o employee welfare plans which are tax-exempt under Section
501(c)(9) of the Internal Revenue Code of 1986, as amended
(Code);
o qualified pension and profit sharing plans;
o cash and deferred arrangements under Section 401(k) of the Code;
o corporations; and
o other 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. In addition,
for investors such as 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.
PURCHASE POLICIES
No sales charges are assessed on the purchase or sale of Fund shares.
Shares of the Funds are offered and purchase orders accepted until the deadlines
listed below on each day on which the Exchange is open for trading. In addition,
shares of the Money Market Funds are not offered and orders are not accepted on
Columbus Day and Veteran's Day:
27
<PAGE> 30
FUND PURCHASE BY (EASTERN TIME)*:
Money Market 3:00 p.m.
Municipal Money Market 11:45 a.m.
U.S. Government Money Market 2:00 p.m.
All other Funds 4:00 p.m.
* or the close of the Exchange
(whichever comes first)
If a purchase order is accepted and payment is received prior to the
applicable Fund's deadline, the purchase price will be the NAV per share next
determined on that day. If a purchase order is accepted or payment is received
after the applicable deadline, the purchase price will be the NAV of the
following day that the Fund is open for business. Checks to purchase shares 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.
OPENING AN ACCOUNT
A completed, signed application is required to open an account. You may
request an application form by:
o calling (800) 967-9009, or
o visiting the Funds' website at www.aafunds.com and downloading an
account application.
Complete the application, sign it and:
Mail to: or Fax to:
American AAdvantage Funds (817) 967-0768 or (817) 931-4331
P.O. Box 619003, MD 5645
DFW Airport, TX 75261-9003
<TABLE>
<CAPTION>
HOW TO PURCHASE SHARES
To Make an Initial Purchase To Add To An Existing Account
BY WIRE------------------------------------------------------------------------------------------------------------
<S> <C>
Call (800) 658-5811 to purchase shares by wire. Send Call (800) 658-5811 to purchase shares by wire. Send a
a bank wire to State Street Bank & Trust Co. with bank wire to State Street Bank & Trust Co. with these
these instructions: instructions:
o ABA# 0110-0002-8; AC-9905-342-3 o ABA# 0110-0002-8; AC-9905-342-3
o Attn: American AAdvantage Funds-Institutional o Attn: American AAdvantage Funds-Institutional Class
Class o the Fund name and Fund number
o the Fund name and Fund number o shareholder's account number
o specify that the wire is for a new account
BY CHECK-----------------------------------------------------------------------------------------------------------
o Make the check payable to the American Include the shareholder's account number and Fund name,
AAdvantage Funds Fund number and "Institutional Class" on the check.
o Include the Fund name, Fund number and Mail check to:
"Institutional Class" on the check
o Mail the check to: American AAdvantage Funds-Institutional Class
P.O. Box 419643
American AAdvantage Funds-Institutional Class Kansas City, MO 64141-6643
P.O. Box 419643
Kansas City, MO 64141-6643
BY EXCHANGE--------------------------------------------------------------------------------------------------------
Shares of a Fund may be purchased by exchange from
another American AAdvantage Fund if the shareholder has
owned Institutional Class shares of the other American
AAdvantage Fund for at least 15 days. Send a written
request to the address above or call (800) 658-5811 to
exchange shares.
</TABLE>
REDEMPTION POLICIES
Shares of any Fund may be redeemed by telephone or mail on any day that
the Fund is open for business. The redemption price will be the NAV next
determined after a redemption order is received in good order. For assistance
with completing a redemption request, please call (800) 658-5811. Except for the
Money Market Funds, proceeds from redemption orders received by 4:00 p.m.
Eastern Time generally are transmitted to shareholders on the next day that the
Funds are open for business. Proceeds from redemptions requested for the Money
Market Funds by the following deadlines will generally be wired to shareholders
on the same day.
FUND SAME DAY WIRE REDEMPTION ORDER DEADLINE:
Money Market 2:00 p.m. Eastern Time
Municipal Money Market 11:45 a.m. Eastern Time
U.S. Government Money Market 2:00 p.m. Eastern Time
28
<PAGE> 31
In any event, proceeds from a redemption order for any Fund will be
transmitted to a shareholder by no later than seven days after the receipt of a
redemption request in good order. Shares purchased by check may not be redeemed
until the check has cleared, which may take up to 15 days. Shares redeemed
through financial intermediaries may be subject to transaction fees.
The Funds reserve the right to suspend redemptions or postpone the date
of payment (i) when the Exchange is closed (other than for customary weekend and
holiday closings); (ii) when trading on the Exchange is restricted; (iii) when
the SEC determines that an emergency exists so that disposal of a Fund's
investments or determination of its NAV is not reasonably practicable; or (iv)
by order of the SEC for protection of the Funds' shareholders.
Although the Funds intend to redeem shares in cash, each Fund reserves
the right to pay the redemption price in whole or in part by a distribution of
readily marketable securities held by the applicable Fund's corresponding
Portfolio. Unpaid dividends credited to an account up to the date of redemption
of all shares of a Money Market Fund generally will be paid at the time of
redemption.
<TABLE>
<CAPTION>
HOW TO REDEEM SHARES
Method Additional Information
BY TELEPHONE-------------------------------------------------------------------------------------------------------
<S> <C>
Call (800) 658-5811 to request a redemption. Proceeds from redemptions placed by telephone will
generally be transmitted by wire only, as instructed
on the application form.
BY MAIL------------------------------------------------------------------------------------------------------------
Write a letter of instruction including Other supporting documents may be required for
o the Fund name, Fund number and class estates, trusts, guardianships, custodians,
o shareholder account number corporations, and welfare, pension and profit sharing
o shares or dollar amount to be sold plans. Call (800) 658-5811 for instructions.
o authorized signature
o how and where to send the proceeds
Mail to:
American AAdvantage Funds-Institutional Class
P.O. Box 419643
Kansas City, MO 64141-6643
BY EXCHANGE--------------------------------------------------------------------------------------------------------
Shares of a Fund may be redeemed in exchange for another American AAdvantage Fund - Institutional Class if the
shareholder has owned Institutional Class shares of the Fund for at least 15 days. Send a written request to the
address above or call (800) 658-5811 to exchange shares.
</TABLE>
GENERAL POLICIES
If a shareholder's account balance in any Fund falls below $2,500, the
shareholder may be asked to increase the balance. If the account balance remains
below $2,500 after 45 days, the Funds reserve the right to close the account and
send the proceeds to the shareholder.
The following policies apply to instructions you may provide to the
Funds by telephone:
o The Funds, their officers, trustees, directors, employees, or
agents are not responsible for the authenticity of instructions
provided by telephone, nor for any loss, liability, cost or
expense incurred for acting on them.
o The Funds employ procedures reasonably designed to confirm that
instructions communicated by telephone are genuine.
o Due to the volume of calls or other unusual circumstances,
telephone redemptions may be difficult to implement during
certain time periods.
The Funds reserve the right to:
o reject any order for the purchase of shares and to limit or
suspend, without prior notice, the offering of shares
o modify or terminate the exchange privilege at any time
o limit the number of exchanges between Funds an investor may
exercise
o seek reimbursement from the shareholder for any related loss
incurred if payment for the purchase of Fund shares by check does
not clear the shareholder's bank
Third parties, such as banks, brokers and 401(k) plan providers who
offer Fund shares, may charge transaction fees and may set different minimum
investments or limitations on buying or selling shares.
29
<PAGE> 32
DISTRIBUTIONS AND TAXES
The Funds distribute most or all of their net earnings in the form of
dividends from net investment income and distributions of realized net capital
gains and gains from certain foreign currency transactions. Unless the account
application instructs otherwise, distributions will be reinvested in additional
Fund shares.
Distributions are paid as follows:
<TABLE>
<CAPTION>
FUND DIVIDENDS PAID OTHER DISTRIBUTIONS PAID
<S> <C> <C>
Balanced Annually Annually
Growth and Income Annually Annually
International Equity Annually Annually
Small Cap Value Annually Annually
S&P 500 Index April, July, October and December Annually
Intermediate Bond Monthly Annually
Short-Term Bond Monthly Annually
Money Market Monthly Monthly
Municipal Money Market Monthly Monthly
U.S. Government Money Market Monthly Monthly
</TABLE>
Usually, dividends received from a Fund (except the Municipal Money
Market Fund) are taxable as ordinary income, regardless of whether dividends are
reinvested. Distributions by a Fund of realized net short-term capital gains and
gains from certain foreign currency transactions are similarly taxed.
Distributions by the Funds of realized net long-term capital gains are taxable
to their shareholders as long-term capital gains regardless of how long an
investor has been a shareholder.
Some foreign countries may impose taxes on dividends paid to and gains
realized by the International Equity Fund. The Fund may treat these taxes as a
deduction or, under certain conditions, "flow the tax through" to shareholders.
In the latter event, shareholders may either deduct the taxes or use them to
calculate a credit against their federal income tax.
A portion of the income dividends paid by the Balanced Fund, the Growth
and Income Fund, the Small Cap Value Fund and the S&P 500 Index Fund is eligible
for the dividends-received deduction allowed to corporations. The eligible
portion may not exceed the Fund's aggregate dividends received from U.S.
corporations. However, dividends received by a corporate shareholder and
deducted by it pursuant to the dividends-received deduction may be subject
indirectly to the federal alternative minimum tax (AMT). The International
Equity Fund's dividends most likely will not qualify for the dividends-received
deduction because none of the dividends received by that Fund are expected to be
paid by U.S. corporations.
The Municipal Money Market Fund designates most of its distributions as
"exempt-interest dividends," which may be excluded from gross income. If the
Fund earns taxable income from any of its investments, that income will be
distributed as a taxable dividend. If the Fund invests in private activity
obligations, shareholders will be required to treat a portion of the
exempt-interest dividends they receive as a "tax preference item" in determining
their liability for the federal alternative minimum tax (AMT). Some states
exempt from income tax the interest on their own obligations and on obligations
of governmental agencies and municipalities in the state; accordingly, each year
shareholders will receive tax information on the Fund's exempt-interest income
by state.
Shareholders may realize a taxable gain or loss when selling or
exchanging shares (other than shares of the Money Market Funds). That gain or
loss may be treated as a short-term or long-term gain, depending on how long the
sold or exchanged shares were held.
This is only a summary of some of the important income tax
considerations that may affect Fund shareholders. Shareholders should consult
their tax adviser regarding specific questions as to the effect of federal,
state or local income taxes on an investment in the Funds.
ADDITIONAL INFORMATION
DISTRIBUTION OF TRUST SHARES
The Trust does not incur any direct distribution expenses related to
Institutional Class shares. However, the Trust has adopted a Distribution Plan
in accordance with Rule 12b-1 under the Investment Company Act of 1940 ("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 the sale and distribution of Fund shares.
30
<PAGE> 33
MASTER-FEEDER STRUCTURE
The Funds operate under a master-feeder structure. This means that each
Fund is a "feeder" fund that invests all of its investable assets in a "master"
fund with the same investment objective. The "master" fund purchases securities
for investment. The master-feeder structure works as follows:
<TABLE>
<S> <C>
-------------------------
Investor
-------------------------
purchases shares of
-------------------------
Feeder Fund
-------------------------
which invests in
-------------------------
Master Fund
-------------------------
which buys
-------------------------
Investment Securities
-------------------------
</TABLE>
Each Fund can withdraw its investment in its corresponding Portfolio at
any time if the Board determines that it is in the best interest of the Fund and
its shareholders to do so. If this happens, the Fund's assets will be invested
according to the investment policies and restrictions described in this
Prospectus.
YEAR 2000
The Funds could be affected adversely if the computer systems used by
the Manager, the Funds' other service providers, or companies in which the Funds
invest do not properly process and calculate information that relates to dates
beginning on January 1, 2000 and beyond. Due to the Funds' reliance on various
service providers to perform essential functions, each of the Funds could have
difficulty calculating its NAV, processing orders for share redemptions and
delivering account statements and other information to shareholders. The
International Equity Fund could experience difficulties in effecting
transactions if any of its foreign subcustodians, or if foreign broker/dealers
or foreign markets are not ready for the Year 2000. The Manager has taken steps
that it believes are reasonably designed to address the potential failure of
computer systems used by the Manager and the Funds' service providers to address
the Year 2000 issue. There can be no assurance that the steps taken by the
Manager will be sufficient to avoid any adverse impact.
In evaluating current and potential portfolio positions, Year 2000 is
one of the factors that each Fund's investment advisers take into consideration.
The Funds' investment advisers will rely upon public filings and other
statements made by companies regarding their Year 2000 readiness. Issuers in
countries outside of the U.S. may not be required to make the level of
disclosure regarding Year 2000 readiness that is required in the U.S. If the
value of a Fund's investment is adversely affected by a Year 2000 problem, the
NAV of the Fund may be affected as well.
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand
each Fund's financial performance for the past five years (or, if shorter, the
period of the Fund's operations). Certain information reflects financial results
for a single Fund share. The total returns in the table represent the rate that
an investor would have earned (or lost) on an investment in the Fund (assuming
reinvestment of all dividends and distributions). Except for the S&P 500 Index
Fund, each Fund's highlights were audited by Ernst & Young LLP, independent
auditors. The financial highlights of the S&P 500 Index Fund were audited by
PricewaterhouseCoopers LLP, independent auditors. More financial information
about the Funds is found in their Annual Report, which you may obtain upon
request.
31
<PAGE> 34
BALANCED FUND - INSTITUTIONAL CLASS
<TABLE>
<CAPTION>
-------------------------------------------------------
YEAR ENDED OCTOBER 31,
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD: 1998 1997(C) 1996(C)(D) 1995(B)(C) 1994(A)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 16.18 $ 15.14 $ 13.95 $ 12.36 $ 13.23
Income from investment operations
Net investment income 0.63(E) 0.59(E) 0.54 0.57
Net gains (losses) on securities (realized and 2.16(E) 1.61(E) 1.71 (0.54)
unrealized) -------- -------- -------- --------
Total from investment operations 2.79 2.20 2.25 0.03
-------- -------- -------- --------
Less distributions:
Dividends from net investment income (0.59) (0.57) (0.52) (0.56)
Distributions from net realized gains on securities (1.16) (0.44) (0.14) (0.34)
-------- -------- -------- --------
Total distributions (1.75) (1.01) (0.66) (0.90)
-------- -------- -------- --------
Net asset value, end of period $ 16.18 $ 15.14 $ 13.95 $ 12.36
======== ======== ======== ========
Total return (annualized)(F) 20.04% 16.46% 19.39% (0.08)%
======== ======== ======== ========
Ratios and supplemental data:
Net assets, end of period (in thousands) $148,176 $298,009 $249,913 $222,873
Ratios to average net assets (annualized)(G)(H)
Expenses 0.60%(E) 0.62%(E) 0.63% 0.36%
Net investment income 3.88%(E) 4.00%(E) 4.30% 4.77%
Portfolio turnover rate(I) 105% 76% 73% 48%
</TABLE>
(A) Average shares outstanding for the period rather than end of period shares
were used to compute net investment income per share.
(B) GSB Investment Management, Inc. was added as an investment adviser to the
Balanced Fund on January 1, 1995.
(C) Class expenses per share were subtracted from net investment income per
share for the Fund before class expenses to determine net investment income
per share.
(D) Brandywine Asset Management, Inc. replaced Capital Guardian Trust Company
as an investment adviser to the Fund as of April 1, 1996.
(E) The per share amounts and ratios reflect income and expenses assuming
inclusion of the Fund's proportionate share of the income and expenses of
its corresponding Portfolio.
(F) Total return reflects accrual for the maximum shareholder services fee of
.30% for periods prior to August 1, 1994.
(G) Effective August 1, 1994, expenses include administrative services fees
paid by the Fund to the Manager. Prior to that date, expenses exclude
shareholder services fees paid directly by shareholders to the Manager,
which amounted to approximately $.01 per share in each period on an
annualized basis.
(H) The method of determining average net assets was changed from a monthly
average to a daily average starting with the year ended October 31, 1994.
(I) On November 1, 1995 the Balanced Fund began investing all of its investable
assets in its corresponding Portfolio. Portfolio turnover rate since
November 1, 1996 is that of the Portfolio.
32
<PAGE> 35
GROWTH AND INCOME FUND - INSTITUTIONAL CLASS
<TABLE>
<CAPTION>
-------------------------------------------------------
YEAR ENDED OCTOBER 31,
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD: 1998 1997(B) 1996(B)(C) 1995(B) 1994(A)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 21.63 $ 18.50 $ 15.91 $ 14.19 $ 14.63
Income from investment operations
Net investment income 0.42(D) 0.42(D) 0.41 0.43
Net gains (losses) on securities (realized and 4.43(D) 3.15(D) 2.28 0.08
unrealized) -------- -------- -------- --------
Total from investment operations 4.85 3.57 2.69 0.51
-------- -------- -------- --------
Less distributions:
Dividends from net investment income (0.41) (0.41) (0.43) (0.41)
Distributions from net realized gains on securities (1.31) (0.57) (0.54) (0.54)
-------- -------- -------- --------
Total distributions (1.72) (0.98) (0.97) (0.95)
-------- -------- -------- --------
Net asset value, end of period $ 21.63 $ 18.50 $ 15.91 $ 14.19
======== ======== ======== ========
Total return (annualized)(E) 28.05% 23.37% 20.69% 3.36%
======== ======== ======== ========
Ratios and supplemental data:
Net assets, end of period (in thousands) $200,887 $ 81,183 $ 71,608 $ 22,737
Ratios to average net assets (annualized)(F)(G)
Expenses 0.61%(D) 0.62%(D) 0.62% 0.33%
Net investment income 2.10%(D) 2.55%(D) 2.84% 3.28%
Portfolio turnover rate(H) 35% 40% 26% 23%
</TABLE>
(A) Average shares outstanding for the period rather than end of period shares
were used to compute net investment income per share.
(B) Class expenses per share were subtracted from net investment income per
share for the Fund before class expenses to determine net investment income
per share.
(C) Brandywine Asset Management, Inc. replaced Capital Guardian Trust Company
as an investment adviser to the Fund as of April 1, 1996.
(D) The per share amounts and ratios reflect income and expenses assuming
inclusion of the Fund's proportionate share of the income and expenses of
its corresponding Portfolio.
(E) Total return reflects accrual for the maximum shareholder services fee of
.30% for periods prior to August 1, 1994.
(F) Effective August 1, 1994, expenses include administrative services fees
paid by the Fund to the Manager. Prior to that date, expenses exclude
shareholder services fees paid directly by shareholders to the Manager,
which amounted to approximately $.01 per share in each period on an
annualized basis.
(G) The method of determining average net assets was changed from a monthly
average to a daily average starting with the year ended October 31, 1994.
(H) On November 1, 1995 the Growth and Income Fund began investing all of its
investable assets in its corresponding Portfolio. Portfolio turnover rate
since November 1, 1996 is that of the Portfolio.
33
<PAGE> 36
INTERNATIONAL EQUITY FUND - INSTITUTIONAL CLASS
<TABLE>
<CAPTION>
-------------------------------------------------------
YEAR ENDED OCTOBER 31,
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD: 1998 1997(B) 1996(B) 1995(B) 1994(A)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 17.08 $ 15.01 $ 13.29 $ 12.87 $ 12.07
Income from investment operations
Net investment income 0.34(C) 0.28(C) 0.27 0.32
Net gains (losses) on securities (realized and 2.44(C) 1.95(C) 0.68 1.10
unrealized) -------- -------- -------- --------
Total from investment operations 2.78 2.23 0.95 1.42
-------- -------- -------- --------
Less distributions:
Dividends from net investment income (0.30) (0.27) (0.21) (0.17)
Distributions from net realized gains on securities (0.41) (0.24) (0.32) (0.45)
-------- -------- -------- --------
Total distributions (0.71) (0.51) (0.53) (0.62)
-------- -------- -------- --------
Net asset value, end of period $ 17.08 $ 15.01 $ 13.29 $ 12.87
======== ======== ======== ========
Total return (annualized)(D) 19.08% 17.27% 7.90% 11.77%
======== ======== ======== ========
Ratios and supplemental data:
Net assets, end of period (in thousands) $231,793 $ 62,992 $ 25,757 $ 23,115
Ratios to average net assets (annualized)(E)(F)
Expenses 0.83%(C) 0.85%(C) 0.85% 0.61%
Net investment income 2.35%(C) 2.19%(C) 2.37% 2.74%
Portfolio turnover rate(G) 15% 19% 21% 37%
</TABLE>
(A) Average shares outstanding for the period rather than end of period shares
were used to compute net investment income per share.
(B) Class expenses per share were subtracted from net investment income per
share for the Fund before class expenses to determine net investment income
per share.
(C) The per share amounts and ratios reflect income and expenses assuming
inclusion of the Fund's proportionate share of the income and expenses of
its corresponding Portfolio.
(D) Total return reflects accrual for the maximum shareholder services fee of
.30% for periods prior to August 1, 1994.
(E) Effective August 1, 1994, expenses include administrative services fees
paid by the Fund to the Manager. Prior to that date, expenses exclude
shareholder services fees paid directly by shareholders to the Manager,
which amounted to approximately $.01 per share in each period on an
annualized basis.
(F) The method of determining average net assets was changed from a monthly
average to a daily average starting with the year ended October 31, 1994.
(G) On November 1, 1995 the International Equity Fund began investing all of
its investable assets in its corresponding Portfolio. Portfolio turnover
rate since November 1, 1996 is that of the Portfolio.
34
<PAGE> 37
S&P 500 INDEX FUND - INSTITUTIONAL CLASS
<TABLE>
<CAPTION>
------------------------------
YEAR ENDED DECEMBER 31,
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD: 1998 1997(A)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net asset value, beginning of period $ 13.16 $ 10.00
Income from investment operations
Net investment income 0.14
Net gains (losses) on securities (realized and unrealized)(B) 3.16
---------
Total from investment operations 3.30
---------
Less distributions:
Dividends from net investment income (0.14)
Distributions from net realized gains on securities --
---------
Total distributions (0.14)
---------
Net asset value, end of period $ 13.16
=========
Total return (annualized) 33.09%
=========
Ratios and supplemental data:
Net assets, end of period (in thousands) $ 7,862
Ratios to average net assets (annualized)(B)
Net investment income 1.61%
Expenses 0.20%
Decrease reflected in above expense ratio due to absorption of expenses
by Bankers Trust and the Manager 0.43%
Portfolio turnover rate(C) 19%
</TABLE>
(A) The S&P 500 Index Fund commenced active operations on January 1, 1997 and
on March 1, 1998, existing shares were designated Institutional Class
shares.
(B) The per share amounts and ratios reflect income and expenses assuming
inclusion of the Fund's proportionate share of the income and expenses of
the Equity 500 Index Portfolio.
(C) Portfolio turnover rate is that of the Equity 500 Index Portfolio.
35
<PAGE> 38
INTERMEDIATE BOND FUND - INSTITUTIONAL CLASS
<TABLE>
<CAPTION>
----------------------------
YEAR ENDED PERIOD ENDED
OCTOBER 31, OCTOBER 31,
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD: 1998 1997(A)
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Net asset value, beginning of period $ 10.17 $ 10.00
Income from investment operations
Net investment income 0.07
Net gains (losses) on securities (realized and unrealized)(B) 0.17
---------
Total from investment operations 0.24
---------
Less distributions:
Dividends from net investment income (0.07)
Distributions from net realized gains on securities --
---------
Total distributions (0.07)
---------
Net asset value, end of period $ 10.17
=========
Total return (annualized) 2.41%
=========
Ratios and supplemental data:
Net assets, end of period (in thousands) $ 216,249
Ratios to average net assets (annualized)(B)
Expenses 0.59%
Net investment income 5.63%
Portfolio turnover rate(C) 47%
</TABLE>
(A) The Intermediate Bond Fund commenced active operations on September 15,
1997.
(B) The per share amounts and ratios reflect income and expenses assuming
inclusion of the Fund's proportionate share of the income and expenses of
its corresponding Portfolio.
(C) Portfolio turnover rate is that of the Portfolio.
36
<PAGE> 39
SHORT-TERM BOND FUND - INSTITUTIONAL CLASS
<TABLE>
<CAPTION>
-----------------------------------------------------------
YEAR ENDED OCTOBER 31,
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD: 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 9.63 $ 9.68 $ 9.82 $ 9.67 $ 10.23
Income from investment operations
Net investment income 0.64(A) 0.62(A) 0.62 0.52
Net gains (losses) on securities (realized and (0.05)(A) (0.14)(A) 0.15 (0.46)
unrealized) --------- --------- --------- ---------
Total from investment operations 0.59 0.48 0.77 0.06
--------- --------- --------- ---------
Less distributions:
Dividends from net investment income (0.64) (0.62) (0.62) (0.52)
Distributions from net realized gains on securities -- -- -- (0.10)
--------- --------- --------- ---------
Total distributions (0.64) (0.62) (0.62) (0.62)
--------- --------- --------- ---------
Net asset value, end of period $ 9.63 $ 9.68 $ 9.82 $ 9.67
========= ========= ========= =========
Total return (annualized)(B) 6.29% 5.10% 8.18% 0.42%
========= ========= ========= =========
Ratios and supplemental data:
Net assets, end of period (in thousands) $ 22,947 $ 108,929 $ 137,293 $ 112,141
Ratios to average net assets (annualized)(C)(D)
Expenses 0.57%(A) 0.60%(A) 0.60% 0.31%
Net investment income 6.67%(A) 6.41%(A) 6.36% 5.26%
Portfolio turnover rate(E) 282% 304% 183% 94%
</TABLE>
(A) The per share amounts and ratios reflect income and expenses assuming
inclusion of the Fund's proportionate share of the income and expenses of
its corresponding Portfolio.
(B) Total return reflects accrual for the maximum shareholder services fee of
.30% for periods prior to August 1, 1994.
(C) Effective August 1, 1994, expenses include administrative services fees
paid by the Fund to the Manager. Prior to that date, expenses exclude
shareholder services fees paid directly by shareholders to the Manager,
which amounted to approximately $.01 per share in each period on an
annualized basis.
(D) The method of determining average net assets was changed from a monthly
average to a daily average starting with the year ended October 31, 1994.
(E) On November 1, 1995 the Short-Term Bond Fund began investing all of its
investable assets in the Short-Term Bond Portfolio. Portfolio turnover rate
since November 1, 1996 is that of the Portfolio.
37
<PAGE> 40
MONEY MARKET FUND - INSTITUTIONAL CLASS
<TABLE>
<CAPTION>
----------------------------------------------------------
YEAR ENDED OCTOBER 31,
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD: 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- ---------- ---------- ---------- ----------
Net investment income 0.06(A) 0.05(A) 0.06 0.04
Less dividends from net investment income (0.06) (0.05) (0.06) (0.04)
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ========== ========== ========== ==========
Total return (annualized) 5.60% 5.57% 5.96% 3.85%
========== ========== ========== ==========
Ratios and supplemental data:
Net assets, end of period (in thousands) $1,123,649 $1,406,939 $1,206,041 $1,893,144
Ratios to average net assets (annualized)
Expenses 0.23%(A) 0.24%(A) 0.23% 0.21%
Net investment income 5.46%(A) 5.41%(A) 5.79% 3.63%
</TABLE>
(A) The per share amounts and ratios reflect income and expenses assuming
inclusion of the Fund's proportionate share of the income and expenses of
its corresponding Portfolio.
38
<PAGE> 41
MUNICIPAL MONEY MARKET FUND - INSTITUTIONAL CLASS
<TABLE>
<CAPTION>
----------------------------------------------------------------
YEAR ENDED OCTOBER 31, PERIOD ENDED
OCTOBER 31,
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD: 1998 1997 1996 1995 1994(A)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Net investment income 0.04(B) 0.04(B) 0.04 0.02
Less dividends from net investment income (0.04) (0.04) (0.04) (0.02)
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total return (annualized) 3.52% 3.59% 3.75% 2.44%
======== ======== ======== ==========
Ratios and supplemental data:
Net assets, end of period (in thousands) $ 369 $ 6 $ 7 $ 9,736
Ratios to average net assets (annualized)(C)
Expenses 0.31%(B) 0.27%(B) 0.35% 0.30%
Net investment income 3.49%(B) 3.49%(B) 3.70% 2.38%
</TABLE>
(A) The Municipal Money Market Fund commenced active operations on November 10,
1993.
(B) The per share amounts and ratios reflect income and expenses assuming
inclusion of the Fund's proportionate share of the income and expenses of
its corresponding Portfolio.
(C) Operating results exclude management and administrative services fees
waived by the Manager. Had the Fund paid such fees, the ratio of expenses
and net investment income to average net assets would have been 0.50% and
2.18%, respectively for the period ended October 31, 1994, 0.55% and 3.50%,
respectively for the year ended October 31, 1995, 0.33% and 3.43%,
respectively for the year ended October 31, 1996, 0.32% and 3.48%,
respectively for the year ended October 31, 1997 and X.XX% and X.XX%,
respectively for the year ended October 31, 1998.
39
<PAGE> 42
U.S. GOVERNMENT MONEY MARKET FUND - INSTITUTIONAL CLASS
<TABLE>
<CAPTION>
---------------------------------------------------------
YEAR ENDED OCTOBER 31,
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD: 1998 1997 1996 1995 1994
- ------------------------------------------------------- ---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Net investment income 0.05(A) 0.05(A) 0.06 0.04
Less dividends from net investment income (0.05) (0.05) (0.06) (0.04)
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total return (annualized) 5.36% 5.29% 5.67% 3.70%
======== ======== ======== ========
Ratios and supplemental data:
Net assets, end of period (in thousands) $ 29,946 $ 25,595 $ 47,184 $ 67,607
Ratios to average net assets (annualized)(B)
Expenses 0.27%(A) 0.32%(A) 0.32% 0.25%
Net investment income 5.24%(A) 5.16%(A) 5.49% 3.44%
</TABLE>
(A) The per share amounts and ratios reflect income and expenses assuming
inclusion of the Fund's proportionate share of the income and expenses of
its corresponding Portfolio.
(B) The method of determining average net assets was changed from a monthly
average to a daily average starting with the year ended October 31, 1994.
40
<PAGE> 43
ADDITIONAL INFORMATION
Additional information about the Funds is found in the documents listed
below. Request a free copy of these documents by calling (800) 967-9009.
<TABLE>
<CAPTION>
ANNUAL REPORT/SEMI-ANNUAL REPORT STATEMENT OF ADDITIONAL INFORMATION
<S> <C>
The Funds' Annual and Semi-Annual Reports list each The SAI contains more details about the Funds and their
Fund's actual investments as of the report's date. investment policies. The SAI is incorporated
They also include a discussion by the Manager of in this Prospectus by reference (it is legally part
market conditions and investment strategies that of this Prospectus). A current SAI is on file with
significantly affected the Funds' performance. The the Securities and Exchange Commission (SEC).
report of the Funds' independent auditors is included
in the Annual Report.
</TABLE>
To obtain more information about the Funds or to request a copy of the documents
listed above:
BY TELEPHONE:
Call (800) 967-9009
BY MAIL:
American AAdvantage Funds
P.O. Box 619003, MD5645
DFW Airport, TX 75261-9003
BY E-MAIL:
[email protected]
ON THE INTERNET:
Visit our website at www.aafunds.com
Visit the SEC website at www.sec.gov
Copies of these documents also may be obtained from the SEC Public Reference
Room in Washington, D.C. The Public Reference Room can be reached at (800)
732-0330 or by mailing a request, including a duplicating fee to: SEC's Public
Reference Section, 450 5th Street NW, Washington, D.C. 20549-6009.
FUND SERVICE PROVIDERS
CUSTODIAN TRANSFER AGENT
State Street Bank and Trust Company National Financial Data Services
Boston, Massachusetts Kansas City, Missouri
INDEPENDENT AUDITORS DISTRIBUTOR
Ernst & Young LLP Brokers Transaction Services, Inc.
Dallas, Texas Dallas, Texas
PricewaterhouseCoopers LLP
Baltimore, Maryland
[AMERICAN AADVANTAGE FUNDS LOGO]
SEC File Number 811-4984
American Airlines is not responsible for investments made in the American
AAdvantage Funds. American AAdvantage Funds is a registered service mark of AMR
Corporation. American AAdvantage Balanced Fund, American AAdvantage Growth and
Income Fund, American AAdvantage International Equity Fund, American AAdvantage
Intermediate Bond Fund, American AAdvantage Short-Term Bond Fund, American
AAdvantage Small Cap Value Fund, American AAdvantage Money Market Fund, American
AAdvantage Municipal Money Market Fund, and American AAdvantage U.S. Government
Money Market Fund are service marks of AMR Investment Services.
<PAGE> 44
[AMERICAN AADVANTAGE FUNDS LOGO]
- PlanAhead Class(R) -
PROSPECTUS
March 1, 1999
Equity Funds
------------
Balanced
Growth and Income
International Equity
Small Cap Value
S&P 500 Index
Bond Funds
----------
Intermediate Bond
Short-Term Bond
Money Market Funds
------------------
Money Market
Municipal Money Market
U.S. Government Money Market
Managed by AMR Investment Services, Inc.
THE SECURITIES AND EXCHANGE COMMISSION DOES NOT GUARANTEE THAT THE INFORMATION
IN THIS PROSPECTUS OR ANY OTHER MUTUAL FUND'S PROSPECTUS IS ACCURATE OR
COMPLETE, NOR DOES IT JUDGE THE INVESTMENT MERIT OF THESE FUNDS. TO STATE
OTHERWISE IS A CRIMINAL OFFENSE.
<PAGE> 45
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
ABOUT THE FUNDS
Overview..............................................................X
Balanced Fund.........................................................X
Growth and Income Fund................................................X
International Equity Fund.............................................X
Small Cap Value Fund .................................................XX
S&P 500 Index Fund....................................................XX
Intermediate Bond Fund................................................XX
Short-Term Bond Fund..................................................XX
Money Market Fund.....................................................XX
Municipal Money Market Fund...........................................XX
U.S. Government Money Market Fund.....................................XX
The Manager...........................................................XX
The Investment Advisers...............................................XX
Valuation of Shares...................................................XX
ABOUT YOUR INVESTMENT
Purchase and Redemption of Shares.....................................XX
Distributions and Taxes...............................................XX
ADDITIONAL INFORMATION
Distribution of Fund Shares...........................................XX
Master-Feeder Structure...............................................XX
Year 2000.............................................................XX
Financial Highlights..................................................XX
Additional Information................................................XX
</TABLE>
ABOUT THE FUNDS
OVERVIEW
The American AAdvantage Funds (the "Funds") are managed by AMR
Investment Services, Inc. (the "Manager"), a wholly owned subsidiary of AMR
Corporation.
The Funds operate under a master-feeder structure. This means that each
Fund, except for the S&P 500 Index Fund, seeks its investment objective by
investing all of its investable assets in a corresponding Portfolio of the AMR
Investment Services Trust ("AMR Trust") that has a similar name and identical
investment objective. The S&P 500 Index Fund invests all of its investable
assets in the Equity 500 Index Portfolio, which is a separate investment company
managed by Bankers Trust Company ("BT") with an identical investment objective.
Throughout this Prospectus, statements regarding investments by a Fund refer to
investments made by its corresponding Portfolio. For easier reading, the term
"Fund" is used throughout the Prospectus to refer to either a Fund or its
Portfolio, unless stated otherwise. See "Master-Feeder Structure".
2
<PAGE> 46
AMERICAN AADVANTAGE BALANCED FUND
INVESTMENT OBJECTIVE
Income and capital appreciation.
PRINCIPAL STRATEGIES
This Fund typically invests between 50% and 65% of its assets in equity
securities and between 35% and 50% of its assets in debt securities.
The Fund's equity investments may include common stocks, preferred
stocks, securities convertible into common stocks, and U.S. dollar-denominated
American Depositary Receipts (collectively referred to as "stocks").
The Fund's investment advisers select stocks which, in their opinion,
have most or all of the following characteristics:
o above-average earnings growth potential,
o selling at prices below their perceived economic value,
o low price to earnings ratio,
o low price to book value ratio, and
o generate above-average dividend yields.
Each of the Fund's investment advisers determines the growth prospects
of companies based upon a combination of internal and external research using
fundamental analysis and considering changing economic trends. The decision to
sell a stock is typically based on the belief that the company is no longer
considered undervalued or shows deteriorating fundamentals, or that better
investment opportunities exist in other stocks. The Manager believes that this
strategy will help the Fund outperform other investment styles over the longer
term while minimizing volatility and downside risk.
The Fund's investment in debt securities may include obligations of the
U.S. Government, its agencies and instrumentalities; corporate debt securities,
such as notes and bonds; mortgage-backed securities; asset-backed securities;
master-demand notes; Yankeedollar and Eurodollar bank certificates of deposit,
time deposits, bankers' acceptances, commercial paper and other notes; and other
debt securities. The Fund will only buy debt securities that are investment
grade at the time of purchase. Investment grade securities include securities
issued or guaranteed by the U.S. Government, its agencies and instrumentalities,
as well as securities rated in one of the four highest rating categories by all
nationally recognized statistical rating organizations rating that security
(such as Standard & Poor's or Moody's Investors Service, Inc.). Obligations
rated in the fourth highest rating category are limited to 25% of the Fund's
debt allocation. The Fund, at the discretion of the investment advisers, may
retain a security that has been downgraded below the initial investment
criteria.
In determining which debt securities to buy and sell, the investment
advisers generally use a top-down fixed income review process, as follows:
o Develop overall investment strategy based on a comprehensive
review of macroeconomic conditions and an analysis of leading
economic indicators.
o Set portfolio maturity structure based on U.S. Treasury yield
curve and credit spread analysis.
o Perform sector analysis to determine relative value.
o Select specific debt securities.
o Review and monitor portfolio composition for changes in credit,
risk-return profile and comparisons with benchmarks.
One of the investment advisers to the Fund uses a bottom-up fixed
income strategy in determining which securities to buy and sell, as follows:
o Select individual securities based upon yield to maturity
advantage versus a comparable U.S. Treasury security.
o Evaluate credit quality of the security.
o Perform quantitative analysis of yield premium using empirical
effective duration measures.
Under adverse market conditions, the Fund may, for temporary defensive
purposes, invest up to 100% of its assets in cash or cash equivalents, including
investment grade short-term obligations. To the extent that the Fund invokes
this strategy, its ability to achieve its investment objective may be affected
adversely.
INVESTMENT ADVISERS
The Manager allocates the assets of the Fund among the following
investment advisers:
Barrow, Hanley, Mewhinney & Strauss, Inc.
Brandywine Asset Management, Inc.
GSB Investment Management, Inc.
Hotchkis and Wiley
Independence Investment Associates, Inc.
3
<PAGE> 47
RISK FACTORS
o Market Risk (Stocks)
Since this Fund invests a substantial portion of its assets in equity
securities, it is subject to stock market risk. Market risk involves
the possibility that the value of the Fund's investments in stocks will
decline due to drops in the stock market. In general, the value of the
Fund will move in the same direction as the overall stock market, which
will vary from day to day in response to the activities of individual
companies and general market and economic conditions.
o Interest Rate Risk (Bonds)
The Fund is subject to the risk that the market value of the bonds it
holds will decline due to rising interest rates. When interest rates
rise, the prices of most bonds go down. When interest rates go down,
the bond prices go up. The price of a bond is also affected by its
maturity. Bonds with longer maturities generally have greater
sensitivity to changes in interest rates.
o Credit Risk (Bonds)
The Fund is subject to the risk that an issuer of a bond will fail to
make timely payment of interest or principal. A decline in an issuer's
credit rating can cause its price to go down. This risk is somewhat
minimized by the Fund's policy of only investing in bonds that are
considered investment grade at the time of purchase.
o Prepayment Risk (Bonds)
The Fund's investments in asset-backed and mortgage-backed securities
are subject to the risk that the principal amount of the underlying
collateral may be repaid prior to the bond's maturity date. If this
occurs, no additional interest will be paid on the investment.
o Additional Risks
An investment in the Fund is not a deposit of a bank and is not insured
or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. The value of an investment in the Fund will
fluctuate up and down, which means an investor could lose money.
INVESTOR PROFILE
This Fund may be suitable for investors who:
o need to fund a long-term objective, such as a child's college
education or a comfortable retirement
o seek a convenient way to invest in value-oriented stocks and
investment grade bonds in a single, professionally managed
portfolio
o desire long-term performance from an investment style that may
help to minimize volatility and downside risk
o require income as well as the potential for long-term growth of
principal
o want to take advantage of the investment expertise of
value-oriented investment advisers
HISTORICAL PERFORMANCE
The bar chart below provides an indication of risk by showing how the
Fund's performance has varied from year to year. The table shows how the Fund's
performance compares to two broad-based market indices and the Lipper Balanced
Index, a composite of X funds as of December 31, 1998, with the same investment
objective as the Fund. The PlanAhead Class of the Fund began offering its shares
on August 1, 1994. However, another class of shares of the Fund not offered in
this prospectus began offering its shares on July 17, 1987. In the chart and
table below, performance results before August 1, 1994 are for the older class.
Because the other class had lower expenses, its performance was better than the
PlanAhead Class of the Fund would have realized in the same period. Past
performance is not necessarily indicative of how the Fund will perform in the
future.
TOTAL RETURN FOR THE CALENDAR YEAR ENDED 12/31 OF EACH YEAR
[GRAPH]
<TABLE>
<S> <C> <C>
Highest Quarterly Return from 1/1/89 through 12/31/98 X Quarter 19XX X.XX%
Lowest Quarterly Return from 1/1/89 through 12/31/98 X Quarter 19XX X.XX%
</TABLE>
4
<PAGE> 48
<TABLE>
<CAPTION>
Average Annual Total Return
================================================
as of 12/31/98
------------------------------------------------
1 Year 5 Years 10 Years
------ ------- --------
<S> <C> <C> <C>
Balanced Fund X.XX% X.XX% X.XX%
S&P 500 Index* X.XX% X.XX% X.XX%
Lehman Bros. Intermediate Gov./Corp. Index** X.XX% X.XX% X.XX%
Lipper Balanced Index X.XX% X.XX% X.XX%
</TABLE>
* The S&P 500 is an unmanaged index of common stocks publicly traded in the
United States.
** The Lehman Brothers Intermediate Gov./Corp. Index is a market value weighted
performance benchmark for government and corporate fixed-rate debt issues with
maturities between one and ten years.
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy
and hold shares of the Balanced Fund.(1)
Annual Fund Operating Expenses (expenses that are deducted from Fund
assets)
<TABLE>
<S> <C>
Management Fees......................................0.33%
Distribution (12b-1) Fees............................0.00
Other Expenses.......................................0.57
----
Total Annual Fund Operating Expenses.................0.90%
====
</TABLE>
(1)The expense table and the Example below reflect the expenses of both
the Fund and its corresponding Portfolio.
EXAMPLE
This Example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The Example assumes
that you invest $10,000 in the Fund for the time periods indicated and then
redeem all of your shares at the end of those periods. The Example also assumes
that your investment has a 5% return each year and that the Fund's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
<TABLE>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- -------
<S> <C> <C> <C>
$92 $287 $498 $1,108
</TABLE>
5
<PAGE> 49
AMERICAN AADVANTAGE GROWTH AND INCOME FUND
INVESTMENT OBJECTIVE
Long-term capital appreciation and current income.
PRINCIPAL STRATEGIES
Ordinarily at least 80% of the total assets of this Fund are invested
in equity securities. The Fund's investments may include common stocks,
preferred stocks, securities convertible into U.S. common stocks, and U.S.
dollar-denominated American Depositary Receipts (collectively referred to as
"stocks").
The Fund's investment advisers select stocks which, in their opinion,
have most or all of the following characteristics:
o above-average earnings growth potential,
o selling at prices below their perceived economic value,
o low price to earnings ratio,
o low price to book value ratio, and
o generate above-average dividend yields.
Each of the Fund's investment advisers determines the growth prospects
of companies based upon a combination of internal and external research using
fundamental analysis and considering changing economic trends. The decision to
sell a stock is typically based on the belief that the company is no longer
considered undervalued or shows deteriorating fundamentals, or that better
investment opportunities exist in other stocks. The Manager believes that this
strategy will help the Fund outperform other investment styles over the longer
term while minimizing volatility and downside risk.
Under adverse market conditions, the Fund may, for temporary defensive
purposes, invest up to 100% of its assets in cash or cash equivalents, including
investment grade short-term obligations. To the extent that the Fund invokes
this strategy, its ability to achieve its investment objective may be affected
adversely.
INVESTMENT ADVISERS
The Manager allocates the assets of the Fund among the following
investment advisers:
Barrow, Hanley, Mewhinney & Strauss, Inc.
Brandywine Asset Management, Inc.
GSB Investment Management, Inc.
Hotchkis and Wiley
Independence Investment Associates, Inc.
RISK FACTORS
o Market Risk
Since this Fund invests most of its assets in equity securities, it is
subject to stock market risk. Market risk involves the possibility that
the value of the Fund's investments in stocks will decline due to drops
in the stock market. In general, the value of the Fund will move in the
same direction as the overall stock market, which will vary from day to
day in response to the activities of individual companies and general
market and economic conditions.
o Additional Risks
An investment in the Fund is not a deposit of a bank and is not insured
or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. The value of an investment in the Fund will
fluctuate up and down, which means an investor could lose money.
INVESTOR PROFILE
This Fund may be suitable for investors who:
o need to fund a long-term objective, such as a child's college
education, a comfortable retirement or wealth accumulation
o seek a U.S. stock mutual fund that invests in fundamentally
strong companies
o require total returns consisting of income as well as the
potential for long-term growth of principal
o want to take advantage of the expertise of value-oriented
investment advisers
6
<PAGE> 50
HISTORICAL PERFORMANCE
The bar chart below provides an indication of risk by showing how the
Fund's performance has varied from year to year. The table shows how the Fund's
performance compares to the S&P 500, a widely recognized unmanaged index of
common stocks publicly traded in the United States, and the Lipper Growth and
Income Index, a composite of X funds as of December 31, 1998, with the same
investment objective as the Fund. The PlanAhead Class of the Fund began offering
its shares on August 1, 1994. However, another class of shares of the Fund not
offered in this prospectus began offering its shares on July 17, 1987. In the
chart and table below, performance results before August 1, 1994 are for the
older class. Because the other class had lower expenses, its performance was
better than the PlanAhead Class of the Fund would have realized in the same
period. Past performance is not necessarily indicative of how the Fund will
perform in the future.
TOTAL RETURN FOR THE CALENDAR YEAR ENDED 12/31 OF EACH YEAR
[GRAPH]
<TABLE>
<S> <C> <C>
Highest Quarterly Return from 1/1/89 through 12/31/98 X Quarter 19XX X.XX%
Lowest Quarterly Return from 1/1/89 through 12/31/98 X Quarter 19XX X.XX%
</TABLE>
<TABLE>
<CAPTION>
Average Annual Total Return
=====================================================
as of 12/31/98
-----------------------------------------------------
1 Year 5 Years 10 Years
------ ------- --------
<S> <C> <C> <C>
Growth and Income Fund X.XX% X.XX% X.XX%
S&P 500 Index X.XX% X.XX% X.XX%
Lipper Growth and Income Index X.XX% X.XX% X.XX%
</TABLE>
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy
and hold shares of the Growth and Income Fund.(1)
Annual Fund Operating Expenses (expenses that are deducted from Fund
assets)
<TABLE>
<S> <C>
Management Fees......................................0.33%
Distribution (12b-1) Fees............................0.00
Other Expenses.......................................0.60
----
Total Annual Fund Operating Expenses.................0.93%
====
</TABLE>
(1)The expense table and the Example below reflect the expenses of both
the Fund and its corresponding Portfolio.
EXAMPLE
This Example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The Example assumes
that you invest $10,000 in the Fund for the time periods indicated and then
redeem all of your shares at the end of those periods. The Example also assumes
that your investment has a 5% return each year and that the Fund's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$95 $296 $515 $1,143
</TABLE>
7
<PAGE> 51
AMERICAN AADVANTAGE INTERNATIONAL EQUITY FUND
INVESTMENT OBJECTIVE
Long-term capital appreciation.
PRINCIPAL STRATEGIES
Under normal circumstances, at least 80% of the Fund's total assets are
invested in common stocks and securities convertible into common stocks
(collectively, "stocks") of issuers based in at least three different countries
located outside the United States.
The current countries in which the Fund may invest are:
<TABLE>
<S> <C> <C> <C> <C> <C>
Australia Denmark Hong Kong Mexico Portugal Sweden
Austria Finland Ireland Netherlands Singapore Switzerland
Belgium France Italy New Zealand South Korea United Kingdom
Canada Germany Japan Norway Spain
</TABLE>
The investment advisers select stocks which, in their opinion, have
most or all of the following characteristics:
o above-average earnings growth potential,
o selling at prices below their perceived economic value,
o low price to earnings ratio,
o low price to book value ratio, and
o generate above-average dividend yields.
The investment advisers will also consider potential changes in
currency exchange rates when choosing stocks. Each of the investment advisers
determines the growth prospects of companies based upon a combination of
internal and external research using fundamental analysis and considering
changing economic trends. The decision to sell a stock is typically based on the
belief that the company is no longer considered undervalued or shows
deteriorating fundamentals, or that better investment opportunities exist in
other stocks. The Manager believes that this strategy will help the Fund
outperform other investment styles over the longer term while minimizing
volatility and downside risk. The Fund may trade forward foreign currency
contracts to hedge currency fluctuations of underlying stock positions when it
is believed that a foreign currency may suffer a decline against the U.S.
dollar.
Under adverse market conditions, the Fund may, for temporary defensive
purposes, invest up to 100% of its assets in cash or cash equivalents, including
investment grade short-term obligations. To the extent that the Fund invokes
this strategy, its ability to achieve its investment objective may be affected
adversely.
INVESTMENT ADVISERS
The Manager allocates the assets of the Fund among the following
investment advisers:
Hotchkis and Wiley
Morgan Stanley Asset Management Inc.
Templeton Investment Counsel, Inc.
RISK FACTORS
o Market Risk
Since this Fund invests most of its assets in equity securities, it is
subject to stock market risk. Market risk involves the possibility that
the value of the Fund's investments in stocks of a particular country
will decline due to drops in that country's stock market. In general,
the value of the Fund will move in the same direction as the
international stock markets it invests in, which will vary from day to
day in response to the activities of individual companies and general
market and economic conditions of that country.
o Foreign Investing
Overseas investing carries potential risks not associated with domestic
investments. Such risks include, but are not limited to: (1) currency
exchange rate fluctuations; (2) political and financial instability;
(3) less liquidity and greater volatility of foreign investments; (4)
lack of uniform accounting, auditing and financial reporting standards;
(5) less government regulation and supervision of foreign stock
exchanges, brokers and listed companies; (6) increased price
volatility; and (7) delays in transaction settlement in some foreign
markets.
o Additional Risks
An investment in the Fund is not a deposit of a bank and is not insured
or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. The value of an investment in the Fund will
fluctuate up and down, which means an investor could lose money.
8
<PAGE> 52
INVESTOR PROFILE
This Fund may be appropriate for investors who:
o need to fund a long-term objective that requires growth of
capital, such as a child's college education, a comfortable
retirement or wealth accumulation
o seek to complement U.S. stock holdings with an international stock
mutual fund that invests in large, well-capitalized foreign
companies
o desire to benefit from the growth potential of major foreign
markets
o want to take advantage of the expertise of leading international
equity investment advisers
o are willing to accept the increased risks of international
investing, including currency and exchange rate risks, accounting
differences and political risks
HISTORICAL PERFORMANCE
The bar chart below provides an indication of risk by showing how the
Fund's performance has varied from year to year. The table shows how the Fund's
performance compares to the Morgan Stanley Eastern AustralAsia Far East (EAFE)
Index, a widely recognized unmanaged index of international stock investment
performance, and the Lipper International Index, a composite of X funds as of
December 31, 1998, with the same investment objective as the Fund. The PlanAhead
Class of the Fund began offering its shares on August 1, 1994. However, another
class of shares of the Fund not offered in this prospectus began offering its
shares on August 7, 1991. In the chart and table below, performance results
before August 1, 1994 are for the older class. Because the other class had lower
expenses, its performance was better than the PlanAhead Class of the Fund would
have realized in the same period. Past performance is not necessarily indicative
of how the Fund will perform in the future.
TOTAL RETURN FOR THE CALENDAR YEAR ENDED 12/31 OF EACH YEAR
[GRAPH]
<TABLE>
<S> <C> <C>
Highest Quarterly Return from 1/1/92 through 12/31/98 X Quarter 19XX X.XX%
Lowest Quarterly Return from 1/1/92 through 12/31/98 X Quarter 19XX X.XX%
</TABLE>
<TABLE>
<CAPTION>
Average Annual Total Return
=====================================================
as of 12/31/98
-----------------------------------------------------
Since Inception
1 Year 5 Years (8/7/91)
------ ------- ---------------
<S> <C> <C> <C>
International Equity Fund X.XX% X.XX% X.XX%
EAFE Index X.XX% X.XX% X.XX%
Lipper International Index X.XX% X.XX% X.XX%
</TABLE>
FEES AND EXPENSES
This table describes the fees and expenses that you pay if you buy and
hold shares of the International Equity Fund.(1)
Annual Fund Operating Expenses (expenses that are deducted from Fund
assets)
<TABLE>
<S> <C>
Management Fees......................................0.48%
Distribution (12b-1) Fees............................0.00
Other Expenses.......................................0.66
----
Total Annual Fund Operating Expenses.................1.14%
====
</TABLE>
(1)The expense table and the Example below reflect the expenses of both
the Fund and its corresponding Portfolio.
EXAMPLE
This Example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The Example assumes
that you invest $10,000 in the Fund for the time periods indicated and then
redeem all of your shares at the end of those periods. The Example also assumes
that your investment has a 5% return each year and that the Fund's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$116 $362 $628 $1,386
</TABLE>
9
<PAGE> 53
AMERICAN AADVANTAGE SMALL CAP VALUE FUND
INVESTMENT OBJECTIVE
Long-term capital appreciation and current income.
PRINCIPAL STRATEGIES
Ordinarily at least 80% of the total assets of the Fund are invested in
equity securities of U.S. companies with market capitalizations of $1 billion or
less at the time of investment. The Fund's investments may include common
stocks, preferred stocks, securities convertible into common stocks, and U.S.
dollar-denominated American Depositary Receipts (collectively, "stocks").
The investment advisers select stocks which, in their opinion, have
most or all of the following characteristics:
o above-average earnings growth potential,
o selling at prices below their perceived economic value,
o low price to earnings ratio,
o low price to book value ratio, and
o generate above-average dividend yields.
Each of the investment advisers determines the growth prospects of
companies based upon a combination of internal and external research using
fundamental analysis and considering changing economic trends. The decision to
sell a stock is typically based on the belief that the company is no longer
considered undervalued or shows deteriorating fundamentals, or that better
investment opportunities exist in other stocks. The Manager believes that this
strategy will help the Fund outperform other investment styles over the longer
term while minimizing volatility and downside risk.
Under adverse market conditions, the Fund may, for temporary defensive
purposes, invest up to 100% of its assets in cash or cash equivalents, including
investment grade short-term obligations. To the extent that the Fund invokes
this strategy, its ability to achieve its investment objective may be affected
adversely.
INVESTMENT ADVISERS
The Manager allocates the assets of the Fund among the following
investment advisers:
Brandywine Asset Management, Inc.
Hotchkis and Wiley
RISK FACTORS
o Market Risk
Since this Fund invests most of its assets in equity securities, it is
subject to stock market risk. Market risk involves the possibility that
the value of the Fund's investments in stocks will decline due to drops
in the stock market. In general, the value of the Fund will move in the
same direction as the overall stock market, which will vary from day to
day in response to the activities of individual companies and general
market and economic conditions.
o Small Capitalization Companies
Investing in the securities of small capitalization companies involves
greater risk and the possibility of greater price volatility than
investing in larger capitalization and more established companies,
since smaller companies may have limited operating history, product
lines, and financial resources, and the securities of these companies
may lack sufficient market liquidity.
o Additional Risks
An investment in the Fund is not a deposit of a bank and is not insured
or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. The value of an investment in the Fund will
fluctuate up and down, which means an investor could lose money.
INVESTOR PROFILE
This Fund may be suitable for investors who:
o need to fund a long-term objective, such as a child's education, a
comfortable retirement or wealth accumulation
o seek a U.S. stock mutual fund that invests in small, less well-known
companies
o want to take advantage of the expertise of value-oriented investment
advisers
o are willing to accept the increased risks of small stock investing
10
<PAGE> 54
HISTORICAL PERFORMANCE
The Small Cap Value Fund began operations on March 1, 1999, and
therefore, long-term historical performance is not available. However,
Brandywine and Hotchkis each have experience managing other accounts with
investment objectives, policies and strategies similar to those of the Fund.
Unlike the Fund, all of the accounts managed by Brandywine include an allocation
to micro-cap companies, which are defined as companies with total market
capitalization of less than $250 million. Thus, the performance below consists
of only the Hotchkis and Wiley Small Cap Fund ("Hotchkis Fund"), an investment
company that has investment objectives, policies and strategies substantially
similar to those of the Fund. The data shown below reflects the total return for
the periods shown, reduced by the actual expenses of the Hotchkis Fund. Applying
the Fund's expense structure to the Hotchkis Fund would have lowered the
performance results shown. THIS PERFORMANCE OF THE HOTCHKIS FUND IS NOT THE
PERFORMANCE OF THE FUND. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF HOW
THE FUND WILL PERFORM IN THE FUTURE.
TOTAL RETURN FOR THE CALENDAR YEAR ENDED 12/31 OF EACH YEAR
[GRAPH]
<TABLE>
<S> <C> <C>
Highest Quarterly Return from 1/1/88 through 12/31/98 X Quarter 19XX X.XX%
Lowest Quarterly Return from 1/1/88 through 12/31/98 X Quarter 19XX X.XX%
Year-to-Date Return through 9/30/98 X.XX%
</TABLE>
<TABLE>
<CAPTION>
Average Annual Total Return
=====================================================
as of 12/31/98
-----------------------------------------------------
1 Year 5 Years 10 Years
------ ------- --------
<S> <C> <C> <C>
Hotchkis Fund X.XX% X.XX% X.XX%
Russell 2000 Index* X.XX% X.XX% X.XX%
</TABLE>
* The Russell 2000 Index is an unmanaged index of 2,000 small capitalization
stocks.
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy
and hold shares of the Small Cap Value Fund.(1)
Annual Fund Operating Expenses (expenses that are deducted from Fund
assets)
<TABLE>
<S> <C>
Management Fees......................................X.X%
Distribution (12b-1) Fees............................0.00
Other Expenses.......................................X.X(2)
----
Total Annual Fund Operating Expenses.................X.X%
====
Fee Waiver and/or Expense Reimbursement..............X.X%(3)
Net Expenses.........................................X.XX%
</TABLE>
(1)The expense table and the Example below reflect the expenses of both
the Fund and its corresponding Portfolio.
(2)Other Expenses are based on estimates for the current fiscal year.
(3)The Manager has contractually agreed to waive a portion of its fee
and to reimburse the Fund for Other Expenses through October 31,
1999 to the extent that Total Annual Fund Operating Expenses exceed
X.XX%.
EXAMPLE
This Example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The Example assumes
that you invest $10,000 in the Fund for the time periods indicated and then
redeem all of your shares at the end of those periods. The Example also assumes
that your investment has a 5% return each year and that the Fund's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
------ -------
<S> <C>
$XXX $XXX
</TABLE>
11
<PAGE> 55
AMERICAN AADVANTAGE S&P 500 INDEX FUND(1)
INVESTMENT OBJECTIVE
To track, as closely as possible, (before expenses) the performance of
the Standard & Poor's 500 Composite Stock Price Index (S&P 500 or Index), which
emphasizes stocks of large U.S. companies.
PRINCIPAL STRATEGIES
The Fund invests for growth, not income; any dividend and interest
income is incidental to the pursuit of its objective. While the Fund's
investment adviser gives priority to capital growth, it cannot offer any
assurance of achieving this objective. The Fund's investment objective is not a
fundamental policy. A shareholder vote is not required to change it, but
shareholders must be notified before it is changed.
An index is a group of securities whose overall performance is used as
a standard to measure investment performance. This Fund is not actively managed
by investment advisers who buy and sell securities based on research and
analysis. Instead, this Fund is passively managed in that it tries to match, as
closely as possible, the performance of a target index by holding either all, or
a representative sample, of the securities in the index.
Under normal conditions, the Fund will invest at least 80% of its
assets in common stocks of companies included in the S&P 500, selected on the
basis of computer generated statistical data, that are deemed representative of
the industry diversification of the S&P 500. The Fund holds each stock found in
the S&P 500 Index in roughly the same proportions as represented by the S&P 500
Index itself. For example, if 5% of the S&P 500 Index were made up of the stock
of a particular company, the Fund would invest 5% of its assets in that company.
To track the S&P 500 Index as closely as possible, the Fund attempts to remain
fully invested in stocks.
Because it would be very expensive to buy and sell all of the stocks in
the S&P 500 Index, the Fund uses a "sampling" technique. Using computer models,
the Fund selects stocks that will track the S&P 500 Index, as closely as
possible, in terms of industry, size, and other characteristics.
Under normal conditions, the investment adviser will attempt to invest
as much of the Fund's assets as is practical in common stocks included in the
S&P 500. However, the Fund may maintain up to 20% of its assets in short-term
debt securities and money market instruments hedged with stock index futures and
options. The Fund will not use these derivatives for speculative purposes or as
leveraged investments that magnify the gains or losses of an investment. The
reasons for which the Fund will invest in derivatives are:
o to keep cash on hand to meet shareholder redemptions or other needs
while simulating full investments in stocks, and
o to reduce the Fund's transaction cost or add value when these
instruments are favorably priced.
INVESTMENT ADVISER
Bankers Trust Company
RISK FACTORS
o Market Risk
As with any investment in common stocks, an investment in the Fund
could lose money, or the Fund's performance could trail that of other
investments. For example:
o Stock prices overall could decline over short or even extended
periods. Stock markets tend to move in cycles, with periods of
rising stock prices and periods of falling stock prices.
o Returns on stocks of large U.S. companies could trail the returns
from the overall stock market. Each type of stock tends to go
through cycles of outperformance and underperformance in
comparison to the overall stock market. These periods in the past
have lasted for several years.
In addition, unlike an index itself, an index fund has operating
expenses. Therefore, while the Fund is expected to track the S&P 500
Index as closely as possible, it will not be able to match the
performance of the index exactly.
o Derivatives
The use of these instruments to pursue the S&P 500 Index returns
requires special skills, knowledge and investment techniques that
differ from those required for normal portfolio management. Gains or
losses from positions in a derivative instrument may be much greater
than the derivative's original cost.
- ------------------------
(1)S&P is a trademark of The McGraw-Hill Companies, Inc. and has been licensed
for use. "Standard and Poor's(R)," "S&P(R)," "Standard & Poor's 500," "S&P
500(R)" and "500" are all trademarks of The McGraw-Hill Companies, Inc. and have
been licensed for use by Bankers Trust Company. The S&P 500 Index Fund is not
sponsored, sold or promoted by Standard & Poor's, and Standard & Poor's makes no
representation regarding the advisability of investing in this Fund.
12
<PAGE> 56
o Futures and Options
Although not one of its principal investment strategies, the Fund may
invest in futures contracts and options on futures contracts. These
investments, when made, are for hedging purposes. If the Fund invests
in futures contracts and options on futures contracts for non-hedging
purposes, the margin and premiums required to make those investments
will not exceed 5% of the Fund's net asset value after taking into
account unrealized profits and losses on the contracts. Futures
contracts and options on futures contracts used for non-hedging
purposes involve greater risks than stock investments.
o Additional Risks
An investment in the Fund is not a deposit of Bankers Trust Company or
any other bank and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. The value of an
investment in the Fund will fluctuate up and down, which means an
investor could lose money.
INVESTOR PROFILE
This Fund may be appropriate for investors who:
o need to fund a long-term objective, such as a child's college
education, a comfortable retirement or wealth accumulation
o seek a stock mutual fund that reflects the performance of publicly
traded U.S. stocks in general
o want to take advantage of a "passive," indexing investment
approach
o are willing to ride out stock market fluctuations in pursuit of
potentially higher long-term returns
HISTORICAL PERFORMANCE
The bar chart below provides an indication of risk by showing how the
Fund's performance has varied from year to year. The table shows how the Fund's
performance compares to the S&P 500 Index, a widely recognized unmanaged index
of common stocks publicly traded in the United States as of December 31, 1998.
The PlanAhead Class of the Fund began offering its shares on March 1, 1998.
However, another class of shares of the Fund not offered in this prospectus
began offering its shares on January 1, 1997. In the chart and table below,
performance results before March 1, 1998 are for the older class. Because the
other class had lower expenses, its performance was better than the PlanAhead
Class of the Fund would have realized in the same period. Past performance is
not necessarily indicative of how the Fund will perform in the future.
TOTAL RETURN FOR THE CALENDAR YEAR ENDED 12/31 OF EACH YEAR
[GRAPH]
<TABLE>
<S> <C> <C>
Highest Quarterly Return from 1/1/97 through 12/31/98 X Quarter 19XX X.XX%
Lowest Quarterly Return from 1/1/97 through 12/31/98 X Quarter 19XX X.XX%
</TABLE>
<TABLE>
<CAPTION>
Average Annual Total Return
==================================================
as of 12/31/98
--------------------------------------------------
Since Inception
---------------
1 Year (1/1/97)
------ ---------------
<S> <C> <C>
S&P 500 Index Fund X.XX% X.XX%
S&P 500 Index X.XX% X.XX%
</TABLE>
13
<PAGE> 57
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy
and hold shares of the S&P 500 Index Fund.(1)
Annual Fund Operating Expenses (expenses that are deducted from Fund
assets)
<TABLE>
<S> <C>
Management Fees......................................0.10%(2)
Distribution (12b-1) Fees............................0.00
Other Expenses.......................................0.85(3)
----
Total Annual Fund Operating Expenses.................X.XX%
====
Fee Waiver and/or Expense Reimbursement..............X.XX%
Net Expenses.........................................0.55%
</TABLE>
(1)The expense table and the Example below reflect the expenses of both
the Fund and the Equity 500 Index Portfolio.
(2)The investment adviser, BT, has voluntarily agreed to waive a
portion of the investment advisory fee. With such waiver, the
Management Feeis 0.05%.
(3)The Manager has contractually agreed to waive a portion of its fee
and to reimburse the Fund for Other Expenses through October 31,
1999 to the extent that Total Annual Fund Operating Expenses exceed
0.55%. After such waivers and reimbursements, Other Expenses are
X.XX%.
EXAMPLE
This Example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The Example assumes
that you invest $10,000 in the Fund for the time periods indicated and then
redeem all of your shares at the end of those periods. The Example also assumes
that your investment has a 5% return each year and that the Fund's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$56 $XXX $XXX $XXX
</TABLE>
14
<PAGE> 58
AMERICAN AADVANTAGE INTERMEDIATE BOND FUND
INVESTMENT OBJECTIVE
Income and capital appreciation.
PRINCIPAL STRATEGIES
The Fund invests in obligations of the U.S. Government, its agencies
and instrumentalities; corporate debt securities, such as commercial paper,
master demand notes, loan participation interests, medium-term notes and funding
agreements; mortgage-backed securities; asset-backed securities; and
Yankeedollar and Eurodollar bank certificates of deposit, time deposits,
bankers' acceptances and other notes. As an investment policy, the Fund
primarily seeks income and secondarily seeks capital appreciation.
The Fund will only buy debt securities that are investment grade at the
time of purchase. Investment grade securities include securities issued or
guaranteed by the U.S. Government, its agencies and instrumentalities, as well
as securities rated in one of the four highest rating categories by all rating
organizations rating the securities (such as Standard & Poor's or Moody's
Investors Service, Inc.). No more than 25% of assets may be invested in
securities rated in the fourth highest rating category. The Fund, at the
discretion of the investment advisers, may retain a security that has been
downgraded below the initial investment criteria.
In determining which securities to buy and sell, the Manager employs a
top-down fixed income review process, as follows:
o Develop overall investment strategy based on a comprehensive
review of macroeconomic conditions and an analysis of leading
economic indicators.
o Set portfolio maturity structure based on U.S. Treasury yield
curve and credit spread analysis.
o Perform sector analysis to determine relative value.
o Select specific debt securities.
o Review and monitor portfolio composition for changes in credit,
risk-return profile and comparisons with benchmarks.
The other investment adviser to the Fund uses a bottom-up fixed income
strategy in determining which securities to buy and sell, as follows:
o Select individual securities based upon yield to maturity
advantage versus a comparable U.S. Treasury security.
o Evaluate credit quality of the security.
o Perform quantitative analysis of yield premium using empirical
effective duration measures.
Under normal circumstances, the Fund seeks to maintain a dollar
weighted average duration of three to seven years. Under adverse market
conditions, the Fund may, for temporary defensive purposes, invest up to 100% of
its assets in cash or cash equivalents, including investment grade short-term
debt obligations. To the extent that the Fund invokes this strategy, its ability
to achieve its investment objective may be affected adversely.
INVESTMENT ADVISERS
The Manager allocates the assets of the Fund among the following
investment advisers:
AMR Investment Services, Inc.
Barrow, Hanley, Mewhinney & Strauss, Inc.
RISK FACTORS
o Interest Rate Risk
The Fund is subject to the risk that the market value of the bonds it
holds will decline due to rising interest rates. When interest rates
rise, the prices of most bonds go down. When interest rates go down,
the bond prices go up. The price of a bond is also affected by its
maturity. Bonds with longer maturities generally have greater
sensitivity to changes in interest rates.
o Credit Risk
The Fund is subject to the risk that an issuer of a bond will fail to
make timely payment of interest or principal. A decline in an issuer's
credit rating can cause its price to go down. This risk is somewhat
minimized by the Fund's policy of only investing in bonds that are
considered investment grade at the time of purchase.
o Prepayment Risk
The Fund's investments in asset-backed and mortgage-backed securities
are subject to the risk that the principal amount of the underlying
collateral may be repaid prior to the bond's maturity date. If this
occurs, no additional interest will be paid on the investment.
15
<PAGE> 59
o Additional Risks
An investment in the Fund is not a deposit of a bank and is not insured
or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. The value of an investment in the Fund will
fluctuate up and down, which means an investor could lose money.
INVESTOR PROFILE
This Fund may be appropriate for investors who:
o seek regular monthly income for retirement or other current
expenses
o want the relative stability of investment grade bonds
o can benefit from a diversified portfolio of fixed income
securities
o wish to complement their equity holdings
HISTORICAL PERFORMANCE
The bar chart below provides an indication of risk by showing how the
Fund has performed during the past year. The table shows how the Fund's
performance compares to the Lehman Brothers Intermediate Gov./Corp. Index and
the Lipper Intermediate Investment Grade Debt Average, a composite of X funds as
of December 31, 1998, with the same investment objective as the Fund. The
PlanAhead Class of the Fund began offering its shares on March 1, 1998 and
therefore, long-term historical performance is not available. However, another
class of shares of the Fund not offered in this prospectus began offering its
shares on September 15, 1997. In the chart and table below, performance results
before March 1, 1998 are for the older class. Because the other class had lower
expenses, its performance was better than the PlanAhead Class of the Fund would
have realized in the same period. Past performance is not necessarily indicative
of how the Fund will perform in the future.
TOTAL RETURN FOR THE CALENDAR YEAR ENDED 12/31/98
[GRAPH]
<TABLE>
<S> <C> <C>
Highest Quarterly Return from 1/1/98 through 12/31/98 X Quarter 19XX X.XX%
Lowest Quarterly Return from 1/1/98 through 12/31/98 X Quarter 19XX X.XX%
</TABLE>
<TABLE>
<CAPTION>
Average Annual Total Return
=================================================
as of 12/31/98
-------------------------------------------------
Since Inception
---------------
1 Year (9/15/97)
------ ---------------
<S> <C> <C>
Intermediate Bond Fund X.XX% X.XX%
Lehman Bros. Intermediate Gov./Corp. Index* X.XX% X.XX%
Lipper Intermediate Investment Grade Debt Average X.XX% X.XX%
</TABLE>
* The Lehman Brothers Intermediate Gov./Corp. Index is a market value weighted
performance benchmark for government and corporate fixed-rate debt issues with
maturities between one and ten years.
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy
and hold shares of the Intermediate Bond Fund.(1)
Annual Fund Operating Expenses (expenses that are deducted from Fund
assets)
<TABLE>
<S> <C>
Management Fees......................................0.25%
Distribution (12b-1) Fees............................0.00
Other Expenses.......................................0.61
----
Total Annual Fund Operating Expenses.................0.86%
====
</TABLE>
(1)The expense table and the Example below reflect the expenses of both
the Fund and its corresponding Portfolio.
EXAMPLE
This Example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The Example assumes
that you invest $10,000 in the Fund for the time periods indicated and then
redeem all of your shares at the end of those periods. The Example also assumes
that your investment has a 5% return each year and that the Fund's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$88 $274 $477 $1,061
</TABLE>
16
<PAGE> 60
AMERICAN AADVANTAGE SHORT-TERM BOND FUND
INVESTMENT OBJECTIVE
Income and capital appreciation.
PRINCIPAL STRATEGIES
The Fund invests in obligations of the U.S. Government, its agencies
and instrumentalities; corporate debt securities, such as commercial paper,
master demand notes, loan participation interests, medium-term notes and funding
agreements; mortgage-backed securities; asset-backed securities; and
Yankeedollar and Eurodollar bank certificates of deposit, time deposits,
bankers' acceptances and other notes. As an investment policy, the Fund
primarily seeks income and secondarily seeks capital appreciation.
The Fund will only buy debt securities that are investment grade at the
time of purchase. Investment grade securities include securities issued or
guaranteed by the U.S. Government, its agencies and instrumentalities, as well
as securities rated in one of the four highest rating categories by all rating
organizations rating the securities (such as Standard & Poor's or Moody's
Investors Service, Inc.). No more than 25% of assets may be invested in
securities rated in the fourth highest rating category. The Fund, at the
discretion of the investment advisers, may retain a security that has been
downgraded below the initial investment criteria.
In determining which securities to buy and sell, the Manager employs a
top-down fixed income review process, as follows:
o Develop overall investment strategy based on a comprehensive
review of macroeconomic conditions and an analysis of leading
economic indicators.
o Set portfolio maturity structure based on U.S. Treasury yield
curve and business cycle analysis.
o Perform sector analysis to determine relative value.
o Select specific debt securities.
o Review and monitor portfolio composition for changes in credit,
standard deviation and comparisons with benchmarks.
Under normal circumstances, the Fund seeks to maintain a dollar
weighted average duration of one to three years. Under adverse market
conditions, the Fund may, for temporary defensive purposes, invest up to 100% of
its assets in cash or cash equivalents, including investment grade short-term
debt obligations. To the extent that the Fund invokes this strategy, its ability
to achieve its investment objective may be affected adversely.
INVESTMENT ADVISER
AMR Investment Services, Inc.
RISK FACTORS
o Interest Rate Risk
The Fund is subject to the risk that the market value of the bonds it
holds will decline due to rising interest rates. When interest rates
rise, the prices of most bonds go down. When interest rates go down,
the bond prices go up. The price of a bond is also affected by its
maturity. Bonds with longer maturities generally have greater
sensitivity to changes in interest rates.
o Credit Risk
The Fund is subject to the risk that an issuer of a bond will fail to
make timely payment of interest or principal. A decline in an issuer's
credit rating can cause its price to go down. This risk is somewhat
minimized by the Fund's policy of only investing in bonds that are
considered investment grade at the time of purchase.
o Prepayment Risk
The Fund's investments in mortgage-backed securities are subject to the
risk that the principal amount of the underlying mortgage may be repaid
prior to the bond's maturity date. If this occurs, no additional
interest will be paid on the investment.
o Additional Risks
An investment in the Fund is not a deposit of a bank and is not insured
or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. The value of an investment in the Fund will
fluctuate up and down, which means an investor could lose money.
17
<PAGE> 61
INVESTOR PROFILE
This Fund may be appropriate for investors who:
o seek regular monthly income for retirement or other current
expenses
o want the relative stability of investment grade bonds
o can benefit from a diversified portfolio of fixed income securities
o wish to complement their equity holdings
HISTORICAL PERFORMANCE
The bar chart below provides an indication of risk by showing how the
Fund's performance has varied from year to year. The table shows how the Fund's
performance compares to the Lehman Brothers Intermediate Gov./Corp. Index and
the Linked Lipper Investment Grade Debt Averages, benchmarks with the same
investment objective as the Fund. The PlanAhead Class of the Fund began offering
its shares on August 1, 1994. However, another class of shares of the Fund not
offered in this prospectus began offering its shares on December 3, 1987. In the
chart and table below, performance results before August 1, 1994 are for the
older class. Because the other class had lower expenses, its performance was
better than the PlanAhead Class of the Fund would have realized in the same
period. Past performance is not necessarily indicative of how the Fund will
perform in the future.
TOTAL RETURN FOR THE CALENDAR YEAR ENDED 12/31 OF EACH YEAR
[GRAPH]
<TABLE>
<S> <C> <C>
Highest Quarterly Return from 1/1/89 through 12/31/98 X Quarter 19XX X.XX%
Lowest Quarterly Return from 1/1/89 through 12/31/98 X Quarter 19XX X.XX%
</TABLE>
<TABLE>
<CAPTION>
Average Annual Total Return
=====================================================
as of 12/31/98
-----------------------------------------------------
1 Year 5 Years 10 Years
------ ------- --------
<S> <C> <C> <C>
Short-Term Bond Fund X.XX% X.XX% X.XX%
Lehman Bros. Intermediate Gov./Corp. Index* X.XX% X.XX% X.XX%
Linked Lipper Investment Grade Debt Averages** X.XX% X.XX% X.XX%
</TABLE>
* The Lehman Brothers Intermediate Gov./Corp. Index is a market value weighted
performance benchmark for government and corporate fixed-rate debt issues with
maturities between one and ten years.
** The Linked Lipper Investment Grade Debt Averages includes the Lipper
Short-Term Investment Grade Debt Average prior to 1/1/96, the Lipper
Short-Intermediate Investment Grade Debt Average from 1/1/96 through 7/31/96 and
the Lipper Short-Term Investment Grade Debt Average since 8/1/96.
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy
and hold shares of the Short-Term Bond Fund.(1)
Annual Fund Operating Expenses (expenses that are deducted from Fund
assets)
<TABLE>
<S> <C>
Management Fees......................................0.25%
Distribution (12b-1) Fees............................0.00
Other Expenses.......................................X.XX(2)
----
Total Annual Fund Operating Expenses.................X.XX%
====
Fee Waiver and/or Expense Reimbursement..............X.XX%
Net Expenses.........................................0.85%
</TABLE>
(1)The expense table and the Example below reflect the expenses of both
the Fund and its corresponding Portfolio.
(2)The Manager has contractually agreed to waive a portion of its fee
and to reimburse the Fund for Other Expenses through October 31,
1999 to the extent that Total Annual Fund Operating Expenses exceed
0.85%. After such waivers and reimbursements, Other Expenses are
X.XX%.
EXAMPLE
This Example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The Example assumes
that you invest $10,000 in the Fund for the time periods indicated and then
redeem all of your shares at the end of those periods. The Example also assumes
that your investment has a 5% return each year and that the Fund's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
$87 $XXX $XXX $XXX
</TABLE>
18
<PAGE> 62
AMERICAN AADVANTAGE MONEY MARKET FUND
INVESTMENT OBJECTIVE
Current income, liquidity and the maintenance of a stable price of $1
per share.
PRINCIPAL STRATEGIES
The Fund invests exclusively in high quality variable or fixed rate,
U.S. dollar denominated short-term money market instruments. These securities
may include obligations of the U.S. Government, its agencies and
instrumentalities; corporate debt securities, such as commercial paper, master
demand notes, loan participation interests, medium-term notes and funding
agreements; Yankeedollar and Eurodollar bank certificates of deposit, time
deposits, and bankers' acceptances; asset-backed securities; and repurchase
agreements involving the foregoing obligations.
The Fund will only buy securities with the following credit qualities:
o rated in the highest short-term categories by two rating
organizations, such as "A-1" by Standard & Poor's Corporation and
"P-1" by Moody's Investors Service, Inc.,
o rated in the highest short-term category by one rating organization
if the securities are rated only by one rating organization, or
o unrated securities that are determined to be of equivalent quality
by the Manager.
The Fund invests more than 25% of its total assets in obligations
issued by the banking industry. However, for temporary defensive purposes when
the Manager believes that maintaining this concentration may be inconsistent
with the best interests of shareholders, the Fund may not maintain this
concentration.
Securities purchased by the Fund generally have remaining maturities of
397 days or less, although instruments subject to repurchase agreements and
certain variable and floating rate obligations may bear longer final maturities.
The average dollar-weighted maturity of the Fund will not exceed 90 days.
INVESTMENT ADVISER
AMR Investment Services, Inc.
RISK FACTORS
o The yield paid by the Fund is subject to changes in interest rates. As
a result, there is risk that a decline in short-term interest rates
would lower its yield and the overall return on your investment.
o Although the Fund seeks to preserve the value of your investment at
$1.00 per share, it is possible to lose money by investing in the Fund.
o As with any money market fund, there is the risk that the issuers or
guarantors of securities owned by the Fund will default on the payment
of principal or interest or the obligation to repurchase securities
from the Fund.
Your investment in the Fund is not insured or guaranteed by the U.S. Government
or any financial or government institution.
INVESTOR PROFILE
This Fund may be suitable for investors who:
o seek the preservation of capital and to avoid fluctuations in
principal
o desire regular, monthly income from a highly liquid investment
o require a short-term vehicle for cash when making long-term
investment decisions
o seek a rate of return that is potentially higher than certificates
of deposit or savings accounts
19
<PAGE> 63
HISTORICAL PERFORMANCE
The bar chart below provides an indication of risk by showing how the
Fund's performance has varied from year to year. The table shows how the Fund's
performance compares to the Lipper Money Market Instrument Average, an average
of X retail money market fund returns as of December 31, 1998. The PlanAhead
Class of the Fund began offering its shares on August 1, 1994. However, another
class of shares of the Fund not offered in this prospectus began offering its
shares on September 1, 1987. In the chart and table below, performance results
before August 1, 1994 are for the older class. Because the other class had lower
expenses, its performance was better than the PlanAhead Class of the Fund would
have realized in the same period. Past performance is not necessarily indicative
of how the Fund will perform in the future. Investors may call 1-800-388-3344 to
obtain the Fund's current seven-day yield.
TOTAL RETURN FOR THE CALENDAR YEAR ENDED 12/31 OF EACH YEAR
[GRAPH]
<TABLE>
<S> <C> <C>
Highest Quarterly Return from 1/1/89 through 12/31/98 X Quarter 19XX X.XX%
Lowest Quarterly Return from 1/1/89 through 12/31/98 X Quarter 19XX X.XX%
</TABLE>
<TABLE>
<CAPTION>
Average Annual Total Return
=====================================================
as of 12/31/98
-----------------------------------------------------
1 Year 5 Years 10 Years
------ ------- --------
<S> <C> <C> <C>
Money Market Fund X.XX% X.XX% X.XX%
Lipper Money Market Instrument Average X.XX% X.XX% X.XX%
</TABLE>
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy
and hold shares of the Money Market Fund.(1)
Annual Fund Operating Expenses (expenses that are deducted from Fund
assets)
<TABLE>
<S> <C>
Management Fees......................................0.10%
Distribution (12b-1) Fees............................0.00
Other Expenses.......................................0.44
----
Total Annual Fund Operating Expenses.................0.54%
====
</TABLE>
(1)The expense table and the Example below reflect the expenses of both
the Fund and its corresponding Portfolio.
EXAMPLE
This Example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The Example assumes
that you invest $10,000 in the Fund for the time periods indicated and then
redeem all of your shares at the end of those periods. The Example also assumes
that your investment has a 5% return each year and that the Fund's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$55 $173 $302 $677
</TABLE>
20
<PAGE> 64
AMERICAN AADVANTAGE MUNICIPAL MONEY MARKET FUND
INVESTMENT OBJECTIVE
Current income, liquidity and the maintenance of a stable price of $1
per share.
PRINCIPAL STRATEGIES
Under normal market conditions, the Fund invests at least 80% of net
assets in securities whose interest income is exempt from federal income tax.
These securities may be issued by or on behalf of the governments of U.S.
states, counties, cities, towns, territories, or public authorities. All
securities purchased by the Fund will be guaranteed by the U.S. Government, its
agencies, or instrumentalities; secured by irrevocable letters of credit issued
by qualified banks; or guaranteed by one or more municipal bond insurance
policies.
The Fund will only buy securities with the following credit qualities:
o rated in the highest short-term categories by two rating
organizations, such as "A-1" by Standard & Poor's and "P-1" by
Moody's Investors Service, Inc.,
o rated in the highest short-term category by one rating organization
if the securities are rated only by one rating organization, or
o unrated securities that are determined to be of equivalent quality
by the Manager.
Securities purchased by the Fund generally have remaining maturities of
397 days or less, although instruments subject to repurchase agreements and
certain variable and floating rate obligations may bear longer final maturities.
The average dollar-weighted maturity of the Fund will not exceed 90 days.
INVESTMENT ADVISER
AMR Investment Services, Inc.
RISK FACTORS
o The yield paid by the Fund is subject to changes in interest rates. As
a result, there is risk that a decline in short-term interest rates
would lower its yield and the overall return on your investment.
o Although the Fund seeks to preserve the value of your investment at
$1.00 per share, it is possible to lose money by investing in the Fund.
o As with any money market fund, there is the risk that the issuers or
guarantors of securities owned by the Fund will default on the payment
of principal or interest or the obligation to repurchase securities
from the Fund.
Your investment in the Fund is not insured or guaranteed by the U.S. Government
or any financial or government institution.
INVESTOR PROFILE
This Fund may be suitable for investors who:
o seek the preservation of capital and to avoid fluctuations in
principal
o desire regular, monthly income that is generally exempt from
Federal income tax
o require a short-term vehicle for cash when making long-term
investment decisions
o seek an after-tax rate of return that is potentially higher than
certificates of deposit or savings accounts
21
<PAGE> 65
HISTORICAL PERFORMANCE
The bar chart below provides an indication of risk by showing how the
Fund's performance has varied from year to year. The table shows how the Fund's
performance compares to the Lipper Tax Exempt Money Market Average, an average
of X tax exempt money market fund returns. The PlanAhead Class of the Fund began
offering its shares on August 1, 1994. However, another class of shares of the
Fund not offered in this prospectus began offering its shares on November 10,
1993. In the chart and table below, performance results before August 1, 1994
are for the older class. Because the other class had lower expenses, its
performance was better than the PlanAhead Class of the Fund would have realized
in the same period. Past performance is not necessarily indicative of how the
Fund will perform in the future. Investors may call 1-800-388-3344 to obtain the
Fund's current seven-day yield.
TOTAL RETURN FOR THE CALENDAR YEAR ENDED 12/31 OF EACH YEAR
[GRAPH]
<TABLE>
<S> <C> <C>
Highest Quarterly Return from 1/1/94 through 12/31/98 X Quarter 19XX X.XX%
Lowest Quarterly Return from 1/1/94 through 12/31/98 X Quarter 19XX X.XX%
</TABLE>
<TABLE>
<CAPTION>
Average Annual Total Return
====================================================
as of 12/31/98
----------------------------------------------------
Since Inception
---------------
1 Year 5 Years (11/10/93)
------ ------- ---------------
<S> <C> <C> <C>
Municipal Money Market Fund X.XX% X.XX% X.XX%
Lipper Tax-Exempt Money Market Average X.XX% X.XX% X.XX%
</TABLE>
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy
and hold shares of the Municipal Money Market Fund.(1)
Annual Fund Operating Expenses (expenses that are deducted from Fund
assets)
<TABLE>
<S> <C>
Management Fees......................................0.10%
Distribution (12b-1) Fees............................0.00
Other Expenses.......................................0.46(2)
----
Total Annual Fund Operating Expenses.................0.61%
====
Fee Waiver and/or Expense Reimbursement..............0.01%
Net Expenses.........................................0.60%
</TABLE>
(1)The expense table and the Example below reflect the expenses of both
the Fund and its corresponding Portfolio.
(2)The Manager has contractually agreed to waive a portion of its fee
and to reimburse the Fund for Other Expenses through October 31,
1999 to the extent that Total Annual Fund Operating Expenses exceed
0.60%. After such waivers and reimbursements, Other Expenses are
0.45%.
EXAMPLE
This Example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The Example assumes
that you invest $10,000 in the Fund for the time periods indicated and then
redeem all of your shares at the end of those periods. The Example also assumes
that your investment has a 5% return each year and that the Fund's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
$61 $XXX $XXX $XXX
</TABLE>
22
<PAGE> 66
AMERICAN AADVANTAGE U.S. GOVERNMENT MONEY MARKET FUND
INVESTMENT OBJECTIVE
Current income, liquidity and the maintenance of a stable price of $1
per share.
PRINCIPAL STRATEGIES
The Fund invests exclusively in obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities and repurchase agreements
that are collateralized by such obligations. Some of these securities are not
backed by the full faith and credit of the U.S. Government. U.S. Government
securities include direct obligations of the U.S. Treasury (such as Treasury
bills, Treasury notes and Treasury bonds).
Securities purchased by the Fund generally have remaining maturities of
397 days or less, although instruments subject to repurchase agreements and
certain variable and floating rate obligations may bear longer final maturities.
The average dollar-weighted maturity of the Fund will not exceed 90 days.
INVESTMENT ADVISER
AMR Investment Services, Inc.
RISK FACTORS
o The yield paid by the Fund is subject to changes in interest rates. As
a result, there is risk that a decline in short-term interest rates
would lower its yield and the overall return on your investment.
o Although the Fund seeks to preserve the value of your investment at
$1.00 per share, it is possible to lose money by investing in the Fund.
Your investment in the Fund is not insured or guaranteed by the U.S. Government
or any financial or government institution.
INVESTOR PROFILE
This Fund may be suitable for investors who:
o seek the preservation of capital and to avoid fluctuations in
principal
o desire regular, monthly income from a highly liquid investment
o require a short-term vehicle for cash when making long-term
investment decisions
o seek a rate of return that is potentially higher than certificates
of deposit or savings accounts
HISTORICAL PERFORMANCE
The bar chart below provides an indication of risk by showing how the
Fund's performance has varied from year to year. The table shows how the Fund's
performance compares to the Lipper U.S. Government Money Market Average, an
average of X retail U.S. Government money market fund returns. The PlanAhead
Class of the Fund began offering its shares on August 1, 1994. However, another
class of shares of the Fund not offered in this prospectus began offering its
shares on March 2, 1992. In the chart and table below, performance results
before August 1, 1994 are for the older class. Because the other class had lower
expenses, its performance was better than the PlanAhead Class of the Fund would
have realized in the same period. Past performance is not necessarily indicative
of how the Fund will perform in the future. Investors may call 1-800-388-3344 to
obtain the Fund's current seven-day yield.
TOTAL RETURN FOR THE CALENDAR YEAR ENDED 12/31 OF EACH YEAR
[GRAPH]
<TABLE>
<S> <C> <C>
Highest Quarterly Return from 1/1/93 through 12/31/98 X Quarter 19XX X.XX%
Lowest Quarterly Return from 1/1/93 through 12/31/98 X Quarter 19XX X.XX%
</TABLE>
23
<PAGE> 67
<TABLE>
<CAPTION>
Average Annual Total Return
=====================================================
as of 12/31/98
-----------------------------------------------------
Since Inception
---------------
1 Year 5 Years (3/2/92)
------ ------- ---------------
<S> <C> <C> <C>
U.S. Government Money Market Fund X.XX% X.XX% X.XX%
Lipper U.S. Govt. Money Market Average X.XX% X.XX% X.XX%
</TABLE>
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy
and hold shares of the U.S. Government Money Market Fund.(1)
Annual Fund Operating Expenses (expenses that are deducted from Fund
assets)
<TABLE>
<S> <C>
Management Fees......................................0.10%
Distribution (12b-1) Fees............................0.00
Other Expenses.......................................0.42
----
Total Annual Fund Operating Expenses.................0.52%
====
</TABLE>
(1)The expense table and the Example below reflect the expenses of both
the Fund and its corresponding Portfolio.
EXAMPLE
This Example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The Example assumes
that you invest $10,000 in the Fund for the time periods indicated and then
redeem all of your shares at the end of those periods. The Example also assumes
that your investment has a 5% return each year and that the Fund's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$53 $167 $291 $653
</TABLE>
24
<PAGE> 68
THE MANAGER
The Trust has retained AMR Investment Services, Inc. to serve as its
Manager. The Manager, located at 4333 Amon Carter Boulevard, Fort Worth, Texas
76155, is a wholly owned subsidiary of AMR Corporation, the parent company of
American Airlines, Inc. The Manager was organized in 1986 to provide investment
management, advisory, administrative and asset management consulting services.
As of December 31, 1998, the Manager had approximately $XX.X billion of assets
under management, including approximately $XX.X billion under active management
and $XX.X billion as named fiduciary or financial adviser. Of the total,
approximately $XX.X of assets are related to AMR Corporation.
The Manager provides or oversees the provision of all administrative,
investment advisory and portfolio management services to the Funds. The Manager
o develops the investment programs for each Fund,
o selects and changes investment advisers (subject to requisite
approvals),
o allocates assets among investment advisers,
o monitors the investment advisers' investment programs and results,
o coordinates the investment activities of the investment advisers
to ensure compliance with regulatory restrictions,
o oversees each Fund's securities lending activities and any actions
taken by the securities lending agent, and
o with the exception of the International Equity Fund and Equity 500
Index Portfolio, invests the portion of Fund assets which the
investment advisers determine should be allocated to high quality
short-term debt obligations.
As compensation for providing management services, the Fund pays the
Manager an annualized advisory fee that is calculated and accrued daily, equal
to the sum of:
o 0.25% of the net assets of the Intermediate Bond Fund and
Short-Term Bond Fund,
o 0.10% of the net assets of all other Funds, plus
o all fees paid to the investment advisers of the Balanced, Growth
and Income, Small Cap Value and International Equity Funds.
The Manager also may receive up to 25% of the net annual interest
income or up to 25% of loan fees in regards to securities lending activities.
Currently, the Manager receives 10% of the net annual interest income from the
investment of cash collateral or 10% of the loan fees posted by borrowers. The
Securities and Exchange Commission ("SEC") has granted exemptive relief that
permits the Funds to invest cash collateral received from securities lending
transactions in shares of one or more private investment companies managed by
the Manager. Subject to the receipt of exemptive relief from the SEC, the Funds
may also invest cash collateral received from securities lending transactions in
shares of one or more registered investment companies managed by the Manager.
William F. Quinn and Nancy A. Eckl have primary responsibility for the
day-to-day operations of the Funds, except as indicated otherwise below. These
responsibilities include oversight of the investment advisers, regular review of
each investment adviser's performance and asset allocations among multiple
investment advisers. Mr. Quinn has served as President of the Manager since its
inception in 1986. Ms. Eckl has served as Vice President-Trust Investments since
May 1995. Prior to her current position, Ms. Eckl held the position of Vice
President-Finance and Compliance of the Manager from December 1990 through April
1995.
Michael W. Fields is responsible for the portfolio management of the
Short-Term Bond Fund as well as a portion of the Intermediate Bond Fund. Mr.
Fields has been with the Manager since it was founded in 1986 and serves as
Chief Investment Officer and Vice President-Fixed Income Investments.
The approximate management fees paid by the Funds for the fiscal year
ended October 31, 1998, net of reimbursements, was as follows:
<TABLE>
<CAPTION>
Fund Manager Fees
---- ------------
<S> <C>
Balanced XX%
Growth and Income XX%
Intermediate Bond XX%
International Equity XX%
Short-Term Bond XX%
Money Market XX%
Municipal Money Market XX%
U.S. Government Money Market XX%
</TABLE>
BT serves as the administrator to the Equity 500 Index Portfolio. Under
an Administration and Services Agreement with the Portfolio, BT calculates the
value of the assets of the Portfolio and generally assists the Equity 500 Index
Portfolio Board in all aspects of the administration and operation of the
Portfolio. The Administration and Services Agreement provides for the Portfolio
to pay BT a fee, computed daily and paid monthly, at the rate of 0.05% of the
average daily net assets of the Portfolio. Under the Administration and Services
Agreement, BT may delegate one or more of its responsibilities to others,
including Federated Services Company, at BT's expense.
25
<PAGE> 69
THE INVESTMENT ADVISERS
Set forth below is a brief description of the investment advisers for
each Fund. The Manager is the sole investment adviser of the Money Market Funds
and the Short-Term Bond Fund. Except for these Funds, each Fund's assets are
allocated among the investment advisers by the Manager. The assets of the
Intermediate Bond Fund are allocated by the Manager between the Manager and
another investment adviser. Each investment adviser has discretion to purchase
and sell securities for its segment of a Fund's assets in accordance with the
Fund's objectives, policies, restrictions and more specific strategies provided
by the Manager. Pursuant to an exemptive order issued by the SEC, the Manager is
permitted to enter into new or modified investment advisory agreements with
existing or new investment advisers without approval of a Fund's shareholders,
but subject to approval of the Trust's Board of Trustees ("Board") and the AMR
Investment Services Trust Board ("AMR Trust Board"). The Prospectus will be
supplemented if additional investment advisers are retained or the contract with
any existing investment adviser is terminated.
BANKERS TRUST COMPANY (BT), 130 Liberty Street (One Bankers Trust Plaza), New
York, New York 10006, is a New York banking corporation and is a wholly owned
subsidiary of Bankers Trust Corporation. BT provides investment advisory,
administrative and other services to the Equity 500 Index Portfolio. As of
September 30, 1998, Bankers Trust Corporation was the _________ largest bank
holding company in the United States with total assets of approximately $XXX
billion and approximately $XXX billion in assets under management globally. Of
that total, approximately $XXX billion are in U.S. equity index assets alone. BT
serves as investment adviser and administrator to the Equity 500 Index
Portfolio.
BARROW, HANLEY, MEWHINNEY & STRAUSS, INC. (Barrow), 3232 McKinney Avenue, 15th
Floor, Dallas, Texas 75204, is a professional investment counseling firm which
has been providing investment advisory services since 1979. The firm is wholly
owned by United Asset Management Corporation, a Delaware corporation. Barrow's
approach to stock selection reflects the traditional value characteristics: low
price to earnings ratio, low price to book ratio and high dividend yields. As of
December 31, 1998, Barrow had discretionary investment management authority with
respect to approximately $XX.X billion of assets, including approximately $XX.X
billion of assets of AMR and its subsidiaries and affiliated entities. Barrow
serves as an investment adviser to the Balanced, Growth and Income, Intermediate
Bond and Short-Term Bond Funds, although the Manager does not presently intend
to allocate any of the assets in the Short-Term Bond Fund to Barrow.
BRANDYWINE ASSET MANAGEMENT, INC. (Brandywine), 201 North Walnut Street,
Wilmington, Delaware 19801, is a professional investment counseling firm founded
in 1986. Brandywine is a wholly owned subsidiary of Legg Mason, Inc.
Brandywine's investment process involves both fundamental screening to identify
stocks that are undervalued and fundamental analysis to identify undervalued
stocks which have the ability to return to normal value. As of December 31,
1998, Brandywine had assets under management totaling approximately $XX.X
billion, including approximately $XX.X million of assets of AMR and its
subsidiaries and affiliated entities. Brandywine serves as an investment adviser
to the Balanced, Growth and Income and Small Cap Value Funds.
GSB INVESTMENT MANAGEMENT, INC. (GSB), 301 Commerce Street, Fort Worth, Texas
76102, is a professional investment management firm which was founded in 1987 by
Frank P. Ganucheau, Mark J. Stupfel, and Lyle E. Brumley. GSB is wholly owned by
United Asset Management Corporation, a Delaware corporation. GSB utilizes
qualitative and quantitative security selection techniques to estimate the
expected absolute return and provide a basis to compare the relative
attractiveness of one stock against another. As of December 31, 1998, GSB
managed approximately $XX.X billion of assets, including approximately $XX.X
million of assets of AMR and its subsidiaries and affiliated entities. GSB
serves as an investment adviser to the Balanced and Growth and Income Funds.
HOTCHKIS AND WILEY, 725 South Figueroa Street, Suite 4000, Los Angeles,
California 90017, is a professional investment counseling firm which was founded
in 1980 by John F. Hotchkis and George Wiley. Hotchkis and Wiley is a division
of the Capital Management Group of Merrill Lynch Asset Management, L.P., a
wholly owned indirect subsidiary of Merrill Lynch & Co., Inc. Hotchkis and Wiley
utilizes extensive fundamental research to identify significantly undervalued
companies where, in their opinion, actual value clearly exceeds current market
price. Assets under management as of December 31, 1998 were approximately $XX.X
billion, which included approximately $XX.X billion of assets of AMR and its
subsidiaries and affiliated entities. Hotchkis and Wiley serves as an investment
adviser to the Balanced, Small Cap Value, Growth and Income and International
Equity Funds.
INDEPENDENCE INVESTMENT ASSOCIATES, INC. (IIA), 53 State Street, Boston,
Massachusetts 02109, is a professional investment counseling firm which was
founded in 1982. The firm is a wholly owned subsidiary of John Hancock Mutual
Life Insurance Company. IIA's investment philosophy that any stock that combines
low cost and improving fundamentals is attractive, is put into practice through
the use of a quantitative, multifactor stock-ranking model fueled by earnings
and growth rates. Assets under management as of December 31, 1998, including
funds managed for its parent company, were approximately $XX.X billion, which
included approximately $XX.X billion of assets of AMR and its subsidiaries and
affiliated entities. IIA serves as an investment adviser to the Balanced and
Growth and Income Funds.
26
<PAGE> 70
MORGAN STANLEY ASSET MANAGEMENT INC. ("MSAM"), 25 Cabot Square, London, United
Kingdom E14 4QA, is a wholly owned subsidiary of Morgan Stanley, Dean Witter,
Discover & Co. MSAM provides portfolio management and named fiduciary services
to taxable and nontaxable institutions, international organizations and
individuals investing in United States and international equity and debt
securities. As of September 30, 1998, MSAM, together with its other asset
management affiliates, had assets under management (including assets under
fiduciary advisory control) totaling approximately $XXX.X billion, including
approximately $XXX.X billion under active management and $XX.X billion as named
fiduciary or fiduciary adviser. As of December 31, 1997, MSAM had investment
authority over approximately $XXX.X million of assets of AMR and its
subsidiaries and affiliated entities. MSAM serves as an investment adviser to
the International Equity Portfolio.
TEMPLETON INVESTMENT COUNSEL, INC. (Templeton), 500 East Broward Blvd., Suite
2100, Fort Lauderdale, Florida 33394-3091, is a professional investment
counseling firm which has been providing investment services since 1979.
Templeton is indirectly owned by Franklin Resources, Inc. Templeton believes in
a disciplined, yet flexible long-term approach to uncovering value oriented
investments regardless of current market trends on a worldwide scale. As of
December 31, 1998, Templeton had discretionary investment management authority
with respect to approximately $XX.X billion of assets, including approximately
$XXX.X million of assets of AMR and its subsidiaries and affiliated entities.
Templeton serves as an investment adviser to the International Equity Fund.
All other assets of American Airlines, Inc. and its affiliates under
management by each respective investment adviser (except assets managed by
Barrow under the HALO Bond Program) are considered when calculating the fees
for each investment adviser other than MSAM and BT. Including these assets
lowers the investment advisory fees for each applicable Fund.
As compensation for its services, each investment adviser, except BT,
is paid a fee by the Manager out of the proceeds of the management fee received
by the Manager from the AMR Trust.
VALUATION OF SHARES
The price of each Fund's shares is based on its net asset value
("NAV"). Each Fund's NAV is computed by adding total assets, subtracting all of
the Fund's liabilities, and dividing the result by the total number of shares
outstanding. Equity securities are valued based on market value. Debt securities
(other than short-term securities) usually are valued on the basis of prices
provided by a pricing service. In some cases, the price of debt securities is
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.
Securities held by the Money Market Funds are valued in accordance with the
amortized cost method, which is designed to enable those Funds to maintain a
stable NAV of $1.00 per share.
The NAV of PlanAhead Class shares will be determined based on a pro
rata allocation of the Portfolio's investment income, expenses and total capital
gains and losses. Each Fund's NAV is determined as of the close of the New York
Stock Exchange ("Exchange"), generally 4:00 p.m. Eastern Time, on each day on
which it is open for business. The Money Market Funds are not open and no NAV is
calculated on Columbus Day and Veteran's Day. The NAV of the International
Equity Fund may change on days when shareholders will not be able to purchase or
redeem the Fund's shares.
ABOUT YOUR INVESTMENT
PURCHASE AND REDEMPTION OF SHARES
ELIGIBILITY
PlanAhead Class shares are offered to all investors, including smaller
institutional investors, investors using intermediary organizations such as
discount brokers or plan sponsors, individual retirement accounts and
self-employed individual retirement plans.
PURCHASE POLICIES
No sales charges are assessed on the purchase or sale of Fund shares.
Shares of the Funds are offered and purchase orders accepted until the deadlines
listed below on each day on which the Exchange is open for trading. In addition,
shares of the Money Market Funds are not offered and orders are not accepted on
Columbus Day and Veteran's Day:
<TABLE>
<CAPTION>
FUND PURCHASE BY (EASTERN TIME)*:
<S> <C>
Money Market 3:00 p.m.
Municipal Money Market 11:45 a.m.
U.S. Government Money Market 2:00 p.m.
All other Funds 4:00 p.m.
* or the close of the Exchange (whichever comes first)
</TABLE>
If a purchase order is accepted and payment is received prior to the
applicable Fund's deadline, the purchase price will be the NAV per share next
determined on that day. If a purchase order is accepted or payment is received
after the applicable deadline, the purchase price will be the NAV of the
following day that the Fund is open for business. Checks to purchase shares 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. The Funds will not accept "starter" checks
or third party checks.
27
<PAGE> 71
OPENING AN ACCOUNT
A completed, signed application is required to open an account. You may request
an application form by:
o calling (800) 388-3344, or
o visiting the Funds' web site at www.aafunds.com and downloading an
account application.
Complete the application, sign it and:
Mail to:
American AAdvantage Funds
P.O. Box 419643
Kansas City, MO 64141-6643
HOW TO PURCHASE SHARES
<TABLE>
<CAPTION>
To Make an Initial Purchase To Add To An Existing Account
<S> <C>
BY CHECK-----------------------------------------------------------------------------------------------------------
o Make check payable to the American AAdvantage o Make check payable to the American AAdvantage Funds
Funds o Include the shareholder's account number, Fund
o Include the Fund name, Fund number and name, and Fund number on the check
"PlanAhead Class" on the check o Mail check ($50 minimum) to:
o Mail check ($2,500 minimum or $2,000 for IRAs) to:
American AAdvantage Funds-PlanAhead Class
American AAdvantage Funds-PlanAhead Class P.O. Box 419643
P.O. Box 419643 Kansas City, MO 64141-6643
Kansas City, MO 64141-6643
BY WIRE------------------------------------------------------------------------------------------------------------
Call (800) 388-3344 to purchase shares by wire. Send Call (800) 388-3344 to purchase shares by wire. Send
a bank wire ($2,500 minimum or $2,000 for IRAs) to a bank wire ($500 minimum) to State Street Bank &
State Street Bank & Trust Co. with these instructions: Trust Co. with these instructions:
o ABA# 0110-0002-8; AC-9905-342-3 o ABA# 0110-0002-8; AC-9905-342-3
o Attn: American AAdvantage Funds-PlanAhead Class o Attn: American AAdvantage Funds-PlanAhead Class
o the Fund name and Fund number o the Fund name and Fund number
o specify that the wire is for a new account o shareholder's account number
BY PRE-AUTHORIZED AUTOMATIC INVESTMENT----------------------------------------------------------------------------
o Fill in required information on the account o Funds will be transferred automatically from your
application, including amount ($50 minimum) bank account via Automated Clearing House ("ACH")
o Attach a voided check to the account application on the 5th day of each month or quarter, depending
upon which periods you specify.
BY EXCHANGE-------------------------------------------------------------------------------------------------------
o Send a written request to the address above or o You may purchase shares of a Fund by exchanging
call (800)388-3344 shares from the PlanAhead Class of another
o A $2,500 minimum is required to establish a new American AAdvantage Fund if you have owned shares
account in the PlanAhead Class of another of the other American AAdvantage Fund for at least
American AAdvantage Fund by making an exchange. 15 days.
o The minimum amount for each exchange is $50.
</TABLE>
REDEMPTION POLICIES
Shares of any Fund may be redeemed by telephone, by pre-authorized
automatic redemption or mail on any day that Fund is open for business. The
redemption price will be the NAV next determined after a redemption order is
received in good order. For assistance with completing a redemption request,
please call (800) 338-3344.
Proceeds from a redemption order for any Fund will be transmitted to a
shareholder by no later than seven days after the receipt of a redemption
request in good order. Shares purchased by check or pre-authorized automatic
redemption may not be redeemed until the funds have cleared, which may take up
to 15 days.
The Funds reserve the right to suspend redemptions or postpone the date
of payment (i) when the Exchange is closed (other than for customary weekend and
holiday closings); (ii) when trading on the Exchange is restricted; (iii) when
the SEC determines that an emergency exists so that disposal of a Fund's
investments or determination of its NAV is not reasonably practicable; or (iv)
by order of the SEC for protection of the Funds' shareholders.
Although the Funds intend to redeem shares in cash, each Fund reserves
the right to pay the redemption price in whole or in part by a distribution of
readily marketable securities held by the applicable Fund's corresponding
Portfolio. Unpaid dividends credited to an account up to the date of redemption
of all shares of a Money Market Fund generally will be paid at the time of
redemption.
28
<PAGE> 72
HOW TO REDEEM SHARES
<TABLE>
<CAPTION>
Method Additional Instructions
<S> <C>
BY TELEPHONE-------------------------------------------------------------------------------------------------------
Call (800) 388-3344 to request a redemption. o Telephone redemption orders are limited to
$25,000 within any 30 day period.
o Proceeds will generally be mailed only to the
account address of record or transmitted by wire
to a commercial bank designated on the account
application form.
BY MAIL------------------------------------------------------------------------------------------------------------
Write a letter of instruction including A signature guarantee may be required for redemption
o the Fund name and Fund number orders:
o shareholder account number o in amounts of $100,000 or more
o shares or dollar amount to be sold o in amounts of $25,000 or more with a request to
o authorized signature(s) of all persons send the proceeds to an address or commercial
required to sign for the account bank account other than the address or commercial
o how and where to send the proceeds bank account designated on the account
Mail to: application, or
American AAdvantage Funds-PlanAhead Class o for an account whose address has changed within
P.O. Box 419643 the last 30 days
Kansas City, MO 64141-6643
Call (800)388-3344 for instructions and further
assistance.
BY CHECK-----------------------------------------------------------------------------------------------------------
(Money Market Fund shareholders only) o Minimum check amount is $100
Choose the check writing feature on the account o A $2 service fee per check is charged for check
application. copies
BY PRE-AUTHORIZED AUTOMATIC REDEMPTION-----------------------------------------------------------------------------
Fill in required information on the account Proceeds will be transferred automatically from your
application, including amount ($100 minimum) Fund account to your bank account via ACH on the 15th
day of each month.
BY EXCHANGE--------------------------------------------------------------------------------------------------------
Send a written request to the address above or o You may sell shares of a Fund in exchange for
call (800) 388-3344 to exchange shares. shares of the PlanAhead Class of another American
AAdvantage Fund if you have owned shares of the
Fund for at least 15 days.
o The minimum amount for each exchange is $50
</TABLE>
GENERAL POLICIES
If a shareholder's account balance in any Fund falls below $2,500, the
shareholder may be asked to increase the balance. If the account balance remains
below $2,500 after 45 days, the Funds reserve the right to close the account and
send the proceeds to the shareholder. The Manager reserves the right to charge
an annual account fee of $12 (to offset the costs of servicing accounts with low
balances) if an account balance falls below certain asset levels.
The following policies apply to instructions you may provide to the
Funds by telephone:
o The Funds, their officers, trustees, directors, employees, or
agents are not responsible for the authenticity of instructions
provided by telephone, nor for any loss, liability, cost or expense
incurred for acting on them.
o The Funds employ procedures reasonably designed to confirm that
instructions communicated by telephone are genuine.
o Due to the volume of calls or other unusual circumstances,
telephone redemptions may be difficult to implement during certain
time periods.
The Funds reserve the right to:
o reject any order for the purchase of shares and to limit or
suspend, without prior notice, the offering of shares
o modify or terminate the exchange privilege at any time
o limit the number of exchanges between Funds an investor may
exercise
o seek reimbursement from you for any related loss incurred if your
payment for the purchase of Fund shares by check does not clear
your bank
Third parties, such as banks, brokers and 401(k) plan providers who
offer Fund shares, may charge transaction fees and may set different minimum
investments or limitations on buying or selling shares.
29
<PAGE> 73
DISTRIBUTIONS AND TAXES
The Funds distribute most or all of their net earnings in the form of
dividends from net investment income and distributions of realized net capital
gains and gains from certain foreign currency transactions. Unless the account
application instructs otherwise, distributions will be reinvested in additional
Fund shares. Distributions are paid as follows:
<TABLE>
<CAPTION>
FUND DIVIDENDS PAID OTHER DISTRIBUTIONS PAID
<S> <C> <C>
Balanced Annually Annually
Growth and Income Annually Annually
International Equity Annually Annually
Small Cap Value Annually Annually
S&P 500 Index April, July, October and December Annually
Intermediate Bond Monthly Annually
Short-Term Bond Monthly Annually
Money Market Monthly Monthly
Municipal Money Market Monthly Monthly
U.S. Government Money Market Monthly Monthly
</TABLE>
Usually, any dividends (except those paid by the Municipal Money Market
Fund) and distributions of net realized gains are taxable events. Shareholders
may realize a taxable gain or loss when selling or exchanging shares (other than
shares of the Money Market Funds). That gain or loss may be treated as a
short-term or long-term capital gain, depending on how long the sold or
exchanged shares were held. The following table outlines the typical tax
liabilities for transactions in taxable accounts:
<TABLE>
<CAPTION>
Type of Transaction Tax Status
------------------- ----------
<S> <C>
Dividends from net investment income* Ordinary income rate
Distributions of realized net short-term capital gains* Ordinary income rate
Distributions of gains from certain foreign currency Ordinary income rate
transactions*
Distributions of realized net long-term capital gains* Long-term capital gains rate
Sales or exchanges of shares owned for more than one year Long-term capital gains or losses
Sales or exchanges of shares owned for less than one year Net gains are treated as ordinary
income; net losses are subject to
special rules
</TABLE>
* whether reinvested or taken in cash
Some foreign countries may impose taxes on dividends paid to and gains
realized by the International Equity Fund. The Fund may treat these taxes as a
deduction or, under certain conditions, "flow the tax through" to shareholders.
In the latter event, shareholders may either deduct the taxes or use them to
calculate a credit against their federal income tax.
A portion of the income dividends paid by the Balanced Fund, the Growth
and Income Fund, the Small Cap Value Fund and the S&P 500 Index Fund is eligible
for the dividends-received deduction allowed to corporations. The eligible
portion may not exceed the Fund's aggregate dividends received from U.S.
corporations. However, dividends received by a corporate shareholder and
deducted by it pursuant to the dividends-received deduction may be subject
indirectly to the federal alternative minimum tax (AMT). The International
Equity Fund's dividends most likely will not qualify for the dividends-received
deduction because none of the dividends received by that Fund are expected to be
paid by U.S. corporations.
The Municipal Money Market Fund designates most of its distributions as
"exempt-interest dividends," which may be excluded from gross income. If the
Fund earns taxable income from any of its investments, that income will be
distributed as a taxable dividend. If the Fund invests in private activity
obligations, shareholders will be required to treat a portion of the
exempt-interest dividends they receive as a "tax preference item" in determining
their liability for AMT. Some states exempt from income tax the interest on
their own obligations and on obligations of governmental agencies and
municipalities in the state; accordingly, each year shareholders will receive
tax information on the Fund's exempt-interest income by state.
This is only a summary of some of the important income tax
considerations that may affect Fund shareholders. Shareholders should consult
their tax adviser regarding specific questions as to the effect of federal,
state or local income taxes on an investment in the Funds.
ADDITIONAL INFORMATION
DISTRIBUTION OF TRUST SHARES
The Trust does not incur any direct distribution expenses related to
PlanAhead Class shares. However, the Trust has adopted a Distribution Plan in
accordance with Rule 12b-1 under the Investment Company Act of 1940 ("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 the sale and distribution of Fund shares.
30
<PAGE> 74
MASTER-FEEDER STRUCTURE
The Funds operate under a master-feeder structure. This means that each
Fund is a "feeder" fund that invests all of its investable assets in a "master"
fund with the same investment objective. The "master" fund purchases securities
for investment. The master-feeder structure works as follows:
- -------------------------
Investor
- -------------------------
purchases shares of
- -------------------------
Feeder Fund
- -------------------------
which invests in
- -------------------------
Master Fund
- -------------------------
which buys
- -------------------------
Investment Securities
- -------------------------
Each Fund can withdraw its investment in its corresponding Portfolio at
any time if the Board determines that it is in the best interest of the Fund and
its shareholders to do so. If this happens, the Fund's assets will be invested
according to the investment policies and restrictions described in this
Prospectus.
YEAR 2000
The Funds could be affected adversely if the computer systems used by
the Manager, the Funds' other service providers, or companies in which the Funds
invest do not properly process and calculate information that relates to dates
beginning on January 1, 2000 and beyond. Due to the Funds' reliance on various
service providers to perform essential functions, each of the Funds could have
difficulty calculating its NAV, processing orders for share redemptions and
delivering account statements and other information to shareholders. The
International Equity Fund could experience difficulties in effecting
transactions if any of its foreign subcustodians, or if foreign broker/dealers
or foreign markets are not ready for the Year 2000. The Manager has taken steps
that it believes are reasonably designed to address the potential failure of
computer systems used by the Manager and the Funds' service providers to address
the Year 2000 issue. There can be no assurance that the steps taken by the
Manager will be sufficient to avoid any adverse impact.
In evaluating current and potential portfolio positions, Year 2000 is
one of the factors that each Fund's investment advisers take into consideration.
The Funds' investment advisers will rely upon public filings and other
statements made by companies regarding their Year 2000 readiness. Issuers in
countries outside of the U.S. may not be required to make the level of
disclosure regarding Year 2000 readiness that is required in the U.S. If the
value of a Fund's investment is adversely affected by a Year 2000 problem, the
NAV of the Fund may be affected as well.
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand
each Fund's financial performance for the past five years (or, if shorter, the
period of the Fund's operations). Certain information reflects financial results
for a single Fund share. The total returns in the table represent the rate that
an investor would have earned (or lost) on an investment in the Fund (assuming
reinvestment of all dividends and distributions). Except for the S&P 500 Index
Fund, each Fund's highlights were audited by Ernst & Young LLP, independent
auditors. The financial highlights of the S&P 500 Index Fund were audited by
PricewaterhouseCoopers LLP, independent auditors. More financial information
about the Funds is found in their Annual Report, which you may obtain upon
request.
31
<PAGE> 75
BALANCED FUND - PLANAHEAD CLASS
<TABLE>
<CAPTION>
--------------------------------------------------------- ----------
YEAR ENDED OCTOBER 31, AUG. 1 TO
OCT. 31,
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD: 1998 1997(D) 1996(D)(E) 1995(C)(D) 1994(A)(B)
- ------------------------------------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 16.18 $ 15.03 $ 13.90 $ 12.35 $ 12.35
Income from investment operations
Net investment income 0.63(F) 0.57(F) 0.54 0.12
Net gains (losses) on securities (realized and 2.10(F) 1.56(F) 1.67 (0.12)
unrealized) ---------- ---------- ---------- ----------
Total from investment operations 2.73 2.13 2.21 0.00
---------- ---------- ---------- ----------
Less distributions:
Dividends from net investment income (0.57) (0.56) (0.52) --
Distributions from net realized gains on
securities (1.16) (0.44) (0.14) --
---------- ---------- ---------- ----------
Total distributions (1.73) (1.00) (0.66) --
---------- ---------- ---------- ----------
Net asset value, end of period $ 16.03 $ 15.03 $ 13.90 $ 12.35
========== ========== ========== ==========
Total return (annualized) 19.75% 16.01% 19.06% (0.16)%(K)
========== ========== ========== ==========
Ratios and supplemental data:
Net assets, end of period (in thousands) $ 34,354 $ 18,000 $ 5,450 $ 528
Ratios to average net assets (annualized)(G)(H)(J)
Expenses 0.90%(F) 0.97%(F) 0.99% 0.92%
Net investment income 3.52%(F) 3.64%(F) 3.70% 4.04%
Portfolio turnover rate(I) 105% 76% 73% 48%
</TABLE>
A The Balanced Fund commenced active operations on August 1, 1994.
B Average shares outstanding for the period rather than end of period shares
were used to compute net investment income per share.
C GSB Investment Management, Inc. was added as an investment adviser to the
Balanced Fund on January 1, 1995.
D Class expenses per share were subtracted from net investment income per
share for the Fund before class expenses to determine net investment income
per share.
E Brandywine Asset Management, Inc. replaced Capital Guardian Trust Company
as an investment adviser to the Fund as of April 1, 1996.
F The per share amounts and ratios reflect income and expenses assuming
inclusion of the Fund's proportionate share of the income and expenses of
its corresponding Portfolio.
G Effective August 1, 1994, expenses include administrative services fees
paid by the Fund to the Manager.
H The method of determining average net assets was changed from a monthly
average to a daily average starting with the year ended October 31, 1994.
I On November 1, 1995 the Balanced Fund began investing all of its investable
assets in its corresponding Portfolio. Portfolio turnover rate since
November 1, 1996 is that of the Portfolio.
J Operating results for the following periods excluded management and
administrative services fees waived by the Manager. Had the Fund paid such
fees, the ratio of expenses and net investment income to average net assets
would have been 0.99% and 3.97%, respectively for the period ended October
31, 1994, and 1.09% and 3.60%, respectively for the year ended October 31,
1995.
K The total return reflects the Institutional Class return from November 1,
1993 through July 31, 1994 and the PlanAhead Class return for the remainder
of the period. Due to the different expense structures between the classes,
the total return would vary from the result shown had the PlanAhead Class
been in operation for the entire year.
32
<PAGE> 76
GROWTH AND INCOME FUND - PLANAHEAD CLASS
<TABLE>
<CAPTION>
-------------------------------------------- ---------
YEAR ENDED OCTOBER 31, AUG. 1 TO
OCT. 31,
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD: 1998 1997(C) 1996(C)(D) 1995(C) 1994(A)(B)
- ----------------------------------------------------------- --------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 21.63 $ 18.33 $ 15.81 $ 14.17 $ 13.99
Income from investment operations
Net investment income 0.35(E) 0.39(E) 0.40 0.05
Net gains (losses) on securities (realized and 4.39(E) 3.10(E) 2.22 0.13
unrealized) -------- -------- -------- --------
Total from investment operations 4.74 3.49 2.62 0.18
-------- -------- -------- --------
Less distributions:
Dividends from net investment income (0.38) (0.40) (0.44) --
Distributions from net realized gains on securities (1.31) (0.57) (0.54) --
-------- -------- -------- --------
Total distributions (1.69) (0.97) (0.98) --
-------- -------- -------- --------
Net asset value, end of period $ 21.38 $ 18.33 $ 15.81 $ 14.17
======== ======== ======== ========
Total return (annualized) 27.64% 22.98% 20.14% 3.21%(J)
======== ======== ======== ========
Ratios and supplemental data:
Net assets, end of period (in thousands) $ 29,684 $ 16,084 $ 4,821 $ 56
Ratios to average net assets (annualized)(F)(G)(I)
Expenses 0.93%(E) 0.94%(E) 0.99% 0.95%
Net investment income 1.85%(E) 2.16%(E) 2.23% 1.50%
Portfolio turnover rate(H) 35% 40% 26% 23%
</TABLE>
A The Growth and Income Fund commenced active operations on August 1, 1994.
B Average shares outstanding for the period rather than end of period shares
were used to compute net investment income per share.
C Class expenses per share were subtracted from net investment income per
share for the Fund before class expenses to determine net investment income
per share.
D Brandywine Asset Management, Inc. replaced Capital Guardian Trust Company
as an investment adviser to the Fund as of April 1, 1996.
E The per share amounts and ratios reflect income and expenses assuming
inclusion of the Fund's proportionate share of the income and expenses of
its corresponding Portfolio.
F Effective August 1, 1994, expenses include administrative services fees
paid by the Fund to the Manager.
G The method of determining average net assets was changed from a monthly
average to a daily average starting with the year ended October 31, 1994.
H On November 1, 1995 the Growth and Income Fund began investing all of its
investable assets in its corresponding Portfolio. Portfolio turnover rate
since November 1, 1996 is that of the Portfolio.
I Operating results for the following periods excluded management and
administrative services fees waived by the Manager. Had the Fund paid such
fees, the ratio of expenses and net investment income to average net assets
would have been 1.05% and 1.40%, respectively for the period ended October
31, 1994, 1.08% and 2.14%, respectively for the year ended October 31,
1995, and 0.96% and 2.14%, respectively for the year ended October 31,
1996.
J The total return reflects the Institutional Class return from November 1,
1993 through July 31, 1994 and the PlanAhead Class return for the remainder
of the period. Due to the different expense structures between the classes,
the total return would vary from the result shown had the PlanAhead Class
been in operation for the entire year.
33
<PAGE> 77
INTERNATIONAL EQUITY FUND - PLANAHEAD CLASS
<TABLE>
<CAPTION>
------------------------------------------- ---------
YEAR ENDED OCTOBER 31, AUG. 1 TO
OCT. 31
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD: 1998 1997(D) 1996(D) 1995(D) 1994(A)(B)(C)
- ----------------------------------------------------------- ---------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 17.08 $ 14.90 $ 13.20 $ 12.85 $ 12.61
Income from investment operations
Net investment income 0.30(E) 0.26(E) 0.24 0.06
Net gains (losses) on securities (realized and 2.41(E) 1.92(E) 0.64 0.18
unrealized) --------- -------- -------- ---------
Total from investment operations 2.71 2.18 0.88 0.24
--------- -------- -------- ---------
Less distributions:
Dividends from net investment income (0.28) (0.24) (0.21) --
Distributions from net realized gains on securities (0.41) (0.24) (0.32 --
--------- -------- -------- ---------
Total distributions (0.69) (0.48) (0.53) --
--------- -------- -------- ---------
Net asset value, end of period $ 16.92 $ 14.90 $ 13.20 $ 12.85
========= ======== ======== =========
Total return (annualized) 18.71% 16.95% 7.37% 11.60%(I)
========= ======== ======== =========
Ratios and supplemental data:
Net assets, end of period (in thousands) $ 20,075 $ 7,138 $ 1,456 $ 375
Ratios to average net assets (annualized)(F)(G)
Expenses 1.14%(E) 1.17%(E) 1.33% 1.25%
Net investment income 1.95%(E) 1.76%(E) 2.08% 1.86%
Portfolio turnover rate(H) 15% 19% 21% 37%
</TABLE>
A The International Equity Fund commenced active operations on August 1,
1994.
B Morgan Stanley Asset Management Inc. was added as an investment adviser to
the International Equity Fund as of the close of business on August 1,
1994.
C Average shares outstanding for the period rather than end of period shares
were used to compute net investment income per share.
D Class expenses per share were subtracted from net investment income per
share for the Fund before class expenses to determine net investment income
per share.
E The per share amounts and ratios reflect income and expenses assuming
inclusion of the Fund's proportionate share of the income and expenses of
its corresponding Portfolio.
F Effective August 1, 1994, expenses include administrative services fees
paid by the Fund to the Manager.
G The method of determining average net assets was changed from a monthly
average to a daily average starting with the year ended October 31, 1994.
H On November 1, 1995 the International Equity Fund began investing all of
its investable assets in its corresponding Portfolio. Portfolio turnover
rate since November 1, 1996 is that of the Portfolio.
I The total return reflects the Institutional Class return from November 1,
1993 through July 31, 1994 and the PlanAhead Class return for the remainder
of the period. Due to the different expense structures between the classes,
the total return would vary from the result shown had the PlanAhead Class
been in operation for the entire year.
34
<PAGE> 78
S&P 500 INDEX FUND - PLANAHEAD CLASS
<TABLE>
<CAPTION>
-------------------
MARCH 1, TO
OCTOBER 31,
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD: 1998(A)
- ------------------------------------------------------------------------------- -------------------
<S> <C>
Net asset value, beginning of period $
Income from investment operations
Net investment income
Net gains (losses) on securities (realized and unrealized)(B)
Total from investment operations
Less distributions:
Dividends from net investment income
Distributions from net realized gains on securities
Total distributions
Net asset value, end of period
Total return (annualized)
Ratios and supplemental data:
Net assets, end of period (in thousands)
Ratios to average net assets (annualized)(B)
Net investment income
Expenses
Decrease reflected in above expense ratio due to absorption of expenses
by Bankers
Trust and the Manager
Portfolio turnover rate(C)
</TABLE>
A The S&P 500 Index Fund commenced active operations on March 1, 1998.
B The per share amounts and ratios reflect income and expenses assuming
inclusion of the Fund's proportionate share of the income and expenses of
the Equity 500 Index Portfolio.
C Portfolio turnover rate is that of the Equity 500 Index Portfolio.
35
<PAGE> 79
INTERMEDIATE BOND FUND - PLANAHEAD CLASS
<TABLE>
<CAPTION>
----------------
MARCH 2 TO
OCTOBER 31,
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD: 1998(A)
- ------------------------------------------------------------------ ----------------
<S> <C>
Net asset value, beginning of period $ 10.17
Income from investment operations
Net investment income
Net gains (losses) on securities (realized and unrealized)(B)
Total from investment operations
Less distributions:
Dividends from net investment income
Distributions from net realized gains on securities
Total distributions
Net asset value, end of period
Total return (annualized)
Ratios and supplemental data:
Net assets, end of period (in thousands)
Ratios to average net assets (annualized)(B)
Expenses
Net investment income
Portfolio turnover rate(C)
</TABLE>
A The Intermediate Bond Fund commenced active operations on March 2, 1998.
B The per share amounts and ratios reflect income and expenses assuming
inclusion of the Fund's proportionate share of the income and expenses of
its corresponding Portfolio.
C Portfolio turnover rate is that of the Portfolio.
36
<PAGE> 80
SHORT-TERM BOND FUND - PLANAHEAD CLASS
<TABLE>
<CAPTION>
---------------------------------------------- ---------
YEAR ENDED OCTOBER 31, AUG. 1 TO
OCT. 31,
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD: 1998 1997 1996 1995 1994(A)
- ----------------------------------------------------------- -------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 9.63 $ 9.68 $ 9.82 $ 9.68 $ 9.78
Income from investment operations
Net investment income 0.61 (B) 0.60 (B) 0.59 0.13
Net gains (losses) on securities (realized and (0.05)(B) (0.14)(B) 0.14 (0.10)
unrealized) ------- ------- ------- -------
Total from investment operations 0.56 0.46 0.73 0.03
------- ------- ------- -------
Less distributions:
Dividends from net investment income (0.61) (0.60) (0.59) (0.13)
Distributions from net realized gains on securities -- -- -- --
------- ------- ------- -------
Total distributions (0.61) (0.60) (0.59) (0.13)
------- ------- ------- -------
Net asset value, end of period $ 9.63 $ 9.68 $ 9.82 $ 9.68
======= ======= ======= =======
Total return (annualized) 6.01% 4.83% 7.83% 0.45%(G)
======= ======= ======= =======
Ratios and supplemental data:
Net assets, end of period (in thousands) $ 5,096 $ 3,399 $ 1,576 $ 403
Ratios to average net assets (annualized)(CDF)
Expenses 0.85%(B) 0.85%(B) 0.83% 0.79%
Net investment income 6.36%(B) 6.11%(B) 6.16% 5.10%
Portfolio turnover rate(E) -- -- 183% 94%
</TABLE>
A The Short-Term Bond Fund commenced active operations on August 1, 1994.
B The per share amounts and ratios reflect income and expenses assuming
inclusion of the Fund's proportionate share of the income and expenses of
its corresponding Portfolio.
C Effective August 1, 1994, expenses include administrative services fees
paid by the Fund to the Manager.
D The method of determining average net assets was changed from a monthly
average to a daily average starting with the year ended October 31, 1994.
E On November 1, 1995 the Short-Term Bond Fund began investing all of its
investable assets in its corresponding Portfolio. Portfolio turnover rate
since November 1, 1996 is that of the Portfolio.
F Operating results exclude management and administrative services fees
waived by the Manager. Had the Fund paid such fees, the ratio of expenses
and net investment income to average net assets would have been 1.00% and
4.89%, respectively for the period ended October 31, 1994, 1.06% and 5.94%,
respectively for the year ended October 31, 1995, 0.94% and 6.02%,
respectively for the year ended October 31, 1996, 0.90% and 6.31%,
respectively for the year ended October 31, 1997 and X.XX% and X.XX%,
respectively for the year ended October 31, 1998.
G The total return reflects the Institutional Class return from November 1,
1993 through July 31, 1994 and the PlanAhead Class return for the remainder
of the period. Due to the different expense structures between the classes,
the total return would vary from the result shown had the PlanAhead Class
been in operation for the entire year.
37
<PAGE> 81
MONEY MARKET FUND - PLANAHEAD CLASS
<TABLE>
<CAPTION>
------------------------------------------------- ---------
YEAR ENDED OCTOBER 31, AUG. 1 TO
OCT. 31,
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD: 1998 1997 1996 1995 1994(A)
- ------------------------------------------------------- -------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- --------- --------- -------
Net investment income 0.05 (B) 0.05 (B) 0.05 0.01
Less dividends from net investment income (0.05) (0.05) (0.05) 0.01)
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ========= =======
Total return (annualized) 5.28% 5.21% 5.60% 1.07%(C)
======== ======== ========= =======
Ratios and supplemental data:
Net assets, end of period (in thousands) $189,189 $106,890 $ 41,989 $ 25
Ratios to average net assets (annualized)
Expenses 0.54%(B) 0.58%(B) 0.55% 0.70%
Net investment income 5.17%(B) 5.06%(B) 5.56% 4.42%
</TABLE>
A The Money Market Fund commenced active operations on August 1, 1994.
B The per share amounts and ratios reflect income and expenses assuming
inclusion of the Fund's proportionate share of the income and expenses of
its corresponding Portfolio.
C The total return reflects the Institutional Class return from November 1,
1993 through July 31, 1994 and the PlanAhead Class return for the remainder
of the period. Due to the different expense structures between the classes,
the total return would vary from the result shown had the PlanAhead Class
been in operation for the entire year.
38
<PAGE> 82
MUNICIPAL MONEY MARKET FUND - PLANAHEAD CLASS
<TABLE>
<CAPTION>
---------------------------------------------------- ---------
YEAR ENDED OCTOBER 31, AUG. 1 TO
OCT. 31,
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD: 1998 1997 1996 1995 1994(A)
- --------------------------------------------------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- -------
Net investment income 0.03 (B) 0.03 (B) 0.03 0.02
Less dividends from net investment income (0.03) (0.03) (0.03) (0.02)
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== =======
Total return (annualized) 3.24% 3.27% 3.39%
======== ======== ========
2.35%(D)
Ratios and supplemental data:
Net assets, end of period (in thousands) $ 9,590 $ 2,340 $ 129 $ 0
Ratios to average net assets (annualized)(C)
Expenses 0.60%(B) 0.62%(B) 0.72% 0.77%
Net investment income 3.18%(B) 3.12%(B) 3.32% 2.49%
</TABLE>
A The Municipal Money Market Fund commenced active operations on August 1,
1994.
B The per share amounts and ratios reflect income and expenses assuming
inclusion of the Fund's proportionate share of the income and expenses of
its corresponding Portfolio.
C Operating results exclude management and administrative services fees
waived by the Manager. Had the Fund paid such fees, the ratio of expenses
and net investment income to average net assets would have been 0.97% and
2.29%, respectively for the period ended October 31, 1994, 0.92% and 3.12%,
respectively for the year ended October 31, 1995, 0.67% and 3.07%,
respectively for the year ended October 31, 1996, 0.61% and 3.17%,
respectively for the year ended October 31, 1997 and X.XX% and X.XX%,
respectively for the year ended October 31, 1998.
D The total return reflects the Institutional Class return from November 1,
1993 through July 31, 1994 and the PlanAhead Class return for the remainder
of the period. Due to the different expense structures between the classes,
the total return would vary from the result shown had the PlanAhead Class
been in operation for the entire year.
39
<PAGE> 83
U.S. GOVERNMENT MONEY MARKET FUND - PLANAHEAD CLASS
<TABLE>
<CAPTION>
------------------------------------------------- -----------
YEAR ENDED OCTOBER 31, AUG. 1 TO
OCT. 31,
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD: 1998 1997(D) 1996 1995 1994(A)
- ------------------------------------------------------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
Net investment income 0.05 (B) 0.05 (B) 0.05 0.01
Less dividends from net investment income (0.05) (0.05) (0.05) (0.01)
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total return (annualized) 5.08% 4.94% 5.19% 3.58%(E)
======== ======== ======== ========
Ratios and supplemental data:
Net assets, end of period (in thousands) $ 4,046 $ 1,822 $ 530 $ 0
Ratios to average net assets (annualized)(C)
Expenses 0.52%(B) 0.67%(B) 0.76% 0.75%
Net investment income 5.00%(B) 4.74%(B) 5.19% 3.94%
</TABLE>
A The U.S. Government Money Market Fund commenced active operations on
August 1, 1994.
B The per share amounts and ratios reflect income and expenses assuming
inclusion of the Fund's proportionate share of the income and expenses of
its corresponding Portfolio.
C The method of determining average net assets was changed from a monthly
average to a daily average starting with the year ended October 31, 1994.
D Prior to March 1, 1997, the American AAdvantage U.S. Government Money
Market Fund was known as the American AAdvantage U.S. Treasury Money Market
Fund and operated under different investment policies.
E The total return reflects the Institutional Class return from November 1,
1993 through July 31, 1994 and the PlanAhead Class return for the remainder
of the period. Due to the different expense structures between the classes,
the total return would vary from the result shown had the PlanAhead Class
been in operation for the entire year.
40
<PAGE> 84
ADDITIONAL INFORMATION
Additional information about the Funds is found in the documents listed
below. Request a free copy of these documents by calling (800) 388-3344.
<TABLE>
<CAPTION>
ANNUAL REPORT/SEMI-ANNUAL REPORT STATEMENT OF ADDITIONAL INFORMATION
<S> <C>
The Funds' Annual and Semi-Annual Reports list each The SAI contains more details about the Funds and
Fund's actual investments as of the report's date. their investment policies. The SAI is incorporated
They also include a discussion by the Manager of in this Prospectus by reference (it is legally part
market conditions and investment strategies that of this Prospectus). A current SAI is on file with
significantly affected the Funds' performance. The the Securities and Exchange Commission (SEC).
report of the Funds' independent auditors is included
in the Annual Report.
</TABLE>
To obtain more information about the Funds or to request a copy of the documents
listed above:
BY TELEPHONE:
Call (800) 388-3344
BY MAIL:
American AAdvantage Funds
P.O. Box 619003, MD5645
DFW Airport, TX 75261-9003
BY E-MAIL:
[email protected]
ON THE INTERNET:
Visit our website at www.aafunds.com
Visit the SEC website at www.sec.gov
Copies of these documents also may be obtained from the SEC Public Reference
Room in Washington, D.C. The Public Reference Room can be reached at (800)
732-0330 or by mailing a request, including a duplicating fee to: SEC's Public
Reference Section, 450 5th Street NW, Washington, D.C. 20549-6009.
FUND SERVICE PROVIDERS
CUSTODIAN TRANSFER AGENT
--------- --------------
State Street Bank and Trust Company National Financial Data Services
Boston, Massachusetts Kansas City, Missouri
INDEPENDENT AUDITORS DISTRIBUTOR
-------------------- -----------
Ernst & Young LLP Brokers Transaction Services, Inc.
Dallas, Texas Dallas, Texas
PricewaterhouseCoopers LLP
Baltimore, Maryland
[AMERICAN AADVANTAGE FUNDS LOGO]
SEC File Number 811-4984
American Airlines is not responsible for investments made in the American
AAdvantage Funds. American AAdvantage Funds is a registered service mark of AMR
Corporation. PlanAhead Class is a registered service mark of AMR Investment
Services, Inc. American AAdvantage Balanced Fund, American AAdvantage Growth and
Income Fund, American AAdvantage International Equity Fund, American AAdvantage
Intermediate Bond Fund, American AAdvantage Short-Term Bond Fund, American
AAdvantage Small Cap Value Fund, American AAdvantage Money Market Fund, American
AAdvantage Municipal Money Market Fund, and American AAdvantage U.S. Government
Money Market Fund are service marks of AMR Investment Services.
41
<PAGE> 85
[AMERICAN AADVANTAGE FUNDS LOGO]
PROSPECTUS
March 1, 1999
- AMR CLASS -
Balanced
Growth and Income
International Equity
Small Cap Value
Intermediate Bond
Short-Term Bond
- INSTITUTIONAL CLASS -
S&P 500 Index Fund
Managed by AMR Investment Services, Inc.
THE SECURITIES AND EXCHANGE COMMISSION DOES NOT GUARANTEE THAT THE INFORMATION
IN THIS PROSPECTUS OR ANY OTHER MUTUAL FUND'S PROSPECTUS IS ACCURATE OR
COMPLETE, NOR DOES IT JUDGE THE INVESTMENT MERIT OF THESE FUNDS. TO STATE
OTHERWISE IS A CRIMINAL OFFENSE.
<PAGE> 86
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ABOUT THE FUNDS
Overview..............................................................X
Balanced Fund.........................................................X
Growth and Income Fund................................................X
International Equity Fund.............................................X
Small Cap Value Fund .................................................XX
Intermediate Bond Fund................................................XX
Short-Term Bond Fund..................................................XX
The Manager...........................................................XX
The Investment Advisers...............................................XX
Valuation of Shares...................................................XX
ABOUT YOUR INVESTMENT
Purchase and Redemption of Shares.....................................XX
Distributions and Taxes...............................................XX
ADDITIONAL INFORMATION
Distribution of Fund Shares...........................................XX
Master-Feeder Structure...............................................XX
Year 2000.............................................................XX
Financial Highlights..................................................XX
Additional Information................................................XX
</TABLE>
ABOUT THE FUNDS
OVERVIEW
The American AAdvantage Funds (the "Funds") are managed by
AMR Investment Services, Inc. (the "Manager"), a wholly owned subsidiary of AMR
Corporation.
The Funds operate under a master-feeder structure. This means that each
Fund, except for the S&P 500 Index Fund, seeks its investment objective by
investing all of its investable assets in a corresponding Portfolio of the AMR
Investment Services Trust ("AMR Trust") that has a similar name and identical
investment objective. The S&P 500 Index Fund invests all of its investable
assets in the Equity 500 Index Portfolio, which is a separate investment company
managed by Bankers Trust Company ("BT") with an identical investment objective.
Throughout this Prospectus, statements regarding investments by a Fund refer to
investments made by its corresponding Portfolio. For easier reading, the term
"Fund" is used throughout the Prospectus to refer to either a Fund or its
Portfolio, unless stated otherwise. See "Master-Feeder Structure".
2
<PAGE> 87
AMERICAN AADVANTAGE BALANCED FUND
INVESTMENT OBJECTIVE
Income and capital appreciation.
PRINCIPAL STRATEGIES
This Fund typically invests between 50% and 65% of its assets in equity
securities and between 35% and 50% of its assets in debt securities.
The Fund's equity investments may include common stocks, preferred
stocks, securities convertible into common stocks, and U.S. dollar-denominated
American Depositary Receipts (collectively referred to as "stocks").
The Fund's investment advisers select stocks which, in their opinion,
have most or all of the following characteristics:
o above-average earnings growth potential,
o selling at prices below their perceived economic value,
o low price to earnings ratio,
o low price to book value ratio,
o and generate above-average dividend yields.
Each of the Fund's investment advisers determines the growth prospects
of companies based upon a combination of internal and external research using
fundamental analysis and considering changing economic trends. The decision to
sell a stock is typically based on the belief that the company is no longer
considered undervalued or shows deteriorating fundamentals, or that better
investment opportunities exist in other stocks. The Manager believes that this
strategy will help the Fund outperform other investment styles over the longer
term while minimizing volatility and downside risk.
The Fund's investment in debt securities may include obligations of the
U.S. Government, its agencies and instrumentalities; corporate debt securities,
such as notes and bonds; mortgage-backed securities; asset-backed securities;
master-demand notes; Yankeedollar and Eurodollar bank certificates of deposit,
time deposits, bankers' acceptances, commercial paper and other notes; and other
debt securities. The Fund will only buy debt securities that are investment
grade at the time of purchase. Investment grade securities include securities
issued or guaranteed by the U.S. Government, its agencies and instrumentalities,
as well as securities rated in one of the four highest rating categories by all
nationally recognized statistical rating organizations rating that security
(such as Standard & Poor's or Moody's Investors Service, Inc.). Obligations
rated in the fourth highest rating category are limited to 25% of the Fund's
debt allocation. The Fund, at the discretion of the investment advisers, may
retain a security that has been downgraded below the initial investment
criteria.
In determining which debt securities to buy and sell, the investment
advisers generally use a top-down fixed income review process, as follows:
o Develop overall investment strategy based on a comprehensive
review of macroeconomic conditions and an analysis of leading
economic indicators.
o Set portfolio maturity structure based on U.S. Treasury yield
curve and credit spread analysis.
o Perform sector analysis to determine relative value.
o Select specific debt securities.
o Review and monitor portfolio composition for changes in credit,
risk-return profile and comparisons with benchmarks.
One of the investment advisers to the Fund uses a bottom-up fixed
income strategy in determining which securities to buy and sell, as follows:
o Select individual securities based upon yield to maturity
advantage versus a comparable U.S. Treasury security.
o Evaluate credit quality of the security.
o Perform quantitative analysis of yield premium using empirical
effective duration measures.
Under adverse market conditions, the Fund may, for temporary defensive
purposes, invest up to 100% of its assets in cash or cash equivalents, including
investment grade short-term obligations. To the extent that the Fund invokes
this strategy, its ability to achieve its investment objective may be affected
adversely.
INVESTMENT ADVISERS
The Manager allocates the assets of the Fund among the following
investment advisers:
Barrow, Hanley, Mewhinney & Strauss, Inc.
Brandywine Asset Management, Inc.
GSB Investment Management, Inc.
Hotchkis and Wiley
Independence Investment Associates, Inc.
3
<PAGE> 88
RISK FACTORS
o Market Risk (Stocks)
Since this Fund invests a substantial portion of its assets in equity
securities, it is subject to stock market risk. Market risk involves
the possibility that the value of the Fund's investments in stocks will
decline due to drops in the stock market. In general, the value of the
Fund will move in the same direction as the overall stock market, which
will vary from day to day in response to the activities of individual
companies and general market and economic conditions.
o Interest Rate Risk (Bonds)
The Fund is subject to the risk that the market value of the bonds it
holds will decline due to rising interest rates. When interest rates
rise, the price of most bonds go down. When interest rates go down, the
bond prices go up. The price of a bond is also affected by its
maturity. Bonds with longer maturities generally have greater
sensitivity to changes in interest rates.
o Credit Risk (Bonds)
The Fund is subject to the risk that an issuer of a bond will fail to
make timely payment of interest or principal. A decline in an issuer's
credit rating can cause its price to go down. This risk is somewhat
minimized by the Fund's policy of only investing in bonds that are
considered investment grade at the time of purchase.
o Prepayment Risk (Bonds)
The Fund's investments in asset-backed and mortgage-backed securities
are subject to the risk that the principal amount of the underlying
collateral may be repaid prior to the bond's maturity date. If this
occurs, no additional interest will be paid on the investment.
o Additional Risks
An investment in the Fund is not a deposit of a bank and is not insured
or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. The value of an investment in the Fund will
fluctuate up and down, which means an investor could lose money.
HISTORICAL PERFORMANCE
The bar chart below provides an indication of risk by showing how the
Fund's performance has varied from year to year. The table shows how the Fund's
performance compares to two broad-based market indices and the Lipper Balanced
Index, a composite of XX funds as of December 31, 1998, with the same investment
objective as the Fund. The AMR Class of the Fund began offering its shares on
August 1, 1994. However, another class of shares of the Fund not offered in this
prospectus, has been offered since July 17, 1987. In the chart and table below,
performance results before August 1, 1994 are for the older class. Because the
other class had slightly higher expenses, its performance was slightly worse
than the AMR Class of the Fund would have realized in the same period. Past
performance is not necessarily indicative of how the Fund will perform in the
future.
TOTAL RETURN FOR THE CALENDAR YEAR ENDED 12/31 OF EACH YEAR
[GRAPH]
Highest Quarterly Return from 1/1/89 through 12/31/98 X Quarter 19XX X.XX%
Lowest Quarterly Return from 1/1/89 through 12/31/98 X Quarter 19XX X.XX%
<TABLE>
<CAPTION>
Average Annual Total Return
===================================================
as of 12/31/98
---------------------------------------------------
1 Year 5 Years 10 Years
------ ------- --------
<S> <C> <C> <C>
Balanced Fund X.XX% X.XX% X.XX%
S&P 500 Index* X.XX% X.XX% X.XX%
Lehman Bros. Intermediate Gov./Corp. Index** X.XX% X.XX% X.XX%
Lipper Balanced Index X.XX% X.XX% X.XX%
</TABLE>
* The S&P 500 is an unmanaged index of common stocks publicly traded in the
United States.
** The Lehman Brothers Intermediate Gov./Corp. Index is a market value weighted
performance benchmark for government and corporate fixed-rate debt issues with
maturities between one and ten years.
4
<PAGE> 89
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy
and hold shares of the Balanced Fund.1
Annual Fund Operating Expenses (expenses that are deducted from Fund
assets)
<TABLE>
<S> <C>
Management Fees......................................0.33%
Distribution (12b-1) Fees............................0.00
Other Expenses.......................................0.01
----
Total Annual Fund Operating Expenses.................0.34%
====
</TABLE>
(1)The expense table and the Example below reflect the expenses of both
the Fund and its corresponding Portfolio.
EXAMPLE
This Example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The Example assumes
that you invest $10,000 in the Fund for the time periods indicated and then
redeem all of your shares at the end of those periods. The Example also assumes
that your investment has a 5% return each year and that the Fund's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- -------
<S> <C> <C> <C>
$35 $109 $191 $431
</TABLE>
5
<PAGE> 90
AMERICAN AADVANTAGE GROWTH AND INCOME FUND
INVESTMENT OBJECTIVE
Long-term capital appreciation and current income.
PRINCIPAL STRATEGIES
Ordinarily at least 80% of the total assets of this Fund are invested
in U.S. equity securities. The Fund's investments may include common stocks,
preferred stocks, securities convertible into U.S. common stocks, and U.S.
dollar-denominated American Depositary Receipts (collectively referred to as
"stocks").
The Fund's investment advisers select stocks which, in their opinion,
have most or all of the following characteristics:
o above-average earnings growth potential,
o selling at prices below their perceived economic value,
o low price to earnings ratio, low price to book value ratio, and
o generate above-average dividend yields.
Each of the Fund's investment advisers determines the growth prospects
of companies based upon a combination of internal and external research using
fundamental analysis and considering changing economic trends. The decision to
sell a stock is typically based on the belief that the company is no longer
considered undervalued or shows deteriorating fundamentals, or that better
investment opportunities exist in other stocks. The Manager believes that this
strategy will help the Fund outperform other investment styles over the longer
term while minimizing volatility and downside risk.
Under adverse market conditions, the Fund may, for temporary defensive
purposes, invest up to 100% of its assets in cash or cash equivalents, including
investment grade short-term obligations. To the extent that the Fund invokes
this strategy, its ability to achieve its investment objective may be affected
adversely.
INVESTMENT ADVISERS
The Manager allocates the assets of the Fund among the following
investment advisers:
Barrow, Hanley, Mewhinney & Strauss, Inc.
Brandywine Asset Management, Inc.
GSB Investment Management, Inc.
Hotchkis and Wiley
Independence Investment Associates, Inc.
RISK FACTORS
o Market Risk
Since this Fund invests most of its assets in equity securities, it is
subject to stock market risk. Market risk involves the possibility that
the value of the Fund's investments in stocks will decline due to drops
in the stock market. In general, the value of the Fund will move in the
same direction as the overall stock market, which will vary from day to
day in response to the activities of individual companies and general
market and economic conditions.
o Additional Risks
An investment in the Fund is not a deposit of a bank and is not insured
or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. The value of an investment in the Fund will
fluctuate up and down, which means an investor could lose money.
6
<PAGE> 91
HISTORICAL PERFORMANCE
The bar chart below provides an indication of risk by showing how the
Fund's performance has varied from year to year. The table shows how the Fund's
performance compares to the S&P 500, a widely recognized unmanaged index of
common stocks publicly traded in the United States, and the Lipper Growth and
Income Index, a composite of XX funds as of December 31, 1998, with the same
investment objective as the Fund. The AMR Class of the Fund began offering its
shares on August 1, 1994. However, another class of shares of the Fund not
offered in this prospectus has been offered since July 17, 1987. In the chart
and table below, performance results before August 1, 1994 are for the older
class. Because the other class had slightly higher expenses, its performance was
slightly worse than the AMR Class of the Fund would have realized in the same
period. Past performance is not necessarily indicative of how the Fund will
perform in the future.
TOTAL RETURN FOR THE CALENDAR YEAR ENDED 12/31 OF EACH YEAR
[GRAPH]
Highest Quarterly Return from 1/1/89 through 12/31/98 X Quarter 19XX X.XX%
Lowest Quarterly Return from 1/1/89 through 12/31/98 X Quarter 19XX X.XX%
<TABLE>
<CAPTION>
Average Annual Total Return
=====================================================
as of 12/31/98
-----------------------------------------------------
1 Year 5 Years 10 Years
------ ------- --------
<S> <C> <C> <C>
Growth and Income Fund X.XX% X.XX% X.XX%
S&P 500 Index X.XX% X.XX% X.XX%
Lipper Growth and Income Index X.XX% X.XX% X.XX%
</TABLE>
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy
and hold shares of the Growth and Income Fund.(1)
Annual Fund Operating Expenses (expenses that are deducted from Fund
assets)
<TABLE>
<S> <C>
Management Fees......................................0.33%
Distribution (12b-1) Fees............................0.00
Other Expenses.......................................0.01
----
Total Annual Fund Operating Expenses.................0.34%
====
</TABLE>
(1)The expense table and the Example below reflect the expenses of both
the Fund and its corresponding Portfolio.
EXAMPLE
This Example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The Example assumes
that you invest $10,000 in the Fund for the time periods indicated and then
redeem all of your shares at the end of those periods. The Example also assumes
that your investment has a 5% return each year and that the Fund's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- -------
<S> <C> <C> <C>
$35 $109 $191 $431
</TABLE>
7
<PAGE> 92
AMERICAN AADVANTAGE INTERNATIONAL EQUITY FUND
INVESTMENT OBJECTIVE
Long-term capital appreciation.
PRINCIPAL STRATEGIES
Under normal circumstances, at least 80% of the Fund's total assets are
invested in common stocks and securities convertible into common stocks
(collectively, "stocks") of issuers based in at least three different countries
located outside the United States.
The current countries in which the Fund may invest are:
<TABLE>
<S> <C> <C> <C> <C> <C>
Australia Denmark Hong Kong Mexico Portugal Sweden
Austria Finland Ireland Netherlands Singapore Switzerland
Belgium France Italy New Zealand South Korea United Kingdom
Canada Germany Japan Norway Spain
</TABLE>
The investment advisers select stocks which, in their opinion, have
most or all of the following characteristics:
o above-average earnings growth potential,
o selling at prices below their perceived economic value,
o low price to earnings ratio, low price to book value ratio, and
o generate above-average dividend yields.
The investment advisers will also consider potential changes in
currency exchange rates when choosing stocks. Each of the investment advisers
determines the growth prospects of companies based upon a combination of
internal and external research using fundamental analysis and considering
changing economic trends. The decision to sell a stock is typically based on the
belief that the company is no longer considered undervalued or shows
deteriorating fundamentals, or that better investment opportunities exist in
other stocks. The Manager believes that this strategy will help the Fund
outperform other investment styles over the longer term while minimizing
volatility and downside risk. The Fund may trade forward foreign currency
contracts to hedge currency fluctuations of underlying stock positions when it
is believed that a foreign currency may suffer a decline against the U.S.
dollar.
Under adverse market conditions, the Fund may, for temporary defensive
purposes, invest up to 100% of its assets in cash or cash equivalents, including
investment grade short-term obligations. To the extent that the Fund invokes
this strategy, its ability to achieve its investment objective may be affected
adversely.
INVESTMENT ADVISERS
The Manager allocates the assets of the Fund among the following
investment advisers:
Hotchkis and Wiley
Morgan Stanley Asset Management Inc.
Templeton Investment Counsel, Inc.
RISK FACTORS
o Market Risk
Since this Fund invests most of its assets in equity securities, it is
subject to stock market risk. Market risk involves the possibility that
the value of the Fund's investments in stocks of a particular country
will decline due to drops in that country's stock market. In general,
the value of the Fund will move in the same direction as the
international stock markets it invests in, which will vary from day to
day in response to the activities of individual companies and general
market and economic conditions of that country.
o Foreign Investing
Overseas investing carries potential risks not associated with domestic
investments. Such risks include, but are not limited to: (1) currency
exchange rate fluctuations, (2) political and financial instability,
(3) less liquidity and greater volatility of foreign investments, (4)
lack of uniform accounting, auditing and financial reporting standards,
(5) less government regulation and supervision of foreign stock
exchanges, brokers and listed companies, (6) increased price
volatility, and (7) delays in transaction settlement in some foreign
markets.
8
<PAGE> 93
o Additional Risks
An investment in the Fund is not a deposit of a bank and is not insured
or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. The value of an investment in the Fund will
fluctuate up and down, which means an investor could lose money.
HISTORICAL PERFORMANCE
The bar chart below provides an indication of risk by showing how the
Fund's performance has varied from year to year. The table shows how the Fund's
performance compares to the Morgan Stanley Eastern AustralAsia Far East (EAFE)
Index, a widely recognized unmanaged index of international stock investment
performance and the Lipper International Index, a composite of XX funds as of
December 31, 1998, with the same investment objective as the Fund. The AMR Class
of the Fund began offering its shares on August 1, 1994. However, another class
of shares of the Fund not offered in this prospectus has been offered since
August 7, 1991. In the chart and table below, performance results before August
1, 1994 are for the older class. Because the other class had slightly higher
expenses, its performance was slightly worse than the Fund would have realized
in the same period. Past performance is not necessarily indicative of how the
Fund will perform in the future.
TOTAL RETURN FOR THE CALENDAR YEAR ENDED 12/31 OF EACH YEAR
[GRAPH]
Highest Quarterly Return from 1/1/92 through 12/31/98 X Quarter 19XX X.XX%
Lowest Quarterly Return from 1/1/92 through 12/31/98 X Quarter 19XX X.XX%
<TABLE>
<CAPTION>
Average Annual Total Return
=====================================================
as of 12/31/98
-----------------------------------------------------
Since Inception
1 Year 5 Years (8/7/91)
------ ------- --------
<S> <C> <C> <C>
International Equity Fund X.XX% X.XX% X.XX%
EAFE Index X.XX% X.XX% X.XX%
Lipper International Index X.XX% X.XX% X.XX%
</TABLE>
FEES AND EXPENSES
This table describes the fees and expenses that you pay if you buy and
hold shares of the International Equity Fund.1
Annual Fund Operating Expenses (expenses that are deducted from Fund
assets)
<TABLE>
<S> <C>
Management Fees......................................0.48%
Distribution (12b-1) Fees............................0.00
Other Expenses.......................................0.10
----
Total Annual Fund Operating Expenses.................0.58%
====
</TABLE>
(1)The expense table and the Example below reflect the expenses of both
the Fund and its corresponding Portfolio.
EXAMPLE
This Example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The Example assumes
that you invest $10,000 in the Fund for the time periods indicated and then
redeem all of your shares at the end of those periods. The Example also assumes
that your investment has a 5% return each year and that the Fund's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- -------
<S> <C> <C> <C>
$59 $186 $324 $726
</TABLE>
9
<PAGE> 94
SMALL CAP VALUE FUND
INVESTMENT OBJECTIVE
Long-term capital appreciation and current income.
PRINCIPAL STRATEGIES
Ordinarily at least 80% of the total assets of the Fund are invested in
equity securities of U.S. companies with market capitalizations of $1 billion or
less at the time of investment. The Fund's investments may include common
stocks, preferred stocks, securities convertible into common stocks, and U.S.
dollar-denominated American Depositary Receipts (collectively, "stocks").
The investment advisers select stocks which, in their opinion, have
most or all of the following characteristics:
o above-average earnings growth potential,
o selling at prices below their perceived economic value,
o low price to earnings ratio, low price to book value ratio, and
o generate above-average dividend yields.
Each of the investment advisers determines the growth prospects of
companies based upon a combination of internal and external research using
fundamental analysis and considering changing economic trends. The decision to
sell a stock is typically based on the belief that the company is no longer
considered undervalued or shows deteriorating fundamentals, or that better
investment opportunities exist in other stocks. The Manager believes that this
strategy will help the Fund outperform other investment styles over the longer
term while minimizing volatility and downside risk.
Under adverse market conditions, the Fund may, for temporary defensive
purposes, invest up to 100% of its assets in cash or cash equivalents, including
investment grade short-term obligations. To the extent that the Fund invokes
this strategy, its ability to achieve its investment objective may be affected
adversely.
INVESTMENT ADVISERS
The Manager allocates the assets of the Fund among the following
investment advisers:
Brandywine Asset Management, Inc.
Hotchkis and Wiley
RISK FACTORS
o Market Risk
Since this Fund invests most of its assets in equity securities, it is
subject to stock market risk. Market risk involves the possibility that
the value of the Fund's investments in stocks will decline due to drops
in the stock market. In general, the value of the Fund will move in the
same direction as the overall stock market, which will vary from day to
day in response to the activities of individual companies and general
market and economic conditions.
o Small Capitalization Companies
Investing in the securities of small capitalization companies involves
greater risk and the possibility of greater price volatility than
investing in larger capitalization and more established companies,
since smaller companies may have limited operating history, product
lines, and financial resources, and the securities of these companies
may lack sufficient market liquidity.
o Additional Risks
An investment in the Fund is not a deposit of a bank and is not insured
or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. The value of an investment in the Fund will
fluctuate up and down, which means an investor could lose money.
10
<PAGE> 95
HISTORICAL PERFORMANCE
The Small Cap Value Fund began operations on January 1, 1999,and
therefore, long-term historical performance is not available. However,
Brandywine and Hotchkis each have experience managing other accounts with
investment objectives, policies and strategies similar to those of the Fund.
Unlike the Fund, all of the accounts managed by Brandywine include an allocation
to micro-cap companies, which are defined as companies with total market
capitalization of less than $250 million. Thus, the performance below consists
of only the Hotchkis and Wiley Small Cap Fund ("Hotchkis Fund"), an investment
company which has investment objective, policies and strategies substantially
similar to those of the Fund. The data shown below reflects the total return for
the periods shown, reduced by the actual expenses of the Hotchkis Fund. Applying
the Fund's expense structure to the Hotchkis Fund would have lowered the
performance results shown. THIS PERFORMANCE OF THE HOTCHKIS FUND IS NOT THE
PERFORMANCE OF THE FUND. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF HOW
THE FUND WILL PERFORM IN THE FUTURE.
TOTAL RETURN FOR THE CALENDAR YEAR ENDED 12/31 OF EACH YEAR
[GRAPH]
Highest Quarterly Return from 1/1/88 through 12/31/98 X Quarter 19XX XX.XX%
Lowest Quarterly Return from 1/1/88 through 12/31/98 X Quarter 19XX XX.XX%
<TABLE>
<CAPTION>
Average Annual Total Return
=====================================================
as of 12/31/98
-----------------------------------------------------
1 Year 5 Years 10 Years
------ ------- --------
<S> <C> <C> <C>
Hotchkis Fund XX.XX% XX.XX% XX.XX%
Russell 2000 Index* XX.XX% XX.XX% XX.XX%
</TABLE>
* The Russell 2000 Index is an unmanaged index of 2,000 small capitalization
stocks.
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy
and hold shares of the Small Cap Value Fund.1
Annual Fund Operating Expenses (expenses that are deducted from Fund
assets)
<TABLE>
<S> <C>
Management Fees......................................X.X%
Distribution (12b-1) Fees............................0.00
Other Expenses.......................................X.X(2)
Total Annual Fund Operating Expenses.................X.X%
Fee Waiver and/or Expense Reimbursement..............X.X%(3)
---
Net Expenses.........................................X.X%
===
</TABLE>
(1) The expense table and the Example below reflect the expenses of both
the Fund and its corresponding Portfolio.
(2) Other Expenses are based on estimates for the current fiscal year.
(3) The Manager has contractually agreed to waive a portion of its fee and
to reimburse the Fund for other expenses through October 31, 1999 to
the extent that Total Annual Fund Operating Expenses exceed X.X%.
EXAMPLE
This Example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The Example assumes
that you invest $10,000 in the Fund for the time periods indicated and then
redeem all of your shares at the end of those periods. The Example also assumes
that your investment has a 5% return each year and that the Fund's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
------ -------
<S> <C>
$XX $XX
</TABLE>
11
<PAGE> 96
AMERICAN AADVANTAGE S&P 500 INDEX FUND(1)-INSTITUTIONAL CLASS
INVESTMENT OBJECTIVE
To track, as closely as possible, (before expenses) the performance of
the Standard & Poor's 500 Composite Stock Price Index (S&P 500 or Index), which
emphasizes stocks of large U.S. companies.
PRINCIPAL STRATEGIES
The Fund invests for growth, not income; any dividend and interest
income is incidental to the pursuit of its objective. While the Fund's
investment adviser gives priority to capital growth, it cannot offer any
assurance of achieving this objective. The Fund's investment objective is not a
fundamental policy. A shareholder vote is not required to change it, but
shareholders must be notified before it is changed.
An index is a group of securities whose overall performance is used as
a standard to measure investment performance. This Fund is not actively managed
by investment advisers who buy and sell securities based on research and
analysis. Instead, this Fund is passively managed in that it tries to match, as
closely as possible, the performance of a target index by holding either all, or
a representative sample, of the securities in the index.
Under normal conditions, the Fund will invest at least 80% of its
assets in common stocks of companies included in the S&P 500, selected on the
basis of computer generated statistical data, that are deemed representative of
the industry diversification of the S&P 500. The Fund holds each stock found in
the S&P 500 Index in roughly the same proportions as represented by the S&P 500
Index itself. For example, if 5% of the S&P 500 Index were made up of the stock
of a particular company, the Fund would invest 5% of its assets in that company.
To track the S&P 500 Index as closely as possible, the Fund attempts to remain
fully invested in stocks.
Because it would be very expensive to buy and sell all of the stocks in
the S&P 500 Index, the Fund uses a "sampling" technique. Using computer models,
the Fund selects stocks that will track the S&P 500 Index, as closely as
possible, in terms of industry, size, and other characteristics.
Under normal conditions, the investment adviser will attempt to invest
as much of the Fund's assets as is practical in common stocks included in the
S&P 500. However, the Fund may maintain up to 20% of its assets in short-term
debt securities and money market instruments hedged with stock index futures and
options. The Fund will not use these derivatives for speculative purposes or as
leveraged investments that magnify the gains or losses of an investment. The
reasons for which the Fund will invest in derivatives are:
o to keep cash on hand to meet shareholder redemptions or other
needs while simulating full investments in stocks, and
o to reduce the Fund's transaction cost or add value when these
instruments are favorably priced.
INVESTMENT ADVISER
Bankers Trust Company
RISK FACTORS
o Market Risk
As with any investment in common stocks, an investment in the Fund
could lose money, or the Fund's performance could trail that of other
investments. For example:
o Stock prices overall could decline over short or even extended
periods. Stock markets tend to move in cycles, with periods of
rising stock prices and periods of falling stock prices.
o Returns on stocks of large U.S. companies could trail the returns
from the overall stock market. Each type of stock tends to go
through cycles of outperformance and underperformance in
comparison to the overall stock market. These periods in the past
have lasted for several years.
In addition, unlike an index itself, an index fund has operating
expenses. Therefore, while the Fund is expected to track the S&P 500
Index as closely as possible, it will not be able to match the
performance of the index exactly.
o Derivatives
The use of these instruments to pursue the S&P 500 Index returns
requires special skills, knowledge and investment techniques that
differ from those required for normal portfolio management. Gains or
losses from positions in a derivative instrument may be much greater
than the derivative's original cost.
- ------------------
(1) S&P is a trademark of The McGraw-Hill Companies, Inc. and has been licensed
for use. "Standard and Poor's(R)," "S&P(R)," "Standard & Poor's 500," "S&P
500(R)" and "500" are all trademarks of The McGraw-Hill Companies, Inc. and have
been licensed for use by Bankers Trust Company. The S&P 500 Index Fund is not
sponsored, sold or promoted by Standard & Poor's, and Standard & Poor's makes no
representation regarding the advisability of investing in this Fund.
12
<PAGE> 97
o Futures and Options
Although not one of its principal investment strategies, the Fund may
invest in futures contracts and options on futures contracts. These
investments, when made, are for hedging purposes. If the Fund invests
in futures contracts and options on futures contracts for non-hedging
purposes, the margin and premiums required to make those investments
will not exceed 5% of the Fund's net asset value after taking into
account unrealized profits and losses on the contracts. Futures
contracts and options on futures contracts used for non-hedging
purposes involve greater risks than stock investments.
o Additional Risks
An investment in the Fund is not a deposit of Bankers Trust Company or
any other bank and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. The value of an
investment in the Fund will fluctuate up and down, which means an
investor could lose money.
HISTORICAL PERFORMANCE
The bar chart below provides an indication of risk by showing how the
Fund's performance has varied from year to year. The table shows how the Fund's
performance compares to the S&P 500 Index, a widely recognized unmanaged index
of common stocks publicly traded in the United States as of December 31, 1998.
The Fund began offering its shares on January 1, 1997. Prior to March 1, 1998,
the Fund's shares were offered as AMR Class shares. On March 1, 1998, AMR Class
shares of the Fund were designated Institutional Class shares. Past performance
is not necessarily indicative of how the Fund will perform in the future.
TOTAL RETURN FOR THE CALENDAR YEAR ENDED 12/31 OF EACH YEAR
[GRAPH]
Highest Quarterly Return from 1/1/97 through 12/31/98 X Quarter 19XX X.XX%
Lowest Quarterly Return from 1/1/97 through 12/31/98 X Quarter 19XX X.XX%
<TABLE>
<CAPTION>
Average Annual Total Return
==================================================
as of 12/31/98
--------------------------------------------------
Since Inception
1 Year (1/1/97)
<S> <C> <C>
S&P 500 Index Fund X.XX% X.XX%
S&P 500 Index X.XX% X.XX%
</TABLE>
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy
and hold shares of the S&P 500 Index Fund.(1)
Annual Fund Operating Expenses (expenses that are deducted from Fund
assets)
<TABLE>
<S> <C>
Management Fees......................................0.10%
Distribution (12b-1) Fees............................0.00
Other Expenses.......................................X.XX
Total Annual Fund Operating Expenses.................X.XX%
Fee Waiver and/or Expense Reimbursement..............X.XX%(2)
----
Net Expenses.........................................0.20%
====
</TABLE>
(1) The expense table and the Example below reflect the expenses of both
the Fund and the Equity 500 Index Portfolio.
(2) The Manager has contractually agreed to waive a portion of its fee and
to reimburse the Fund for other expenses through October 31, 1999 to
the extent that Total Annual Fund Operating Expenses exceed 0.20%.
After such waivers and reimbursements, Other Expenses are X.XX%.
EXAMPLE
This Example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The Example assumes
that you invest $10,000 in the Fund for the time periods indicated and then
redeem all of your shares at the end of those periods. The Example also assumes
that your investment has a 5% return each year and that the Fund's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- -------
<S> <C> <C> <C>
$20 $XX $XXX $XXX
</TABLE>
13
<PAGE> 98
AMERICAN AADVANTAGE INTERMEDIATE BOND FUND
INVESTMENT OBJECTIVE
Income and capital appreciation.
PRINCIPAL STRATEGIES
The Fund invests in obligations of the U.S. Government, its agencies
and instrumentalities; corporate debt securities, such as commercial paper,
master demand notes, loan participation interests, medium-term notes and funding
agreements; mortgage-backed securities; asset-backed securities; and
Yankeedollar and Eurodollar bank certificates of deposit, time deposits,
bankers' acceptances and other notes. As an investment policy, the Fund
primarily seeks income and secondarily seeks capital appreciation.
The Fund will only buy debt securities that are investment grade at the
time of purchase. Investment grade securities include securities issued or
guaranteed by the U.S. Government, its agencies and instrumentalities, as well
as securities rated in one of the four highest rating categories by all rating
organizations rating the securities (such as Standard & Poor's or Moody's
Investors Service, Inc.). No more than 25% of assets may be invested in
securities rated in the fourth highest rating category. The Fund, at the
discretion of the investment advisers, may retain a security that has been
downgraded below the initial investment criteria.
In determining which securities to buy and sell, the Manager employs a
top-down fixed income review process, as follows:
o Develop overall investment strategy based on a comprehensive
review of macroeconomic conditions and an analysis of leading
economic indicators.
o Set portfolio maturity structure based on U.S. Treasury yield
curve and credit spread analysis.
o Perform sector analysis to determine relative value.
o Select specific debt securities.
o Review and monitor portfolio composition for changes in credit,
risk-return profile and comparisons with benchmarks.
The other investment adviser to the Fund uses a bottom-up fixed income
strategy in determining which securities to buy and sell, as follows:
o Select individual securities based upon yield to maturity
advantage versus a comparable U.S. Treasury security.
o Evaluate credit quality of the security.
o Perform quantitative analysis of yield premium using empirical
effective duration measures.
Under normal circumstances, the Fund seeks to maintain a dollar
weighted average duration of three to seven years. Under adverse market
conditions, the Fund may, for temporary defensive purposes, invest up to 100% of
its assets in cash or cash equivalents, including investment grade short-term
debt obligations. To the extent that the Fund invokes this strategy, its ability
to achieve its investment objective may be affected adversely.
INVESTMENT ADVISERS
The Manager allocates the assets of the Fund among the following
investment advisers:
AMR Investment Services, Inc.
Barrow, Hanley, Mewhinney & Strauss, Inc.
RISK FACTORS
o Interest Rate Risk
The Fund is subject to the risk that the market value of the bonds it
holds will decline due to rising interest rates. When interest rates
rise, the price of most bonds go down. When interest rates go down, the
bond prices go up. The price of a bond is also affected by its
maturity. Bonds with longer maturities generally have greater
sensitivity to changes in interest rates.
o Credit Risk
The Fund is subject to the risk that an issuer of a bond will fail to
make timely payment of interest or principal. A decline in an issuer's
credit rating can cause its price to go down. This risk is somewhat
minimized by the Fund's policy of only investing in bonds that are
considered investment grade at the time of purchase.
o Prepayment Risk
The Fund's investments in asset-backed and mortgage-backed securities
are subject to the risk that the principal amount of the underlying
collateral may be repaid prior to the bond's maturity date. If this
occurs, no additional interest will be paid on the investment.
14
<PAGE> 99
o Additional Risks
An investment in the Fund is not a deposit of a bank and is not insured
or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. The value of an investment in the Fund will
fluctuate up and down, which means an investor could lose money.
HISTORICAL PERFORMANCE
The bar chart below provides an indication of risk by showing how the
Fund has performed during the past year. The table shows how the Fund's
performance compares to the Lehman Brothers Intermediate Gov./Corp. Index and
the Lipper Intermediate Investment Grade Debt Average, benchmarks with the same
investment objective as the Fund. The AMR Class of the Intermediate Bond Fund
began offering its shares on March 1, 1998, and therefore, long-term historical
performance is not available. However, another class of shares of the Fund not
offered in this prospectus has been offered since September 15, 1997. In the
chart and table below, performance results before March 1, 1998 are for the
other class. Because the other class had slightly higher expenses, its
performance was slightly worse than the Fund would have realized in the same
period. Past performance is not necessarily indicative of how the Fund will
perform in the future.
TOTAL RETURN FOR THE CALENDAR YEAR ENDED 12/31/98
[GRAPH]
Highest Quarterly Return from 1/1/98 through 12/31/98 X Quarter 1998 X.XX%
Lowest Quarterly Return from 1/1/98 through 12/31/98 X Quarter 1998 X.XX%
<TABLE>
<CAPTION>
Average Annual Total Return
=================================================
as of 12/31/98
-------------------------------------------------
Since Inception
1 Year (9/15/97)
<S> <C> <C>
Intermediate Bond Fund X.XX% X.XX%
Lehman Bros. Intermediate Gov./Corp. Index* X.XX% X.XX%
Lipper Intermediate Investment Grade Debt Average X.XX% X.XX%
</TABLE>
* The Lehman Brothers Intermediate Gov./Corp. Index is a market value weighted
performance benchmark for government and corporate fixed-rate debt issues with
maturities between one and ten years.
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy
and hold shares of the Intermediate Bond Fund.1
Annual Fund Operating Expenses (expenses that are deducted from Fund
assets)
<TABLE>
<S> <C>
Management Fees......................................0.25%
Distribution (12b-1) Fees............................0.00
Other Expenses.......................................0.13
----
Total Annual Fund Operating Expenses.................0.38%
====
</TABLE>
(1)The expense table and the Example below reflect the expenses of both
the Fund and its corresponding Portfolio.
EXAMPLE
This Example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The Example assumes
that you invest $10,000 in the Fund for the time periods indicated and then
redeem all of your shares at the end of those periods. The Example also assumes
that your investment has a 5% return each year and that the Fund's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- -------
<S> <C> <C> <C>
$39 $122 $213 $480
</TABLE>
15
<PAGE> 100
AMERICAN AADVANTAGE SHORT-TERM BOND FUND
INVESTMENT OBJECTIVE
Income and capital appreciation.
PRINCIPAL STRATEGIES
The Fund invests in obligations of the U.S. Government, its agencies
and instrumentalities; corporate debt securities, such as commercial paper,
master demand notes, loan participation interests, medium-term notes and funding
agreements; mortgage-backed securities; asset-backed securities; and
Yankeedollar and Eurodollar bank certificates of deposit, time deposits,
bankers' acceptances and other notes. As an investment policy, the Fund
primarily seeks income and secondarily seeks capital appreciation.
The Fund will only buy debt securities that are investment grade at the
time of purchase. Investment grade securities include securities issued or
guaranteed by the U.S. Government, its agencies and instrumentalities, as well
as securities rated in one of the four highest rating categories by all rating
organizations rating the securities (such as Standard & Poor's or Moody's
Investors Service, Inc.). No more than 25% of assets may be invested in
securities rated in the fourth highest rating category. The Fund, at the
discretion of the investment advisers, may retain a security that has been
downgraded below the initial investment criteria.
In determining which securities to buy and sell, the Manager employs a
top-down fixed income review process, as follows:
o Develop overall investment strategy based on a comprehensive
review of macroeconomic conditions and an analysis of leading
economic indicators.
o Set portfolio maturity structure based on U.S. Treasury yield
curve and business cycle analysis.
o Perform sector analysis to determine relative value.
o Select specific debt securities.
o Review and monitor portfolio composition for changes in credit,
standard deviation and comparisons with benchmarks.
Under normal circumstances, the Fund seeks to maintain a dollar
weighted average duration of one to three years. Under adverse market
conditions, the Fund may, for temporary defensive purposes, invest up to 100% of
its assets in cash or cash equivalents, including investment grade short-term
debt obligations. To the extent that the Fund invokes this strategy, its ability
to achieve its investment objective may be affected adversely.
INVESTMENT ADVISER
AMR Investment Services, Inc.
RISK FACTORS
o Interest Rate Risk
The Fund is subject to the risk that the market value of the bonds it
holds will decline due to rising interest rates. When interest rates
rise, the price of most bonds go down. When interest rates go down, the
bond prices go up. The price of a bond is also affected by its
maturity. Bonds with longer maturities generally have greater
sensitivity to changes in interest rates.
o Credit Risk
The Fund is subject to the risk that an issuer of a bond will fail to
make timely payment of interest or principal. A decline in an issuer's
credit rating can cause its price to go down. This risk is somewhat
minimized by the Fund's policy of only investing in bonds that are
considered investment grade at the time of purchase.
o Prepayment Risk
The Fund's investments in mortgage-backed securities are subject to the
risk that the principal amount of the underlying mortgage may be repaid
prior to the bond's maturity date. If this occurs, no additional
interest will be paid on the investment.
o Additional Risks
An investment in the Fund is not a deposit of a bank and is not insured
or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. The value of an investment in the Fund will
fluctuate up and down, which means an investor could lose money.
16
<PAGE> 101
HISTORICAL PERFORMANCE
The bar chart below provides an indication of risk by showing how the
Fund's performance has varied from year to year. The table shows how the Fund's
performance compares to the Lehman Brothers Intermediate Gov./Corp. Index and
the Linked Lipper Investment Grade Debt Averages, benchmarks with the same
investment objective as the Fund. The Fund began offering its shares on August
1, 1994. However, another class of shares of the Fund not offered in this
prospectus has been offered since December 3, 1987. In the chart and table
below, performance results before August 1, 1994 are for the older class.
Because the other class had slightly higher expenses, its performance was
slightly worse than the AMR Class of the Fund would have realized in the same
period. Past performance is not necessarily indicative of how the Fund will
perform in the future.
TOTAL RETURN FOR THE CALENDAR YEAR ENDED 12/31 OF EACH YEAR
[GRAPH]
Highest Quarterly Return from 1/1/89 through 12/31/98 X Quarter 19XX X.XX%
Lowest Quarterly Return from 1/1/89 through 12/31/98 X Quarter 19XX X.XX%
<TABLE>
<CAPTION>
Average Annual Total Return
=====================================================
as of 12/31/98
-----------------------------------------------------
1 Year 5 Years 10 Years
------ ------- --------
<S> <C> <C> <C>
Short-Term Bond Fund X.XX% X.XX% X.XX%
Lehman Bros. Intermediate Gov./Corp. Index* X.XX% X.XX% X.XX%
Linked Lipper Investment Grade Debt Averages** X.XX% X.XX% X.XX%
</TABLE>
* The Lehman Brothers Intermediate Gov./Corp. Index is a market value weighted
performance benchmark for government and corporate fixed-rate debt issues with
maturities between one and ten years. ** The Linked Lipper Investment Grade Debt
Averages includes the Lipper Short-Term Investment Grade Debt Average prior to
1/1/96, the Lipper Short-Intermediate Investment Grade Debt Average from 1/1/96
through 7/31/96 and the Lipper Short-Term Investment Grade Debt Average since
8/1/96.
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy
and hold shares of the Short-Term Bond Fund.1
Annual Fund Operating Expenses (expenses that are deducted from Fund
assets)
<TABLE>
<S> <C>
Management Fees......................................0.25%
Distribution (12b-1) Fees............................0.00
Other Expenses.......................................0.07
----
Total Annual Fund Operating Expenses.................0.32%
====
</TABLE>
(1)The expense table and the Example below reflect the expenses of both
the Fund and its corresponding Portfolio.
EXAMPLE
This Example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The Example assumes
that you invest $10,000 in the Fund for the time periods indicated and then
redeem all of your shares at the end of those periods. The Example also assumes
that your investment has a 5% return each year and that the Fund's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- -------
<S> <C> <C> <C>
$33 $103 $180 $406
</TABLE>
17
<PAGE> 102
THE MANAGER
The Trust has retained AMR Investment Services, Inc. to serve as its
Manager. The Manager, located at 4333 Amon Carter Boulevard, Fort Worth, Texas
76155, is a wholly owned subsidiary of AMR Corporation, the parent company of
American Airlines, Inc. The Manager was organized in 1986 to provide investment
management, advisory, administrative and asset management consulting services.
As of December 31, 1998, the Manager had approximately $XX.X billion of assets
under management, including approximately $XX.X billion under active management
and $XX.X billion as named fiduciary or financial adviser. Of the total,
approximately $XX.X of assets are related to AMR Corporation.
The Manager provides or oversees the provision of all administrative,
investment advisory and portfolio management services to the Funds. The Manager
o develops the investment programs for each Fund,
o selects and changes investment advisers (subject to requisite
approvals),
o allocates assets among investment advisers,
o monitors the investment advisers' investment programs and
results,
o coordinates the investment activities of the investment advisers
to ensure compliance with regulatory restrictions,
o oversees each Fund's securities lending activities and any
actions taken by the securities lending agent, and
o with the exception of the International Equity Fund and Equity
500 Index Portfolio, invests the portion of Fund assets that the
investment advisers determine should be allocated to high quality
short-term debt obligations.
As compensation for providing management services, the Fund pays the
Manager an annualized advisory fee that is calculated and accrued daily, equal
to the sum of:
o 0.25% of the net assets of the Intermediate Bond Fund and
Short-Term Bond Fund,
o 0.10% of the net assets of all other Funds, plus
o all fees paid to the investment advisers of the Balanced, Growth
and Income, Small Cap Value and International Equity Funds.
The Manager also may receive up to 25% of the net annual interest
income or up to 25% of loan fees in regards to securities lending activities.
Currently, the Manager receives 10% of the net annual interest income from the
investment of cash collateral or 10% of the loan fees posted by borrowers. The
Securities and Exchange Commission ("SEC") has granted exemptive relief that
permits the Funds to invest cash collateral received from securities lending
transactions in shares of one or more private investment companies managed by
the Manager. Subject to the receipt of exemptive relief from the SEC, the Funds
may also invest cash collateral received from securities lending transactions in
shares of one or more registered investment companies managed by the Manager.
William F. Quinn and Nancy A. Eckl have primary responsibility for the
day-to-day operations of the Funds, except as indicated otherwise below. These
responsibilities include oversight of the investment advisers, regular review of
each investment adviser's performance and asset allocations among multiple
investment advisers. Mr. Quinn has served as President of the Manager since its
inception in 1986. Ms. Eckl has served as Vice President-Trust Investments since
May 1995. Prior to her current position, Ms. Eckl held the position of Vice
President-Finance and Compliance of the Manager from December 1990 through April
1995.
Michael W. Fields is responsible for the portfolio management of the
Short-Term Bond Fund as well as a portion of the Intermediate Bond Fund. Mr.
Fields has been with the Manager since it was founded in 1986 and serves as
Chief Investment Officer and Vice President-Fixed Income Investments.
The approximate management fees paid for the Funds for the fiscal year
ended October 31, 1998, net of reimbursements, was as follows:
<TABLE>
<CAPTION>
Fund Manager Fees
---- ------------
<S> <C>
Balanced XX%
Growth and Income XX%
Intermediate Bond XX%
International Equity XX%
Short-Term Bond XX%
</TABLE>
BT serves as the administrator to the Equity 500 Index Portfolio. Under
an Administration and Services Agreement with the Portfolio, BT calculates the
value of the assets of the Portfolio and generally assists the Equity 500 Index
Portfolio Board in all aspects of the administration and operation of the
Portfolio. The Administration and Services Agreement provides for the Portfolio
to pay BT a fee, computed daily and paid monthly, at the rate of 0.05% of the
average daily net assets of the Portfolio. Under the Administration and Services
Agreement, BT may delegate one or more of its responsibilities to others,
including Federated Services Company, at BT's expense.
18
<PAGE> 103
THE INVESTMENT ADVISERS
Set forth below is a brief description of the investment advisers for
each Fund. The Manager is the sole investment adviser of the Short-Term Bond
Fund. Except for this Fund, each Fund's assets are allocated among the
investment advisers by the Manager. The assets of the Intermediate Bond Fund are
allocated by the Manager between the Manager and another investment adviser.
Each investment adviser has discretion to purchase and sell securities for its
segment of a Fund's assets in accordance with the Fund's objectives, policies,
restrictions and more specific strategies provided by the Manager. Pursuant to
an exemptive order issued by the SEC, the Manager is permitted to enter into new
or modified investment advisory agreements with existing or new investment
advisers without approval of a Fund's shareholders, but subject to approval of
the Trust's Board of Trustees ("Board") and the AMR Investment Services Trust
Board ("AMR Trust Board"). The Prospectus will be supplemented if additional
investment advisers are retained or the contract with any existing investment
adviser is terminated.
BANKERS TRUST COMPANY (BT), 130 Liberty Street (One Bankers Trust Plaza), New
York, New York 10006, is a New York banking corporation and is a wholly owned
subsidiary of Bankers Trust Corporation. BT provides investment advisory,
administrative and other services to the Equity 500 Index Portfolio. As of
September 30, 1998, Bankers Trust Corporation was the _________ largest bank
holding company in the United States with total assets of approximately $XXX
billion and approximately $XXX billion in assets under management globally. Of
that total, approximately $XXX billion are in U.S. equity index assets alone. BT
serves as investment adviser and administrator to the Equity 500 Index
Portfolio.
BARROW, HANLEY, MEWHINNEY & STRAUSS, INC. (Barrow), 3232 McKinney Avenue, 15th
Floor, Dallas, Texas 75204, is a professional investment counseling firm which
has been providing investment advisory services since 1979. The firm is wholly
owned by United Asset Management Corporation, a Delaware corporation. Barrow's
approach to stock selection reflects the traditional value characteristics: low
price to earnings ratio, low price to book ratio and high dividend yields. As of
December 31, 1998, Barrow had discretionary investment management authority with
respect to approximately $XX.X billion of assets, including approximately $XX.X
billion of assets of AMR and its subsidiaries and affiliated entities. Barrow
serves as an investment adviser to the Balanced, Growth and Income, Intermediate
Bond and Short-Term Bond Funds, although the Manager does not presently intend
to allocate any of the assets in the Short-Term Bond Fund to Barrow.
BRANDYWINE ASSET MANAGEMENT, INC. (Brandywine), 201 North Walnut Street,
Wilmington, Delaware 19801, is a professional investment counseling firm founded
in 1986. Brandywine is a wholly owned subsidiary of Legg Mason, Inc.
Brandywine's investment process involves both fundamental screening to identify
stocks that are undervalued and fundamental analysis to identify undervalued
stocks which have the ability to return to normal value. As of December 31,
1998, Brandywine had assets under management totaling approximately $XX.X
billion, including approximately $XX.X million of assets of AMR and its
subsidiaries and affiliated entities. Brandywine serves as an investment adviser
to the Balanced, Growth and Income and Small Cap Value Funds.
GSB INVESTMENT MANAGEMENT, INC. (GSB), 301 Commerce Street, Fort Worth, Texas
76102, is a professional investment management firm which was founded in 1987 by
Frank P. Ganucheau, Mark J. Stupfel, and Lyle E. Brumley. GSB is wholly owned by
United Asset Management Corporation, a Delaware corporation. GSB utilizes
qualitative and quantitative security selection techniques to estimate the
expected absolute return and provide a basis to compare the relative
attractiveness of one stock against another. As of December 31, 1998, GSB
managed approximately $XX.X billion of assets, including approximately $XX.X
million of assets of AMR and its subsidiaries and affiliated entities. GSB
serves as an investment adviser to the Balanced and Growth and Income Funds.
HOTCHKIS AND WILEY, 725 South Figueroa Street, Suite 4000, Los Angeles,
California 90017, is a professional investment counseling firm which was founded
in 1980 by John F. Hotchkis and George Wiley. Hotchkis and Wiley is a division
of the Capital Management Group of Merrill Lynch Asset Management, L.P., a
wholly owned indirect subsidiary of Merrill Lynch & Co., Inc. Hotchkis and Wiley
utilizes extensive fundamental research to identify significantly undervalued
companies where, in their opinion, actual value clearly exceeds current market
price. Assets under management as of December 31, 1998 were approximately $XX.X
billion, which included approximately $XX.X billion of assets of AMR and its
subsidiaries and affiliated entities. Hotchkis and Wiley serves as an investment
adviser to the Balanced, Small Cap Value, Growth and Income and International
Equity Funds.
INDEPENDENCE INVESTMENT ASSOCIATES, INC. (IIA), 53 State Street, Boston,
Massachusetts 02109, is a professional investment counseling firm which was
founded in 1982. The firm is a wholly owned subsidiary of John Hancock Mutual
Life Insurance Company. IIA's investment philosophy that any stock which
combines low cost and improving fundamentals is attractive, is put into practice
through the use of a quantitative, multifactor stock-ranking model fueled by
earnings and growth rates. Assets under management as of December 31, 1998,
including funds managed for its parent company, were approximately $XX.X
billion, which included approximately $XX.X billion of assets of AMR and its
subsidiaries and affiliated entities. IIA serves as an investment adviser to the
Balanced and Growth and Income Funds.
MORGAN STANLEY ASSET MANAGEMENT INC. ("MSAM"), 25 Cabot Square, London, United
Kingdom E14 4QA, is a wholly owned subsidiary of Morgan Stanley, Dean Witter,
Discover & Co. MSAM provides portfolio management and named fiduciary services
to taxable and nontaxable institutions, international organizations and
individuals investing in United States and international equity and debt
securities. As of September 30, 1998. MSAM, together with its other asset
management affiliates, had assets under management (including assets under
fiduciary advisory control) totaling approximately $XXX.X billion, including
approximately $XXX.X billion under active management and $XX.X billion as named
fiduciary or fiduciary adviser. As of December 31, 1997, MSAM had investment
authority over approximately $XXX.X million of assets of AMR and its
subsidiaries and affiliated entities. MSAM serves as an investment adviser to
the International Equity Portfolio.
TEMPLETON INVESTMENT COUNSEL, INC. (Templeton), 500 East Broward Blvd., Suite
2100, Fort Lauderdale, Florida 33394-3091, is a professional investment
counseling firm which has been providing investment services since 1979.
Templeton is indirectly owned by Franklin Resources, Inc. Templeton believes in
a disciplined, yet flexible long-term approach to uncovering value oriented
investments regardless of current market trends on a worldwide scale. As of
December 31, 1998, Templeton had discretionary investment management authority
with respect to approximately $XX.X billion of assets, including approximately
$XXX.X million of assets of AMR and its subsidiaries and affiliated entities.
Templeton serves as an investment adviser to the International Equity Fund.
19
<PAGE> 104
All other assets of American Airlines, Inc. and its affiliates under
management by each respective investment adviser (except assets managed by
Barrow under the HALO Bond Program) are considered when calculating the fees for
each investment adviser other than MSAM and BT. Including these assets lowers
the investment advisory fees for each applicable Fund.
As compensation for its services, each 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.
VALUATION OF SHARES
The price of each Fund's shares is based on its net asset value
("NAV"). Each Fund's NAV is computed by adding total assets, subtracting all of
the Fund's liabilities, and dividing the result by the total number of shares
outstanding. Equity securities are valued based on market value. Debt securities
(other than short-term securities) usually are valued on the basis of prices
provided by a pricing service. In some cases, the price of debt securities is
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 Fund's Board of Trustees.
The NAV of AMR Class shares will be determined based on a pro rata
allocation of the Portfolio's investment income, expenses and total capital
gains and losses. Each Fund's NAV is determined as of the close of the New York
Stock Exchange ("Exchange"), generally 4:00 p.m. Eastern Time, on each day on
which it is open for business. The NAV of the International Equity Fund may
change on days when shareholders will not be able to purchase or redeem the
Fund's shares.
ABOUT YOUR INVESTMENT
PURCHASE AND REDEMPTION OF SHARES
ELIGIBILITY
AMR Class shares are offered only to investors in the tax-exempt
retirement and benefit plans of the AMR Corporation and its affiliates.
PURCHASE POLICIES
No sales charges are assessed on the purchase or sale of Fund shares.
Shares of the Funds are offered and purchase orders accepted until 4:00 p.m. or
the close of the Exchange (whichever comes first) on each day on which the
Exchange is open for trading. If a purchase order is accepted and payment is
received prior to the deadline., the purchase price will be the NAV per share
next determined on that day. If a purchase order is accepted or payment is
received after the deadline, the purchase price will be the NAV of the following
day that the Fund is open for business.
<TABLE>
<S> <C>
HOW TO PURCHASE SHARES
To Make An Initial Purchase To Add to an Existing Account
BY WIRE------------------------------------------------------------------------------------------------------------
Call (800) 492-9063 to purchase shares by wire. Send Call (800) 492-9063 to purchase shares by wire. Send a
a bank wire to State Street Bank & Trust Co. with bank wire to State Street Bank & Trust Co. with these
these instructions: instructions:
o ABA# 0110-0002-8; AC-0002-888-6 o ABA# 0110-0002-8; AC-0002-888-6
o Attn: American AAdvantage Funds-AMR Class o Attn: American AAdvantage Funds-AMR Class
o the Fund name and Fund number o the Fund name and Fund number
o shareholder's account number
BY EXCHANGE--------------------------------------------------------------------------------------------------------
Shares of a Fund may be purchased by exchange from
another American AAdvantage Fund if the shareholder has
owned AMR Class shares of the other American AAdvantage
Fund for at least 15 days. Send a written request to the
address above or call (800) 492-9063 to exchange shares.
</TABLE>
20
<PAGE> 105
REDEMPTION POLICIES
Shares of any Fund may be redeemed by telephone or mail on any day that
the Fund is open for business. The redemption price will be the NAV next
determined after a redemption order is received in good order. For assistance
with completing a redemption request, please call (800) 658-5811. Proceeds from
redemption orders received by 4:00 p.m. Eastern Time generally are transmitted
to shareholders on the next day that the Funds are open for business.
In any event, proceeds from a redemption order will be transmitted to a
shareholder by no later than seven days after the receipt of a redemption
request in good order.
The Funds reserve the right to suspend redemptions or postpone the date
of payment (i) when the Exchange is closed (other than for customary weekend and
holiday closings); (ii) when trading on the Exchange is restricted; (iii) when
the SEC determines that an emergency exists so that disposal of a Fund's
investments or determination of its NAV is not reasonably practicable; or (iv)
by order of the SEC for protection of the Funds' shareholders.
Although the Funds intend to redeem shares in cash, each Fund reserves
the right to pay the redemption price in whole or in part by a distribution of
readily marketable securities held by the applicable Fund's corresponding
Portfolio.
<TABLE>
<S> <C>
HOW TO REDEEM SHARES
BY MAIL------------------------------------------------------------------------------------------------------------
Write a letter of instruction including
o the Fund name, number and class
o shareholder account number
o shares or dollar amount to be redeemed
o authorized signature
o how and where to send the proceeds
Mail to:
State Street Bank & Trust Co.
P.O. Box 1978
Boston, MA 02105-1978
Attn: American AAdvantage Funds
BY TELEPHONE-------------------------------------------------------------------------------------------------------
Call (800) 492-9063 to request a redemption. Proceeds from redemptions placed by telephone will
generally be transmitted by wire only, as instructed
on the application form.
BY EXCHANGE--------------------------------------------------------------------------------------------------------
Shares of a Fund may be redeemed in exchange for another American AAdvantage
Fund if the shareholder has owned AMR Class shares of the Fund for at least 15
days. Send a written request to the address above or call (800) 492-9063 to
exchange shares.
</TABLE>
GENERAL POLICIES
The following policies apply to instructions you may provide to the
Funds by telephone:
o The Funds, their officers, trustees, directors, employees, or
agents are not responsible for the authenticity of instructions
provided by telephone, nor for any loss, liability, cost or
expense incurred for acting on them.
o The Funds employ procedures reasonably designed to confirm that
instructions communicated by telephone are genuine.
o Due to the volume of calls or other unusual circumstances,
telephone redemptions may be difficult to implement during
certain time periods.
The Funds reserve the right to:
o reject any order for the purchase of shares and to limit or
suspend, without prior notice, the offering of shares
o modify or terminate the exchange privilege at any time
o limit the number of exchanges between Funds an investor may
exercise
o seek reimbursement from the shareholder for any related loss
incurred if payment for the purchase of Fund shares by check does
not clear the shareholder's bank
21
<PAGE> 106
DISTRIBUTIONS AND TAXES
The Funds distribute most or all of their net earnings in the form of
dividends from net investment income and distributions of realized net capital
gains and gains from foreign currency transactions. Unless the account
application instructs otherwise, distributions will be reinvested in additional
Fund shares.
Distributions are paid as follows:
<TABLE>
<CAPTION>
FUND DIVIDENDS PAID DISTRIBUTIONS PAID
- ---- -------------- ------------------
<S> <C> <C>
Balanced Annually Annually
Growth and Income Annually Annually
International Equity Annually Annually
Small Cap Value Annually Annually
S&P 500 Index April, July, October and December Annually
Intermediate Bond Monthly Annually
Short-Term Bond Monthly Annually
</TABLE>
Usually, dividends received from a Fund are taxable as ordinary income,
regardless of whether dividends are reinvested. Distributions by a Fund of
realized net short-term capital gains and gains from certain foreign currency
transactions are similarly taxed. Distributions by the Funds of realized net
long-term capital gains are taxable to their shareholders as long-term capital
gains regardless of how long an investor has been a shareholder.
Some foreign countries may impose taxes on dividends paid to and gains
realized by the International Equity Fund. The Fund may treat these taxes as a
deduction or, under certain conditions, "flow the tax through" to shareholders.
In the latter event, shareholders may either deduct the taxes or use them to
calculate a credit against their federal income tax.
A portion of the income dividends paid by the Balanced Fund, the Growth
and Income Fund, the Small Cap Value Fund, and the S&P 500 Index Fund is
eligible for the dividends-received deduction allowed to corporations. The
eligible portion may not exceed the Fund's aggregate dividends received from
U.S. corporations. However, dividends received by a corporate shareholder and
deducted by it pursuant to the dividends-received deduction may be subject
indirectly to the federal alternative minimum tax (AMT). The International
Equity Fund's dividends most likely will not qualify for the dividends-received
deduction because none of the dividends received by that Fund are expected to be
paid by U.S. corporations.
The qualified retirement and benefit plans of AMR Corporation and its
affiliates ("Plans") 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.
This is only a summary of some of the important income tax
considerations that may affect Fund shareholders. Shareholders should consult
their tax adviser regarding specific questions as to the effect of federal,
state or local income taxes on an investment in the Funds.
ADDITIONAL INFORMATION
DISTRIBUTION OF TRUST SHARES
The Trust does not incur any direct distribution expenses related to
AMR Class or Institutional Class shares. However, the Trust has adopted a
Distribution Plan in accordance with Rule 12b-1 under the Investment Company Act
of 1940 ("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 the sale and distribution of Fund
shares.
MASTER-FEEDER STRUCTURE
The Funds operate under a master-feeder structure. This means that each
Fund is a "feeder" fund that invests all of its investable assets in a "master"
fund with the same investment objective. The "master" fund purchases securities
for investment. The master-feeder structure works as follows:
22
<PAGE> 107
-------------------------
Investor
-------------------------
purchases shares of
-------------------------
Feeder Fund
-------------------------
which invests in
-------------------------
Master Fund
-------------------------
which buys
-------------------------
Investment Securities
-------------------------
Each Fund can withdraw its investment in its corresponding Portfolio at
any time if the Board determines that it is in the best interest of the Fund and
its shareholders to do so. If this happens, the Fund's assets will be invested
according to the investment policies and restrictions described in this
Prospectus.
YEAR 2000
The Funds could be affected adversely if the computer systems used by
the Manager, the Funds' other service providers, or companies in which the Funds
invest do not properly process and calculate information that relates to dates
beginning on January 1, 2000 and beyond. Due to the Funds' reliance on various
service providers to perform essential functions, each of the Funds could have
difficulty calculating its NAV, processing orders for share redemptions and
delivering account statements and other information to shareholders. The
International Equity Fund could experience difficulties in effecting
transactions if any of its foreign subcustodians, or if foreign broker/dealers
or foreign markets are not ready for the Year 2000. The Manager has taken steps
that it believes are reasonably designed to address the potential failure of
computer systems used by the Manager and the Funds' service providers to address
the Year 2000 issue. There can be no assurance that the steps taken by the
Manager will be sufficient to avoid any adverse impact.
In evaluating current and potential portfolio positions, Year 2000 is
one of the factors that each Fund's investment advisers take into consideration.
The Funds' investment advisers will rely upon public filings and other
statements made by companies regarding their Year 2000 readiness. Issuers in
countries outside of the U.S. may not be required to make the level of
disclosure regarding Year 2000 readiness that is required in the U.S. If the
value of a Fund's investment is adversely affected by a Year 2000 problem, the
NAV of the Fund may be affected as well.
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand
each Fund's financial performance for the past five years (or, if shorter, the
period of the Fund's operations). Certain information reflects financial results
for a single Fund share. The total returns in the table represent that rate than
an investor would have earned (or lost) on an investment in the Fund (assuming
reinvestment of all dividends and distributions). Financial highlights are not
available for the Intermediate Bond Fund or the Small Cap Value Fund because as
of October 31, 1998, they had not commenced active operations. Except for the
S&P 500 Index Fund, each Fund's highlights were audited by Ernst & Young LLP,
independent auditors. The financial highlights of the S&P 500 Index Fund were
audited by PricewaterhouseCoopers LLP, independent auditors. More financial
information about the Funds is found in their Annual Report, which you may
obtain upon request.
23
<PAGE> 108
BALANCED FUND - AMR CLASS
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, AUG. 1,
TO OCT.
31,
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD: 1998 1997(D) 1996(D)(E) 1995(C)(D) 1994 (AB)
- ----------------------------------------------------------- ---------- -------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 16.18 $ 15.18 $ 13.98 $ 12.36 $ 12.35
Income from investment operations
Net investment income 0.70(F) 0.63(F) 0.58 0.14
Net gains (losses) on securities (realized and 2.13(F) 1.61(F) 1.71 (0.13)
-------- -------- -------- ---------
unrealized)
Total from investment operations 2.83 2.24 2.29 0.01
-------- -------- -------- --------
Less distributions:
Dividends from net investment income (0.62) (0.60) (0.53)
--
Distributions from net realized gains on securities (1.16) (0.44) (0.14)
-------- -------- --------
--
Total distributions (1.78) (1.04) (0.67)
-------- -------- --------
--
Net asset value, end of period $ 16.23 $ 15.18 $ 13.98 $ 12.36
======== ======== ======== =========
Total return (annualized) 20.36% 16.77% 19.77%
======== ======== ========
(0.08)%(J)
Ratios and supplemental data:
Net assets, end of period (in thousands) $769,289 $576,673 $542,619 $ 393,504
Ratios to average net assets (annualized)(G)(H)
Expenses 0.34%(F) 0.37%(F) 0.38% 0.36%
Net investment income 4.09%(F) 4.26%(F) 4.54% 4.65%
Portfolio turnover rate(I) 105% 76% 73% 48%
</TABLE>
A The Balanced Fund commenced active operations on August 1, 1994.
B Average shares outstanding for the period rather than end of period shares
were used to compute net investment income per share.
C GSB Investment Management, Inc. was added as an investment adviser to the
Balanced Fund on January 1, 1995.
D Class expenses per share were subtracted from net investment income per
share for the Fund before class expenses to determine net investment income
per share.
E Brandywine Asset Management, Inc. replaced Capital Guardian Trust Company
as an investment adviser to the Fund as of April 1, 1996.
F The per share amounts and ratios reflect income and expenses assuming
inclusion of the Fund's proportionate share of the income and expenses of
its corresponding Portfolio.
G Effective August 1, 1994, expenses include administrative services fees
paid by the Fund to the Manager.
H The method of determining average net assets was changed from a monthly
average to a daily average starting with the year ended October 31, 1994.
I On November 1, 1995 the Balanced Fund began investing all of its investable
assets in a corresponding portfolio of the AMR Trust. Portfolio turnover
rate since November 1, 1996 is that of its corresponding Portfolio.
J The total return reflects the Institutional Class return from November 1,
1993 through July 31, 1994 and the AMR Class return for the remainder of
the period. Due to the different expense structures between the classes,
the total return would vary from the result shown had the AMR Class been in
operation for the entire year.
24
<PAGE> 109
GROWTH AND INCOME FUND - AMR CLASS
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, AUG. 1,
TO OCT.
31,
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD: 1998 1997(C) 1996(C)(D) 1995(C) 1994(AB)
- -------------------------------------------------------- --------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 21.63 $ 18.56 $ 15.95 $ 14.20 $ 13.99
Income from investment operations
Net investment income 0.45(E) 0.47(E) 0.44 0.11
Net gains (losses) on securities (realized and 4.47(E) 3.15(E) 2.30 0.10
---------- ---------- -------- --------
unrealized)
Total from investment operations 4.92 3.62 2.74 0.21
---------- ---------- -------- --------
Less distributions:
Dividends from net investment income (0.47) (0.44) (0.45)
--
Distributions from net realized gains on securities (1.31) (0.57) (0.54)
---------- ---------- --------
--
Total distributions (1.78) (1.01) (0.99)
---------- ---------- --------
--
Net asset value, end of period $ 21.70 $ 18.56 $ 15.95 $ 14.20
========== ========== ======== ========
Total return (annualized)(F) 28.40% 23.66% 21.03% 3.43%
========== ========== ======== ========
Ratios and supplemental data:
Net assets, end of period (in thousands) $1,431,805 $1,008,518 $706,884 $505,892
Ratios to average net assets (annualized)(F)(G)
Expenses 0.34%(E) 0.36%(E) 0.38% 0.37%
Net investment income 2.45%(E) 2.80%(E) 3.20% 3.18%
Portfolio turnover rate(H) 35% 40% 26% 23%
</TABLE>
A The Growth and Income Fund commenced active operations on August 1, 1994.
B Average shares outstanding for the period rather than end of period shares
were used to compute net investment income per share.
C Class expenses per share were subtracted from net investment income per
share for the Fund before class expenses to determine net investment income
per share.
D Brandywine Asset Management, Inc. replaced Capital Guardian Trust Company
as an investment adviser to the Fund as of April 1, 1996.
E The per share amounts and ratios reflect income and expenses assuming
inclusion of the Fund's proportionate share of the income and expenses of
its corresponding Portfolio.
F Effective August 1, 1994, expenses include administrative services fees
paid by the Fund to the Manager.
G The method of determining average net assets was changed from a monthly
average to a daily average starting with the year ended October 31, 1994.
H On November 1, 1995 the Growth and Income Fund began investing all of its
investable assets in a corresponding Portfolio of the AMR Trust. Portfolio
turnover rate since November 1, 1996 is that of its corresponding
Portfolio.
I The total return reflects the Institutional Class return from November 1,
1993 through July 31, 1994 and the AMR Class return for the remainder of
the period. Due to the different expense structures between the classes,
the total return would vary from the result shown had the AMR Class been in
operation for the entire year.
25
<PAGE> 110
INTERNATIONAL EQUITY FUND - AMR CLASS
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, AUG. 1,
TO OCT.
31,
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD: 1998 1997(D) 1996(D) 1995(D) 1994(ABC)
- -------------------------------------------------------- --------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 17.08 $ 15.06 $ 13.31 $ 12.87 $ 12.61
Income from investment operations
Net investment income 0.37(E) 0.31(E) 0.30 0.05
Net gains (losses) on securities (realized and
unrealized) 2.46(E) 1.98(E) 0.68 0.21
-------- -------- -------- --------
Total from investment operations 2.83 2.29 0.98 0.26
-------- -------- -------- --------
Less distributions:
Dividends from net investment income (0.33) (0.30) (0.22)
--
Distributions from net realized gains on securities (0.41) (0.24) (0.32)
-------- -------- --------
--
Total distributions (0.74) (0.54) (0.54)
-------- -------- --------
--
Net asset value, end of period $ 17.15 $ 15.06 $ 13.31 $ 12.87
======== ======== ======== ========
Total return (annualized) 19.39% 17.72% 8.18% 11.77%
======== ======== ======== ========
Ratios and supplemental data:
Net assets, end of period (in thousands) $464,588 $330,898 $227,939 $165,524
Ratios to average net assets (annualized)(F)(G)
Expenses 0.58%(E) 0.57%(E) 0.60% 0.63%
Net investment income 2.51%(E) 2.49%(E) 2.65% 1.41%
Portfolio turnover rate(H) 15% 19% 21% 37%
</TABLE>
A The International Equity Fund commenced active operations on August 1,
1994.
B Morgan Stanley Asset Management Inc. was added as an investment adviser to
the International Equity Fund as of the close of business on August 1,
1994.
C Average shares outstanding for the period rather than end of period shares
were used to compute net investment income per share.
D Class expenses per share were subtracted from net investment income per
share for the Fund before class expenses to determine net investment income
per share.
E The per share amounts and ratios reflect income and expenses assuming
inclusion of the Fund's proportionate share of the income and expenses of
its corresponding Portfolio.
F Effective August 1, 1994, expenses include administrative services fees
paid by the Fund to the Manager.
G The method of determining average net assets was changed from a monthly
average to a daily average starting with the year ended October 31, 1994.
H On November 1, 1995 the International Equity Fund began investing all of
its investable assets in a corresponding Portfolio of the AMR Trust.
Portfolio turnover rate since November 1, 1996 is that of its corresponding
Portfolio.
I The total return reflects the Institutional Class return from November 1,
1993 through July 31, 1994 and the AMR Class return for the remainder of
the period. Due to the different expense structures between the classes,
the total return would vary from the result shown had the AMR Class been in
operation for the entire year.
26
<PAGE> 111
S&P 500 INDEX FUND - INSTITUTIONAL CLASS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD: 1998 1997(A)
- ------------------------------------------------------------------------------- ----------------- ---------------
<S> <C> <C>
Net asset value, beginning of period $ 13.16 $ 10.00
Income from investment operations
Net investment income 0.14
Net gains (losses) on securities (realized and unrealized)(B) 3.16
----------
Total from investment operations 3.30 Less distributions:
Dividends from net investment income (0.14)
Distributions from net realized gains on securities --
----------
Total distributions (0.14)
----------
Net asset value, end of period $ 13.16
==========
Total return (annualized) 33.09%
==========
Ratios and supplemental data:
Net assets, end of period (in thousands) $ 7,862
Ratios to average net assets (annualized)(B)
Net investment income 1.61%
Expenses 0.20%
Decrease reflected in above expense ratio due to absorption of expenses
by Bankers Trust and the Manager 0.43%
Portfolio turnover rate(C) 19%
</TABLE>
A The S&P 500 Index Fund commenced active operations on January 1, 1997 and
on March 1, 1998, existing shares were designated Institutional Class
shares.
B The per share amounts and ratios reflect income and expenses assuming
inclusion of the Fund's proportionate share of the income and expenses of
its corresponding Portfolio.
C Portfolio turnover rate is that of the Equity 500 Index Portfolio.
27
<PAGE> 112
SHORT-TERM BOND FUND - AMR CLASS
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, AUG. 1,
TO OCT.
31,
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD: 1998 1997 1996 1995 1994(A)
- -------------------------------------------------------- -------- ------- ------- -------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 9.63 $ 9.67 $ 9.81 $ 9.68 $ 9.78
Income from investment operations
Net investment income 0.66(B) 0.65(B) 0.64 0.14
Net gains (losses) on securities (realized and (0.05)(B) (0.14)(B) 0.13 (0.10)
------- ------- -------- --------
unrealized)
Total from investment operations 0.61 0.51 0.77 0.04
------- ------- -------- --------
Less distributions:
Dividends from net investment income (0.66) (0.65) (0.64) (0.14)
Distributions from net realized gains on securities -- -- -- --
------- ------- -------- --------
Total distributions (0.66) (0.65) (0.64) (0.14)
------- ------- -------- --------
Net asset value, end of period $ 9.62 $ 9.67 $ 9.81 $ 9.68
======= ======= ======== ========
Total return (annualized)(C) 6.57% 5.38% 8.22% 0.59%(F)
======= ======= ======== ========
Ratios and supplemental data:
Net assets, end of period (in thousands) $64,010 $59,526 $ 64,595 $ 53,445
Ratios to average net assets (annualized)(C)(D)
Expenses 0.32%(B) 0.33%(B) 0.36% 0.33%
Net investment income 6.90%(B) 6.66%(B) 6.60% 5.77%
Portfolio turnover rate(E) 282% 304% 183% 94%
</TABLE>
A The Short-Term Bond Fund commenced active operations on August 1, 1994.
B The per share amounts and ratios reflect income and expenses assuming
inclusion of the Fund's proportionate share of the income and expenses of
its corresponding Portfolio.
C Effective August 1, 1994, expenses include administrative services fees
paid by the Fund to the Manager.
D The method of determining average net assets was changed from a monthly
average to a daily average starting with the year ended October 31, 1994.
E On November 1, 1995 the Short-Term Bond Fund began investing all of its
investable assets in a corresponding Portfolio of the AMR Trust. Portfolio
turnover rate since November 1, 1996 is that of its corresponding
Portfolio.
F The total return reflects the Institutional Class return from November 1,
1993 through July 31, 1994 and the AMR Class return for the remainder of
the period. Due to the different expense structures between the classes,
the total return would vary from the result shown had the AMR Class been in
operation for the entire year.
28
<PAGE> 113
ADDITIONAL INFORMATION
Additional information about the Funds is found in the documents listed
below. Request a free copy of these documents by calling (800) 967-9009.
<TABLE>
<CAPTION>
ANNUAL REPORT/SEMI-ANNUAL REPORT STATEMENT OF ADDITIONAL INFORMATION
<S> <C>
The Fund's Annual and Semi-Annual Reports list each The SAI contains more details about the Funds and their
Fund's actual investments as of the report's date. They also investment policies. The SAI is incorporated in this
include a discussion by the Manager of market conditions Prospectus by reference (it is legally part of this Prospectus).
and investment strategies that significantly affected the A current SAI is on file with the Securities and Exchange
Funds' performance. The report of the Funds' independent Commission (SEC).
auditors is included in the Annual Report.
</TABLE>
To obtain more information about the Funds or to request a copy of the documents
listed above:
BY TELEPHONE:
Call (800) 967-9009
BY MAIL:
American AAdvantage Funds
P.O. Box 619003, MD5645
DFW Airport, TX 75261-9003
BY E-MAIL:
[email protected]
ON THE INTERNET:
Visit our website at www.aafunds.com
Visit the SEC website at www.sec.gov
Copies of these documents also may be obtained from the SEC Public Reference
Room in Washington, D.C. The Public Reference Room can be reached at (800)
732-0330 or by mailing a request, including a duplicating fee to: SEC's Public
Reference Section, 450 5th Street NW, Washington, D.C. 20549-6009.
FUND SERVICE PROVIDERS
CUSTODIAN TRANSFER AGENT
State Street Bank and Trust Company State Street Bank and Trust Company
Boston, Massachusetts Boston, Massachusetts
INDEPENDENT AUDITORS DISTRIBUTOR
Ernst & Young LLP Brokers Transaction Services, Inc.
Dallas, Texas Dallas, Texas
PricewaterhouseCoopers LLP
Baltimore, Maryland
[AMERICAN AADVANTAGE FUNDS LOGO]
SEC File Number 811-4984
American Airlines is not responsible for investments made in the American
AAdvantage Funds. American AAdvantage Funds is a registered service mark of AMR
Corporation. American AAdvantage Balanced Fund, American AAdvantage Growth and
Income Fund, American AAdvantage International Equity Fund, American AAdvantage
Intermediate Bond Fund, American AAdvantage Short-Term Bond Fund, American
AAdvantage Small Cap Value Fund, American AAdvantage Money Market Fund, American
AAdvantage Municipal Money Market Fund, and American AAdvantage U.S. Government
Money Market Fund are service marks of AMR Investment Services.
29
<PAGE> 114
[AMERICAN AADVANTAGE FUNDS LOGO] [AMERICAN AADVANTAGE
-PLATINUM CLASS(SM)- MILEAGE FUNDS LOGO]
- Platinum Class(sm) -
Money Market Fund Money Market Mileage Fund
Municipal Money Market Fund
U.S. Government Money Market Fund
PROSPECTUS
March 1, 1999
Managed by AMR Investment Services, Inc.
THE SECURITIES AND EXCHANGE COMMISSION DOES NOT GUARANTEE THAT THE INFORMATION
IN THIS PROSPECTUS OR ANY OTHER MUTUAL FUND'S PROSPECTUS IS ACCURATE OR
COMPLETE, NOR DOES IT JUDGE THE INVESTMENT MERIT OF THESE FUNDS. TO STATE
OTHERWISE IS A CRIMINAL OFFENSE.
<PAGE> 115
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ABOUT THE FUNDS
Overview..............................................X
Money Market Fund....................................XX
Municipal Money Market Fund..........................XX
U.S. Government Money Market Fund....................XX
Money Market Mileage Fund............................XX
The Manager..........................................XX
Investment Advisers..................................XX
Valuation of Shares..................................XX
ABOUT YOUR INVESTMENT
Purchase and Redemption of Shares....................XX
Distributions and Taxes..............................XX
AAdvantage(R) Miles..................................XX
ADDITIONAL INFORMATION
Distribution of Fund Shares..........................XX
Master-Feeder Structure..............................XX
Financial Highlights.................................XX
Additional Information...............................XX
</TABLE>
ABOUT THE FUNDS
OVERVIEW
The American AAdvantage Funds (the "AAdvantage Funds") and the American
AAdvantage Mileage Funds (the "Mileage Funds") are managed by AMR Investment
Services, Inc. (the "Manager"), a wholly owned subsidiary of AMR Corporation.
The AAdvantage Funds and Mileage Funds (collectively, the "Funds")
operate under a master-feeder structure. This means that each Fund seeks its
investment objective by investing all of its investable assets in a
corresponding Portfolio of the AMR Investment Services Trust ("AMR Trust") that
has a similar name and identical investment objective. Throughout this
Prospectus, statements regarding investments by a Fund refer to investments made
by its corresponding Portfolio. For easier reading, the term "Fund" is used
throughout the Prospectus to refer to either a Fund or its Portfolio, unless
stated otherwise. See "Master-Feeder Structure".
2
<PAGE> 116
AMERICAN AADVANTAGE MONEY MARKET FUND
INVESTMENT OBJECTIVE
Current income, liquidity and the maintenance of a stable price of $1
per share.
PRINCIPAL STRATEGIES
The Fund invests exclusively in high quality variable or fixed rate,
U.S. dollar denominated short-term money market instruments. These securities
may include obligations of the U.S. Government, its agencies and
instrumentalities; corporate debt securities, such as commercial paper, master
demand notes, loan participation interests, medium-term notes and funding
agreements; Yankeedollar and Eurodollar bank certificates of deposit, time
deposits, and bankers' acceptances; asset-backed securities; and repurchase
agreements involving the foregoing obligations.
The Fund will only buy securities with the following credit qualities:
o rated in the highest short-term categories by two rating
organizations , such as "A-1" by Standard & Poor's Corporation and
"P-1" by Moody's Investors Service, Inc.,
o rated in the highest short-term category by one rating organization
if the securities are rated only by one rating organization, or
o unrated securities that are determined to be of equivalent quality
by the Manager.
The Fund invests more than 25% of its total assets in obligations
issued by the banking industry. However, for temporary defensive purposes when
the Manager believes that maintaining this concentration may be inconsistent
with the best interests of shareholders, the Fund may not maintain this
concentration.
Securities purchased by the Fund generally have remaining maturities of
397 days or less, although instruments subject to repurchase agreements and
certain variable and floating rate obligations may bear longer final maturities.
The average dollar-weighted maturity of the Fund will not exceed 90 days.
INVESTMENT ADVISER
AMR Investment Services, Inc.
RISK FACTORS
o The yield paid by the Fund is subject to changes in interest rates.
As a result, there is risk that a decline in short-term interest
rates would lower its yield and the overall return on your
investment.
o Although the Fund seeks to preserve the value of your investment at
$1.00 per share, it is possible to lose money by investing in the
Fund.
o As with any money market fund, there is the risk that the issuers
or guarantors of securities owned by the Fund will default on the
payment of principal or interest or the obligation to repurchase
securities from the Fund.
Your investment in the Fund is not insured or guaranteed by the U.S. Government
or any financial or government institution.
INVESTOR PROFILE
o This Fund may be suitable for investors who:
o seek the preservation of capital and to avoid fluctuations in
principal
o desire regular, monthly income from a highly liquid investment
o require a short-term vehicle for cash when making long-term
investment decisions
o seek a rate of return that is potentially higher than certificates
of deposit or savings accounts
3
<PAGE> 117
HISTORICAL PERFORMANCE
The bar chart below provides an indication of risk by showing how the
Fund's performance has varied from year to year. The table shows how the Fund's
performance compares to the Lipper Money Market Instrument Average, an average
of XX retail money market fund returns as of December 31, 1998. The Platinum
Class of the Fund began offering its shares on November 7, 1995. However,
another class of shares of the Fund not offered in this prospectus has been
offered since September 1, 1987. In the chart and table below, performance
results before November 7, 1995 are for the older class. Because the other class
had lower expenses, its performance was better than the Platinum Class of the
Fund would have realized in the same period. Past performance is not necessarily
indicative of how the Fund will perform in the future. Investors may call
1-800-388-3344 to obtain the Fund's current seven-day yield.
[GRAPH]
<TABLE>
<S> <C> <C>
Highest Quarterly Return from 1/1/89 through 12/31/98 X Quarter 19XX X.XX%
Lowest Quarterly Return from 1/1/89 through 12/31/98 X Quarter 19XX X.XX%
</TABLE>
<TABLE>
<CAPTION>
Average Annual Total Return
=====================================================
as of 12/31/98
-----------------------------------------------------
1 Year 5 Years 10 Years
------ ------- --------
<S> <C> <C> <C>
Money Market Fund X.XX% X.XX% X.XX%
Lipper Money Market Instrument Average X.XX% X.XX% X.XX%
</TABLE>
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy
and hold shares of the Money Market Fund. (1)
Annual Fund Operating Expenses (expenses that are deducted from Fund
assets)
<TABLE>
<S> <C>
Management Fees......................................0.10%
Distribution (12b-1) Fees............................0.25
Other Expenses.......................................0.58
----
Total Annual Fund Operating Expenses.................0.93%
====
</TABLE>
(1) The expense table and the Example below reflect the expenses of
both the Fund and its corresponding Portfolio.
EXAMPLE
This Example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The Example assumes
that you invest $10,000 in the Fund for the time periods indicated and then
redeem all of your shares at the end of those periods. The Example also assumes
that your investment has a 5% return each year and that the Fund's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- -------
<S> <C> <C> <C>
$95 $296 $515 $1,143
</TABLE>
4
<PAGE> 118
AMERICAN AADVANTAGE MUNICIPAL MONEY MARKET FUND
INVESTMENT OBJECTIVE
Current income, liquidity and the maintenance of a stable price of $1
per share.
PRINCIPAL STRATEGIES
Under normal market conditions, the Fund invests at least 80% of net
assets in securities whose interest income is exempt from federal income tax.
These securities may be issued by or on behalf of the governments of U.S.
states, counties, cities, towns, territories, or public authorities. All
securities purchased by the Fund will be guaranteed by the U.S. Government, its
agencies, or instrumentalities; secured by irrevocable letters of credit issued
by qualified banks; or guaranteed by one or more municipal bond insurance
policies.
The Fund will only buy securities with the following credit qualities:
o rated in the highest short-term categories by two rating
organizations, such as "A-1" by Standard & Poor's and "P-1" by
Moody's Investors Service, Inc.,
o rated in the highest short-term category by one rating organization
if the securities are rated only by one rating organization, or
o unrated securities that are determined to be of equivalent quality
by the Manager.
Securities purchased by the Fund generally have remaining maturities of
397 days or less, although instruments subject to repurchase agreements and
certain variable and floating rate obligations may bear longer final maturities.
The average dollar-weighted maturity of the Fund will not exceed 90 days.
INVESTMENT ADVISER
AMR Investment Services, Inc.
RISK FACTORS
o The yield paid by the Fund is subject to changes in interest rates.
As a result, there is risk that a decline in short-term interest
rates would lower its yield and the overall return on your
investment.
o Although the Fund seeks to preserve the value of your investment at
$1.00 per share, it is possible to lose money by investing in the
Fund.
o As with any money market fund, there is the risk that the issuers
or guarantors of securities owned by the Fund will default on the
payment of principal or interest or the obligation to repurchase
securities from the Fund.
Your investment in the Fund is not insured or guaranteed by the U.S. Government
or any financial or government institution.
INVESTOR PROFILE
This Fund may be suitable for investors who:
o seek the preservation of capital and to avoid fluctuations in
principal
o desire regular, monthly income that is generally exempt from
federal income tax
o require a short-term vehicle for cash when making long-term
investment decisions
o seek a rate of return that is potentially higher than certificates
of deposit or savings accounts
5
<PAGE> 119
HISTORICAL PERFORMANCE
The bar chart below provides an indication of risk by showing how the
Fund's performance has varied from year to year. The table shows how the Fund's
performance compares to the Lipper Tax Exempt Money Market Fund Average, an
average of XX tax exempt money market fund returns as of December 31, 1998. The
Platinum Class of the Fund began offering its shares on November 7, 1995.
However, another class of shares of the Fund not offered in this prospectus has
been offered since November 10, 1993. In the chart and table below, performance
results before November 7, 1995 are for the older class. Because the other class
had lower expenses, its performance was better than the Platinum Class of the
Fund would have realized in the same period. Past performance is not necessarily
indicative of how the Fund will perform in the future. Investors may call
1-800-388-3344 to obtain the Fund's current seven-day yield.
[GRAPH]
<TABLE>
<S> <C> <C>
Highest Quarterly Return from 1/1/94 through 12/31/98 X Quarter 19XX X.XX%
Lowest Quarterly Return from 1/1/94 through 12/31/98 X Quarter 19XX X.XX%
</TABLE>
<TABLE>
<CAPTION>
Average Annual Total Return
====================================================
as of 12/31/98
----------------------------------------------------
Since Inception
1 Year 5 Years (11/10/93)
------ ------- ----------
<S> <C> <C> <C>
Municipal Money Market Fund X.XX% X.XX% X.XX%
Lipper Tax-Exempt Money Market Fund Average X.XX% X.XX% X.XX%
</TABLE>
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy
and hold shares of the Municipal Money Market Fund. (1)
Annual Fund Operating Expenses (expenses that are deducted from Fund
assets)
<TABLE>
<S> <C>
Management Fees......................................0.10%
Distribution (12b-1) Fees............................0.25
Other Expenses.......................................0.XX
----
Total Annual Fund Operating Expenses.................1.XX%
====
Fee Waiver and/or Expense Reimbursement..............0.XX(2)
Net Expenses.........................................1.04%
</TABLE>
(1) The expense table and the Example below reflect the expenses of
both the Fund and its corresponding Portfolio.
(2) The Manager has contractually agreed to waive a portion of its fee
and to reimburse the Fund for Other Expenses through October 31,
1999 to the extent that Total Annual Fund Operating Expenses exceed
1.04%.
EXAMPLE
This Example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The Example assumes
that you invest $10,000 in the Fund for the time periods indicated and then
redeem all of your shares at the end of those periods. The Example also assumes
that your investment has a 5% return each year and that the Fund's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- -------
<S> <C> <C> <C>
$105 $XXX $XXX $X,XXX
</TABLE>
6
<PAGE> 120
AMERICAN AADVANTAGE U.S. GOVERNMENT MONEY MARKET FUND
INVESTMENT OBJECTIVE
Current income, liquidity and the maintenance of a stable price of $1
per share.
PRINCIPAL STRATEGIES
The Fund invests exclusively in obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities and repurchase agreements
that are collateralized by such obligations. Some of these securities are not
backed by the full faith and credit of the U.S. Government. U.S. Government
securities include direct obligations of the U.S. Treasury (such as Treasury
bills, Treasury notes and Treasury bonds).
Securities purchased by the Fund generally have remaining maturities of
397 days or less, although instruments subject to repurchase agreements and
certain variable and floating rate obligations may bear longer final maturities.
The average dollar-weighted maturity of the Fund will not exceed 90 days.
INVESTMENT ADVISER
AMR Investment Services, Inc.
RISK FACTORS
o The yield paid by the Fund is subject to changes in interest rates.
As a result, there is risk that a decline in short-term interest
rates would lower its yield and the overall return on your
investment.
o Although the Fund seeks to preserve the value of your investment at
$1.00 per share, it is possible to lose money by investing in the
Fund.
Your investment in the Fund is not insured or guaranteed by the U.S. Government
or any financial or government institution.
INVESTOR PROFILE
This Fund may be suitable for investors who:
o seek the preservation of capital and to avoid fluctuations in
principal
o desire regular, monthly income from a highly liquid investment
o require a short-term vehicle for cash when making long-term
investment decisions
o seek a rate of return that is potentially higher than certificates
of deposit or savings accounts
7
<PAGE> 121
HISTORICAL PERFORMANCE
The bar chart below provides an indication of risk by showing how the
Fund's performance has varied from year to year. The table shows how the Fund's
performance compares to the Lipper U.S. Government Money Market Fund Average, an
average of XXX U.S. Government money market fund returns as of December 31,
1998. The Platinum Class of the Fund began offering its shares on November 7,
1995. However, another class of shares of the Fund not offered in this
prospectus has been offered since March 2, 1992. In the chart and table below,
performance results before November 7, 1995 are for the older class. Because the
other class had lower expenses, its performance was better than the Platinum
Class of the Fund would have realized in the same period. Past performance is
not necessarily indicative of how the Fund will perform in the future. Investors
may call 1-800-388-3344 to obtain the Fund's current seven-day yield.
[GRAPH]
<TABLE>
<S> <C> <C>
Highest Quarterly Return from 1/1/93 through 12/31/98 X Quarter 19XX X.XX%
Lowest Quarterly Return from 1/1/93 through 12/31/98 X Quarter 19XX X.XX%
</TABLE>
<TABLE>
<CAPTION>
Average Annual Total Return
=====================================================
as of 12/31/98
-----------------------------------------------------
Since Inception
1 Year 5 Years (3/2/92)
------ ------- --------
<S> <C> <C> <C>
U.S. Government Money Market Fund X.XX% X.XX% X.XX%
Lipper U.S. Govt. Money Mkt. Fund Average X.XX% X.XX% X.XX%
</TABLE>
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy
and hold shares of the U.S. Government Money Market Fund. (1)
Annual Fund Operating Expenses (expenses that are deducted from Fund
assets)
<TABLE>
<S> <C>
Management Fees......................................0.10%
Distribution (12b-1) Fees............................0.25
Other Expenses.......................................0.64
----
Total Annual Fund Operating Expenses.................0.99%
====
</TABLE>
(1) The expense table and the Example below reflect the expenses of
both the Fund and its corresponding Portfolio.
EXAMPLE
This Example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The Example assumes
that you invest $10,000 in the Fund for the time periods indicated and then
redeem all of your shares at the end of those periods. The Example also assumes
that your investment has a 5% return each year and that the Fund's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- -------
<S> <C> <C> <C>
$101 $315 $547 $1,213
</TABLE>
8
<PAGE> 122
AMERICAN AADVANTAGE MONEY MARKET MILEAGE FUND
INVESTMENT OBJECTIVE
Current income, liquidity and the maintenance of a stable price of $1
per share.
PRINCIPAL STRATEGIES
The Fund invests exclusively in high quality variable or fixed rate,
U.S. dollar denominated short-term money market instruments. These securities
may include obligations of the U.S. Government, its agencies and
instrumentalities; corporate debt securities, such as commercial paper, master
demand notes, loan participation interests, medium-term notes and funding
agreements; Yankeedollar and Eurodollar bank certificates of deposit, time
deposits, and bankers' acceptances; asset-backed securities; and repurchase
agreements involving the foregoing obligations.
The Fund will only buy securities with the following credit qualities:
o rated in the highest short-term categories by two rating
organizations , such as "A-1" by Standard & Poor's and "P-1" by
Moody's Investors Service, Inc.,
o rated in the highest short-term category by one rating organization
if the securities are rated only by one rating organization, or
o unrated securities that are determined to be of equivalent quality
by the Manager.
The Fund invests more than 25% of its total assets in obligations
issued by the banking industry. However, for temporary defensive purposes when
the Manager believes that maintaining this concentration may be inconsistent
with the best interests of shareholders, the Fund may not maintain this
concentration.
Securities purchased by the Fund generally have remaining maturities of
397 days or less, although instruments subject to repurchase agreements and
certain variable and floating rate obligations may bear longer final maturities.
The average dollar-weighted maturity of the Fund will not exceed 90 days.
INVESTMENT ADVISER
AMR Investment Services, Inc.
RISK FACTORS
o The yield paid by the Fund is subject to changes in interest rates.
As a result, there is risk that a decline in short-term interest
rates would lower its yield and the overall return on your
investment.
o Although the Fund seeks to preserve the value of your investment at
$1.00 per share, it is possible to lose money by investing in the
Fund.
o As with any money market fund, there is the risk that the issuers
or guarantors of securities owned by the Fund will default on the
payment of principal or interest or the obligation to repurchase
securities from the Fund.
Your investment in the Fund is not insured or guaranteed by the U.S. Government
or any financial or government institution.
INVESTOR PROFILE
This Fund may be suitable for investors who:
o seek the preservation of capital and to avoid fluctuations in
principal
o desire regular, monthly income from a highly liquid investment
require a short-term vehicle for cash when making long-term
investment decisions
o seek a rate of return that is potentially higher than Certificates
of Deposit or savings accounts
o desire to receive miles in the American Airlines AAdvantage program
9
<PAGE> 123
HISTORICAL PERFORMANCE
The bar chart below provides an indication of risk by showing how the
Fund's performance has varied from year to year. The table shows how the Fund's
performance compares to the Lipper Money Market Instrument Average, an average
of XX retail money market fund returns as of December 31, 1998. The performance
shown in the chart and table below is a combination of the Fund's performance
and that of its predecessor fund. The Fund was created from a predecessor fund
that began offering its shares on September 1, 1987. Performance results from
inception through October 31, 1991 are for the Institutional Class of the
predecessor fund, and results from November 1, 1991 through October 31, 1995 are
for the predecessor fund's Mileage Class, and results from November 1, 1995
through January 28, 1996 are for the Platinum Class of the predecessor fund..
The Fund began offering its shares on January 29, 1996. Performance results
shown from that date through December 31, 1998 are for the Fund. Because the
predecessor fund had lower expenses, its performance was better than the
Platinum Class of the Fund would have realized in the same period. Past
performance is not necessarily indicative of how the Fund will perform in the
future. Investors may call 1-800-388-3344 to obtain the Fund's current seven-day
yield.
[GRAPH]
<TABLE>
<S> <C> <C>
Highest Quarterly Return from 1/1/89 through 12/31/98 X Quarter 19XX X.XX%
Lowest Quarterly Return from 1/1/89 through 12/31/98 X Quarter 19XX X.XX%
</TABLE>
<TABLE>
<CAPTION>
Average Annual Total Return
=====================================================
as of 12/31/98
-----------------------------------------------------
1 Year 5 Years 10 Years
------ ------- --------
<S> <C> <C> <C>
Money Market Mileage Fund X.XX% X.XX% X.XX%
Lipper Money Market Instrument Average X.XX% X.XX% X.XX%
</TABLE>
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy
and hold shares of the Money Market Mileage Fund. (1)
Annual Fund Operating Expenses (expenses that are deducted from Fund
assets)
<TABLE>
<S> <C>
Management Fees......................................0.10%
Distribution (12b-1) Fees............................0.25
Other Expenses.......................................X.XX
Total Annual Fund Operating Expenses.................X.XX%
Fee Waiver and/or Expense Reimbursement..............X.XX%(2)
Net Expenses.........................................1.09%
</TABLE>
(1) The expense table and the Example below reflect the expenses of
both the Fund and its corresponding Portfolio.
(2) The Manager has contractually agreed to waive Distribution Fees to
the extent that Total Annual Fund Operating Expenses exceed 1.09%.
EXAMPLE
This Example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The Example assumes
that you invest $10,000 in the Fund for the time periods indicated and then
redeem all of your shares at the end of those periods. The Example also assumes
that your investment has a 5% return each year and that the Fund's operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- -------
<S> <C> <C> <C>
$111 $XXX $XXX $X,XXX
</TABLE>
10
<PAGE> 124
THE MANAGER
The Trust has retained AMR Investment Services, Inc. to serve as its
Manager. The Manager, located at 4333 Amon Carter Boulevard, Fort Worth, Texas
76155, is a wholly owned subsidiary of AMR Corporation, the parent company of
American Airlines, Inc. The Manager was organized in 1986 to provide investment
management, advisory, administrative and asset management consulting services.
As of December 31, 1998, the Manager had approximately $XX.X billion of assets
under management, including approximately $XX.X billion under active management
and $XX.X billion as named fiduciary or financial adviser. Of the total,
approximately $XX.X of assets are related to AMR Corporation.
The Manager provides or oversees the provision of all administrative,
investment advisory and portfolio management services to the Funds. The Manager
develops the investment programs for each Fund and serves as the sole investment
adviser to the Funds. As compensation for providing management services, each
Fund pays the Manager an annualized advisory fee that is calculated and accrued
daily, equal to the sum of 0.10% of the net assets of the Fund.
VALUATION OF SHARES
The price of each Fund's shares is based on its net asset value
("NAV"). Each Fund's NAV is computed by adding total assets, subtracting all of
the Fund's liabilities, and dividing the result by the total number of shares
outstanding. Securities held by the Funds are valued in accordance with the
amortized cost method, which is designed to enable the Funds to maintain a
stable NAV of $1.00 per share. Debt securities (other than short-term
securities) usually are valued on the basis of prices provided by a pricing
service. In some cases, the price of debt securities is determined using quotes
obtained from brokers.
The NAV of Platinum Class shares will be determined based on a pro rata
allocation of investment income, expenses and total capital gains and losses.
Each Fund's NAV is determined as of the close of the New York Stock Exchange
("Exchange"), generally 4:00 p.m. Eastern time, on each day on which the
Exchange is open for business, except for Columbus Day and Veteran's Day.
ABOUT YOUR INVESTMENT
PURCHASE AND REDEMPTION OF SHARES
ELIGIBILITY
Platinum Class shares are offered on a continuous basis at net asset
value through selected financial institutions (such as banks and
broker/dealers). Money Market Mileage Fund shares are offered only to
individuals and certain grantor trusts. Qualified retirement plans (i.e. IRAs,
Keogh, profit sharing plans) and institutional investors are not eligible to
invest in the Money Market Mileage Fund.
PURCHASE POLICIES
No sales charges are assessed on the purchase or sale of Fund shares.
Shares of the Funds are offered and purchase orders accepted until the deadlines
listed below on each day on which the Exchange is open for trading. In addition,
shares are not offered and orders are not accepted on Columbus Day and Veteran's
Day:
<TABLE>
<CAPTION>
FUND PURCHASE BY (EASTERN TIME)*:
<S> <C>
Money Market 3:00 p.m.
Municipal Money Market 11:45 a.m.
U.S. Government Money Market 2:00 p.m.
Money Market Mileage 3:00 p.m.
* or the close of the Exchange (whichever
comes first)
</TABLE>
If a purchase order is accepted and payment is received prior to the
applicable Fund's deadline, the purchase price will be the NAV per share next
determined on that day. If a purchase order is accepted or payment is received
after the applicable deadline, the purchase price will be the NAV of the
following day that the Fund is open for business. Checks to purchase shares 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.
OPENING AN ACCOUNT
A completed, signed application is required to open an account. Financial
institutions may have different procedures for opening an account. Investors in
the Money Market Mileage Fund will be enrolled in the AAdvantage Program and
assigned an AAdvantage account number upon receipt of a completed application.
You may request an application form by calling (800) 388-3344.
Complete the application, sign it and:
Mail to:
American AAdvantage Funds-Platinum Class
P.O. 419643
Kansas City, MO 64141-6643
11
<PAGE> 125
HOW TO PURCHASE SHARES
<TABLE>
<CAPTION>
To Make an Initial Purchase To Add To An Existing Account
<S> <C>
BY CHECK-------------------------------------------------------------------------------------------------------------
o Make check payable to American AAdvantage Funds Include the shareholder's account number and Fund name and
o Include the Fund name and Fund number on the Fund number on the check. Mail check ($50 minimum) to:
check.
o Mail check ($2,500 minimum) to:
American AAdvantage Funds-Platinum Class American AAdvantage Funds-Platinum Class
P.O. Box 419643 P.O. Box 419643
Kansas City, MO 64141-6643 Kansas City, MO 64141-6643
BY WIRE------------------------------------------------------------------------------------------------------------
Call (800) 388-3344 to purchase shares by wire. Send a Call (800) 388-3344 to purchase shares by wire. Send a
bank wire to State Street Bank & Trust Co. with bank wire to State Street Bank & Trust Co. with these
these instructions: instructions:
o ABA# 0110-0002-8; AC-9905-342-3 o ABA# 0110-0002-8; AC-9905-342-3
o Attn: American AAdvantage Funds-Platinum Class o Attn: American AAdvantage Funds-Platinum Class
o the Fund name and Fund number o the Fund name and Fund number
o specify that the wire is for a new account o shareholder's account number
BY EXCHANGE--------------------------------------------------------------------------------------------------------
Shares of a Fund may be purchased by exchange from
another American AAdvantage Fund-Platinum Class if
the shareholder has owned shares of the other Fund
for at least 15 days. Send a written request to the
address above or call (800) 388-3344 to exchange
shares.
</TABLE>
REDEMPTION POLICIES
Shares of any Fund may be redeemed by telephone or mail on any day that
the Fund is open for business. The redemption price will be the NAV next
determined after a redemption order is received in good order. Any questions
regarding what constitutes good order should be directed to the financial
institution through which Fund shares were purchased or the Fund's transfer
agent at (800) 388-3344. Proceeds from redemptions requested by the following
deadlines will generally be wired to shareholders on the same day.
<TABLE>
<CAPTION>
FUND SAME DAY WIRE REDEMPTION ORDER DEADLINE:
<S> <C>
Money Market 2:00 p.m. Eastern Time
Municipal Money Market 11:45 a.m. Eastern Time
U.S. Government Money Market 2:00 p.m. Eastern Time
</TABLE>
In any event, proceeds from a redemption order for any Fund will be
transmitted to a shareholder by no later than seven days after the receipt of a
redemption request in good order. Shares purchased by check may not be redeemed
until the check has cleared, which may take up to 15 days.
The Funds reserve the right to suspend redemptions or postpone the date
of payment (i) when the Exchange is closed (other than for customary weekend and
holiday closings); (ii) when trading on the Exchange is restricted; (iii) when
the SEC determines that an emergency exists so that disposal of a Fund's
investments or determination of its NAV is not reasonably practicable; or (iv)
by order of the SEC for protection of the Funds' shareholders.
Although the Funds intend to redeem shares in cash, each Fund reserves
the right to pay the redemption price in whole or in part by a distribution of
readily marketable securities held by the applicable Fund's corresponding
Portfolio. Unpaid dividends credited to an account up to the date of redemption
of all shares generally will be paid at the time of redemption.
12
<PAGE> 126
HOW TO REDEEM SHARES
<TABLE>
<CAPTION>
Method Additional Instructions
<S> <C>
BY TELEPHONE-------------------------------------------------------------------------------------------------------
Call (800) 388-3344 to request a redemption. Proceeds from redemptions placed by telephone will
generally be transmitted by wire only, as instructed
on the application form.
BY MAIL------------------------------------------------------------------------------------------------------------
Write a letter of instruction including Other supporting documents may be required for
o the Fund name, Fund number and class estates, trusts, guardianships, custodians,
o shareholder account number corporations, IRAs and welfare, pension and profit
o shares or dollar amount to be redeemed sharing plans. Call (800) 388-3344 for instructions.
o authorized signature of all persons
required to sign for the account
o how and where to send the proceeds
Mail to:
American AAdvantage Funds-Platinum Class
P.O. Box 419643
Kansas City, MO 64141-6643
BY CHECK-----------------------------------------------------------------------------------------------------------
Choose the checkwriting feature on the account o Minimum check amount is $100
application. o A $2 service fee per check is charged for check
copies
o A $15 service fee will be charged when a check
is presented for an amount greater than the
value of the shareholder's account
o A $12 fee will be charged for "stop payment"
requests
BY PRE-AUTHORIZED AUTOMATIC REDEMPTION-----------------------------------------------------------------------------
Contact the financial institution through which you Proceeds will be transferred automatically from your
purchased Fund shares. Fund account to your bank account via ACH on the 15th
day of each month ($100 minimum).
BY EXCHANGE--------------------------------------------------------------------------------------------------------
Shares of a Fund may be redeemed in exchange for another American AAdvantage Fund-Platinum Class if the shareholder
has owned shares of the Fund for at least 15 days. Send a written request to the address above or call
(800) 388-3344 to exchange shares.
</TABLE>
GENERAL POLICIES
If a shareholder's account balance in any Fund falls below $2,500, the
shareholder may be asked to increase the balance. If the account balance remains
below $2,500 after 45 days, the Funds reserve the right to close the account and
send the proceeds to the shareholder.
The following policies apply to instructions you may provide to the
Funds by telephone:
o The Funds, their officers, trustees, directors, employees, or
agents are not responsible for the authenticity of instructions
provided by telephone, nor for any loss, liability, cost or expense
incurred for acting on them.
o The Funds employ procedures reasonably designed to confirm that
instructions communicated by telephone are genuine.
o Due to the volume of calls or other unusual circumstances,
telephone redemptions may be difficult to implement during certain
time periods.
The Funds reserve the right to:
o reject any order for the purchase of shares and to limit or
suspend, without prior notice, the offering of shares
o modify or terminate the exchange privilege at any time
o limit the number of exchanges between Funds an investor may
exercise
o seek reimbursement from you for any related loss incurred if your
payment for the purchase of Fund shares by check does not clear
your bank
Each financial institution is responsible for the prompt transmission
of purchase and redemption orders of its clients. Financial institutions may
provide varying arrangements for their clients with respect to the purchase and
redemption of Platinum Class shares. Shares purchased through financial
institutions may be subject to transaction fees. Financial institutions offering
Platinum Class shares may impose fees on investors for checkwriting privileges
or, if approved by the Funds, establish variations on minimum check amounts.
Some firms may arrange for additional privileges associated with Platinum Class
shares, such as a debit card, which may only be available subject to certain
conditions or limitations.
13
<PAGE> 127
DISTRIBUTIONS AND TAXES
The Funds distribute most or all of their net earnings in the form of
dividends from net investment income and distributions of realized net capital
gains. Unless the account application instructs otherwise, distributions will be
reinvested in additional Fund shares. Each Fund generally makes distributions of
dividends once each month. Usually, dividends (except those paid by the
Municipal Money Market Fund) and distributions of net realized gains are taxable
events.
The Municipal Money Market Fund designates most of its distributions as
"exempt-interest dividends," which may be excluded from gross income. If the
Fund earns taxable income from any of its investments, that income will be
distributed as a taxable dividend. If the Fund invests in private activity
obligations, shareholders will be required to treat a portion of the
interest-exempt dividends they receive as a "tax preference item" in determining
their liability for federal alternative minimum tax (AMT). Some states exempt
from income tax the interest on their own obligations and on obligations of
governmental agencies and municipalities in the state; accordingly, each year
shareholders will receive tax information on the Fund's exempt-interest income
by state.
This is only a summary of some of the important income tax
considerations that may affect Fund shareholders. Shareholders should consult
their tax adviser regarding specific questions as to the effect of federal,
state or local income taxes on an investment in the Funds.
AADVANTAGE(R) MILES
The AAdvantage program offers its members the opportunity to obtain
free upgrades and travel awards on American Airlines and other AAdvantage
airline participants, as well as upgrades and discounts on car rental and hotel
accommodations. For more information about the AAdvantage program, call American
Airlines at (800) 433-7300.
AAdvantage travel awards ("miles") will be posted monthly in arrears to
each shareholder's AAdvantage account based on the shareholder's average daily
account balance during the previous month. Miles are posted at an annual rate of
one mile per $10 maintained in the Money Market Mileage Fund. Mileage is
calculated on the average daily balance and posted monthly. The average daily
balance is calculated by adding each day's balance and dividing by the number of
days in the month. For example, the average daily balance on an $50,000 account
funded on the 16th day of a month having 30 days (and maintained at that balance
through the end of the month) would be $25,000. Mileage received for that month
would be 208 miles. If the same balance were maintained through the next month,
the average daily balance would be $50,000, and the mileage would be 417 miles
that month and every month the $50,000 investment was maintained in the Money
Market Mileage Fund. These miles appear on subsequent AAdvantage program
statements.
For trust accounts, AAdvantage miles will be posted only in a trustee's
individual name, and not in the name of the trust account. Before investing in
the Money Market Mileage Fund, trustees of the trust account should consult
their own legal and tax advisers as to the tax effect of this arrangement and
whether the arrangement is consistent with their duties as trustees. American
Airlines has informed the Money Market Mileage Fund that in administering an
AAdvantage member's AAdvantage account, it shall not be required to distinguish
between AAdvantage miles accumulated by the individual in his/her capacity as
trustee to a trust account from AAdvantage miles accumulated in an individual
capacity from other sources.
The Manager reserves the right to discontinue posting AAdvantage miles
or to change the mileage calculation at any time upon notice to shareholders.
American Airlines may find it necessary to change AAdvantage program rules,
regulations, travel awards and special offers at any time. This means that
American Airlines may initiate changes impacting, for example, participant
affiliations, rules for earning mileage credit, mileage levels and rules for the
use of travel awards, continued availability of travel awards, blackout dates
and limited seating for travel awards, and the features of special offers.
American Airlines reserves the right to end the AAdvantage program with six
months' notice. AAdvantage travel awards, mileage accrual and special offers are
subject to governmental regulations.
ADDITIONAL INFORMATION
DISTRIBUTION OF TRUST SHARES
The AAdvantage Funds and Mileage Funds have each adopted a Distribution
Plan for the Platinum Class (the "Plans") in accordance with Rule 12b-1 under
the Investment Company Act of 1940 ("1940 Act"), which allow the Funds to pay
distribution and other fees for the sale of Fund shares and for other services
provided to shareholders. In addition, the Mileage Funds' Plan authorizes
expenses incurred in connection with participation in the AAdvantage program.
The Plans provide that each Platinum Class will pay 0.25% per annum of its
average daily net assets to the Manager (or another entity approved by the
applicable Board). Because these fees are paid out of each Fund's assets on an
on-going basis, over time these fees will increase the cost of your investment
and may cost you more than paying other types of sales charges.
14
<PAGE> 128
MASTER-FEEDER STRUCTURE
The Funds operate under a master-feeder structure. This means that each
Fund is a "feeder" fund that invests all of its investable assets in a "master"
fund with the same investment objective. The "master" fund purchases securities
for investment. The master-feeder structure works as follows:
-------------------------
Investor
-------------------------
purchases shares of
-------------------------
Feeder Fund
-------------------------
which invests in
-------------------------
Master Fund
-------------------------
which buys
-------------------------
Investment Securities
-------------------------
Each Fund can withdraw its investment in its corresponding Portfolio at
any time if the Board determines that it is in the best interest of the Fund and
its shareholders to do so. If this happens, the Fund's assets will be invested
according to the investment policies and restrictions described in this
Prospectus.
YEAR 2000
The Funds could be affected adversely if the computer systems used by
the Manager, the Funds' other service providers, or companies in which the Funds
invest do not properly process and calculate information that relates to dates
beginning on January 1, 2000 and beyond. Due to the Funds' reliance on various
service providers to perform essential functions, each of the Funds could have
difficulty calculating its NAV, processing orders for share redemptions and
delivering account statements and other information to shareholders. The Manager
has taken steps that it believes are reasonably designed to address the
potential failure of computer systems used by the Manager and the Funds' service
providers to address the Year 2000 issue. There can be no assurance that the
steps taken by the Manager will be sufficient to avoid any adverse impact.
In evaluating current and potential portfolio positions, Year 2000 is
one of the factors that the Manager takes into consideration. The Manager will
rely upon public filings and other statements made by companies regarding their
Year 2000 readiness. Issuers in countries outside of the U.S. may not be
required to make the level of disclosure regarding Year 2000 readiness that is
required in the U.S. If the value of a Fund's investment is adversely affected
by a Year 2000 problem, the NAV of the Fund may be affected as well.
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand each Fund's
financial performance for the past five years (or, if shorter, the period of the
Fund's operations). Certain information reflects financial results for a single
Fund share. The total returns in the table represent that rate than an investor
would have earned (or lost) on an investment in the Fund (assuming reinvestment
of all dividends and distributions). Each Fund's highlights were audited by
Ernst & Young LLP, independent auditors. More financial information about the
Funds is found in their Annual Report, which you may obtain upon request.
15
<PAGE> 129
MONEY MARKET FUND - PLATINUM CLASS
<TABLE>
<CAPTION>
--------------------------- -------------
YEAR ENDED OCTOBER 31, PERIOD
ENDED
OCTOBER 31,
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD: 1998 1997 1996(A)
- ------------------------------------------------------ ------------ -------------- -------------
<S> <C> <C> <C>
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00
-------- -------- --------
Net investment income 0.05(B) 0.05(B)
Less dividends from net investment income (0.05) (0.05)
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00
======== ======== ========
Total return (annualized) 4.87% 4.85%(C)
======== ========
Ratios and supplemental data:
Net assets, end of period (in thousands) $494,413 $119,981
Ratios to average net assets (annualized)
Expenses 0.93%(B) 0.94%(B)
Net investment income 4.80%(B) 4.63%(B)
</TABLE>
(A) The Money Market Fund commenced active operations on November 7, 1995.
(B) The per share amounts and ratios reflect income and expenses assuming
inclusion of the Fund's proportionate share of the income and expenses of
its corresponding Portfolio.
(C) Total return for the Platinum Class for the period ended October 31, 1996
reflects Institutional Class returns from November 1, 1995 through November
6, 1995 and returns of the Platinum Class through October 31, 1996. Due to
the different expense structures between the classes, total return would
vary from the results shown had the Platinum Class been in operation for
the entire year.
16
<PAGE> 130
MUNICIPAL MONEY MARKET FUND - PLATINUM CLASS
<TABLE>
<CAPTION>
------------------------- -------------
YEAR ENDED OCTOBER 31, PERIOD
ENDED
OCTOBER 31,
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD: 1998 1997 1996(A)
- -------------------------------------------------- ------------ ------------ -------------
<S> <C> <C> <C>
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00
-------- -------- --------
Net investment income 0.03(B) 0.03(B)
Less dividends from net investment income (0.03) (0.03)
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00
======== ======== ========
Total return (annualized) 2.79% 2.88%(C)
======== ========
Ratios and supplemental data:
Net assets, end of period (in thousands) $ 63,883 $ 49,862
Ratios to average net assets (annualized)(D)
Expenses 1.03%(B) 0.97%(B)
Net investment income 2.75%(B) 2.72%(B)
</TABLE>
(A) The Municipal Money Market Fund commenced active operations on November 7,
1995.
(B) The per share amounts and ratios reflect income and expenses assuming
inclusion of the Fund's proportionate share of the income and expenses of
its corresponding Portfolio.
(C) Total return for the Platinum Class for the period ended October 31, 1996
reflects Institutional Class returns from November 1, 1995 through November
6, 1995 and returns of the Platinum Class through October 31, 1996. Due to
the different expense structures between the classes, total return would
vary from the results shown had the Platinum Class been in operation for
the entire year.
(D) Operating results exclude management and administrative services fees
waived by the Manager. Had the Fund paid such fees, the ratio of expenses
and net investment income to average net assets would have been 1.02% and
2.67%, respectively for the period ended October 31, 1996, 1.04% and 2.74%,
respectively for the year ended October 31, 1997 and X.XX% and X.XX%,
respectively for the year ended October 31, 1998.
17
<PAGE> 131
U.S. GOVERNMENT MONEY MARKET FUND - PLATINUM CLASS
<TABLE>
<CAPTION>
------------------------ --------------
YEAR ENDED OCTOBER 31, PERIOD ENDED
OCTOBER 31,
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD: 1998 1997 1996(A)
- ------------------------------------------------------ ------------ ----------- --------------
<S> <C> <C> <C>
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00
-------- -------- --------
Net investment income 0.05(B) 0.04(B)
Less dividends from net investment income (0.05) (0.04)
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00
======== ======== ========
Total return (annualized) 4.61% 4.58%(C)
======== ========
Ratios and supplemental data:
Net assets, end of period (in thousands) $ 68,439 $ 52,153
Ratios to average net assets (annualized)
Expenses 0.99%(B) 1.00%(B)
Net investment income 4.53%(B) 4.35%(B)
</TABLE>
(A) The U.S. Government Money Market Fund commenced active operations on
November 7, 1995.
(B) The per share amounts and ratios reflect income and expenses assuming
inclusion of the Fund's proportionate share of the income and expenses of
its corresponding Portfolio.
(C) Total return for the Platinum Class for the period ended October 31, 1996
reflects Institutional Class returns from November 1, 1995 through November
6, 1995 and returns of the Platinum Class through October 31, 1996. Due to
the different expense structures between the classes, total return would
vary from the results shown had the Platinum Class been in operation for
the entire year.
18
<PAGE> 132
MONEY MARKET MILEAGE FUND - PLATINUM CLASS
<TABLE>
<CAPTION>
------------------------- -------------
YEAR ENDED OCTOBER 31, PERIOD
ENDED
OCTOBER 31,
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD: 1998 1997 1996(A)
- -------------------------------------------------- ------------ ------------ -------------
<S> <C> <C> <C>
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00
-------- -------- --------
Net investment income 0.05(B) 0.03(B)
Less dividends from net investment income (0.05) (0.03)
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00
======== ======== ========
Total return (annualized) 4.71% 4.78%(C)
======== ========
Ratios and supplemental data:
Net assets, end of period (in thousands) $ 49,184 $ 15,429
Ratios to average net assets (annualized)(D)
Expenses 1.09%(B) 1.09%(B)
Net investment income 4.64%(B) 4.48%(B)
</TABLE>
(A) The Money Market Mileage Fund commenced active operations on January 29,
1996.
(B) The per share amounts and ratios reflect income and expenses assuming
inclusion of the Fund's proportionate share of the income and expenses of
its corresponding Portfolio.
(C) Total return for the Platinum Class for the period ended October 31, 1996
reflects Mileage Class returns from November 1, 1995 through January 27,
1996 and returns of the Platinum Class through October 31, 1996. Due to the
different expense structures between the classes, total return would vary
from the results shown had the Platinum Class been in operation for the
entire year.
(D) Operating results exclude expenses reimbursed by the Manager. Had the Fund
paid such fees, the ratio of expenses and net investment income to average
net assets would have been 1.24% and 4.33%, respectively for the period
ended October 31, 1996, 1.14% and 4.59%, respectively for the year ended
October 31, 1997 and X.XX% and X.XX%, respectively for the year ended
October 31, 1998.
19
<PAGE> 133
ADDITIONAL INFORMATION
Additional information about the Funds is found in the documents listed
below. Request a free copy of these documents by calling (800) 967-9009.
<TABLE>
<CAPTION>
ANNUAL REPORT/SEMI-ANNUAL REPORT STATEMENT OF ADDITIONAL INFORMATION
<S> <C>
The Funds' Annual and Semi-Annual Reports list each The SAI contains more details about the Funds and their
Fund's actual investments as of the report's date. They also investment policies. The SAI is incorporated in this
include a discussion by the Manager of market conditions Prospectus by reference (it is legally part of this Prospectus).
and investment strategies that significantly affected the A current SAI is on file with Securities and Exchange
Funds' performance. The report of the Funds' independent Commission (SEC).
auditors is included in the Annual Report.
</TABLE>
To obtain more information about the Funds or to request a copy of the documents
listed above:
BY TELEPHONE:
Call (800) 388-3344
BY MAIL:
American AAdvantage Funds
P.O. Box 619003, MD5645
DFW Airport, TX 75261-9003
BY E-MAIL:
[email protected]
ON THE INTERNET:
Visit our website at www.aafunds.com
Visit the SEC website at www.sec.gov
Copies of these documents may also be obtained from the SEC Public Reference
Room in Washington, D.C. The Public Reference Room can be reached at (800)
732-0330 or by mailing a request, including a duplicating fee to: SEC's Public
Reference Section, 450 5th Street NW, Washington, D.C. 20549-6009.
FUND SERVICE PROVIDERS
<TABLE>
<CAPTION>
<S> <C>
CUSTODIAN TRANSFER AGENT
State Street Bank and Trust Company National Financial Data Services
Boston, Massachusetts Kansas City, Missouri
INDEPENDENT AUDITORS DISTRIBUTOR
Ernst & Young LLP Brokers Transaction Services, Inc.
Dallas, Texas Dallas, Texas
</TABLE>
[AMERICAN AADVANTAGE FUNDS LOGO]
SEC File Number 811-4984
[AMERICAN AADVANTAGE MILEAGE FUNDS LOGO]
SEC File Number 811-9018
American Airlines is not responsible for investments made in the American
AAdvantage Funds. American AAdvantage Funds and American AAdvantage Mileage
Funds are registered service marks of AMR Corporation. Platinum Class, American
AAdvantage Money Market Fund, American AAdvantage Municipal Money Market Fund,
American AAdvantage U.S. Government Money Market Fund and American AAdvantage
Money Market Mileage Fund are service marks of AMR Investment Services.
20
<PAGE> 134
STATEMENT OF ADDITIONAL INFORMATION
AMERICAN AADVANTAGE FUNDS(R)
-- AMR CLASS(SM) --
-- INSTITUTIONAL CLASS --
-- PLANAHEAD CLASS(R) --
MARCH 1, 1999
The American AAdvantage Balanced Fund(sm) (the "Balanced Fund"),
American AAdvantage Growth and Income Fund(sm), formerly known as the American
AAdvantage Equity Fund prior to August 1, 1994 (the "Growth and Income Fund"),
American AAdvantage International Equity Fundsm (the "International Equity
Fund"), American AAdvantage Small Cap Value Fund (the "Small Cap Fund"),
American AAdvantage S&P 500 Index Fund (the "S&P 500 Index Fund"), American
AAdvantage Intermediate Bond Fund(sm) (the "Intermediate Bond Fund"), American
AAdvantage Short-Term Bond Fund(sm), formerly known as the American AAdvantage
Limited-Term Income Fund prior to March 1, 1998 (the "Short-Term Bond Fund"),
American AAdvantage Money Market Fund(sm) (the "Money Market Fund"), American
AAdvantage Municipal Money Market Fund(sm) (the "Municipal Money Market Fund")
and American AAdvantage U.S. Government Money Market Fundsm, formerly known as
the American AAdvantage U.S. Treasury Money Market Fund prior to March 1, 1997
(the "U.S. Government Money Market Fund"), (individually, a "Fund" and
collectively, the "Funds") are ten separate investment portfolios of the
American AAdvantage Funds (the "Trust"), a no-load, open-end, diversified
management investment company organized as a Massachusetts business trust on
January 16, 1987. Each Fund constitutes a separate investment portfolio with a
distinct investment objective, and distinct purpose and strategy. Each Fund is
comprised of multiple classes of shares designed to meet the needs of different
groups of investors. This Statement of Additional Information ("SAI") relates to
the AMR, Institutional and PlanAhead Classes of the Trust.
Each Fund, except the S&P 500 Index Fund, seeks its investment
objective by investing all of its investable assets in a corresponding portfolio
of the AMR Investment Services Trust ("AMR Trust") that has a similar name and
an identical investment objective to the investing Fund. The S&P 500 Index Fund
invests all of its investable assets in the Equity 500 Index Portfolio, which
has an identical investment objective. The Equity 500 Index Portfolio and the
portfolios of the AMR Trust are referred to herein individually as a "Portfolio"
and, collectively, the "Portfolios." Each Portfolio has an investment objective
identical to the investing Fund. The AMR Trust is a separate investment company
managed by AMR Investment Services, Inc. (the "Manager"). The Equity 500 Index
Portfolio is a separate investment company managed by Bankers Trust Company
("BT").
This SAI should be read in conjunction with an AMR Class, an
Institutional Class or a PlanAhead Class prospectus, dated March 1, 1999,
(individually, a "Prospectus"), copies of which may be obtained without charge
by calling (800) 388-3344 for a PlanAhead or Institutional Class Prospectus or
(817) 967-3509 for an AMR Class Prospectus.
This SAI is not a prospectus and is authorized for distribution to
prospective investors only if preceded or accompanied by a current Prospectus.
TABLE OF CONTENTS
<TABLE>
<S> <C>
Non-Principal Investment Strategies and Risks....................................................
Investment Restrictions..........................................................................
Temporary Defensive Position.....................................................................
Portfolio Turnover...............................................................................
Trustees and Officers of the Trust and the AMR Trust.............................................
Trustees and Officers of the Equity 500 Index Portfolio..........................................
Control Persons and 5% Shareholders..............................................................
Investment Advisory Agreements...................................................................
</TABLE>
<PAGE> 135
<TABLE>
<S> <C>
Management, Administrative Services and Distribution Fees........................................
Other Service Providers..........................................................................
Portfolio Securities Transactions................................................................
Redemptions in Kind..............................................................................
Net Asset Value..................................................................................
Tax Information..................................................................................
Yield and Total Return Quotations................................................................
Description of the Trust.........................................................................
Other Information................................................................................
Financial Statements.............................................................................
Appendix A....................................................................................A-1
</TABLE>
NON-PRINCIPAL INVESTMENT STRATEGIES AND RISKS
In addition to the investment strategies described in the Prospectus,
the Balanced Fund, the Growth and Income Fund, the International Equity Fund,
and the Small Cap Value Fund may:
Invest up to 20% of total assets in debt securities that are investment
grade at the time of purchase, including obligations of the U.S.
Government, its agencies and instrumentalities, corporate debt
securities, mortgage-backed securities, asset-backed securities,
master-demand notes, Yankeedollar and Eurodollar bank certificates of
deposit, time deposits, bankers' acceptances, commercial paper and
other notes, and other debt securities. Investment grade securities
include securities issued or guaranteed by the U.S. Government, its
agencies and instrumentalities, as well as securities rated in one of
the four highest rating categories by all rating organizations rating
that security (such as Standard & Poor's or Moody's Investor Services,
Inc.). Obligations rated in the fourth highest rating category are
limited to 25% of each of these Funds' debt allocations. The
International Equity Fund may invest up to 20% of its total assets in
non-U.S. debt securities that are rated at the time of purchase in one
of the three highest rating categories by any rating organization or,
if unrated, are deemed to be of comparable quality by the applicable
investment adviser and traded publicly on a world market. These Funds,
at the discretion of the investment advisers, may retain a debt
security that has been downgraded below the initial investment
criteria.
Each Fund may:
1. Engage in dollar rolls or purchase or sell securities on a
when-issued or forward commitment basis. The purchase or sale of
when-issued securities enables an investor to hedge against anticipated
changes in interest rates and prices by locking in an attractive price
or yield. The price of when-issued securities is fixed at the time the
commitment to purchase or sell is made, but delivery and payment for
the when-issued securities take place at a later date, normally one to
two months after the date of purchase. During the period between
purchase and settlement, no payment is made by the purchaser to the
issuer and no interest accrues to the purchaser. Such transactions
therefore involve a risk of loss if the value of the security to be
purchased declines prior to the settlement date or if the value of the
security to be sold increases prior to the settlement date. A sale of a
when-issued security also involves the risk that the other party will
be unable to settle the transaction. Dollar rolls are a type of forward
commitment transaction. Purchases and sales of securities on a forward
commitment basis involve a commitment to purchase or sell securities
with payment and delivery to take place at some future date, normally
one to two months after the date of the transaction. As with
when-issued securities, these transactions involve certain risks, but
they also enable an investor to hedge against anticipated changes in
interest rates and prices. Forward commitment transactions are executed
for existing obligations, whereas in a when-issued transaction, the
obligations have not yet been issued. When purchasing securities on a
when-issued or
2
<PAGE> 136
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.
2. Invest in other investment companies to the extent permitted by the
Investment Company Act of 1940 ("1940 Act") or exemptive relief granted
by the Securities and Exchange Commission ("SEC").
3. Loan securities to broker-dealers or other institutional investors.
Securities loans will not be made if, as a result, the aggregate amount
of all outstanding securities loans by a Portfolio exceeds 33 1/3% of
its total assets (including the market value of collateral received).
For purposes of complying with a Portfolio's investment policies and
restrictions, collateral received in connection with securities loans
is deemed an asset of the Portfolio to the extent required by law. The
Manager receives compensation for administrative and oversight
functions with respect to securities lending. The amount of such
compensation depends on the income generated by the loan of the
securities. A Portfolio continues to receive interest on the securities
loaned and simultaneously earns either interest on the investment of
the cash collateral or fee income if the loan is otherwise
collateralized.
4. Enter into repurchase agreements. A repurchase agreement is an
agreement under which securities are acquired by a Portfolio from a
securities dealer or bank subject to resale at an agreed upon price on
a later date. The acquiring Portfolio bears a risk of loss in the event
that the other party to a repurchase agreement defaults on its
obligations and the Portfolio is delayed or prevented from exercising
its rights to dispose of the collateral securities. However, the
investment advisers or the Manager attempt to minimize this risk by
entering into repurchase agreements only with financial institutions
which are deemed to be of good financial standing and which have been
approved by the AMR Trust's Board of Trustees ("AMR Trust Board") or
the Equity 500 Index Portfolio's Board of Trustees ("Equity 500 Index
Portfolio Board"), as appropriate.
5. Purchase securities in private placement offerings made in reliance
on the "private placement" exemption from registration afforded by
Section 4(2) of the Securities Act of 1933 ("1933 Act"), and resold to
qualified institutional buyers under Rule 144A under the 1933 Act
("Section 4(2) securities"). The Money Market Portfolios will not
invest more than 10% (and the other Funds' respective Portfolios will
not invest more than 15%) of their respective net assets in Section
4(2) securities and illiquid securities unless the applicable
investment adviser determines, by continuous reference to the
appropriate trading markets and pursuant to guidelines approved by the
AMR Trust Board or the Equity 500 Index Portfolio Board, that any
Section 4(2) securities held by such Portfolio in excess of this level
are at all times liquid.
INVESTMENT RESTRICTIONS
Each Fund has the following fundamental investment policy that enables
it to invest in its corresponding Portfolio:
Notwithstanding any other limitation, the Fund may invest all of
its investable assets in an open-end management investment company
with substantially the same investment objectives, policies and
limitations as the Fund. For this purpose, "all of the Fund's
investable assets" means that the only investment securities that
will be held by the Fund will be the Fund's interest in the
investment company.
All other fundamental investment policies and the non-fundamental
policies of each Fund and its corresponding Portfolio are identical. Therefore,
although the following discusses the investment policies of each Portfolio, the
AMR Trust Board and the Equity 500 Index Portfolio Board, it applies equally to
each Fund and the Trust's Board of Trustees ("Board").
PORTFOLIOS OF THE AMR TRUST
In addition to the investment limitations noted in the Prospectus, the
following nine restrictions have been adopted by each Portfolio of the AMR
Trust, and may be changed with respect to any such Portfolio only by the
majority vote of that Portfolio's outstanding interests. "Majority of the
outstanding voting securities" under the 1940 Act, as amended, and as used
herein means, with respect to the Portfolio, the lesser of (a) 67% of the
interests of the Portfolio present at the meeting if the holders of more than
50% of the interests are present and represented at the interest holders'
meeting or (b) more than 50% of the interests of the Portfolio. Whenever a Fund
is requested to vote on a change in the investment restrictions of its
corresponding Portfolio, that Fund will hold a meeting of its shareholders and
will cast its votes as instructed by its shareholders. The percentage of a
Fund's votes representing
3
<PAGE> 137
that Fund's shareholders not voting will be voted by the Board in the same
proportion as those Fund shareholders who do, in fact, vote.
No Portfolio of the AMR Trust may:
1. Purchase or sell real estate or real estate limited partnership
interests, provided, however, that the Portfolio may invest in
securities secured by real estate or interests therein or issued by
companies which invest in real estate or interests therein when
consistent with the other policies and limitations described in the
Prospectus.
2. Purchase or sell commodities (including direct interests and/or
leases in oil, gas or minerals) or commodities contracts, except with
respect to forward foreign currency exchange contracts, foreign
currency futures contracts and when-issued securities when consistent
with the other policies and limitations described in the Prospectus.
3. Engage in the business of underwriting securities issued by others,
except to the extent that, in connection with the disposition of
securities, the Portfolio may be deemed an underwriter under federal
securities law.
4. Make loans to any person or firm, provided, however, that the making
of a loan shall not be construed to include (i) the acquisition for
investment of bonds, debentures, notes or other evidences of
indebtedness of any corporation or government which are publicly
distributed or (ii) the entry into repurchase agreements and further
provided, however, that each Portfolio may lend its portfolio
securities to broker-dealers or other institutional investors in
accordance with the guidelines stated in the Prospectus.
5. Purchase from or sell portfolio securities to its officers, Trustees
or other "interested persons" of the Trust, as defined in the 1940 Act,
including its investment advisers and their affiliates, except as
permitted by the 1940 Act and exemptive rules or orders thereunder.
6. Issue senior securities except that the Portfolio may engage in
when-issued securities and forward commitment transactions and the
International Equity Portfolio may engage in currency futures and
forward currency contracts.
7. Borrow money, except from banks or through reverse repurchase
agreements for temporary purposes in an aggregate amount not to exceed
10% of the value of its total assets at the time of borrowing. In
addition, although not a fundamental policy, the Portfolios intend to
repay any money borrowed before any additional portfolio securities are
purchased. See "Other Information" for a further description regarding
reverse repurchase agreements.
8. 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; or
9. Invest more than 25% of its total assets in the securities of
companies primarily engaged in any one industry, provided that: (i)
this limitation does not apply to obligations issued or guaranteed by
the U.S. Government, its agencies and instrumentalities; (ii)
municipalities and their agencies and authorities are not deemed to be
industries; and (iii) financial service companies are classified
according to the end users of their services (for example, automobile
finance, bank finance, and diversified finance will be considered
separate industries).
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.
The following non-fundamental investment restrictions may be changed with
respect to each 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:
1. Invest more than 15% of its net assets in illiquid securities,
including time deposits and repurchase agreements that mature in more
than seven days; or
4
<PAGE> 138
2. Purchase securities on margin, effect short sales (except that a
Portfolio may obtain such short term credits as may be necessary for
the clearance of purchases or sales of securities) or purchase or sell
call options or engage in the writing of such options.
All Portfolios of the AMR Trust may invest up to 10% of their total
assets in the securities of other investment companies to the extent permitted
by law. A Portfolio of the AMR Trust may incur duplicate advisory or management
fees when investing in another mutual fund.
EQUITY 500 INDEX PORTFOLIO
The following investment restrictions are "fundamental policies" of the
Equity 500 Index Portfolio and may be changed with respect to the Portfolio only
by the majority vote of the Portfolio's outstanding interests, as defined above.
Whenever the S&P 500 Index Fund is requested to vote on a change in the
fundamental policy of the Portfolio, the Fund will hold a meeting of its
shareholders and will cast its votes as instructed by its shareholders. The
percentage of the Fund's votes representing Fund shareholders not voting will be
voted by the Board in the same proportion as the Fund shareholders who do, in
fact, vote.
The Equity 500 Index Portfolio may not:
1. Borrow money or mortgage or hypothecate assets of the Portfolio,
except that in an amount not to exceed 1/3 of the current value of the
Portfolio's net assets, it may borrow money as a temporary measure for
extraordinary or emergency purposes and enter into reverse repurchase
agreements or dollar roll transactions, and except that it may pledge,
mortgage or hypothecate not more than 1/3 of such assets to secure such
borrowings (it is intended that money would be borrowed only from banks
and only either to accommodate requests for the withdrawal of
beneficial interests (redemption of shares) while effecting an orderly
liquidation of portfolio securities or to maintain liquidity in the
event of an unanticipated failure to complete a portfolio security
transaction or other similar situations) or reverse repurchase
agreements, provided that collateral arrangements with respect to
options and futures, including deposits of initial deposit and
variation margin, are not considered a pledge of assets for purposes of
this restriction and except that assets may be pledged to secure
letters of credit solely for the purpose of participating in a captive
insurance company sponsored by the Investment Company Institute; for
additional related restrictions, see clause (1) below. (As an operating
policy, the Portfolio may not engage in dollar roll transactions).
2. Underwrite securities issued by other persons except insofar as the
Portfolio may technically be deemed an underwriter under the Securities
Act of 1933 (the "1933 Act") in selling a portfolio security.
3. Make loans to other persons except: (a) through the use of
repurchase agreements or the purchase of short-term obligations; or (b)
by purchasing a portion of an issue of debt securities of types
distributed publicly or privately.
4. Purchase or sell real estate (including limited partnership
interests but excluding securities secured by real estate or interests
therein), interests in oil, gas or mineral leases, commodities or
commodity contracts (except futures and option contracts) in the
ordinary course of business (except that the Portfolio may hold and
sell, for the Portfolio's portfolio, real estate acquired as a result
of the Portfolio's ownership of securities).
5. Concentrate its investments in any particular industry (excluding
U.S. Government securities), but if it is deemed appropriate for the
achievement of the Portfolio's investment objective, up to 25% of its
total assets may be invested in any one industry.
6. Issue any senior security (as that term is defined in the 1940 Act)
if such issuance is specifically prohibited by the 1940 Act or the
rules and regulations promulgated thereunder, provided that collateral
arrangements with respect to options and futures, including deposits of
initial deposit and variation margin, are not considered to be the
issuance of a senior security for purposes of this restriction.
In order to comply with certain statutes and policies the Equity 500
Index Portfolio will not as a matter of operating policy:
5
<PAGE> 139
1. Borrow money (including through dollar roll transactions) for any
purpose in excess of 10% of the Portfolio's total assets (taken at
cost) except that the Portfolio may borrow for temporary or emergency
purposes up to 1/3 of its total assets.
2. Pledge, mortgage or hypothecate for any purpose in excess of 10% of
the Portfolio's total assets (taken at market value), provided that
collateral arrangements with respect to options and futures, including
deposits of initial deposit and variation margin, are not considered a
pledge of assets for purposes of this restriction.
3. Purchase any security or evidence of interest therein on margin,
except that such short-term credit as may be necessary for the
clearance of purchases and sales of securities may be obtained and
except that deposits of initial deposit and variation margin may be
made in connection with the purchase, ownership, holding or sale of
futures.
4. Sell any security that it does not own unless by virtue of its
ownership of other securities it has at the time of sale a right to
obtain securities, without payment of further consideration, equivalent
in kind and amount to the securities sold and provided that if such
right is conditional the sale is made upon the same conditions.
5. Invest for the purpose of exercising control or management.
6. Purchase securities issued by any investment company except by
purchase in the open market where no commission or profit to a sponsor
or dealer results from such purchase other than the customary broker's
commission, or except when such purchase, though not made in the open
market, is part of a plan of merger or consolidation; provided,
however, that securities of any investment company will not be
purchased for the Portfolio if such purchase at the time thereof would
cause: (a) more than 10% of the Portfolio's total assets (taken at the
greater of cost or market value) to be invested in the securities of
such issuers; (b) more than 5% of the Portfolio's total assets (taken
at the greater of cost or market value) to be invested in any one
investment company; or (c) more than 3% of the outstanding voting
securities of any such issuer to be held for the Portfolio; and,
provided further that, except in the case of merger or consolidation,
the Portfolio shall not invest in any other open-end investment company
unless the Portfolio (1) waives the investment advisory fee with
respect to assets invested in other open-end investment companies and
(2) incurs no sales charge in connection with the investment (as an
operating policy, the Portfolio will not invest in another open-end
registered investment company).
7. Invest more than 15% of the Portfolio's net assets (taken at the
greater of cost or market value) in securities that are illiquid or not
readily marketable not including (a) Rule 144A securities that have
been determined to be liquid by the Equity 500 Index Portfolio Board;
and (b) commercial paper that is sold under section 4(2) of the 1933
Act which: (i) is not traded flat or in default as to interest or
principal; and (ii) is rated in one of the two highest categories by at
least two nationally recognized statistical rating organizations and
the Equity 500 Index Portfolio Board has determined the commercial
paper to be liquid; or (iii) is rated in one of the two highest
categories by one nationally recognized statistical rating agency and
the Equity 500 Index Portfolio Board has determined that the commercial
paper is equivalent quality and is liquid.
8. Invest more than 10% of the Portfolio's total assets (taken at the
greater of cost or market value) in securities that are restricted as
to resale under the 1933 Act (other than Rule 144A securities deemed
liquid by the Equity 500 Index Portfolio Board).
9. No more than 5% of the Portfolio's total assets are invested in
securities issued by issuers which (including predecessors) have been
in operation less than three years.
10. With respect to 75% of the Portfolio's total assets, purchase
securities of any issuer if such purchase at the time thereof would
cause the Portfolio to hold more than 10% of any class of securities of
such issuer, for which purposes all indebtedness of an issuer shall be
deemed a single class and all preferred stock of an issuer shall be
deemed a single class, except that futures or option contracts shall
not be subject to this restriction.
11. If the Portfolio is a "diversified" fund with respect to 75% of its
assets, invest more than 5% of its total assets in the securities
(excluding U.S. Government securities) of any one issuer.
6
<PAGE> 140
12. Purchase or retain in the Portfolio's portfolio any securities
issued by an issuer any of whose officers, directors, trustees or
security holders is an officer or Trustee of the Equity 500 Index
Portfolio, or is an officer or partner of BT, if after the purchase of
the securities of such issuer for the Portfolio one or more of such
persons owns beneficially more than 1/2 of 1% of the shares or
securities, or both, all taken at market value, of such issuer, and
such persons owning more than 1/2 of 1% of such shares or securities
together own beneficially more than 5% of such shares or securities, or
both, all taken at market value.
13. Invest more than 5% of the Portfolio's net assets in warrants
(valued at the lower of cost or market) (other than warrants acquired
by the Portfolio as part of a unit or attached to securities at the
time of purchase), but not more than 2% of the Portfolio's net assets
may be invested in warrants not listed on the NYSE or the AMEX.
14. Make short sales of securities or maintain a short position, unless
at all times when a short position is open it owns an equal amount of
such securities or securities convertible into or exchangeable, without
payment of any further consideration, for securities of the same issue
and equal in amount to, the securities sold short, and unless not more
than 10% of the Portfolio's net assets (taken at market value) is
represented by such securities, or securities convertible into or
exchangeable for such securities, at any one time (the Portfolio has no
current intention to engage in short selling).
15. Write puts and calls on securities unless each of the following
conditions are met: (a) the security underlying the put or call is
within the investment policies of the Portfolio and the option is
issued by the Options Clearing Corporation, except for put and call
options issued by non-U.S. entities or listed on non-U.S. securities or
commodities exchanges; (b) the aggregate value of the obligations
underlying the puts determined as of the date the options are sold
shall not exceed 5% of the Portfolio's net assets; (c) the securities
subject to the exercise of the call written by the Portfolio must be
owned by the Portfolio at the time the call is sold and must continue
to be owned by the Portfolio until the call has been exercised, has
lapsed, or the Portfolio has purchased a closing call, and such
purchase has been confirmed, thereby extinguishing the Portfolio's
obligation to deliver securities pursuant to the call it has sold; and
(d) at the time a put is written, the Portfolio establishes a
segregated account with its custodian consisting of cash or short-term
U.S. Government securities equal in value to the amount the Portfolio
will be obligated to pay upon exercise of the put (this account must be
maintained until the put is exercised, has expired, or the Portfolio
has purchased a closing put, which is a put of the same series as the
one previously written).
16. Buy and sell puts and calls on securities, stock index futures or
options on stock index futures, or, financial futures or options on
financial futures unless such options are written by other persons and:
(a) the options or futures are offered through the facilities of a
national securities association or are listed on a national securities
or commodities exchange, except for put and call options issued by
non-U.S. entities or listed on non-U.S. securities or commodities
exchanges; (b) the aggregate premiums paid on all such options which
are held at any time do not exceed 20% of the Portfolio's total net
assets; and (c) the aggregate margin deposits required on all such
futures or options thereon held at any time do not exceed 5% of the
Portfolio's total assets.
7
<PAGE> 141
TEMPORARY DEFENSIVE POSITION
While assuming a temporary defensive position, a Fund may invest in cash
or cash equivalent short-term investment grade obligations, including:
obligations of the U.S. Government, its agencies and instrumentalities;
corporate debt securities, such as commercial paper, master demand notes, loan
participation interests, medium-term notes and funding agreements; Yankeedollar
and Eurodollar bank certificates of deposit, time deposits, and banker's
acceptances; asset-backed securities; and repurchase agreements involving the
foregoing obligations.
PORTFOLIO TURNOVER
Following is a list of the Funds' corresponding Portfolios exhibiting
significant variation in the portfolio turnover rate for the fiscal years ended
October 31, 1997 and 1998.
<TABLE>
<CAPTION>
Portfolio 1997 1998
- --------- ---- ----
<S> <C> <C>
Balanced 105% %
Short-Term Bond 282% %
</TABLE>
High portfolio turnover can increase a Fund's transaction costs and
generate additional capital gains or losses. The high portfolio turnover rate
for the Balanced Portfolio for 1997 was due to an unusually large redemption in
the Balanced Fund. The portfolio turnover rate for the Short-Term Bond Fund may
continue to exceed 100% due to the active style in which the portfolio is
managed in response to changes in market conditions.
TRUSTEES AND OFFICERS OF THE TRUST AND THE AMR TRUST
The Board provides broad supervision over the Trust's affairs. The
Manager is responsible for the management of Trust assets, and the Trust's
officers are responsible for the Trust's operations. The Trustees and officers
of the Trust and AMR Trust are listed below, together with their principal
occupations during the past five years. Unless otherwise indicated, the address
of each person listed below is 4333 Amon Carter Boulevard, MD 5645, Fort Worth,
Texas 76155.
<TABLE>
<CAPTION>
POSITION WITH
NAME, AGE AND ADDRESS EACH TRUST PRINCIPAL OCCUPATION DURING PAST 5 YEARS
--------------------- ------------- ----------------------------------------
<S> <C> <C>
William F. Quinn* (51) Trustee and President President, AMR Investment Services, Inc. (1986-Present);
Chairman, American Airlines Employees Federal Credit Union
(1989-Present); Trustee, American Performance Funds
(1990-1994); Director, Crescent Real Estate Equities, Inc.
(1994-Present); Trustee, American AAdvantage Mileage Funds
(1995-Present).
Alan D. Feld (61) Trustee Partner, Akin, Gump, Strauss, Hauer & Feld, LLP
1700 Pacific Avenue (1960-Present)#; Director, Clear Channel Communications
Suite 4100 (1984-Present); Director, CenterPoint Properties, Inc.
Dallas, Texas 75201 (1994-Present); Trustee, American AAdvantage Mileage Funds
(1996-Present).
Ben J. Fortson (66) Trustee President and CEO, Fortson Oil Company (1958-Present);
301 Commerce Street Director, Kimbell Art Foundation (1964-Present); Director,
Suite 3301 Burnett Foundation (1987-Present); Honorary Trustee, Texas
Fort Worth, Texas 76102 Christian University (1986-Present); Trustee, American
AAdvantage Mileage Funds (1996-Present).
</TABLE>
8
<PAGE> 142
<TABLE>
<CAPTION>
POSITION WITH
NAME, AGE AND ADDRESS EACH TRUST PRINCIPAL OCCUPATION DURING PAST 5 YEARS
--------------------- ------------- ----------------------------------------
<S> <C> <C>
John S. Justin (82) Trustee Chairman and Chief Executive Officer, Justin Industries,
2821 West Seventh Street Inc. (a diversified holding company) (1969-Present);
Fort Worth, Texas 76107 Executive Board Member, Blue Cross/Blue Shield of Texas
(1985-Present); Board Member, Zale Lipshy Hospital
(1993-Present); Trustee, Texas Christian University
(1980-Present); Director and Executive Board Member,
Moncrief Radiation Center (1985-Present); Director, Texas
New Mexico Enterprises (1984-1993); Director, Texas New
Mexico Power Company (1979-1993); Trustee, American
AAdvantage Mileage Funds (1995-Present).
Stephen D. O'Sullivan (63) Trustee Consultant (1994-Present); Vice President and Controller
(1985-1994), American Airlines, Inc.; Trustee, American
AAdvantage Mileage Funds (1995-Present).
Roger T. Staubach (56) Trustee Chairman of the Board and Chief Executive Officer of The
6750 LBJ Freeway Staubach Company (a commercial real estate company)
Dallas, Texas 75240 (1982-Present); Director, Halliburton Company
(1991-Present); Director, Brinker International
(1993-Present); Director, International Home Foods, Inc.
(1997-Present); National Advisory Board, The Salvation
Army; Trustee, Institute for Aerobics Research; Member,
Executive Council, Daytop/Dallas; Member, National Board
of Governors, United Way of America; former quarterback of
the Dallas Cowboys professional football team; Trustee,
American AAdvantage Mileage Funds (1995-Present).
Kneeland Youngblood (42) Trustee President, Youngblood Enterprises, Inc. (a private
2305 Cedar Springs Road business management firm) (1983-Present); Trustee,
Suite 401 Teachers Retirement System of Texas (1993-Present);
Dallas, Texas 75201 Director, United States Enrichment Corporation
(1993-Present), Director, Just For the Kids
(1995-Present); Director, Starwood Financial Trust
(1998-Present); Member, Council on Foreign Relations
(1995-Present); Trustee, American AAdvantage Mileage Funds
(1996-Present).
Nancy A. Eckl (36) Vice President Vice President, AMR Investment Services, Inc.
(1990-Present).
Michael W. Fields (45) Vice President Vice President, AMR Investment Services, Inc.
(1988-Present).
Barry Y. Greenberg (35) Vice President and Vice President, AMR Investment Services, Inc.
Assistant Secretary (1995-Present); Branch Chief (1992-1995) and Staff
Attorney (1988-1992), Securities and Exchange Commission.
Rebecca L. Harris (32) Treasurer Vice President, Finance (1995-Present), Controller (1991-
1995), AMR Investment Services, Inc.
John B. Roberson (40) Vice President Vice President, AMR Investment Services, Inc.
(1991-Present).
Robert J. Zutz (46) Secretary Partner, Kirkpatrick & Lockhart LLP (law firm)
1800 Massachusetts Ave. NW
Washington, D.C. 20036
</TABLE>
9
<PAGE> 143
* Mr. Quinn, by virtue of his current position with the Manager, is deemed
to be an "interested person" of the Trust and AMR Trust as defined by the
1940 Act.
# 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.
All Trustees and officers as a group own less than 1% of the outstanding
shares of any of the Funds.
As compensation for their service to the Trust and the AMR Trust, the
Independent Trustees and their spouses receive free air travel from American
Airlines, Inc., an affiliate of the Manager. The Trust and the AMR Trust do not
pay for these travel arrangements. However, the Trusts compensate each Trustee
with payments in an amount equal to the Trustees' income tax on the value of
this free airline travel. Mr. O'Sullivan, as a retiree of American Airlines,
Inc., already receives flight benefits. The Trusts compensate Mr. O'Sullivan
annually up to $10,000 to cover his personal flight service charges and the
charges for his three adult children, as well as any income tax charged on the
value of these flight benefits. Trustees are also reimbursed for any expenses
incurred in attending Board meetings. These amounts (excluding reimbursements)
are reflected in the following table for the fiscal year ended October 31, 1998.
<TABLE>
<CAPTION>
Total Compensation
Aggregate Pension or Retirement From American
Compensation Benefits Accrued as Part Estimated Annual AAdvantage Funds
From the of the Benefits Upon Complex
Name of Trustee Trust Trust's Expenses Retirement (30 Funds)
- --------------- ------------ ------------------------ ---------------- ------------------
<S> <C> <C> <C> <C>
William F. Quinn $0 $0 $0 $0
Alan D. Feld $XX,XXX $0 $0 $XX,XXX
Ben J. Fortson $XX,XXX $0 $0 $XX,XXX
John S. Justin $XX,XXX $0 $0 $XX,XXX
Stephen D. O'Sullivan $XX,XXX $0 $0 $XX,XXX
Roger T. Staubach $XX,XXX $0 $0 $XX,XXX
Kneeland Youngblood $XX,XXX $0 $0 $XX,XXX
</TABLE>
TRUSTEES AND OFFICERS OF THE EQUITY 500 INDEX PORTFOLIO
The Equity 500 Index Portfolio Board oversees the activities of the
Equity 500 Index Portfolio and reviews contractual arrangements with companies
that provide services to the Portfolio. The Trustees and officers of the Equity
500 Index Portfolio and their principal occupations during the past five years
are set forth below. Their titles may have varied during that period. Unless
otherwise indicated, the address of each Trustee and officer is c/o Edgewood
Services, Inc., Clearing Operations, P.O. Box 897, Pittsburgh, PA 15230-0897.
<TABLE>
<CAPTION>
POSITION WITH
EQUITY 500 INDEX
NAME, AGE AND ADDRESS PORTFOLIO PRINCIPAL OCCUPATION DURING PAST 5 YEARS
- --------------------- ------------------- ----------------------------------------
<S> <C> <C>
Charles P. Biggar (67) Trustee Retired; Director of Chase/NBW Bank Advisory Board;
12 Hitching Post Lane Director, Batemen, Eichler, Hill Richards Inc.; formerly
Chappaqua, NY 10514 Vice President of International Business Machines and
President of the National Services and the Field Engineering
Divisions of IBM.
S. Leland Dill (67) Trustee Retired; Director, Coutts Group, Coutts (U.S.A.)
5070 North Ocean Drive International, and Coutts Trust Holdings Ltd.; Director,
Singer Island, FL 33404 Zweig Series Trust; formerly Partner of KPMG Peat Marwick;
Director, Vinters International Company Inc.; General
Partner of Pemco (an investment company
</TABLE>
10
<PAGE> 144
<TABLE>
<CAPTION>
POSITION WITH
EQUITY 500 INDEX
NAME, AGE AND ADDRESS PORTFOLIO PRINCIPAL OCCUPATION DURING PAST 5 YEARS
- --------------------- ------------------- ----------------------------------------
<S> <C> <C>
registered under the 1940 Act).
Philip Saunders, Jr. (62) Trustee Principal, Philip Saunders Associates (Consulting); former
445 Glen Road Director of Financial Industry Consulting, Wolf & Company;
Weston, MA 02193 President, John Hancock Home Mortgage Corporation; and
Senior Vice President of Treasury and Financial Services,
John Hancock Mutual Life Insurance Company, Inc.
Ronald M. Petnuch (38) President and Treasurer Senior Vice President, Federated Services Company ("FSC");
formerly Director of Proprietary Client Services, Federated
Administrative Services ("FAS") and formerly Associate
Corporate Counsel, Federated Investors ("FI").
Charles L. Davis, Jr. (37) Vice President and Vice President, FAS.
Assistant Treasurer
Jay S. Neuman (47) Secretary Corporate Counsel, FI.
</TABLE>
No person who is an officer or director of BT is an officer or Trustee
of the Equity 500 Index Portfolio. No director, officer or employee of Edgewood
Services, Inc. ("Edgewood") or any of its affiliates will receive any
compensation from the Equity 500 Index Portfolio for serving as an officer or
Trustee of the Equity 500 Index Portfolio. The Portfolio and certain other
investment companies advised by BT (the "BT Funds Complex") collectively pay
each Trustee who is not a director, officer or employee of BT, Edgewood, or any
of their affiliates an annual fee of $10,000, respectively, per annum plus
$1,250, respectively, per meeting attended and reimburses them for travel and
out-of-pocket expenses. For the years ended December 31, 1996, 1997, and 1998
the Equity 500 Index Portfolio incurred Trustees fees equal to $9,865 and
$2,723, and $X,XXX respectively.
The following table reflects fees paid to the Trustees of the Equity
500 Index Portfolio for their services to that Portfolio and to certain other
investment companies advised by BT (the "BT Funds Complex") for the year ended
December 31, 1998.
<TABLE>
<CAPTION>
TOTAL COMPENSATION FROM
AGGREGATE COMPENSATION BT FUNDS COMPLEX
FROM THE EQUITY PAID TO TRUSTEES
NAME OF TRUSTEE 500 INDEX PORTFOLIO (24 FUNDS)
- --------------- ---------------------- -----------------------
<S> <C> <C>
Charles P. Biggar $XXXX $XXXX
S. Leland Dill $XXXX $XXXX
Philip Saunders, Jr. $XXXX $XXXX
</TABLE>
11
<PAGE> 145
CONTROL PERSONS AND 5% SHAREHOLDERS
The following persons may be deemed to control certain Funds by virtue of
their ownership of more than 25% of the outstanding shares of a Fund as of
January 31, 1999:
<TABLE>
<S> <C>
American AAdvantage Balanced Fund
AMR Corporation and subsidiary companies and Employee Benefit Trusts thereof.....................XX%
4333 Amon Carter Boulevard
Fort Worth, TX 76155
American AAdvantage Growth and Income Fund
AMR Corporation and subsidiary companies and Employee Benefit Trusts thereof.....................XX%
4333 Amon Carter Boulevard
Fort Worth, TX 76155
American AAdvantage International Equity Fund
AMR Corporation and subsidiary companies and Employee Benefit Trusts thereof.....................XX%
4333 Amon Carter Boulevard
Fort Worth, TX 76155
American AAdvantage Intermediate Bond Fund
AMR Corporation and subsidiary companies and Employee Benefit Trusts thereof.....................XX%
4333 Amon Carter Boulevard
Fort Worth, TX 76155
American AAdvantage Small Cap Value Fund
AMR Corporation and subsidiary companies and Employee Benefit Trusts thereof.....................XX%
4333 Amon Carter Boulevard
Fort Worth, TX 76155
</TABLE>
AMR Corporation and subsidiary companies and Employee Benefit Trusts
thereof own 100% of the S&P 500 Index Fund and 100% of the shares of the AMR
Class of the Balanced Fund, the Growth and Income Fund, the International Equity
Fund and the Short-Term Bond Fund.
In addition, the following persons own 5% or more of the outstanding
shares of a Fund or Class as of January 31, 1999:
<TABLE>
<CAPTION>
Total Institutional PlanAhead
American AAdvantage Balanced Fund Fund Class Class
- --------------------------------- ----- ------------- ---------
<S> <C> <C> <C>
Sky Chefs Master Trust XX% XX%
601 Ryan Plaza Drive
Arlington, TX 76011
</TABLE>
<TABLE>
<CAPTION>
Total Institutional PlanAhead
American AAdvantage Growth and Income Fund Fund Class Class
- ------------------------------------------ ----- ------------- ---------
<S> <C> <C> <C>
Berg Electronics Inc. Savings Plan XX%
4 New York Plaza - EBS 4th. Floor
New York, NY 10004-2413
Charles Schwab & Co.* XX%*
4500 Cherry Creek Dr. South, Suite 700
Denver, CO 80222
Coca-Cola Retirement Plan X%
Hamill and Company (Trust Operations)
P.O. Box 2558
Houston, TX 77252-2558
National Financial Services Corp.* XX%* XX%*
P.O. Box 3908
New York, NY 10163-3908
Technical Products Group Inc. Retirement & Savings Plan X%
3353 Peachtree Road, Suite 920
Atlanta, GA 30326-1053
Wachovia Bank of North Carolina X%
P.O. Box 3073
Winston-Salem, NC 27150
</TABLE>
12
<PAGE> 146
<TABLE>
<CAPTION>
Total Institutional PlanAhead
American AAdvantage International Equity Fund Fund Class Class
- --------------------------------------------- ----- ------------- ---------
<S> <C> <C> <C>
The Burnett Foundation XX%
801 Cherry Street, Suite 1400
Fort Worth, TX 76102 X%* XX%* XX%*
Charles Schwab & Co.*
101 Montgomery Street
San Francisco, CA 94104-4122 XX%*
Fidelity Investments Institutional Operations Co. Inc.*
100 Magellan Way
Covington, KY 41015-1999 XX%*
IBJ Distributor Inc. FBO INTRUST Bank*
3435 Stelzer Road, Suite 1000
Columbus, OH 43219-6004 x%
The Kimbell Art Foundation
301 Commerce Street, Suite 2240
Fort Worth, TX 76102 X%
MAC & Co.
P.O. Box 3198
Pittsburgh, PA 15230-3198 X%* X%*
NA Bank & Co.*
P.O. Box 2180
Tulsa, Oklahoma 74101-2180 XX%* X%*
National Financial Services Corp.*
P.O. Box 3908
New York, NY 10163-3908
</TABLE>
*Denotes record owner of Fund shares only
<TABLE>
<CAPTION>
Total Institutional PlanAhead
American AAdvantage International Equity Fund (cont'd.) Fund Class Class
- ------------------------------------------------------- ----- ------------- ---------
<S> <C> <C> <C>
University of Tulsa X%
600 S. College Ave.
Tulsa, OK 74104
</TABLE>
<TABLE>
<CAPTION>
Total Institutional PlanAhead
American AAdvantage Intermediate Bond Fund Fund Class Class
- ------------------------------------------ ----- ------------- ---------
<S> <C> <C> <C>
National Financial Services Corp.* XXX%* XXX%*
P.O. Box 3908
New York, NY 10163-3908
</TABLE>
<TABLE>
<CAPTION>
Total Institutional PlanAhead
American AAdvantage Short-Term Bond Fund Fund Class Class
- ---------------------------------------- ----- ------------- ---------
<S> <C> <C> <C>
Berg Electronics Inc. Savings Plan XX%
770 Broadway, 10th Floor
New York, NY 10003-9522
Chancellor Limited Partnership X%
c/o Retirement Advisors of America
13155 Noel Road, Floor 24
Dallas, TX 75240-5090
C.R. Smith Museum X%
P.O. Box 619616 MD 5334
Dallas/Fort Worth Airport, TX 75261-9616
</TABLE>
13
<PAGE> 147
<TABLE>
<CAPTION>
Total Institutional PlanAhead
American AAdvantage Short-Term Bond Fund Fund Class Class
- ---------------------------------------- ----- ------------- ---------
<S> <C> <C> <C>
EPR Limited Partnership XX%
c/o Retirement Advisors of America
13155 Noel Road, Floor 24
Dallas, TX 75240-5090
Gale Force Limited Partnership X%
c/o Retirement Advisors of America
13155 Noel Road, Floor 24
Dallas, TX 75240-5090
William N. Hoffman IRA X%
3515 Davis Rd.
Granbury, TX 76049-5469
RIW Limited Partnership XX%
c/o Retirement Advisors of America
13155 Noel Road, Floor 24
Dallas, TX 75240-5090
Charles Schwab & Co.* XX%*
101 Montgomery Street
San Francisco, CA 94104-4122
Technical Products Group Inc. Retirement & Savings Plan Xx%
3353 Peachtree Road, Suite 920
Atlanta, GA 30326-1053
Wachovia Bank of North Carolina XX% XX%
P.O. Box 3073
Winston-Salem, North Carolina 27150
</TABLE>
<TABLE>
<CAPTION>
Total Institutional PlanAhead
American AAdvantage Money Market Fund Fund Class Class
- ------------------------------------- ----- ------------- ---------
<S> <C> <C> <C>
City of Chicago International Airport Revenue Bonds X%
Harris Trust and Savings Bank(Indenture Trust Division)
P.O. Box 755
Chicago, Illinois 60690
Investors Bank & Trust X%
200 Clarendon Street, 16th Floor
Boston, MA 02117-9130
</TABLE>
*Denotes record owner of Fund shares only
<TABLE>
<CAPTION>
Total Institutional PlanAhead
American AAdvantage Money Market Fund (cont'd.) Fund Class Class
- ----------------------------------------------- ---- ------------- ---------
<S> <C> <C> <C>
Michaels Stores, Inc. XX%
P.O. Box 619566
Dallas, TX 75261-9566
State Street Securities Lending X%
2 International Place, Floor 31
Boston, MA 02110-4104
Texas A&M University X%
P.O. Box 1159
College Station, TX 77841-1159
</TABLE>
<TABLE>
<CAPTION>
Total Institutional PlanAhead
American AAdvantage Municipal Money Market Fund Fund Class Class
- ----------------------------------------------- ----- ------------- ---------
<S> <C> <C> <C>
AMR Investment Services, Inc. XX%
4333 Amon Carter Blvd., MD 5645
Fort Worth, TX 76155
Larry M. and Marie S. Brown X%
11 Crestview Drive
Orinda, CA 94563-3919
</TABLE>
14
<PAGE> 148
<TABLE>
<CAPTION>
Total Institutional PlanAhead
American AAdvantage Municipal Money Market Fund Fund Class Class
- ----------------------------------------------- ----- ------------- ---------
<S> <C> <C> <C>
Dralie Partners LTD X%
5604 Banister Court
Plano, TX 75093-4227
Georgia L. Ledbetter Revocable Trust X%
2334 Birdwood Drive
Orange Park, FL 32073-5324
Lee R. Ledbetter Revocable Trust X%
2334 Birdwood Drive
Orange Park, FL 32073-5324
Anne and Martin McNamara X%
9307 Guernsey Lane
Dallas, TX 75220-3929
Merit Partners LP X% XX%
12222 Merit Dr., Suite 1500
Dallas, TX 75251-3206
NA Bank & Co.* X%*
P.O. Box 2180
Tulsa, Oklahoma 74101-2180
Jerome Reed Schusterman Irrevocable Trust XX%
P.O. Box 699
Tulsa, OK 74101-0699
</TABLE>
<TABLE>
Total Institutional PlanAhead
American AAdvantage U.S. Government Money Market Fund Fund Class Class
- ----------------------------------------------------- ----- ------------- ---------
<S> <C> <C> <C>
Bozell Jacobs Kenyon and Eckhardt, Inc. X%
302 South 36th Street
Omaha, NE 68131-3827
British American Insurance Company X%
P.O. Box 1590
Dallas, Texas 75221-1590
Leone C. Campbell Intervivo Trust X%
4000 N. Federal Highway, Suite 206
Boca Raton, FL 33431-4586
Dennis G. Davis X%
8116 Golden Avenue
Lemon Grove, CA 91945-2508
</TABLE>
*Denotes record owner of Fund shares only
<TABLE>
<CAPTION>
Total Institutional PlanAhead
American AAdvantage US Gov't. Money Market Fund (cont'd.) Fund Class Class
- --------------------------------------------------------- ----- ------------- ----------
<S> <C> <C> <C>
Entis Family Trust X%
6645 Nancy Ridge Drive
San Diego, CA 92121-2253
Family Orthopedic Association Profit Sharing Plan X%
8953 Bath Road
Byron, MI 48418-9785
Grapevine Industrial Development Corp. X% X%
First National Bank of Chicago
One First National Plaza, Suite 0126
Chicago, Illinois 60670
Hare & Co. XX% XX%
Bank of New York
One Wall Street
New York, NY 10005-2505
Lone Star Airport Improvement Authority X% XX%
First National Bank of Chicago
One First National Place
Chicago, Illinois 60670
Ray K. Robinson Trust XX%
200 Hillview Drive, Suite 100
Richland, WA 99352-7660
</TABLE>
15
<PAGE> 149
INVESTMENT ADVISORY AGREEMENTS
To the extent that the Funds invest all of their investable assets in a
corresponding portfolio of the AMR Trust, investment advisers receive a fee on
behalf of the Portfolio, and not the corresponding Fund. The following table
reflects the fees paid to the investment advisers from the AMR Trust for the
fiscal years ending October 31, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
Investment Advisory Investment Advisory Investment Advisory
Adviser Fees for 1996 Fees for 1997 Fees for 1998
------- ------------------- ------------------- -------------------
<S> <C> <C> <C>
Barrow, Hanley Mewhinney & Strauss, Inc. $ 862,335 $ 1,052,749 $
Brandywine Asset Management, Inc. $ 297,073 $ 857,875 $
GSB Investment Management, Inc. $ 575,720 $ 804,221 $
Hotchkis and Wiley $ 1,327,731 $ 1,607,851 $
Independence Investment Associates, Inc. $ 893,078 $ 1,110,438 $
Morgan Stanley Asset Management $ 504,731 $ 885,253 $
Templeton Investment Counsel, Inc. $ 410,013 $ 669,848 $
</TABLE>
Under the terms of the Equity 500 Index Portfolio's Investment Advisory
Agreement with BT, BT manages the Equity 500 Index Portfolio subject to the
supervision and direction of the Equity 500 Index Portfolio Board. BT has agreed
to: (1) act in strict conformity with the Equity 500 Index Portfolio's
Declaration of Trust and the 1940 Act, as the same may from time to time be
amended; (2) manage the Equity 500 Index Portfolio in accordance with the
Portfolio's investment objective, restrictions and policies; (3) make investment
decisions for the Equity 500 Index Portfolio; and (4) place purchase and sale
orders for securities and other financial institutions on behalf of the Equity
500 Index Portfolio.
BT bears all expenses in connection with the performance of services
under the Agreement. The S&P 500 Index Fund and the Equity 500 Index Portfolio
each bear certain other expenses incurred in their operation, including: taxes,
interest, brokerage fees and commissions, if any; fees of Trustees of the
Portfolio or Trustees of the Trust who are not officers, directors or employees
of BT, Edgewood, the Manager or any of their affiliates; SEC fees and state Blue
Sky qualification fees; charges of custodians and transfer and dividend
disbursing agents; certain insurance premiums; outside auditing and legal
expenses; costs attributable to investor services, including telephone and
personnel expenses; costs of preparing and printing prospectuses and statements
of additional information for regulatory purposes and for distribution to
existing shareholders; costs of shareholders' reports and meetings of
shareholders, officers and Trustees of the Equity 500 Index Portfolio or
Trustees of the Trust, and any extraordinary expenses.
For the years ended December 31, 1996, 1997 and 1998, BT earned
$1,505,963, $2,430,147 and $XXXXXXX, respectively, as compensation for
investment advisory services provided to the Equity 500 Index Portfolio. During
the same periods, BT reimbursed $870,024, $1,739,490 and $XXXXXXXX respectively,
to the Equity 500 Index Portfolio to cover expenses.
BT may have deposit, loan and other commercial banking relationships with
the issuers of obligations that may be purchased on behalf of the Equity 500
Index Portfolio, including outstanding loans to such issuers that could be
repaid in whole or in part with the proceeds of securities so purchased. Such
affiliates deal, trade and invest for their own accounts in such obligations and
are among the leading dealers of various types of such obligations. BT has
informed the Equity 500 Index Portfolio that, in making its investment
decisions, it does not obtain or use material inside information in its
possession or in the possession of any of its affiliates. In making investment
recommendations for the Equity 500 Index Portfolio, BT will not inquire or take
into consideration whether an issuer of securities proposed for purchase or sale
by the Equity 500 Index Portfolio is a customer of BT, its parent or its
subsidiaries or affiliates and, in dealing with its customers, BT, its parent,
subsidiaries and affiliates will not inquire or take into consideration whether
securities of such customers are held by any fund managed by BT or any such
affiliate.
Each Investment Advisory Agreement will automatically terminate if
assigned, and may be terminated without penalty at any time by the Manager, by a
vote of a majority of the Trustees or by a vote of a majority of the outstanding
voting securities of the applicable Fund on no less than thirty (30) days' nor
more than sixty (60) days'
16
<PAGE> 150
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.
Brokers Transaction Services, Inc. ("BTS"), located at 7001 Preston
Road, Dallas, Texas 75205, is the distributor and principal underwriter of the
Funds' 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.
MANAGEMENT, ADMINISTRATIVE SERVICES AND DISTRIBUTION FEES
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. Pursuant to management and
administrative services agreements, 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:
o complying with reporting requirements;
o corresponding with shareholders;
o maintaining internal bookkeeping, accounting and auditing services and
records; and
o supervising the provision of services to the Trusts by third parties.
In addition to its oversight of the investment advisers, the Manager
invests the portion of Fund assets which the investment advisers determine to be
allocated to high quality short-term debt obligations.
Management fees for the fiscal years ended October 31 were
approximately as follows: 1996, $10,853,000 of which approximately $5,403,000
was paid by the Manager to the other investment advisers; 1997, $13,730,443 of
which $7,061,014 was paid by the Manager to the other investment advisers and
1998, $XX,XXX,XXX of which approximately $X,XXX,XXX was paid by the Manager to
the other investment advisers. Management fees in the amount of approximately
$44,000, $7,309 and $X,XXX were waived by the Manager during the fiscal years
ended October 31, 1996, 1997 and 1998.
Under the Management Agreement, the Manager presently monitors the
services provided by BT to the Equity 500 Index Portfolio. The Manager receives
no fee for providing these monitoring services. In the event that the Board
determines that it is in the best interest of the S&P 500 Index Fund's
shareholders to withdraw its investment from the Equity 500 Index Portfolio, the
Manager would become responsible for directly managing the assets of the S&P 500
Index Fund. In such event, the Fund would pay the Manager an annual fee of up to
0.10% of the Fund's average net assets, accrued daily and paid monthly.
In addition to the management fee, the Manager is paid an
administrative services fee for providing administrative and management services
(other than investment advisory services) to the Funds. Administrative services
fees for the fiscal years ended October 31 were approximately as follows: 1996,
$2,893,400; 1997, $4,538,345 and 1998, $X,XXX,XXX.
The Manager receives compensation for administrative and oversight
functions with respect to securities lending of the Portfolios of the AMR Trust.
Fees received by the Manager from securities lending for the fiscal years ended
October 31 were approximately as follows: 1997, $81,113 and 1998, $XX,XXX.
BT provides administrative services to the Equity 500 Index Portfolio.
Under the administration and services agreement between the Equity 500 Index
Portfolio and BT, BT is obligated on a continuous basis to provide such
administrative services as the Equity 500 Index Portfolio Board reasonably deems
necessary for the proper administration of the Portfolio. BT generally will
assist in all aspects of the Portfolio's operations; supply and maintain office
facilities (which may be in BT's own offices), statistical and research data,
data processing services, clerical, accounting, bookkeeping and recordkeeping
services (including without limitation the maintenance of such books and records
as are required under the 1940 Act and the rules thereunder, except as
maintained by other agents), internal auditing, executive and administrative
services, and stationery and office supplies; prepare reports to investors;
prepare and file tax returns; supply financial information and supporting data
for reports to and filing with the SEC and various state Blue Sky authorities;
supply supporting documentation for meetings of the Equity 500 Index Portfolio
Board; provide monitoring reports and assistance regarding compliance with its
Declaration of Trust, By-Laws, investment objectives and policies and with
Federal and state securities laws; arrange for appropriate insurance
17
<PAGE> 151
coverage; calculate net asset values, net income and realized capital gains or
losses; and negotiate arrangements with, and supervise and coordinate the
activities of, agents and others to supply services.
Pursuant to a sub-administration agreement between BT and Federated
Services Company ("Federated") (the "Sub-Administration Contract"), Federated
performs such sub-administration duties for the Equity 500 Index Portfolio as
from time to time may be agreed upon by BT and Federated. The Sub-Administration
Contract provides that Federated will receive such compensation as from time to
time may be agreed upon by Federated and BT. All such compensation will be paid
by BT.
For the years ended December 31, 1996, 1997 and 1998, BT earned,
$752,981, $1,215,073 and $X,XXX,XXX, respectively, as compensation for
administrative and other services provided to the Equity 500 Index Portfolio.
The PlanAhead Class has adopted a service plan ("Service Plan") which
provides that each Fund's PlanAhead Class will pay 0.25% per annum of its
average daily net assets to the Manager (or another entity approved by the
Board). The Manager or these approved entities may spend such amounts on any
activities or expenses primarily intended to result in or relate to the
servicing of PlanAhead Class shares including but not limited to payment of
shareholder service fees and transfer agency or sub-transfer agency expenses.
The fee, which is included as part of a Fund's "Other Expenses" in the Table of
Fees and Expenses in the PlanAhead Class Prospectus, will be payable monthly in
arrears without regard to whether the amount of the fee is more or less than the
actual expenses incurred in a particular month by the entity for the services
provided pursuant to the Service Plan. The primary expenses expected to be
incurred under the Service Plan are transfer agency fees and servicing fees paid
to financial intermediaries such as plan sponsors and discount brokers.
OTHER SERVICE PROVIDERS
The transfer agent for the Trust is State Street Bank & Company ("State
Street"), Boston, Massachusetts, who provides transfer agency services to Fund
shareholders directly and through its affiliate National Financial Data
Services, Kansas City, Missouri. State Street also serves as custodian for the
Portfolios of the AMR Trust and the Funds. Bankers Trust Company, New York, NY,
serves as custodian and transfer agent for the assets of the Equity 500 Index
Portfolio. The independent auditor for the Funds (except as noted otherwise) and
the AMR Trust is Ernst & Young LLP, Dallas, Texas. The independent auditor for
the S&P 500 Index Fund and the Equity 500 Index Portfolio is
PricewaterhouseCoopers LLP, Baltimore, Maryland.
PORTFOLIO SECURITIES TRANSACTIONS
Each investment adviser will place its own orders to execute securities
transactions which are designed to implement the applicable Portfolio's
investment objective and policies. In placing such orders, each investment
adviser will seek the best available price and most favorable execution. The
full range and quality of services offered by the executing broker or dealer
will be considered when making these determinations. Pursuant to written
guidelines approved by the AMR Trust Board, as appropriate, an investment
adviser of a Portfolio, or its affiliated broker-dealer, may execute portfolio
transactions and receive usual and customary brokerage commissions (within the
meaning of Rule 17e-1 of the 1940 Act) for doing so. A Portfolio's turnover
rate, or the frequency of portfolio transactions, will vary from year to year
depending on market conditions and the Portfolio's cash flows. High portfolio
activity increases a Portfolio's transaction costs, including brokerage
commissions, and may result in a greater number of taxable transactions.
The Investment Advisory Agreements provide, in substance, that in
executing portfolio transactions and selecting brokers or dealers, the principal
objective of each investment adviser is to seek the best net price and execution
available. It is expected that securities ordinarily will be purchased in the
primary markets, and that in assessing the best net price and execution
available, each investment adviser shall consider all factors it deems relevant,
including the breadth of the market in the security, the price of the security,
the financial condition and execution capability of the broker or dealer and the
reasonableness of the commission, if any, for the specific transaction and on a
continuing basis.
BT may utilize the expertise of any of its worldwide subsidiaries and
affiliates to assist in its role as investment adviser. All orders for
investment transactions on behalf of the Equity 500 Index Portfolio are placed
by BT with broker-dealers and other financial intermediaries that it selects,
including those affiliated with BT. A BT affiliate will be used in connection
with a purchase or sale of an investment for the Equity 500 Index Portfolio only
if BT believes that the affiliate's charge for the transaction does not exceed
usual and customary levels. The Equity 500 Index Portfolio will not invest in
obligations for which BT or any of its affiliates is the ultimate obligor or
accepting bank. The Portfolio may, however, invest in the obligations of
correspondents and customers of BT.
In selecting brokers or dealers to execute particular transactions,
investment advisers are authorized to consider "brokerage and research services"
(as those terms are defined in Section 28(e) of the Securities Exchange Act of
1934), provision of statistical quotations (including the quotations necessary
to determine a Portfolio's net asset value), the sale of Trust shares by such
broker-dealer or the servicing of Trust shareholders by such broker-dealer, and
other information provided to the applicable Portfolio, to the Manager, BT
and/or to the investment advisers (or their affiliates), provided, however, that
the investment adviser determines that it has received the best net price and
execution available. The investment advisers are also authorized to cause a
Portfolio to pay a commission to a
18
<PAGE> 152
broker or dealer who provides such brokerage and research services for executing
a portfolio transaction which is in excess of the amount of the commission
another broker or dealer would have charged for effecting that transaction. The
Trustees, the Manager or the investment advisers, as appropriate, must determine
in good faith, however, that such commission was reasonable in relation to the
value of the brokerage and research services provided viewed in terms of that
particular transaction or in terms of all the accounts over which the Manager or
the investment adviser exercises investment discretion.
For the fiscal years ended October 31, 1996, 1997 and 1998, the following
brokerage commissions were paid by the Portfolios:
<TABLE>
<CAPTION>
Portfolio 1996 1997 1998
- --------- ---------- ---------- ----
<S> <C> <C> <C>
Balanced $ 503,947 $ 562,493 $
Growth and Income $ 956,767 $1,192,792 $
International Equity $ 544,844 $ 956,160 $
Intermediate Bond* N/A $ 0 $
Short-Term Bond $ 0 $ 0 $0
Money Market Funds $ 0 $ 0 $0
</TABLE>
*The Intermediate Bond Portfolio commenced operations on September 15, 1997.
For the fiscal years ended December 31, 1996, 1997 and 1998 the Equity
500 Index Portfolio paid the following brokerage commissions: $289,791, $341,058
and $XXXXXX. The S&P 500 Index Fund was not operational during 1995 and 1996.
Shareholders of the S&P 500 Index Fund bear only their pro-rata portion of the
brokerage commissions paid during 1997 and 1998.
The fees of the investment advisers are not reduced by reason of receipt
of such brokerage and research services. However, with disclosure to and
pursuant to written guidelines approved by the AMR Trust Board, or the Equity
500 Index Portfolio Board, an investment adviser of a Portfolio or its
affiliated broker-dealer may execute portfolio transactions and receive usual
and customary brokerage commissions (within the meaning of Rule 17e-1 under the
1940 Act) for doing so.
During the fiscal year ended October 31, 1996, the following commissions
were paid to affiliated brokers:
<TABLE>
<CAPTION>
Portfolio Broker Affiliated With Commission
- --------- ------- --------------- ----------
<S> <C> <C> <C>
Balanced Sutro & Company Independence Investment Associates $125
Growth and Income Sutro & Company Independence Investment Associates $2,750
International Equity Fleming Martin Rowe-Price Fleming International, Inc. $2,142
International Equity Jardine Fleming Rowe-Price Fleming International, Inc. $1,002
International Equity Ord Minnett Rowe-Price Fleming International, Inc. $2,051
International Equity Robert Fleming & Co. Rowe-Price Fleming International, Inc. $20,129
International Equity Morgan Stanley Intl. Morgan Stanley Asset Management Inc. $3,892
</TABLE>
The percentages of total commissions of the Balanced Portfolio, the
Growth and Income Portfolio and the International Equity Portfolio paid to
affiliated brokers in 1996 were 0.02%, 0.29% and 2.68%, respectively. The
transactions represented 0.03% of the Balanced Portfolio, 0.25% of the Growth
and Income Portfolio and 2.2% of the International Equity Portfolio's total
dollar value of portfolio transactions for the fiscal year ended October 31,
1996.
During the fiscal year ended October 31, 1997, the following commissions
were paid to affiliated brokers:
<TABLE>
<CAPTION>
Portfolio Broker Affiliated With Commission
- --------- ------- --------------- ----------
<S> <C> <C> <C>
Balanced Merrill Lynch & Co. Hotchkis and Wiley $105,166
Growth and Income Merrill Lynch & Co. Hotchkis and Wiley $43,886
International Equity Jardine Fleming Rowe-Price Fleming International, Inc. $3,260
International Equity Ord Minnett Rowe-Price Fleming International, Inc. $13,141
International Equity Robert Fleming & Co. Rowe-Price Fleming International, Inc. $81,109
International Equity Morgan Stanley Intl. Morgan Stanley Asset Management Inc. $5,413
International Equity Merrill Lynch & Co. Hotchkis and Wiley $50,428
</TABLE>
The percentages of total commissions of the Balanced Portfolio, the
Growth and Income Portfolio and the International Equity Portfolio paid to
affiliated brokers in 1997 were 8.82%, 7.80% and 16.04%, respectively. The
19
<PAGE> 153
transactions represented 5.75% of the Balanced Portfolio, 6.20% of the Growth
and Income Portfolio and 9.2% of the International Equity Portfolio's total
dollar value of portfolio transactions for the fiscal year ended October 31,
1997.
During the fiscal year ended October 31, 1998, the following commissions
were paid to affiliated brokers:
<TABLE>
<CAPTION>
Portfolio Broker Affiliated With Commission
- --------- ------ --------------- ----------
<S> <C> <C> <C>
</TABLE>
In certain instances there may be securities that are suitable for the
Equity 500 Index Portfolio as well as for one or more of BT's other clients.
Investment decisions for the Equity 500 Index Portfolio and for BT's other
clients are made with a view to achieving their respective investment
objectives. It may develop that a particular security is bought or sold for only
one client even though it might be held by, or bought or sold for, other
clients. Likewise, a particular security may be bought for one or more clients
when one or more clients are selling that same security. Some simultaneous
transactions are inevitable when several clients receive investment advice from
the same investment adviser, particularly when the same security is suitable for
the investment objectives of more than one client. When two or more clients are
simultaneously engaged in the purchase or sale of the same security, the
securities are allocated among clients in a manner believed to be equitable to
each. It is recognized that in some cases this system could have a detrimental
effect on the price or volume of the security as far as the Equity 500 Index
Portfolio is concerned. However, it is believed that the ability of the Equity
500 Index Portfolio to participate in volume transactions will produce better
executions for the Portfolio.
REDEMPTIONS IN KIND
Although each Fund intends to redeem shares in cash, each reserves the
right to pay the redemption price in whole or in part by a distribution of
readily marketable securities held by the applicable Fund's corresponding
Portfolio. However, shareholders always will be entitled to redeem shares for
cash up to the lesser of $250,000 or 1% of the applicable Fund's net asset value
during any 90-day period. Redemption in kind is not as liquid as a cash
redemption. In addition, if redemption is made in kind, shareholders who receive
securities and sell them could receive less than the redemption value of their
securities and could incur certain transactions costs.
NET ASSET VALUE
It is the policy of the Money Market Fund, the Municipal Money Market
Fund and the U.S. Government Money Market Fund (collectively the "Money Market
Funds") to attempt to maintain a constant price per share of $1.00. There can be
no assurance that a $1.00 net asset value per share will be maintained. The
portfolio instruments held by the Money Market Funds' corresponding Portfolios
are valued based on the amortized cost valuation technique pursuant to Rule 2a-7
under the 1940 Act. This involves valuing an instrument at its cost and
thereafter assuming a constant amortization to maturity of any discount or
premium, even though the portfolio security may increase or decrease in market
value. Such market fluctuations are generally in response to changes in interest
rates. Use of the amortized cost valuation method requires the corresponding
Portfolios of the Money Market Funds to purchase instruments having remaining
maturities of 397 days or less, to maintain a dollar weighted average portfolio
maturity of 90 days or less, and to invest only in securities determined by the
Trustees to be of high quality with minimal credit risks. The corresponding
portfolios of the Money Market Funds may invest in issuers or instruments that
at the time of purchase have received the highest short-term rating by two
Rating Organizations, such as "D-1" by Duff & Phelps and "F-1" by Fitch IBCA,
Inc., and have received the next highest short-term rating by other Rating
Organizations, such as "A-2" by Standard & Poors and "P-2" by Moody's Investors
Service, Inc. See "Ratings of Municipal Obligations" and "Ratings of Short-Term
Obligations" for further information concerning ratings.
TAX INFORMATION
TAXATION OF THE FUNDS
To qualify as a regulated investment company ("RIC") under the Internal
Revenue Code of 1986, as amended ("Code"), each Fund (each of which is treated
as a separate corporation for these purposes) must, among other requirements:
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<PAGE> 154
o Derive at least 90% of its gross income each taxable year from
dividends, interest, payments with respect to securities loans and
gains from the sale or other disposition of securities or (in the
case of the International Equity Fund) foreign currencies, or
certain other income, including gains from options, futures or
forward contracts ("Income Requirement");
o Diversify its investments in securities within certain statutory
limits ("Diversification Requirement"); and
o Distribute annually to its shareholders at least 90% of its
investment company taxable income (generally, taxable net investment
income plus net short-term capital gain and, in the case of the
International Equity Fund, net gains from foreign currency
transactions) plus, in the case of the Municipal Money Market Fund,
net interest income excludable from gross income under section
103(a) of the Code.
Each Fund, as an investor in its corresponding Portfolio, is deemed to
own a proportionate share of the Portfolio's assets and to earn the income on
that share for purposes of determining whether the Fund satisfies the Income and
Diversification Requirements. If a Fund failed to qualify as a RIC for any
taxable year, it would be taxed on the full amount of its taxable income for
that year without being able to deduct the distributions it makes to its
shareholders and the shareholders would treat all those distributions as
dividends (that is, ordinary income) to the extent of the Fund's earnings and
profits.
TAXATION OF THE PORTFOLIOS
Each Portfolio should be classified as a separate partnership for federal
income tax purposes and is not a "publicly traded partnership." As a result,
each Portfolio is or should not be subject to federal income tax; instead, each
investor in a Portfolio, such as a Fund, is required to take into account in
determining its federal income tax liability its share of the Portfolio's
income, gains, losses, deductions, credits and tax preference items, without
regard to whether it has received any cash distributions from the Portfolio.
Because, as noted above, each Fund is deemed to own a proportionate share
of its corresponding Portfolio's assets and to earn a proportionate share of its
corresponding Portfolio's income for purposes of determining whether the Fund
satisfies the requirements to qualify as a RIC, each Portfolio intends to
conduct its operations so that its corresponding Fund will be able to satisfy
all those requirements.
Distributions to a Fund from its corresponding Portfolio (whether
pursuant to a partial or complete withdrawal or otherwise) will not result in
the Fund's recognition of any gain or loss for federal income tax purposes,
except that (1) gain will be recognized to the extent any cash that is
distributed exceeds the Fund's basis for its interest in the Portfolio before
the distribution, (2) income or gain will be recognized if the distribution is
in liquidation of the Fund's entire interest in the Portfolio and includes a
disproportionate share of any unrealized receivables held by the Portfolio and
(3) loss will be recognized if a liquidation distribution consists solely of
cash and/or unrealized receivables. A Fund's basis for its interest in its
corresponding Portfolio generally will equal the amount of cash and the basis of
any property the Fund invests in the Portfolio, increased by the Fund's share of
the Portfolio's net income and gains and decreased by (a) the amount of cash and
the basis of any property the Portfolio distributes to the Fund and (b) the
Fund's share of the Portfolio's losses.
A Portfolio may acquire zero coupon or other securities issued with
original issue discount. As an investor in a Portfolio that holds those
securities, a Fund would have to include in its income its share of the original
issue discount that accrues on the securities during the taxable year, even if
the Portfolio (and, hence, the Fund) receives no corresponding payment on the
securities during the year. Because each Fund annually must distribute
substantially all of its investment company taxable income, including any
original issue discount, to satisfy the Distribution Requirement and avoid
imposition of the 4% excise tax described in the Prospectus, a Fund may be
required in a particular year to distribute as a dividend an amount that is
greater than the total amount of cash it actually receives. Those distributions
would be made from the Fund's cash assets, if any, or the proceeds of redemption
of a portion of the Fund's interest in its corresponding Portfolio (which
redemption proceeds would be paid from the Portfolio's cash assets or the
proceeds of sales of portfolio securities, if necessary). The Portfolio might
realize capital gains or losses from any such sales, which would increase or
decrease the Fund's investment company taxable income and/or net capital gain
(the excess of net long-term capital gain over net short-term capital loss).
If the Balanced, the Growth and Income, the International Equity, or the
Small Cap Portfolio acquires stock in a foreign corporation that is a "passive
foreign investment company" ("PFIC") and holds the stock beyond the end of the
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<PAGE> 155
year of acquisition, its corresponding Fund will be subject to federal income
tax on the Fund's share of a portion of any "excess distribution" received by
the Portfolio on the stock or of any gain realized by the Portfolio from
disposition of the stock (collectively "PFIC income"), plus interest thereon,
even if the Fund distributes the PFIC income as a taxable dividend to its
shareholders. A Fund may avoid this tax and interest if its corresponding
Portfolio elects to treat the PFIC as a "qualified electing fund;" however, the
requirements for that election are difficult to satisfy. These Portfolios
currently do not intend to acquire securities that are considered PFICs.
Hedging strategies, such as entering into forward contracts and selling
and purchasing options and futures contracts, involve complex rules that will
determine for federal income tax purposes the amount, character and timing of
recognition of gains and losses the International Equity Portfolio and the
Equity 500 Index Portfolio realize in connection therewith. The International
Equity Fund's share of the International Equity Portfolio's (1) income from
foreign currencies (except certain gains that may be excluded by future
regulations) and (2) income from transactions in futures and forward contracts
derived with respect to its business of investing in securities or foreign
currencies will qualify as allowable income for that Fund under the Income
Requirement. Similarly, the S&P 500 Index Fund's share of the Equity 500 Index
Portfolio's income from options and futures derived with respect to its business
of investing securities will so qualify for that Fund..
Dividends and interest received by the International Equity Portfolio,
and gains realized thereby, may be subject to income, withholding or other taxes
imposed by foreign countries and U.S. possessions that would reduce the yield
and/or total return on its securities. Tax treaties between certain countries
and the United States may reduce or eliminate these foreign taxes, however, and
many foreign countries do not impose taxes on capital gains on investments by
foreign investors.
TAXATION OF THE FUNDS' SHAREHOLDERS
A portion of the dividends from a Fund's investment company taxable
income, whether received in cash or paid in additional Fund shares, may be
eligible for the dividends-received deduction allowed to corporations. The
eligible portion may not exceed the Fund's share of the aggregate dividends
received by its corresponding Portfolio from U.S. corporations. However,
dividends received by a corporate shareholder and deducted by it pursuant to the
dividends-received deduction are subject indirectly to the alternative minimum
tax. No dividends paid by the Money Market Funds, the International Equity Fund,
the Intermediate Bond Fund or the Short-Term Bond Fund are expected to be
eligible for this deduction.
Distributions by the Municipal Money Market Fund of the amount by which
the Fund's share of its corresponding Portfolio's income on tax-exempt
securities exceeds certain amounts disallowed as deductions, designated by the
Fund as "exempt-interest dividends," generally may be excluded from gross income
by its shareholders. Dividends paid by the Fund will qualify as exempt-interest
dividends if, at the close of each quarter of its taxable year, at least 50% of
the value of its total assets (including its share of the Municipal Money Market
Portfolio's assets) consists of securities the interest on which is excludable
from gross income under section 103(a) of the Code. The Fund intends to continue
to satisfy this requirement. The aggregate dividends excludable from
shareholders' gross income may not exceed the Fund's net tax-exempt income. The
shareholders' treatment of dividends from the Fund under state and local income
tax laws may differ from the treatment thereof under the Code.
Exempt-interest dividends received by a corporate shareholder may be
indirectly subject to the alternative minimum tax. In addition, entities or
persons who are "substantial users" (or persons related to "substantial users")
of facilities financed by private activity bonds ("PABs") or industrial
development bonds ("IDBs") should consult their tax advisers before purchasing
shares of the Municipal Money Market Fund because, for users of certain of these
facilities, the interest on those bonds is not exempt from federal income tax.
For these purposes, the term "substantial user" is defined generally to include
a "non-exempt person" who regularly uses in trade or business a part of a
facility financed from the proceeds of PABs or IDBs.
Up to 85% of social security and railroad retirement benefits may be
included in taxable income for recipients whose adjusted gross income (including
income from tax-exempt sources such as the Municipal Money Market Fund) plus 50%
of their benefits exceeds certain base amounts. Exempt-interest dividends from
the Fund still are tax-exempt to the extent described above; they are only
included in the calculation of whether a recipient's income exceeds the
established amounts.
If more than 50% of the value of the International Equity Fund's total
assets (including its share of the International Equity Portfolio's total
assets) at the close of its taxable year consists of securities of foreign
corporations, the Fund will be eligible to, and may, file an election with the
IRS that will enable the Fund's shareholders, in effect, to receive the benefit
of the foreign tax credit with respect to the Fund's share of any foreign
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<PAGE> 156
and U.S. possessions income taxes paid by the Portfolio. If the Fund makes this
election, the Fund will treat those taxes as dividends paid to its shareholders
and each shareholder will be required to (1) include in gross income, and treat
as paid by him, his proportionate share of those taxes, (2) treat his share of
those taxes and of any dividend paid by the Fund that represents income from
foreign or U.S. possessions sources as his own income from those sources and (3)
either deduct the taxes deemed paid by him in computing his taxable income or,
alternatively, use the foregoing information in calculating the foreign tax
credit against his federal income tax. If the election is made, the Fund will
report to its shareholders shortly after each taxable year their respective
share of the Portfolio's income from foreign and U.S. possessions sources and
the taxes paid by the Portfolio to foreign countries and U.S. possessions.
Pursuant to that election, individuals who have no more than $300 ($600 for
married persons filing jointly) of creditable foreign taxes included on Forms
1099 and all of whose foreign source income is "qualified passive income" may
elect each year to be exempt from the extremely complicated foreign tax credit
limitation and will be able to claim a foreign tax credit without having to file
the detailed Form 1116 that otherwise is required.
The foregoing is only a summary of some of the important federal tax
considerations affecting the Funds and their shareholders and is not intended as
a substitute for careful tax planning. Accordingly, prospective investors are
advised to consult their own tax advisers for more detailed information
regarding the above and for information regarding federal, state, local and
foreign taxes.
YIELD AND TOTAL RETURN QUOTATIONS
A quotation of yield on shares of each class of the Money Market Funds
may appear from time to time in advertisements and in communications to
shareholders and others. Quotations of yields are indicative of yields for the
limited historical period used but not for the future. Yield will vary as
interest rates and other conditions change. Yield also depends on the quality,
length of maturity and type of instruments invested in by the corresponding
Portfolios of the Money Market Funds, and the applicable class's operating
expenses. A comparison of the quoted yields offered for various investments is
valid only if yields are calculated in the same manner. In addition, other
similar investment companies may have more or less risk due to differences in
the quality or maturity of securities held.
The yields of the Money Market Funds may be calculated in one of two
ways:
(1) Current Yield--the net average annualized return without compounding
accrued interest income. For a 7-day current yield, this is computed by
dividing the net change in value over a 7 calendar-day period of a
hypothetical account having one share at the beginning of a 7
calendar-day period by the value of the account at the beginning of this
period to determine the "base period return." The quotient is multiplied
by 365 divided by 7 and stated to two decimal places. A daily current
yield is calculated by multiplying the net change in value over one day
by 365 and stating it to two decimal places. Income other than investment
income and capital changes, such as realized gains and losses from the
sale of securities and unrealized appreciation and depreciation, are
excluded in calculating the net change in value of an account. However,
this calculation includes the aggregate fees and other expenses that are
charged to all shareholder accounts in a class of a Fund. In determining
the net change in value of a hypothetical account, this value is adjusted
to reflect the value of any additional shares purchased with dividends
from the original share and dividends declared on both the original share
and any such additional shares.
(2) Effective Yield--the net average annualized return as computed by
compounding accrued interest income. In determining the 7-day effective
yield, a class of a Fund will compute the "base period return" in the
same manner used to compute the "current yield" over a 7 calendar-day
period as described above. One is then added to the base period return
and the sum is raised to the 365/7 power. One is subtracted from the
result, according to the following formula:
EFFECTIVE YIELD = [ (BASE PERIOD RETURN + 1)365/7 ] - 1
Based on these formulas, the current and effective yields were as follows
for the periods and Funds indicated:
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<PAGE> 157
<TABLE>
<CAPTION>
Current yield for Effective yield for
Current daily yield the 7 day period the 7 day period
as of ended ended
October 31, 1998 October 31, 1998 October 31, 1998
------------------- ----------------- -------------------
<S> <C> <C> <C>
Institutional Class
Money Market Fund % % %
Municipal Money Market Fund % % %
U.S. Government Money Market Fund % % %
PlanAhead Class
Money Market Fund % % %
Municipal Money Market Fund % % %
U.S. Government Money Market Fund % % %
</TABLE>
The Municipal Money Market Fund also may advertise a tax equivalent
current and effective yield. The tax equivalent yields are calculated as
follows:
CURRENT YIELD/(1-APPLICABLE TAX RATE) = CURRENT TAX EQUIVALENT YIELD
EFFECTIVE YIELD/(1-APPLICABLE TAX RATE) = EFFECTIVE TAX EQUIVALENT YIELD
Based on these formulas, the current and effective tax equivalent yields for the
Municipal Money Market Fund for the seven day periods ending October 31, 1998
were:
<TABLE>
<CAPTION>
Current Effective
Class Tax Equivalent Yield Tax Equivalent Yield
- ----- -------------------- --------------------
<S> <C> <C>
Institutional (based on a 35.0% corporate tax rate) % %
PlanAhead (based on a 39.6% personal tax rate) % %
</TABLE>
The advertised yields for each class of the Variable NAV Funds (as
defined in the Prospectus) are computed by dividing the net investment income
per share earned during a 30-day (or one month) period less the aggregate fees
that are charged to all shareholder accounts of the class in proportion to the
30-day (or one month) period and the weighted average size of an account in that
class of a Fund by the maximum offering price per share of the class on the last
day of the period, according to the following formula:
6
YIELD = 2{(A-B +1) - 1}
---
CD
where, with respect to a particular class of a Fund, "a" is the dividends and
interest earned during the period; "b" is the sum of the expenses accrued for
the period (net of reimbursement, if any) and the aggregate fees that are
charged to all shareholder accounts in proportion to the 30-day (or one month)
period and the weighted average size of an account in the class; "c" is the
average daily number of class shares outstanding during the period that were
entitled to receive dividends; and "d" is the maximum offering price per class
share on the last day of the period. Based on this formula, the 30-day yield for
the period ended October 31, 1998 for the Short-Term Bond Fund was X.XX%, X.XX%
and X.XX%, for the AMR, Institutional and PlanAhead Classes, respectively. The
30-day yield for the period ended October 31, 1998 for the Institutional Class
of the Intermediate Bond Fund was X.XX%.
Each class of the Intermediate Bond and the Short-Term Bond Fund also may
advertise a monthly distribution rate. The distribution rate gives the return of
the class based solely on the dividend payout to that class if someone was
entitled to the dividends for an entire month. A monthly distribution rate is
calculated from the following formula:
MONTHLY DISTRIBUTION RATE = A/P*(365/N)
where, with respect to a particular class of shares, "A" is the dividend accrual
per share during the month, "P" is the share price at the end of the month and
"N" is the number of days in the month. Based on this formula, the monthly
distribution rate for the AMR, Institutional and PlanAhead Classes of the
Short-Term Bond Fund for the month of October 1998 was X.XX%, X.XX% and X.XX%,
respectively. The monthly distribution rate for the Institutional Class of the
Intermediate Bond Fund for the month of October 1998 was X.XX%. The "monthly
distribution rate" is a non-standardized performance calculation and when used
in an advertisement will be accompanied by the appropriate standardized SEC
calculations.
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<PAGE> 158
The advertised total return for a class of a Fund is calculated by
equating an initial amount invested in a class of a Fund to the ending
redeemable value, according to the following formula:
n
P(1 + T) = ERV
where "P" is a hypothetical initial payment of $1,000; "T" is the average annual
total return for the class; "n" is the number of years involved; and "ERV" is
the ending redeemable value of a hypothetical $1,000 payment made in the class
at the beginning of the investment period covered.
Based on this formula, annualized total returns were as follows for the
periods and Funds indicated:
<TABLE>
<CAPTION>
For the period
For the For the from commencement
For the one-year five-year period ten-year of active
period ended ended period ended operations through
October 31, October 31, October 31, October 31,
1998(1) 1998(1) 1998(1) 1998(1)(3)
---------------- ---------------- ------------ ------------------
<S> <C> <C> <C> <C>
AMR Class
Balanced Fund
Growth and Income Fund
International Equity Fund N/A(2)
Short-Term Bond Fund N/A(2)
Institutional Class
Balanced Fund
Growth and Income Fund
International Equity Fund N/A(2)
S&P 500 Index Fund(4) N/A(2) N/A(2) N/A(2)
Intermediate Bond N/A(2) N/A(2) N/A(2)
Short-Term Bond Fund N/A(2)
Money Market Fund
Municipal Money Market Fund (5) N/A(2) N/A(2)
U.S. Government Money Market Fund N/A(2)
PlanAhead Class
Balanced Fund (6)
Growth and Income Fund
International Equity Fund N/A(2)
Short-Term Bond Fund (6) N/A(2)
Money Market Fund
Municipal Money Market Fund (5) N/A(2) N/A(2)
U.S. Government Money Market Fund 4.37% N/A(2)
</TABLE>
(1) The Institutional Class is the initial class for each Fund, except for
the S&P 500 Index Fund. Except for the S&P 500 Index Fund, total returns
for the PlanAhead and AMR Classes reflect Institutional Class returns from
the date of commencement of operations of each of these Funds through July
31, 1994 and returns of the applicable class from the commencement of
operations of the new classes through October 31, 1997. Due to the
different expense structures between the classes, total returns would vary
from the results shown had the classes been in operation for the entire
periods.
(2) The Fund was not operational during this period.
(3) Inception dates are as follows:
<TABLE>
<CAPTION>
Fund Institutional Class AMR Class PlanAhead Class
---- ------------------- --------- ---------------
<S> <C> <C> <C>
Balanced 7/17/87 8/1/94 8/1/94
Growth and Income 7/17/87 8/1/94 8/1/94
International Equity 8/7/91 8/1/94 8/1/94
S&P 500 Index(4) 1/1/97 N/A N/A
Intermediate Bond 9/15/97 N/A N/A
Short-Term Bond 12/3/87 8/1/94 8/1/94
Money Market 9/1/87 N/A 8/1/94
Municipal Money Market 11/10/93 N/A 8/1/94
U.S. Government Money Market 3/2/92 N/A 8/1/94
</TABLE>
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<PAGE> 159
(4) On March 1, 1998, the S&P 500 Index Fund-AMR Class was redesignated
the S&P 500 Index Fund-Institutional Class.
(5) A portion of the Management and Administrative Services fees has been
waived for the Municipal Money Market Fund since its inception.
(6) A portion of the Service Plan Fees of the PlanAhead Class has been
waived for the Short-Term Bond Fund since August 1, 1994.
See Appendix A for historical performance of the S&P 500 Composite Stock Price
Index.
Each class of a Fund also may use "aggregate" total return figures for
various periods which represent the cumulative change in value of an investment
in a class of a Fund for the specific period. Such total returns reflect changes
in share prices of a class of a Fund and assume reinvestment of dividends and
distributions.
Each Fund may give total returns from inception using the date when the
current managers began active management as the inception date. However, returns
using the actual inception date of the Fund also will be provided.
In reports or other communications to shareholders or in advertising
material, each class of a Fund may from time to time compare its performance
with that of other mutual funds in rankings prepared by Lipper Analytical
Services, Inc., Morningstar, Inc., IBC Financial Data, Inc. and other similar
independent services which monitor the performance of mutual funds or
publications such as the "New York Times," "Barrons" and the "Wall Street
Journal." Each class of a Fund may also compare its performance with various
indices prepared by independent services such as Standard & Poor's, Morgan
Stanley or Lehman Brothers or to unmanaged indices that may assume reinvestment
of dividends but generally do not reflect deductions for administrative and
management costs.
Each Fund may advertise the standard deviation of its returns for various
time periods and compare its standard deviation to that of various indices.
Standard deviation of returns over time is a measure of volatility. It indicates
the spread of a Fund's returns about their central tendency or mean. In theory,
a Fund that is more volatile should receive a higher return in exchange for
taking extra risk. Standard deviation is a well-accepted statistic to gauge the
riskiness of an investment strategy and measure its historical volatility as a
predictor of risk, although the measure is subject to time selection bias.
Advertisements for the Funds may mention that the Funds offer a variety
of investment options. They may also compare the Funds to federally insured
investments such as bank certificates of deposit and credit union deposits,
including the long-term effects of inflation on these types of investments.
Advertisements may also compare the historical rate of return of different types
of investments. Advertisements for the International Equity Fund may compare the
differences between domestic and foreign investments. Information concerning
broker-dealers who sell the Funds may also appear in advertisements for the
Funds, including their ranking as established by various publications compared
to other broker-dealers.
From time to time, the Manager may use contests as a means of promoting
the American AAdvantage Funds. Prizes may include free air travel and/or hotel
accommodations. Listings for certain of the Funds may be found in newspapers
under the heading "Amer AAdvant."
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
26
<PAGE> 160
insurance existed and the Trust itself was unable to meet its obligations. The
Trust has not engaged in any other business.
The Trust was originally created to manage money for large institutional
investors, including pension and 401(k) plans for American Airlines, Inc. The
AMR Class is offered to tax-exempt retirement and benefit plans of AMR
Corporation and its affiliates. The following individuals are eligible for
purchasing shares of the Institutional Class with an initial investment of less
than $2 million: (i) employees of the Manager, (ii) officers and directors of
AMR and (iii) members of the Trust's Board of Trustees. The PlanAhead Class was
later created to give individuals and other smaller investors an opportunity to
invest in the American AAdvantage Funds. As a result, shareholders of the
PlanAhead Class benefit from the economies of scale generated by being part of a
larger pool of assets.
The corresponding Portfolios of the Balanced, the Growth and Income, the
International Equity, the Small Cap Value and the Intermediate Bond and
Short-Term Bond Funds utilize a multi-manager approach designed to reduce
volatility by diversifying assets over multiple investment management firms.
Each adviser is carefully chosen by the Manager through a rigorous screening
process.
OTHER INFORMATION
American Depositary Receipts (ADRs), European Depositary Receipts
(EDRs)-ADRs are depositary receipts for foreign issuers in registered form
traded in U.S. securities markets, whereas, EDRs are in bearer form and traded
in European securities markets. These securities are not denominated in the same
currency as the securities into which they may be converted. Investing in ADRs
and EDRs involves greater risks than are normally present in domestic
investments. There is generally less publicly available information about
foreign companies and there may be less governmental regulation and supervision
of foreign stock exchanges, brokers and listed companies. In addition, such
companies may use different accounting and financial standards (and certain
currencies may become unavailable for transfer from a foreign currency),
resulting in a Fund's possible inability to convert immediately into U.S.
currency proceeds realized upon the sale of portfolio securities of the affected
foreign companies.
Asset-Backed Securities-Through the use of trusts and special purpose
subsidiaries, various types of assets (primarily home equity loans, automobile
and credit card receivables, other types of receivables/assets as well as
purchase contracts, financing leases and sales agreements entered into by
municipalities) are securitized in pass-through structures similar to
Mortgage-Backed Securities, as described below. The Portfolios are permitted to
invest in asset-backed securities, subject to the Portfolios' rating and quality
requirements.
Bank Deposit Notes-Bank deposit notes are obligations of a bank, rather
than bank holding company corporate debt. The only structural difference between
bank deposit notes and certificates of deposit is that interest on bank deposit
notes is calculated on a 30/360 basis as are corporate notes/bonds. Similar to
certificates of deposit, deposit notes represent bank level investments and,
therefore, are senior to all holding company corporate debt.
Bankers' Acceptances-Bankers' acceptances are short-term credit
instruments designed to enable businesses to obtain funds to finance commercial
transactions. Generally, an acceptance is a time draft drawn on a bank by an
exporter or an importer to obtain a stated amount of funds to pay for specific
merchandise. The draft is then "accepted" by a bank that, in effect,
unconditionally guarantees to pay the face value of the instrument on its
maturity date. The acceptance may then be held by the accepting bank as an
earning asset or it may be sold in the secondary market at the going rate of
discount for a specific maturity. Although maturities for acceptances can be as
long as 270 days, most acceptances have maturities of six months or less.
Cash Equivalents-Cash equivalents include certificates of deposit, bearer
deposit notes, bankers' acceptances, government obligations, commercial paper,
short-term corporate debt securities and repurchase agreements.
Certificates of Deposit-Certificates of deposit are issued against funds
deposited in an eligible bank (including its domestic and foreign branches,
subsidiaries and agencies), are for a definite period of time, earn a specified
rate of return and are normally negotiable.
Cover-Transactions using forward contracts, future contracts, options on
futures contracts and options on indices ("Financial Instruments"), other than
purchased options, expose a Portfolio to an obligation to another party. A
Portfolio will not enter into any such transactions unless it owns either (1) an
offsetting ("covered") position in securities, currencies, or other forward
contracts, options or futures contracts, or (2) cash, receivables and liquid
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assets, with a value, marked-to-market daily, sufficient to cover its potential
obligations to the extent not covered as provided in (1) above. Each Portfolio
will comply with SEC guidelines regarding cover for these instruments and will,
if the guidelines so require, set aside cash, receivables, or liquid assets in a
segregated account with its custodian in the prescribed amount.
Assets used as cover or held in a segregated account cannot be sold while
the position in the corresponding Financial Instrument is open, unless they are
replaced with other appropriate assets. As a result, the commitment of a large
portion of a Portfolio's assets to cover or to segregated accounts could impede
portfolio management or the Portfolio's ability to meet redemption requests or
other current obligations.
Commercial Paper-Commercial paper refers to promissory notes representing
an unsecured debt of a corporation or finance company with a fixed maturity of
no more than 270 days. A variable amount master demand note (which is a type of
commercial paper) represents a direct borrowing arrangement involving
periodically fluctuating rates of interest under a letter agreement between a
commercial paper issuer and an institutional lender pursuant to which the lender
may determine to invest varying amounts.
Debentures-Debentures are unsecured debt securities. The holder of a
debenture is protected only by the general creditworthiness of the issuer.
Derivatives-Generally, a derivative is a financial arrangement, the value
of which is based on, or "derived" from, a traditional security, asset or market
index. Some "derivatives" such as mortgage-related and other asset-backed
securities are in many respects like any other investment, although they may be
more volatile or less liquid than more traditional debt securities. There are,
in fact, many different types of derivatives and many different ways to use
them. There are a range of risks associated with those uses.
Dollar Rolls-A dollar roll is a contract to sell mortgage-backed
securities as collateral against a commitment to repurchase similar, but not
identical, mortgage-backed securities on a specified future date. The other
party to the contract is entitled to all principal, interest, and prepayment
cash flows while it holds the collateral. Each Portfolio maintains with the
Custodian a segregated account containing high-grade liquid securities in an
amount at least equal to the forward purchase obligation.
Eurodollar and Yankeedollar obligations-Eurodollar obligations are U.S.
dollar obligations issued outside the United States by domestic or foreign
entities, while Yankeedollar obligations are U.S. dollar obligations issued
inside the United States by foreign entities. There is generally less publicly
available information about foreign issuers and there may be less governmental
regulation and supervision of foreign stock exchanges, brokers and listed
companies. Foreign issuers may use different accounting and financial standards,
and the addition 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.
Forward Foreign Currency Exchange Contracts-A forward foreign currency
exchange contract ("forward contract") is a contract to purchase or sell a
currency at a future date. The two parties to the contract set the number of
days and the price. Forward contracts are used as a hedge against movements in
future foreign exchange rates. The corresponding Portfolio of the International
Equity Fund may enter into forward contracts to purchase or sell foreign
currencies for a fixed amount of U.S. dollars or other foreign currency.
Forward contracts may serve as long hedges -- for example, the Portfolio
may purchase a forward contract to lock in the U.S. dollar price of a security
denominated in a foreign currency that the Portfolio intends to acquire. Forward
contracts may also serve as short hedges -- for example, the Portfolio may sell
a forward contract to lock in the U.S. dollar equivalent of the proceeds from
the anticipated sale of a security denominated in a foreign currency or from the
anticipated dividend or interest payments denominated in a foreign currency. The
Manager may seek to hedge against changes in the value of a particular currency
by using forward contracts on another foreign currency or basket of currencies,
the value of which the Manager believes will bear a positive correlation to the
value of the currency being hedged.
The cost to the Portfolio of engaging in forward contracts varies with
factors such as the currency involved, the length of the contract period and the
market conditions then prevailing. Because forward contracts are usually entered
into on a principal basis, no fees or commissions are involved. When the
Portfolio enters into a forward contract, it relies on the contra party to make
or take delivery of the underlying currency at the maturity of the contract.
Failure by the contra party to do so would result in the loss of any expected
benefit of the transaction.
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Buyers and sellers of forward contracts can enter into offsetting closing
transactions by selling or purchasing, respectively, an instrument identical to
the instrument purchased or sold. Secondary markets generally do not exist for
forward contracts, with the result that closing transactions generally can be
made for forward contracts only by negotiating directly with the contra party.
Thus, there can be no assurance that the Portfolio will in fact be able to close
out a forward contract at a favorable price prior to maturity. In addition, in
the event of insolvency of the contra party, the Portfolio might be unable to
close out a forward contract at any time prior to maturity. In either event, the
Portfolio would continue to be subject to market risk with respect to the
position, and would continue to be required to maintain a position in the
securities or currencies that are the subject of the hedge or to maintain cash
or securities in a segregated account.
The precise matching of forward currency contract amounts and the value
of the securities involved generally will not be possible because the value of
such securities, measured in the foreign currency, will change after the forward
contract has been established. Thus, the Portfolio might need to purchase or
sell foreign currencies in the spot (cash) market to the extent such foreign
currencies are not covered by forward contracts. The projection of short-term
currency market movements is extremely difficult, and the successful execution
of a short-term hedging strategy is highly uncertain.
Full Faith and Credit Obligations of the U.S. Government-Securities
issued or guaranteed by the U.S. Treasury, backed by the full taxing power of
the U.S. Government or the right of the issuer to borrow from the U.S. Treasury.
Futures Contracts-Futures contracts obligate a purchaser to take delivery
of a specific amount of an obligation underlying the futures contract at a
specified time in the future for a specified price. Likewise, the seller incurs
an obligation to deliver the specified amount of the underlying obligation
against receipt of the specified price. Futures are traded on both U.S. and
foreign commodities exchanges. Only currency futures will be permitted in the
corresponding Portfolio of the International Equity Fund. Futures contracts will
be traded for the same purposes as entering into forward contracts. The use of
futures contracts by the Equity 500 Index Portfolio is explained further under
"Index Futures Contracts and Options on Index Futures Contracts."
The purchase of futures can serve as a long hedge, and the sale of
futures can serve as a short hedge.
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract a Portfolio is required to deposit "initial
deposit" consisting of cash or U.S. Government Securities in an amount generally
equal to 10% or less of the contract value. Margin must also be deposited when
writing a call or put option on a futures contract, in accordance with
applicable exchange rules. Unlike margin in securities transactions, initial
margin on futures contracts does not represent a borrowing, but rather is in the
nature of a performance bond or good-faith deposit that is returned to the
Portfolio at the termination of the transaction if all contractual obligations
have been satisfied. Under certain circumstances, such as periods of high
volatility, a Portfolio may be required by a futures exchange to increase the
level of its initial margin payment, and initial margin requirements might be
increased generally in the future by regulatory action.
Subsequent "variation margin" payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
"marking-to-market." Variation margin does not involve borrowing, but rather
represents a daily settlement of a Portfolio's obligations to or from a futures
broker. When the Portfolio purchases or sells a futures contract, it is subject
to daily variation margin calls that could be substantial in the event of
adverse price movements. If a Portfolio has insufficient cash to meet daily
variation margin requirements, it might need to sell securities at a time when
such sales are disadvantageous.
Purchasers and sellers of futures contracts can enter into offsetting
closing transactions, by selling or purchasing, respectively, an instrument
identical to the instrument purchased or sold. Positions in futures contracts
may be closed only on a futures exchange or board of trade that provides a
secondary market. The Portfolios intend to enter into futures contracts only on
exchanges or boards of trade where there appears to be a liquid secondary
market. However, there can be no assurance that such a market will exist for a
particular contract at a particular time. In such event, it may not be possible
to close a futures contract.
Although futures contracts by their terms call for the actual delivery or
acquisition of securities or currency, in most cases the contractual obligation
is fulfilled before the date of the contract without having to make or take
delivery of the securities or currency. The offsetting of a contractual
obligation is accomplished by buying (or selling, as appropriate) on a
commodities exchange an identical futures contract calling for delivery in the
same month. Such a transaction, which is effected through a member of an
exchange, cancels the obligation to make or take
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delivery of the securities or currency. Since all transactions in the futures
market are made, offset or fulfilled through a clearinghouse associated with the
exchange on which the contracts are traded, a Portfolio will incur brokerage
fees when it purchases or sells futures contracts.
Under certain circumstances, futures exchanges may establish daily limits
on the amount that the price of a futures contract can vary from the previous
day's settlement price; once that limit is reached, no trades may be made that
day at a price beyond the limit. Daily price limits do not limit potential
losses because prices could move to the daily limit for several consecutive days
with little or no trading, thereby preventing liquidation of unfavorable
positions.
If a Portfolio were unable to liquidate a futures contract due to the
absence of a liquid secondary market or the imposition of price limits, it could
incur substantial losses. The Portfolio would continue to be subject to market
risk with respect to the position. In addition, the Portfolio would continue to
be required to make daily variation margin payments and might be required to
maintain the position being hedged by the futures contract or option thereon or
to maintain cash or securities in a segregated account.
To the extent that a Portfolio enters into futures contracts, in each
case other than for bona fide hedging purposes (as defined by the Commodities
Futures Trading Commission ("CFTC"), the aggregate initial margin will not
exceed 5% of the liquidation value of a Portfolio's portfolio, after taking into
account unrealized profits and unrealized losses on any contracts that the
Portfolio has entered into. This policy does not limit to 5% the percentage of
the Portfolio's assets that are at risk in futures contracts.
Futures contracts require the deposit of initial margin valued at a
certain percentage of the contract and possibly adding "variation margin" should
the price of the contract move in an unfavorable direction. As with forward
contracts, the segregated assets must be either cash or high-grade liquid debt
securities.
The ordinary spreads between prices in the cash and futures market, due
to differences in the nature of those markets, are subject to distortions.
First, all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
deposit requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may
cause temporary price distortions. Due to the possibility of distortion, a
correct forecast of securities price or currency exchange rate trends by the
investment adviser may still not result in a successful transaction.
In addition, futures contracts entail risks. Although an investment
adviser believes that use of such contracts will benefit a particular Portfolio,
if that investment adviser's investment judgment about the general direction of,
for example, an index is incorrect, a Portfolio's overall performance would be
poorer than if it had not entered into any such contract.
General Obligation Bonds-General obligation bonds are secured by the
pledge of the issuer's full faith, credit, and usually, taxing power. The taxing
power may be an unlimited ad valorem tax or a limited tax, usually on real
estate and personal property. Most states do not tax real estate, but leave that
power to local units of government.
Illiquid Securities - Historically, illiquid securities have included
securities subject to contractual or legal restrictions on resale because they
have not been registered under the 1933 Act, securities that are otherwise not
readily marketable and repurchase agreements having a remaining maturity of
longer than seven calendar days. Securities that have not been registered under
the 1933 Act are referred to as private placements or restricted securities and
are purchased directly from the issuer or in the secondary market. Mutual funds
do not typically hold a significant amount of these restricted or other illiquid
securities because of the potential for delays on resale and uncertainty in
valuation. Limitations on resale may have an adverse effect on the marketability
of portfolio securities and a mutual fund might be unable to dispose of
restricted or 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
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the unregistered security can be readily resold or on an issuer's ability to
honor a demand for repayment. However, the fact that there are contractual or
legal restrictions on resale of such investments to the general public or to
certain institutions may not be indicative of their liquidity.
Index Futures Contracts and Options on Index Futures Contracts-The Equity
500 Index Portfolio may invest in index futures contracts, options on index
futures contracts and options on securities indices.
Index Futures Contracts-U.S. futures contracts have been designed by
exchanges which have been designated "contracts markets" by the CFTC and must be
executed through a futures commission merchant, or brokerage firm, which is a
member of the relevant contract market. Futures contracts trade on a number of
exchange markets, and through their clearing corporations.
At the same time a futures contract on the Standard & Poor's 500
Composite Stock Price Index (the "S&P 500" or the "Index") is purchased or sold,
the Portfolio must allocate cash or securities as a deposit payment ("initial
deposit"). It is expected that the initial deposit would be approximately 1-1/2%
to 5% of a contract's face value. Daily thereafter, the futures contract is
valued and the payment of "variation margin" may be required.
Options on Index Futures Contracts-The purchase of a call option on
an index futures contract is similar in some respects to the purchase of a call
option on such an index.
The writing of a call option on a futures contract with respect to
the Index constitutes a partial hedge against declining prices of the underlying
securities that are deliverable upon exercise of the futures contract. If the
futures price at expiration of the option is below the exercise price, the
Portfolio will retain the full amount of the option premium which provides a
partial hedge against any decline that may have occurred in the Portfolio's
holdings. The writing of a put option on an index futures contract constitutes a
partial hedge against increasing prices of the underlying securities that are
deliverable upon exercise of the futures contract. If the futures price at
expiration of the option is higher than the exercise price, the Portfolio will
retain the full amount of the option premium which provides a partial hedge
against any increase in the price of securities that the Portfolio intends to
purchase. If a put or call option the Portfolio has written is exercised, the
Portfolio will incur a loss that will be reduced by the amount of the premium it
receives. Depending on the degree of correlation between changes in the value of
its portfolio securities and changes in the value of its futures positions, the
Portfolio's losses from existing options on futures may to some extent be
reduced or increased by changes in the value of portfolio securities.
The purchase of a put option on a futures contract with respect to
the Index is similar in some respects to the purchase of protective put options
on the Index. For example, the Portfolio may purchase a put option on an index
futures contract to hedge against the risk of lowering securities values.
The amount of risk the Portfolio assumes when it purchases an option
on a futures contract with respect to the Index is the premium paid for the
option plus related transaction costs. In addition to the correlation risks
discussed above, the purchase of such an option also entails the risk that
changes in the value of the underlying futures contract will not be fully
reflected in the value of the option purchased.
The Equity 500 Index Portfolio Board has adopted the requirement that
index futures contracts and options on index futures contracts be used as a
hedge. Stock index futures may be used on a continual basis to equitize cash so
that the Portfolio may maintain maximum equity exposure. The Portfolio will not
enter into any futures contracts or options on futures contracts if immediately
thereafter the amount of margin deposits on all the futures contracts of the
Portfolio and premiums paid on outstanding options on futures contracts owned by
the Portfolio would exceed 5% of the market value of the total assets of the
Portfolio.
Futures Contracts on Stock Indices-The Portfolio may enter into
contracts providing for the making and acceptance of a cash settlement based
upon changes in the value of an index of securities ("Futures Contracts"). This
investment technique is designed only to hedge against anticipated future change
in general market prices which otherwise might either adversely affect the value
of securities held by the Portfolio or adversely affect the prices of securities
which are intended to be purchased at a later date for the Portfolio.
In general, each transaction in Futures Contracts involves the
establishment of a position which will move in a direction opposite to that of
the investment being hedged. If these hedging transactions are successful, the
futures positions taken for the Portfolio will rise in value by an amount that
approximately offsets the decline in value of the portion of the Portfolio's
investments that are being hedged. Should general market prices move in an
unexpected manner, the full anticipated benefits of Futures Contracts may not be
achieved or a loss may be realized.
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Although Futures Contracts would be entered into for cash management
purposes only, such transactions do involve certain risks. These risks could
include a lack of correlation between the Futures Contract and the equity
market, a potential lack of liquidity in the secondary market and incorrect
assessments of market trends which may result in worse overall performance than
if a Futures Contract had not been entered into.
Brokerage costs will be incurred and "margin" will be required to be
posted and maintained as a good-faith deposit against performance of obligations
under Futures Contracts written into by the Portfolio. The Portfolio may not
purchase or sell a Futures Contract (or options thereon) if immediately
thereafter its margin deposits on its outstanding Futures Contracts (and its
premium paid on outstanding options thereon) would exceed 5% of the market value
of the Portfolio's total assets.
Options on Securities Indices-The Portfolio may write (sell) covered
call and put options to a limited extent on the Index ("covered options") in an
attempt to increase income. Such options give the holder the right to receive a
cash settlement during the term of the option based upon the difference between
the exercise price and the value of the Index. The Portfolio may forgo the
benefits of appreciation on the Index or may pay more than the market price or
the Index pursuant to call and put options written by the Portfolio.
By writing a covered call option, the Portfolio forgoes, in exchange
for the premium less the commission ("net premium"), the opportunity to profit
during the option period from an increase in the market value of the Index above
the exercise price. By writing a covered put option, the Portfolio, in exchange
for the net premium received, accepts the risk of a decline in the market value
of the Index below the exercise price.
The Portfolio may terminate its obligation as the writer of a call or
put option by purchasing an option with the same exercise price and expiration
date as the option previously written.
When the Portfolio writes an option, an amount equal to the net
premium received by the Portfolio is included in the liability section of the
Portfolio's Statement of Assets and Liabilities as a deferred credit. The amount
of the deferred credit will be subsequently marked to market to reflect the
current market value of the option written. The current market value of a traded
option is the last sale price or, in the absence of a sale, the mean between the
closing bid and asked price. If an option expires on its stipulated expiration
date or if the Portfolio enters into a closing purchase transaction, the
Portfolio will realize a gain (or loss if the cost of a closing purchase
transaction exceeds the premium received when the option was sold), and the
deferred credit related to such option will be eliminated.
The Portfolio has adopted certain other nonfundamental policies
concerning index option transactions that are discussed above. The Portfolio's
activities in index options also may be restricted by the requirements of the
Code, for qualification as a RIC.
The hours of trading for options on the Index may not conform to the
hours during which the underlying securities are traded. To the extent that the
option markets close before the markets for the underlying securities,
significant price and rate movements can take place in the underlying securities
markets that cannot be reflected in the option markets. It is impossible to
predict the volume of trading that may exist in such options, and there can be
no assurance that viable exchange markets will develop or continue.
Because options on securities indices require settlement in cash, BT
may be forced to liquidate portfolio securities to meet settlement obligations.
Options on Stock Indices-The Portfolio may purchase and write put and
call options on stock indices listed on stock exchanges. A stock index
fluctuates with changes in the market values of the stocks included in the
index. Options on stock indices generally are similar to options on stock except
that the delivery requirements are different. Instead of giving the right to
take or make delivery of stock at a specified price, an option on a stock index
gives the holder the right to receive a cash "exercise settlement amount" equal
to (a) the amount, if any, by which the fixed exercise price of the option
exceeds (in the case of a put) or is less than (in the case of a call) the
closing value of the underlying index on the date of exercise, multiplied by (b)
a fixed "index multiplier." The writer of the option is obligated, in return for
the premium received, to make delivery of this amount. The writer may offset its
position in stock index options prior to expiration by entering into a closing
transaction on an exchange or the option may expire unexercised.
Because the value of an index option depends upon movements in the
level of the index rather than the price of a particular stock, whether the
Portfolio will realize a gain or loss from the purchase or writing of options on
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an index depends upon movements in the level of stock prices in the stock market
generally or, in the case of certain indices, in an industry or market segment,
rather than movements in the price of a particular stock.
Loan Participation Interests-Loan participation interests represent
interests in bank loans made to corporations. The contractual arrangement with
the bank transfers the cash stream of the underlying bank loan to the
participating investor. Because the issuing bank does not guarantee the
participations, they are subject to the credit risks generally associated with
the underlying corporate borrower. In addition, because it may be necessary
under the terms of the loan participation for the investor to assert through the
issuing bank such rights as may exist against the underlying corporate borrower,
in the event the underlying corporate borrower fails to pay principal and
interest when due, the investor may be subject to delays, expenses and risks
that are greater than those that would have been involved if the investor had
purchased a direct obligation (such as commercial paper) of such borrower.
Moreover, under the terms of the loan participation, the investor may be
regarded as a creditor of the issuing bank (rather than of the underlying
corporate borrower), so that the issuer may also be subject to the risk that the
issuing bank may become insolvent. Further, in the event of the bankruptcy or
insolvency of the corporate borrower, the loan participation may be subject to
certain defenses that can be asserted by such borrower as a result of improper
conduct by the issuing bank. The secondary market, if any, for these loan
participations is extremely limited and any such participations purchased by the
investor are regarded as illiquid.
Loan Transactions-Loan transactions involve the lending of securities to
a broker-dealer or institutional investor for its use in connection with short
sales, arbitrages or other security transactions. The purpose of a qualified
loan transaction is to afford a lender the opportunity to continue to earn
income on the securities loaned and at the same time earn fee income or income
on the collateral held by it.
Securities loans will be made in accordance with the following
conditions: (1) the Portfolio must receive at least 100% collateral in the form
of cash or cash equivalents, securities of the U.S. Government and its agencies
and instrumentalities, and approved bank letters of credit; (2) the borrower
must increase the collateral whenever the market value of the loaned securities
(determined on a daily basis) rises above the level of collateral; (3) the
Portfolio must be able to terminate the loan after notice, at any time; (4) the
Portfolio must receive reasonable interest on the loan or a flat fee from the
borrower, as well as amounts equivalent to any dividends, interest or other
distributions on the securities loaned, and any increase in market value of the
loaned securities; (5) the Portfolio may pay only reasonable custodian fees in
connection with the loan; and (6) voting rights on the securities loaned may
pass to the borrower, provided, however, that if a material event affecting the
investment occurs, the AMR Trust Board or the Equity 500 Index Portfolio Board,
as appropriate, must be able to terminate the loan and vote proxies or enter
into an alternative arrangement with the borrower to enable the AMR Trust Board
or the Equity 500 Index Portfolio Board, as appropriate, to vote proxies.
While there may be delays in recovery of loaned securities or even a loss
of rights in collateral supplied should the borrower fail financially, loans
will be made only to firms deemed by the AMR Trust Board to be of good financial
standing and will not be made unless the consideration to be earned from such
loans would justify the risk. If the borrower of the securities fails
financially, there is a risk of delay in recovery of the securities loaned or
loss of rights in the collateral. Such loan transactions are referred to in this
Statement of Additional Information as "qualified" loan transactions.
The cash collateral so acquired through qualified loan transactions may
be invested only in those categories of high quality liquid securities
previously authorized by the AMR Trust Board or the Equity 500 Index Portfolio
Board, as appropriate.
Mortgage-Backed Securities-Mortgage-backed securities consist of both
collateralized mortgage obligations and mortgage pass-through certificates.
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,
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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.
Municipal Lease Obligations ("MLOs")-MLOs are issued by state and local
governments and authorities to acquire land and a wide variety of equipment and
facilities. These obligations typically are not fully backed by the
municipality's credit and thus interest may become taxable if the lease is
assigned. If funds are not appropriated for the following year's lease payments,
a lease may terminate with the possibility of default on the lease obligation.
With respect to MLOs purchased by the corresponding Portfolio of the Municipal
Money Market Fund, the AMR Trust Board has established the following guidelines
for determining the liquidity of the MLOs in its portfolio, and, subject to
review by the AMR Trust Board, has delegated that responsibility to the
investment adviser: (1) the frequency of trades and quotes for the security; (2)
the number of dealers willing to purchase or sell the security and the number of
other potential buyers; (3) the willingness of dealers to undertake to make a
market in the security; (4) the nature of the marketplace trades; (5) the
likelihood that the marketability of the obligation will be maintained through
the time the security is held by the Portfolio; (6) the credit quality of the
issuer and the lessee; (7) the
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essentiality to the lessee of the property covered by the lease and (8) for
unrated MLOs, the MLOs' credit status analyzed according to the factors reviewed
by rating agencies.
Private Activity Obligations-Private activity obligations are issued to
finance, among other things, privately operated housing facilities, pollution
control facilities, convention or trade show facilities, mass transit, airport,
port or parking facilities and certain facilities for water supply, gas,
electricity, sewage or solid waste disposal. Private activity obligations are
also issued to privately held or publicly owned corporations in the financing of
commercial or industrial facilities. The principal and interest on these
obligations may be payable from the general revenues of the users of such
facilities. Shareholders, depending on their individual tax status, may be
subject to the federal alternative minimum tax on the portion of a distribution
attributable to these obligations. Interest on private activity obligations will
be considered exempt from federal income taxes; however, shareholders should
consult their own tax advisers to determine whether they may be subject to the
federal alternative minimum tax.
Ratings of Long-Term Obligations-The Portfolio utilizes ratings provided
by the following nationally recognized statistical rating organizations ("Rating
Organizations") in order to determine eligibility of long-term obligations.
The four highest Moody's Investors Service, Inc. ("Moody's") ratings for
long-term obligations (or issuers thereof) are Aaa, Aa, A and Baa. Obligations
rated Aaa are judged by Moody's to be of the best quality. Obligations rated Aa
are judged to be of high quality by all standards. Together with the Aaa group,
such debt comprises what is generally known as high-grade debt. Moody's states
that debt rated Aa is rated lower than Aaa debt because margins of protection or
other elements make long-term risks appear somewhat larger than for Aaa debt.
Obligations which are rated A by Moody's possess many favorable investment
attributes and are considered "upper medium-grade obligations." Obligations
which are rated Baa by Moody's are considered to be medium grade obligations,
i.e., they are neither highly protected or poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Moody's also supplies numerical indicators 1, 2, and 3 to rating
categories. The modifier 1 indicates that the security is in the higher end of
its rating category; the modifier 2 indicates a mid-range ranking; and modifier
3 indicates a ranking toward the lower end of the category.
The four highest Standard & Poor's ratings for long-term obligations are
AAA, AA, A and BBB. Obligations rated AAA have the highest rating assigned by
Standard & Poor's. Capacity to pay interest and repay principal is extremely
strong. Obligations rated AA have a very strong capacity to pay interest and
repay principal and differs from the highest rated issues only in a small
degree. Obligations rated A have a strong capacity to pay principal and
interest, although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions. Obligations rated BBB by
Standard & Poor's are regarded as having adequate capacity to pay interest and
repay principal. Whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
Duff & Phelps' four highest ratings for long-term obligations are AAA,
AA, A and BBB. Obligations rated AAA have the highest credit quality with risk
factors being negligible. Obligations rated AA are of high credit quality and
strong protection factors. Risk is modest but may vary slightly from time to
time because of economic conditions. Obligations rated A have average but
adequate protection factors. However, risk factors are more variable and greater
in periods of economic stress. Obligations rated BBB have below average
protection factors with considerable variability in risk during economic cycles,
but are still considered sufficient for prudent investment.
Thomson BankWatch ("BankWatch") long-term debt ratings apply to specific
issues of long-term debt and preferred stock. They specifically assess the
likelihood of an untimely repayment of principal or interest over the term to
maturity of the rated instrument. BankWatch's four highest ratings for long-term
obligations are AAA, AA, A and BBB. Obligations rated AAA indicate that the
ability to repay principal and interest on a timely basis is very high.
Obligations rated AA indicate a superior ability to repay principal and interest
on a timely basis, with limited incremental risk compared to issues rated in the
highest category. Obligations rated A indicate the ability to repay principal
and interest is strong. Issues rated A could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
BBB is the lowest investment grade category and indicates an acceptable capacity
to repay principal and interest. Issues rated BBB are, however, more vulnerable
to adverse developments (both internal and external) than obligations with
higher ratings.
Fitch IBCA, Inc. ("Fitch") investment grade bond ratings provide a guide
to investors in determining the credit risk associated with a particular
security. The ratings represent Fitch's assessment of the issuer's ability to
meet the obligations of a specific debt issue or class of debt in a timely
manner. Obligations rated AAA are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and
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repay principal, which is unlikely to be affected by reasonable foreseeable
events. Bonds rated AA are considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated AAA. Bonds rated A are
considered to be investment grade and of high credit quality. The obligor's
ability to pay interest and repay principal is considered to be strong, but may
be more vulnerable to adverse changes in economic conditions and circumstances
than bonds with higher ratings. Bonds rated BBB are considered to be investment
grade and of satisfactory credit quality. The obligor's ability to pay interest
and repay principal is considered to be adequate. Adverse changes in economic
conditions and circumstances, however, are more likely to have adverse impact on
these bonds, and therefore impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher than for bonds
with higher ratings.
Standard & Poor's, Duff & Phelps and Fitch apply indicators, such as
"+","-," or no character, to indicate relative standing within the major rating
categories.
Ratings of Municipal Obligations-Moody's ratings for state and municipal
short-term obligations are designated Moody's Investment Grade or "MIG" with
variable rate demand obligations being designated as "VMIG." A VMIG rating may
also be assigned to commercial paper programs which are characterized as having
variable short-term maturities but having neither a variable rate nor demand
feature. Factors used in determination of ratings include liquidity of the
borrower and short-term cyclical elements.
Standard & Poor's uses SP-1, SP-2, and SP-3 to rate short-term municipal
obligations. A rating of SP-1 denotes a very strong or strong capacity to pay
principal and interest.
Ratings of Short-Term Obligations-The rating P-1 is the highest
short-term rating assigned by Moody's. Among the factors considered by Moody's
in assigning ratings are the following: (1) evaluations of the management of the
issuer; (2) economic evaluation of the issuer's industry or industries and an
appraisal of speculative-type risks which may be inherent in certain areas; (3)
evaluation of the issuer's products in relation to competition and customer
acceptance; (4) liquidity; (5) amount and quality of long-term debt; (6) trend
of earnings over a period of ten years; (7) financial strength of a parent
company and the relationships which exist with the issuer; and (8) recognition
by the management of obligations which may be present or may arise as a result
of public interest questions and preparations to meet such obligations.
Short-term obligations (or issuers thereof) rated A-1 by Standard &
Poor's have the following characteristics. Liquidity ratios are adequate to meet
cash requirements. The issuer has access to at least two additional channels of
borrowing. Basic earnings and cash flow have an upward trend with allowance made
for unusual circumstances. Typically, the issuer's industry is well established
and the issuer has a strong position within the industry. The reliability and
quality of management are unquestioned. Relative strength or weakness of the
above factors determines whether the issuer's short-term obligation is rated
A-1, A-2, or A-3.
The distinguishing feature of Duff & Phelps Credit Ratings' short-term
rating is the refinement of the traditional 1 category. The majority of
short-term debt issuers carry the highest rating, yet quality differences exist
within that tier. Obligations rated D-1+ indicate the highest certainty of
timely payment. Safety is just below risk-free U.S. Treasury obligations.
Obligations rated D-1 have a very high certainty of timely payment. Risk factors
are minor. Obligations rated D-1- have a high certainty of timely payment. Risk
factors are very small. Obligations rated D-2 have good certainty of timely
payment. Liquidity factors and company fundamentals are sound. Although ongoing
funding needs may enlarge total financing requirements, access to capital
markets is good. Risk factors are small.
Thomson BankWatch short-term ratings are intended to assess the
likelihood of an untimely or incomplete payment of principal or interest.
Obligations rated TBW-1 indicate a very high likelihood that principal and
interest will be paid on a timely basis. While the degree of safety regarding
timely payment of principal and interest is strong for an obligation rated
TBW-2, the relative degree of safety is not as high as for issues rated TBW-1.
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes. A rating of F-1+ indicates exceptionally strong credit
quality. Issues assigned this rating are regarded as having the strongest degree
of assurance for timely payment. Obligations rated F-1 have very strong credit
quality. Issues assigned this rating reflect an assurance of timely payment only
slightly less in degree than issues rated F-1+. Issues assigned a rating of F-2
indicate good credit quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not as great
as for issues assigned F-1+ and F-1 ratings.
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<PAGE> 170
Repurchase Agreements-A repurchase agreement, which provides a means to
earn income on funds for periods as short as overnight, is an arrangement under
which the purchaser (e.g., a Portfolio) purchases securities and the seller
agrees, at the time of sale, to repurchase the securities at a specified time
and price. The repurchase price will be higher than the purchase price, the
difference being income to the purchaser, or the purchase and repurchase prices
may be the same, with interest at a stated rate due to the purchaser together
with the repurchase price on repurchase. In either case, the income to the
purchaser is unrelated to the interest rate on the securities subject to the
repurchase agreement.
Each Portfolio may enter into repurchase agreements with any bank or
registered broker-dealer who, in the opinion of the AMR Trust Board or the
Equity 500 Index Portfolio Board, as appropriate, presents a minimum risk of
bankruptcy during the term of the agreement based upon guidelines that
periodically are reviewed by the AMR Trust Board and the Equity 500 Index
Portfolio Board. Each Portfolio may enter into repurchase agreements as a
short-term investment of its idle cash in order to earn income. The securities
will be held by a custodian (or agent) approved by the AMR Trust Board or the
Equity 500 Index Portfolio Board, as appropriate, during the term of the
agreement. However, if the market value of the securities subject to the
repurchase agreement becomes less than the repurchase price (including
interest), the Portfolio will direct the seller of the securities to deliver
additional securities so that the market value of all securities subject to the
repurchase agreement will equal or exceed the repurchase price.
In the event of the commencement of bankruptcy or insolvency proceedings
with respect to the seller of the securities before the repurchase of the
securities under a repurchase agreement, a Portfolio may encounter a delay and
incur costs before being able to sell the security being held as collateral.
Delays may involve loss of interest or decline in price of the securities. Apart
from the risk of bankruptcy or insolvency proceedings, there is also the risk
that the seller may fail to repurchase the securities, in which case a Portfolio
may incur a loss if the proceeds to the Portfolio from the sale of the
securities to a third party are less than the repurchase price.
Reverse Repurchase Agreements-The Portfolios may borrow funds for
temporary purposes by entering into reverse repurchase agreements. Pursuant to
such agreements, a Portfolio would sell portfolio securities to financial
institutions such as banks and broker/dealers and agree to repurchase them at a
mutually agreed-upon date and price. The Portfolios intend to enter into reverse
repurchase agreements only to avoid selling securities to meet redemptions
during market conditions deemed unfavorable by the investment adviser possessing
investment authority. At the time a Portfolio enters into a reverse repurchase
agreement, it will place in a segregated custodial account assets such as liquid
high quality debt securities having a value not less than 100% of the repurchase
price (including accrued interest), and will subsequently monitor the account to
ensure that such required value is maintained. Reverse repurchase agreements
involve the risk that the market value of the securities sold by a Portfolio may
decline below the price at which such Portfolio is obligated to repurchase the
securities. Reverse repurchase agreements are considered to be borrowings by an
investment company under the 1940 Act.
Resource Recovery Obligations-Resource recovery obligations are a type of
municipal revenue obligation issued to build facilities such as solid waste
incinerators or waste-to-energy plants. Usually, a private corporation will be
involved and the revenue cash flow will be supported by fees or units paid by
municipalities for use of the facilities. The viability of a resource recovery
project, environmental protection regulations and project operator tax
incentives may affect the value and credit quality of these obligations.
Revenue Obligations-Revenue obligations are backed by the revenue cash
flow of a project or facility.
Rights and Warrants-Rights are short-term warrants issued in conjunction
with new stock issues. Warrants are options to purchase an issuer's securities
at a stated price during a stated term. There is no specific limit on the
percentage of assets a Portfolio may invest in rights and warrants, although the
ability of some of the Portfolios to so invest is limited by their investment
objectives or policies.
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 through or with the
assistance of the issuer or dealers that make a market in the Section 4(2)
securities, thus providing liquidity.
The AMR Trust Board, the Equity 500 Index Portfolio Board and the
applicable investment adviser 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
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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.
Separately Traded Registered Interest and Principal Securities and Zero
Coupon Obligations-Separately traded registered interest and principal
securities or "STRIPS" and zero coupon obligations are securities that do not
make regular interest payments. Instead they are sold at a discount from their
face value. Each Portfolio will take into account as income a portion of the
difference between these obligations' purchase prices and their face values.
Because they do not pay coupon income, the prices of STRIPS and zero coupon
obligations can be very volatile when interest rates change. STRIPS are zero
coupon bonds issued by the U.S. Treasury.
Tax, Revenue or Bond Anticipation Notes-Tax, revenue or bond anticipation
notes are issued by municipalities in expectation of future tax or other
revenues which are payable from these specific taxes or revenues. Bond
anticipation notes usually provide interim financing in advance of an issue of
bonds or notes, the proceeds of which are used to repay the anticipation notes.
Tax-exempt commercial paper is issued by municipalities to help finance
short-term capital or operating needs in anticipation of future tax or other
revenue.
U.S. Government Securities-U.S. Government securities are issued or
guaranteed by the U.S. Government and include U.S. Treasury obligations (see
definition below) and securities issued by U.S. agencies and instrumentalities.
U. S. Government agencies or instrumentalities that issue or guarantee
securities include, but are not limited to, the Federal Housing Administration,
Farmers Home Administration, Export-Import Bank of the United States, Small
Business Administration, GNMA, General Services Administration, Central Bank for
Cooperatives, Federal Home Loan Banks, FHLMC, Federal Intermediate Credit Banks,
Federal Land Banks, Maritime Administration, Tennessee Valley Authority,
District of Columbia Armory Board, Inter-American Development Bank,
Asian-American Development Bank, Agency for International Development, Student
Loan Marketing Association and International Bank of Reconstruction and
Development.
Obligations of U.S. Government agencies and instrumentalities may or may
not be supported by the full faith and credit of the United States. Some are
backed by the right of the issuer to borrow from the Treasury; others are
supported by discretionary authority of the U.S. Government to purchase the
agencies' obligations; while still others, such as the Student Loan Marketing
Association, are supported only by the credit of the instrumentality. In the
case of securities not backed by the full faith and credit of the United States,
the investor must look principally to the agency issuing or guaranteeing the
obligation for ultimate repayment, and may not be able to assert a claim against
the United States itself in the event the agency or instrumentality does not
meet its commitment.
U.S. Treasury Obligations-U.S. Treasury obligations include bills, notes
and bonds issued by the U.S. Treasury and Separately Traded Registered Interest
and Principal component parts of such obligations known as STRIPS.
Variable or Floating Rate Obligations-A variable rate obligation is one
whose terms provide for the adjustment of its interest rate on set dates and
which, upon such adjustment, can reasonably be expected to have a market value
that approximates its par value. A floating rate obligation is one whose terms
provide for the adjustment of its interest rate whenever a specified interest
rate changes and which, at any time, can reasonably be expected to have a market
value that approximates its par value. Variable or floating rate obligations may
be secured by bank letters of credit.
Pursuant to Rule 2a-7 under the 1940 Act, variable or floating rate
obligations with stated maturities of more than 397 days may be deemed to have
shorter maturities as follows:
(1) An obligation that is issued or guaranteed by the United States
Government or any agency thereof which has a variable rate of interest
readjusted no less frequently than every 762 days will be deemed by a Portfolio
to have a maturity equal to the period remaining until the next readjustment of
the interest rate.
(2) A variable rate obligation, the principal amount of which is
scheduled on the face of the instrument to be paid in 397 days or less, will be
deemed by a Portfolio to have a maturity equal to the period remaining until the
next readjustment of the interest rate.
(3) A variable rate obligation that is subject to a demand feature will
be deemed by a Portfolio to have a maturity equal to the longer of the period
remaining until the next readjustment of the interest rate or the period
remaining until the principal amount can be recovered through demand.
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(4) A floating rate obligation that is subject to a demand feature will
be deemed by a Portfolio to have a maturity equal to the period remaining until
the principal amount can be recovered through demand.
As used above, an obligation is "subject to a demand feature" when a
Portfolio is entitled to receive the principal amount of the obligation either
at any time on no more than 30 days' notice or at specified intervals not
exceeding one year and upon no more than 30 days' notice.
Variable Rate Auction and Residual Interest Obligations-Variable rate
auction and residual interest obligations are created when an issuer or dealer
separates the principal portion of a long-term, fixed-rate municipal bond into
two long-term, variable-rate instruments. The interest rate on one portion
reflects short-term interest rates, while the interest rate on the other portion
is typically higher than the rate available on the original fixed-rate bond.
When-Issued and Forward Commitment Transactions- For purchases on a
when-issued basis, the price of the security is fixed at the date of purchase,
but delivery of and payment for the securities is not set until after the
securities are issued (generally one to two months later). The value of
when-issued securities is subject to market fluctuation during the interim
period and no income accrues to a Portfolio until settlement takes place.
Forward commitment transactions 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. The payment obligation and
interest rate are fixed at the time the buyer enters into the forward
commitment. Forward commitment transactions are typically used as a hedge
against anticipated changes in interest rates and prices. Each Portfolio
maintains with the Custodian a segregated account containing high-grade liquid
securities in an amount at least equal to the when-issued or forward commitment
transaction. Forward commitment transactions are executed for existing
obligations, whereas in a when-issued transaction, the obligations have not yet
been issued. When entering into a when-issued or forward commitment transaction,
a Portfolio will rely on the other party to consummate the transaction; if the
other party fails to do so, the Portfolio may be disadvantaged.
FINANCIAL STATEMENTS
The American AAdvantage Funds' Annual Report to Shareholders for the
period ended October 31, 1998 and the S&P 500 Index Fund's Annual Report to
Shareholders for the period ended December 31, 1998 are supplied with the
Statement of Additional Information, and the financial statements and
accompanying notes appearing therein are incorporated by reference in this
Statement of Additional Information.
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APPENDIX A
The following table shows the performance of the S&P 500 Composite Stock
Price Index for the periods indicated. Stock prices fluctuated widely during the
periods but were higher at the end than at the beginning. The results shown
should not be considered as a representation of the income or capital gain or
loss that may be generated by the Index in the future or should this be
considered a representation of the past or future performance of the S&P 500
Index Fund.
<TABLE>
<CAPTION>
YEAR TOTAL RETURN YEAR TOTAL RETURN YEAR TOTAL RETURN
---- ------------ ---- ------------ ---- ------------
<S> <C> <C> <C> <C> <C>
1998 1973 -14.66% 1948 5.50%
1997 33.26% 1972 18.98% 1947 5.71%
1996 23.03% 1971 14.31% 1946 -8.07%
1995 37.49% 1970 4.01% 1945 36.44%
1994 1.32% 1969 -8.51% 1944 19.75%
1993 9.99% 1968 11.06% 1943 25.90%
1992 7.67% 1967 23.98% 1942 20.34%
1991 30.55% 1966 -10.06% 1941 -11.59%
1990 -3.17% 1965 12.45% 1940 -9.78%
1989 31.49% 1964 16.48% 1939 -0.41%
1988 16.81% 1963 22.08% 1938 31.12%
1987 5.23% 1962 -8.73% 1937 -35.03%
1986 18.47% 1961 26.89% 1936 33.92%
1985 32.16% 1960 0.47% 1935 47.67%
1984 6.27% 1959 11.96% 1934 -1.44%
1983 22.51% 1958 43.36% 1933 53.99%
1982 21.41% 1957 -10.78% 1932 -8.19%
1981 -4.91% 1956 6.56% 1931 -43.34%
1980 32.42% 1955 31.56% 1930 -24.90%
1979 18.44% 1954 52.62% 1929 -8.42%
1978 6.56% 1953 -0.99% 1928 43.61%
1977 -7.18% 1952 18.73% 1927 37.49%
1976 23.84% 1951 24.02% 1926 11.62%
1975 37.20% 1950 31.71%
1974 -26.47% 1949 18.79%
</TABLE>
<PAGE> 174
STATEMENT OF ADDITIONAL INFORMATION
AMERICAN AADVANTAGE FUNDS(R)
AMERICAN AADVANTAGE MILEAGE FUNDS(R)
-- PLATINUM CLASS(SM) --
MARCH 1, 1999
The American AAdvantage Money Market Fund(sm) (the "Money Market Fund"),
the American AAdvantage Municipal Money Market Fund(sm) (the "Municipal Money
Market Fund"), and the American AAdvantage U.S. Government Money Market
Fund(sm), formerly known as the American AAdvantage U.S. Treasury Money Market
Fund prior to March 1, 1997 (the "U.S. Government Money Market Fund"), are three
separate investment portfolios of the American AAdvantage Funds (the "AAdvantage
Trust"). The American AAdvantage Money Market Mileage Fund (the "Mileage Fund")
is a separate investment portfolio of the American AAdvantage Mileage Funds (the
"Mileage Trust") (individually, a "Fund" and, collectively, the "Funds"). The
AAdvantage Trust and the Mileage Trust (collectively the "Trusts") are no load,
open-end, diversified management investment companies. The Trusts were organized
as Massachusetts business trusts on January 16, 1987 and February 22, 1995,
respectively. Each Fund consists of multiple classes of shares designed to meet
the needs of different groups of investors. This Statement of Additional
Information ("SAI") relates only to the Platinum Class of the Funds.
Each Fund seeks its investment objective by investing all of its
investable assets in a corresponding portfolio (individually, a "Portfolio" and,
collectively, the "Portfolios") of the AMR Investment Services Trust ("AMR
Trust") that has a similar name and an identical investment objective to the
investing Fund.
This SAI should be read in conjunction with the Platinum Class prospectus
dated March 1, 1999 ("Prospectus"), a copy of which may be obtained without
charge by calling (800) 967-9009.
This SAI is not a prospectus and is authorized for distribution to
prospective investors only if preceded or accompanied by a current Prospectus.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Non-Principal Investment Strategies and Risks..................................
Investment Restrictions........................................................
Trustees and Officers of the Trust and the AMR Trust...........................
Control Persons and 5% Shareholders............................................
Management, Administrative Services and Distribution Fees......................
Other Service Providers........................................................
Redemptions in Kind............................................................
Net Asset Value................................................................
Tax Information................................................................
Yield and Total Return Quotations..............................................
Description of the Trusts......................................................
Other Information..............................................................
Financial Statements...........................................................
</TABLE>
<PAGE> 175
NON-PRINCIPAL INVESTMENT STRATEGIES AND RISKS
Each Fund may:
1. Invest in other investment companies to the extent permitted by the
Investment Company Act of 1940 ("1940 Act") or exemptive relief granted
by the Securities and Exchange Commission ("SEC").
2. Loan securities to broker-dealers or other institutional investors.
Securities loans will not be made if, as a result, the aggregate amount
of all outstanding securities loans by a Portfolio exceeds 33 1/3% of
its total assets (including the market value of collateral received).
For purposes of complying with a Portfolio's investment policies and
restrictions, collateral received in connection with securities loans
is deemed an asset of the Portfolio to the extent required by law. AMR
Investment Services, Inc. ("The Manager") receives compensation for
administrative and oversight functions with respect to securities
lending. The amount of such compensation depends on the income
generated by the loan of the securities. A Portfolio continues to
receive interest on the securities loaned and simultaneously earns
either interest on the investment of the cash collateral or fee income
if the loan is otherwise collateralized.
3. Enter into repurchase agreements. A repurchase agreement is an
agreement under which securities are acquired by a Portfolio from a
securities dealer or bank subject to resale at an agreed upon price on
a later date. The acquiring Portfolio bears a risk of loss in the event
that the other party to a repurchase agreement defaults on its
obligations and the Portfolio is delayed or prevented from exercising
its rights to dispose of the collateral securities. However, the
Manager attempts to minimize this risk by entering into repurchase
agreements only with financial institutions which are deemed to be of
good financial standing and which have been approved by the AMR Trust's
Board of Trustees ("AMR Trust Board").
4. Purchase securities in private placement offerings made in reliance
on the "private placement" exemption from registration afforded by
Section 4(2) of the Securities Act of 1933 ("1933 Act"), and resold to
qualified institutional buyers under Rule 144A under the 1933 Act
("Section 4(2) securities"). The Portfolios will not invest more than
10% of their respective net assets in Section 4(2) securities and
illiquid securities unless the applicable investment adviser
determines, by continuous reference to the appropriate trading markets
and pursuant to guidelines approved by the AMR Trust Board, that any
Section 4(2) securities held by such Portfolio in excess of this level
are at all times liquid.
INVESTMENT RESTRICTIONS
Each Fund has the following fundamental investment policy that enables it
to invest in a corresponding Portfolio of the AMR Trust:
Notwithstanding any other limitation, the Fund may invest all of
its investable assets in an open-end management investment company
with substantially the same investment objectives, policies and
limitations as the Fund. For this purpose, "all of the Fund's
investable assets" means that the only investment securities that
will be held by the Fund will be the Fund's interest in the
investment company.
All other fundamental investment policies and the non-fundamental
policies of each Fund and its corresponding Portfolio are identical. Therefore,
although the following discusses the investment policies of each Portfolio and
the AMR Trust Board, it applies equally to each Fund and the AAdvantage Trust's
Board of Trustees ("AAdvantage Board") and the Mileage Trust's Board of Trustees
("Mileage Trust Board"), as applicable.
In addition to the investment limitations noted in the Prospectus, the
following seven restrictions have been adopted by each Portfolio and may be
changed with respect to any Portfolio only by the majority vote of that
Portfolio's outstanding interests. "Majority of the outstanding voting
securities" under the Investment Company Act of 1940, as amended (the "1940
Act"), and as used herein means, with respect to the Portfolio, the lesser of
(a) 67% of the interests of the Portfolio present at the meeting if the holders
of more than 50% of the interests are present and represented at the interest
holders' meeting or (b) more than 50% of the interests of the Portfolio.
Whenever a Fund is requested to vote on a change in the investment restrictions
of its corresponding Portfolio, that Fund will hold a meeting of its
shareholders and will cast its votes as instructed by its shareholders. The
percentage of a Fund's votes representing that Fund's shareholders not voting
will be voted by the AAdvantage Board and the Mileage Trust Board in the same
proportion as those Fund shareholders who do, in fact, vote.
2
<PAGE> 176
No Portfolio may:
1. Purchase or sell real estate or real estate limited partnership
interests, provided, however, that the Portfolio may invest in securities
secured by real estate or interests therein or issued by companies which
invest in real estate or interests therein when consistent with the other
policies and limitations described in the Prospectus.
2. Purchase or sell commodities (including direct interests and/or leases
in oil, gas or minerals) or commodities contracts, except with respect to
forward foreign currency exchange contracts, foreign currency futures
contracts and when-issued securities when consistent with the other
policies and limitations described in the Prospectus.
3. Engage in the business of underwriting securities issued by others
except to the extent that, in connection with the disposition of
securities, the Portfolio may be deemed an underwriter under federal
securities law.
4. Make loans to any person or firm, provided, however, that the making
of a loan shall not be construed to include (i) the acquisition for
investment of bonds, debentures, notes or other evidences of indebtedness
of any corporation or government which are publicly distributed or (ii)
the entry into repurchase agreements and further provided, however, that
each Portfolio may lend its investment securities to broker-dealers or
other institutional investors in accordance with the guidelines stated in
the Prospectus.
5. Purchase from or sell portfolio securities to its officers, Trustees
or other "interested persons" of the AMR Trust, as defined in the 1940
Act, including its investment advisers and their affiliates, except as
permitted by the 1940 Act and exemptive rules or orders thereunder.
6. Issue senior securities except that the Portfolio may engage in
when-issued and forward commitment transactions.
7. Borrow money, except from banks or through reverse repurchase
agreements for temporary purposes in an aggregate amount not to exceed
10% of the value of its total assets at the time of borrowing. In
addition, although not a fundamental policy, the Portfolios intend to
repay any money borrowed before any additional portfolio securities are
purchased. See "Other Information" for a further description regarding
reverse repurchase agreements.
8. 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; or
9. Invest more than 25% of its total assets in the securities of
companies primarily engaged in any one industry, provided that: (i) this
limitation does not apply to obligations issued or guaranteed by the U.S.
Government, its agencies and instrumentalities; (ii) municipalities and
their agencies and authorities are not deemed to be industries; and (iii)
financial service companies are classified according to the end users of
their services (for example, automobile finance, bank finance, and
diversified finance will be considered separate industries).
The following non-fundamental investment restrictions may be changed
with respect to each 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:
1. Invest more than 15% of its net assets in illiquid securities,
including time deposits and repurchase agreements that mature in more
than seven days; or
2. Purchase securities on margin, effect short sales (except that a
Portfolio may obtain such short term credits as may be necessary for
the clearance of purchases or sales of securities) or purchase or sell
call options or engage in the writing of such options.
All Portfolios may invest up to 10% of their total assets in the
securities of other investment companies to the extent permitted by law. A
Portfolio may incur duplicate advisory or management fees when investing in
another mutual fund.
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<PAGE> 177
TRUSTEES AND OFFICERS OF THE TRUSTS AND THE AMR TRUST
The AAdvantage Board, the Mileage Trust Board and the AMR Trust Board
provide broad supervision over each Trust's affairs. The Manager is responsible
for the management and the administration of each Trust's assets, and each
Trust's officers are responsible for the respective Trust's operations. The
Trustees and officers of the Trusts and the AMR Trust are listed below, together
with their principal occupations during the past five years. Unless otherwise
indicated, the address of each person listed below is 4333 Amon Carter
Boulevard, MD 5645, Fort Worth, Texas 76155.
<TABLE>
<CAPTION>
POSITION WITH
NAME, AGE AND ADDRESS EACH TRUST PRINCIPAL OCCUPATION DURING PAST 5 YEARS
- --------------------- ------------- ----------------------------------------
<S> <C> <C>
William F. Quinn* (51) Trustee and President, AMR Investment Services, Inc. (1986-Present);
President Chairman, American Airlines Employees Federal Credit
Union (October 1989-Present); Trustee, American
Performance Funds (1990-1994); Director, Crescent Real
Estate Equities, Inc. (1994 - Present); Trustee,
American AAdvantage Funds (1987-Present); Trustee,
American AAdvantage Mileage Funds (1995-Present).
Alan D. Feld (61) Trustee Partner, Akin, Gump, Strauss, Hauer & Feld, LLP
1700 Pacific Avenue (1960-Present)#; Director, Clear Channel Communications
Suite 4100 (1984-Present); Director, CenterPoint Properties, Inc.
Dallas, Texas 75201 (1994-Present); Trustee, American AAdvantage Funds
(1993-Present); Trustee, American AAdvantage Funds(1996-
Present); Trustee American AAdvantage Mileage Funds
(1996-Present).
Ben J. Fortson (66) Trustee President and CEO, Fortson Oil Company (1958-Present);
301 Commerce Street Director, Kimbell Art Foundation (1964-Present); Director,
Suite 3301 Burnett Foundation (1987-Present); Honorary Trustee, Texas
Fort Worth, Texas 76102 Christian University (1986-Present); Trustee, American
AAdvantage Funds (1996-Present); Trustee, American AAdvantage
Mileage Funds (1996-Present).
John S. Justin (82) Trustee Chairman and Chief Executive Officer, Justin Industries,
2821 West Seventh Street Inc. (a diversified holding company) (1969-Present);
Fort Worth, Texas 76107 Executive Board Member, Blue Cross/Blue Shield of Texas
(1985-Present); Board Member, Zale Lipshy Hospital (June
1993-Present); Trustee, Texas Christian University
(1980-Present); Director and Executive Board Member,
Moncrief Radiation Center (1985-Present); Director,
Texas New Mexico Enterprises (1984-1993); Director,
Texas New Mexico Power Company (1979-1993); Trustee,
American AAdvantage Funds (1989-Present); Trustee,
American AAdvantage Mileage Funds (1995-Present).
Stephen D. O'Sullivan (63) Trustee Consultant (1994-Present); Vice President and Controller
(1985-1994), American Airlines, Inc.; Trustee, American
AAdvantage Funds (1987-Present); Trustee, American AAdvantage
Mileage Funds (1995-Present).
</TABLE>
4
<PAGE> 178
<TABLE>
<CAPTION>
POSITION WITH
NAME, AGE AND ADDRESS EACH TRUST PRINCIPAL OCCUPATION DURING PAST 5 YEARS
- --------------------- ------------- ----------------------------------------
<S> <C> <C>
Roger T. Staubach (56) Trustee Chairman of the Board and Chief Executive Officer of The
6750 LBJ Freeway Staubach Company (a commercial real estate company)
Dallas, TX 75240 (1982-Present); Director, Halliburton Company
(1991-Present); Director, Brinker International
(1993-Present); Director, International Home Foods, Inc.
(1997-Present); National Advisory Board, The Salvation
Army; Trustee, Institute for Aerobics Research; Member,
Executive Council, Daytop/Dallas; Member, National Board
of Governors, United Way of America; former quarterback
of the Dallas Cowboys professional football team;
Trustee, American AAdvantage Mileage Funds
(1995-Present).
Kneeland Youngblood (41) Trustee Physician (1982-Present); President, Youngblood
2305 Cedar Springs Road Enterprises, Inc. (a business and management firm)
Suite 401 (1983-Present); Trustee, Teachers Retirement System of
Dallas, Texas 75201 Texas (1993-Present); Director, United States Enrichment
Corporation (1993-Present), Director, Just For the Kids
(1995-Present); Director, Starwood Financial Trust
(1998-Present); Member, Council on Foreign Relations
(1995-Present); Trustee, American AAdvantage Funds
(1996-Present); Trustee, American AAdvantage Mileage
Funds (1996-Present).
Nancy A. Eckl (36) Vice President Vice President, AMR Investment Services, Inc. (December
1990-Present).
Michael W. Fields (45) Vice President Vice President, AMR Investment Services, Inc. (August
1988-Present).
Barry Y. Greenberg (35) Vice President Vice President, Legal and Compliance, AMR Investment
and Assistant Services, Inc. (1995-Present); Branch Chief (1992-1995) and
Secretary Staff Attorney (1988-1992), Securities and Exchange
Commission.
Rebecca L. Harris (32) Treasurer Vice President, Finance (1995-Present), Controller
(1991-1995), AMR Investment Services, Inc.
John B. Roberson (40) Vice President Vice President, AMR Investments Services, Inc. (1991-Present).
Robert J. Zutz (46) Secretary Partner, Kirkpatrick & Lockhart LLP (law firm)
1800 Massachusetts Ave. NW
Washington, D.C. 20036
</TABLE>
* Mr. Quinn , by virtue of his current position with the Manager, is deemed to
be an "interested person" of each Trust and the AMR Trust as defined by the
1940 Act.
# 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.
All Trustees and officers as a group own less than 1% of the outstanding
shares of any of the Funds.
As compensation for their service to the Trusts and the AMR Trust, the
Independent Trustees and their spouses receive free air travel from American
Airlines, Inc., an affiliate of the Manager. The Trusts and the AMR Trust do not
pay for these travel arrangements. However, the Trusts and the AMR Trust
compensate each Trustee with payments in an amount equal to the Trustees' income
tax on the value of this free airline travel.
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<PAGE> 179
Mr. O'Sullivan, as a retiree of American Airlines, Inc., already receives flight
benefits. The Trusts compensate Mr. O'Sullivan annually up to $10,000 to cover
his personal flight service charges and the charges for his three adult
children, as well as any income tax charged on the value of these flight
benefits. Trustees are also reimbursed for any expenses incurred in attending
Board meetings. These amounts (excluding reimbursements) are reflected in the
following table for the fiscal year ended October 31, 1998.
<TABLE>
<CAPTION>
Pension or
Retirement
Aggregate Aggregate Benefits Total
Compensation Compensation Accrued as Estimated Compensation
From the From the Part of the Annual From AAdvantage
AAdvantage Mileage Trusts' Benefits Upon Funds Complex
Name of Trustee Trust Trust Expenses Retirement (27 Funds)
- --------------- ----- ----- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
William F. Quinn $0 $0 $0 $0 $0
Alan D. Feld $XX,XXX $XX,XXX $0 $0 $XX,XXX
Ben J. Fortson $XX,XXX $XX,XXX $0 $0 $XX,XXX
John S. Justin $XX,XXX $XX,XXX $0 $0 $XX,XXX
Stephen D. O'Sullivan $XX,XXX $XX,XXX $0 $0 $XX,XXX
Roger T. Staubach $XX,XXX $XX,XXX $0 $0 $XX,XXX
Kneeland Youngblood $XX,XXX $XX,XXX $0 $0 $XX,XXX
</TABLE>
CONTROL PERSONS AND 5% SHAREHOLDERS
There are no persons deemed to control any of the Funds by virtue of
their ownership of more than 25% of the outstanding shares of a Fund as of
January 31, 1999.
The following persons are record owners of 5% or more of the outstanding
shares of the Platinum Class of the Funds as of January 31, 1999:
<TABLE>
<S> <C>
American AAdvantage Money Market Fund
Southwest Securities, Inc...........................................................XX%
1201 Elm Street, Suite 4300
Dallas, TX 75270-2180
American AAdvantage Municipal Money Market Fund
Southwest Securities, Inc...........................................................XX%
1201 Elm Street, Suite 4300
Dallas, TX 75270-2180
American AAdvantage U.S. Government Money Market Fund
Southwest Securities, Inc...........................................................XX%
1201 Elm Street, Suite 4300
Dallas, TX 75270-2180
American AAdvantage Money Market Mileage Fund
Southwest Securities, Inc...........................................................XX%
1201 Elm Street, Suite 4300
Dallas, TX 75270-2180
</TABLE>
MANAGEMENT, ADMINISTRATIVE SERVICES AND DISTRIBUTION FEES
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. Pursuant to management and
administrative services agreements, the Manager provides the Trusts and the AMR
Trust with office space, office equipment and personnel necessary to manage and
administer the Trusts' operations. This includes:
o complying with reporting requirements;
o corresponding with shareholders;
o maintaining internal bookkeeping, accounting and auditing services and
records; and
o supervising the provision of services to the Trusts by third parties.
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<PAGE> 180
Management fees for the AAdvantage Trust for the fiscal years ended
October 31 were approximately as follows: 1996, $10,853,000 of which
approximately $5,403,000 was paid by the Manager to other investment advisers;
1997, $13,730,443 of which approximately $7,061,014 was paid by the Manager to
other investment advisers; and 1998, $XX,XXX,XXX of which approximately
$X,XXX,XXX was paid by the Manager to other investment advisers. Management fees
in the amount of approximately $44,000, $7,309, and $X,XXX were waived by the
Manager during the fiscal years ended October 31, 1996, 1997, and 1998
respectively. These amounts include payments by Portfolios in the AAdvantage
Trust other than the Funds.
Management fees for the Mileage Trust for the fiscal years ended October
31 were approximately as follows: 1996, $10,853,000 of which approximately
$5,403,000 was paid by the Manager to other investment advisers; 1997,
$13,730,443 of which $7,061,014 was paid by the Manager to other investment
advisers and 1998, $XX,XXX,XXX of which approximately $X,XXX,XXX was paid by the
Manager to other investment advisers. Management fees in the amount of
approximately $44,000, $7,309 and $X,XXX were waived by the Manager during the
fiscal years ended October 31, 1996, 1997 and 1998.
In addition to the management fee, the Manager is paid an administrative
services fee for providing administrative and management services (other than
investment advisory services) to the Funds. Administrative services fees for the
AAdvantage Trust for the fiscal years ended October 31 were approximately as
follows: 1996, $2,893,400; 1997, $4,538,345; and 1998, $X,XXX,XXX.
Administrative service fees in the amount of approximately $9,000 were waived by
the Manager during the fiscal year ended October 31, 1995. These amounts include
payments by Portfolios in the AAdvantage Trust other than the Funds.
Administrative service fees for the Mileage Trust for the fiscal years ended
October 31, 1996, 1997 and 1998 were approximately $95,944, $275,120 and
$XXX,XXX, respectively.
The Manager receives compensation for administrative and oversight
functions with respect to securities lending of the Portfolios of the AMR Trust.
Fees received by the Manager from securities lending for the fiscal years ended
October 31, 1997 and 1998 were approximately $81,113 and $XXX,XXX.
OTHER SERVICE PROVIDERS
The transfer agent for the Trust is State Street Bank & Company ("State
Street"), Boston, Massachusetts, who provides transfer agency services to Fund
shareholders directly and through its affiliate National Financial Data
Services, Kansas City, Missouri. State Street also serves as custodian for the
Portfolios of the AMR Trust and the Funds. The independent auditor for the Funds
(except as noted otherwise) and the AMR Trust is Ernst & Young LLP, Dallas,
Texas.
REDEMPTIONS IN KIND
Although each Fund intends to redeem shares in cash, each reserves the
right to pay the redemption price in whole or in part by a distribution of
readily marketable securities held by the applicable Fund's corresponding
Portfolio. However, shareholders always will be entitled to redeem shares for
cash up to the lesser of $250,000 or 1% of the applicable Fund's net asset value
during any 90 day period. Redemption in kind is not as liquid as a cash
redemption. In addition, if redemption is made in kind, shareholders who receive
securities and sell them could receive less than the redemption value of their
securities and could incur certain transactions costs.
NET ASSET VALUE
It is the policy of the Funds to attempt to maintain a constant price per
share of $1.00. There can be no assurance that a $1.00 net asset value per share
will be maintained. The portfolio instruments held by each Fund's corresponding
Portfolio are valued based on the amortized cost valuation technique pursuant to
Rule 2a-7 under the 1940 Act. This involves valuing an instrument at its cost
and thereafter assuming a constant amortization to maturity of any discount or
premium, even though the portfolio security may increase or decrease in market
value. Such market fluctuations are generally in response to changes in interest
rates. Use of the amortized cost valuation method requires the Funds'
corresponding Portfolios to purchase instruments having remaining maturities of
397 days or less, to maintain a dollar-weighted average portfolio maturity of 90
days or less, and to invest only in securities determined by the AMR Trust Board
to be of high quality with minimal credit risks. The corresponding portfolios of
the Money Market Funds may invest in issuers or instruments that at the
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<PAGE> 181
time of purchase have received the highest short-term rating by two Rating
Organizations, such as "D-1" by Duff & Phelps and "F-1" by Fitch IBCA, Inc., and
have received the next highest short-term rating by other Rating Organizations,
such as "A-2" by Standard & Poors and "P-2" by Moody's Investors Service, Inc.
See "Ratings of Municipal Obligations" and "Ratings of Short-Term Obligations"
for further information concerning ratings.
TAX INFORMATION
TAXATION OF THE FUNDS
To qualify for treatment as a regulated investment company ("RIC") under
the Internal Revenue Code of 1986, as amended ("Code"), each Fund (each of which
is treated as a separate corporation for these purposes) must, among other
requirements:
o Derive at least 90% of its gross income each taxable year from
dividends, interest, payments with respect to securities loans and
gains from the sale or other disposition of securities or certain
other income;
o Diversify its investments in securities within certain statutory
limits ("Diversification Requirement"); and
o Distribute annually to its shareholders at least 90% of its
investment company taxable income (generally, taxable net
investment income plus net short-term capital gain) plus, in the
case of the Municipal Money Market Fund, net interest income
excludable from gross income under Section 103(a) of the Code
("Distribution Requirement").
Each Fund, as an investor in its corresponding Portfolio, is deemed to
own a proportionate share of the Portfolio's assets and to earn the income on
that share for purposes of determining whether the Fund satisfies the Income and
Diversification Requirements. If a Fund failed to qualify as a RIC for any
taxable year, it would be taxed on the full amount of its taxable income for
that year without being able to deduct the distributions it makes to its
shareholders and the shareholders would treat all those distributions as
dividends (that is, ordinary income) to the extent of the Fund's earnings and
profits.
TAXATION OF THE PORTFOLIOS
Each Portfolio should be classified as a separate partnership for federal
income tax purposes and is not a "publicly traded partnership." As a result,
each Portfolio is not or should not be subject to federal income tax; instead,
each investor in a Portfolio, such as a Fund, is required to take into account
in determining its federal income tax liability its share of the Portfolio's
income, gains, losses, deductions, credits and tax preference items, without
regard to whether it has received any cash distributions from the Portfolio.
Because, as noted above, each Fund is deemed to own a proportionate share
of its corresponding Portfolio's assets and to earn a proportionate share of its
corresponding Portfolio's income for purposes of determining whether the Fund
satisfies the requirements to qualify as a RIC, each Portfolio intends to
conduct its operations so that its corresponding Fund will be able to satisfy
all those requirements.
Distributions to a Fund from its corresponding Portfolio (whether
pursuant to a partial or complete withdrawal or otherwise) will not result in
the Fund's recognition of any gain or loss for federal income tax purposes,
except that (1) gain will be recognized to the extent any cash that is
distributed exceeds the Fund's basis for its interest in the Portfolio before
the distribution, (2) income or gain will be recognized if the distribution is
in liquidation of the Fund's entire interest in the Portfolio and includes a
disproportionate share of any unrealized receivables held by the Portfolio and
(3) loss will be recognized if a liquidation distribution consists solely of
cash and/or unrealized receivables. A Fund's basis for its interest in its
corresponding Portfolio generally will equal the amount of cash and the basis of
any property the Fund invests in the Portfolio, increased by the Fund's share of
the Portfolio's net income and gains and decreased by (a) the amount of cash and
the basis of any property the Portfolio distributes to the Fund and (b) the
Fund's share of the Portfolio's losses.
The Municipal Money Market Fund's corresponding Portfolio may acquire
zero coupon or other securities issued with original issue discount. As an
investor in the Portfolio that holds those securities, the Municipal Money
Market Fund would have to include in its income its share of the original issue
discount that accrues on the securities during the taxable year, even if the
Portfolio (and, hence, the Fund) receives no corresponding payment on the
securities during the year. Because each Fund annually must distribute
substantially all of its investment
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<PAGE> 182
company taxable income, including any original issue discount, to satisfy the
Distribution Requirement and avoid imposition of the 4% excise tax described in
the Prospectus, the Municipal Money Market Fund may be required in a particular
year to distribute as a dividend an amount that is greater than the total amount
of cash it actually receives. Those distributions would be made from the Fund's
cash assets, if any, or the proceeds of redemption of a portion of the Municipal
Money Market Fund's interest in its corresponding Portfolio (which redemption
proceeds would be paid from the Portfolio's cash assets or the proceeds of sales
of portfolio securities, if necessary). The Portfolio might realize capital
gains or losses from any such sales, which would increase or decrease the
Municipal Money Market Fund's investment company taxable income and/or net
capital gain (the excess of net long-term capital gain over net short-term
capital loss).
TAXATION OF THE FUNDS' SHAREHOLDERS
Distributions by the Municipal Money Market Fund of the amount by which
the Fund's share of its corresponding Portfolio's income on tax-exempt
securities exceeds certain amounts disallowed as deductions, designated by the
Fund as "exempt-interest dividends," generally may be excluded from gross income
by its shareholders. Dividends paid by the Municipal Money Market Fund will
qualify as exempt-interest dividends if, at the close of each quarter of its
taxable year, at least 50% of the value of its total assets (including its share
of the Municipal Money Market Portfolio's assets) consists of securities the
interest on which is excludable from gross income under Section 103(a) of the
Code. The Municipal Money Market Fund intends to continue to satisfy this
requirement. The aggregate dividends excludable from shareholders' gross income
may not exceed the Municipal Money Market Fund's net tax-exempt income. The
shareholders' treatment of dividends from the Municipal Money Market Fund under
state and local income tax laws may differ from the treatment thereof under the
Code.
Exempt-interest dividends received by a corporate shareholder may be
indirectly subject to the alternative minimum tax. In addition, entities or
persons who are "substantial users" (or persons related to "substantial users")
of facilities financed by private activity bonds ("PABs") or industrial
development bonds ("IDBs") should consult their tax advisers before purchasing
shares of the Municipal Money Market Fund because, for users of certain of these
facilities, the interest on those bonds is not exempt from federal income tax.
For these purposes, the term "substantial user" is defined generally to include
a "non-exempt person" who regularly uses in trade or business a part of a
facility financed from the proceeds of PABs or IDBs.
Up to 85% of social security and railroad retirement benefits may be
included in taxable income for recipients whose adjusted gross income (including
income from tax-exempt sources such as the Municipal Money Market Fund) plus 50%
of their benefits exceeds certain base amounts. Exempt-interest dividends from
the Municipal Money Market Fund still are tax-exempt to the extent described
above; they are only included in the calculation of whether a recipient's income
exceeds the established amounts.
The foregoing is only a summary of some of the important federal tax
considerations affecting the Funds and their shareholders and is not intended as
a substitute for careful tax planning. Accordingly, prospective investors are
advised to consult their own tax advisers for more detailed information
regarding the above and for information regarding federal, state, local and
foreign taxes.
YIELD AND TOTAL RETURN QUOTATIONS
The Platinum Class of the AAdvantage Trust commenced operations on
November 7, 1995 and the Platinum Class of the Mileage Trust commenced
operations on January 29, 1996. For purposes of advertising performance, and in
accordance with Securities and Exchange Commission staff interpretations, the
Funds in the AAdvantage Trust have adopted the performance of the Institutional
Class of the Funds in the AAdvantage Trust for periods prior to the inception
date. The Mileage Fund has adopted the performance of the American AAdvantage
Money Market Mileage Fund - Mileage Class for periods prior to its inception
date. The performance results for the Platinum Class will be lower, because the
figures for the other classes (except for the Mileage Fund) do not reflect the
12b-1 fees, Administrative Services Plan fees or other class expenses that will
be borne by the Platinum Class.
A quotation of yield on shares of the Funds may appear from time to time
in advertisements and in communications to shareholders and others. Quotations
of yields are indicative of yields for the limited historical period used but
not for the future. Yield will vary as interest rates and other conditions
change. Yield also depends on the quality, length of maturity and type of
instruments invested in by the Funds, and the applicable Fund's operating
expenses. A comparison of the quoted yields offered for various investments is
valid only if
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<PAGE> 183
yields are calculated in the same manner. In addition, other similar investment
companies may have more or less risk due to differences in the quality or
maturity of securities held.
The yields of the Funds may be calculated in one of two ways:
(1) Current Yield--the net average annualized return without compounding
accrued interest income. For a 7-day current yield, this is computed by
dividing the net change in value over a 7 calendar-day period of a
hypothetical account having one share at the beginning of a 7
calendar-day period by the value of the account at the beginning of this
period to determine the "base period return". The quotient is multiplied
by 365 divided by 7 and stated to two decimal places. A daily current
yield is calculated by multiplying the net change in value over one day
by 365 and stating it to two decimal places. Income other than investment
income and capital changes, such as realized gains and losses from the
sale of securities and unrealized appreciation and depreciation, are
excluded in calculating the net change in value of an account. However,
this calculation includes the aggregate fees and other expenses that are
charged to all shareholder accounts in a Fund. In determining the net
change in value of a hypothetical account, this value is adjusted to
reflect the value of any additional shares purchased with dividends from
the original share and dividends declared on both the original share and
any such additional shares.
(2) Effective Yield--the net average annualized return as computed by
compounding accrued interest income. In determining the 7-day effective
yield, a Fund will compute the "base period return" in the same manner
used to compute the "current yield" over a 7 calendar-day period as
described above. One is then added to the base period return and the sum
is raised to the 365/7 power. One is subtracted from the result,
according to the following formula:
EFFECTIVE YIELD = [ (BASE PERIOD RETURN + 1)365/7 ] - 1
The current and effective yields for the Funds are as follows:
<TABLE>
<CAPTION>
Current yield for Effective yield for
Current daily the seven-day period the seven-day period
yield as of ended ended
Platinum Class October 31, 1998 October 31, 1998 October 31, 1998
-------------- ---------------- ---------------- ----------------
<S> <C> <C> <C>
Money Market Fund % % %
Municipal Money Market Fund % % %
U.S. Government Money Market Fund % % %
Mileage Fund % % %
</TABLE>
The Municipal Money Market Fund also may advertise a tax-equivalent
current and effective yield. The tax-equivalent yields are calculated as
follows:
CURRENT YIELD/(1 - APPLICABLE TAX RATE) = CURRENT TAX-EQUIVALENT YIELD
EFFECTIVE YIELD/(1 - APPLICABLE TAX RATE) = EFFECTIVE TAX-EQUIVALENT YIELD
Based on these formulas, the current and effective tax-equivalent yields
for the Municipal Money Market Fund for the seven day period ending October 31,
1998 were X.XX% and X.XX%, respectively (based upon a 39.6% personal tax rate).
The advertised total return for a class of a Fund would be calculated by
equating an initial amount invested in a class of a Fund to the ending
redeemable value, according to the following formula:
n
P(1 + T) = ERV
where "P" is a hypothetical initial payment of $1,000; "T" is the average annual
total return for the Fund; "n" is the number of years involved; and "ERV" is the
ending redeemable value of a hypothetical $1,000 payment made in the Fund at the
beginning of the investment period covered.
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<PAGE> 184
Based on this formula, annualized total returns were as follows for the
periods indicated:
<TABLE>
<CAPTION>
For the For the For the period from
For the five-year ten-year commencement of
one-year period period ended period ended operations through
ended October 31, October 31, October 31, October 31,
1998(1) 1998(1) 1998(1) 1998(1)
Platinum Class ------- ------- ------- -------
- --------------
<S> <C> <C> <C> <C>
Money Market Fund % % % %
Municipal Money Market Fund % N/A(2) N/A(2) %
U. S. Government Money Mkt. Fund (3) % % N/A(2) %
Mileage Fund % % % %
</TABLE>
(1) Performance of the Funds of the AAdvantage Trust represents total returns
achieved by the Institutional Class from the inception date of each Fund up to
the inception date of the Platinum Class on 11/7/95. Performance of the Mileage
Fund represents total return of the Money Market Fund-Institutional Class
(9/1/87-10/31/91); the Money Market Fund-Mileage Class (11/1/91-10/31/95); the
Money Market Mileage Fund-Mileage Class (11/1/95-1/28/96) and the Money Market
Mileage Fund-Platinum Class since its 1/29/96 inception. Total returns have not
been adjusted for any difference between the fees and expenses of each Fund and
the historical fees and expenses of the predecessor Funds. Inception dates are:
Money Market Fund-Institutional Class, 9/1/87; Municipal Money Market
Fund-Institutional Class, 11/10/93; U.S. Government Money Market
Fund-Institutional Class, 3/1/92.
(2) The Fund was not operational during this period.
(3) Prior to March 1, 1997, the U.S. Government Money Market Fund was known as
the U.S. Treasury Money Market Fund and operated under different investment
policies.
Each Fund also may use "aggregate" total return figures for various
periods which represent the cumulative change in value of an investment in a
Fund for the specific period. Such total returns reflect changes in share prices
of a Fund and assume reinvestment of dividends and distributions.
In reports or other communications to shareholders or in advertising
material, each class of a Fund may from time to time compare its performance
with that of other mutual funds in rankings prepared by Lipper Analytical
Services, Inc., Morningstar, Inc., IBC Financial Data, Inc. and other similar
independent services which monitor the performance of mutual funds or
publications such as the "New York Times," "Barrons" and the "Wall Street
Journal." Each Fund also may compare its performance with various indices
prepared by independent services such as Standard & Poor's, Morgan Stanley or
Lehman Brothers or to unmanaged indices that may assume reinvestment of
dividends but generally do not reflect deductions for administrative and
management costs.
Advertisements for the Funds may mention that the Funds offer a variety
of investment options. They also may compare the Funds to federally insured
investments such as bank certificates of deposit and credit union deposits,
including the long-term effects of inflation on these types of investments.
Advertisements also may compare the historical rate of return of different types
of investments. Information concerning broker-dealers who sell the Funds also
may appear in advertisements for the Funds, including their ranking as
established by various publications compared to other broker-dealers.
From time to time, the Manager may use contests as a means of promoting
the American AAdvantage Funds and the American AAdvantage Mileage Funds. Prizes
may include free air travel and/or hotel accommodations. Listings for certain of
the Funds may be found in newspapers under the heading Amer AAdvant.
Each Fund may advertise the standard deviation of its returns for various
time periods and compare its standard deviation to that of various indices.
Standard deviation of returns over time is a measure of volatility. It indicates
the spread of returns about their central tendency or mean. In theory, a Fund
that is more volatile should receive a higher return in exchange for taking
extra risk. Standard deviation is a well-accepted statistic to gauge the
riskiness of an investment strategy and measure its historical volatility as a
predictor of risk, although the measure is subject to time selection bias.
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<PAGE> 185
DESCRIPTION OF THE TRUSTS
The AAdvantage Trust, organized on January 16, 1987 and the Mileage
Trust, organized on February 22, 1995, (originally named American AAdvantage
Funds II) are entities of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable for its obligations. However, each
Trust's Declaration of Trust contains an express disclaimer of shareholder
liability for acts or obligations of the Trust and provides for indemnification
and reimbursement of expenses out of Trust property for any shareholder held
personally liable for the obligations of the Trust. The Declaration of Trust
also provides that the Trusts may maintain appropriate insurance (for example,
fidelity bonding) for the protection of the Trust, its shareholders, Trustees,
officers, employees and agents to cover possible tort and other liabilities.
Thus, the risk of a shareholder incurring financial loss due to shareholder
liability is limited to circumstances in which both inadequate insurance existed
and the Trust itself was unable to meet its obligations. The Trust has not
engaged in any other business. The Platinum Class was created as an investment
vehicle for cash balances of customers of certain broker-dealers.
OTHER INFORMATION
Asset-Backed Securities-Through the use of trusts and special purpose
subsidiaries, various types of assets (primarily home equity loans, automobile
and credit card receivables, other types of receivables/assets as well as
purchase contracts, financing leases and sales agreements entered into by
municipalities) are securitized in pass-through structures similar to
Mortgage-Backed Securities, as described below. The Portfolios are permitted to
invest in asset-backed securities, subject to the Portfolios' rating and quality
requirements.
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.
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.
Eurodollar and Yankeedollar obligations-Eurodollar obligations are U.S.
dollar obligations issued outside the United States by domestic or foreign
entities, while Yankeedollar obligations are U.S. dollar obligations issued
inside the United States by foreign entities. There is generally less publicly
available information about foreign issuers and there may be less governmental
regulation and supervision of foreign stock exchanges, brokers and listed
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<PAGE> 186
companies. Foreign issuers may use different accounting and financial standards,
and the addition 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.
Full Faith and Credit Obligations of the U.S. Government-Securities
issued or guaranteed by the U.S. Treasury, backed by the full taxing power of
the U.S. Government or the right of the issuer to borrow from the U.S. Treasury.
Illiquid Securities. Historically, illiquid securities have included
securities subject to contractual or legal restrictions on resale because they
have not been registered under the 1933 Act, securities that are otherwise not
readily marketable and repurchase agreements having a remaining maturity of
longer than seven calendar days. Securities that have not been registered under
the 1933 Act are referred to as private placements or restricted securities and
are purchased directly from the issuer or in the secondary market. Mutual funds
do not typically hold a significant amount of these restricted or other illiquid
securities because of the potential for delays on resale and uncertainty in
valuation. Limitations on resale may have an adverse effect on the marketability
of portfolio securities and a mutual fund might be unable to dispose of
restricted or other illiquid securities promptly or at reasonable prices and
might thereby experience difficulty satisfying redemptions within seven calendar
days. A mutual fund also might have to register such restricted securities in
order to dispose of them resulting in additional expense and delay. Adverse
market conditions could impede such a public offering of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the 1933 Act, including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. However, the
fact that there are contractual or legal restrictions on resale of such
investments to the general public or to certain institutions may not be
indicative of their liquidity.
Loan Participation Interests-Loan participation interests represent
interests in bank loans made to corporations. The contractual arrangement with
the bank transfers the cash stream of the underlying bank loan to the
participating investor. Because the issuing bank does not guarantee the
participations, they are subject to the credit risks generally associated with
the underlying corporate borrower. In addition, because it may be necessary
under the terms of the loan participation for the investor to assert through the
issuing bank such rights as may exist against the underlying corporate borrower,
in the event the underlying corporate borrower fails to pay principal and
interest when due, the investor may be subject to delays, expenses and risks
that are greater than those that would have been involved if the investor had
purchased a direct obligation (such as commercial paper) of such borrower.
Moreover, under the terms of the loan participation, the investor may be
regarded as a creditor of the issuing bank (rather than of the underlying
corporate borrower), so that the issuer also may be subject to the risk that the
issuing bank may become insolvent. Further, in the event of the bankruptcy or
insolvency of the corporate borrower, the loan participation may be subject to
certain defenses that can be asserted by such borrower as a result of improper
conduct by the issuing bank. The secondary market, if any, for these loan
participations is extremely limited and any such participations purchased by the
investor are regarded as illiquid.
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.
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<PAGE> 187
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. If the borrower of the securities fails
financially, there is a risk of delay in recovery of the securities loaned or
loss of rights in the collateral. Such loan transactions are referred to in this
Statement of Additional Information as "qualified" loan transactions.
The cash collateral so acquired through qualified loan transactions may
be invested only in those categories of high quality liquid securities
previously authorized by the AMR Trust Board.
Mortgage-Backed Securities-Mortgage-backed securities consist of both
collateralized mortgage obligations and mortgage pass-through certificates.
Collateralized Mortgage Obligations ("CMOs")-CMOs and interests in
real estate mortgage investment conduits ("REMICs") are debt securities
collateralized by mortgages, or mortgage pass-through securities. CMOs divide
the cash flow generated from the underlying mortgages or mortgage pass-through
securities into different groups referred to as "tranches," which are then
retired sequentially over time in order of priority. The principal governmental
issuers of such securities are the Federal National Mortgage Association
("FNMA"), a government sponsored corporation owned entirely by private
stockholders and the Federal Home Loan Mortgage Corporation ("FHLMC"), a
corporate instrumentality of the United States created pursuant to an act of
Congress which is owned entirely by Federal Home Loan Banks. The issuers of CMOs
are structured as trusts or corporations established for the purpose of issuing
such CMOs and often have no assets other than those underlying the securities
and any credit support provided. A REMIC is a mortgage securities vehicle that
holds residential or commercial mortgages and issues securities representing
interests in those mortgages. A REMIC may be formed as a corporation,
partnership, or segregated pool of assets. The REMIC itself is generally exempt
from federal income tax, but the income from the mortgages is reported by
investors. For investment purposes, interests in REMIC securities are virtually
indistinguishable from CMOs.
Mortgage Pass-Through Certificates-Mortgage pass-through certificates
are issued by governmental, government-related and private organizations which
are backed by pools of mortgage loans.
(1) Government National Mortgage Association ("GNMA") Mortgage
Pass-Through Certificates ("Ginnie Maes")-GNMA is a wholly-owned U.S. Government
corporation within the Department of Housing and Urban Development. Ginnie Maes
represent an undivided interest in a pool of mortgages that are insured by the
Federal Housing Administration or the Farmers Home Administration or guaranteed
by the Veterans Administration. Ginnie Maes entitle the holder to receive all
payments (including prepayments) of principal and interest owed by the
individual mortgagors, net of fees paid to GNMA and to the issuer which
assembles the mortgage pool and passes through the monthly mortgage payments to
the certificate holders (typically, a mortgage banking firm), regardless of
whether the individual mortgagor actually makes the payment. Because payments
are made to certificate holders regardless of whether payments are actually
received on the underlying mortgages, Ginnie Maes are of the "modified
pass-through" mortgage certificate type. The GNMA is authorized to guarantee the
timely payment of principal and interest on the Ginnie Maes. The GNMA guarantee
is backed by the full faith and credit of the United States, and the GNMA has
unlimited authority to borrow funds from the U.S. Treasury to make payments
under the guarantee. The market for Ginnie Maes is highly liquid 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
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<PAGE> 188
foreclosed or otherwise liquidated mortgages. The obligation of the FNMA under
its guarantee is solely its obligation and is not backed by, nor entitled to,
the full faith and credit of the United States.
(4) Mortgage-Related Securities Issued by Private Organizations-Pools
created by non-governmental issuers generally offer a higher rate of interest
than government and government-related pools because there are no direct or
indirect government guarantees of payments in such pools. However, timely
payment of interest and principal of these pools is often partially supported by
various enhancements such as over-collateralization and senior/subordination
structures and by various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance. The insurance and guarantees are issued
by government entities, private insurers or the mortgage poolers. Although the
market for such securities is becoming increasingly liquid, securities issued by
certain private organizations may not be readily marketable.
Municipal Lease Obligations ("MLOs")-MLOs are issued by state and local
governments and authorities to acquire land and a wide variety of equipment and
facilities. These obligations typically are not fully backed by the
municipality's credit and thus interest may become taxable if the lease is
assigned. If funds are not appropriated for the following year's lease payments,
a lease may terminate with the possibility of default on the lease obligation.
With respect to MLOs purchased by the corresponding Portfolio of the Municipal
Money Market Fund, the AMR Trust Board has established the following guidelines
for determining the liquidity of the MLOs in its portfolio, and, subject to
review by the AMR Trust Board, has delegated that responsibility to the
investment adviser: (1) the frequency of trades and quotes for the security; (2)
the number of dealers willing to purchase or sell the security and the number of
other potential buyers; (3) the willingness of dealers to undertake to make a
market in the security; (4) the nature of the marketplace trades; (5) the
likelihood that the marketability of the obligation will be maintained through
the time the security is held by the Portfolio; (6) the credit quality of the
issuer and the lessee; (7) the essentiality to the lessee of the property
covered by the lease and (8) for unrated MLOs, the MLOs' credit status analyzed
according to the factors reviewed by rating agencies.
Private Activity Obligations-Private activity obligations are issued to
finance, among other things, privately operated housing facilities, pollution
control facilities, convention or trade show facilities, mass transit, airport,
port or parking facilities and certain facilities for water supply, gas,
electricity, sewage or solid waste disposal. Private activity obligations are
also issued to privately held or publicly owned corporations in the financing of
commercial or industrial facilities. The principal and interest on these
obligations may be payable from the general revenues of the users of such
facilities. Shareholders, depending on their individual tax status, may be
subject to the federal alternative minimum tax on the portion of a distribution
attributable to these obligations. Interest on private activity obligations will
be considered exempt from federal income taxes; however, shareholders should
consult their own tax advisers to determine whether they may be subject to the
federal alternative minimum tax.
Ratings of Long-Term Obligations-The Portfolio utilizes ratings provided
by the following nationally recognized statistical rating organizations ("Rating
Organizations") in order to determine eligibility of long-term obligations.
The two highest Moody's Investors Service, Inc. ("Moody's") ratings for
long-term obligations (or issuers thereof) are Aaa and Aa. Obligations rated Aaa
are judged by Moody's to be of the best quality. Obligations rated Aa are judged
to be of high quality by all standards. Together with the Aaa group, such debt
comprises what is generally known as high-grade debt. Moody's states that debt
rated Aa is rated lower than Aaa debt because margins of protection or other
elements make long-term risks appear somewhat larger than for Aaa debt. Moody's
also supplies numerical indicators 1, 2, and 3 to rating categories. The
modifier 1 indicates that the security is in the higher end of its rating
category; the modifier 2 indicates a mid-range ranking; and modifier 3 indicates
a ranking toward the lower end of the category.
The two highest Standard & Poor's ratings for long-term obligations are
AAA and AA. Obligations rated AAA have the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
Obligations rated AA have a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in a small degree.
Duff & Phelps' two highest ratings for long-term obligations are AAA and
AA. Obligations rated AAA have the highest credit quality with risk factors
being negligible. Obligations rated AA are of high credit quality and strong
protection factors. Risk is modest but may vary slightly from time to time
because of economic conditions.
Thomson BankWatch ("BankWatch") long-term debt ratings apply to specific
issues of long-term debt and preferred stock. They specifically assess the
likelihood of an untimely repayment of principal or interest over the term to
maturity of the rated instrument. BankWatch's two highest ratings for long-term
obligations are AAA and AA. Obligations rated AAA indicate that the ability to
repay principal and interest on a timely basis is very high.
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<PAGE> 189
Obligations rated AA indicate a superior ability to repay principal and interest
on a timely basis, with limited incremental risk compared to issues rated in the
highest category.
Fitch IBCA, Inc. ("Fitch") investment grade bond ratings provide a guide
to investors in determining the credit risk associated with a particular
security. The ratings represent Fitch's assessment of the issuer's ability to
meet the obligations of a specific debt issue or class of debt in a timely
manner. Obligations rated AAA are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonable
foreseeable events. Bonds rated AA are considered to be investment grade and of
very high credit quality. The obligor's ability to pay interest and repay
principal is very strong, although not quite as strong as bonds rated AAA.
Standard & Poor's, Duff & Phelps and Fitch apply indicators, such as
"+","-," or no character, to indicate relative standing within the major rating
categories.
Ratings of Municipal Obligations-Moody's ratings for state and municipal
short-term obligations are designated Moody's Investment Grade or "MIG" with
variable rate demand obligations being designated as "VMIG." A VMIG rating also
may be assigned to commercial paper programs which are characterized as having
variable short-term maturities but having neither a variable rate nor demand
feature. Factors used in determination of ratings include liquidity of the
borrower and short-term cyclical elements.
Standard & Poor's uses SP-1, SP-2, and SP-3 to rate short-term municipal
obligations. A rating of SP-1 denotes a very strong or strong capacity to pay
principal and interest.
Ratings of Short-term Obligations-The rating P-1 is the highest
short-term rating assigned by Moody's. Among the factors considered by Moody's
in assigning ratings are the following: (1) evaluations of the management of the
issuer; (2) economic evaluation of the issuer's industry or industries and an
appraisal of speculative-type risks which may be inherent in certain areas; (3)
evaluation of the issuer's products in relation to competition and customer
acceptance; (4) liquidity; (5) amount and quality of long-term debt; (6) trend
of earnings over a period of ten years; (7) financial strength of a parent
company and the relationships which exist with the issuer; and (8) recognition
by the management of obligations which may be present or may arise as a result
of public interest questions and preparations to meet such obligations.
Short-term obligations (or issuers thereof) rated A-1 by Standard &
Poor's have the following characteristics. Liquidity ratios are adequate to meet
cash requirements. The issuer has access to at least two additional channels of
borrowing. Basic earnings and cash flow have an upward trend with allowance made
for unusual circumstances. Typically, the issuer's industry is well established
and the issuer has a strong position within the industry. The reliability and
quality of management are unquestioned. Relative strength or weakness of the
above factors determines whether the issuer's short-term obligation is rated
A-1, A-2, or A-3.
The distinguishing feature of Duff & Phelps Credit Ratings' short-term
rating is the refinement of the traditional 1 category. The majority of
short-term debt issuers carry the highest rating, yet quality differences exist
within that tier. Obligations rated D-1+ indicate the highest certainty of
timely payment. Safety is just below risk-free U.S. Treasury obligations.
Obligations rated D-1 have a very high certainty of timely payment. Risk factors
are minor. Obligations rated D-1- have a high certainty of timely payment. Risk
factors are very small. Obligations rated D-2 have good certainty of timely
payment. Liquidity factors and company fundamentals are sound. Although ongoing
funding needs may enlarge total financing requirements, access to capital
markets is good. Risk factors are small.
Thomson BankWatch short-term ratings are intended to assess the
likelihood of an untimely or incomplete payment of principal or interest.
Obligations rated TBW-1 indicate a very high likelihood that principal and
interest will be paid on a timely basis. While the degree of safety regarding
timely payment of principal and interest is strong for an obligation rated
TBW-2, the relative degree of safety is not as high as for issues rated TBW-1.
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes. A rating of F-1+ indicates exceptionally strong credit
quality. Issues assigned this rating are regarded as having the strongest degree
of assurance for timely payment. Obligations rated F-1 have very strong credit
quality. Issues assigned this rating reflect an assurance of timely payment only
slightly less in degree than issues rated F-1+. Issues assigned a rating of F-2
indicate good credit quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not as great
as for issues assigned F-1+ and F-1 ratings.
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<PAGE> 190
Repurchase Agreements-A repurchase agreement, which provides a means to
earn income on funds for periods as short as overnight, is an arrangement under
which the purchaser (e.g., a Portfolio) purchases securities and the seller
agrees, at the time of sale, to repurchase the securities at a specified time
and price. The repurchase price will be higher than the purchase price, the
difference being income to the purchaser, or the purchase and repurchase prices
may be the same, with interest at a stated rate due to the purchaser together
with the repurchase price on repurchase. In either case, the income to the
purchaser is unrelated to the interest rate on the securities subject to the
repurchase agreement.
Each Portfolio may enter into repurchase agreements with any bank or
registered broker-dealer who, in the opinion of the AMR Trust Board presents a
minimum risk of bankruptcy during the term of the agreement based upon
guidelines that periodically are reviewed by the AMR Trust Board. Each Portfolio
may enter into repurchase agreements as a short-term investment of its idle cash
in order to earn income. The securities will be held by a custodian (or agent)
approved by the AMR Trust Board during the term of the agreement. However, if
the market value of the securities subject to the repurchase agreement becomes
less than the repurchase price (including interest), the Portfolio will direct
the seller of the securities to deliver additional securities so that the market
value of all securities subject to the repurchase agreement will equal or exceed
the repurchase price.
In the event of the commencement of bankruptcy or insolvency proceedings
with respect to the seller of the securities before the repurchase of the
securities under a repurchase agreement, a Portfolio may encounter a delay and
incur costs before being able to sell the security being held as collateral.
Delays may involve loss of interest or decline in price of the securities. Apart
from the risk of bankruptcy or insolvency proceedings, there is also the risk
that the seller may fail to repurchase the securities, in which case a Portfolio
may incur a loss if the proceeds to the Portfolio from the sale of the
securities to a third party are less than the repurchase price.
Reverse Repurchase Agreements-The Portfolios may borrow funds for
temporary purposes by entering into reverse repurchase agreements. Pursuant to
such agreements, a Portfolio would sell portfolio securities to financial
institutions such as banks and broker/dealers and agree to repurchase them at a
mutually agreed-upon date and price. The Portfolios intend to enter into reverse
repurchase agreements only to avoid selling securities to meet redemptions
during market conditions deemed unfavorable by the investment adviser possessing
investment authority. At the time a Portfolio enters into a reverse repurchase
agreement, it will place in a segregated custodial account assets such as liquid
high quality debt securities having a value not less than 100% of the repurchase
price (including accrued interest), and will subsequently monitor the account to
ensure that such required value is maintained. Reverse repurchase agreements
involve the risk that the market value of the securities sold by a Portfolio may
decline below the price at which such Portfolio is obligated to repurchase the
securities. Reverse repurchase agreements are considered to be borrowings by an
investment company under the 1940 Act.
Resource Recovery Obligations-Resource recovery obligations are a type of
municipal revenue obligation issued to build facilities such as solid waste
incinerators or waste-to-energy plants. Usually, a private corporation will be
involved and the revenue cash flow will be supported by fees or units paid by
municipalities for use of the facilities. The viability of a resource recovery
project, environmental protection regulations and project operator tax
incentives may affect the value and credit quality of these obligations.
Revenue Obligations-Revenue obligations are backed by the revenue cash
flow of a project or facility.
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 through or with the
assistance of the issuer or dealers that make a market in the Section 4(2)
securities, thus providing liquidity.
The AMR Trust Board and the applicable investment adviser 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.
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.
17
<PAGE> 191
Because they do not pay coupon income, the prices of STRIPS and zero coupon
obligations can be very volatile when interest rates change. STRIPS are zero
coupon bonds issued by the U.S. Treasury.
Tax, Revenue or Bond Anticipation Notes-Tax, revenue or bond anticipation
notes are issued by municipalities in expectation of future tax or other
revenues which are payable from these specific taxes or revenues. Bond
anticipation notes usually provide interim financing in advance of an issue of
bonds or notes, the proceeds of which are used to repay the anticipation notes.
Tax-exempt commercial paper is issued by municipalities to help finance
short-term capital or operating needs in anticipation of future tax or other
revenue.
U.S. Government Securities-U.S. Government securities are issued or
guaranteed by the U.S. Government and include U.S. Treasury obligations (see
definition below) and securities issued by U.S. agencies and instrumentalities.
U. S. Government agencies or instrumentalities that issue or guarantee
securities include, but are not limited to, the Federal Housing Administration,
Farmers Home Administration, Export-Import Bank of the United States, Small
Business Administration, GNMA, General Services Administration, Central Bank for
Cooperatives, Federal Home Loan Banks, FHLMC, Federal Intermediate Credit Banks,
Federal Land Banks, Maritime Administration, Tennessee Valley Authority,
District of Columbia Armory Board, Inter-American Development Bank,
Asian-American Development Bank, Agency for International Development, Student
Loan Marketing Association and International Bank of Reconstruction and
Development.
Obligations of U.S. Government agencies and instrumentalities may or may
not be supported by the full faith and credit of the United States. Some are
backed by the right of the issuer to borrow from the Treasury; others are
supported by discretionary authority of the U.S. Government to purchase the
agencies' obligations; while still others, such as the Student Loan Marketing
Association, are supported only by the credit of the instrumentality. In the
case of securities not backed by the full faith and credit of the United States,
the investor must look principally to the agency issuing or guaranteeing the
obligation for ultimate repayment, and may not be able to assert a claim against
the United States itself in the event the agency or instrumentality does not
meet its commitment.
U.S. Treasury Obligations-U.S. Treasury obligations include bills, notes
and bonds issued by the U.S. Treasury and Separately Traded Registered Interest
and Principal component parts of such obligations known as STRIPS.
Variable or Floating Rate Obligations-A variable rate obligation is one
whose terms provide for the adjustment of its interest rate on set dates and
which, upon such adjustment, can reasonably be expected to have a market value
that approximates its par value. A floating rate obligation is one whose terms
provide for the adjustment of its interest rate whenever a specified interest
rate changes and which, at any time, can reasonably be expected to have a market
value that approximates its par value. Variable or floating rate obligations may
be secured by bank letters of credit.
Pursuant to Rule 2a-7 under the 1940 Act, variable or floating rate
obligations with stated maturities of more than 397 days may be deemed to have
shorter maturities as follows:
(1) An obligation that is issued or guaranteed by the United States
Government or any agency thereof which has a variable rate of interest
readjusted no less frequently than every 762 days will be deemed by a Portfolio
to have a maturity equal to the period remaining until the next readjustment of
the interest rate.
(2) A variable rate obligation, the principal amount of which is
scheduled on the face of the instrument to be paid in 397 days or less, will be
deemed by a Portfolio to have a maturity equal to the period remaining until the
next readjustment of the interest rate.
(3) A variable rate obligation that is subject to a demand feature will
be deemed by a Portfolio to have a maturity equal to the longer of the period
remaining until the next readjustment of the interest rate or the period
remaining until the principal amount can be recovered through demand.
(4) A floating rate obligation that is subject to a demand feature will
be deemed by a Portfolio to have a maturity equal to the period remaining until
the principal amount can be recovered through demand.
As used above, an obligation is "subject to a demand feature" when a
Portfolio is entitled to receive the principal amount of the obligation either
at any time on no more than 30 days' notice or at specified intervals not
exceeding one year and upon no more than 30 days' notice.
18
<PAGE> 192
Variable Rate Auction and Residual Interest Obligations-Variable rate
auction and residual interest obligations are created when an issuer or dealer
separates the principal portion of a long-term, fixed-rate municipal bond into
two long-term, variable-rate instruments. The interest rate on one portion
reflects short-term interest rates, while the interest rate on the other portion
is typically higher than the rate available on the original fixed-rate bond.
FINANCIAL STATEMENTS
The American AAdvantage Money Market Funds' and the American AAdvantage
Mileage Funds' Annual Reports to Shareholders for the fiscal year ended October
31, 1998, as audited by Ernst & Young, LLP, are supplied with the SAI, and the
financial statements and accompanying notes appearing therein are incorporated
by reference in this SAI.
19
<PAGE> 193
AMERICAN AADVANTAGE FUNDS
PART C. OTHER INFORMATION
Item 23. Exhibits
(a) Declaration of Trust - (iv)
(b) Bylaws - (iv)
(c) Voting trust agreement -- none
(d)(i)(A) Fund Management Agreement between American AAdvantage Funds and
AMR Investment Services, Inc. dated April 3, 1987 - (iv)
(i)(B) Supplement to Fund Management Agreement dated October 1, 1990 -
(iv)
(i)(C) Supplement to Fund Management Agreement dated August 1, 1994 -
(iv)
(i)(D) Supplement to Fund Management Agreement dated August 1, 1995 -
(iv)
(i)(E) Amendment to Schedule A of Fund Management Agreement dated
December 1, 1995 - (i)
(i)(F) Supplement to Fund Management Agreement dated December 16, 1996
- (ii)
(i)(G) Supplement to Fund Management Agreement dated July 15, 1997 -
(iii)
(i)(H) Amendment to Schedule A of Fund Management Agreement dated
September 1, 1998 - (vi)
(ii)(A) Investment Advisory Agreement between AMR Investment Services,
Inc. and Independence Investment Associates, Inc. dated
November 1, 1995 - (iv)
(ii)(B) Investment Advisory Agreement between AMR Investment Services,
Inc. and Morgan Stanley Asset Management Inc. dated November 1,
1995 - (iv)
(ii)(C) Investment Advisory Agreement between AMR Investment Services,
Inc. and Templeton Investment Counsel, Inc. dated November 1,
1995 - (iv)
(ii)(D) Investment Advisory Agreement between AMR Investment Services,
Inc. and Barrow, Hanley, Mewhinney & Strause, Inc. dated
November 1, 1995 - (iv)
(ii)(E) Investment Advisory Agreement between AMR Investment Services,
Inc. and GSB Investment Management, Inc. dated November 1, 1995
- (iv)
(ii)(F) Investment Advisory Agreement between AMR Investment Services,
Inc. and Brandywine Asset Management, Inc. dated January 16,
1998 - (v)
(ii)(G) Investment Advisory Agreement between AMR Investment Services,
Inc. and Hotchkis and Wiley, a division of the Capital
Management Group of Merrill Lynch Asset Management, L.P. dated
November 12, 1996 - (ii)
(ii)(H) Amendment to Schedule A of Advisory Agreement between AMR
Investment Services, Inc. and Brandywine Asset Management, Inc.
dated October 15, 1998 - (vi)
<PAGE> 194
(ii)(I) Amendment to Schedule A to of Advisory Agreement between AMR
Investment Services, Inc. and Hotchkis and Wiley, a division of
the Capital Management Group of Merrill Lynch Asset Management,
L.P. dated October 15, 1998 - (vi)
(iii)(A) Administrative Services Agreement between the American
AAdvantage Funds and AMR Investment Services, Inc. dated
November 21, 1997 - (iv)
(iii)(B) Supplement to Administrative Services Agreement dated
September 1, 1998 - (vi)
(iv) Administrative Services Plan for the Platinum Class - (iv)
(v) Administrative Agreement with S&P 500 Index Fund - (iv)
(e) Distribution Agreement among the American AAdvantage Funds, the
American AAdvantage Mileage Funds and Brokers Transaction
Services, Inc. dated September 1, 1995 - (iv)
(f) Bonus, profit sharing or pension plans - none
(g) Custodian Agreement between the American AAdvantage Funds and
State Street Bank and Trust Company dated December 1, 1997 -
(v)
(h)(i) Transfer Agency and Service Agreement between the American
AAdvantage Funds-and State Street Bank and Trust Company dated
January 1, 1998 - (v)
(ii) Securities Lending Authorization Agreement between American
AAdvantage Funds and State Street Bank and Trust Company dated
January 2, 1998 - (v)
(iii) Service Plan Agreement for the American AAdvantage Funds
PlanAhead Class dated August 1, 1994 - (iv)
(i) Opinion and consent of counsel - filed herewith
(j) Consent of Independent Auditors - none
(k) Financial statements omitted from prospectus - none
(l) Letter of investment intent - (iv)
(m)(i) Plan pursuant to Rule 12b-1 for the Institutional, PlanAhead
and AMR Classes - (iv)
(ii) Plan pursuant to Rule 12b-1 for the Platinum Class - (iv)
(n) Financial Data Schedules - none
(o) Amended and Restated Plan pursuant to Rule 18f-3 - (iv)
Other Exhibits - Powers of Attorney for all Trustees - (ii)
- -------------------------
(i) Incorporated by reference to PEA No. 15 to the Registration Statement of
the Trust on Form N-1A as filed with the SEC on December 22, 1995.
(ii) Incorporated by reference to PEA No. 19 to the Registration Statement of
the Trust on Form N-1A as filed with the SEC on February 13, 1997.
C-2
<PAGE> 195
(iii) Incorporated by reference to PEA No. 20 to the Registration Statement of
the Trust on Form N-1A as filed with the SEC on July 1, 1997.
(iv) Incorporated by reference to PEA No. 23 to the Registration Statement of
the Trust on Form N-1A as filed with the SEC on December 18, 1997.
(v) Incorporated by reference to PEA No. 24 to the Registration Statement of
the Trust on Form N-1A as filed with the SEC on February 27, 1998.
(vi) Incorporated by reference to PEA No. 25 to the Registration Statement of
the Trust on Form N-1A as filed with the SEC on October 15, 1998.
Item 24. Persons Controlled by or under Common Control with Registrant
None.
Item 25. Indemnification
Article XI, Section 2 of the Declaration of Trust of the Trust provides
that:
(a) Subject to the exceptions and limitations contained in paragraph
(b) below:
(i) every person who is, or has been, a Trustee or officer of the
Trust (hereinafter referred to as "Covered Person") shall be indemnified by the
appropriate portfolios to the fullest extent permitted by law against liability
and against all expenses reasonably incurred or paid by him in connection with
any claim, action, suit or proceeding in which he becomes involved as a party or
otherwise by virtue of his being or having been a Trustee or officer and against
amounts paid or incurred by him in the settlement thereof;
(ii) the words "claim," "action," "suit," or "proceeding" shall
apply to all claims, actions, suits or proceedings (civil, criminal or other,
including appeals), actual or threatened while in office or thereafter, and the
words "liability" and "expenses" shall include, without limitation, attorneys'
fees, costs, judgments, amounts paid in settlement, fines, penalties and other
liabilities.
(b) No indemnification shall be provided hereunder to a Covered
Person:
(i) who shall have been adjudicated by a court or body before
which the proceeding was brought (A) to be liable to the Trust or its
Shareholders by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office or (B)
not to have acted in good faith in the reasonable belief that his action was in
the best interest of the Trust; or
(ii) in the event of a settlement, unless there has been a
determination that such Trustee or officer did not engage in willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office (A) by the court or other body approving
the settlement; (B) by at least a majority of those Trustees who are neither
interested persons of the Trust nor are parties to the matter based upon a
review of readily available facts (as opposed to a full trial-type inquiry); or
(C) by written opinion of independent legal counsel based upon a review of
readily available facts (as opposed to a full trial-type inquiry); provided,
however, that any Shareholder
C-3
<PAGE> 196
may, by appropriate legal proceedings, challenge any such determination by the
Trustees, or by independent counsel.
(c) The rights of indemnification herein provided may be insured
against by policies maintained by the Trust, shall be severable, shall not be
exclusive of or affect any other rights to which any Covered Person may now or
hereafter be entitled, shall continue as to a person who has ceased to be such
Trustee or officer and shall inure to the benefit of the heirs, executors and
administrators of such a person. Nothing contained herein shall affect any
rights to indemnification to which Trust personnel, other than Trustees and
officers, and other persons may be entitled by contract or otherwise under law.
(d) Expenses in connection with the preparation and presentation of a
defense to any claim, action, suit, or proceeding of the character described in
paragraph (a) of this Section 2 may be paid by the applicable Portfolio from
time to time prior to final disposition thereof upon receipt of an undertaking
by or on behalf of such Covered Person that such amount will be paid over by him
to the Trust if it is ultimately determined that he is not entitled to
indemnification under this Section 2; provided, however, that:
(i) such Covered Person shall have provided appropriate security
for such undertaking;
(ii) the Trust is insured against losses arising out of any such
advance payments; or
(iii) either a majority of the Trustees who are neither interested
persons of the Trust nor parties to the matter, or independent legal counsel in
a written opinion, shall have determined, based upon a review of readily
available facts (as opposed to a trial-type inquiry or full investigation), that
there is reason to believe that such Covered Person will be found entitled to
indemnification under this Section 2.
According to Article XII, Section 1 of the Declaration of Trust, the
Trust is a trust, not a partnership. Trustees are not liable personally to any
person extending credit to, contracting with or having any claim against the
Trust, a particular Portfolio or the Trustees. A Trustee, however, is not
protected from liability due to willful misfeasance, bad faith, gross negligence
or reckless disregard of the duties involved in the conduct of his office.
Article XII, Section 2 provides that, subject to the provisions of
Section 1 of Article XII and to Article XI, the Trustees are not liable for
errors of judgment or mistakes of fact or law, or for any act or omission in
accordance with advice of counsel or other experts or for failing to follow such
advice.
Item 26. I. Business and Other Connections of Investment Manager
AMR Investment Services, Inc. (the "Manager"), 4333 Amon Carter
Boulevard, MD 5645, Fort Worth, Texas 76155, offers investment management and
administrative services. Information as to the officers and directors of the
Manager is included in its current Form ADV filed with the SEC and is
incorporated by reference herein.
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<PAGE> 197
II. Business and Other Connections of Investment Advisers
The investment advisers listed below provide investment advisory
services to the Trust.
Barrow, Hanley, Mewhinney & Strauss, 3232 McKinney Avenue, 15th Floor,
Dallas, Texas 75204.
Brandywine Asset Management, Inc., 201 North Walnut Street, Wilmington,
Delaware 19801.
GSB Investment Management, Inc., 301 Commerce Street, Suite 1501, Fort
Worth, Texas 76102.
Hotchkis and Wiley, 800 West Sixth Street, 5th Floor, Los Angeles,
California 90017.
Independence Investment Associates, Inc., 53 State Street, Boston,
Massachusetts 02109.
Morgan Stanley Asset Management Inc., 1221 Avenue of the Americas, 21st
Floor, New York, New York 10020.
Templeton Investment Counsel, Inc. 500 East Broward Blvd., Ft.
Lauderdale, Florida 33394.
Information as to the officers and directors of each of the above
investment advisers is included in that adviser's current Form ADV filed with
the SEC and is incorporated by reference herein.
Item 27. Principal Underwriter
(a) Brokers Transaction Services, Inc., 7001 Preston Road, Dallas, TX
75205 is the principal underwriter for the Trust and the American AAdvantage
Mileage Funds.
(b) The directors and officers of the Trust's principal underwriter
are:
<TABLE>
<CAPTION>
Positions & Offices Position
Name with Underwriter with Registrant
- ---- ---------------- ---------------
<S> <C> <C>
Sue H. Peden Chief Executive Officer None
Raymond E. Wooldridge Chairman None
Dianna Boswell President None
Diana Burrell Vice President None
Diane Scott Assistant Vice President None
</TABLE>
C-5
<PAGE> 198
The address of the above named directors and officers is 7001 Preston
Road, Dallas, TX 75205.
Item 28. Location of Accounts and Records
The books and other documents required by Rule 31a-1 under the
Investment Company Act of 1940 are maintained as follows:
31a-1(b)(1) - in the physical possession of the Trust's custodian;
31a-1(b)(2)(i),(ii)&(iii) - in the physical possession of the Trust's custodian
31a-1(b)(2)(iv) - in the physical possession of the Trust's transfer agent
31a-1(b)(4) - in the physical possession of the Trust's Manager
31a-1(b)(5) - in the physical possession of the Trust's investment advisers
31a-1(b)(6) - A record of other purchases or sales etc. - in the physical
possession of the Trust's Manager, investment advisers and custodian
31a-1(b)(7) - in the physical possession of the Trust's custodian
31a-1(b)(8) - in the physical possession of the Trust's custodian
31a-1(b)(9) - in the physical possession of the Trust's investment advisers
31a-1(b)(10) - in the physical possession of the Trust's Manager
31a-1(b)(11) - in the physical possession of the Trust's Manager
31a-1(b)(12) - in the physical possession of the Trust's Manager, investment
advisers and custodian
Item 29. Management Services
All substantive provisions of any management-related service contract
are discussed in Part A or Part B.
Item 30. Undertakings
Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of its latest annual report to Shareholders,
upon request and without charge.
Registrant hereby undertakes to carry out all indemnification
provisions of its Declaration of Trust in accordance with Investment Company Act
Release No. 11330 (September 4, 1980) and successor releases.
Insofar as indemnification for liability arising under the Securities
Act of 1933, as amended ("1933 Act"), may be permitted to trustees, officers and
controlling persons of the Registrant pursuant to the provisions under Item 27
herein, or otherwise, the Registrant has been advised that in the opinion of the
SEC such indemnification is against public policy as expressed in the 1933 Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a trustee, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
trustee, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the 1933 Act and will be governed by the final
adjudication.
C-6
<PAGE> 199
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, the Registrant has duly
caused this Post-Effective Amendment No. 26 to its Registration Statement on
Form N-1A to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Fort Worth and the State of Texas on December 15,
1998.
AMERICAN AADVANTAGE FUNDS
By: /s/ William F. Quinn
---------------------------
William F. Quinn
President
Attest:
/s/ Barry Y. Greenberg
- --------------------------------------
Barry Y. Greenberg
Vice President and Assistant Secretary
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Post-Effective Amendment No. 26 to the Registration Statement has been
signed below by the following persons in the capacities and on the dates
indicated.
Signature Title Date
- --------- ----- ----
/s/ William F. Quinn President and December 15, 1998
- -------------------------------- Trustee
William F. Quinn
Alan D. Feld* Trustee December 15, 1998
- --------------------------------
Alan D. Feld
Ben J. Fortson* Trustee December 15, 1998
- --------------------------------
Ben J. Fortson
John S. Justin* Trustee December 15, 1998
- --------------------------------
John S. Justin
Stephen D. O'Sullivan* Trustee December 15, 1998
- --------------------------------
Stephen D. O'Sullivan
Roger T. Staubach* Trustee December 15, 1998
- --------------------------------
Roger T. Staubach
Dr. Kneeland Youngblood * Trustee December 15, 1998
- --------------------------------
Dr. Kneeland Youngblood
*By /s/ William F. Quinn
----------------------------------
William F. Quinn, Attorney-In-Fact
<PAGE> 200
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, AMR Investment Services
Trust has duly caused this Post-Effective Amendment No. 26 to the Registration
Statement on Form N-1A as it relates to the AMR Investment Services Trust to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Fort Worth and the State of Texas on December 15, 1998.
AMR INVESTMENT SERVICES TRUST
By: /s/ William F. Quinn
-----------------------------
William F. Quinn
President
Attest:
/s/ Barry Y. Greenberg
- --------------------------------------
Barry Y. Greenberg
Vice President and Assistant Secretary
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Post-Effective Amendment No. 26 to the Registration Statement for the
American AAdvantage Funds as it relates to the AMR Investment Services Trust has
been signed below by the following persons in the capacities and on the dates
indicated.
Signature Title Date
- --------- ----- ----
/s/ William F. Quinn President and December 15, 1998
- ----------------------------------- Trustee
William F. Quinn
Alan D. Feld* Trustee December 15, 1998
- -----------------------------------
Alan D. Feld
Ben J. Fortson* Trustee December 15, 1998
- -----------------------------------
Ben J. Fortson
John S. Justin* Trustee December 15, 1998
- -----------------------------------
John S. Justin
Stephen D. O'Sullivan* Trustee December 15, 1998
- -----------------------------------
Stephen D. O'Sullivan
Roger T. Staubach* Trustee December 15, 1998
- -----------------------------------
Roger T. Staubach
Dr. Kneeland Youngblood * Trustee December 15, 1998
- -----------------------------------
Dr. Kneeland Youngblood
*By /s/ William F. Quinn
----------------------------------
William F. Quinn, Attorney-In-Fact
<PAGE> 201
SIGNATURES
Equity 500 Index Portfolio has duly caused this Post-Effective
Amendment No. 26 to the Registration Statement on Form N-1A of American
AAdvantage Funds, as it relates to the American AAdvantage S&P 500 Index Fund,
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Pittsburgh and the Commonwealth of Pennsylvania on December 11, 1998.
EQUITY 500 INDEX PORTFOLIO
By: /s/ Jay S. Neuman
-----------------------
Jay S. Neuman
Secretary
This Post-Effective Amendment No. 26 to the Registration Statement on
Form N-1A of American AAdvantage Funds, as it relates to the American AAdvantage
S&P 500 Index Fund, has been signed below by the following persons, in the
capacities indicated, with respect to Equity 500 Index Portfolio on December 11,
1998.
SIGNATURE TITLE
Charles P. Biggar* Trustee
- --------------------
Charles P. Biggar
S. Leland Dill* Trustee
- --------------------
S. Leland Dill
Philip Saunders, Jr* Trustee
- --------------------
Philip Saunders, Jr.
Ronald M. Petnuch * President and Treasurer (Chief Executive Officer,
- -------------------- Principal Financial and Accounting Officer)
Ronald M. Petnuch
*By: /s/ Jay S. Neuman
---------------------------------------------------
Jay S. Neuman, Secretary of Equity 500 Index Portfolio,
as Attorney-in-Fact pursuant to a Power of Attorney
<PAGE> 202
INDEX TO EXHIBITS
Exhibit
Number Description
(a) Declaration of Trust - (iv)
(b) Bylaws - (iv)
(c) Voting trust agreement -- none
(d)(i)(A) Fund Management Agreement between American AAdvantage Funds and
AMR Investment Services, Inc. dated April 3, 1987 - (iv)
(i)(B) Supplement to Fund Management Agreement dated October 1, 1990 -
(iv)
(i)(C) Supplement to Fund Management Agreement dated August 1, 1994 -
(iv)
(i)(D) Supplement to Fund Management Agreement dated August 1, 1995 -
(iv)
(i)(E) Amendment to Schedule A of Fund Management Agreement dated
December 1, 1995 - (i)
(i)(F) Supplement to Fund Management Agreement dated December 16, 1996
- (ii)
(i)(G) Supplement to Fund Management Agreement dated July 15, 1997 -
(iii)
(i)(H) Amendment to Schedule A of Fund Management Agreement dated
September 1, 1998 - (vi)
(ii)(A) Investment Advisory Agreement between AMR Investment Services,
Inc. and Independence Investment Associates, Inc. dated
November 1, 1995 - (iv)
(ii)(B) Investment Advisory Agreement between AMR Investment Services,
Inc. and Morgan Stanley Asset Management Inc. dated November 1,
1995 - (iv)
(ii)(C) Investment Advisory Agreement between AMR Investment Services,
Inc. and Templeton Investment Counsel, Inc. dated November 1,
1995 - (iv)
(ii)(D) Investment Advisory Agreement between AMR Investment Services,
Inc. and Barrow, Hanley, Mewhinney & Strause, Inc. dated
November 1, 1995 - (iv)
(ii)(E) Investment Advisory Agreement between AMR Investment Services,
Inc. and GSB Investment Management, Inc. dated November 1, 1995
- (iv)
(ii)(F) Investment Advisory Agreement between AMR Investment Services,
Inc. and Brandywine Asset Management, Inc. dated January 16,
1998 - (v)
(ii)(G) Investment Advisory Agreement between AMR Investment Services,
Inc. and Hotchkis and Wiley, a division of the Capital
Management Group of Merrill Lynch Asset Management, L.P. dated
November 12, 1996 - (ii)
(ii)(H) Amendment to Schedule A of Advisory Agreement between AMR
Investment Services, Inc. and Brandywine Asset Management, Inc.
dated October 15, 1998 - (vi)
(ii)(I) Amendment to Schedule A to of Advisory Agreement between AMR
Investment Services, Inc. and Hotchkis and Wiley, a division of
the Capital Management Group of Merrill Lynch Asset Management,
L.P. dated October 15, 1998 - (vi)
<PAGE> 203
(iii)(A) Administrative Services Agreement between the American
AAdvantage Funds and AMR Investment Services, Inc. dated
November 21, 1997 - (iv)
(iii)(B) Supplement to Administrative Services Agreement dated
September 1, 1998 - (vi)
(iv) Administrative Services Plan for the Platinum Class - (iv)
(v) Administrative Agreement with S&P 500 Index Fund - (iv)
(e) Distribution Agreement among the American AAdvantage Funds, the
American AAdvantage Mileage Funds and Brokers Transaction
Services, Inc. dated September 1, 1995 - (iv)
(f) Bonus, profit sharing or pension plans - none
(g) Custodian Agreement between the American AAdvantage Funds and
State Street Bank and Trust Company dated December 1, 1997 -
(v)
(h)(i) Transfer Agency and Service Agreement between the American
AAdvantage Funds-and State Street Bank and Trust Company dated
January 1, 1998 - (v)
(ii) Securities Lending Authorization Agreement between American
AAdvantage Funds and State Street Bank and Trust Company dated
January 2, 1998 - (v)
(iii) Service Plan Agreement for the American AAdvantage Funds
PlanAhead Class dated August 1, 1994 - (iv)
(i) Opinion and consent of counsel - filed herewith
(j) Consent of Independent Auditors - none
(k) Financial statements omitted from prospectus - none
(l) Letter of investment intent - (iv)
(m)(i) Plan pursuant to Rule 12b-1 for the Institutional, PlanAhead
and AMR Classes - (iv)
(ii) Plan pursuant to Rule 12b-1 for the Platinum Class - (iv)
(n) Financial Data Schedules - none
(o) Amended and Restated Plan pursuant to Rule 18f-3 - (iv)
Other Exhibits - Powers of Attorney for all Trustees - (ii)
- -------------------------
(i) Incorporated by reference to PEA No. 15 to the Registration Statement of
the Trust on Form N-1A as filed with the SEC on December 22, 1995.
(ii) Incorporated by reference to PEA No. 19 to the Registration Statement of
the Trust on Form N-1A as filed with the SEC on February 13, 1997.
(iii) Incorporated by reference to PEA No. 20 to the Registration Statement of
the Trust on Form N-1A as filed with the SEC on July 1, 1997.
(iv) Incorporated by reference to PEA No. 23 to the Registration Statement of
the Trust on Form N-1A as filed with the SEC on December 18, 1997.
(v) Incorporated by reference to PEA No. 24 to the Registration Statement of
the Trust on Form N-1A as filed with the SEC on February 27, 1998.
(vi) Incorporated by reference to PEA No. 25 to the Registration Statement of
the Trust on Form N-1A as filed with the SEC on October 15, 1998.
<PAGE> 1
EXHIBIT 99.i
December 9, 1998
American AAdvantage Mileage Funds
4333 Amon Carter Boulevard
Fort Worth, Texas 76155
Ladies and Gentlemen:
You have requested our opinion, as counsel to American AAdvantage
Mileage Funds (the "Trust"), as to certain matters regarding the issuance by the
Trust of shares of beneficial interest (collectively, the "Shares").
As such counsel, we have examined certified or other copies, believed
by us to be genuine, of the Trust's Declaration of Trust and by-laws and such
resolutions and minutes of meetings of the Trust's Board of Trustees as we have
deemed relevant to our opinion, as set forth herein. Our opinion is limited to
the laws and facts in existence on the date hereof, and it is further limited to
the laws (other than the conflict of law rules) in the Commonwealth of
Massachusetts that in our experience are normally applicable to the issuance of
shares by unincorporated voluntary associations and to the Securities Act of
1933 ("1933 Act"), the Investment Company Act of 1940 ("1940 Act") and the
regulations of the Securities and Exchange Commission ("SEC") thereunder.
Based on present laws and facts, we are of the opinion that the
issuance of the Shares has been duly authorized by the Trust and that, when sold
in accordance with the terms contemplated by the Post-Effective Amendment No. 7
to the Trust's Registration Statement on Form N-1A ("PEA"), including receipt by
the Trust of full payment for the Shares and compliance with the 1933 Act and
the 1940 Act, the Shares will have been validly issued, fully paid and
non-assessable.
We note, however, that the Trust is an entity of the type commonly
known as a "Massachusetts business trust." Under Massachusetts law, shareholders
could, under certain circumstances, be held personally liable for the
obligations of the Trust. The Declaration of Trust states that all persons
extending credit to, contracting with or having any claim against the Trust or
the Trustees shall look only to the assets of the Trust for payment under such
credit, contract or claim; and neither the Shareholders nor the Trustees, nor
any of their agents, whether past, present or future, shall be personally liable
therefor. It also requires that every note, bond, contract or other undertaking
issued by or on behalf of the Trust or the Trustees relating to the Trust shall
include a recitation limiting the obligation represented thereby to the Trust
and its assets. The Declaration of Trust further provides: (1) for
indemnification from the assets of the
<PAGE> 2
American AAdvantage Mileage Funds
December 9, 1998
Page 2
Trust for all loss and expense of any shareholder held personally liable for the
obligations of the Trust by virtue of ownership of shares of the Trust; and (2)
for the Trust to assume the defense of any claim against the shareholder for any
act or obligation of the Trust. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to circumstances
in which the Trust or series would be unable to meet its obligations.
We hereby consent to this opinion accompanying the PEA when it is filed
with the SEC and to the reference to our firm in the PEA.
Very truly yours,
KIRKPATRICK & LOCKHART LLP
By /s/ Robert J. Zutz
------------------------------
Robert J. Zutz
