<PAGE> 1
As filed with the Securities and Exchange Commission on December 21, 1999
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. 28 [ ]
----
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ X ]
Amendment No. 29
----
(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, a master trust, 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, Large Cap
Value 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, Large Cap Value 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, Large Cap Value Fund,
International Equity Fund, Small Cap Value Fund, Intermediate
Bond Fund and Short-Term Bond Fund
Prospectus for the Platinum Class of the American AAdvantage
Money Market Fund, American AAdvantage Municipal Money Market
Fund, American AAdvantage U.S. Government Money Market Fund,
American AAdvantage Money Market Mileage Fund, American
AAdvantage Municipal Money Market Mileage Fund and American
AAdvantage U.S. Government 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, Large Cap Value 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, American AAdvantage Municipal Money Market Mileage Fund and
American AAdvantage U.S. Government Money Market Mileage Fund
Part C
Signature Pages
Exhibits
<PAGE> 3
-------------------
INSTITUTIONAL CLASS
-------------------
[LOGO]
PROSPECTUS
MARCH 1, 2000
[AMERICAN AADVANTAGE FUNDS LOGO]
EQUITY FUNDS
------------------------------------------
o BALANCED FUND
o LARGE CAP VALUE FUND
o SMALL CAP VALUE FUND
o INTERNATIONAL EQUITY FUND
o S&P 500 INDEX FUND
BOND FUNDS
------------------------------------------
o INTERMEDIATE BOND FUND
o SHORT-TERM BOND FUND
MONEY MARKET FUNDS
---------------------------------------------------
o MONEY MARKET FUND
o U.S. GOVERNMENT MONEY MARKET FUND
o MUNICIPAL MONEY MARKET FUND
MANAGED BY AMR INVESTMENT SERVICES, INC.
[EAGLE LOGO]
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
[AMERICAN AADVANTAGE FUNDS INST. CLASS LOGO]
TABLE OF CONTENTS
<TABLE>
<S> <C>
About the Funds
Overview........................................ 2
Balanced Fund................................... 3
Large Cap Value Fund............................ 6
Small Cap Value Fund............................ 8
International Equity Fund....................... 10
S&P 500 Index Fund.............................. 12
Intermediate Bond Fund.......................... 15
Short-Term Bond Fund............................ 18
Money Market Fund............................... 20
U.S. Government Money Market Fund............... 22
Municipal Money Market Fund..................... 24
The Manager..................................... 26
Equity 500 Index Portfolio Administrator........ 27
The Investment Advisers......................... 27
Valuation of Shares............................. 28
About Your Investment
Purchase and Redemption of Shares............... 29
Distributions and Taxes......................... 32
Additional Information
Distribution of Trust Shares.................... 33
Master-Feeder Structure......................... 33
Financial Highlights............................ 34
Additional Information.................... Back Cover
</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
State Street Equity 500 Index Portfolio ("Equity 500 Index Portfolio"), which is
a separate investment company with an identical investment objective, managed by
State Street Bank and Trust Company ("State Street"), through its State Street
Global Advisors division. 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".
- --------------------------------------------------------------------------------
About the Funds 2 Prospectus
<PAGE> 5
AMERICAN AADVANTAGE
BALANCED FUND(SM)
- --------------------------------------------------------------------------------
Investment Objective
- -------------------------------
Income and capital appreciation.
Principal Strategies
- ------------------------------
This Fund typically invests between 50% and 65% of its total assets in equity
securities and between 35% and 50% of its total 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:
- - above-average earnings growth potential,
- - below-average price to earnings ratio,
- - below-average price to book value ratio, and
- - above-average dividend yields.
Each of the Fund's investment advisers determines the earnings 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.
One of the investment advisers utilizes an "amplified alpha" approach in
determining which equity securities to buy and sell. This approach attempts to
amplify the outperformance expected from the best ideas of the other investment
advisers by concentrating assets in those stocks that are overweighted in the
aggregate of the advisers' portfolios when compared to a relevant market index.
The Fund's investments in debt securities may include: obligations of the U.S.
Government, its agencies and instrumentalities; U.S. 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 Corporation or Moody's Investors Service, Inc.).
Obligations rated in the fourth highest rating category are limited to 25% of
the Fund's total assets. The Fund, at the discretion of the applicable
investment adviser, 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" or "bottom-up" investment strategy, or a combination
of both strategies.
The top-down fixed income investment strategy is implemented as follows:
- - Develop an overall investment strategy, including a portfolio duration target,
by examining the current trend in the U.S. economy.
- - Set desired portfolio maturity structure by comparing the differences between
corporate and U.S. Government securities of similar duration to judge their
potential for optimal return in accordance with the target duration benchmark.
- - Determine the weightings of each security type by analyzing the difference in
yield spreads between corporate and U.S. Government securities.
- - Select specific debt securities within each security type.
- - Review and monitor portfolio composition for changes in credit, risk-return
profile and comparisons with benchmarks.
The bottom-up fixed income investment strategy is implemented as follows:
- - Search for eligible securities with a yield to maturity advantage versus a
U.S. Government security with a similar maturity.
- --------------------------------------------------------------------------------
Prospectus 3 About the Funds
<PAGE> 6
AMERICAN AADVANTAGE
BALANCED FUND(SM) -- (CONTINUED)
- --------------------------------------------------------------------------------
- - Evaluate credit quality of the securities.
- - Perform an analysis of the expected price volatility of the securities to
changes in interest rates by examining actual price volatility between U.S.
Government and non-U.S. Government securities.
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.
Risk Factors
- -------------------
MARKET RISK (STOCKS)
Since this Fund invests a substantial portion of its assets in stocks, 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.
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, bond prices generally 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.
CREDIT RISK (BONDS)
The Fund is subject to the risk that the 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.
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 and the Fund may have to invest at a
lower rate.
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. When
you sell your shares of the Fund, they could be worth less than what you paid
for them.
- --------------------------------------------------------------------------------
About the Funds 4 Prospectus
<PAGE> 7
AMERICAN AADVANTAGE
BALANCED FUND(SM) -- (CONTINUED)
- --------------------------------------------------------------------------------
Historical Performance
- -----------------------------------
The bar chart and table below provide 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 three broad-based market indices and the Lipper Balanced
Index, a composite of mutual funds 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
[PERFORMANCE GRAPH]
<TABLE>
<S> <C>
90.......................................................... 0.29%
91.......................................................... 21.22%
92.......................................................... 8.97%
93.......................................................... 14.46%
94.......................................................... -1.84%
95.......................................................... 28.79%
96.......................................................... 13.96%
97.......................................................... 19.87%
98.......................................................... 8.28%
99.......................................................... x.xx%
</TABLE>
<TABLE>
<S> <C>
Highest Quarterly Return: x.xx%
(1/1/90 through 12/31/99) (x Quarter 19xx)
Lowest Quarterly Return: x.xx%
(1/1/90 through 12/31/99) (x Quarter 19xx)
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
-----------------------------------
AS OF 12/31/99
-----------------------------------
1 YEAR 5 YEARS 10 YEARS
-------- --------- ----------
<S> <C> <C> <C>
BALANCED FUND x.xx% x.xx% x.xx%
S&P/Barra Value Index* 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/Barra Value Index is a market value weighted index of stocks with
book-to-price ratios in the top 50% of the S&P 500 Index.
** 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 0.30%
Distribution (12b-1) Fees 0.00
Other Expenses x.xx
----
TOTAL ANNUAL FUND OPERATING EXPENSES x.xx%
====
</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 $10,000 in the Fund for
the time periods indicated and then redeem all
of your shares at the end of those periods. The
Example also assumes that your investment has a
5% return each year and that the Fund's
operating expenses remain the same. Although
your actual costs may be higher or lower, based
on these assumptions your costs would be:
1 YEAR .....................................$xxx
3 YEARS.....................................$xxx
5 YEARS.....................................$xxx
10 YEARS....................................$xxx
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.
- --------------------------------------------------------------------------------
Prospectus 5 About the Funds
<PAGE> 8
AMERICAN AADVANTAGE
LARGE CAP VALUE FUND(SM)
- --------------------------------------------------------------------------------
Investment Objective
- -------------------------------
Long-term capital appreciation and current income.
Principal Strategies
- ------------------------------
Ordinarily at least 65% of the total assets of this Fund are invested in equity
securities of U.S. companies with market capitalizations of $5 billion or more
at the time of investment. 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:
- - above-average earnings growth potential,
- - below-average price to earnings ratio,
- - below-average price to book value ratio, and
- - above-average dividend yields.
Each of the Fund's investment advisers determines the earnings 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.
One of the investment advisers utilizes an "amplified alpha" approach in
determining which equity securities to buy and sell. This approach attempts to
amplify the outperformance expected from the best ideas of the other investment
advisers by concentrating assets in those stocks that are overweighted in the
aggregate of the advisers' portfolios when compared to a relevant market index.
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.
Risk Factors
- -------------------
MARKET RISK
Since this Fund invests most of its assets in stocks, 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.
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. When
you sell your shares of the Fund, they could be worth less than what you paid
for them.
- --------------------------------------------------------------------------------
About the Funds 6 Prospectus
<PAGE> 9
AMERICAN AADVANTAGE
LARGE CAP VALUE FUND(SM) -- (CONTINUED)
- --------------------------------------------------------------------------------
Historical Performance
- -----------------------------------
The bar chart and table below provide 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/Barra Value Index, a market value weighted index
of stocks with book-to-price ratios in the top 50% of the S&P 500 Index, the S&P
500, a widely recognized unmanaged index of common stocks publicly traded in the
U.S., and the Lipper Multi Cap Value Index, a composite of mutual funds 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
[PERFORMANCE GRAPH]
<TABLE>
<S> <C>
90.......................................................... -5.97%
91.......................................................... 26.00%
92.......................................................... 11.90%
93.......................................................... 15.74%
94.......................................................... -1.14%
95.......................................................... 34.43%
96.......................................................... 21.09%
97.......................................................... 26.48%
98.......................................................... 6.17%
99.......................................................... x.xx%
</TABLE>
<TABLE>
<S> <C>
Highest Quarterly Return: x.xx%
(1/1/90 through 12/31/99) (x Quarter 19xx)
Lowest Quarterly Return: x.xx%
(1/1/90 through 12/31/99) (x Quarter 19xx)
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL
RETURN
----------------------------
AS OF 12/31/99
----------------------------
1 YEAR 5 YEARS 10 YEARS
------ -------- --------
<S> <C> <C> <C>
LARGE CAP VALUE FUND x.xx% x.xx% x.xx%
S&P/Barra Value Index x.xx% x.xx% x.xx%
S&P 500 Index x.xx% x.xx% x.xx%
Lipper Multi Cap Value
Index* x.xx% x.xx% x.xx%
</TABLE>
* On September 1, 1999, Lipper reclassified the Fund from the Lipper Growth
and Income Index to the Lipper Multi Cap Value Index.
Fees and Expenses
- ----------------------------
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Large Cap Value Fund.(1)
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)
<TABLE>
<S> <C>
Management Fees 0.30%
Distribution (12b-1) Fees 0.00
Other Expenses x.xx
----
TOTAL ANNUAL FUND OPERATING EXPENSES x.xx%
====
</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 $10,000 in the Fund for the time periods indicated and then redeem all of
your shares at the end of those periods. The Example also assumes that your
investment has a 5% return each year and that the Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
<TABLE>
<S> <C>
1 YEAR .....................................$xxx
3 YEARS.....................................$xxx
5 YEARS.....................................$xxx
10 YEARS....................................$xxx
</TABLE>
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.
- --------------------------------------------------------------------------------
Prospectus 7 About the Funds
<PAGE> 10
AMERICAN AADVANTAGE
SMALL CAP VALUE FUND(SM)
- --------------------------------------------------------------------------------
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:
- - above-average earnings growth potential,
- - below-average price to earnings ratio,
- - below-average price to book value ratio, and
- - above-average dividend yields.
Each of the investment advisers determines the earnings 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.
Risk Factors
- -------------------
MARKET RISK
Since this Fund invests most of its assets in stocks, 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.
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.
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. When
you sell your shares of the Fund, they could be worth less than what you paid
for them.
About the Funds 8 Prospectus
<PAGE> 11
AMERICAN AADVANTAGE
SMALL CAP VALUE FUND(SM) -- (CONTINUED)
- --------------------------------------------------------------------------------
Historical Performance
- -----------------------------------
The bar chart and table below provide 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 Russell 2000(R)--Index, a widely-recognized
unmanaged index of 2,000 small capitalization stocks, and the Lipper Small Cap
Value Index, a composite of mutual funds 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 12/31/99
[PERFORMANCE GRAPH]
<TABLE>
<S> <C>
99....................................................... x.xx%
</TABLE>
<TABLE>
<S> <C>
Highest Quarterly Return: x.xx%
(1/1/99 through 12/31/99) (x Quarter 1999)
Lowest Quarterly Return: x.xx%
(1/1/99 through 12/31/99) (x Quarter 1999)
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
----------------------------
AS OF 12/31/99
----------------------------
1 YEAR
-------
<S> <C>
SMALL CAP VALUE FUND x.xx%
Russell 2000 Index x.xx%
Lipper Small Cap Value Index 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 Small Cap Value Fund.(1)
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)
<TABLE>
<S> <C>
Management Fees 0.68%
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%(2)
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) The Manager has contractually agreed to reimburse the Fund for Other
Expenses through October 31, 2000 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 $10,000 in the Fund for
the time periods indicated and then redeem all
of your shares at the end of those periods. The
Example also assumes that your investment has a
5% return each year and that the Fund's operating
expenses remain the same. Because the Manager's
expense reimbursement is only guaranteed through
October 31, 2000, net expenses are used to
calculate costs in year one, and total fund
expenses are used to calculate costs in years two
through ten. Although your actual costs may be
higher or lower, based on these assumptions your
costs would be:
1 YEAR .....................................$xxx
3 YEARS.....................................$xxx
5 YEARS.....................................$xxx
10 YEARS.....................................$xxx
Investment Advisers
- ------------------------------
The Manager allocates the assets of the Fund among the following investment
advisers:
Brandywine Asset Management, Inc.
Hotchkis and Wiley
- --------------------------------------------------------------------------------
Prospectus 9 About the Funds
<PAGE> 12
AMERICAN AADVANTAGE
INTERNATIONAL EQUITY FUND(SM)
- --------------------------------------------------------------------------------
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>
Australia France Mexico South Korea
Austria Germany Netherlands Spain
Belgium Hong Kong New Zealand Sweden
Canada Ireland Norway Switzerland
Denmark Italy Portugal United Kingdom
Finland Japan Singapore
</TABLE>
The investment advisers select stocks which, in their opinion, have most or all
of the following characteristics:
- - above-average earnings growth potential,
- - below-average price to earnings ratio,
- - below-average price to book value ratio, and
- - above-average dividend yields.
The investment advisers may also consider potential changes in currency
exchange rates when choosing stocks. Each of the investment advisers determines
the earnings 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 or currency futures
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.
One of the investment advisers utilizes an "amplified alpha" approach in
determining which equity securities to buy and sell. This approach attempts to
amplify the outperformance expected from the best ideas of the other investment
advisers by concentrating assets in those stocks that are overweighted in the
aggregate of the advisers' portfolios when compared to a relevant market index.
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.
Risk Factors
- -------------------
MARKET RISK
Since this Fund invests most of its assets in stocks, 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 market 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.
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, (7) delays in transaction settlement in some foreign
markets, and (8) adverse impact of the euro conversion on the business or
financial condition of companies in which the Fund is invested.
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
- --------------------------------------------------------------------------------
About the Funds 10 Prospectus
<PAGE> 13
AMERICAN AADVANTAGE
INTERNATIONAL EQUITY FUND(SM) -- (CONTINUED)
- --------------------------------------------------------------------------------
will fluctuate up and down. When you sell your shares of the Fund, they could be
worth less than what you paid for them.
Historical Performance
- -----------------------------------
The bar chart and table below provide 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 Europe Australasia Far East ("EAFE")
Index, a widely recognized unmanaged index of international stock investment
performance and the Lipper International Index, a composite of mutual funds 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
[PERFORMANCE GRAPH]
<TABLE>
<S> <C>
92.......................................................... -11.03%
93.......................................................... 42.33%
94.......................................................... 0.98%
95.......................................................... 17.69%
96.......................................................... 19.78%
97.......................................................... 9.56%
98.......................................................... 11.73%
99.......................................................... x.xx%
</TABLE>
<TABLE>
<S> <C>
Highest Quarterly Return: x.xx%
(1/1/92 through 12/31/99) (x Quarter 19xx)
Lowest Quarterly Return: x.xx%
(1/1/92 through 12/31/99) (x Quarter 19xx)
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
----------------------------------
AS OF 12/31/99
----------------------------------
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 0.41%
Distribution (12b-1) Fees 0.00
Other Expenses x.xx
----
TOTAL ANNUAL FUND OPERATING EXPENSES x.xx%
====
</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 $10,000 in the Fund for
the time periods indicated and then redeem all
of your shares at the end of those periods. The
Example also assumes that your investment has a
5% return each year and that the Fund's
operating expenses remain the same. Although
your actual costs may be higher or lower, based
on these assumptions your costs would be:
1 YEAR .....................................$xxx
3 YEARS.....................................$xxx
5 YEARS.....................................$xxx
10 YEARS....................................$xxx
Investment Advisers
- ------------------------------
The Manager allocates the assets of the Fund among the following investment
advisers:
Hotchkis and Wiley
Independence Investment Associates, Inc.
Lazard Asset Management
Templeton Investment Counsel, Inc.
- --------------------------------------------------------------------------------
Prospectus 11 About the Funds
<PAGE> 14
AMERICAN AADVANTAGE
S&P 500 INDEX FUND(SM) (1)
- --------------------------------------------------------------------------------
Investment Objective
- -------------------------------
To replicate as closely as possible, before expenses, the performance of the
Standard & Poor's 500 Composite Stock Price Index ("S&P 500 Index" or "Index").
Principal Strategies
- ------------------------------
The Fund uses a passive management strategy designed to track the performance of
the S&P 500 Index. The S&P 500 Index is a well-known stock market index that
includes common stocks of 500 companies from several industrial sectors
representing a significant portion of the market value of all stocks publicly
traded in the United States.
The Fund is not managed according to traditional methods of "active" investment
management, which involve the buying and selling of securities based upon
economic, financial and market analysis and investment judgement. Instead, the
Fund, using a "passive" or "indexing" investment approach, attempts to
replicate, before expenses, the performance of the S&P 500 Index. State Street,
through its State Street Global Advisors division, seeks a correlation of 0.95
or better between the Fund's performance and the performance of the Index; a
figure of 1.00 would represent perfect correlation.
The Fund intends to invest in all 500 stocks comprising the Index in proportion
to their weightings in the Index. However, under various circumstances, it may
not be possible or practicable to purchase all 500 stocks in those weightings.
In those circumstances, the Fund may purchase a sample of the stocks in the
Index in proportions expected by State Street to replicate generally the
performance of the Index as a whole. In addition, from time to time stocks are
added to or removed from the Index. The Fund may sell stocks that are
represented in the Index, or purchase stocks that are not yet represented in the
Index, in anticipation of their removal from or addition to the Index.
In addition, the Fund may at times purchase or sell futures contracts on the
Index, or options on those futures, in lieu of investment directly in the stocks
making up the Index. The Fund might do so, for example, in order to increase its
investment exposure pending investment of cash in the stocks comprising the
Index. Alternatively, the Fund might use futures or options on futures to reduce
its investment exposure in situations where it intends to sell a portion of the
stocks in its portfolio but the sale has not yet been completed. The Fund may
also enter into other derivatives transactions, including the purchase or sale
of options or enter into swap transactions, to assist in replicating the
performance of the Index. The reasons for which the Fund will invest in
derivatives are:
- - to keep cash on hand to meet shareholder redemptions or other needs while
maintaining exposure to the stock market, and
- - they are a low cost method of gaining exposure to a particular securities
market without investing directly in that market.
- ---------------
(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 State Street Bank and 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.
- --------------------------------------------------------------------------------
About the Funds 12 Prospectus
<PAGE> 15
AMERICAN AADVANTAGE
S&P 500 INDEX FUND(SM) -- (CONTINUED)
- --------------------------------------------------------------------------------
Risk Factors
- -------------------
MARKET RISK
Stock values could decline generally or could underperform other investments.
In addition, returns on investments in stocks of large U.S. companies could
trail the returns on investments in stocks of smaller companies.
TRACKING ERROR RISK
The Fund's return may not match the return of the Index for a number of reasons.
For example, the Fund incurs a number of operating expenses not applicable to
the Index, and incurs costs in buying and selling securities. The Fund may not
be fully invested at times, either as a result of cash flows into the Fund or
reserves of cash held by the fund to meet redemptions. The return on the sample
of stocks purchased by the Fund, or futures or other derivative positions taken
by the Fund, to replicate the performance of the Index may not correlate
precisely with the return on the Index.
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.
ADDITIONAL RISKS
An investment in the Fund is not a deposit with 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. When
you sell your shares of the Fund, they could be worth less than what you paid
for them.
Historical Performance
- -----------------------------------
The bar chart and table below provide 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 U.S., and the Lipper S&P 500 Index, a
composite of funds with the same investment objective as the Fund. 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. Prior to March 1, 2000, the
Fund invested all of its investable assets in the BT Equity 500 Index Portfolio,
a separate investment company managed by Bankers Trust Company. 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
[PERFORMANCE GRAPH]
<TABLE>
<S> <C>
97.......................................................... 33.09%
98.......................................................... 28.87%
99.......................................................... X.XX%
</TABLE>
<TABLE>
<S> <C>
Highest Quarterly Return: X.XX%
(1/1/97 through 12/31/99) ( X Quarter 19XX)
Lowest Quarterly Return: X.XX%
(1/1/97 through 12/31/99) ( X Quarter 19XX)
</TABLE>
- --------------------------------------------------------------------------------
Prospectus 13 About the Funds
<PAGE> 16
AMERICAN AADVANTAGE
S&P 500 INDEX FUND(SM) -- (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL RETURN
------------------------
AS OF 12/31/99
------------------------
SINCE INCEPTION
1 YEAR 3 YEAR (1/1/97)
------ ------ ------
<S> <C> <C> <C>
S&P 500 INDEX FUND X.XX% X.XX% X.XX%
S&P 500 Index X.XX% X.XX% X.XX%
Lipper S&P 500 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 S&P 500 Index Fund.(1)
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)
<TABLE>
<S> <C>
Management Fees 0.045%
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 Portfolio.
(2) The Manager has contractually agreed to reimburse the Fund for other
expenses through October 31, 2000 to the extent that Total Annual Fund
Operating Expenses exceed 0.20%.
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 $10,000 in the Fund for the time periods indicated and then redeem all of
your shares at the end of those periods. The Example also assumes that your
investment has a 5% return each year and that the Fund's operating expenses
remain the same. Because the Manager's expense reimbursement is only guaranteed
through October 31, 2000, net expenses are used to calculate costs in year one,
and total fund expenses are used to calculate costs in years two through ten.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 YEAR......................................$XXX
3 YEARS.....................................$XXX
5 YEARS.....................................$XXX
10 YEARS....................................$XXX
Investment Adviser
- -----------------------------
State Street Bank and Trust Company
- --------------------------------------------------------------------------------
About the Funds 14 Prospectus
<PAGE> 17
AMERICAN AADVANTAGE
INTERMEDIATE BOND FUND(SM)
- --------------------------------------------------------------------------------
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
seeks capital appreciation by investing in corporate issues whose relative value
is expected to increase over time.
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 Corporation or Moody's
Investors Service, Inc.). No more than 25% of total assets may be invested in
securities rated in the fourth highest rating category. The Fund, at the
discretion of the applicable investment adviser, 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 investment strategy, as follows:
- - Develop an overall investment strategy, including a portfolio duration target,
by examining the current trend in the U.S. economy.
- - Set desired portfolio maturity structure by comparing the differences between
corporate and U.S. Government securities of similar duration to judge their
potential for optimal return in accordance with the target duration benchmark.
- - Determine the weightings of each security type by analyzing the difference in
yield spreads between corporate and U.S. Government securities.
- - Select specific debt securities within each security type.
- - 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
investment strategy in determining which securities to buy and sell, as follows:
- - Search for eligible securities with a yield to maturity advantage versus a
U.S. Government security with a similar maturity.
- - Evaluate credit quality of the securities.
- - Perform an analysis of the expected price volatility of the securities to
changes in interest rates by examining actual price volatility between U.S.
Government and non-U.S. Government securities.
Under normal circumstances, the Fund seeks to maintain a duration of three to
seven years. Duration is a measure of price sensitivity relative to
changes in interest rates. Portfolios with longer durations are typically more
sensitive to changes in interest rates. 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.
Risk Factors
- -------------------
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, bond prices generally 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.
- --------------------------------------------------------------------------------
Prospectus 15 About the Funds
<PAGE> 18
AMERICAN AADVANTAGE
INTERMEDIATE BOND FUND(SM) -- (CONTINUED)
- --------------------------------------------------------------------------------
CREDIT RISK
The Fund is subject to the risk that the 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.
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 and the Fund may have to invest at a
lower rate.
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. When
you sell your shares of the Fund, they could be worth less than what you paid
for them.
Historical Performance
- -----------------------------------
The bar chart and table below provide an indication of risk by showing how the
Fund has performed during the past two years. The table shows how the Fund's
performance compares to the Lehman Brothers Intermediate Gov./Corp. and
Aggregate Indexes, two broad-based market indexes, and the Lipper Intermediate
Investment Grade Debt Average and Index, composites of mutual funds 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
[PERFORMANCE GRAPH]
<TABLE>
<S> <C>
98.......................................................... 8.57%
99.......................................................... X.XX%
</TABLE>
<TABLE>
<S> <C>
Highest Quarterly Return: X.XX%
(1/1/98 through 12/31/99) (XXX Quarter 199X)
Lowest Quarterly Return: X.XX%
(1/1/98 through 12/31/99) (XXX Quarter 199X)
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL RETURN
------------------------
AS OF 12/31/99
------------------------
SINCE INCEPTION
1 YEAR (9/15/97)
------ ---------------
<S> <C> <C>
INTERMEDIATE BOND FUND X.XX% X.XX%
Lehman Bros. Aggregate
Index** X.XX% X.XX%*
Lehman Bros. Intermediate
Gov./Corp. Index*** X.XX% X.XX%*
Lipper Intermediate
Investment Grade Debt
Index**** X.XX% X.XX%*
Lipper Intermediate
Investment Grade Debt
Average X.XX% X.XX%*
</TABLE>
* The since inception return is shown from 8/31/97.
** The Lehman Brothers Aggregate Index is a market value weighted performance
benchmark for government, corporate, mortgage-backed and asset-backed
fixed-rate debt securities of all maturities. This Index has replaced the
Lehman Bros. Intermediate Gov./Corp. Index as the Fund's market index,
because it better reflects the principal strategies of the Fund.
*** The Lehman Bros. Intermediate Gov./Corp. Index is a market value weighted
performance benchmark for government and corporate fixed-rate debt
securities with maturities between one and ten years.
**** The Fund's investment advisers have designated this Index of 30 funds as
the Fund's new performance benchmark, replacing the Lipper Intermediate
Investment Grade Debt Average.
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 X.XX
----
TOTAL ANNUAL FUND OPERATING EXPENSES X.XX%
====
</TABLE>
(1) The expense table and the Example below reflect the expenses of both the
Fund and its corresponding Portfolio.
- --------------------------------------------------------------------------------
About the Funds 16 Prospectus
<PAGE> 19
AMERICAN AADVANTAGE
INTERMEDIATE BOND FUND(SM) -- (CONTINUED)
- --------------------------------------------------------------------------------
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 $10,000 in the Fund for the time periods indicated and then redeem all of
your shares at the end of those periods. The Example also assumes that your
investment has a 5% return each year and that the Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
1 YEAR .....................................$XXX
3 YEARS.....................................$XXX
5 YEARS.....................................$XXX
10 YEARS.....................................$XXX
Investment Advisers
- ------------------------------
The Manager allocates the assets of the Fund among the following investment
advisers:
AMR Investment Services, Inc.
Barrow, Hanley, Mewhinney & Strauss, Inc.
- --------------------------------------------------------------------------------
Prospectus 17 About the Funds
<PAGE> 20
AMERICAN AADVANTAGE
SHORT-TERM BOND FUND(SM)
- --------------------------------------------------------------------------------
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
seeks capital appreciation by investing in corporate issues whose relative
value is expected to increase over time.
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 Corporation or Moody's
Investors Service, Inc.). No more than 25% of total 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 investment strategy, as follows:
- - Develop an overall investment strategy, including a portfolio duration target,
by examining the current trend in the U.S. economy.
- - Set desired portfolio maturity structure by comparing the differences between
corporate and U.S. Government securities of similar duration to judge their
potential for optimal return in accordance with the target duration benchmark.
- - Determine the weightings of each security type by analyzing the difference in
yield spreads between corporate and U.S. Government securities.
- - Select specific debt securities within each security type.
- - Review and monitor portfolio composition for changes in credit, risk-return
profile and comparisons with benchmarks.
Under normal circumstances, the Fund seeks to maintain a duration of one to
three years. Duration is a measure of price sensitivity relative to
changes in interest rates. Portfolios with longer durations are typically more
sensitive to changes in interest rates. 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.
Risk Factors
- -------------------
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, bond prices generally 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.
CREDIT RISK
The Fund is subject to the risk that the 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.
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
- --------------------------------------------------------------------------------
About the Funds 18 Prospectus
<PAGE> 21
AMERICAN AADVANTAGE
SHORT-TERM BOND FUND(SM) -- (CONTINUED)
- --------------------------------------------------------------------------------
interest will be paid on the investment and the Fund may have to invest at a
lower rate.
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. When
you sell your shares of the Fund, they could be worth less than what you paid
for them.
Historical Performance
- -----------------------------------
The bar chart and table below provide 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. and Merrill
Lynch 1-3 Year Gov./Corp. Indices, two broad-based market indices, and the
Linked Lipper Investment Grade Debt Averages, a composite of mutual funds 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
[PERFORMANCE GRAPH]
<TABLE>
<S> <C>
90.......................................................... 8.47%
91.......................................................... 12.97%
92.......................................................... 5.19%
93.......................................................... 6.50%
94.......................................................... 1.15%
95.......................................................... 9.90%
96.......................................................... 3.76%
97.......................................................... 6.71%
98.......................................................... 5.30%
99.......................................................... X.XX%
</TABLE>
<TABLE>
<S> <C>
Highest Quarterly Return: X.XX%
(1/1/90 through 12/31/99) (XXX Quarter 19XX)
Lowest Quarterly Return: X.XX%
(1/1/90 through 12/31/99) (XXX Quarter 19XX)
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL
RETURN
---------------------------
AS OF 12/31/99
---------------------------
1 YEAR 5 YEARS 10 YEARS
------ ------- --------
<S> <C> <C> <C>
SHORT-TERM BOND FUND X.XX% X.XX% X.XX%
Merrill Lynch 1-3 Yr.
Gov./Corp. Index* 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 Merrill Lynch 1-3 Year Gov./Corp. Index is a market value
weighted performance benchmark for government and corporate fixed-rate debt
securities with maturities between one and three years. The Manager chose
to replace the Lehman Bros. Intermediate Gov./Corp. Index with this Index
because it better reflects the duration of the Fund.
** The Lehman Bros. Intermediate Gov./Corp. Index is a market value weighted
performance benchmark for government and corporate fixed-rate debt
securities 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
----
TOTAL ANNUAL FUND OPERATING EXPENSES X.XX%
====
</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 $10,000 in the Fund for
the time periods indicated and then redeem all
of your shares at the end of those periods. The
Example also assumes that your investment has a
5% return each year and that the Fund's
operating expenses remain the same. Although
your actual costs may be higher or lower, based
on these assumptions your costs would be:
1 YEAR .....................................$XXX
3 YEARS.....................................$XXX
5 YEARS.....................................$XXX
10 YEARS....................................$XXX
Investment Adviser
- -----------------------------
AMR Investment Services, Inc.
- --------------------------------------------------------------------------------
Prospectus 19 About the Funds
<PAGE> 22
AMERICAN AADVANTAGE
MONEY MARKET FUND(SM)
- --------------------------------------------------------------------------------
Investment Objective
- -------------------------------
Current income, liquidity and the maintenance of a stable price of $1.00 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:
- - 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., at the time of purchase.
- - rated in the highest short-term category by one rating organization if the
securities are rated only by one rating organization, or
- - unrated securities that are determined to be of equivalent quality by the
Manager pursuant to guidelines approved by the Board of Trustees.
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.
Risk Factors
- -------------------
- - 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.
- - 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.
- - 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.
Historical Performance
- -----------------------------------
The bar chart and table below provide an indication of risk by showing how the
Fund's performance has varied from year to year. 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
[PERFORMANCE GRAPH]
<TABLE>
<S> <C>
90.......................................................... 8.40%
91.......................................................... 6.77%
92.......................................................... 4.02%
93.......................................................... 3.28%
94.......................................................... 4.22%
95.......................................................... 6.04%
96.......................................................... 5.50%
97.......................................................... 5.64%
98.......................................................... 5.56%
99.......................................................... X.XX%
</TABLE>
<TABLE>
<S> <C>
Highest Quarterly Return: X.XX%
(1/1/90 through 12/31/99) (XXX Quarter 19XX)
Lowest Quarterly Return: X.XX%
(1/1/90 through 12/31/99) (XXX Quarter 19XX)
</TABLE>
- --------------------------------------------------------------------------------
About the Funds 20 Prospectus
<PAGE> 23
AMERICAN AADVANTAGE
MONEY MARKET FUND(SM) -- (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL
RETURN
---------------------------
AS OF 12/31/99
---------------------------
1 YEAR 5 YEARS 10 YEARS
------ ------- --------
<S> <C> <C> <C>
MONEY MARKET FUND 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 X.XX
----
TOTAL ANNUAL FUND OPERATING EXPENSES X.XX%
====
</TABLE>
(1) The expense table and the Example below reflect the expenses of both the
Fund and its corresponding Portfolio.
<TABLE>
<S> <C> <C>
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 $10,000 in the Fund for
the time periods indicated and then redeem all
of your shares at the end of those periods. The
Example also assumes that your investment has a
5% return each year and that the Fund's
operating expenses remain the same. Although
your actual costs may be higher or lower, based
on these assumptions your costs would be:
1 YEAR .....................................$XXX
3 YEARS.....................................$XXX
5 YEARS.....................................$XXX
10 YEARS....................................$XXX
</TABLE>
Investment Adviser
- -----------------------------
AMR Investment Services, Inc.
- --------------------------------------------------------------------------------
Prospectus 21 About the Funds
<PAGE> 24
AMERICAN AADVANTAGE
U.S. GOVERNMENT MONEY MARKET FUND(SM)
- --------------------------------------------------------------------------------
Investment Objective
- -------------------------------
Current income, liquidity and the maintenance of a stable price of $1.00 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.
Risk Factors
- -------------------
- - 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.
- - 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 and table below provide an indication of risk by showing how the
Fund's performance has varied from year to year. 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
[PERFORMANCE GRAPH]
<TABLE>
<S> <C>
93.......................................................... 3.05%
94.......................................................... 4.09%
95.......................................................... 5.72%
96.......................................................... 5.23%
97.......................................................... 5.41%
98.......................................................... 5.40%
99.......................................................... X.XX%
</TABLE>
<TABLE>
<S> <C>
Highest Quarterly Return: X.XX%
(1/1/93 through 12/31/99) (XXX Quarter 19XX)
Lowest Quarterly Return: X.XX%
(1/1/93 through 12/31/99) (XXX Quarter 19XX)
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
------------------------------
AS OF 12/31/99
------------------------------
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%
</TABLE>
- --------------------------------------------------------------------------------
About the Funds 22 Prospectus
<PAGE> 25
AMERICAN AADVANTAGE
U.S. GOVERNMENT MONEY MARKET FUND(SM) -- (CONTINUED)
- --------------------------------------------------------------------------------
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 X.XX
----
TOTAL ANNUAL FUND OPERATING EXPENSES X.XX%
====
</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 $10,000 in the
Fund for the time periods indicated and then
redeem all of your shares at the end of those
periods. The Example also assumes that your
investment has a 5% return each year and that
the Fund's operating expenses remain the same.
Although your actual costs may be higher or
lower, based on these assumptions your costs
would be:
1 YEAR ....................................$XX
3 YEARS....................................$XX
5 YEARS...................................$XXX
10 YEARS..................................$XXX
Investment Adviser
- -----------------------------
AMR Investment Services, Inc.
- --------------------------------------------------------------------------------
Prospectus 23 About the Funds
<PAGE> 26
AMERICAN AADVANTAGE
MUNICIPAL MONEY MARKET FUND(SM)
- --------------------------------------------------------------------------------
Investment Objective
- -------------------------------
Current income, liquidity and the maintenance of a stable price of $1.00 per
share.
Principal Strategies
- ------------------------------
Under normal market conditions, the Fund invests at least 80% of its 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:
- - 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., at the time of purchase,
- - rated in the highest short-term category by one rating organization if the
securities are rated only by one rating organization, or
- - unrated securities that are determined to be of equivalent quality by the
Manager pursuant to guidelines approved by the Board of Trustees.
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.
Risk Factors
- -------------------
- - 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.
- - 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.
- - 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.
Historical Performance
- -----------------------------------
The bar chart and table below provide an indication of risk by showing how the
Fund's performance has varied from year to year. 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
[PERFORMANCE GRAPH]
<TABLE>
<S> <C>
94.......................................................... 2.66%
95.......................................................... 3.81%
96.......................................................... 3.51%
97.......................................................... 3.55%
98.......................................................... 3.37%
99.......................................................... X.XX%
</TABLE>
<TABLE>
<S> <C>
Highest Quarterly Return: X.XX%
(1/1/94 through 12/31/99) (XXX Quarter 19XX)
Lowest Quarterly Return: X.XX%
(1/1/94 through 12/31/99) (XXX Quarter 19XX)
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
----------------------------------
AS OF 12/31/99
----------------------------------
SINCE INCEPTION
1 YEAR 5 YEARS (11/10/99)
------ ------- ---------------
<S> <C> <C> <C>
MUNICIPAL MONEY MARKET
FUND X.XX% X.XX% X.XX%
</TABLE>
- --------------------------------------------------------------------------------
About the Funds 24 Prospectus
<PAGE> 27
AMERICAN AADVANTAGE
MUNICIPAL MONEY MARKET FUND(SM) -- (CONTINUED)
- --------------------------------------------------------------------------------
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 X.XX
----
TOTAL ANNUAL FUND OPERATING EXPENSES X.XX%
====
</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 $10,000 in the Fund for the time periods indicated and then redeem all
of your shares at the end of those periods. The Example also assumes that your
investment has a 5% return each year and that the Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
<TABLE>
<S> <C> <C>
1 YEAR ...................................$XXX
3 YEARS...................................$XXX
5 YEARS...................................$XXX
10 YEARS..................................$XXX
</TABLE>
Investment Adviser
- -----------------------------
AMR Investment Services, Inc.
- --------------------------------------------------------------------------------
Prospectus 25 About the Funds
<PAGE> 28
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, 1999, the Manager had approximately $XX.X billion of assets
under management, including approximately $X.X billion under active management
and $XX.X billion as named fiduciary or financial adviser. Of the total,
approximately $XX.X billion 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,
- - selects and changes investment advisers (subject to requisite approvals),
- - allocates assets among investment advisers,
- - monitors the investment advisers' investment programs and results,
- - coordinates the investment activities of the investment advisers to ensure
compliance with regulatory restrictions,
- - oversees each Fund's securities lending activities and actions taken by the
securities lending agent, and
- - with the exception of the International Equity and S&P 500 Index Funds,
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 Manager receives an
annualized advisory fee that is calculated and accrued daily, equal to the sum
of:
- - 0.25% of the net assets of the Manager's portion of the Intermediate Bond
Fund,
- - 0.25% of the net assets of the Short-Term Bond Fund, plus
- - 0.10% of the net assets of all other Funds.
In addition, the Balanced, Large Cap Value, Small Cap Value, International
Equity and Intermediate Bond Funds pay the Manager the amounts due to their
respective investment advisers. The Manager then remits these amounts to the
investment advisers.
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 or registered investment companies managed by the
Manager.
The management fees paid by the Funds for the fiscal year ended October 31,
1999, net of reimbursements and shown as a percentage of average net assets,
were as follows:
<TABLE>
<CAPTION>
MANAGEMENT
FUND FEES
---- ------------
<S> <C>
Balanced............................ X.XX%
Large Cap Value..................... X.XX%
Small Cap Value..................... X.XX%
Intermediate Bond................... X.XX%
International Equity................ X.XX%
S&P 500 Index Fund.................. X.XX%
Short-Term Bond..................... X.XX%
Money Market........................ X.XX%
U.S. Government Money Market........ X.XX%
Municipal Money Market.............. X.XX%
</TABLE>
William F. Quinn and Nancy A. Eckl have primary responsibility for the
day-to-day operations of the Balanced, Large Cap Value, Small Cap Value,
International Equity and Intermediate Bond 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 of the Manager 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 oversees the team responsible for the portfolio management of
the Short-Term Bond Fund.
- --------------------------------------------------------------------------------
About the Funds 26 Prospectus
<PAGE> 29
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.
Equity 500 Index Portfolio Administrator
- ------------------------------------------------------------
State Street serves as the adviser, administrator, custodian and transfer agent
to the Equity 500 Index Portfolio. As compensation for its services as adviser,
administrator, custodian and transfer agent (and for assuming ordinary operating
expenses of the portfolio including ordinary legal and audit expenses), State
Street receives a unitary fee at an annual rate of 0.045% of the average daily
net assets of the portfolio.
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 and the S&P 500 Index 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.
BARROW, HANLEY, MEWHINNEY & STRAUSS, INC. ("BARROW"), 3232 McKinney Avenue, 15th
Floor, Dallas, Texas 75204, is a professional investment counseling firm which
has been providing investment advisory services since 1979. The firm is wholly
owned by United Asset Management Corporation, a Delaware corporation. As of
December 31, 1999, Barrow had discretionary investment management authority with
respect to approximately $XX.X billion of assets, including approximately $X.X
billion of assets of AMR and its subsidiaries and affiliated entities. Barrow
serves as an investment adviser to the Balanced, Large Cap Value, 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. As of
December 31, 1999, Brandywine had assets under management totaling approximately
$X.X billion, including approximately $X.X billion of assets of AMR and its
subsidiaries and affiliated entities. Brandywine serves as an investment adviser
to the Balanced, Large Cap Value 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.
GSB is wholly owned by United Asset Management Corporation, a Delaware
corporation. As of December 31, 1999, GSB managed approximately $X.X billion of
assets, including approximately $XXX.X million of assets of AMR and its
subsidiaries and affiliated entities. GSB serves as
- --------------------------------------------------------------------------------
Prospectus 27 About the Funds
<PAGE> 30
an investment adviser to the Balanced and Large Cap Value Funds.
HOTCHKIS AND WILEY, 725 South Figueroa Street, Suite 4000, Los Angeles,
California 90017, is a professional investment management firm which was founded
in 1980. Hotchkis and Wiley is a division of Merrill Lynch Asset Management,
L.P., a wholly owned indirect subsidiary of Merrill Lynch & Co., Inc. Assets
under management as of December 31, 1999 were approximately $XX.X billion, which
included approximately $X.X billion of assets of AMR and its subsidiaries and
affiliated entities. Hotchkis and Wiley serves as an investment adviser to the
Balanced, Large Cap Value, Small Cap Value, 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. Assets under management as of December 31, 1999,
including funds managed for its parent company, were approximately $XX.X
billion, which included approximately $X.X billion of assets of AMR and its
subsidiaries and affiliated entities. IIA serves as an investment adviser to the
Balanced, Large Cap Value and International Equity Funds.
LAZARD ASSET MANAGEMENT ("LAZARD"), 30 Rockefeller Plaza, New York, New York
10112, is a division of Lazard Freres & Co. LLC, a registered investment adviser
and member of the New York, American and Midwest Stock Exchanges, providing its
clients with a wide variety of investment banking, brokerage and related
services. Lazard provides investment management services to client discretionary
accounts with assets totaling approximately $XX.X billion as of December 31,
1999. Lazard serves as an investment adviser to the International Equity Fund.
STATE STREET BANK AND TRUST COMPANY ("STATE STREET"), Two International Place,
Boston, Massachusetts 02110, is a Massachusetts banking corporation. State
Street serves as investment adviser and administrator to the Equity 500 Index
Portfolio. As of December 31, 1999, State Street Global Advisors, the division
responsible for managing the Portfolio, had assets under management of $X.X
million.
TEMPLETON INVESTMENT COUNSEL, INC. ("TEMPLETON"), 500 East Broward Blvd., Suite
2100, Fort Lauderdale, Florida 33394-3091, is a professional investment
counseling firm which has been providing investment services since 1979.
Templeton is indirectly owned by Franklin Resources, Inc. As of December 31,
1999, 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 State Street. Including these assets lowers the investment
advisory fees for each applicable Fund.
Valuation of Shares
- -------------------------------
The price of each Fund's shares is based on its net asset value ("NAV") per
share. 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 are valued at fair
value, as determined in good faith and pursuant to procedures approved by the
Board and the AMR Trust Board, under certain limited circumstances. For example,
fair valuation would be used if market quotations are not readily available or a
material event occurs after the close of the Exchange which may affect the
security's value. 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 per share 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 Veterans Day. The NAV per share of the
International Equity Fund may change on days when shareholders will not be able
to purchase or redeem the Fund's shares.
- --------------------------------------------------------------------------------
About the Funds 28 Prospectus
<PAGE> 31
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:
- - 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);
- - endowment funds and charitable foundations;
- - employee welfare plans which are tax-exempt under Section 501(c)(9) of the
Internal Revenue Code of 1986, as amended ("Code");
- - qualified pension and profit sharing plans;
- - cash and deferred arrangements under Section 401(k) of the Code;
- - corporations; and
- - 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 Veterans Day:
<TABLE>
<CAPTION>
PURCHASE BY
FUND (EASTERN TIME)*:
---- ----------------
<S> <C>
Municipal Money Market 11:45 a.m.
All other Funds 4:00 p.m.
</TABLE>
* or the close of the Exchange (whichever comes first)
If a purchase order is received in good order 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 received in good order 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:
- - calling (800) 967-9009, or
- - visiting the Funds' website at www.aafunds.com and downloading an account
application.
Complete the application, sign it and:
Mail to:
American AAdvantage Funds
P.O. Box 619003, MD 5645
DFW Airport, TX 75261-9003
or Fax to:
(817) 967-0768 or (817) 931-4331
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.
<TABLE>
<CAPTION>
SAME DAY WIRE
FUND 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>
* or the close of the Exchange (whichever comes first)
- --------------------------------------------------------------------------------
Prospectus 29 About Your Investment
<PAGE> 32
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. Delivery of proceeds from shares purchased by check may
be delayed 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 of a Money Market Fund generally will be paid at the time of redemption.
- --------------------------------------------------------------------------------
About Your Investment 30 Prospectus
<PAGE> 33
<TABLE>
<CAPTION>
HOW TO PURCHASE SHARES
To Make an Initial Purchase To Add to an Existing Account
<S> <C>
By Wire
If your account has been established, you may call (800) Call (800) 658-5811 to purchase shares by wire. Send a bank
658-5811 to purchase shares by wire. Send a bank wire to wire to State Street Bank & Trust Co. with these
State Street Bank & Trust Co. with these instructions: instructions:
- - ABA# 0110-0002-8; AC-9905-342-3
- - Attn: American AAdvantage Funds-Institutional Class - ABA# 0110-0002-8; AC-9905-342-3
- - the Fund name and Fund number - Attn: American AAdvantage Funds-Institutional Class
- - account number and registration - the Fund name and Fund number
- shareholder's account number and registration
By Check
- - Make check payable to American AAdvantage Funds - Include the shareholder's account number, Fund name and
- - Include the Fund name, Fund number and "Institutional Fund number on the check.
Class" on the check - Mail the check to:
- - Mail the check to:
American AAdvantage Funds-Institutional Class American AAdvantage Funds-Institutional Class
P.O. Box 219643 P.O. Box 219643
Kansas City, MO 64121-9643 Kansas City, MO 64121-9643
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>
<TABLE>
<CAPTION>
HOW TO REDEEM SHARES
Method Additional Information
<S> <C>
By Telephone
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 estates,
- - the Fund name, Fund number and class trusts, guardianships, custodians, corporations, and
- - shareholder account number welfare, pension and profit sharing plans. Call (800)
- - shares or dollar amount to be redeemed 658-5811 for instructions.
- - authorized signature(s) of all persons required to sign - Proceeds will only be mailed to the account address of
for the account record or transmitted by wire to a commercial bank account
designated on the account application form.
Mail to: - A signature guarantee is required for redemption orders:
American AAdvantage Funds-Institutional Class - in amounts of $25,000 or more
P.O. Box 219643 - with a request to send the proceeds to an address or
Kansas City, MO 64121-9643 commercial bank account other than the address or
commercial bank account designated on the account
application, or
- for an account whose address has changed within the last 30
days.
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>
- --------------------------------------------------------------------------------
Prospectus 31 About Your Investment
<PAGE> 34
General Policies
- ------------------------
If a shareholder's account balance in any Fund falls below $100,000, the
shareholder may be asked to increase the balance. If the account balance remains
below $100,000 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:
- - 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.
- - The Funds employ procedures reasonably designed to confirm that instructions
communicated by telephone are genuine.
- - 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:
- - reject any order for the purchase of shares and to limit or suspend, without
prior notice, the offering of shares,
- - modify or terminate the exchange privilege at any time,
- - terminate the exchange privilege of any shareholder who makes more than one
exchange in and out of a Fund (other than the Money Market Funds) during any
three month period,
- - 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, broker-dealers and 401(k) plan providers who offer
Fund shares, may charge transaction fees and may set different minimum
investments or limitations on purchasing or redeeming shares.
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.
Monthly distributions are paid to shareholders on the first business day of the
following month.
Distributions are paid as follows:
<TABLE>
<CAPTION>
OTHER
DISTRIBUTIONS
FUND DIVIDENDS PAID PAID
- ---- -------------- -------------
<S> <C> <C>
Balanced Annually Annually
Large Cap Value Annually Annually
Small Cap Value Annually Annually
International Equity Annually Annually
S&P 500 Index April, July, October Annually
and December
Intermediate Bond Monthly Annually
Short-Term Bond Monthly Annually
Money Market Monthly Monthly
U.S. Government Money Monthly Monthly
Market
Municipal Money Monthly Monthly
Market
</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 Large Cap Value
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.
- --------------------------------------------------------------------------------
About Your Investment 32 Prospectus
<PAGE> 35
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 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. In the
event the Trust begins to incur distribution expenses for the Funds,
distribution fees may be paid out of Fund assets, possibly causing the cost of
your investment to increase over time.
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:
MASTER-FEEDER STRUCTURE GRAPH
-----------------------
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.
- --------------------------------------------------------------------------------
Prospectus 33 Additional Information
<PAGE> 36
Financial Highlights
- ---------------------------------
The financial highlights tables are intended to help you understand each Fund's
financial performance for the past five fiscal 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.
<TABLE>
<CAPTION>
BALANCED FUND-INSTITUTIONAL CLASS
------------------------------------------------------
YEAR ENDED OCTOBER 31,
------------------------------------------------------
1999 1998(B) 1997(B) 1996(B C) 1995(A B)
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD: ------ -------- -------- --------- ---------
<S> <C> <C> <C> <C>
Net asset value, beginning of period........................ $ 16.18 $ 15.14 $ 13.95 $ 12.36
Income from investment operations
Net investment income..................................... 0.51(D) 0.63(D) 0.59(D) 0.54
Net gains (losses) on securities (realized and
unrealized)............................................. 0.76(D) 2.16(D) 1.61(D) 1.71
-------- -------- -------- --------
Total from investment operations............................ 1.27 2.79 2.20 2.25
-------- -------- -------- --------
Less distributions:
Dividends from net investment income...................... (0.63) (0.59) (0.57) (0.52)
Distributions from net realized gains on securities....... (2.26) (1.16) (0.44) (0.14)
-------- -------- -------- --------
Total distributions......................................... (2.89) (1.75) (1.01) (0.66)
-------- -------- -------- --------
Net asset value, end of period.............................. $ 14.56 $ 16.18 $ 15.14 $ 13.95
======== ======== ======== ========
Total return(E)............................................. 9.04% 20.04% 16.46% 19.39%
======== ======== ======== ========
Ratios and supplemental data:
Net assets, end of period (in thousands).................. $145,591 $148,176 $298,009 $249,913
Ratios to average net assets(F)
Expenses................................................ 0.59%(D) 0.60%(D) 0.62%(D) 0.63%
Net investment income................................... 3.54%(D) 3.88%(D) 4.00%(D) 4.30%
Portfolio turnover rate(G).................................. 87% 105% 76% 73%
</TABLE>
(A)GSB Investment Management, Inc. was added as an investment adviser to the
Balanced Fund on January 1, 1995.
(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)On November 1, 1995 the Balanced Fund began investing all of its investable
assets in its corresponding Portfolio. Portfolio turnover rate since November
1, 1995 is that of the Portfolio.
- --------------------------------------------------------------------------------
Additional Information 34 Prospectus
<PAGE> 37
<TABLE>
<CAPTION>
LARGE CAP VALUE FUND-INSTITUTIONAL CLASS
--------------------------------------------------------
YEAR ENDED OCTOBER 31,
--------------------------------------------------------
1999 1998(A)(B) 1997(B) 1996(B)(C) 1995(B)
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD: ------ ---------- -------- ----------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period........................ $ 21.63 $ 18.50 $ 15.91 $ 14.19
Income from investment operations
Net investment income..................................... 0.40(D) 0.42(D) 0.42(D) 0.41
Net gains on securities (realized and unrealized)......... 0.89(D) 4.43(D) 3.15(D) 2.28
-------- -------- ------- -------
Total from investment operations............................ 1.29 4.85 3.57 2.69
-------- -------- ------- -------
Less distributions:
Dividends from net investment income...................... (0.41) (0.41) (0.41) (0.43)
Distributions from net realized gains on securities....... (1.58) (1.31) (0.57) (0.54)
-------- -------- ------- -------
Total distributions......................................... (1.99) (1.72) (0.98) (0.97)
-------- -------- ------- -------
Net asset value, end of period.............................. $ 20.93 $ 21.63 $ 18.50 $ 15.91
======== ======== ======= =======
Total return(E)............................................. 6.28% 28.05% 23.37% 20.69%
======== ======== ======= =======
Ratios and supplemental data:
Net assets, end of period (in thousands).................. $216,548 $200,887 $81,183 $71,608
Ratios to average net assets(F)
Expenses................................................ 0.57%(D) 0.61%(D) 0.62%(D) 0.62%
Net investment income................................... 1.86%(D) 2.10%(D) 2.55%(D) 2.84%
Portfolio turnover rate(G).................................. 40% 35% 40% 26%
</TABLE>
(A)Prior to March 1, 1999, the Large Cap Value Fund-Institutional Class was
known as the American AAdvantage Growth and Income Fund-Institutional Class.
(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)On November 1, 1995 the Large Cap Value Fund began investing all of its
investable assets in its corresponding Portfolio. Portfolio turnover rate
since November 1, 1995 is that of the Portfolio.
<TABLE>
<CAPTION>
SMALL CAP
VALUE FUND --
INSTITUTIONAL CLASS
--------------------
DECEMBER 31, 1998
TO
OCTOBER 31, 1999
--------------------
<S> <C>
Net asset value, beginning of period..... $ 10.00
-------
Income from investment operations:
Net investment income(A)............... 0.07
Net gains (losses) on securities (both
realized and unrealized)(A)......... (1.00)
-------
Total from investment operations......... (0.93)
-------
Less distributions:
Dividends from net investment income... --
Distributions from net realized gains
on securities....................... --
-------
Total distributions...................... --
-------
Net asset value, end of period (not
annualized)............................ $ 9.07
=======
Total return............................. (9.30)%
=======
Ratios and supplemental data:
Net assets, end of period (in
thousands).......................... $ 2,117
Ratios to average net assets
(annualized)(A):
Expenses............................ 0.96%
Net investment income............... 0.84%
Decrease reflected in above expense
ratio due to absorption of
expenses by the Manager........... 1.23%
</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
the AMR Investment Services Small Cap Value Portfolio.
- --------------------------------------------------------------------------------
Prospectus 35 Additional Information
<PAGE> 38
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY FUND-INSTITUTIONAL CLASS(A)
-------------------------------------------------------
YEAR ENDED OCTOBER 31,
-------------------------------------------------------
1999 1998(B) 1997(B) 1996(B) 1995(B)
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD: --------- -------- -------- ------- -------
<S> <C> <C> <C> <C>
Net asset value, beginning of period........................ $ 17.08 $ 15.01 $ 13.29 $ 12.87
Income from investment operations
Net investment income..................................... 0.33(C) 0.34(C) 0.28(C) 0.27
Net gains on securities (realized and unrealized)......... 0.34(C) 2.44(C) 1.95(C) 0.68
-------- -------- ------- -------
Total from investment operations............................ 0.67 2.78 2.23 0.95
-------- -------- ------- -------
Less distributions:
Dividends from net investment income...................... (0.34) (0.30) (0.27) (0.21)
Distributions from net realized gains on securities....... (0.48) (0.41) (0.24) (0.32)
-------- -------- ------- -------
Total distributions......................................... (0.82) (0.71) (0.51) (0.53)
-------- -------- ------- -------
Net asset value, end of period.............................. $ 16.93 $ 17.08 $ 15.01 $ 13.29
======== ======== ======= =======
Total return(D)............................................. 4.19% 19.08% 17.27% 7.90%
======== ======== ======= =======
Ratios and supplemental data:
Net assets, end of period (in thousands).................. $408,581 $231,793 $62,992 $25,757
Ratios to average net assets(E)
Expenses................................................ 0.80%(C) 0.83%(C) 0.85%(C) 0.85%
Net investment income................................... 2.05%(C) 2.35%(C) 2.19%(C) 2.37%
Portfolio turnover rate(F).................................. 24% 15% 19% 21%
</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
less than $.04 per share in each period on an annualized basis.
(F)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, 1995 is that of the Portfolio.
<TABLE>
<CAPTION>
S&P 500
INDEX FUND-
INSTITUTIONAL CLASS(A)
----------------------------------
YEAR ENDED
DECEMBER 31,
---------------------------------
1999 1998 1997(B)
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD: --------- --------- -------
<S> <C> <C> <C>
Net asset value, beginning of period........................ $ 13.16 $10.00
Income from investment operations
Net investment income(C).................................. 0.16 0.14
Net gains on securities (realized and unrealized)(C)...... 3.62 3.16
-------- ------
Total from investment operations............................ 3.78 3.30
-------- ------
Less distributions:
Dividends from net investment income...................... (0.16) (0.14)
-------- ------
Total distributions......................................... (0.16) (0.14)
-------- ------
Net asset value, end of period.............................. $ 16.78 $13.16
======== ======
Total return................................................ 28.87% 33.09%
======== ======
Ratios and supplemental data:
Net assets, end of period (in thousands).................. $100.870 $7,862
Ratios to average net assets (annualized)(C)
Net investment income................................... 1.41% 1.61%
Expenses................................................ 0.20% 0.20%
Decrease reflected in above expense ratio due to
absorption of expenses by Bankers Trust and the
Manager................................................ 0.06% 0.43%
Portfolio turnover rate(D).................................. 4% 19%
</TABLE>
(A) Prior to March 1, 2000, the S&P 500 Index Fund - Institutional Class
invested all of its investable assets in the BT Equity 500 Index Portfolio,
a separate investment company managed by Bankers Trust Company.
(B) 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.
(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
the BT Equity 500 Index Portfolio.
(D) Portfolio turnover rate is that of the BT Equity 500 Index Portfolio.
- --------------------------------------------------------------------------------
Additional Information 36 Prospectus
<PAGE> 39
<TABLE>
<CAPTION>
INTERMEDIATE BOND FUND-
INSTITUTIONAL CLASS
------------------------------------------
YEAR ENDED OCTOBER 31, PERIOD ENDED
-------------------------- OCTOBER 31,
1999 1998 1997(A)
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD: ----------- ----------- ------------
<S> <C> <C>
Net asset value, beginning of period........................ $ 10.17 $ 10.00
Income from investment operations
Net investment income(B).................................. 0.59 0.07
Net gains on securities (realized and unrealized)(B)...... 0.34 0.17
-------- --------
Total from investment operations............................ 0.93 0.24
-------- --------
Less distributions:
Dividends from net investment income...................... (0.59) (0.07)
Distributions from net realized gains on securities....... (0.01) --
-------- --------
Total distributions......................................... (0.60) (0.07)
-------- --------
Net asset value, end of period.............................. $ 10.50 $ 10.17
======== ========
Total return................................................ 9.37% 2.41%
======== ========
Ratios and supplemental data:
Net assets, end of period (in thousands).................. $178,840 $216,249
Ratios to average net assets (annualized)(B)
Expenses................................................ 0.57% 0.59%
Net investment income................................... 5.74% 5.63%
Portfolio turnover rate(C).................................. 181% 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.
<TABLE>
<CAPTION>
SHORT-TERM BOND FUND-INSTITUTIONAL CLASS
------------------------------------------------------
YEAR ENDED OCTOBER 31,
------------------------------------------------------
1999 1998(A) 1997 1996 1995
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD: -------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period........................ $ 9.63 $ 9.68 $ 9.82 $ 9.67
Income from investment operations
Net investment income..................................... 0.62(B) 0.64(B) 0.62(B) 0.62
Net gains (losses) on securities (realized and
unrealized)............................................. --(B) (0.05)(B) (0.14)(B) 0.15
------- ------- -------- --------
Total from investment operations............................ 0.62 0.59 0.48 0.77
------- ------- -------- --------
Less distributions:
Dividends from net investment income...................... (0.62) (0.64) (0.62) (0.62)
Distributions from net realized gains on securities....... -- -- -- --
------- ------- -------- --------
Total distributions......................................... (0.62) (0.64) (0.62) (0.62)
------- ------- -------- --------
Net asset value, end of period.............................. $ 9.63 $ 9.63 $ 9.68 $ 9.82
======= ======= ======== ========
Total return(C)............................................. 6.60% 6.29% 5.10% 8.18%
======= ======= ======== ========
Ratios and supplemental data:
Net assets, end of period (in thousands).................. $18,453 $22,947 $108,929 $137,293
Ratios to average net assets(D)
Expenses................................................ 0.65%(B) 0.57%(B) 0.60%(B) 0.60%
Net investment income................................... 6.43%(B) 6.67%(B) 6.41%(B) 6.36%
Portfolio turnover rate(E).................................. 74% 282% 304% 183%
</TABLE>
(A)Prior to March 1, 1998, the Short-Term Bond Fund-Institutional Class was
known as the American AAdvantage Limited-Term Income Fund-Institutional
Class.
(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 reflects accrual for the maximum shareholder services fee of
.30% for periods prior to August 1, 1994.
(D)Effective August 1, 1994, expenses include administrative services fees paid
by the Fund to the Manager. Prior to that date, expenses exclude shareholder
services fees paid directly by shareholders to the Manager, which amounted to
less than $.03 per share in each period on an annualized basis.
(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, 1995 is that of the Portfolio.
- --------------------------------------------------------------------------------
Prospectus 37 Additional Information
<PAGE> 40
<TABLE>
<CAPTION>
MONEY MARKET FUND-INSTITUTIONAL CLASS
--------------------------------------------------------------
YEAR ENDED OCTOBER 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD: ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period........................ $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------- ---------- ---------- ----------
Net investment income....................................... 0.06(A) 0.06(A) 0.05(A) 0.06
Less dividends from net investment income................... (0.06) (0.06) (0.05) (0.06)
---------- ---------- ---------- ----------
Net asset value, end of period.............................. $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== ========== ========== ==========
Total return................................................ 5.63% 5.60% 5.57% 5.96%
========== ========== ========== ==========
Ratios and supplemental data:
Net assets, end of period (in thousands).................. $1,241,999 $1,123,649 $1,406,939 $1,206,041
Ratios to average net assets
Expenses................................................ 0.23%(A) 0.23%(A) 0.24%(A) 0.23%
Net investment income................................... 5.49%(A) 5.46%(A) 5.41%(A) 5.79%
</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.
<TABLE>
<CAPTION>
U.S. GOVERNMENT MONEY MARKET
FUND-INSTITUTIONAL CLASS
---------------------------------------------
YEAR ENDED OCTOBER 31,
---------------------------------------------
1999 1998 1997(A) 1996 1995
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD: ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period........................ $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- -------
Net investment income....................................... 0.05(B) 0.05(B) 0.05(B) 0.06
Less dividends from net investment income................... (0.05) (0.05) (0.05) (0.06)
------- ------- ------- -------
Net asset value, end of period.............................. $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= =======
Total return................................................ 5.47% 5.36% 5.29% 5.67%
======= ======= ======= =======
Ratios and supplemental data:
Net assets, end of period (in thousands).................. $39,004 $29,946 $25,595 $47,184
Ratios to average net assets
Expenses................................................ 0.30%(B) 0.27%(B) 0.32%(B) 0.32%
Net investment income................................... 5.34%(B) 5.24%(B) 5.16%(B) 5.49%
</TABLE>
(A)Prior to March 1, 1997, the U.S. Government Money Market Fund-Institutional
Class was known as the American AAdvantage U.S. Treasury Money Market
Fund-Institutional Class and operated under different investment policies.
(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.
<TABLE>
<CAPTION>
MUNICIPAL MONEY MARKET FUND-INSTITUTIONAL CLASS(A)
---------------------------------------------------
YEAR ENDED OCTOBER 31,
---------------------------------------------------
1999 1998 1997 1996 1995
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD: ---- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period........................ $1.00 $1.00 $1.00 $1.00
----- ----- ----- -----
Net investment income....................................... 0.03(B) 0.04(B) 0.04(B) 0.04
Less dividends from net investment income................... (0.03) (0.04) (0.04) (0.04)
----- ----- ----- -----
Net asset value, end of period.............................. $1.00 $1.00 $1.00 $1.00
===== ===== ===== =====
Total return (annualized)................................... 3.46% 3.52% 3.59% 3.75%
===== ===== ===== =====
Ratios and supplemental data:
Net assets, end of period (in thousands).................. $ 847 $ 369 $ 6 $ 7
Ratios to average net assets (annualized)(C)
Expenses................................................ 0.33%(B) 0.31%(B) 0.27%(B) 0.35%
Net investment income................................... 3.35%(B) 3.49%(B) 3.49%(B) 3.70%
</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 in the following years 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 0.50% 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, and 0.32%
and 3.48%, respectively, for the year ended October 31, 1997.
- --------------------------------------------------------------------------------
Additional Information 38 Prospectus
<PAGE> 41
-- Notes --
<PAGE> 42
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.
ANNUAL REPORT/SEMI-ANNUAL REPORT
The Funds' Annual and Semi-Annual Reports list each Fund's actual investments as
of the report's date. They also include a discussion by the Manager of market
conditions and investment strategies that significantly affected the Funds'
performance. The report of the Funds' independent auditors is included in the
Annual Report.
STATEMENT OF ADDITIONAL INFORMATION
The SAI contains more details about the Funds and their investment policies. The
SAI is incorporated in this Prospectus by reference (it is legally part of this
Prospectus). A current SAI is on file with the Securities and Exchange
Commission (SEC).
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 may also be obtained from the SEC Public Reference
Room by mailing a request, including a duplicating fee to: SEC's Public
Reference Section, 450 5th Street NW, Washington, D.C. 20549-6009. The Public
Reference Room can be reached at (202) 942-8090.
FUND SERVICE PROVIDERS:
<TABLE>
<S> <C> <C> <C>
CUSTODIAN TRANSFER AGENT INDEPENDENT AUDITORS DISTRIBUTOR
STATE STREET BANK NATIONAL FINANCIAL ERNST & YOUNG LLP SWS FINANCIAL
AND TRUST DATA SERVICES Dallas, Texas SERVICES
Boston, Massachusetts Kansas City, Missouri Dallas, Texas
</TABLE>
[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 Large Cap
Value 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, Inc.
<PAGE> 43
---------------
PLANAHEAD CLASS
---------------
[LOGO]
PROSPECTUS
MARCH 1, 2000
[AMERICAN AADVANTAGE FUNDS LOGO]
EQUITY FUNDS
------------------------------------------
o BALANCED FUND
o LARGE CAP VALUE FUND
o SMALL CAP VALUE FUND
o INTERNATIONAL EQUITY FUND
o S&P 500 INDEX FUND
BOND FUNDS
------------------------------------------
o INTERMEDIATE BOND FUND
o SHORT-TERM BOND FUND
MONEY MARKET FUNDS
---------------------------------------------------
o MONEY MARKET FUND
o U.S. GOVERNMENT MONEY MARKET FUND
o MUNICIPAL MONEY MARKET FUND
MANAGED BY AMR INVESTMENT SERVICES, INC.
[EAGLE LOGO]
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> 44
[AMERICAN AADVANTAGE FUNDS P.A. CLASS LOGO]
TABLE OF CONTENTS
<TABLE>
<S> <C>
About the Funds
Overview.................................... 2
Balanced Fund............................... 3
Large Cap Value Fund........................ 6
Small Cap Value Fund........................ 8
International Equity Fund................... 10
S&P 500 Index Fund.......................... 13
Intermediate Bond Fund...................... 16
Short-Term Bond Fund........................ 19
Money Market Fund........................... 22
U.S. Government Money Market Fund........... 24
Municipal Money Market Fund................. 26
The Manager................................. 28
Equity 500 Index Portfolio Administrator.... 29
The Investment Advisers..................... 29
Valuation of Shares......................... 30
About Your Investment
Purchase and Redemption of Shares........... 31
Distributions and Taxes..................... 34
Additional Information
Distribution of Trust Shares................ 35
Master-Feeder Structure..................... 35
Financial Highlights........................ 36
Additional Information.................Back Cover
</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
State Street Equity 500 Index Portfolio ("Equity 500 Index Portfolio"), which is
a separate investment company with an identical investment objective, managed by
State Street Bank and Trust Company ("State Street"), through its State Street
Global Advisors division. 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".
- --------------------------------------------------------------------------------
About the Funds 2 Prospectus
<PAGE> 45
AMERICAN AADVANTAGE
BALANCED FUND(SM)
- --------------------------------------------------------------------------------
Investment Objective
- -------------------------------
Income and capital appreciation.
Principal Strategies
- ------------------------------
This Fund typically invests between 50% and 65% of its total assets in equity
securities and between 35% and 50% of its total 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:
- - above-average earnings growth potential,
- - below-average price to earnings ratio,
- - below-average price to book value ratio, and
- - above-average dividend yields.
Each of the Fund's investment advisers determines the earnings 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.
One of the investment advisers utilizes an "amplified alpha" approach in
determining which equity securities to buy and sell. This approach attempts to
amplify the outperformance expected from the best ideas of the other investment
advisers by concentrating assets in those stocks that are overweighted in the
aggregate of the advisers' portfolios when compared to a relevant market index.
The Fund's investments in debt securities may include: obligations of the U.S.
Government, its agencies and instrumentalities; U.S. 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 Corporation or Moody's Investors Service, Inc.).
Obligations rated in the fourth highest rating category are limited to 25% of
the Fund's total assets. The Fund, at the discretion of the applicable
investment adviser, 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" or "bottom-up" investment strategy, or a combination
of both strategies.
The top-down fixed income investment strategy is implemented as follows:
- - Develop an overall investment strategy, including a portfolio duration target,
by examining the current trend in the U.S. economy.
- - Set desired portfolio maturity structure by comparing the differences between
corporate and U.S. Government securities of similar duration to judge their
potential for optimal return in accordance with the target duration benchmark.
- - Determine the weightings of each security type by analyzing the difference in
yield spreads between corporate and U.S. Government securities.
- - Select specific debt securities within each security type.
- - Review and monitor portfolio composition for changes in credit, risk-return
profile and comparisons with benchmarks.
The bottom-up fixed income investment strategy is implemented as follows:
- - Search for eligible securities with a yield to maturity advantage versus a
U.S. Government security with a similar maturity.
- --------------------------------------------------------------------------------
Prospectus 3 About the Funds
<PAGE> 46
AMERICAN AADVANTAGE
BALANCED FUND(SM) -- (CONTINUED)
- --------------------------------------------------------------------------------
- - Evaluate credit quality of the securities.
- - Perform an analysis of the expected price volatility of the securities to
changes in interest rates by examining actual price volatility between U.S.
Government and non-U.S. Government securities.
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.
Risk Factors
- -------------------
MARKET RISK (STOCKS)
Since this Fund invests a substantial portion of its assets in stocks, 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.
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, bond prices generally 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.
CREDIT RISK (BONDS)
The Fund is subject to the risk that the 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.
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 and the Fund may have to invest at a
lower rate.
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. When
you sell your shares of the Fund, they could be worth less than what you paid
for them.
Investor Profile
- -----------------------
This Fund may be suitable for investors who:
- - need to fund a long-term objective, such as a child's college education or a
comfortable retirement
- - seek a convenient way to invest in value-oriented stocks and investment grade
bonds in a single, professionally managed portfolio
- - desire long-term performance from an investment style that may help to
minimize volatility and downside risk
- - require investment income
- - want to take advantage of the investment expertise of value-oriented
investment advisers
- --------------------------------------------------------------------------------
About the Funds 4 Prospectus
<PAGE> 47
AMERICAN AADVANTAGE
BALANCED FUND(SM) -- (CONTINUED)
- --------------------------------------------------------------------------------
Historical Performance
- -----------------------------------
The bar chart and table below provide 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 three broad-based market indices and the Lipper Balanced
Index, a composite of mutual funds 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
[PERFORMANCE GRAPH]
<TABLE>
<S> <C>
90.......................................................... 0.29%
91.......................................................... 21.22%
92.......................................................... 8.97%
93.......................................................... 14.46%
94.......................................................... -1.92%
95.......................................................... 28.32%
96.......................................................... 13.67%
97.......................................................... 19.45%
98.......................................................... 8.00%
99.......................................................... XX.XX%
</TABLE>
<TABLE>
<S> <C>
Highest Quarterly Return: X.XX%
(1/1/90 through 12/31/99) (XXX Quarter 19XX)
Lowest Quarterly Return: X.XX%
(1/1/90 through 12/31/99) (XXX Quarter 19XX)
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
-----------------------------
AS OF 12/31/99
-----------------------------
1 YEAR 5 YEARS 10 YEARS
------ ------- --------
<S> <C> <C> <C>
BALANCED FUND X.XX% X.XX% X.XX%
S&P/Barra Value Index* 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/Barra Value Index is a market value weighted index of stocks with
book-to-price ratios in the top 50% of the S&P 500 Index.
** 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 0.30%
Distribution (12b-1) Fees 0.00
Other Expenses X.XX
----
TOTAL ANNUAL FUND OPERATING EXPENSES X.XX%
====
</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 $10,000 in the Fund for
the time periods indicated and then redeem all
of your shares at the end of those periods. The
Example also assumes that your investment has a
5% return each year and that the Fund's
operating expenses remain the same. Although
your actual costs may be higher or lower, based
on these assumptions your costs would be:
1 YEAR .....................................$XXX
3 YEARS.....................................$XXX
5 YEARS.....................................$XXX
10 YEARS....................................$XXX
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.
- --------------------------------------------------------------------------------
Prospectus 5 About the Funds
<PAGE> 48
AMERICAN AADVANTAGE
LARGE CAP VALUE FUND(SM)
- --------------------------------------------------------------------------------
Investment Objective
- -------------------------------
Long-term capital appreciation and current income.
Principal Strategies
- ------------------------------
Ordinarily at least 65% of the total assets of this Fund are invested in equity
securities of U.S. companies with market capitalizations of $5 billion or more
at the time of investment. 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:
- - above-average earnings growth potential,
- - below-average price to earnings ratio,
- - below-average price to book value ratio, and
- - above-average dividend yields.
Each of the Fund's investment advisers determines the earnings 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.
One of the investment advisers utilizes an "amplified alpha" approach in
determining which equity securities to buy and sell. This approach attempts to
amplify the outperformance expected from the best ideas of the other investment
advisers by concentrating assets in those stocks that are overweighted in the
aggregate of the advisers' portfolios when compared to a relevant market index.
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.
Risk Factors
- -------------------
MARKET RISK
Since this Fund invests most of its assets in stocks, 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.
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. When
you sell your shares of the Fund, they could be worth less than what you paid
for them.
Investor Profile
- -----------------------
This Fund may be suitable for investors who:
- - need to fund a long-term objective, such as a child's college education or a
comfortable retirement
- - seek a U.S. stock mutual fund that invests in fundamentally strong companies
- - require total returns including income
- - want to take advantage of the expertise of value-oriented investment advisers
- --------------------------------------------------------------------------------
About the Funds 6 Prospectus
<PAGE> 49
AMERICAN AADVANTAGE
LARGE CAP VALUE FUND(SM) -- (CONTINUED)
- --------------------------------------------------------------------------------
Historical Performance
- -----------------------------------
The bar chart and table below provide 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/Barra Value Index, a market value weighted index
of stocks with book-to-price ratios in the top 50% of the S&P 500 Index, the S&P
500, a widely recognized unmanaged index of common stocks publicly traded in the
U.S., and the Lipper Multi Cap Value Index, a composite of mutual funds 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
[PERFORMANCE GRAPH]
<TABLE>
<S> <C>
90.......................................................... -5.97%
91.......................................................... 26.00%
92.......................................................... 11.90%
93.......................................................... 15.74%
94.......................................................... -1.26%
95.......................................................... 33.69%
96.......................................................... 20.74%
97.......................................................... 26.08%
98.......................................................... 5.88%
99.......................................................... X.XX%
</TABLE>
<TABLE>
<S> <C>
Highest Quarterly Return: X.XX%
(1/1/90 through 12/31/99) (XXX Quarter 19XX)
Lowest Quarterly Return: X.XX%
(1/1/90 through 12/31/99) (XXX Quarter 19XX)
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
-----------------------------
AS OF 12/31/99
-----------------------------
1 YEAR 5 YEARS 10 YEARS
------ ------- --------
<S> <C> <C> <C>
LARGE CAP VALUE FUND X.XX% X.XX% X.XX%
S&P/Barra Value Index X.XX% X.XX% X.XX%
S&P 500 Index X.XX% X.XX% X.XX%
Lipper Multi Cap Value
Index* X.XX% X.XX% X.XX%
</TABLE>
* On September 1, 1999, Lipper reclassified the Fund from the Lipper Growth and
Income Index to the Lipper Multi Cap Value Index.
Fees and Expenses
- ----------------------------
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Large Cap Value Fund.(1)
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)
<TABLE>
<S> <C>
Management Fees 0.30%
Distribution (12b-1) Fees 0.00
Other Expenses X.XX
----
TOTAL ANNUAL FUND OPERATING EXPENSES X.XX%
====
</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 $10,000 in the Fund for the time periods indicated and then redeem all of
your shares at the end of those periods. The Example also assumes that your
investment has a 5% return each year and that the Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
<TABLE>
<S> <C> <C>
1 YEAR .....................................$XXX
3 YEARS.....................................$XXX
5 YEARS.....................................$XXX
10 YEARS....................................$XXX
</TABLE>
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.
- --------------------------------------------------------------------------------
Prospectus 7 About the Funds
<PAGE> 50
AMERICAN AADVANTAGE
SMALL CAP VALUE FUND(SM)
- --------------------------------------------------------------------------------
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:
- - above-average earnings growth potential,
- - below-average price to earnings ratio,
- - below-average price to book value ratio, and
- - above-average dividend yields.
Each of the investment advisers determines the earnings 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.
Risk Factors
- -------------------
MARKET RISK
Since this Fund invests most of its assets in stocks, 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.
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.
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. When
you sell your shares of the Fund, they could be worth less than what you paid
for them.
Investor Profile
- -----------------------
This Fund may be suitable for investors who:
- - need to fund a long-term objective, such as a child's education or a
comfortable retirement
- - seek a U.S. stock mutual fund that invests in small, less well-known companies
- - want to take advantage of the expertise of value-oriented investment advisers
- - are willing to accept the increased risks of small stock investing
- --------------------------------------------------------------------------------
About the Funds 8 Prospectus
<PAGE> 51
AMERICAN AADVANTAGE
SMALL CAP VALUE FUND(SM) -- (CONTINUED)
- --------------------------------------------------------------------------------
Historical Performance
- -----------------------------------
The bar chart and table below provide 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 Russell 2000(R) Index, a widely-recognized unmanaged
index of 2,000 small capitalization companies and the Lipper Small Cap Value
Index, a composite of mutual funds with the same investment objective as the
Fund. The PlanAhead Class of the Fund began offering its shares on March 1,
1999. However, another class of shares of the Fund not offered in this
prospectus began offering its shares on January 1, 1999. In the chart and table
below, performance results before March 1, 1999 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 12/31/99
[PERFORMANCE GRAPH]
<TABLE>
<S> <C>
99............................................................X.XX%
</TABLE>
<TABLE>
<S> <C>
Highest Quarterly Return: X.XX%
(1/1/99 through 12/31/99) (XXX Quarter 1999)
Lowest Quarterly Return: X.XX%
(1/1/99 through 12/31/99) (XXX Quarter 1999)
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
------------------------------
AS OF 12/31/99
------------------------------
1 YEAR
-------
<S> <C>
SMALL CAP VALUE X.XX%
Russell 2000 Index X.XX%
Lipper Small Cap
Value Index 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 Small Cap Value Fund.(1)
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)
<TABLE>
<S> <C>
Management Fees 0.68%
Distribution (12b-1) Fees 0.00
Other Expenses X.XX
----
Total Annual Fund Operating Expenses X.XX%
====
Fee Waiver and/or Expense Reimbursement XXX (3)
NET EXPENSES 1.28%
</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 reimburse the Fund for Other
Expenses through October 31, 2000 to the extent that Total Annual Fund
Operating Expenses exceed 1.28%.
<TABLE>
<S> <C> <C>
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 $10,000 in the Fund for the time periods indicated and then redeem all of
your shares at the end of those periods. The Example also assumes that your
investment has a 5% return each year and that the Fund's operating expenses
remain the same. Because the Manager's expense reimbursement is only guaranteed
through October 31, 2000, net expenses are used to calculate costs in year one,
and total fund expenses are used to calculate costs in years two through ten.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 YEAR..............................................$XXX
3 YEARS.............................................$XXX
5 YEARS.............................................$XXX
10 YEARS.............................................$XXX
</TABLE>
Investment Advisers
- ----------------------------------
The Manager allocates the assets of the Fund among the following investment
advisers:
Brandywine Asset Management, Inc.
Hotchkis and Wiley
- --------------------------------------------------------------------------------
Prospectus 9 About the Funds
<PAGE> 52
AMERICAN AADVANTAGE
INTERNATIONAL EQUITY FUND(SM)
- --------------------------------------------------------------------------------
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>
Australia France Mexico South Korea
Austria Germany Netherlands Spain
Belgium Hong Kong New Zealand Sweden
Canada Ireland Norway Switzerland
Denmark Italy Portugal United Kingdom
Finland Japan Singapore
</TABLE>
The investment advisers select stocks which, in their opinion, have most or all
of the following characteristics:
- - above-average earnings growth potential,
- - below-average price to earnings ratio,
- - below-average price to book value ratio, and
- - above-average dividend yields.
The investment advisers may also consider potential changes in currency exchange
rates when choosing stocks. Each of the investment advisers determines the
earnings 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 or currency futures 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.
One of the investment advisers utilizes an "amplified alpha" approach in
determining which equity securities to buy and sell. This approach attempts to
amplify the outperformance expected from the best ideas of the other investment
advisers by concentrating assets in those stocks that are overweighted in the
aggregate of the advisers' portfolios when compared to a relevant market index.
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.
Risk Factors
- -------------------
MARKET RISK
Since this Fund invests most of its assets in stocks, 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 market 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.
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; (7) delays in transaction settlement in some foreign
markets; and (8) adverse impact of the euro conversion on the business or
financial condition of companies in which the Fund is invested.
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
- --------------------------------------------------------------------------------
About the Funds 10 Prospectus
<PAGE> 53
AMERICAN AADVANTAGE
INTERNATIONAL EQUITY FUND(SM) -- (CONTINUED)
- --------------------------------------------------------------------------------
will fluctuate up and down. When you sell your shares of the Fund, they could be
worth less than what you paid for them.
Investor Profile
- -----------------------
This Fund may be appropriate for investors who:
- - need to fund a long-term objective that requires growth of capital, such as a
child's college education or a comfortable retirement
- - seek to complement U.S. stock holdings with an international stock mutual fund
that invests in large, well-capitalized foreign companies
- - want to take advantage of the expertise of leading international equity
investment advisers
- - 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 and table below provide 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 Europe Australasia Far East ("EAFE")
Index, a widely recognized unmanaged index of international stock investment
performance, and the Lipper International Index, a composite of mutual funds
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
[PERFORMANCE GRAPH]
<TABLE>
<S> <C>
92.......................................................... -11.03%
93.......................................................... 42.33%
94.......................................................... 0.76%
95.......................................................... 17.20%
96.......................................................... 19.33%
97.......................................................... 9.26%
98.......................................................... 11.52%
99.......................................................... X.XX%
</TABLE>
<TABLE>
<S> <C>
Highest Quarterly Return: X.XX%
(1/1/92 through 12/31/99) (XXX Quarter 199X)
Lowest Quarterly Return: X.XX%
(1/1/92 through 12/31/99) (XXX Quarter 199X)
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
------------------------------
AS OF 12/31/99
------------------------------
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 0.41%
Distribution (12b-1) Fees 0.00
Other Expenses X.XX
----
TOTAL ANNUAL FUND OPERATING EXPENSES X.XX%
====
</TABLE>
(1) The expense table and the Example below reflect the expenses of both the
Fund and its corresponding Portfolio.
- --------------------------------------------------------------------------------
Prospectus 11 About the Funds
<PAGE> 54
AMERICAN AADVANTAGE
INTERNATIONAL EQUITY FUND(SM) -- (CONTINUED)
- --------------------------------------------------------------------------------
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
$10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those
periods. The Example also assumes that your investment
has a 5% return each year and that the Fund's operating
expenses remain the same. Although your actual costs may
be higher or lower, based on these assumptions your
costs would be:
1 YEAR .....................................$XXX
3 YEARS.....................................$XXX
5 YEARS.....................................$XXX
10 YEARS....................................$XXX
Investment Advisers
- ----------------------------------
The Manager allocates the assets of the Fund among the following investment
advisers:
Hotchkis and Wiley
Independence Investment Associates, Inc.
Lazard Asset Management
Templeton Investment Counsel, Inc.
- --------------------------------------------------------------------------------
About the Funds 12 Prospectus
<PAGE> 55
AMERICAN AADVANTAGE
S&P 500 INDEX FUND(SM)(1)
- --------------------------------------------------------------------------------
Investment Objective
- -------------------------------
To replicate as closely as possible, before expenses, the performance of the
Standard & Poor's 500 Composite Stock Price Index ("S&P 500 Index" or "Index").
Principal Strategies
- ------------------------------
The Fund uses a passive management strategy designed to track the performance of
the S&P 500 Index. The S&P 500 Index is a well-known stock market index that
includes common stocks of 500 companies from several industrial sectors
representing a significant portion of the market value of all stocks publicly
traded in the United States.
The Fund is not managed according to traditional methods of "active" investment
management, which involve the buying and selling of securities based upon
economic, financial and market analysis and investment judgement. Instead, the
Fund, using a "passive" or "indexing" investment approach, attempts to
replicate, before expenses, the performance of the S&P 500 Index. State Street,
through its State Street Global Advisors division, seeks a correlation of 0.95
or better between the Fund's performance and the performance of the Index; a
figure of 1.00 would represent perfect correlation.
The Fund intends to invest in all 500 stocks comprising the Index in proportion
to their weightings in the Index. However, under various circumstances, it may
not be possible or practicable to purchase all 500 stocks in those weightings.
In those circumstances, the Fund may purchase a sample of the stocks in the
Index in proportions expected by State Street to replicate generally the
performance of the Index as a whole. In addition, from time to time stocks are
added to or removed from the Index. The Fund may sell stocks that are
represented in the Index, or purchase stocks that are not yet represented in the
Index, in anticipation of their removal from or addition to the Index.
In addition, the Fund may at times purchase or sell futures contracts on the
Index, or options on those futures, in lieu of investment directly in the stocks
making up the Index. The Fund might do so, for example, in order to increase its
investment exposure pending investment of cash in the stocks comprising the
Index. Alternatively, the Fund might use futures or options on futures to reduce
its investment exposure in situations where it intends to sell a portion of the
stocks in its portfolio but the sale has not yet been completed. The Fund may
also enter into other derivatives transactions, including the purchase or sale
of options or enter into swap transactions, to assist in replicating the
performance of the Index. The reasons for which the Fund will invest in
derivatives are:
- - to keep cash on hand to meet shareholder redemptions or other needs while
maintaining exposure to the stock market, and
- - they are a low cost method of gaining exposure to a particular securities
market without investing directly in that market.
- ---------------
(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 State Street Bank and 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.
- --------------------------------------------------------------------------------
Prospectus 13 About the Funds
<PAGE> 56
AMERICAN AADVANTAGE
S&P 500 INDEX FUND(SM) -- (CONTINUED)
- --------------------------------------------------------------------------------
Risk Factors
- -------------------
MARKET RISK
Stock values could decline generally or could underperform other investments.
In addition, returns on investments in stocks of large U.S. companies could
trail the returns on investments in stocks of smaller companies.
TRACKING ERROR RISK
The Fund's return may not match the return of the Index for a number of reasons.
For example, the Fund incurs a number of operating expenses not applicable to
the Index, and incurs costs in buying and selling securities. The Fund may not
be fully invested at times, either as a result of cash flows into the Fund or
reserves of cash held by the fund to meet redemptions. The return on the sample
of stocks purchased by the Fund, or futures or other derivative positions taken
by the Fund, to replicate the performance of the Index may not correlate
precisely with the return on the Index.
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.
ADDITIONAL RISKS
An investment in the Fund is not a deposit with 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. When
you sell your shares of the Fund, they could be worth less than what you paid
for them.
Investor Profile
- -----------------------
This Fund may be appropriate for investors who:
- - need to fund a long-term objective, such as a child's college education or a
comfortable retirement
- - seek a stock mutual fund that reflects the performance of publicly traded U.S.
stocks in general
- - want to take advantage of a "passive," indexing investment approach
Historical Performance
- -----------------------------------
The bar chart and table below provide 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, and the Lipper S&P 500
Index, a composite of funds with the same investment objective as the Fund. 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. Prior to March 1,
2000, the Fund invested all of its investable assets in the BT Equity 500 Index
Portfolio, a separate investment company managed by Bankers Trust Company. Past
performance is not necessarily indicative of how the Fund will perform in the
future.
- --------------------------------------------------------------------------------
About the Funds 14 Prospectus
<PAGE> 57
AMERICAN AADVANTAGE
S&P 500 INDEX FUND(SM ) -- (CONTINUED)
- --------------------------------------------------------------------------------
TOTAL RETURN FOR THE CALENDAR YEAR ENDED 12/31 OF EACH YEAR
[PERFORMANCE GRAPH]
<TABLE>
<S> <C>
97.......................................................... 33.09%
98.......................................................... 28.58%
99.......................................................... X.XX%
</TABLE>
<TABLE>
<S> <C>
Highest Quarterly Return: X.XX%
(1/1/97 through 12/31/99) (X Quarter 199X)
Lowest Quarterly Return: X.XX%
(1/1/97 through 12/31/99) (X Quarter 199X)
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL RETURN
-------------------------
AS OF 12/31/99
-------------------------
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%
Lipper 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 0.045%
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 0.55%
</TABLE>
(1) The expense table and the Example below reflect the expenses of both the
Fund and the State Street Equity 500 Index Portfolio.
(2) The Manager has contractually agreed to reimburse the Fund for Other
Expenses through October 31, 2000 to the extent that Total Annual Fund
Operating Expenses exceed 0.55%.
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 $10,000 in
the Fund for the time periods indicated and then redeem all
of your shares at the end of those periods. The Example also
assumes that your investment has a 5% return each year and
that the Fund's operating expenses remain the same. Because
the Manager's expense reimbursement is only guaranteed
through October 31, 2000, net expenses are used to calculate
costs in year one, and total fund expenses are used to
calculate costs in years two through ten. Although your
actual costs may be higher or lower, based on these
assumptions your costs would be:
1 YEAR .....................................$XXX
3 YEARS.....................................$XXX
5 YEARS.....................................$XXX
10 YEARS....................................$XXX
Investment Adviser
- -----------------------------
State Street Bank and Trust Company
- --------------------------------------------------------------------------------
Prospectus 15 About the Funds
<PAGE> 58
AMERICAN AADVANTAGE
INTERMEDIATE BOND FUND(SM)
- --------------------------------------------------------------------------------
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
seeks capital appreciation by investing in corporate issues whose relative value
is expected to increase over time.
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 Corporation or Moody's
Investors Service, Inc.). No more than 25% of total assets may be invested in
securities rated in the fourth highest rating category. The Fund, at the
discretion of the applicable investment adviser, 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 investment strategy, as follows:
- - Develop an overall investment strategy, including a portfolio duration target,
by examining the current trend in the U.S. economy.
- - Set desired portfolio maturity structure by comparing the differences between
corporate and U.S. Government securities of similar duration to judge their
potential for optimal return in accordance with the target duration benchmark.
- - Determine the weightings of each security type by analyzing the difference in
yield spreads between corporate and U.S. Government securities.
- - Select specific debt securities within each security type.
- - 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
investment strategy in determining which securities to buy and sell, as follows:
- - Search for eligible securities with a yield to maturity advantage versus a
U.S. Government security with a similar maturity.
- - Evaluate credit quality of the securities.
- - Perform an analysis of the expected price volatility of the securities to
changes in interest rates by examining actual price volatility between U.S.
Government and non-U.S. Government securities.
Under normal circumstances, the Fund seeks to maintain a duration of three to
seven years. Duration is a measure of price sensitivity relative to changes in
interest rates. Portfolios with longer durations are typically more sensitive to
changes in interest rates. 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.
Risk Factors
- -------------------
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, bond prices generally 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.
- --------------------------------------------------------------------------------
About the Funds 16 Prospectus
<PAGE> 59
AMERICAN AADVANTAGE
INTERMEDIATE BOND FUND(SM) -- (CONTINUED)
- --------------------------------------------------------------------------------
CREDIT RISK
The Fund is subject to the risk that the 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.
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 and the Fund may have to invest at a
lower rate.
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. When
you sell your shares of the Fund, they could be worth less than what you paid
for them.
Investor Profile
- -----------------------
This Fund may be appropriate for investors who:
- - seek regular monthly income for retirement or other current expenses
- - want the relative stability of investment grade bonds
- - can benefit from a diversified portfolio of fixed income securities
- - wish to complement their equity holdings
Historical Performance
- -----------------------------------
The bar chart and table below provide an indication of risk by showing how the
Fund has performed during the past two years. The table shows how the Fund's
performance compares to the Lehman Brothers Intermediate Gov./Corp. and
Aggregate Indexes, two broad-based market indexes, and the Lipper Intermediate
Investment Grade Debt Average and Index, composites of mutual funds with the
same investment objective as the Fund. The PlanAhead Class of the Fund began
offering its shares on March 2, 1998. 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 2, 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
[PERFORMANCE GRAPH]
<TABLE>
<S> <C>
98.......................................................... 8.32%
99.......................................................... X.XX%
</TABLE>
<TABLE>
<S> <C>
Highest Quarterly Return: X.XX%
(1/1/98 through 12/31/99) (X Quarter 199X)
Lowest Quarterly Return: X.XX%
(1/1/98 through 12/31/99) (X Quarter 199X)
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL
RETURN
-------------------------
AS OF 12/31/99
-------------------------
SINCE
INCEPTION
1 YEAR (9/15/97)
------ ---------------
<S> <C> <C>
INTERMEDIATE BOND FUND X.XX% X.XX%
Lehman Bros. Aggregate
Index** X.XX% X.XX%*
Lehman Bros. Intermediate
Gov./Corp. Index*** X.XX% X.XX%*
Lipper Intermediate Investment
Grade Debt Index**** X.XX% X.XX%*
Lipper Intermediate Investment
Grade Debt Average X.XX% X.XX%*
</TABLE>
* The since inception return is shown from 8/31/97.
** The Lehman Brothers Aggregate Index is a market value weighted performance
benchmark for government, corporate, mortgage-backed and asset-backed
fixed-rate debt securities of all maturities. This Index has replaced the
Lehman Bros. Intermediate Gov./Corp. Index as the Fund's market index,
because it better reflects the principal strategies of the Fund.
*** The Lehman Bros. Intermediate Gov./Corp. Index is a market value weighted
performance benchmark for government and corporate fixed-rate debt
securities with maturities between one and ten years.
**** The Fund's investment advisers have designated this Index of 30 funds as
the Fund's new performance benchmark, replacing the Lipper Intermediate
Investment Grade Debt Average.
- --------------------------------------------------------------------------------
Prospectus 17 About the Funds
<PAGE> 60
AMERICAN AADVANTAGE
INTERMEDIATE BOND FUND(SM) -- (CONTINUED)
- --------------------------------------------------------------------------------
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 X.XX
----
TOTAL ANNUAL FUND OPERATING EXPENSES X.XX%
====
</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
$10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those
periods. The Example also assumes that your investment
has a 5% return each year and that the Fund's operating
expenses remain the same. Although your actual costs may
be higher or lower, based on these assumptions your
costs would be:
1 YEAR .....................................$XXX
3 YEARS.....................................$XXX
5 YEARS.....................................$XXX
10 YEARS....................................$XXX
Investment Advisers
- ----------------------------------
The Manager allocates the assets of the Fund among the following investment
advisers:
AMR Investment Services, Inc.
Barrow, Hanley, Mewhinney & Strauss, Inc.
- --------------------------------------------------------------------------------
About the Funds 18 Prospectus
<PAGE> 61
AMERICAN AADVANTAGE
SHORT-TERM BOND FUND(SM)
- --------------------------------------------------------------------------------
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
seeks capital appreciation by investing in corporate issues whose relative value
is expected to increase over time.
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 Corporation or Moody's
Investors Service, Inc.). No more than 25% of total 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 investment strategy, as follows:
- - Develop an overall investment strategy, including a portfolio duration target,
by examining the current trend in the U.S. economy.
- - Set desired portfolio maturity structure by comparing the differences between
corporate and U.S. Government securities of similar duration to judge their
potential for optimal return in accordance with the target duration benchmark.
- - Determine the weightings of each security type by analyzing the difference in
yield spreads between corporate and U.S. Government securities.
- - Select specific debt securities within each security type.
- - Review and monitor portfolio composition for changes in credit, risk-return
profile and comparisons with benchmarks.
Under normal circumstances, the Fund seeks to maintain a duration of one to
three years. Duration is a measure of price sensitivity relative to changes in
interest rates. Portfolios with longer durations are typically more sensitive to
changes in interest rates. 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.
Risk Factors
- -------------------
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, bond prices generally 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.
CREDIT RISK
The Fund is subject to the risk that the 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.
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
- --------------------------------------------------------------------------------
Prospectus 19 About the Funds
<PAGE> 62
AMERICAN AADVANTAGE
SHORT-TERM BOND FUND(SM) -- (CONTINUED)
- --------------------------------------------------------------------------------
interest will be paid on the investment and the Fund may have to invest at a
lower rate.
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. When
you sell your shares of the Fund, they could be worth less than what you paid
for them.
Investor Profile
- -----------------------
This Fund may be appropriate for investors who:
- - seek regular monthly income for retirement or other current expenses
- - want the relative stability of investment grade bonds
- - can benefit from a diversified portfolio of fixed income securities
- - wish to complement their equity holdings
Historical Performance
- -----------------------------------
The bar chart and table below provide 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. and Merrill
Lynch 1-3 Year Gov./Corp. Indexes, two broad-based market indexes, and the
Linked Lipper Investment Grade Debt Averages, a composite of funds 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
[PERFORMANCE GRAPH]
<TABLE>
<S> <C>
90.......................................................... 8.47%
91.......................................................... 12.97%
92.......................................................... 5.19%
93.......................................................... 6.50%
94.......................................................... 1.04%
95.......................................................... 9.65%
96.......................................................... 3.50%
97.......................................................... 6.45%
98.......................................................... 5.19%
99.......................................................... X.XX%
</TABLE>
<TABLE>
<S> <C>
Highest Quarterly Return: X.XX%
(1/1/90 through 12/31/99) (X Quarter 19XX)
Lowest Quarterly Return: X.XX%
(1/1/90 through 12/31/99) (X Quarter 19XX)
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
-----------------------------
AS OF 12/31/99
-----------------------------
1 YEAR 5 YEARS 10 YEARS
------ ------- --------
<S> <C> <C> <C>
SHORT-TERM BOND FUND X.XX% X.XX% X.XX%
Merrill Lynch 1-3 Yr.
Gov./Corp. Index* 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 Merrill Lynch 1-3 Yr. Gov./Corp. Index is a market value weighted
performance benchmark for government and corporate fixed-rate debt
securities with maturities between one and three years. The manager chose
to replace the Lehman Bros. Intermediate Gov./Corp. Index with this Index,
because it better reflects the duration of the Fund.
** The Lehman Bros. Intermediate Gov./Corp. Index is a market value weighted
performance benchmark for government and corporate fixed-rate debt
securities 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>
- --------------------------------------------------------------------------------
About the Funds 20 Prospectus
<PAGE> 63
AMERICAN AADVANTAGE
SHORT-TERM BOND FUND(SM) -- (CONTINUED)
- --------------------------------------------------------------------------------
(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 reimburse the Fund for Other
Expenses through October 31, 2000 to the extent that Total Annual Fund
Operating Expenses exceed 0.85%.
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
$10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those
periods. The Example also assumes that your investment
has a 5% return each year and that the Fund's operating
expenses remain the same. Because the Manager's expense
reimbursement is only guaranteed through October 31,
2000, net expenses are used to calculate costs in year
one, and total fund expenses are used to calculate costs
in years two through ten. Although your actual costs may
be higher or lower, based on these assumptions your
costs would be:
1 YEAR .....................................$XXX
3 YEARS.....................................$XXX
5 YEARS.....................................$XXX
10 YEARS....................................$XXX
Investment Adviser
- --------------------------------
AMR Investment Services, Inc.
- --------------------------------------------------------------------------------
Prospectus 21 About the Funds
<PAGE> 64
AMERICAN AADVANTAGE
MONEY MARKET FUND(SM)
- --------------------------------------------------------------------------------
Investment Objective
- -------------------------------
Current income, liquidity and the maintenance of a stable price of $1.00 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:
- - 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., at the time of purchase,
- - rated in the highest short-term category by one rating organization if the
securities are rated only by one rating organization, or
- - unrated securities that are determined to be of equivalent quality by the
Manager pursuant to guidelines approved by the Board of Trustees.
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.
Risk Factors
- -------------------
- - 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.
- - 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.
- - 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:
- - seek the preservation of capital and to avoid fluctuations in principal
- - desire regular, monthly income from a highly liquid investment
- - require a short-term vehicle for cash when making long-term investment
decisions
- - seek a rate of return that is potentially higher than certificates of deposit
or savings accounts
- --------------------------------------------------------------------------------
About the Funds 22 Prospectus
<PAGE> 65
AMERICAN AADVANTAGE
MONEY MARKET FUND(SM) -- (CONTINUED)
- --------------------------------------------------------------------------------
Historical Performance
- -----------------------------------
The bar chart and table below provide an indication of risk by showing how the
Fund's performance has varied from year to year. 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
[PERFORMANCE GRAPH]
<TABLE>
<S> <C>
90.......................................................... 8.40%
91.......................................................... 6.77%
92.......................................................... 4.02%
93.......................................................... 3.28%
94.......................................................... 4.02%
95.......................................................... 5.70%
96.......................................................... 5.15%
97.......................................................... 5.32%
98.......................................................... 5.24%
99.......................................................... X.XX%
</TABLE>
<TABLE>
<S> <C>
Highest Quarterly Return: X.XX%
(1/1/90 through 12/31/99) (X Quarter 19XX)
Lowest Quarterly Return: X.XX%
(1/1/90 through 12/31/99) (X Quarter 19XX)
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL RETURN
---------------------------
AS OF 12/31/99
---------------------------
1 YEAR 5 YEARS 10 YEARS
------ ------- --------
<S> <C> <C> <C>
MONEY MARKET FUND 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 X.XX
----
TOTAL ANNUAL FUND OPERATING EXPENSES X.XX%
====
</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 $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the
end of those periods. The Example also assumes that
your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although
your actual costs may be higher or lower, based on
these assumptions your costs would be:
1 YEAR ...........................................$XXX
3 YEARS...........................................$XXX
5 YEARS...........................................$XXX
10 YEARS..........................................$XXX
Investment Adviser
- -----------------------------
AMR Investment Services, Inc.
- --------------------------------------------------------------------------------
Prospectus 23 About the Funds
<PAGE> 66
AMERICAN AADVANTAGE
U.S. GOVERNMENT MONEY MARKET FUND(SM)
- --------------------------------------------------------------------------------
Investment Objective
- -------------------------------
Current income, liquidity and the maintenance of a stable price of $1.00 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.
Risk Factors
- -------------------
- - 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.
- - 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:
- - seek the preservation of capital and to avoid fluctuations in principal
- - desire regular, monthly income from a highly liquid investment
- - require a short-term vehicle for cash when making long-term investment
decisions
- - seek a rate of return that is potentially higher than certificates of deposit
or savings accounts
Historical Performance
- -----------------------------------
The bar chart and table below provide an indication of risk by showing how the
Fund's performance has varied from year to year. 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
[PERFORMANCE GRAPH]
<TABLE>
<S> <C>
93.......................................................... 3.05%
94.......................................................... 3.89%
95.......................................................... 5.27%
96.......................................................... 4.88%
97.......................................................... 5.13%
98.......................................................... 5.04%
99.......................................................... X.XX%
</TABLE>
<TABLE>
<S> <C>
Highest Quarterly Return: X.XX%
(1/1/93 through 12/31/99) (X Quarter 199X)
Lowest Quarterly Return: X.XX%
(1/1/93 through 12/31/99) (X Quarter 199X)
</TABLE>
- --------------------------------------------------------------------------------
About the Funds 24 Prospectus
<PAGE> 67
AMERICAN AADVANTAGE
U.S. GOVERNMENT MONEY MARKET FUND(SM) -- (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL
RETURN
----------------------------
AS OF 12/31/99
----------------------------
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%
</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 X.XX
----
TOTAL ANNUAL FUND OPERATING EXPENSES X.XX%
====
</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 $10,000 in the Fund for the time
periods indicated and then redeem all of your shares
at the end of those periods. The Example also as-
sumes that your investment has a 5% return each year
and that the Fund's operating expenses remain the
same. Although your actual costs may be higher or
lower, based on these assumptions your costs would
be:
1 YEAR .........................................$XXX
3 YEARS.........................................$XXX
5 YEARS.........................................$XXX
10 YEARS........................................$XXX
Investment Adviser
- -----------------------------
AMR Investment Services, Inc.
- --------------------------------------------------------------------------------
Prospectus 25 About the Funds
<PAGE> 68
AMERICAN AADVANTAGE
MUNICIPAL MONEY MARKET FUND(SM)
- --------------------------------------------------------------------------------
Investment Objective
- -------------------------------
Current income, liquidity and the maintenance of a stable price of $1.00 per
share.
Principal Strategies
- ------------------------------
Under normal market conditions, the Fund invests at least 80% of its 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:
- - 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., at the time of purchase,
- - rated in the highest short-term category by one rating organization if the
securities are rated only by one rating organization, or
- - unrated securities that are determined to be of equivalent quality by the
Manager pursuant to guidelines approved by the Board of Trustees.
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.
Risk Factors
- -------------------
- - 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.
- - 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.
- - 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:
- - seek the preservation of capital and to avoid fluctuations in principal
- - desire regular, monthly income that is generally exempt from Federal income
tax
- - require a short-term vehicle for cash when making long-term investment
decisions
- - seek an after-tax rate of return that is potentially higher than certificates
of deposit or savings accounts
- --------------------------------------------------------------------------------
About the Funds 26 Prospectus
<PAGE> 69
AMERICAN AADVANTAGE
MUNICIPAL MONEY MARKET FUND(SM) -- (CONTINUED)
- --------------------------------------------------------------------------------
Historical Performance
- -----------------------------------
The bar chart and table below provide an indication of risk by showing how the
Fund's performance has varied from year to year. 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
[PERFORMANCE GRAPH]
<TABLE>
<S> <C>
94.......................................................... 2.52%
95.......................................................... 3.47%
96.......................................................... 3.18%
97.......................................................... 3.26%
98.......................................................... 3.08%
99.......................................................... X.XX%
</TABLE>
<TABLE>
<S> <C>
Highest Quarterly Return: X.XX%
(1/1/94 through 12/31/99) (X Quarter 199X)
Lowest Quarterly Return: X.XX%
(1/1/94 through 12/31/99) (X Quarter 199X)
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
-------------------------------
AS OF 12/31/99
-------------------------------
SINCE
INCEPTION
1 YEAR 5 YEARS (11/10/93)
------ ------- ----------
<S> <C> <C> <C>
MUNICIPAL MONEY MARKET
FUND 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 X.XX
----
TOTAL ANNUAL FUND OPERATING EXPENSES X.XX%
====
</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
$10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those
periods. The Example also assumes that your investment
has a 5% return each year and that the Fund's operating
expenses remain the same. Although your actual costs may
be higher or lower, based on these assumptions your
costs would be:
1 YEAR .....................................$XXX
3 YEARS.....................................$XXX
5 YEARS.....................................$XXX
10 YEARS....................................$XXX
Investment Adviser
- -----------------------------
AMR Investment Services, Inc.
- --------------------------------------------------------------------------------
Prospectus 27 About the Funds
<PAGE> 70
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, 1999, the Manager had approximately $XX.X billion of assets
under management, including approximately $X.X billion under active management
and $XX.X billion as named fiduciary or financial adviser. Of the total,
approximately $XX.X billion 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,
- - selects and changes investment advisers (subject to requisite approvals),
- - allocates assets among investment advisers,
- - monitors the investment advisers' investment programs and results,
- - coordinates the investment activities of the investment advisers to ensure
compliance with regulatory restrictions,
- - oversees each Fund's securities lending activities and actions taken by the
securities lending agent, and
- - with the exception of the International Equity and S&P 500 Index Funds,
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 Manager receives an
annualized advisory fee that is calculated and accrued daily, equal to the sum
of:
- - 0.25% of the net assets of the Manager's portion of the Intermediate Bond
Fund,
- - 0.25% of the net assets of the Short-Term Bond Fund, plus
- - 0.10% of the net assets of all other Funds.
In addition, the Balanced, Large Cap Value, Small Cap Value, International
Equity and Intermediate Bond Funds pay the Manager the amounts due to their
respective investment advisers. The Manager then remits these amounts to the
investment advisers.
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 or registered investment companies managed by the
Manager.
The management fees paid by the Funds for the fiscal year ended October 31,
1999, net of reimbursements and shown as a percentage of average net assets,
were as follows:
<TABLE>
<CAPTION>
FUND MANAGEMENT FEES
---- ---------------
<S> <C>
Balanced........................ X.XX%
Large Cap Value................. X.XX%
Small Cap Value................. X.XX%
Intermediate Bond............... X.XX%
International Equity............ X.XX%
S&P 500 Index................... X.XX%
Short-Term Bond................. X.XX%
Money Market.................... X.XX%
U.S. Government Money Market.... X.XX%
Municipal Money Market.......... X.XX%
</TABLE>
William F. Quinn and Nancy A. Eckl have primary responsibility for the
day-to-day operations of the Balanced, Large Cap Value, Small Cap Value,
International Equity and Intermediate Bond 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 of the Manager 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 oversees the team responsible for the portfolio management of
the Short-Term Bond Fund. Mr. Fields has been with the Manager since it was
- --------------------------------------------------------------------------------
About the Funds 28 Prospectus
<PAGE> 71
founded in 1986 and serves as Chief Investment Officer and Vice President-Fixed
Income Investments.
Equity 500 Index Portfolio Administrator
- ------------------------------------------------------------
State Street serves as the adviser, administrator, custodian and transfer agent
to the Equity 500 Index Portfolio. As compensation for its services as adviser,
administrator, custodian and transfer agent (and for assuming ordinary
operating expenses of the Portfolio, including ordinary legal and audit
expenses), State Street receives a unitary fee at an annual rate of 0.045% of
the average daily net assets of the Portfolio.
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 and the S&P 500 Index 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.
BARROW, HANLEY, MEWHINNEY & STRAUSS, INC. ("BARROW"), 3232 McKinney Avenue, 15th
Floor, Dallas, Texas 75204, is a professional investment counseling firm which
has been providing investment advisory services since 1979. The firm is wholly
owned by United Asset Management Corporation, a Delaware corporation. As of
December 31, 1999, Barrow had discretionary investment management authority with
respect to approximately $XX.X billion of assets, including approximately $X.X
billion of assets of AMR and its subsidiaries and affiliated entities. Barrow
serves as an investment adviser to the Balanced, Large Cap Value, 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. As of
December 31, 1999, Brandywine had assets under management totaling approximately
$X.X billion, including approximately $X.X billion of assets of AMR and its
subsidiaries and affiliated entities. Brandywine serves as an investment adviser
to the Balanced, Large Cap Value 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.
GSB is wholly owned by United Asset Management Corporation, a Delaware
corporation. As of December 31, 1999, GSB managed approximately $X.X billion of
assets, including approximately $XXX.X million of assets of AMR and its
subsidiaries and affiliated entities. GSB serves as
- --------------------------------------------------------------------------------
Prospectus 29 About the Funds
<PAGE> 72
an investment adviser to the Balanced and Large Cap Value Funds.
HOTCHKIS AND WILEY, 725 South Figueroa Street, Suite 4000, Los Angeles,
California 90017, is a professional investment management firm which was founded
in 1980. Hotchkis and Wiley is a division of Merrill Lynch Asset Management,
L.P., a wholly owned indirect subsidiary of Merrill Lynch & Co., Inc. Assets
under management as of December 31, 1999 were approximately $XX.X billion, which
included approximately $X.X billion of assets of AMR and its subsidiaries and
affiliated entities. Hotchkis and Wiley serves as an investment adviser to the
Balanced, Large Cap Value, Small Cap Value 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. Assets under management as of December 31, 1999,
including funds managed for its parent company, were approximately $XX.X
billion, which included approximately $X.X billion of assets of AMR and its
subsidiaries and affiliated entities. IIA serves as an investment advisor to the
Balanced, Large Cap Value and International Equity Funds.
LAZARD ASSET MANAGEMENT ("LAZARD"), 30 Rockefeller Plaza, New York, New York
10112, is a division of Lazard Freres & Co. LLC, a registered investment adviser
and a member of the New York, American and Midwest Stock Exchanges, providing
its clients with a wide variety of investment banking, brokerage and related
services. Lazard provides investment management services to client discretionary
accounts with assets totaling approximately $XX.X billion as of December 31,
1999. Lazard serves as an investment adviser to the International Equity Fund.
STATE STREET BANK AND TRUST COMPANY ("STATE STREET"), Two International Place,
Boston, Massachusetts 02110, is a Massachusetts banking corporation. State
Street serves as investment adviser and administrator to the Equity 500 Index
Portfolio. As of December 31, 1999, State Street Global Advisors, the division
responsible for managing the Portfolio, had assets under management of
$X.X million.
TEMPLETON INVESTMENT COUNSEL, INC. ("TEMPLETON"), 500 East Broward Blvd., Suite
2100, Fort Lauderdale, Florida 33394-3091, is a professional investment
counseling firm which has been providing investment services since 1979.
Templeton is indirectly owned by Franklin Resources, Inc. As of December 31,
1999, 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 State Street. Including these assets lowers the investment
advisory fees for each applicable Fund.
Valuation of Shares
- -------------------------------
The price of each Fund's shares is based on its net asset value ("NAV") per
share. 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 are valued at fair
value, as determined in good faith and pursuant to procedures approved by the
Board and the AMR Trust Board, under certain limited circumstances. For example,
fair valuation would be used if market quotations are not readily available or a
material event occurs after the close of the Exchange which may affect a
security's value. 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 per share 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 Veterans Day. The NAV per share of the
International Equity Fund may change on days when shareholders will not be able
to purchase or redeem the Fund's shares.
- --------------------------------------------------------------------------------
About the Funds 30 Prospectus
<PAGE> 73
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 Veterans Day:
<TABLE>
<CAPTION>
PURCHASE BY
FUND (EASTERN TIME)*:
---- ----------------
<S> <C>
Municipal Money Market 11:45 a.m.
All other Funds 4:00 p.m.
</TABLE>
* or the close of the Exchange (whichever comes first)
If a purchase order is received in good order 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 received in good order 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, credit card checks or
third party checks.
Opening an Account
- -------------------------------
A completed, signed application is required to open an account. You may request
an application form by:
- - calling (800) 388-3344, or
- - 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 219643
Kansas City, MO 64121-9643
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. 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.
<TABLE>
<CAPTION>
SAME DAY WIRE
FUND 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>
* or the close of the Exchange (whichever comes first)
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. Delivery of proceeds from shares purchased by check or
pre-authorized automatic investment may be delayed 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.
- --------------------------------------------------------------------------------
Prospectus 31 About Your Investment
<PAGE> 74
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 PURCHASE SHARES
To Make an Initial Purchase To Add to an Existing Account
<S> <C>
By Check
- - Make check payable to the American AAdvantage Funds Include the shareholder's account number, Fund name, and
- - Include the Fund name, Fund number and "PlanAhead Class" Fund number on the check. Mail check ($50 minimum) to:
on the check American AAdvantage Funds-PlanAhead Class
- - Mail check ($2,500 minimum or $2,000 for IRAs) to: P.O. Box 219643
American AAdvantage Funds-PlanAhead Class Kansas City, MO 64121-9643
P.O. Box 219643
Kansas City, MO 64121-9643
By Wire
If your account has been established, you may call (800) Call (800) 388-3344 to purchase shares by wire. Send a bank
388-3344 to purchase shares by wire. Send a bank wire wire ($500 minimum) to State Street Bank & Trust Co. with
($2,500 minimum or $2,000 for IRAs) to State Street Bank & these instructions:
Trust Co. with these instructions:
- - ABA# 0110-0002-8; AC-9905-342-3 - ABA# 0110-0002-8; AC-9905-342-3
- - Attn: American AAdvantage Funds-PlanAhead Class - Attn: American AAdvantage Funds-PlanAhead Class
- - the Fund name and Fund number - the Fund name and Fund number
- - account number and registration - shareholder's account number and registration
By Pre-Authorized Automatic Investment
- - The minimum account size of $2,500 ($2,000 for IRAs) must - Funds will be transferred automatically from your bank
be met before establishing an automatic investment plan. account via Automated Clearing House ("ACH") on or about
- - Fill in required information on the account application, the 5th day of each month or quarter, depending upon
including amount of automatic investment ($50 minimum) which periods you specify.
- - Attach a voided check to the account application
By Exchange
- - Send a written request to the address above or call (800) - You may purchase shares of a Fund by exchanging shares
388-3344 from the PlanAhead Class of another American AAdvantage
- - A $2,500 minimum is required to establish a new account Fund if you have owned shares of the other American
in the PlanAhead Class of another American AAdvantage AAdvantage Fund for at least 15 days.
Fund by making an exchange. - The minimum amount for each exchange is $50.
</TABLE>
- --------------------------------------------------------------------------------
About Your Investment 32 Prospectus
<PAGE> 75
<TABLE>
<CAPTION>
HOW TO REDEEM SHARES
Method Additional Information
<S> <C>
By Telephone
Call (800) 388-3344 to request a redemption. - Telephone redemption orders are limited to $25,000 within
any 30 day period.
- 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: - Proceeds will only be mailed to the account address of
- - the Fund name, Fund number and Class record or transmitted by wire to a commercial bank account
- - shareholder account number designated on the account application form.
- - shares or dollar amount to be redeemed
- - authorized signature(s) of all persons required to sign A signature guarantee is required for redemption orders:
for the account - in amounts of $25,000 or more
- with a request to send the proceeds to an address or
Mail to: commercial bank account other than the address or
commercial bank account designated on the account
American AAdvantage Funds-PlanAhead Class application, or
P.O. Box 219643 - for an account whose address has changed within the last
Kansas City, MO 64121-9643 30 days.
Call (800) 388-3344 for instructions and further
assistance.
By Check
(Money Market Funds' shareholders only) - Minimum check amount is $100
Choose the check writing feature on the account - A $2 service fee per check is charged for check copies
application.
By Pre-Authorized Automatic Redemption
- - Fill in required information on the account application, - Proceeds will be transferred automatically from your Fund
including amount ($100 minimum). account to your bank account via ACH on or about the 15th
day of each month.
By Exchange
- - Send a written request to the address above or call (800) - You may sell shares of a Fund in exchange for shares of
388-3344 to exchange shares. the PlanAhead Class of another American AAdvantage Fund if
you have owned shares of the Fund for at least 15 days.
- The minimum amount for each exchange is $50
</TABLE>
- --------------------------------------------------------------------------------
Prospectus 33 About Your Investment
<PAGE> 76
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:
- - 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.
- - The Funds employ procedures reasonably designed to confirm that instructions
communicated by telephone are genuine.
- - 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:
- - reject any order for the purchase of shares and to limit or suspend, without
prior notice, the offering of shares,
- - modify or terminate the exchange privilege at any time,
- - terminate the exchange privilege of any shareholder who makes more than one
exchange in and out of a Fund (other than the Money Market Funds) during any
three month period, and
- - 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, broker-dealers 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.
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.
Monthly distributions are paid to shareholders on the first business day of the
following month. Distributions are paid as follows:
<TABLE>
<CAPTION>
OTHER
DISTRIBUTIONS
FUND DIVIDENDS PAID PAID
- ---- -------------- -------------
<S> <C> <C>
Balanced Annually Annually
Large Cap Value Annually Annually
Small Cap Value Annually Annually
International Equity Annually Annually
S&P 500 Index April, July, October Annually
and December
Intermediate Bond Monthly Annually
Short-Term Bond Monthly Annually
Money Market Monthly Monthly
U.S. Government Money Monthly Monthly
Market
Municipal Money Monthly Monthly
Market
</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 Ordinary income rate
income*
Distributions of realized net short- Ordinary income rate
term capital gains*
Distributions of gains from certain Ordinary income rate
foreign currency transactions*
Distributions of realized net Long-term capital
long-term capital gains* gains rate
Sales or exchanges of shares owned Long-term capital
for more than one year gains or losses
Sales or exchanges of shares owned Net gains are treated
for less than one year 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
- --------------------------------------------------------------------------------
About Your Investment 34 Prospectus
<PAGE> 77
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 Large Cap Value
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. In the event the Trust
begins to incur distribution expenses for the Funds, distribution fees may be
paid out of Fund assets, possibly causing the cost of your investment to
increase over time.
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:
MASTER-FEEDER STRUCTURE GRAPH
-----------------------
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.
- --------------------------------------------------------------------------------
Prospectus 35 Additional Information
<PAGE> 78
Financial Highlights
- ---------------------------------
The financial highlights tables are intended to help you understand each Fund's
financial performance for the past five fiscal 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.
<TABLE>
<CAPTION>
BALANCED FUND-PLANAHEAD CLASS(A)
----------------------------------------------------------
YEAR ENDED OCTOBER 31,
----------------------------------------------------------
1999 1998(C) 1997(C) 1996(C)(D) 1995(B)(C)
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD: --------- ------- ------- ---------- ----------
<S> <C> <C> <C> <C>
Net asset value, beginning of period.................... $ 16.03 $ 15.03 $ 13.90 $12.35
Income from investment operations
Net investment income................................. 0.47(E) 0.63(E) 0.57(E) 0.54
Net gains (losses) on securities (realized and
unrealized)....................................... 0.75(E) 2.10(E) 1.56(E) 1.67
------- ------- ------- ------
Total from investment operations........................ 1.22 2.73 2.13 2.21
------- ------- ------- ------
Less distributions:
Dividends from net investment income.................. (0.64) (0.57) (0.56) (0.52)
Distributions from net realized gains on securities... (2.26) (1.16) (0.44) (0.14)
------- ------- ------- ------
Total distributions..................................... (2.90) (1.73) (1.00) (0.66)
------- ------- ------- ------
Net asset value, end of period.......................... $ 14.35 $ 16.03 $ 15.03 $13.90
======= ======= ======= ======
Total return (annualized)............................... 8.73% 19.75% 16.01% 19.06%
======= ======= ======= ======
Ratios and supplemental data:
Net assets, end of period (in thousands).............. $40,717 $34,354 $18,000 $5,450
Ratios to average net assets (annualized)(G)
Expenses............................................ 0.89%(E) 0.90%(E) 0.97%(E) 0.99%
Net investment income............................... 3.23%(E) 3.52%(E) 3.64%(E) 3.70%
Portfolio turnover rate(F).............................. 87% 105% 76% 73%
</TABLE>
(A)The Balanced Fund-PlanAhead Class commenced active operations on August 1,
1994.
(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)On November 1, 1995 the Balanced Fund began investing all of its investable
assets in its corresponding Portfolio. Portfolio turnover rate since November
1, 1995 is that of the Portfolio.
(G)Operating results for the following periods excluded expenses 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.
- --------------------------------------------------------------------------------
Additional Information 36 Prospectus
<PAGE> 79
<TABLE>
<CAPTION>
LARGE CAP VALUE FUND-PLANAHEAD CLASS(A)
---------------------------------------------------
YEAR ENDED OCTOBER 31,
---------------------------------------------------
1999 1998(B) 1997(C) 1996(C)(D) 1995(C)
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD: ------ ------- ------- ---------- -------
<S> <C> <C> <C> <C>
Net asset value, beginning of period........................ $ 21.38 $ 18.33 $ 15.81 $14.17
Income from investment operations
Net investment income..................................... 0.35(E) 0.35(E) 0.39(E) 0.40
Net gains on securities (realized and unrealized)....... 0.86(E) 4.39(E) 3.10(E) 2.22
------- ------- ------- ------
Total from investment operations............................ 1.21 4.74 3.49 2.62
------- ------- ------- ------
Less distributions:
Dividends from net investment income...................... (0.34) (0.38) (0.40) (0.44)
Distributions from net realized gains on securities....... (1.58) (1.31) (0.57) (0.54)
------- ------- ------- ------
Total distributions......................................... (1.92) (1.69) (0.97) (0.98)
------- ------- ------- ------
Net asset value, end of period.............................. $ 20.67 $ 21.38 $ 18.33 $15.81
======= ======= ======= ======
Total return (annualized)................................... 5.94% 27.64% 22.98% 20.14%
======= ======= ======= ======
Ratios and supplemental data:
Net assets, end of period (in thousands).................. $40,907 $29,684 $16,084 $4,821
Ratios to average net assets (annualized)(G)
Expenses................................................ 0.86%(E) 0.93%(E) 0.94%(E) 0.99%
Net investment income................................... 1.58%(E) 1.85%(E) 2.16%(E) 2.23%
Portfolio turnover rate(F).................................. 40% 35% 40% 26%
</TABLE>
(A)The Large Cap Value Fund-PlanAhead Class commenced active operations on
August 1, 1994.
(B)Prior to March 1, 1999, the Large Cap Value Fund-PlanAhead Class was known as
the American AAdvantage Growth and Income Fund-PlanAhead Class.
(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)On November 1, 1995 the Large Cap Value Fund began investing all of its
investable assets in its corresponding Portfolio. Portfolio turnover rate
since November 1, 1995 is that of the Portfolio.
(G)Operating results for the following periods excluded expenses 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.
<TABLE>
<CAPTION>
Small Cap Value Fund
PlanAhead Class
---------------------
March 1 to
October 31, 1999
---------------------
<S> <C>
Net asset value, beginning of period $ 9.13
------
Income from investment operations:
Net investment income(A) 0.02
Net gains (losses) on securities (both
realized and unrealized)(A) (0.10)
------
Total from investment operations (0.08)
------
Less distributions:
Dividends from net investment income --
Distributions from net realized gains
on securities --
------
Total distributions --
------
Net asset value, end of period (not
annualized) $ 9.05
======
Total return (0.88)%
======
Ratios and supplemental data:
Net assets, end of period (in
thousands) $ 74
Ratios to average net assets
(annualized)(A):
Expenses 1.28%
Net investment income 0.57%
Decrease reflected in above expense
ratio due to absorption of
expenses by the Manager 0.18%
</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
the AMR Investment Services Small Cap Value Portfolio.
- --------------------------------------------------------------------------------
Prospectus 37 Additional Information
<PAGE> 80
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY FUND-PLANAHEAD CLASS(A)
--------------------------------------------------
YEAR ENDED OCTOBER 31,
--------------------------------------------------
1999 1998(B) 1997(B) 1996(B) 1995(B)
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD: ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period........................ $ 16.92 $ 14.90 $13.20 $12.85
Income from investment operations
Net investment income..................................... 0.31(C) 0.30(C) 0.26(C) 0.24
Net gains on securities (realized and unrealized)....... 0.31(C) 2.41(C) 1.92(C) 0.64
------- ------- ------ ------
Total from investment operations............................ 0.62 2.71 2.18 0.88
------- ------- ------ ------
Less distributions:
Dividends from net investment income...................... (0.31) (0.28) (0.24) (0.21)
Distributions from net realized gains on securities....... (0.48) (0.41) (0.24) (0.32)
------- ------- ------ ------
Total distributions......................................... (0.79) (0.69) (0.48) (0.53)
------- ------- ------ ------
Net asset value, end of period.............................. $ 16.75 $ 16.92 $14.90 $13.20
======= ======= ====== ======
Total return (annualized)................................... 3.94% 18.71% 16.95% 7.37%
======= ======= ====== ======
Ratios and supplemental data:
Net assets, end of period (in thousands).................. $46,242 $20,075 $7,138 $1,456
Ratios to average net assets (annualized)
Expenses................................................ 1.08%(C) 1.14%(C) 1.17%(C) 1.33%
Net investment income................................... 1.72%(C) 1.95%(C) 1.76%(C) 2.08%
Portfolio turnover rate(D).................................. 24% 15% 19% 21%
</TABLE>
(A)The International Equity Fund-PlanAhead Class commenced active operations on
August 1, 1994.
(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)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, 1995 is that of the Portfolio.
<TABLE>
<CAPTION>
S&P 500 INDEX FUND-
PLANAHEAD CLASS(A)
------------------------------
YEAR ENDED MARCH 1, TO
DECEMBER 31, DECEMBER 31,
1999 1998(B)
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD: ------------ ------------
<S> <C> <C>
Net asset value, beginning of period........................ $14.27
Income from investment operations
Net investment income(C).................................. 0.08
Net gains (losses) on securities (realized and
unrealized)(C)......................................... 2.56
------
Total from investment operations............................ 2.64
------
Less distributions:
Dividends from net investment income...................... (0.08)
------
Total distributions......................................... (0.08)
------
Net asset value, end of period.............................. $16.83
======
Total return................................................ 18.58%
Ratios and supplemental data:
Net assets, end of period (in thousands).................. $1,963
Ratios to average net assets (annualized)(C)
Net investment income................................... 1.04%
Expenses................................................ 0.55%
Decrease reflected in above expense ratio due to
absorption of expenses by Bankers Trust and the
Manager................................................ 0.24%
Portfolio turnover rate(D).................................. 4%
</TABLE>
(A)Prior to March 1, 2000, the S&P 500 Index Fund-PlanAhead Class invested all
of its investable assets in the BT Equity 500 Index Portfolio, a separate
investment company managed by Bankers Trust company.
(B)The S&P 500 Index Fund-PlanAhead Class commenced active operations on March
1, 1998.
(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 the
Equity 500 Index Portfolio.
(D)Portfolio turnover rate is that of the BT Equity 500 Index Portfolio.
- --------------------------------------------------------------------------------
Additional Information 38 Prospectus
<PAGE> 81
<TABLE>
<CAPTION>
INTERMEDIATE BOND
FUND-PLANAHEAD
CLASS
-------------------------------
YEAR ENDED MARCH 2 TO
OCTOBER 31, OCTOBER 31,
1999 1998(A)
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD: ------------ ------------
<S> <C> <C>
Net asset value, beginning of period........................ $10.25
Income from investment operations
Net investment income(B).................................. 0.37
Net gains (losses) on securities (realized and
unrealized)(B)......................................... 0.30
------
Total from investment operations............................ 0.67
------
Less distributions:
Dividends from net investment income...................... (0.37)
Distributions from net realized gains on securities....... --
------
Total distributions......................................... (0.37)
------
Net asset value, end of period.............................. $10.55
======
Total return (annualized)................................... 6.63%
======
Ratios and supplemental data:
Net assets, end of period (in thousands).................. $ 30
Ratios to average net assets (annualized)(B)
Expenses................................................ 0.86%
Net investment income................................... 5.21%
Portfolio turnover rate(C).................................. 181%
</TABLE>
(A)The Intermediate Bond Fund-PlanAhead Class 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.
- --------------------------------------------------------------------------------
Prospectus 39 Additional Information
<PAGE> 82
<TABLE>
<CAPTION>
SHORT-TERM BOND FUND-PLANAHEAD CLASS(A)
---------------------------------------------------
YEAR ENDED OCTOBER 31,
---------------------------------------------------
1999 1998(B) 1997 1996(D) 1995
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD: ------- ------- ------ -------- ------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period........................ $ 9.63 $ 9.68 $ 9.82 $ 9.68
Income from investment operations
Net investment income..................................... 0.60(C) 0.61(C) 0.60(C) 0.59
Net gains (losses) on securities (realized and
unrealized)........................................... 0.01(C) (0.05)(C) (0.14)(C) 0.14
------ ------ ------ ------
Total from investment operations............................ 0.61 0.56 0.46 0.73
------ ------ ------ ------
Less distributions:
Dividends from net investment income...................... (0.60) (0.61) (0.60) (0.59)
Distributions from net realized gains on securities....... -- -- -- --
------ ------ ------ ------
Total distributions......................................... (0.60) (0.61) (0.60) (0.59)
------ ------ ------ ------
Net asset value, end of period.............................. $ 9.64 $ 9.63 $ 9.68 $ 9.82
====== ====== ====== ======
Total return (annualized)................................... 6.50% 6.01% 4.83% 7.83%
====== ====== ====== ======
Ratios and supplemental data:
Net assets, end of period (in thousands).................. $3,722 $5,096 $3,399 $1,576
Ratios to average net assets (annualized)(E)
Expenses................................................ 0.85%(C) 0.85%(C) 0.85%(C) 0.83%
Net investment income................................... 6.24%(C) 6.36%(C) 6.11%(C) 6.16%
Portfolio turnover rate..................................... 74% 282% 304% 183%
</TABLE>
(A)The Short-Term Bond Fund-PlanAhead Class commenced active operations on
August 1, 1994.
(B)Prior to March 1, 1998, the Short-Term Bond Fund-PlanAhead Class was known as
the American AAdvantage Limited-Term Income Fund-PlanAhead Class.
(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)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, 1995 is that of the Portfolio.
(E)Operating results exclude expenses 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, 0.93% and
6.16%, respectively for the year ended October 31, 1998 and X.XX% and X.XX%,
respectively for the year ended October 31, 1999.
- --------------------------------------------------------------------------------
Additional Information 40 Prospectus
<PAGE> 83
<TABLE>
<CAPTION>
MONEY MARKET FUND-PLANAHEAD CLASS(A)
---------------------------------------------------------------
YEAR ENDED OCTOBER 31,
---------------------------------------------------------------
1999 1998 1997 1996 1995
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD: -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period........................ $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------
Net investment income....................................... 0.05(B) 0.05(B) 0.05(B) 0.05
Less dividends from net investment income................... (0.05) (0.05) (0.05) (0.05)
-------- -------- -------- -------
Net asset value, end of period.............................. $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== =======
Total return (annualized)................................... 5.31% 5.28% 5.21% 5.60%
======== ======== ======== =======
Ratios and supplemental data:
Net assets, end of period (in thousands).................. $288,759 $189,189 $106,890 $41,989
Ratios to average net assets (annualized)
Expenses................................................ 0.53%(B) 0.54%(B) 0.58%(B) 0.55%
Net investment income................................... 5.18%(B) 5.17%(B) 5.06%(B) 5.56%
</TABLE>
(A)The Money Market Fund-PlanAhead Class 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.
<TABLE>
<CAPTION>
U.S. GOVERNMENT MONEY MARKET FUND-PLANAHEAD CLASS(A)
---------------------------------------------------------
YEAR ENDED OCTOBER 31,
---------------------------------------------------------
1999 1998 1997(C) 1996 1995
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD: ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period........................ $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------ ------ ------
Net investment income....................................... 0.05(B) 0.05(B) 0.05(B) 0.05
Less dividends from net investment income................... (0.05) (0.05) (0.05) (0.05)
------- ------ ------ ------
Net asset value, end of period.............................. $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ====== ====== ======
Total return (annualized)................................... 5.13% 5.08% 4.94% 5.19%
======= ====== ====== ======
Ratios and supplemental data:
Net assets, end of period (in thousands).................. $99,869 $4,046 $1,822 $ 530
Ratios to average net assets (annualized)
Expenses................................................ 0.57%(B) 0.52%(B) 0.67%(B) 0.76%
Net investment income................................... 5.01%(B) 5.00%(B) 4.74%(B) 5.19%
</TABLE>
(A)The U.S. Government Money Market Fund-PlanAhead Class 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)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.
- --------------------------------------------------------------------------------
Prospectus 41 Additional Information
<PAGE> 84
<TABLE>
<CAPTION>
MUNICIPAL MONEY MARKET FUND-PLANAHEAD CLASS(A)
------------------------------------------------------
YEAR ENDED OCTOBER 31,
------------------------------------------------------
1999 1998 1997 1996 1995
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD: ------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period........................ $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------ ------ ------
Net investment income....................................... 0.03(B) 0.03(B) 0.03(B) 0.03
Less dividends from net investment income................... (0.03) (0.03) (0.03) (0.03)
------- ------ ------ ------
Net asset value, end of period.............................. $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ====== ====== ======
Total return (annualized)................................... 3.17% 3.24% 3.27% 3.39%
======= ====== ====== ======
Ratios and supplemental data:
Net assets, end of period (in thousands).................. $13,474 $9,590 $2,340 $ 129
Ratios to average net assets (annualized)(C)
Expenses................................................ 0.64%(B) 0.60%(B) 0.62%(B) 0.72%
Net investment income................................... 3.07%(B) 3.18%(B) 3.12%(B) 3.32%
</TABLE>
(A)The Municipal Money Market Fund-PlanAhead Class 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 for the following years excluded expenses 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, and 0.61% and 3.17%,
respectively for the year ended October 31, 1997.
- --------------------------------------------------------------------------------
Additional Information 42 Prospectus
<PAGE> 85
-- Notes --
<PAGE> 86
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.
ANNUAL REPORT/SEMI-ANNUAL REPORT
The Funds' Annual and Semi-Annual Reports list each Fund's actual investments as
of the report's date. They also include a discussion by the Manager of market
conditions and investment strategies that significantly affected the Funds'
performance. The report of the Funds' independent auditors is included in the
Annual Report.
STATEMENT OF ADDITIONAL INFORMATION
The SAI contains more details about the Funds and their investment policies.
The SAI is incorporated in this Prospectus by reference (it is legally part of
this Prospectus). A current SAI is on file with the Securities and Exchange
Commission (SEC).
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 by mailing a request, including a duplicating fee to: SEC's Public
Reference Section, 450 5th Street NW, Washington, D.C. 20549-6009. The Public
Reference Room can be reached at (202) 942-8090.
FUND SERVICE PROVIDERS:
<TABLE>
<S> <C> <C> <C>
CUSTODIAN TRANSFER AGENT INDEPENDENT AUDITORS DISTRIBUTOR
STATE STREET BANK NATIONAL FINANCIAL ERNST & YOUNG LLP SWS FINANCIAL
AND TRUST DATA SERVICES Dallas, Texas SERVICES
Boston, Massachusetts Kansas City, Missouri Dallas, Texas
</TABLE>
[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 Large Cap
Value 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, Inc.
<PAGE> 87
[AMERICAN AADVANTAGE FUNDS]
[LOGO]
PROSPECTUS
MARCH 1, 2000
AMR CLASS
------------------------------------------
o BALANCED FUND
o LARGE CAP VALUE FUND
o SMALL CAP VALUE FUND
o INTERNATIONAL EQUITY FUND
o INTERMEDIATE BOND FUND
o SHORT-TERM BOND FUND
INSTITUTIONAL CLASS
------------------------------------------
o S&P 500 INDEX FUND
MANAGED BY AMR INVESTMENT SERVICES, INC.
[EAGLE LOGO]
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> 88
[AMERICAN AADVANTAGE FUNDS AMR CLASS LOGO]
TABLE OF CONTENTS
<TABLE>
<S> <C>
About the Funds
Overview........................................ 2
Balanced Fund................................... 3
Large Cap Value Fund............................ 6
Small Cap Value Fund............................ 8
International Equity Fund....................... 10
S&P 500 Index Fund.............................. 12
Intermediate Bond Fund.......................... 15
Short-Term Bond Fund............................ 18
The Manager..................................... 21
Equity 500 Index Portfolio Administrator........ 22
The Investment Advisers......................... 22
Valuation of Shares............................. 23
About Your Investment
Purchase and Redemption of Shares............... 24
Distributions and Taxes......................... 26
Additional Information
Distribution of Trust Shares.................... 27
Master-Feeder Structure......................... 27
Financial Highlights............................ 27
Additional Information.....................Back Cover
</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
State Street Equity 500 Index Portfolio ("Equity 500 Index Portfolio"), which is
a separate investment company with an identical investment objective, managed by
State Street Bank and Trust Company ("State Street"), through its State Street
Global Advisors division. 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".
- --------------------------------------------------------------------------------
About the Funds 2 Prospectus
<PAGE> 89
AMERICAN AADVANTAGE
BALANCED FUND(SM)
- --------------------------------------------------------------------------------
Investment Objective
- -------------------------------
Income and capital appreciation.
Principal Strategies
- ------------------------------
This Fund typically invests between 50% and 65% of its total assets in equity
securities and between 35% and 50% of its total 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:
- - above-average earnings growth potential,
- - below-average price to earnings ratio,
- - below-average price to book value ratio, and
- - above-average dividend yields.
Each of the Fund's investment advisers determines the earnings 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.
One of the investment advisers utilizes an "amplified alpha" approach in
determining which equity securities to buy and sell. This approach attempts to
amplify the outperformance expected from the best ideas of the other investment
advisers by concentrating assets in those stocks that are overweighted in the
aggregate of the advisers' portfolios when compared to a relevant market index.
The Fund's investments in debt securities may include: obligations of the U.S.
Government, its agencies and instrumentalities; U.S. 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 Corporation or Moody's Investors Service, Inc.).
Obligations rated in the fourth highest rating category are limited to 25% of
the Fund's total assets. The Fund, at the discretion of the applicable
investment adviser, 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" or "bottom-up" investment strategy or a combination
of both strategies.
The top-down fixed income investment strategy is implemented as follows:
- - Develop an overall investment strategy, including a portfolio duration target,
by examining the current trend in the U.S. economy.
- - Set desired portfolio maturity structure by comparing the differences between
corporate and U.S. Government securities of similar duration to judge their
potential for optimal return in accordance with the target duration benchmark.
- - Determine the weightings of each security type by analyzing the difference in
yield spreads between corporate and U.S. Government securities.
- - Select specific debt securities within each security type.
- - Review and monitor portfolio composition for changes in credit, risk-return
profile and comparisons with benchmarks.
The bottom-up fixed income investment strategy is implemented as follows:
- - Search for eligible securities with a yield to maturity advantage versus a
U.S. Government security with a similar maturity.
- --------------------------------------------------------------------------------
Prospectus 3 About the Funds
<PAGE> 90
AMERICAN AADVANTAGE
BALANCED FUND(SM) -- (CONTINUED)
- --------------------------------------------------------------------------------
- - Evaluate credit quality of the securities.
- - Perform an analysis of the expected price volatility of the securities to
changes in interest rates by examining actual price volatility between U.S.
Government and non-U.S. Government securities.
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.
Risk Factors
- -------------------
MARKET RISK (STOCKS)
Since this Fund invests a substantial portion of its assets in stocks, 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.
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, bond prices generally 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.
CREDIT RISK (BONDS)
The Fund is subject to the risk that the 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.
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 and the Fund may have to invest at a
lower rate.
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. When
you sell your shares of the Fund, they could be worth less than what you paid
for them.
Historical Performance
- -----------------------------------
The bar chart and table below provide 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 three broad-based market indices and the Lipper Balanced
Index, a composite of mutual funds 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 lower than the AMR
Class of the Fund would have realized in the same
- --------------------------------------------------------------------------------
About the Funds 4 Prospectus
<PAGE> 91
AMERICAN AADVANTAGE
BALANCED FUND(SM) -- (CONTINUED)
- --------------------------------------------------------------------------------
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
[PERFORMANCE GRAPH]
<TABLE>
<S> <C>
90.......................................................... 0.29%
91.......................................................... 21.22%
92.......................................................... 8.97%
93.......................................................... 14.46%
94.......................................................... -1.74%
95.......................................................... 29.35%
96.......................................................... 14.04%
97.......................................................... 20.23%
98.......................................................... 8.50%
99.......................................................... X.XX%
</TABLE>
<TABLE>
<S> <C>
Highest Quarterly Return: X.XX%
(1/1/90 through 12/31/99) (X Quarter 19XX)
Lowest Quarterly Return: X.XX%
(1/1/90 through 12/31/99) (X Quarter 19XX)
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------------
AS OF 12/31/99
---------------------------------
1 YEAR 5 YEARS 10 YEARS
-------- --------- ----------
<S> <C> <C> <C>
BALANCED FUND X.XX% X.XX% X.XX%
S&P/Barra Value
Index* 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/Barra Value Index is a market-value weighted index of stocks with
book-to-price ratios in the top 50% of the S&P 500 Index.
** 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 0.30%
Distribution (12b-1) Fees 0.00
Other Expenses X.XX
----
TOTAL ANNUAL FUND OPERATING EXPENSES X.XX%
====
</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 $10,000 in the Fund for the time
periods indicated and then redeem all of your shares
at the end of those periods. The example also as-
sumes that your investment has a 5% return each year
and that the Fund's operating expenses remain the
same. Although your actual costs may be higher or
lower, based on these assumptions your costs would
be:
1 YEAR .........................................$XXX
3 YEARS.........................................$XXX
5 YEARS.........................................$XXX
10 YEARS........................................$XXX
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.
- --------------------------------------------------------------------------------
Prospectus 5 About the Funds
<PAGE> 92
AMERICAN AADVANTAGE
LARGE CAP VALUE FUND(SM)
- --------------------------------------------------------------------------------
Investment Objective
- -------------------------------
Long-term capital appreciation and current income.
Principal Strategies
- ------------------------------
Ordinarily at least 65% of the total assets of this Fund are invested in equity
securities of U.S. companies with market capitalizations of $5 billion or more
at the time of investment. 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:
- - above-average earnings growth potential,
- - below-average price to earnings ratio,
- - below-average price to book value ratio, and
- - above-average dividend yields.
Each of the Fund's investment advisers determines the earnings 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.
One of the investment advisers utilizes an "amplified alpha" approach in
determining which equity securities to buy and sell. This approach attempts to
amplify the outperformance expected from the best ideas of the other investment
advisers by concentrating assets in those stocks that are overweighted in the
aggregate of the advisers' portfolios when compared to a relevant market index.
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.
Risk Factors
- -------------------
MARKET RISK
Since this Fund invests most of its assets in stocks, 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.
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. When
you sell your shares of the Fund, they could be worth less than what you paid
for them.
- --------------------------------------------------------------------------------
About the Funds 6 Prospectus
<PAGE> 93
AMERICAN AADVANTAGE
LARGE CAP VALUE FUND(SM) -- (CONTINUED)
- --------------------------------------------------------------------------------
Historical Performance
- -----------------------------------
The bar chart and table below provide 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/Barra Value Index, a market value weighted index
of stocks with book-to-price ratios in the top 50% of the S&P 500 Index, the S&P
500, a widely recognized unmanaged index of common stocks publicly traded in the
United States, and the Lipper Multi Cap Value Index, a composite of mutual funds
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 lower 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
[PERFORMANCE GRAPH]
<TABLE>
<S> <C>
90.......................................................... -5.97%
91.......................................................... 26.00%
92.......................................................... 11.90%
93.......................................................... 15.74%
94.......................................................... -1.04%
95.......................................................... 34.81%
96.......................................................... 21.41%
97.......................................................... 26.78%
98.......................................................... 6.51%
99.......................................................... X.XX%
</TABLE>
<TABLE>
<S> <C>
Highest Quarterly Return: X.XX%
(1/1/90 through 12/31/99) (X Quarter 19XX)
Lowest Quarterly Return: X.XX%
(1/1/90 through 12/31/99) (X Quarter 19XX)
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL
RETURN
----------------------------
AS OF 12/31/99
----------------------------
1 YEAR 5 YEARS 10 YEARS
------ -------- --------
<S> <C> <C> <C>
LARGE CAP VALUE FUND X.XX% X.XX% X.XX%
S&P/Barra Value Index X.XX% X.XX% X.XX%
S&P 500 Index X.XX% X.XX% X.XX%
Lipper Multi Cap Value
Index* X.XX% X.XX% X.XX%
</TABLE>
* On September 1, 1999, Lipper reclassified the Fund from the Lipper Growth and
Income Index to the Lipper Multi Cap Value Index.
Fees and Expenses
- ----------------------------
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Large Cap Fund.(1)
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
<TABLE>
<S> <C>
Management Fees 0.30%
Distribution (12b-1) Fees 0.00
Other Expenses X.XX
----
TOTAL ANNUAL FUND OPERATING EXPENSES X.XX%
====
</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
$10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those
periods. The Example also assumes that your investment
has a 5% return each year and that the Fund's operating
expenses remain the same. Although your actual costs may
be higher or lower, based on these assumptions your
costs would be:
1 YEAR .............................................$XXX
3 YEARS.............................................$XXX
5 YEARS.............................................$XXX
10 YEARS............................................$XXX
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.
- --------------------------------------------------------------------------------
Prospectus 7 About the Funds
<PAGE> 94
AMERICAN AADVANTAGE
SMALL CAP VALUE FUND(SM)
- --------------------------------------------------------------------------------
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:
- - above-average earnings growth potential,
- - below-average price to earnings ratio,
- - below-average price to book value ratio, and
- - above-average dividend yields.
Each of the investment advisers determines the earnings 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.
Risk Factors
- -------------------
MARKET RISK
Since this Fund invests most of its assets in stocks, 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.
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.
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. When
you sell your shares of the Fund, they could be worth less than what you paid
for them.
- --------------------------------------------------------------------------------
About the Funds 8 Prospectus
<PAGE> 95
AMERICAN AADVANTAGE
SMALL CAP VALUE FUND(SM) -- (CONTINUED)
- --------------------------------------------------------------------------------
Historical Performance
- -----------------------------------
The bar chart and table below provide 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 Russell 2000(R) Index, a widely-recognized unmanaged
index of 2,000 small capitalization stocks and the Lipper Small Cap Value Index,
a composite of mutual funds with the same investment objective as the Fund. The
AMR Class of the Fund began offering its shares on March 1, 1999. However,
another class of shares of the Fund not offered in this prospectus began
offering its shares on January 1, 1999. In the chart and table below,
performance results before March 1, 1999 are for the older class. Because the
other class had lower expenses, its performance was better 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 12/31/99
[PERFORMANCE GRAPH]
<TABLE>
<S> <C>
99.......................................................... X.XX%
</TABLE>
<TABLE>
<S> <C>
Highest Quarterly Return: X.XX%
(1/1/99 through 12/31/99) (X Quarter 1999)
Lowest Quarterly Return: X.XX%
(1/1/99 through 12/31/99) (X Quarter 1999)
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
----------------------------
AS OF 12/31/99
----------------------------
1 YEAR
-------
<S> <C>
SMALL CAP VALUE FUND X.XX%
Russell 2000 Index X.XX%
Lipper Small Cap Value Index
</TABLE>
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 0.68%
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 0.75%
</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 reimburse the Fund for Other
Expenses through October 31, 2000 to the extent that Total Annual Fund
Operating Expenses exceed 0.75%.
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
$10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those
periods. The Example also assumes that your investment
has a 5% return each year and that the Fund's operating
expenses remain the same. Because the Manager's expense
reimbursement is only guaranteed through October 31,
2000, net expenses are used to calculate costs in year
one, and total fund expenses are used to calculate costs
in years two through ten. Although your actual costs may
be higher or lower, based on these assumptions your
costs would be:
1 YEAR..............................................$XXX
3 YEARS.............................................$XXX
5 YEARS.............................................$XXX
10 YEARS............................................$XXX
Investment Advisers
- ------------------------------
The Manager allocates the assets of the Fund among the following investment
advisers:
Brandywine Asset Management, Inc.
Hotchkis and Wiley
- --------------------------------------------------------------------------------
Prospectus 9 About the Funds
<PAGE> 96
AMERICAN AADVANTAGE
INTERNATIONAL EQUITY FUND(SM)
- --------------------------------------------------------------------------------
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>
Australia France Mexico South Korea
Austria Germany Netherlands Spain
Belgium Hong Kong New Zealand Sweden
Canada Ireland Norway Switzerland
Denmark Italy Portugal United Kingdom
Finland Japan Singapore
</TABLE>
The investment advisers select stocks which, in their opinion, have most or all
of the following characteristics:
- - above-average earnings growth potential,
- - below-average price to earnings ratio,
- - below-average price to book value ratio, and
- - above-average dividend yields.
The investment advisers may also consider potential changes in currency exchange
rates when choosing stocks. Each of the investment advisers determines the
earnings 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 or currency futures 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.
One of the investment advisers utilizes an "amplified alpha" approach in
determining which equity securities to buy and sell. This approach attempts to
amplify the outperformance expected from the best ideas of the other investment
advisers by concentrating assets in those stocks that are overweighted in the
aggregate of the advisers' portfolios when compared to a relevant market index.
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.
Risk Factors
- -------------------
MARKET RISK
Since this Fund invests most of its assets in stocks, 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 market 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.
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, (7) delays in transaction settlement in some foreign
markets, and (8) adverse impact of the euro conversion on the business or
financial condition of companies in which the Fund is invested.
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
- --------------------------------------------------------------------------------
About the Funds 10 Prospectus
<PAGE> 97
AMERICAN AADVANTAGE
INTERNATIONAL EQUITY FUND(SM) -- (CONTINUED)
- --------------------------------------------------------------------------------
will fluctuate up and down. When you sell your shares of the Fund, they could be
worth less than what you paid for them.
Historical Performance
- -----------------------------------
The bar chart and table below provide 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 Europe Australasia Far East ("EAFE")
Index, a widely recognized unmanaged index of international stock investment
performance and the Lipper International Index, a composite of mutual funds 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 lower 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
[PERFORMANCE GRAPH]
<TABLE>
<S> <C>
92.......................................................... -11.03%
93.......................................................... 42.33%
94.......................................................... 1.09%
95.......................................................... 18.01%
96.......................................................... 20.06%
97.......................................................... 9.88%
98.......................................................... 12.07%
99.......................................................... X.XX%
</TABLE>
<TABLE>
<S> <C>
Highest Quarterly Return: X.XX%
(1/1/92 through 12/31/99) (X Quarter 19XX)
Lowest Quarterly Return: X.XX%
(1/1/92 through 12/31/99) (X Quarter 19XX)
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
----------------------------------
AS OF 12/31/99
----------------------------------
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 0.41%
Distribution (12b-1) Fees 0.00
Other Expenses X.XX
----
TOTAL ANNUAL FUND OPERATING EXPENSES X.XX%
====
</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 $10,000 in the Fund for the time
periods indicated and then redeem all of your shares
at the end of those periods. The Example also as-
sumes that your investment has a 5% return each year
and that the Fund's operating expenses remain the
same. Although your actual costs may be higher or
lower, based on these assumptions your costs would
be:
1 YEAR .........................................$XXX
3 YEARS.........................................$XXX
5 YEARS.........................................$XXX
10 YEARS........................................$XXX
Investment Advisers
- ------------------------------
The Manager allocates the assets of the Fund among the following investment
advisers:
Hotchkis and Wiley
Independence Investment Associates, Inc.
Lazard Asset Management
Templeton Investment Counsel, Inc.
- --------------------------------------------------------------------------------
Prospectus 11 About the Funds
<PAGE> 98
AMERICAN AADVANTAGE
S&P 500 INDEX FUND(SM)(1)-Institutional Class
- --------------------------------------------------------------------------------
Investment Objective
- -------------------------------
To replicate as closely as possible, before expenses, the performance of the
Standard & Poor's 500 Composite Stock Price Index ("S&P 500 Index" or "Index").
Principal Strategies
- ------------------------------
The Fund uses a passive management strategy designed to track the performance of
the S&P 500 Index. The S&P Index is a well-known stock market index that
includes common stocks of 500 companies from several industrial sectors
representing a significant portion of the market value of all stocks publicly
traded in the United States.
The Fund is not managed according to traditional methods of "active" investment
management, which involve the buying and selling of securities based upon
economic, financial and market analysis and investment judgement. Instead, the
Fund, using a "passive" or "indexing" investment approach, attempts to
replicate, before expenses, the performance of the S&P 500 Index. State Street,
through its State Street Global Advisors division, seeks a correlation of 0.95
or better between the Fund's performance and the performance of the Index; a
figure of 1.00 would represent perfect correlation.
The Fund intends to invest in all 500 stocks comprising the Index in proportion
to their weightings in the Index. However, under various circumstances, it may
not be possible or practicable to purchase all 500 stocks in those weightings.
In those circumstances, the Fund may purchase a sample of the stocks in the
Index in proportions expected by State Street to replicate generally the
performance of the Index as a whole. In addition, from time to time stocks are
added to or removed from the Index. The Fund may sell stocks that are
represented in the Index, or purchase stocks that are not yet represented in the
Index, in anticipation of their removal from or addition to the Index.
In addition, the Fund may at times purchase or sell futures contracts on the
Index, or options on those futures, in lieu of investment directly in the stocks
making up the Index. The Fund might do so, for example, in order to increase its
investment exposure pending investment of cash in the stocks comprising the
Index. Alternatively, the Fund might use futures or options on futures to reduce
its investment exposure in situations where it intends to sell a portion of the
stocks in its portfolio but the sale has not yet been completed. The Fund may
also enter into other derivatives transactions, including the purchase or sale
of options or enter into swap transactions, to assist in replicating the
performance of the Index. The reasons for which the Fund will invest in
derivatives are:
- - to keep cash on hand to meet shareholder redemptions or other needs while
maintaining exposure to the stock market, and
- - they are a low cost method of gaining exposure to a particular securities
market without investing directly in that market.
- ---------------
(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 State Street Bank and 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.
- --------------------------------------------------------------------------------
About the Funds 12 Prospectus
<PAGE> 99
AMERICAN AADVANTAGE
S&P 500 INDEX FUND(SM) -- (CONTINUED)
- --------------------------------------------------------------------------------
Risk Factors
- -------------------
MARKET RISK
Stock values could decline generally or could underperform other investments.
In addition, returns on investments in stocks of large U.S. companies could
trail the returns on investments in stocks of smaller companies.
TRACKING ERROR RISK
The Fund's return may not match the return of the Index for a number of reasons.
For example, the Fund incurs a number of operating expenses not applicable to
the Index, and incurs costs in buying and selling securities. The Fund may not
be fully invested at times, either as a result of cash flows into the Fund or
reserves of cash held by the Fund to meet redemptions. The return on the sample
of stocks purchased by the Fund, or futures or other derivative positions taken
by the Fund, to replicate the performance of the Index may not correlate
precisely with the return on the Index.
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.
ADDITIONAL RISKS
An investment in the Fund is not a deposit with 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. When
you sell your shares of the Fund, they could be worth less than what you paid
for them.
Historical Performance
- -----------------------------------
The bar chart and table below provide 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, and the Lipper S&P 500
Index, a composite of funds with the same investment objective as the Fund. 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. Prior to March 1,
2000, the Fund invested all of its investable assets in the BT Equity 500 Index
Portfolio, a separate investment company managed by Bankers Trust Company. 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
[PERFORMANCE GRAPH]
<TABLE>
<S> <C>
97.......................................................... 33.09%
98.......................................................... 28.87%
99.......................................................... X.XX%
</TABLE>
<TABLE>
<S> <C>
Highest Quarterly Return: X.XX%
(1/1/97 through 12/31/99) (X Quarter 199X)
Lowest Quarterly Return: X.XX%
(1/1/97 through 12/31/99) (X Quarter 199X)
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL RETURN
------------------------
AS OF 12/31/99
------------------------
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%
Lipper S&P 500 Index X.XX% X.XX%
</TABLE>
- --------------------------------------------------------------------------------
Prospectus 13 About the Funds
<PAGE> 100
AMERICAN AADVANTAGE
S&P 500 INDEX FUND(SM) -- (CONTINUED)
- --------------------------------------------------------------------------------
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 0.05%
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 State Street Equity 500 Index Portfolio.
(2) The Manager has contractually agreed to reimburse the Fund for Other
Expenses through October 31, 2000 to the extent that Total Annual Fund
Operating Expenses exceed 0.20%.
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 $10,000 in the Fund for the time periods indicated and then redeem all of
your shares at the end of those periods. The Example also assumes that your
investment has a 5% return each year and that the Fund's operating expenses
remain the same. Because the Manager's expense reimbursement is only guaranteed
through October 31, 2000, net expenses are used to calculate costs in year one,
and total fund expenses are used to calculate costs in years two through ten.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 YEAR .........................................$XXX
3 YEARS.........................................$XXX
5 YEARS.........................................$XXX
10 YEARS........................................$XXX
Investment Adviser
- -----------------------------
State Street Bank and Trust Company
- --------------------------------------------------------------------------------
About the Funds 14 Prospectus
<PAGE> 101
AMERICAN AADVANTAGE
INTERMEDIATE BOND FUND(SM)
- --------------------------------------------------------------------------------
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
seeks capital appreciation by investing in corporate issues whose relative value
is expected to increase over time.
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 Corporation or Moody's
Investors Service, Inc.). No more than 25% of total assets may be invested in
securities rated in the fourth highest rating category. The Fund, at the
discretion of the applicable investment adviser, 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 investment strategy, as follows:
- - Develop an overall investment strategy, including a portfolio duration target,
by examining the current trend in the U.S. economy.
- - Set desired portfolio maturity structure by comparing the differences between
corporate and U.S. Government securities of similar duration to judge their
potential for optimal return in accordance with the target duration benchmark.
- - Determine the weightings of each security type by analyzing the difference in
yield spreads between corporate and U.S. Government securities.
- - Select specific debt securities within each security type.
- - 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
investment strategy in determining which securities to buy and sell, as follows:
- - Search for eligible securities with a yield to maturity advantage versus a
U.S. Government security with a similar maturity.
- - Evaluate credit quality of the securities.
- - Perform an analysis of the expected price volatility of the securities to
changes in interest rates by examining actual price volatility between U.S.
Government and non-U.S. Government securities.
Under normal circumstances, the Fund seeks to maintain a duration of three to
seven years. Duration is a measure of price sensitivity relative to changes in
interest rates. Portfolios with longer durations are typically more sensitive to
changes in interest rates. 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.
Risk Factors
- -------------------
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, bond prices generally 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.
- --------------------------------------------------------------------------------
Prospectus 15 About the Funds
<PAGE> 102
AMERICAN AADVANTAGE
INTERMEDIATE BOND FUND(SM) -- (CONTINUED)
- --------------------------------------------------------------------------------
CREDIT RISK
The Fund is subject to the risk that the 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.
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 and the Fund may have to invest at a
lower rate.
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. When
you sell your shares of the Fund, they could be worth less than what you paid
for them.
Historical Performance
- -----------------------------------
The bar chart and table below provide an indication of risk by showing how the
Fund has performed during the past two years. The table shows how the Fund's
performance compares to the Lehman Brothers Intermediate Gov./Corp. and
Aggregate Indexes, two broad-based market indexes, and the Lipper Intermediate
Investment Grade Debt Average and Index, composites of mutual funds with the
same investment objective as the Fund. The AMR Class of the Fund began offering
its shares on March 1, 1999. 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, 1999 are for the
other class. Because the other class had slightly higher expenses, its
performance was slightly lower 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
[PERFORMANCE GRAPH]
<TABLE>
<S> <C>
98.......................................................... 8.57%
99.......................................................... X.XX%
</TABLE>
<TABLE>
<S> <C>
Highest Quarterly Return: X.XX%
(1/1/98 through 12/31/99) (X Quarter 1999)
Lowest Quarterly Return: X.XX%
(1/1/98 through 12/31/99) (X Quarter 1999)
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL RETURN
------------------------
AS OF 12/31/99
------------------------
SINCE INCEPTION
1 YEAR (9/15/97)
------ ---------------
<S> <C> <C>
INTERMEDIATE BOND FUND X.XX% X.XX%
Lehman Bros. Aggregate
Index** X.XX% X.XX%*
Lehman Bros. Intermediate
Gov./Corp. Index*** X.XX% X.XX%*
Lipper Intermediate Investment
Grade Debt Index**** X.XX% X.XX%*
Lipper Intermediate Investment
Grade Debt Average X.XX% X.XX%*
</TABLE>
* The since inception return is shown from 8/31/97.
** The Lehman Brothers Aggregate Index is a market value weighted performance
benchmark for government, corporate, mortgage-backed and asset-backed
fixed-rate debt securities of all maturities. This Index has replaced the
Lehman Bros. Intermediate Gov./Corp. Index as the Fund's market index,
because it better reflects the principal strategies of the Fund.
*** The Lehman Brothers Intermediate Gov./Corp. Index is a market value
weighted performance benchmark for government and corporate fixed-rate
debt securities with maturities between one and ten years.
**** The Fund's investment advisers have designated this Index of 30 funds as
the Fund's new performance benchmark, replacing the Lipper Intermediate
Investment Grade Debt Average.
- --------------------------------------------------------------------------------
About the Funds 16 Prospectus
<PAGE> 103
AMERICAN AADVANTAGE
INTERMEDIATE BOND FUND(SM) -- (CONTINUED)
- --------------------------------------------------------------------------------
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 X.XX
----
TOTAL ANNUAL FUND OPERATING EXPENSES X.XX%
====
</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 $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the
end of those periods. The Example also assumes that
your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although
your actual costs may be higher or lower, based on
these assumptions your costs would be:
1 YEAR ...........................................$XXX
3 YEARS...........................................$XXX
5 YEARS...........................................$XXX
10 YEARS..........................................$XXX
Investment Advisers
- ------------------------------
The Manager allocates the assets of the Fund among the following investment
advisers:
AMR Investment Services, Inc.
Barrow, Hanley, Mewhinney & Strauss, Inc.
- --------------------------------------------------------------------------------
Prospectus 17 About the Funds
<PAGE> 104
AMERICAN AADVANTAGE
SHORT-TERM BOND FUND(SM)
- --------------------------------------------------------------------------------
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
seeks capital appreciation by investing in corporate issues whose relative value
is expected to increase over time.
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 Corporation or Moody's
Investors Service, Inc.). No more than 25% of total 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 investment strategy, as follows:
- - Develop an overall investment strategy, including a portfolio duration target,
by examining the current trend in the U.S. economy.
- - Set desired portfolio maturity structure by comparing the differences between
corporate and U.S. Government securities of similar duration to judge their
potential for optimal return in accordance with the target duration benchmark.
- - Determine the weightings of each security type by analyzing the difference in
yield spreads between corporate and U.S. Government securities.
- - Select specific debt securities within each security type.
- - Review and monitor portfolio composition for changes in credit, risk-return
profile and comparisons with benchmarks.
Under normal circumstances, the Fund seeks to maintain a duration of one to
three years. Duration is a measure of price sensitivity relative to changes in
interest rates. Portfolios with longer durations are typically more sensitive to
changes in interest rates. 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.
Risk Factors
- -------------------
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, bond prices generally 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.
CREDIT RISK
The Fund is subject to the risk that the 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.
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
- --------------------------------------------------------------------------------
About the Funds 18 Prospectus
<PAGE> 105
AMERICAN AADVANTAGE
SHORT-TERM BOND FUND(SM) -- (CONTINUED)
- --------------------------------------------------------------------------------
interest will be paid on the investment and the Fund may have to invest at a
lower rate.
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. When
you sell your shares of the Fund, they could be worth less than what you paid
for them.
Historical Performance
- -----------------------------------
The bar chart and table below provide 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. and Merrill
Lynch 1-3 Year Gov./Corp. Indexes, two broad-based market indexes, and the
Linked Lipper Investment Grade Debt Averages, a composite of mutual funds 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 lower 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
[PERFORMANCE GRAPH]
<TABLE>
<S> <C>
90.......................................................... 8.47%
91.......................................................... 12.97%
92.......................................................... 5.19%
93.......................................................... 6.50%
94.......................................................... 1.15%
95.......................................................... 10.18%
96.......................................................... 4.04%
97.......................................................... 7.00%
98.......................................................... 5.63%
99.......................................................... X.XX%
</TABLE>
<TABLE>
<S> <C>
Highest Quarterly Return: X.XX%
(1/1/90 through 12/31/99) (X Quarter 19XX)
Lowest Quarterly Return: X.XX%
(1/1/90 through 12/31/99) (X Quarter 19XX)
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL
RETURN
---------------------------
AS OF 12/31/99
---------------------------
1 YEAR 5 YEARS 10 YEARS
------ ------- --------
<S> <C> <C> <C>
SHORT-TERM BOND FUND X.XX% X.XX% X.XX%
Merrill Lynch 1-3 Yr.
Gov./Corp. Index* 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 Merrill Lynch 1-3 Yr. Gov./Corp. Index is a market value weighted
performance benchmark for government and corporate fixed-rate debt
securities with maturities between one and three years. The Manager
chose to replace the Lehman Bros. Intermediate Gov./Corp. Index with this
Index, because it better reflects the duration of the Fund.
** The Lehman Bros. Intermediate Gov./Corp. Index is a market value weighted
performance benchmark for government and corporate fixed-rate debt
securities 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.
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
----
TOTAL ANNUAL FUND OPERATING EXPENSES X.XX%
====
</TABLE>
(1) The expense table and the Example below reflect the expenses of both the
Fund and its corresponding Portfolio.
- --------------------------------------------------------------------------------
Prospectus 19 About the Funds
<PAGE> 106
AMERICAN AADVANTAGE
SHORT-TERM BOND FUND(SM) -- (CONTINUED)
- --------------------------------------------------------------------------------
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 $10,000 in the Fund for the time
periods indicated and then redeem all of your shares
at the end of those periods. The Example also as-
sumes that your investment has a 5% return each year
and that the Fund's operating expenses remain the
same. Although your actual costs may be higher or
lower, based on these assumptions your costs would
be:
1 YEAR .........................................$XXX
3 YEARS.........................................$XXX
5 YEARS.........................................$XXX
10 YEARS........................................$XXX
Investment Adviser
- -----------------------------
AMR Investment Services, Inc.
- --------------------------------------------------------------------------------
About the Funds 20 Prospectus
<PAGE> 107
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, 1999, the Manager had approximately $xx.x billion of assets
under management, including approximately $x.x billion under active management
and $xx.x billion as named fiduciary or financial adviser. Of the total,
approximately $xx.x billion 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,
- - selects and changes investment advisers (subject to requisite approvals),
- - allocates assets among investment advisers,
- - monitors the investment advisers' investment programs and results,
- - coordinates the investment activities of the investment advisers to ensure
compliance with regulatory restrictions,
- - oversees each Fund's securities lending activities and actions taken by the
securities lending agent, and
- - with the exception of the International Equity and S&P 500 Index Funds,
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 Manager receives an
annualized advisory fee that is calculated and accrued daily, equal to the sum
of:
- - 0.25% of the net assets of the Manager's portion of the Intermediate Bond
Fund,
- - 0.25% of the net assets of the Short-Term Bond Fund, plus
- - 0.10% of the net assets of all other Funds.
In addition, the Balanced, Large Cap Value, Small Cap Value, International
Equity and Intermediate Bond Funds pay the Manager the amounts due to their
respective investment advisers. The Manager then remits these amounts to the
investment advisers.
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 or registered investment companies managed by the
Manager.
The management fees paid for the Funds for the fiscal year ended October 31,
1999, net of reimbursements and shown as a percentage of average net assets,
were as follows:
<TABLE>
<CAPTION>
FUND MANAGEMENT FEES
---- ---------------
<S> <C>
Balanced........................ x.xx%
Large Cap Value................. x.xx%
Small Cap Value................. x.xx%
Intermediate Bond............... x.xx%
International Equity............ x.xx%
S&P 500 Index Fund.............. x.xx%
Short-Term Bond................. x.xx%
</TABLE>
William F. Quinn and Nancy A. Eckl have primary responsibility for the
day-to-day operations of the Balanced, Large Cap Value, Small Cap Value,
International Equity and Intermediate Bond 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 of the Manager 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 oversees the team responsible for the portfolio management of
the Short-Term 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.
- --------------------------------------------------------------------------------
Prospectus 21 About the Funds
<PAGE> 108
Equity 500 Index Portfolio Administrator
- ------------------------------------------------------------
State Street serves as the adviser, administrator, custodian and transfer agent
to the Equity 500 Index Portfolio. As compensation for its services as adviser,
administrator, custodian and transfer agent (and for assuming ordinary operating
expenses for the Portfolio, including ordinary legal and audit expenses), State
Street receives a unitary fee at an annual rate of 0.045% of the average daily
net assets of the Portfolio.
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 and the S&P 500 Index 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.
BARROW, HANLEY, MEWHINNEY & STRAUSS, INC. ("BARROW"), 3232 McKinney Avenue, 15th
Floor, Dallas, Texas 75204, is a professional investment counseling firm which
has been providing investment advisory services since 1979. The firm is wholly
owned by United Asset Management Corporation, a Delaware corporation. As of
December 31, 1999, Barrow had discretionary investment management authority with
respect to approximately $xx.x billion of assets, including approximately $X.X
billion of assets of AMR and its subsidiaries and affiliated entities. Barrow
serves as an investment adviser to the Balanced, Large Cap Value, 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. As of
December 31, 1999, Brandywine had assets under management totaling approximately
$x.x billion, including approximately $x.x billion of assets of AMR and its
subsidiaries and affiliated entities. Brandywine serves as an investment adviser
to the Balanced, Large Cap Value 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.
GSB is wholly owned by United Asset Management Corporation, a Delaware
corporation. As of December 31, 1999, GSB managed approximately $x.x billion of
assets, including approximately $xxx.x million of assets of AMR and its
subsidiaries and affiliated entities. GSB serves as an investment adviser to the
Balanced and Large Cap Value Funds.
HOTCHKIS AND WILEY, 725 South Figueroa Street, Suite 4000, Los Angeles,
California 90017, is a professional investment management firm which was founded
in 1980. Hotchkis and Wiley is a division of
- --------------------------------------------------------------------------------
About the Funds 22 Prospectus
<PAGE> 109
Merrill Lynch Asset Management, L.P., a wholly owned indirect subsidiary of
Merrill Lynch & Co., Inc. Assets under management as of December 31, 1999 were
approximately $XX.X billion, which included approximately $X.X billion of assets
of AMR and its subsidiaries and affiliated entities. Hotchkis and Wiley serves
as an investment adviser to the Balanced, Large Cap Value, Small Cap Value 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. Assets under management as of December 31, 1999,
including funds managed for its parent company, were approximately $XX.X
billion, which included approximately $X.X billion of assets of AMR and its
subsidiaries and affiliated entities. IIA serves as an investment adviser to the
Balanced, Large Cap Value and International Equity Funds.
LAZARD ASSET MANAGEMENT, ("LAZARD"), 30 Rockefeller Plaza, New York, New York
10112, is a division of Lazard Freres & Co. LLC, a registered investment adviser
and member of the New York, American and Midwest Stock Exchanges, providing its
clients with a wide variety of investment banking, brokerage and related
services. Lazard provides investment management services to client discretionary
accounts with assets totaling approximately $XX.X billion as of December 31,
1999. Lazard serves as an investment adviser to the International Equity Fund.
STATE STREET BANK AND TRUST COMPANY ("STATE STREET"), Two International Place,
Boston, Massachusetts 02110, is a Massachusetts banking corporation. State
Street serves as investment adviser and administrator to the Equity 500 Index
Portfolio. As of December 31, 1999, State Street Global Advisors, the division
responsible for managing the Portfolio, had assets under management of $X.X
million.
TEMPLETON INVESTMENT COUNSEL, INC. ("TEMPLETON"), 500 East Broward Blvd., Suite
2100, Fort Lauderdale, Florida 33394-3091, is a professional investment
counseling firm which has been providing investment services since 1979.
Templeton is indirectly owned by Franklin Resources, Inc. As of December 31,
1999, 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 State Street. Including these assets lowers the investment
advisory fees for each applicable Fund.
Valuation of Shares
- -------------------------------
The price of each Fund's shares is based on its net asset value ("NAV") per
share. 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 are valued at fair
value, as determined in good faith and pursuant to procedures approved by the
Fund's Board of Trustees, under certain limited circumstances. For example, fair
valuation would be used if market quotations are not readily available or a
material event occurs after the close of the Exchange which may affect the
security's value.
The NAV of AMR and 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 per share 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 per share of the International
Equity Fund may change on days when shareholders will not be able to purchase or
redeem the Fund's shares.
- --------------------------------------------------------------------------------
Prospectus 23 About the Funds
<PAGE> 110
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. Eastern Time
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 received in good order
prior to the deadline, the purchase price will be the NAV per share next
determined on that day. If a purchase order is received in good order after the
deadline, the purchase price will be the NAV of the following day that the Fund
is open for business.
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) 492-9063 (for the S&P 500 Index Fund,
please call (800) 658-5811). Proceeds from redemption orders received by 4:00
p.m. Eastern Time or the close of the Exchange (whichever comes first) generally
are transmitted to shareholders on the next day that the Funds are open for
business.
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.
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.
- --------------------------------------------------------------------------------
About Your Investment 24 Prospectus
<PAGE> 111
<TABLE>
<CAPTION>
HOW TO PURCHASE SHARES
To Make an Initial Purchase To Add to an Existing Account
<S> <C>
By Wire
Call (800) 492-9063 to purchase shares by wire. Send a bank Call (800) 492-9063 to purchase shares by wire. Send a bank
wire to State Street Bank & Trust Co. with these wire to State Street Bank & Trust Co. with these
instructions: instructions:
- - ABA# 0110-0002-8; AC-0002-888-6 - ABA# 0110-0002-8; AC-0002-888-6
- - Attn: American AAdvantage Funds-AMR Class - Attn: American AAdvantage Funds-AMR Class
- - the Fund name and shareholder account number - the Fund name and Fund number
- shareholder's account number and registration
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>
<TABLE>
<CAPTION>
HOW TO REDEEM SHARES
Method Additional Information
<S> <C>
By Mail
Write a letter of instruction including Proceeds will only be mailed to the account address of
- - the Fund name, number and class record or transmitted by wire to a commercial bank account
- - shareholder account number designated on the account application form.
- - shares or dollar amount to be redeemed
- - authorized signature
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>
- --------------------------------------------------------------------------------
Prospectus 25 About Your Investment
<PAGE> 112
General Policies
- ------------------------
The following policies apply to instructions you may provide to the Funds by
telephone:
- - 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.
- - The Funds employ procedures reasonably designed to confirm that instructions
communicated by telephone are genuine.
- - 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:
- - reject any order for the purchase of shares and to limit or suspend, without
prior notice, the offering of shares,
- - modify or terminate the exchange privilege at any time,
- - limit the number of exchanges between Funds an investor may exercise, and
- - 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.
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.
Monthly distributions are paid to shareholders on the first business day of the
following month. Distributions are paid as follows:
<TABLE>
<CAPTION>
OTHER
DISTRIBUTIONS
FUND DIVIDENDS PAID PAID
- ---- -------------- -------------
<S> <C> <C>
Balanced Annually Annually
Large Cap Value Annually Annually
Small Cap Value Annually Annually
International Equity Annually Annually
S&P 500 Index April, July, October Annually
and December
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 Large Cap Value
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.
- --------------------------------------------------------------------------------
About Your Investment 26 Prospectus
<PAGE> 113
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. In
the event the Trust begins to incur distribution expenses for the Funds,
distribution fees may be paid out of Fund assets, possibly causing the cost of
your investment to increase over time.
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:
MASTER-FEEDER STRUCTURE GRAPH
-----------------------
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.
Financial Highlights
- ---------------------------------
The financial highlights tables are intended to help you understand each Fund's
financial performance for the past five fiscal 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
- --------------------------------------------------------------------------------
Prospectus 27 Additional Information
<PAGE> 114
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.
<TABLE>
<CAPTION>
BALANCED FUND-AMR CLASS(A)
--------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
--------------------------------------------------------------------
1999 1998(C) 1997(C) 1996(C)(D) 1995(B)(C)
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD: --------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Net asset value, beginning of period....................... $ 16.23 $ 15.18 $ 13.98 $ 12.36
Income from investment operations
Net investment income.................................... 0.55(E) 0.70(E) 0.63(E) 0.58
Net gains (losses) on securities (realized and
unrealized).......................................... 0.76(E) 2.13(E) 1.61(E) 1.71
-------- -------- -------- --------
Total from investment operations........................... 1.31 2.83 2.24 2.29
-------- -------- -------- --------
Less distributions:
Dividends from net investment income..................... (0.71) (0.62) (0.60) (0.53)
Distributions from net realized gains on securities...... (2.26) (1.16) (0.44) (0.14)
-------- -------- -------- --------
Total distributions........................................ (2.97) (1.78) (1.04) (0.67)
-------- -------- -------- --------
Net asset value, end of period............................. $ 14.57 $ 16.23 $ 15.18 $ 13.98
======== ======== ======== ========
Total return (annualized).................................. 9.34% 20.36% 16.77% 19.77%
======== ======== ======== ========
Ratios and supplemental data:
Net assets, end of period (in thousands)................. $886,908 $769,289 $576,673 $542,619
Ratios to average net assets (annualized)
Expenses............................................... 0.33%(E) 0.34%(E) 0.37%(E) 0.38%
Net investment income.................................. 3.79%(E) 4.09%(E) 4.26%(E) 4.54%
Portfolio turnover rate(F)................................. 87% 105% 76% 73%
</TABLE>
(A)The Balanced Fund-AMR Class commenced active operations on August 1, 1994.
(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)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, 1995 is that of its corresponding Portfolio.
- --------------------------------------------------------------------------------
Additional Information 28 Prospectus
<PAGE> 115
<TABLE>
<CAPTION>
LARGE CAP VALUE FUND-AMR CLASS(A)
-----------------------------------------------------------
YEAR ENDED OCTOBER 31,
-----------------------------------------------------------
1999 1998(B)(C) 1997(C) 1996(C)(D) 1995(C)
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD: ------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period..................... $ 21.70 $ 18.56 $ 15.95 $ 14.20
Income from investment operations
Net investment income.................................. 0.46(E) 0.45(E) 0.47(E) 0.44
Net gains on securities (realized and unrealized).... 0.89(E) 4.47(E) 3.15(E) 2.30
---------- ---------- ---------- --------
Total from investment operations......................... 1.35 4.92 3.62 2.74
---------- ---------- ---------- --------
Less distributions:
Dividends from net investment income................... (0.44) (0.47) (0.44) (0.45)
Distributions from net realized gains on securities.... (1.58) (1.31) (0.57) (0.54)
---------- ---------- ---------- --------
Total distributions...................................... (2.02) (1.78) (1.01) (0.99)
---------- ---------- ---------- --------
Net asset value, end of period........................... $ 21.03 $ 21.70 $ 18.56 $ 15.95
========== ========== ========== ========
Total return (annualized)................................ 6.56% 28.40% 23.66% 21.03%
========== ========== ========== ========
Ratios and supplemental data:
Net assets, end of period (in thousands)............... $1,614,432 $1,431,805 $1,008,518 $706,884
Ratios to average net assets (annualized)
Expenses............................................. 0.31%(E) 0.34%(E) 0.36%(E) 0.38%
Net investment income................................ 2.12%(E) 2.45%(E) 2.80%(E) 3.20%
Portfolio turnover rate(F)............................... 40% 35% 40% 26%
</TABLE>
(A)The Large Cap Value Fund-AMR Class commenced active operations on August 1,
1994.
(B)Prior to March 1, 1999, the Large Cap Value Fund-AMR Class was known as the
American AAdvantage Growth and Income Fund-AMR Class.
(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)On November 1, 1995 the Large Cap Value Fund began investing all of its
investable assets in a corresponding Portfolio of the AMR Trust. Portfolio
turnover rate since November 1, 1995 is that of its corresponding Portfolio.
<TABLE>
<CAPTION>
Small Cap Value Fund
AMR Class
--------------------
March 1 to
October 31, 1999
--------------------
<S> <C>
Net asset value, beginning of period..... $ 9.13
-------
Income from investment operations:
Net investment income(A)............... 0.04
Net gains (losses) on securities (both
realized and unrealized)(A)......... (0.09)
-------
Total from investment operations......... (0.05)
-------
Less distributions:
Dividends from net investment income... --
Distributions from net realized gains
on securities....................... --
-------
Total distributions...................... --
-------
Net asset value, end of period (not
annualized)............................ $ 9.08
=======
Total return............................. (0.55)%
=======
Ratios and supplemental data:
Net assets, end of period (in
thousands).......................... $64,662
Ratios to average net assets
(annualized)(A):
Expenses............................ 0.70%
Net investment income............... 1.14%
Decrease reflected in above expense
ratio due to absorption of
expenses by the Manager........... 0.24%
</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
the AMR Investment Services Small Cap Value Portfolio.
- --------------------------------------------------------------------------------
Prospectus 29 Additional Information
<PAGE> 116
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY FUND-AMR CLASS(A)
------------------------------------------------------
YEAR ENDED OCTOBER 31,
------------------------------------------------------
1999 1998(B) 1997(B) 1996(B) 1995(B)
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD: ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period........................ $ 17.15 $ 15.06 $ 13.31 $ 12.87
Income from investment operations
Net investment income..................................... 0.37(C) 0.37(C) 0.31(C) 0.30
Net gains on securities (realized and unrealized)....... 0.34(C) 2.46(C) 1.98(C) 0.68
-------- -------- -------- --------
Total from investment operations............................ 0.71 2.83 2.29 0.98
-------- -------- -------- --------
Less distributions:
Dividends from net investment income...................... (0.37) (0.33) (0.30) (0.22)
Distributions from net realized gains on securities....... (0.48) (0.41) (0.24) (0.32)
-------- -------- -------- --------
Total distributions......................................... (0.85) (0.74) (0.54) (0.54)
-------- -------- -------- --------
Net asset value, end of period.............................. $ 17.01 $ 17.15 $ 15.06 $ 13.31
======== ======== ======== ========
Total return (annualized)................................... 4.44% 19.39% 17.72% 8.18%
======== ======== ======== ========
Ratios and supplemental data:
Net assets, end of period (in thousands).................. $496,040 $464,588 $330,898 $227,939
Ratios to average net assets (annualized)
Expenses................................................ 0.53%(C) 0.58%(C) 0.57%(C) 0.
Net investment income................................... 2.26%(C) 2.51%(C) 2.49%(C) 2.
Portfolio turnover rate(D).................................. 24% 15% 19% 21%
</TABLE>
(A)The International Equity Fund-AMR Class commenced active operations on August
1, 1994.
(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)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, 1995 is that of its corresponding Portfolio.
- --------------------------------------------------------------------------------
Additional Information 30 Prospectus
<PAGE> 117
<TABLE>
<CAPTION>
S&P 500
INDEX FUND-
INSTITUTIONAL CLASS(A)
-----------------------------
YEAR ENDED
DECEMBER 31,
-----------------------------
1999 1998 1997(B)
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD: ------- --------- -------
<S> <C> <C> <C>
Net asset value, beginning of period........................ $ 13.16 $10.00
Income from investment operations
Net investment income(B).................................. 0.16 0.14
Net gains on securities (realized and unrealized)(B).... 3.62 3.16
-------- ------
Total from investment operations............................ 3.78 3.30
-------- ------
Less distributions:
Dividends from net investment income...................... (0.16) (0.14)
-------- ------
Total distributions......................................... (0.16) (0.14)
-------- ------
Net asset value, end of period.............................. $ 16.78 $13.16
======== ======
Total return................................................ 28.87% 33.09%
======== ======
Ratios and supplemental data:
Net assets, end of period (in thousands).................. $100,870 $7,862
Ratios to average net assets(C)
Net investment income................................... 1.41% 1.61%
Expenses................................................ 0.20% 0.20%
Decrease reflected in above expense ratio due to
absorption of expenses by Bankers Trust and the
Manager................................................ 0.06% 0.43%
Portfolio turnover rate(D).................................. 4% 19%
</TABLE>
(A)Prior to March 1, 2000, the S&P 500 Index Fund-Institutional Class invested
all of its investable assets in the BT Equity 500 Index Portfolio, a separate
investment company managed by Bankers Trust Company.
(B)The S&P 500 Index Fund-Institutional Class commenced active operations on
January 1, 1997 and on March 1, 1998, existing shares were designated
Institutional Class shares.
(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 the
Equity 500 Index Portfolio.
(D)Portfolio turnover rate is that of the Equity 500 Index Portfolio.
<TABLE>
<CAPTION>
AMR Class
-----------
March 1
to
October 31,
1999
-----------
<S> <C>
Net asset value, beginning of
period.............................. $ 9.95
--------
Income from investment operations:
Net investment income(A).......... 0.39
Net gains (losses) on securities
(both realized and
unrealized)(A).................. (0.37)
--------
Total from investment operations.... 0.02
--------
Less distributions:
Dividends from net investment
income.......................... (0.39)
Distributions from net realized
gains on securities............. --
--------
Total distributions................. (0.39)
--------
Net asset value, end of period (not
annualized)....................... $ 9.58
========
Total return........................ (0.17)%
========
Ratios and supplemental data:
Net assets, end of period (in
thousands)...................... $ 46,655
Ratios to average net assets
(annualized)(A):
Expenses........................ 0.30%
Net investment income........... 6.12%
</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
the AMR Investment Services Intermediate Bond Portfolio.
<TABLE>
<CAPTION>
SHORT-TERM BOND FUND-AMR CLASS (A)
------------------------------------------------------
YEAR ENDED OCTOBER 31,
-----------------------------------------------------
1999 1998(B)(C) 1997(C) 1996(C) 1995(C)
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD: --------- --------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period........................ $ 9.62 $ 9.67 $ 9.81 $ 9.68
Income from investment operations
Net investment income..................................... 0.65(D) 0.66(D) 0.65(D) 0.64
Net gains (losses) on securities (realized and
unrealized)........................................... --(D) (0.05)(D) (0.14)(D) 0.13
------- ------- ------- -------
Total from investment operations............................ 0.65 0.61 0.51 0.77
------- ------- ------- -------
Less distributions:
Dividends from net investment income...................... (0.65) (0.66) (0.65) (0.64)
Distributions from net realized gains on securities....... -- -- -- --
------- ------- ------- -------
Total distributions......................................... (0.65) (0.66) (0.65) (0.64)
------- ------- ------- -------
Net asset value, end of period.............................. $ 9.62 $ 9.62 $ 9.67 $ 9.81
======= ======= ======= =======
Total return (annualized)................................... 6.93% 6.57% 5.38% 8.22%
======= ======= ======= =======
Ratios and supplemental data:
Net assets, end of period (in thousands).................. $95,056 $64,010 $59,526 $64,595
Ratios to average net assets (annualized)
Expenses................................................ 0.34%(D) 0.32%(D) 0.33%(D) 0.36%
Net investment income................................... 6.71%(D) 6.90%(D) 6.66%(D) 6.60%
Portfolio turnover rate(E).................................. 74% 282% 304% 183%
</TABLE>
(A)The Short-Term Bond Fund-AMR Class commenced active operations on August 1,
1994.
(B)Prior to March 1, 1998, the Short-Term Bond Fund-AMR Class was known as the
American AAdvantage Limited-Term Income Fund-AMR Class.
(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)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)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, 1995 is that of its corresponding Portfolio.
- --------------------------------------------------------------------------------
Prospectus 31 Additional Information
<PAGE> 118
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.
ANNUAL REPORT/SEMI-ANNUAL REPORT
The Funds' Annual and Semi-Annual Reports list each Fund's actual investments as
of the report's date. They also include a discussion by the Manager of market
conditions and investment strategies that significantly affected the Funds'
performance. The report of the Funds' independent auditors is included in the
Annual Report.
STATEMENT OF ADDITIONAL INFORMATION
The SAI contains more details about the Funds and their investment policies.
The SAI is incorporated in this Prospectus by reference (it is legally part of
this Prospectus). A current SAI is on file with the Securities and Exchange
Commission (SEC).
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 may also be obtained from the SEC Public Reference
Room by mailing a request, including a duplicating fee to: SEC's Public
Reference Section, 450 5th Street NW, Washington, D.C. 20549-6009. The Public
Reference Room can be reached at (202) 942-8090.
FUND SERVICE PROVIDERS:
<TABLE>
<S> <C> <C> <C>
CUSTODIAN TRANSFER AGENT INDEPENDENT AUDITORS DISTRIBUTOR
STATE STREET BANK NATIONAL FINANCIAL ERNST & YOUNG LLP SWS FINANCIAL
AND TRUST DATA SERVICES Dallas, Texas SERVICES
Boston, Massachusetts Kansas City, Missouri Dallas, Texas
</TABLE>
[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 Large Cap
Value Fund, American AAdvantage International Equity Fund, American AAdvantage
Intermediate Bond Fund, American AAdvantage Short-Term Bond Fund and American
AAdvantage Small Cap Value Fund are service marks of AMR Investment Services,
Inc.
<PAGE> 119
------------------
PLATINUM CLASS(SM)
------------------
[GRAPHIC]
PROSPECTUS
NOVEMBER 1, 1999
[AMERICAN AADVANTAGE FUNDS(R) LOGO]
[AMERICAN AADVANTAGE MILEAGE FUNDS(R) LOGO]
Managed by AMR Investment Services, Inc.
[GRAPHIC]
o Money Market Fund
o Municipal Money Market Fund
o U.S. Government Money Market Fund
o Money Market Mileage Fund
o Municipal Money Market Mileage Fund
o U.S. Government Money Market Mileage Fund
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> 120
TABLE OF CONTENTS
- ---------------------------
<TABLE>
<S> <C>
About the Funds
Overview.................................................... 3
Investment Objective........................................ 4
Principal Strategies........................................ 4
Risk Factors................................................ 6
Investor Profile............................................ 7
Historical Performance...................................... 7
Fees and Expenses........................................... 15
Examples.................................................... 16
The Manager................................................. 16
Valuation of Shares......................................... 17
About Your Investment
Purchase and Redemption of Shares........................... 18
Distributions and Taxes..................................... 23
AAdvantage(R) Miles......................................... 24
Additional Information
Distribution of Trust Shares................................ 26
Master-Feeder Structure..................................... 26
Financial Highlights........................................ 27
</TABLE>
- --------------------------------------------------------------------------------
About the Funds 2 Prospectus
<PAGE> 121
ABOUT THE FUNDS The American AAdvantage Funds (the "AAdvantage
OVERVIEW 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".
Each shareholder of the Mileage Funds will
receive American Airlines(R) AAdvantage(R)
travel awards program ("AAdvantage") miles.(1)
AAdvantage miles will be posted monthly to each
shareholder's AAdvantage account at an annual
rate of one mile for every $10 invested in the
Fund. See "AAdvantage Miles".
- ---------------
(1) American Airlines and AAdvantage are registered trademarks of American
Airlines, Inc.
- --------------------------------------------------------------------------------
Prospectus 3 About the Funds
<PAGE> 122
Taxable Money Market Funds ("Money Market Funds")
- ------------------------------------------------------
American AAdvantage Money Market Fund
American AAdvantage Money Market Mileage Fund
Municipal Money Market Funds ("Municipal Funds")
- ----------------------------------------------------
American AAdvantage Municipal Money Market Fund
American AAdvantage Municipal Money Market Mileage Fund
U.S. Government Money Market Funds ("Government Funds")
- -----------------------------------------------------------
American AAdvantage U.S. Government Money Market Fund
American AAdvantage U.S. Government Money Market Mileage Fund
================================================================================
INVESTMENT OBJECTIVE Current income, liquidity and the maintenance of
(All Funds) a stable price of $1.00 per share.
PRINCIPAL STRATEGIES Each Money Market Fund invests exclusively in
(Money Market Funds) 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.
Each Fund will only buy securities with the
following credit qualities:
- 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., at the time
of purchase,
- rated in the highest short-term category by
one rating organization if the securities are
rated only by one rating organization, or
- unrated securities that are determined to be
of equivalent quality by the Manager pursuant
to
- --------------------------------------------------------------------------------
About the Funds 4 Prospectus
<PAGE> 123
guidelines approved by each Fund's Board of
Trustees.
Each 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, a Fund may not maintain this
concentration.
Securities purchased by each 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 each Fund will not exceed 90 days.
(Municipal Funds) Under normal market conditions, each Municipal
Fund invests at least 80% of its 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 each 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.
Each Fund will only buy securities with the
following credit qualities:
- 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., at the time of
purchase,
- rated in the highest short-term category by
one rating organization if the securities are
rated only by one rating organization, or
- --------------------------------------------------------------------------------
Prospectus 5 About the Funds
<PAGE> 124
- unrated securities that are determined to be
of equivalent quality by the Manager pursuant
to guidelines approved by each Fund's Board of
Trustees.
Securities purchased by each 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 each Fund will not exceed 90 days.
(Government Funds) Each Government 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 each 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 each Fund will not exceed 90 days.
RISK FACTORS - The yield paid by each Fund is subject to
(All Funds) 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.
- Although each 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 a Fund is not insured or
guaranteed by the U.S. Government or any
financial or government institution.
- --------------------------------------------------------------------------------
About the Funds 6 Prospectus
<PAGE> 125
(Money Market and - As with any money market fund, there is the
Municipal Funds) risk that the issuers or guarantors of
securities owned by each Fund will default on
the payment of principal or interest or the
obligation to repurchase securities from each
Fund.
INVESTOR PROFILE All of the Funds may be suitable for investors
(All Funds) who:
- seek the preservation of capital and to avoid
fluctuations in principal
- desire regular, monthly income from a highly
liquid investment
- require a short-term vehicle for cash when
making long-term investment decisions
- seek a rate of return that is potentially
higher than certificates of deposit or savings
accounts
(Municipal Funds) The Municipal Funds may be suitable for
investors who:
- desire regular, monthly income that is
generally exempt from Federal income tax
- seek an after-tax rate of return that is
potentially higher than certificates of
deposit or savings accounts
(Mileage Funds) The Mileage Funds may be suitable for investors
who:
- desire to receive miles in the American
Airlines AAdvantage(R) program
HISTORICAL PERFORMANCE The bar chart and table below provide an
(American AAdvantage indication of risk by showing how the Fund's
Money Market Fund (sm)) performance has varied from year to year. 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
- --------------------------------------------------------------------------------
Prospectus 7 About the Funds
<PAGE> 126
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
[PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---- ----------
<S> <C>
90 8.4
91 6.77
92 4.02
93 3.28
94 4.22
95 5.93
96 4.77
97 4.90
98 4.82
99 x.xx
</TABLE>
Highest Quarterly Return: x.xx%
(1/1/90 through 12/31/99) (x Quarter 19xx)
Lowest Quarterly Return: x.xx%
(1/1/90 through 12/31/99) (x Quarter 19xx)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL
RETURN
---------------------------
AS OF 12/31/99
---------------------------
1 YEAR 5 YEARS 10 YEARS
------ ------- --------
<S> <C> <C> <C>
Money Market Fund........................................... x.xx% x.xx% x.xx%
</TABLE>
(American AAdvantage The bar chart and table below provide an
Money Market Mileage indication of risk by showing how the Fund's
Fund (sm)) performance has varied from year to year. 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 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
- --------------------------------------------------------------------------------
About the Funds 8 Prospectus
<PAGE> 127
Mileage Class, and results from November 1, 1995
through January 28, 1996 are for the original
class of this Fund. The Platinum Class of the
Fund began offering its shares on January 29,
1996. Performance results shown from that date
through December 31, 1999 are for the Platinum
Class of the Fund. Because the predecessor fund
and the original class of this Fund had lower
expenses, their 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.
TOTAL RETURN FOR THE CALENDAR YEAR ENDED 12/31 OF EACH YEAR
[PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---- ----------
<S> <C>
90 8.4
91 6.77
92 4.02
93 3.28
94 4.22
95 5.93
96 4.56
97 4.74
98 4.67
99 x.xx
</TABLE>
Highest Quarterly Return: x.xx%
(1/1/90 through 12/31/99) (x Quarter 19xx)
Lowest Quarterly Return: x.xx%
(1/1/90 through 12/31/99) (x Quarter 19xx)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL
RETURN
---------------------------
AS OF 12/31/99
---------------------------
1 YEAR 5 YEARS 10 YEARS
------ ------- --------
<S> <C> <C> <C>
Money Market Mileage Fund................................... x.xx% x.xx% x.xx%
</TABLE>
(American AAdvantage The bar chart and table below provide an
Municipal Money Market indication of risk by showing how the Fund's
Fund (sm)) performance has varied from year to year. The
Platinum Class of the
- --------------------------------------------------------------------------------
Prospectus 9 About the Funds
<PAGE> 128
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.
TOTAL RETURN FOR THE CALENDAR YEAR ENDED 12/31 OF EACH YEAR
[PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---- ----------
<S> <C>
94 2.66
95 3.71
96 2.78
97 2.83
98 2.64
99 x.xx
</TABLE>
Highest Quarterly Return: x.xx%
(1/1/94 through 12/31/99) (x Quarter 199x)
Lowest Quarterly Return: x.xx%
(1/1/94 through 12/31/99) (x Quarter 199x)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
----------------------------------
AS OF 12/31/99
----------------------------------
SINCE INCEPTION
1 YEAR 5 YEARS (11/10/93)
------ ------- ---------------
<S> <C> <C> <C>
Municipal Money Market Fund.......................... x.xx% x.xx% x.xx%
</TABLE>
(American AAdvantage The bar chart and table below provide an
Municipal Money Market indication of risk by showing how the Fund's
Mileage Fund (sm)) performance has varied from year to year. The
performance shown in
- --------------------------------------------------------------------------------
About the Funds 10 Prospectus
<PAGE> 129
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 November 10, 1993. Performance results
through October 31, 1995 are for the Mileage
Class of the predecessor fund. The Fund began
offering its shares on November 1, 1995.
Performance results shown from that date through
October 31, 1999 are for the original class of
the Fund. The Platinum Class of the Fund began
offering its shares on November 1, 1999.
Performance results shown from that date through
December 31, 1999 are for the Platinum Class of
the Fund. Because the predecessor fund and the
original class of this Fund had lower expenses,
their 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.
TOTAL RETURN FOR THE CALENDAR YEAR ENDED 12/31 OF EACH YEAR
[PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---- ----------
<S> <C>
94 2.37
95 3.48
96 3.09
97 3.23
98 3.06
99 x.xx
</TABLE>
Highest Quarterly Return: x.xx%
(1/1/94 through 12/31/99) (x Quarter 199x)
Lowest Quarterly Return: x.xx%
(1/1/94 through 12/31/99) (x Quarter 199x)
- --------------------------------------------------------------------------------
Prospectus 11 About the Funds
<PAGE> 130
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
-------------------------------
AS OF 12/31/99
-------------------------------
SINCE
INCEPTION
1 YEAR 5 YEARS (11/10/93)
------ ------- ----------
<S> <C> <C> <C>
Municipal Money Market Mileage Fund.................... x.xx% x.xx% x.xx%
</TABLE>
(American AAdvantage The bar chart and table below provide an
U.S. Government Money indication of risk by showing how the Fund's
Market Fund (sm)) performance has varied from year to year. 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.
TOTAL RETURN FOR THE CALENDAR YEAR ENDED 12/31 OF EACH YEAR
[PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---- ----------
<S> <C>
93 3.05
94 4.09
95 5.62
96 4.51
97 4.65
98 4.62
99 x.xx
</TABLE>
Highest Quarterly Return: x.xx%
(1/1/93 through 12/31/99) (x Quarter 199x)
Lowest Quarterly Return: x.xx%
(1/1/93 through 12/31/99) (x Quarter 199x)
- --------------------------------------------------------------------------------
About the Funds 12 Prospectus
<PAGE> 131
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
----------------------------------
AS OF 12/31/99
----------------------------------
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%
</TABLE>
(American AAdvantage The bar chart and table below provide an
U.S. Government Money indication of risk by showing how the Fund's
Market Mileage Fund (sm)) performance has varied from year to year. 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 March 2, 1992.
Performance results through October 31, 1993 are
for the Institutional Class of the predecessor
fund, and from November 1, 1993 through October
31, 1995 are for the predecessor fund's Mileage
Class. The Fund began offering its shares on
November 1, 1995. Performance results shown from
that date through October 31, 1999 are for the
original class of the Fund. The Platinum Class
of the Fund began offering its shares on
November 1, 1999. Performance results shown from
that date through December 31, 1999 are for the
Platinum Class of the Fund. Because the
predecessor fund and the original class of this
Fund had lower expenses, their 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.
- --------------------------------------------------------------------------------
Prospectus 13 About the Funds
<PAGE> 132
TOTAL RETURN FOR THE CALENDAR YEAR ENDED 12/31 OF EACH YEAR
[PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---- ----------
<S> <C>
93 3.00
94 3.79
95 5.37
96 4.91
97 5.04
98 5.04
99 x.xx
</TABLE>
Highest Quarterly Return: x.xx%
(1/1/93 through 12/31/99) (x Quarter 199x)
Lowest Quarterly Return: x.xx%
(1/1/93 through 12/31/99) (x Quarter 199x)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
-------------------------------
AS OF 12/31/99
-------------------------------
SINCE
INCEPTION
1 YEAR 5 YEARS (3/2/92)
------ ------- ----------
<S> <C> <C> <C>
U.S. Government Money Market Mileage Fund.............. x.xx% x.xx% x.xx%
</TABLE>
- --------------------------------------------------------------------------------
About the Funds 14 Prospectus
<PAGE> 133
FEES AND EXPENSES This table describes the fees and expenses that
you may pay if you buy and hold shares of each
Fund. The expense table and the Examples below
reflect the expenses of each Fund and its
corresponding Portfolio.
<TABLE>
<CAPTION>
MONEY MONEY MARKET MUNICIPAL MONEY MUNICIPAL MONEY U.S. GOVERNMENT
MARKET MILEAGE MARKET MARKET MILEAGE MONEY MARKET
------ ------------ --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Management Fees 0.10% 0.10% 0.10% 0.10% 0.10%
Distribution (12b-1) Fees 0.25% 0.25% 0.25% 0.25% 0.25%
Other Expenses x.xx% x.xx% x.xx% x.xx%(1) x.xx%
Total Annual Fund Operating Expenses x.xx% x.xx% x.xx% x.xx% x.xx%
Fee Waiver and/or Expense Reimbursement -- x.xx%(3) x.xx%(2) x.xx%(4) --
Net Expenses x.xx% x.xx% x.xx% x.xx% x.xx%
<CAPTION>
U.S. GOVERNMENT
MONEY MARKET
MILEAGE
--------------
<S> <C>
Management Fees 0.10%
Distribution (12b-1) Fees 0.25%
Other Expenses x.xx%(1)
Total Annual Fund Operating Expenses x.xx%
Fee Waiver and/or Expense Reimbursement x.xx%(5)
Net Expenses x.xx%
</TABLE>
(1) Other Expenses are based on estimates for the current fiscal year.
(2) The Manager has agreed to waive a portion of Distribution Fees for the
Municipal Money Market Fund through December 31, 2000 to the extent that the
Fund's Total Annual Fund Operating Expenses exceed x.xx%.
(3) The Manager has agreed to waive a portion of Distribution Fees for the Money
Market Mileage Fund through December 31, 2000 to the extent that the Fund's
Total Annual Fund Operating Expenses exceed x.xx%.
(4) The Manager has agreed to waive a portion of Distribution Fees for the
Municipal Money Market Mileage Fund through December 31, 2000 to the extent
that the Fund's Total Annual Fund Operating Expenses exceed x.xx%.
(5) The Manager has agreed to waive a portion of Distribution Fees for the U.S.
Government Money Market Mileage Fund through December 31, 2000 to the extent
that the Fund's Total Annual Fund Operating Expenses exceed x.xx%.
- --------------------------------------------------------------------------------
Prospectus 15 About the Funds
<PAGE> 134
EXAMPLES These examples are intended to help you compare
the cost of investing in each Fund with the cost
of investing in other mutual funds. The examples
assume that you invest $10,000 in each Fund for
the time periods indicated and then redeem all
of your shares at the end of those periods. The
examples also assume that your investment has a
5% return each year and that each 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>
Money Market................................................ $xxx $xxx $xxx $xxx
Money Market Mileage*....................................... $xxx $xxx $xxx $xxx
Municipal Money Market*..................................... $xxx $xxx $xxx $xxx
Municipal Money Market Mileage*............................. $xxx $xxx $xxx $xxx
U.S. Government Money Market................................ $xxx $xxx $xxx $xxx
U.S. Government Money Market Mileage*....................... $xxx $xxx $xxx $xxx
</TABLE>
* Fee waivers are only guaranteed by the Manager through December 31, 2000.
Therefore, net expenses are used to calculate the costs in the first year, and
total fund expenses are used to calculate costs in the remaining nine years.
THE MANAGER The Funds have retained AMR Investment Services,
Inc. to serve as their 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, 1999, the Manager had approximately $XX.X
billion of assets under management, including
approximately $X.X billion under active
management and $XX.X billion as named fiduciary
or financial adviser. Of the total,
approximately $XX.X billion 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
- --------------------------------------------------------------------------------
About the Funds 16 Prospectus
<PAGE> 135
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") per share. 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 per share 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, with the exception of
Columbus Day and Veterans Day. The Funds are
closed and no NAV is calculated on these days.
- --------------------------------------------------------------------------------
Prospectus 17 About the Funds
<PAGE> 136
ABOUT YOUR INVESTMENT Platinum Class shares are offered on a
continuous basis at net asset value through
selected financial institutions (such as banks
PURCHASE AND and broker-dealers). Shares of the Mileage Funds
REDEMPTION OF SHARES are offered only to individuals and certain
grantor trusts. Qualified retirement plans (i.e.
Eligibility IRAs, Keogh, profit sharing plans) and
institutional investors are not eligible to
invest in the Mileage Funds.
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 Veterans Day.
<TABLE>
<CAPTION>
PURCHASE BY
FUND (EASTERN TIME)*:
---- ----------------
<S> <C>
Money Market and Government Funds 4:00 p.m.
Municipal Funds 11:45 a.m.
* or the close of the Exchange
(whichever comes first)
</TABLE>
If a purchase order is received in good order
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
received in good order 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.
Eligible investors in the Mileage Funds can
enroll in the American Airlines AAdvantage(R)
Program by calling (800) 433-7300. You may
request a Fund application form by calling (800)
388-3344.
- --------------------------------------------------------------------------------
About Your Investment 18 Prospectus
<PAGE> 137
Complete the application, sign it and:
Mail to:
American AAdvantage Funds-Platinum Class
P.O. Box 219643
Kansas City, MO 64121-9643
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 Funds' 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>
SAME DAY
WIRE REDEMPTION
ORDER DEADLINE
FUND (EASTERN TIME)*:
---- ----------------
<S> <C>
Money Market and Government 2:00 p.m.
Funds
Municipal Funds 11:45 a.m.
* or the close of the Exchange
(whichever comes first)
</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. Delivery of proceeds from shares
purchased by check may be delayed 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.
- --------------------------------------------------------------------------------
Prospectus 19 About Your Investment
<PAGE> 138
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.
HOW TO PURCHASE SHARES
<TABLE>
<CAPTION>
To Make an Initial Purchase To Add to an Existing Account
- ------------------------------------------------------------------------------------------
<S> <C>
By Check
- - Make check payable to American AAdvantage Include the shareholder's account number and
Funds Fund name and Fund number on the check. Mail
- - Include the Fund name, Fund number and check ($50 minimum) to:
"Platinum Class" on the check.
- - Mail check ($2,500 minimum) to: American AAdvantage Funds
P.O. Box 219643
American AAdvantage Funds Kansas City, MO 64121-9643
P.O. Box 219643
Kansas City, MO 64121-9643
By Wire
If your account has been established, you Call (800) 388-3344 to purchase shares by
may call (800) 388-3344 to purchase shares wire. Send a bank wire to State Street Bank
by wire. Send a bank wire to State Street & Trust Co. with these instructions:
Bank & Trust Co. with these instructions: - ABA# 0110-0002-8; AC-9905-342-3
- - ABA# 0110-0002-8; AC-9905-342-3 - Attn: American AAdvantage Funds
- - Attn: American AAdvantage Funds - the Fund name and Fund number
- - the Fund name and Fund number - shareholder's account number and
- - account number and registration registration
By Exchange
Shares of an AAdvantage Fund or Mileage Fund Shares of an AAdvantage Fund or Mileage Fund
may be purchased by exchange from another may be redeemed in exchange for another
American AAdvantage Fund-Platinum Class or American AAdvantage Fund-Platinum Class or
American AAdvantage Mileage Fund-Platinum American AAdvantage Mileage Fund- Platinum
Class, as applicable, if the shareholder has Class, as applicable, if the shareholder has
owned shares of the other AAdvantage Fund or owned shares of the AAdvantage Fund or
Mileage Fund for at least 15 days. Send a Mileage Fund for at least 15 days. Send a
written request to the address above or call written request to the address above or call
(800) 388-3344 to exchange shares. (800) 388-3344 to exchange shares.
</TABLE>
- --------------------------------------------------------------------------------
About Your Investment 20 Prospectus
<PAGE> 139
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
- - the Fund name, Fund number and class for estates, trusts, guardianships,
- - shareholder account number custodians, corporations, IRAs and welfare,
- - shares or dollar amount to be redeemed pension and profit sharing plans. Call (800)
- - authorized signature(s) of all persons 388-3344 for instructions.
required to sign for the account - Proceeds will only be mailed to the
account address of record or transmitted by
Mail to: wire to a commercial bank account
American AAdvantage Funds designated on the account application
P.O. Box 219643 form.
Kansas City, MO 64121-9643
By Check
Choose the check writing feature on the - Minimum check amount is $100
account application. - A $2 service fee per check is charged for
check copies
- A $15 service fee will be charged when a
check is presented for an amount greater
than the value of the shareholder's
account
- A $12 fee will be charged for "stop
payment" requests
By Pre-Authorized Automatic Redemption
Contact the financial institution through Proceeds will be transferred automatically
which you purchased Fund shares. from your Fund account to your bank account
via ACH on or about the 15th day of each
month ($100 minimum).
By Exchange
Shares of an AAdvantage Fund or Mileage Fund may be redeemed in exchange for another
American AAdvantage Fund-Platinum Class or American AAdvantage Mileage Fund-Platinum
Class, as applicable, if the shareholder has owned shares of the AAdvantage Fund or
Mileage Fund for at least 15 days. Send a written request to the address above or call
(800) 388-3344 to exchange shares.
</TABLE>
- --------------------------------------------------------------------------------
Prospectus 21 About Your Investment
<PAGE> 140
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:
- 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.
- The Funds employ procedures reasonably
designed to confirm that instructions
communicated by telephone are genuine.
- 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:
- reject any order for the purchase of shares
and to limit or suspend, without prior notice,
the offering of shares,
- modify or terminate the exchange privilege at
any time,
- limit the number of exchanges between Funds an
investor may exercise, and
- 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 check writing
- --------------------------------------------------------------------------------
About Your Investment 22 Prospectus
<PAGE> 141
privileges or, if approved by the Funds,
establish variations on minimum check amounts.
Some institutions 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.
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 that are paid to shareholders
monthly on the first business day after the
month ends. Unless the account application
instructs otherwise, distributions will be
reinvested in additional Fund shares. Usually,
dividends (except those paid by the Municipal
Funds) and distributions of net realized gains
are taxable events.
The Municipal Funds designate most of their
distributions as "exempt-interest dividends,"
which may be excluded from gross income. If the
Funds earn taxable income from any of their
investments, that income will be distributed as
a taxable dividend. If the Funds invest 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 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 Funds'
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.
- --------------------------------------------------------------------------------
Prospectus 23 About Your Investment
<PAGE> 142
AADVANTAGE(R) MILES The AAdvantage program offers the opportunity to
obtain free upgrades and travel awards on
American Airlines and AAdvantage airline
participants, as well as upgrades and discounts
on car 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 each
Mileage Fund. Mileage is calculated on the
average daily balance and posted monthly. The
average daily balance is calculated by adding
each day's balance and dividing by the number of
days in the month. For example, the average
daily balance on a $50,000 account funded on the
16th day of a month having 30 days (and
maintained at that balance through the end of
the month) would be $25,000. Mileage received
for that month would be 208 miles. If the same
balance were maintained through the next month,
the average daily balance would be $50,000, and
the mileage would be 417 miles that month and
every month the $50,000 investment was
maintained in the Mileage Fund. These miles
appear on subsequent AAdvantage program
statements.
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 Mileage Funds, trustees of
trust accounts should consult their own legal
and tax advisers as to the tax effect of this
arrangement and whether this arrangement is
consistent with their legal duties as trustees.
American Airlines has informed the Mileage Funds
that in administering an AAdvantage member's
AAdvantage account, it shall not be required to
distinguish between AAdvantage miles accumulated
by the individual in his/her capacity as
- --------------------------------------------------------------------------------
About Your Investment 24 Prospectus
<PAGE> 143
trustee to a trust account from AAdvantage miles
accumulated in an individual capacity from other
sources.
The Manager reserves the right to discontinue
the posting of AAdvantage miles or to change the
mileage calculation at any time upon notice to
shareholders. 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.
- --------------------------------------------------------------------------------
Prospectus 25 About Your Investment
<PAGE> 144
ADDITIONAL INFORMATION The AAdvantage Funds and Mileage Funds have each
adopted a Distribution Plan for the Platinum
Class (the "Plans") in accordance with Rule
DISTRIBUTION OF 12b-1 under the Investment Company Act of 1940
TRUST SHARES ("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 Fund
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.
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.
- --------------------------------------------------------------------------------
About Your Investment 26 Prospectus
<PAGE> 145
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 share of the Fund's Platinum Class.
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). Financial highlights are not
available for the Platinum Class of the
Municipal Money Market Mileage Fund or the U.S.
Government Money Market Mileage Fund, because
they commenced active operations on November 1,
1999. 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.
- --------------------------------------------------------------------------------
Prospectus 27 Additional Information
<PAGE> 146
<TABLE>
<CAPTION>
MONEY MARKET FUND
--------------------------------------------------------------------------------------
PLATINUM CLASS INSTITUTIONAL CLASS
---------------------------------------------------- ---------------------------
PERIOD YEAR ENDED
YEAR ENDED OCTOBER 31, ENDED OCTOBER 31,
---------------------------------- OCTOBER 31, ---------------------------
FOR A SHARE OUTSTANDING
THROUGHOUT THE PERIOD: 1999 1998 1997 1996(A) 1996 1995
-------- -------- -------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period..... $ x.xx $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- ---------- ----------
Net investment income.................... x.xx(B) 0.05(B) 0.05(B) 0.05(B) 0.05(B) 0.06
Less dividends from net investment
income.................................. (x.xx) (0.05) (0.05) (0.05) (0.05) (0.06)
-------- -------- -------- -------- ---------- ----------
Net asset value, end of period........... $ x.xx $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========== ==========
Total return (annualized)................ x.xx% 4.89% 4.87% 4.85%(C) 5.57% 5.96%
======== ======== ======== ======== ========== ==========
Ratios and supplemental data:
Net assets, end of period (in
thousands)............................ $xxx,xxx $744,226 $494,413 $119,981 $1,406,939 $1,206,041
Ratios to average net assets
(annualized)
Expenses.............................. x.xx%(B) 0.94%(B) 0.93%(B) 0.94%(B) 0.24%(B) 0.23%
Net investment income................. x.xx%(B) 4.78%(B) 4.80%(B) 4.63%(B) 5.41%(B) 5.79%
</TABLE>
(A) The Money Market Fund-Platinum Class 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.
- --------------------------------------------------------------------------------
Additional Information 28 Prospectus
<PAGE> 147
<TABLE>
<CAPTION>
MUNICIPAL MONEY MARKET FUND
----------------------------------------------------------------------------------
INSTITUTIONAL
PLATINUM CLASS CLASS
-------------------------------------------------------- -------------------
PERIOD YEAR ENDED
YEAR ENDED OCTOBER 31, ENDED OCTOBER 31,
-------------------------------------- OCTOBER 31, -------------------
FOR A SHARE OUTSTANDING
THROUGHOUT THE PERIOD: 1999 1998 1997 1996(A) 1996 1995
------- ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period......... $ x.xx $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- ------ ------
Net investment income........................ x.xx(B) 0.03(B) 0.03(B) 0.03(B) 0.04(B) 0.04
Less dividends from net investment income.... (x.xx) (0.03) (0.03) (0.03) (0.04) (0.04)
------- ------- ------- ------- ------ ------
Net asset value, end of period............... $ x.xx $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= ====== ======
Total return (annualized).................... x.xx% 2.75% 2.79% 2.88%(C) 3.59% 3.75%
======= ======= ======= ======= ====== ======
Ratios and supplemental data:
Net assets, end of period (in thousands).... $xx,xxx $87,852 $63,883 $49,862 $ 6 $ 7
Ratios to average net assets (annualized)(D)
Expenses.................................. x.xx%(B) 1.04%(B) 1.03%(B) 0.97%(B) 0.27%(B) 0.35%
Net investment income..................... x.xx%(B) 2.69%(B) 2.75%(B) 2.72%(B) 3.49%(B) 3.70%
</TABLE>
(A) The Municipal Money Market Fund commenced active operations on November 10,
1993. The Municipal Money Market Fund-Platinum Class 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 Platinum Class of 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, 1.07% and
2.66%, respectively, for the year ended October 31, 1998 and x.xx% and
x.xx%, respectively, for the year ended October 31, 1999. Had the
Institutional Class of 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 and 0.33% and 3.43%,
respectively, for the year ended October 31, 1996.
- --------------------------------------------------------------------------------
Prospectus 29 Additional Information
<PAGE> 148
<TABLE>
<CAPTION>
U.S. GOVERNMENT MONEY MARKET FUND
-------------------------------------------------------------------------------------
INSTITUTIONAL
PLATINUM CLASS CLASS
--------------------------------------------------------- ---------------------
PERIOD YEAR ENDED
YEAR ENDED OCTOBER 31, ENDED OCTOBER 31,
--------------------------------------- OCTOBER 31, ---------------------
FOR A SHARE OUTSTANDING
THROUGHOUT THE PERIOD: 1999 1998 1997(B) 1996(A) 1996 1995
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period............................... $ x.xx $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- ------- -------
Net investment income................. x.xx(C) 0.05(C) 0.05(C) 0.04(C) 0.05(C) 0.06
Less dividends from net investment
income............................... (x.xx) (0.05) (0.05) (0.04) (0.05) (0.06)
------- ------- ------- ------- ------- -------
Net asset value, end of period........ $ x.xx $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= ======= =======
Total return (annualized)............. x.xx% 4.71% 4.61% 4.58%(D) 5.29% 5.67%
======= ======= ======= ======= ======= =======
Ratios and supplemental data:
Net assets, end of period (in
thousands)......................... $xx,xxx $78,412 $68,439 $52,153 $25,595 $47,184
Ratios to average net assets
(annualized)(E)
Expenses........................... x.xx%(C) 1.01%(C) 0.99%(C) 1.00%(C) 0.32%(C) 0.32%
Net investment income.............. x.xx%(C) 4.62%(C) 4.53%(C) 4.35%(C) 5.16%(C) 5.49%
</TABLE>
(A) The U.S. Government Money Market Fund-Platinum Class commenced active
operations on November 7, 1995.
(B) Prior to March 1, 1997, the American AAdvantage U.S. Government Money Market
Fund was known as the U.S. Treasury Money Market Fund and operated under
different investment policies.
(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 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.
(E) Operating results exclude fees waived by the Manager. Had the Platinum Class
of the Fund paid such fees, the ratio of expenses and net investment income
to average net assets would have been 1.02% and 4.62%, respectively, for the
year ended October 31, 1998 and x.xx% and x.xx%, respectively, for the year
ended October 31, 1999.
- --------------------------------------------------------------------------------
Additional Information 30 Prospectus
<PAGE> 149
<TABLE>
<CAPTION>
MONEY MARKET MILEAGE FUND
---------------------------------------------------------------------
PLATINUM CLASS MILEAGE
--------------------------------------------------- CLASS
YEAR ENDED -----------
OCTOBER 31, PERIOD ENDED YEAR ENDED
-------------------------------- OCTOBER 31, OCTOBER 31,
FOR A SHARE OUTSTANDING
THROUGHOUT THE PERIOD: 1999 1998 1997 1996(A) 1996
-------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period............... $ x.xx $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- ------- ------- ------- --------
Net investment income.............................. x.xx%(B) 0.05(B) 0.05(B) 0.03(B) 0.05(B)
Less dividends from net investment income.......... (x.xx) (0.05) (0.05) (0.03) (0.05)
-------- ------- ------- ------- --------
Net asset value, end of period..................... $ x.xx $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======= ======= ======= ========
Total return (annualized).......................... x.xx% 4.74% 4.71% 4.78% 5.12%
======== ======= ======= ======= ========
Ratios and supplemental data:
Net assets, end of period (in thousands).......... $xxx,xxx $73,875 $49,184 $15,429 $106,709
Ratios to average net assets (annualized)(C)
Expenses........................................ x.xx%(B) 1.09%(B) 1.09%(B) 1.09%(B) 0.67%(B)
Net investment income........................... x.xx%(B) 4.64%(B) 4.64%(B) 4.48%(B) 5.02%(B)
</TABLE>
(A) The Money Market Mileage Fund-Platinum Class commenced active operations on
January 29, 1996, and at that time the existing shares of the Fund were
designated as Mileage 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) Operating results exclude expenses reimbursed by the Manager. Had the
Platinum Class of 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, 1.12% and 4.61%,
respectively, for the year ended October 31, 1998 and x.xx% and x.xx%,
respectively, for the year ended October 31, 1999. Had the Mileage Class of
the Fund paid such fees, the ratio of expenses and net investment income to
average net assets would have been 0.78% and 4.91%, respectively, for the
year ended October 31, 1996.
- --------------------------------------------------------------------------------
Prospectus 31 Additional Information
<PAGE> 150
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.
Annual Report/Semi-Annual Report
The Funds' Annual and Semi-Annual Reports list each Fund's actual investments as
of the report's date. They also include a discussion by the Manager of market
conditions and investment strategies that significantly affected the Funds'
performance. The report of the Funds' independent auditors is included in the
Annual Report.
Statement of Additional Information
The SAI contains more details about the Funds and their investment policies. The
SAI is incorporated in this Prospectus by reference (it is legally part of this
Prospectus). A current SAI is on file with the Securities and Exchange
Commission (SEC).
To obtain more information about the Funds or to request a copy of the documents
listed above:
<TABLE>
<S> <C>
BY TELEPHONE: BY MAIL:
Call (800) 388-3344 American AAdvantage Funds
P.O. Box 619003, MD5645
DFW Airport, TX 75261-9003
BY E-MAIL: ON THE INTERNET:
american [email protected] Visit our website at www.aafunds.com
Visit the SEC website at www.sec.gov
</TABLE>
Copies of these documents may also be obtained from the SEC Public Reference
Room in Washington, D.C. by mailing a request, including a duplicating fee to:
SEC's Public Reference Section, 450 5th Street NW, Washington, D.C. 20549-6009.
The Public Reference Room can be reached at (202) 942-8090.
Fund Service Providers
<TABLE>
<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>
- --------------------------------------------------------------------------------
Additional Information 32 Prospectus
<PAGE> 151
STATEMENT OF ADDITIONAL INFORMATION
AMERICAN AADVANTAGE FUNDS(R)
-- AMR CLASS(SM) --
-- INSTITUTIONAL CLASS --
-- PLANAHEAD CLASS(R) --
MARCH 1, 2000
The American AAdvantage Balanced Fund(SM) (the "Balanced Fund"),
American AAdvantage Large Cap Value Fund(SM), formerly known as the American
AAdvantage Growth and Income Fund prior to March 1, 1999 and as the American
AAdvantage Equity Fund prior to August 1, 1994 (the "Large Cap Value Fund"),
American AAdvantage International Equity Fund(SM) (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 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"), (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 State Street Equity 500 Index
Portfolio ("Equity 500 Index Portfolio"), which has an identical investment
objective. Prior to March 1, 2000, the S&P 500 Index Fund invested all of its
investable assets in the BT Equity 500 Index Portfolio, a separate investment
company managed by Bankers Trust Company ("BT"). 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 State Street Bank and Trust Company ("State Street"), through its
State Street Global Advisors division.
This SAI should be read in conjunction with an AMR Class, an
Institutional Class or a PlanAhead Class prospectus, dated March 1, 2000,
(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.
<PAGE> 152
TABLE OF CONTENTS
<TABLE>
<S> <C>
Non-Principal Investment Strategies and Risks............................................................................2
Investment Restrictions..................................................................................................3
Temporary Defensive Position.............................................................................................7
Portfolio Turnover.......................................................................................................7
Trustees and Officers of the Trust and the AMR Trust.....................................................................8
Trustees and Officers of the Equity 500 Index Portfolio.................................................................10
Control Persons and 5% Shareholders.....................................................................................11
Investment Advisory Agreements..........................................................................................13
Management, Administrative Services and Distribution Fees...............................................................14
Other Service Providers.................................................................................................15
Portfolio Securities Transactions.......................................................................................15
Redemptions in Kind.....................................................................................................18
Net Asset Value.........................................................................................................18
Tax Information.........................................................................................................18
Yield and Total Return Quotations.......................................................................................21
Description of the Trust................................................................................................24
Other Information.......................................................................................................25
Financial Statements....................................................................................................37
Appendix A.............................................................................................................A-1
</TABLE>
NON-PRINCIPAL INVESTMENT STRATEGIES AND RISKS
In addition to the investment strategies described in the Prospectuses,
the Balanced Fund, the Large Cap Value 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 Corporation or Moody's
Investors Service, 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
2
<PAGE> 153
transaction, the obligations have not yet been issued. When purchasing
securities on a when-issued or forward commitment basis, a segregated
account of liquid assets at least equal to the value of purchase
commitments for such securities will be maintained until the settlement
date.
2. Invest in other investment companies (including affiliated
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.
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's Board of Trustees ("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 Prospectuses,
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
3
<PAGE> 154
shareholders and will cast its votes as instructed by its shareholders. The
percentage of a Fund's votes representing that Fund's shareholders not voting
will be voted by the Board in the same proportion as those Fund shareholders who
do, in fact, vote.
No Portfolio of the AMR Trust may:
1. Purchase or sell real estate or real estate limited partnership
interests, provided, however, that the Portfolio may invest in
securities secured by real estate or interests therein or issued by
companies which invest in real estate or interests therein when
consistent with the other policies and limitations described in the
Prospectuses.
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 Prospectuses.
In addition, the Balanced Portfolio, Large Cap Value Portfolio, Small
Cap Value Portfolio, and International Equity Portfolio may purchase or
sell futures contracts and options on futures contracts as a method for
keeping cash on hand to meet shareholder redemptions or other needs
while maintaining exposure to the stock market.
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 addition, the Balanced Portfolio,
Large Cap Value Portfolio, Small Cap Value Portfolio, and International
Equity Portfolio may borrow money from the Manager or any of its
affiliates for temporary purposes. The aggregate amount of borrowing
for each Portfolio is not to exceed 10% of the value of the Portfolio's
assets at the time of borrowing. 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:
4
<PAGE> 155
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 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; however, pursuant to exemptive relief granted by the SEC, a Portfolio
may invest up to 25% of its total assets in the aggregate of the Money Market
Portfolio, Municipal Money Market Portfolio, and U.S. Government Money Market
Portfolio. 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 more than 33 1/3% of the value of its total assets less all
liabilities and indebtedness (other than such borrowings).
(2) Underwrite securities issued by other persons except to the extent
that, in connection with the disposition of its portfolio investments, it may be
deemed to be an underwriter under certain federal securities laws.
(3) Purchase or sell real estate, although it may purchase securities of
issuers which deal in real estate, securities which are secured by interests in
real estate, and securities which represent interests in real estate, and it may
acquire and dispose of real estate or interests in real estate acquired through
the exercise of its rights as a holder of debt obligations secured by real
estate or interests therein.
(4) Purchase or sell commodities or commodity contracts, except that it may
purchase and sell financial futures contracts and options and may enter into
foreign exchange contracts and other financial transactions not involving the
direct purchase or sale of physical commodities.
(5) Make loans, except by purchase of debt obligations in which the
Portfolio may invest consistent with its investment policies, by entering into
repurchase agreements, or by lending its portfolio securities.
(6) With respect to 75% of its total assets, invest in the securities of
any issuer if, immediately after such investment, more than 5% of the total
assets of the Portfolio (taken at current value) would be invested in the
securities of such issuer; provided that this limitation does not apply to
obligations issued or guaranteed as to interest or principal by the U.S.
government or its agencies or instrumentalities.
(7) With respect to 75% of its total assets, acquire more than 10% of the
outstanding voting securities of any issuer.
(8) Purchase securities (other than securities of the U.S. government, its
agencies or instrumentalities) if, as a result of such purchase, more than 25%
of the Portfolio's total assets would be invested in any one industry.
5
<PAGE> 156
(9) Issue any class of securities which is senior to the Portfolio's
beneficial interests, to the extent prohibited by the Investment Company Act of
1940, as amended.
In addition, it is contrary to the Portfolio's present policy, which may be
changed without interestholder approval, to invest in (a) securities which are
not readily marketable, (b) securities restricted as to resale (excluding
securities determined by the Trustees of the Trust (or the person designated by
the Trustees of the Trust to make such determinations) to be readily
marketable), and (c) repurchase agreements maturing in more than seven days, if,
as a result, more than 15% of the Portfolio's net assets (taken at current
value) would be invested in securities described in (a), (b) and (c) above.
All percentage limitations on investments will apply at the time of the making
of an investment and shall not be considered violated unless an excess or
deficiency occurs or exists immediately after and as a result of such
investment. Except for the investment restrictions listed above as fundamental
or to the extent designated as such in the Prospectus with respect to the
Portfolio, the other investment policies described in this SAI or in the
Prospectus are not fundamental and may be changed by approval of the Trustees.
6
<PAGE> 157
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, 1998 and 1999.
<TABLE>
<CAPTION>
Portfolio 1998 1999
- --------- ---- ----
<S> <C> <C>
Short-Term Bond 74% 115%
Intermediate Bond 181% 123%
</TABLE>
High portfolio turnover can increase a Fund's transaction costs and
generate additional capital gains or losses. The portfolio turnover rate for the
Short-Term Bond and Intermediate Bond Funds may continue to exceed 100% due to
the active style in which the portfolios are managed in response to changes in
market conditions.
7
<PAGE> 158
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* (52) 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); Trustee, American Select Funds (1999-Present).
Alan D. Feld (63) 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); Trustee, American Select Funds (1999-Present).
Ben J. Fortson (67) 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); Trustee, American
Select Funds (1999-Present).
John S. Justin (83) Trustee Chief Executive Officer (Emeritus), Justin Industries, Inc.
2821 West Seventh Street (a diversified holding company) (1969-Present); Executive
Fort Worth, Texas 76107 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); Trustee, American Select Funds (1999-Present).
Stephen D. O'Sullivan* (64) Trustee Consultant (1994-Present); Vice President and Controller,
American Airlines, Inc. (1985-1994); Trustee, American
AAdvantage Mileage Funds (1995-Present); Trustee, American
Select Funds (1999-Present).
Roger T. Staubach (58) 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, Brinker International
(1993-Present); Director, International Home Foods, Inc.
(1997-Present); 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); Trustee,
American Select Funds (1999-Present).
</TABLE>
8
<PAGE> 159
<TABLE>
<CAPTION>
POSITION WITH
NAME, AGE AND ADDRESS EACH TRUST PRINCIPAL OCCUPATION DURING PAST 5 YEARS
--------------------- ---------- ----------------------------------------
<S> <C> <C>
Kneeland Youngblood (44) Trustee Managing Partner, Pharos Capital Group, L.L.C. (a private
100 Crescent Court equity firm) (1998-Present); Trustee, Teachers Retirement
Suite 1740 System of Texas (1993-Present); Director, United States
Dallas, Texas 75201 Enrichment Corporation (1993-1998), 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); Trustee, American Select Funds (1999-Present).
Nancy A. Eckl (37) Vice President Vice President, Trust Investments, AMR Investment Services, Inc.
(1990-Present).
Michael W. Fields (46) Vice President Vice President, Fixed Income Investments, AMR Investment Services,
Inc. (1988-Present).
Barry Y. Greenberg (36) Vice President and Vice President, Legal and compliance, AMR Investment Services,
Assistant Secretary Inc. (1995-Present); Branch Chief (1992-1995) and Staff
Attorney (1988-1992), Securities and Exchange Commission.
Rebecca L. Harris (33) Treasurer Vice President, Finance (1995-Present), Controller (1991-
1995), AMR Investment Services, Inc.
John B. Roberson (41) Vice President Vice President, Sales and Marketing, AMR Investment
Services, Inc. (1991-Present).
Robert J. Zutz (47) Secretary Partner, Kirkpatrick & Lockhart LLP (law firm)
1800 Massachusetts Ave. NW
2nd Floor
Washington, D.C. 20036
</TABLE>
* Messrs. Quinn and O'Sullivan are deemed to be "interested persons" 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, the American AAdvantage
Mileage Funds, the American Select Funds 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 pay American Airlines
the flight service charges incurred for these travel arrangements. The Trust and
the AMR Trust compensate each Trustee with payments in an amount equal to the
Trustees' income tax on the value of this free airline travel. Mr. O'Sullivan,
as a retiree of American Airlines, Inc., already receives flight benefits. The
Trusts compensate Mr. O'Sullivan up to $10,000 annually 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, 1999. The compensation amounts below include the flight
service charges paid by the Trust and the AMR Trust to American Airlines.
9
<PAGE> 160
<TABLE>
<CAPTION>
Total Compensation
Aggregate Pension or Retirement From American
Compensation Benefits Accrued as Estimated Annual AAdvantage Funds
From the Part of the Benefits Upon Complex
Name of Trustee Trust Trust's Expenses Retirement (31 Funds)
- --------------- ------------ --------------------- ---------------- ------------------
<S> <C> <C> <C> <C>
William F. Quinn $ 0 $0 $0 $ 0
Alan D. Feld $ xxx $0 $0 $ xxx
Ben J. Fortson $ xxx $0 $0 $ xxx
John S. Justin $ xxx $0 $0 $ xxx
Stephen D. O'Sullivan $ xxx $0 $0 $ xxx
Roger T. Staubach $ xxx $0 $0 $ xxx
Kneeland Youngblood $ xxx $0 $0 $ 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.
<TABLE>
<CAPTION>
POSITION WITH
EQUITY 500 INDEX
NAME, AGE AND ADDRESS PORTFOLIO PRINCIPAL OCCUPATION DURING PAST 5 YEARS
- --------------------- ------------------- ----------------------------------------
<S> <C> <C>
</TABLE>
10
<PAGE> 161
Prior to March 1, 2000, the S&P 500 Index Fund invested all of its
investable assets in the BT Equity 500 Index Portfolio. The BT Equity 500 Index
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, ICC, 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, 1998, and 1999 the BT Equity 500 Index Portfolio incurred Trustees
fees equal to $2,982 and $XXX, respectively.
The following table reflects fees paid to the Trustees of the BT 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, 1999.
<TABLE>
<CAPTION>
TOTAL COMPENSATION FROM
AGGREGATE COMPENSATION BT FUNDS COMPLEX
FROM THE BT EQUITY PAID TO TRUSTEES
NAME OF TRUSTEE 500 INDEX PORTFOLIO (24 FUNDS)
- --------------- ------------------- ----------
<S> <C> <C>
</TABLE>
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, 2000:
AMR Corporation and subsidiary companies and Employee Benefit Trusts
thereof own 100% of the shares of the AMR Class of the Balanced Fund, the Large
Cap Value Fund, the Small Cap Value Fund, the International Equity Fund, the
Intermediate Bond Fund and the Short-Term Bond Fund.
11
<PAGE> 162
In addition, the following persons own 5% or more of the outstanding
shares of a Fund or Class as of January 31, 2000:
12
<PAGE> 163
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, 1997, 1998 and 1999:
<TABLE>
<CAPTION>
Investment Advisory Investment Advisory Investment Advisory
Adviser Fees for 1997 Fees for 1998 Fees for 1999
------- ------------------- ------------------- -------------------
<S> <C> <C> <C>
Barrow, Hanley Mewhinney & Strauss, Inc. $1,052,749 $1,324,073 $XXX
Brandywine Asset Management, Inc. $ 857,875 $1,291,065 $XXX
GSB Investment Management, Inc. $ 804,221 $ 936,043 $XXX
Hotchkis and Wiley $1,607,851 $1,970,618 $XXX
Independence Investment Associates, Inc. $1,110,438 $1,258,417 $XXX
Lazard Asset Management N/A* N/A* $XXX
Morgan Stanley Asset Management $ 885,253 $1,231,651 $XXX
Templeton Investment Counsel, Inc. $ 669,848 $ 994,381 $XXX
</TABLE>
* Lazard Asset Management was not an investment adviser to the Funds during this
period.
Under the terms of the Equity 500 Index Portfolio's Investment
Advisory Agreement with State Street, State Street manages the Equity 500 Index
Portfolio subject to the supervision and direction of the Equity 500 Index
Portfolio Board. State Street 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.
State Street 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 State Street, 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.
13
<PAGE> 164
Prior to March 1, 2000, the S&P 500 Index Fund invested all of its
investable assets in the BT Equity 500 Index Portfolio. For the years ended
December 31, 1997, 1998 and 1999, BT earned $2,430,147, $3,186,503 and $XXX,
respectively, as compensation for investment advisory services provided to the
BT Equity 500 Index Portfolio. During the same periods, BT reimbursed
$1,739,490, $799,296 and $XXX, respectively, to the BT Equity 500 Index
Portfolio to cover expenses.
Each Investment Advisory Agreement will automatically terminate if
assigned, and may be terminated without penalty at any time by the Manager, by a
vote of a majority of the Trustees or by a vote of a majority of the outstanding
voting securities of the applicable Fund on no less than thirty (30) days' nor
more than sixty (60) days' written notice to the investment adviser, or by the
investment adviser upon sixty (60) days' written notice to the Trust. The
Investment Advisory Agreements will continue in effect provided that annually
such continuance is specifically approved by a vote of the Trustees, including
the affirmative votes of a majority of the Trustees who are not parties to the
Agreement or "interested persons" (as defined in the 1940 Act) of any such
party, cast in person at a meeting called for the purpose of considering such
approval, or by the vote of shareholders.
SWS Financial Services, Inc. ("SWS"), 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, the American AAdvantage
Mileage Funds and the American Select 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: 1997, $13,730,443, of which $7,061,014 was paid by the
Manager to the other investment advisers; 1998, $17,230,000, of which
approximately $8,675,000 was paid by the Manager to the other investment
advisers and 1999, $XXX, of which approximately $XXX was paid by the Manager to
the other investment advisers. Management fees in the amount of approximately
$7,309, $407,195 and $XXX were waived by the Manager during the fiscal years
ended October 31, 1997, 1998 and 1999.
Under the Management Agreement, the Manager presently monitors the
services provided by State Street 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.
14
<PAGE> 165
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: 1997,
$4,538,345, 1998, $7,476,000 and 1999, $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, 1998, $175,025 and
1999, $XXX.
State Street provides administrative services to the Equity 500 Index
Portfolio. Under the administration and services agreement between the Equity
500 Index Portfolio and State Street, State Street 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.
State Street generally will assist in all aspects of the Portfolio's operations;
supply and maintain office facilities (which may be in State Street'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 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.
Prior to March 1, 2000, the S&P 500 Index Fund invested all of its
investable assets in the BT Equity 500 Index Portfolio. For the years ended
December 31, 1997, 1998 and 1999, BT earned $1,215,073, $676,625 and $XXX,
respectively, as compensation for administrative and other services provided to
the BT 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 broker-dealers.
OTHER SERVICE PROVIDERS
The transfer agent for the Trust is State Street Bank & Trust 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. In addition to its other duties as
custodian, pursuant to instructions given by the Manager, State Street invests
certain excess cash balances of certain funds in various futures contracts.
State Street also serves as custodian and transfer agent for the assets of the
Equity 500 Index Portfolio. The independent auditor for the Funds, the AMR Trust
and the Equity 500 Index Portfolio is Ernst & Young LLP, Dallas, Texas and
Boston, Massachusetts.
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
15
<PAGE> 166
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.
The Portfolios of the AMR Trust have established brokerage commission
recapture arrangements with certain brokers or dealers. If a Portfolio
investment adviser chooses to execute a transaction through a participating
broker, the broker rebates a portion of the commission back to the Portfolio.
Any collateral benefit received through participation in the commission
recapture program is directed exclusively to the Portfolios. Neither the Manager
nor any of the investment advisers receive any benefits from the commission
recapture program. A Portfolio investment adviser's participation in the
brokerage commission recapture program is optional. Each investment adviser
retains full discretion in selecting brokerage firms for securities transactions
and is instructed to use the commission recapture program for a transaction only
if it is consistent with the investment adviser's obligation to seek the best
execution available.
State Street may utilize the expertise of any of its worldwide
subsidiaries and affiliates to assist in its role as investment adviser to the
Equity 500 Index Portfolio. All orders for investment transactions on behalf of
the Equity 500 Index Portfolio are placed by State Street with broker-dealers
and other financial intermediaries that it selects, including those affiliated
with State Street. A State Street affiliate will be used in connection with a
purchase or sale of an investment for the Equity 500 Index Portfolio only if
State Street 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 State Street 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 State Street.
In certain instances there may be securities that are suitable for the
Equity 500 Index Portfolio as well as for one or more of State Street's other
clients. Investment decisions for the Equity 500 Index Portfolio and for State
Street'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.
In selecting brokers or dealers to execute particular transactions,
investment advisers are authorized to consider "brokerage and research services"
(as those terms are defined in Section 28(e) of the Securities Exchange Act of
1934), provision of statistical quotations (including the quotations necessary
to determine a Portfolio's net asset value), the sale of Trust shares by such
broker-dealer or the servicing of Trust shareholders by such broker-dealer, and
other information provided to the applicable Portfolio, to the Manager, BT
and/or to the investment advisers (or their affiliates), provided, however, that
the investment adviser determines that it has received the best net price and
execution available. The investment advisers are also authorized to cause a
Portfolio to pay a commission to a broker or dealer who provides such brokerage
and research services for executing a portfolio transaction which is in excess
of the amount of the commission another broker or dealer would have charged for
effecting that transaction. The Trustees, the Manager or the investment
advisers, as appropriate, must determine in good faith, however, that such
commission was reasonable in relation to the value of the brokerage and research
services provided viewed in terms of that particular transaction or in terms of
all the accounts over which the Manager or the investment adviser exercises
investment discretion.
For the fiscal years ended October 31, 1997, 1998 and 1999, the
following brokerage commissions were paid by the Portfolios:
<TABLE>
<CAPTION>
Portfolio 1997 1998 1999
- --------- ---- ---- ----
<S> <C> <C> <C>
Balanced $ 562,493 $ 520,881 $XXX
Large Cap Value $1,192,792 $1,643,540 $XXX
Small Cap Value* $ 0 $ 0 $XXX
International Equity $ 956,160 $1,833,458 $XXX
Intermediate Bond** $ 0 $1,833,458 $XXX
Short-Term Bond $ 0 $1,833,458 $XXX
Money Market Funds $ 0 $1,833,458 $XXX
</TABLE>
* The Small Cap Value Portfolio commenced operations on December 31, 1998.
**The Intermediate Bond Portfolio commenced operations on September 15, 1997.
The commissions listed above were paid by the corresponding Portfolios
of the AMR Trust. Shareholders of the Funds bear only their pro-rata portion.
For the fiscal years ended December 31, 1997, 1998 and 1999 the BT
Equity 500 Index Portfolio paid the following brokerage commissions: $341,058,
$534,801 and $XXX. Shareholders of the S&P 500 Index Fund bear only their
pro-rata portion of the brokerage commissions.
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
16
<PAGE> 167
portfolio transactions and receive usual and customary brokerage commissions
(within the meaning of Rule 17e-1 under the 1940 Act) for doing so.
During the fiscal year ended October 31, 1997, the 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 $ 43,886
Large Cap Value Merrill Lynch & Co. Hotchkis and Wiley $ 105,166
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
Large Cap Value Portfolio and the International Equity Portfolio paid to
affiliated brokers in 1997 were 7.80%, 8.82% and 16.04%, respectively. The
transactions represented 5.75% of the Balanced Portfolio, 6.20% of the Large Cap
Value 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>
Balanced Merrill Lynch & Co. Hotchkis and Wiley $ 38,538
Balanced Morgan Stanley Intl. Morgan Stanley Asset Management $ 16,486
Balanced Legg Mason Wood Walker Legg Mason, Inc. $ 930
Large Cap Value Merrill Lynch & Co. Hotchkis and Wiley $ 131,987
Large Cap Value Morgan Stanley Intl. Morgan Stanley Asset Management $ 61,469
Large Cap Value Legg Mason Wood Walker Legg Mason, Inc. $ 4,598
International Equity Merrill Lynch & Co. Hotchkis and Wiley $ 29,669
International Equity Morgan Stanley Intl. Morgan Stanley Asset Management $ 30,057
International Equity Robert Fleming & Co. Rowe-Price Fleming International, Inc. $ 93,606
International Equity Ord Minnett Rowe-Price Fleming International, Inc. $ 13,959
International Equity Jardine Fleming Rowe-Price Fleming International, Inc. $ 3,846
</TABLE>
The percentages of total commissions of the Balanced Portfolio, the
Large Cap Value Portfolio and the International Equity Portfolio paid to
affiliated brokers in 1998 were 10.74%, 12.05% and 9.33%, respectively. The
transactions represented 7.09% of the Balanced Portfolio, 8.81% of the Large Cap
Value Portfolio and 9.14% of the International Equity Portfolio's total dollar
value of portfolio transactions for the fiscal year ended October 31, 1998.
During the fiscal year ended October 31, 1999, the following
commissions were paid to affiliated brokers:
<TABLE>
<CAPTION>
Portfolio Broker Affiliated With Commission
- --------- ------ --------------- ----------
<S> <C> <C> <C>
</TABLE>
The percentages of total commissions of the Balanced Portfolio, the
Large Cap Value Portfolio, the Small Cap Value Portfolio and the International
Equity Portfolio paid to affiliated brokers in 1999 were x.xx%, x.xx% x.xx% and
x.xx%, respectively. The transactions represented x.xx% of the Balanced
Portfolio, x.xx% of the Large Cap Value Portfolio, x.xx% of the Small Cap Value
Portfolio and x.xx% of the International Equity Portfolio's total dollar value
of portfolio transactions for the fiscal year ended October 31, 1999.
17
<PAGE> 168
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:
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.
18
<PAGE> 169
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 Large Cap Value, the International Equity, or the
Small Cap Value Portfolio acquires stock in a foreign corporation that is a
"passive foreign investment company" ("PFIC") and holds the stock beyond the end
of the year of acquisition, its corresponding Fund will be subject to federal
income tax on the Fund's share of a portion of any "excess distribution"
received by the Portfolio on the stock or of any gain realized by the Portfolio
from disposition of the stock (collectively "PFIC income"), plus interest
thereon, even if the Fund distributes the PFIC income as a taxable dividend to
its shareholders. A Fund may avoid this tax and interest if its corresponding
Portfolio elects to treat the PFIC as a "qualified electing fund;" however, the
requirements for that election are difficult to satisfy. These Portfolios
currently do not intend to acquire securities that are considered PFICs.
Hedging strategies, such as entering into forward contracts and selling
and purchasing options and futures contracts, involve complex rules that will
determine for federal income tax purposes the amount, character and timing of
recognition of gains and losses the Balanced, Large Cap Value, Small Cap Value,
International Equity 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. The Balanced, Large Cap Value and Small Cap Value
Funds' share of their corresponding Portfolios' income from futures contracts
will qualify as allowable income under the Income Requirement. Similarly, the
S&P 500 Index Fund's share
19
<PAGE> 170
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 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.
20
<PAGE> 171
The foregoing is only a summary of some of the important federal tax
considerations affecting the Funds and their shareholders and is not intended as
a substitute for careful tax planning. Accordingly, prospective investors are
advised to consult their own tax advisers for more detailed information
regarding the above and for information regarding federal, state, local and
foreign taxes.
YIELD AND TOTAL RETURN QUOTATIONS
A quotation of yield on shares of each class of the Money Market Funds
may appear from time to time in advertisements and in communications to
shareholders and others. Quotations of yields are indicative of yields for the
limited historical period used but not for the future. Yield will vary as
interest rates and other conditions change. Yield also depends on the quality,
length of maturity and type of instruments invested in by the corresponding
Portfolios of the Money Market Funds, and the applicable class's operating
expenses. A comparison of the quoted yields offered for various investments is
valid only if yields are calculated in the same manner. In addition, other
similar investment companies may have more or less risk due to differences in
the quality or maturity of securities held.
The yields of the Money Market Funds may be calculated in one of two
ways:
(1) Current Yield--the net average annualized return without
compounding accrued interest income. For a 7-day current yield, this is
computed by dividing the net change in value over a 7 calendar-day
period of a hypothetical account having one share at the beginning of a
7 calendar-day period by the value of the account at the beginning of
this period to determine the "base period return." The quotient is
multiplied by 365 divided by 7 and stated to two decimal places. A
daily current yield is calculated by multiplying the net change in
value over one day by 365 and stating it to two decimal places. Income
other than investment income and capital changes, such as realized
gains and losses from the sale of securities and unrealized
appreciation and depreciation, are excluded in calculating the net
change in value of an account. However, this calculation includes the
aggregate fees and other expenses that are charged to all shareholder
accounts in a class of a Fund. In determining the net change in value
of a hypothetical account, this value is adjusted to reflect the value
of any additional shares purchased with dividends from the original
share and dividends declared on both the original share and any such
additional shares.
(2) Effective Yield--the net average annualized return as computed by
compounding accrued interest income. In determining the 7-day effective
yield, a class of a Fund will compute the "base period return" in the
same manner used to compute the "current yield" over a 7 calendar-day
period as described above. One is then added to the base period return
and the sum is raised to the 365/7 power. One is subtracted from the
result, according to the following formula:
(365/7)
EFFECTIVE YIELD = [ (BASE PERIOD RETURN + 1) ] - 1
Based on these formulas, the current and effective yields were as
follows for the periods and Funds indicated:
<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, 1999 October 31, 1999 October 31, 1999
---------------- ---------------- -------------------
<S> <C> <C> <C>
Institutional Class
Money Market Fund 5.44% 5.42% 5.57%
Municipal Money Market Fund 3.20% 3.17% 3.22%
U.S. Government Money Market Fund 5.21% 5.20% 5.33%
PlanAhead Class
Money Market Fund 5.15% 5.12% 5.25%
Municipal Money Market Fund 3.01% 2.98% 3.03%
U.S. Government Money Market Fund 4.74% 4.73% 4.84%
</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
21
<PAGE> 172
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, 1999
were:
<TABLE>
<CAPTION>
Current Effective
Class Tax Equivalent Yield Tax Equivalent Yield
- ----- -------------------- --------------------
<S> <C> <C>
Institutional (based on a 35.0% corporate tax rate) 4.88% 4.95%
PlanAhead (based on a 39.6% personal tax rate) 4.93% 5.02%
</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, 1999 for the Short-Term Bond Fund was 6.74%, 6.57%
and 6.24%, for the AMR, Institutional and PlanAhead Classes, respectively. The
30-day yield for the period ended October 31, 1999 for the Intermediate Bond
Fund was 6.39%, 6.18% and 5.83%, for the AMR, Institutional and PlanAhead
Classes, respectively.
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 1999 was 6.53%, 6.36% and 6.04%,
respectively. The monthly distribution rate for the AMR Institutional and
PlanAhead Classes of the Intermediate Bond Fund for the month of October 1999
was 6.39%, 6.19% and 5.84%, respectively. The "monthly distribution rate" is a
non-standardized performance calculation and when used in an advertisement will
be accompanied by the appropriate standardized SEC calculations.
The advertised total return for a class of a Fund is calculated by
equating an initial amount invested in a class of a Fund to the ending
redeemable value, according to the following formula:
(N)
P(1 + T) = ERV
where "P" is a hypothetical initial payment of $1,000; "T" is the average annual
total return for the class; "n" is the number of years involved; and "ERV" is
the ending redeemable value of a hypothetical $1,000 payment made in the class
at the beginning of the investment period covered.
Based on this formula, annualized total returns were as follows for the
periods and Funds indicated:
22
<PAGE> 173
<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,
1999(1) 1999(1) 1999(1) 1999(1)(3)
---------------- ---------------- ------------ ------------------
<S> <C> <C> <C> <C>
AMR Class
Balanced Fund 0.83% 13.16% 11.06% 10.55%
Large Cap Value Fund(7) 1.97% 15.87% 12.82% 12.16%
Small Cap Value Fund N/A(2) N/A(2) N/A(2) -9.20%
International Equity Fund 20.27% 13.81% N/A(2) 12.29%
Intermediate Bond Fund -1.06% N/A(2) N/A(2) 5.01%
Short-Term Bond Fund 2.83% 5.97% 6.46% 6.63%
Institutional Class
Balanced Fund 0.53% 12.84% 10.90% 10.42%
Large Cap Value Fund(7) 1.72% 15.57% 12.67% 12.04%
Small Cap Value Fund N/A(2) N/A(2) N/A(2) -9.30%
International Equity Fund 19.98% 13.50% N/A(2) 12.10%
S&P 500 Index Fund(4) 25.36% N/A(2) N/A(2) 25.80%
Intermediate Bond Fund -0.83% N/A(2) N/A(2) 5.13%
Short-Term Bond Fund 2.56% 5.73% 6.32% 6.51%
Money Market Fund 5.09% 5.57% 5.50% 6.00%
Municipal Money Market Fund(5) 2.92% 3.45% N/A(2) 3.28%
U.S. Government Money Market Fund 4.94% 5.35% N/A(2) 4.69%
PlanAhead Class
Balanced Fund 0.22% 12.50% 10.73% 10.28%
Large Cap Value Fund(7) 1.41% 15.17% 12.46% 11.87%
Small Cap Value Fund N/A(2) N/A(2) N/A(2) -9.50%
International Equity Fund 19.68% 13.14% N/A(2) 11.87%
S&P 500 Index Fund(4) 24.91% N/A(2) N/A(2) 25.59%
Intermediate Bond Fund -0.98% N/A(2) N/A(2) 4.91%
Short-Term Bond Fund(6) 2.21% 5.46% 6.19% 6.40%
Money Market Fund 4.79% 5.24% 5.32% 5.86%
Municipal Money Market Fund(5) 2.68% 3.15% N/A(2) 3.02%
U.S. Government Money Market Fund 4.56% 4.98% N/A(2) 4.43%
</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 and returns of the applicable
class from the commencement of operations of the new classes through October 31,
1999. 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
Large Cap Value 7/17/87 8/1/94 8/1/94
Small Cap Value 12/31/98 3/1/99 3/1/99
International Equity 8/7/91 8/1/94 8/1/94
S&P 500 Index(4) 1/1/97 N/A 3/1/98
Intermediate Bond 9/15/97 3/1/99 3/1/98
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>
(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.
(7) Prior to March 1, 1999, the Large Cap Value Fund was known as the Growth
and Income Fund and operated under different investment policies.
See Appendix A for historical performance of the S&P 500 Composite Stock Price
Index.
23
<PAGE> 174
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, Merrill
Lynch, 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 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 Large Cap Value, 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.
24
<PAGE> 175
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
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.
25
<PAGE> 176
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.
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
26
<PAGE> 177
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. Futures contracts will be traded for the same
purposes as entering into forward contracts. The use of futures contracts by the
Equity 500 Index Portfolio is explained further under "Index Futures Contracts
and Options on Index Futures Contracts."
The purchase of futures can serve as a long hedge, and the sale of futures
can serve as a short hedge.
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract a Portfolio is required to deposit "initial
deposit" consisting of cash or U.S. Government Securities in an amount generally
equal to 10% or less of the contract value. Margin must also be deposited when
writing a call or put option on a futures contract, in accordance with
applicable exchange rules. Unlike margin in securities transactions, initial
margin on futures contracts does not represent a borrowing, but rather is in the
nature of a performance bond or good-faith deposit that is returned to the
Portfolio at the termination of the transaction if all contractual obligations
have been satisfied. Under certain circumstances, such as periods of high
volatility, a Portfolio may be required by a futures exchange to increase the
level of its initial margin payment, and initial margin requirements might be
increased generally in the future by regulatory action.
Subsequent "variation margin" payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
"marking-to-market." Variation margin does not involve borrowing, but rather
represents a daily settlement of a Portfolio's obligations to or from a futures
broker. When the Portfolio purchases or sells a futures contract, it is subject
to daily variation margin calls that could be substantial in the event of
adverse price movements. If a Portfolio has insufficient cash to meet daily
variation margin requirements, it might need to sell securities at a time when
such sales are disadvantageous.
Purchasers and sellers of futures contracts can enter into offsetting
closing transactions, by selling or purchasing, respectively, an instrument
identical to the instrument purchased or sold. Positions in futures contracts
may be closed only on a futures exchange or board of trade that provides a
secondary market. The Portfolios intend to enter into futures contracts only on
exchanges or boards of trade where there appears to be a liquid secondary
market. However, there can be no assurance that such a market will exist for a
particular contract at a particular time. In such event, it may not be possible
to close a futures contract.
Although futures contracts by their terms call for the actual delivery or
acquisition of securities or currency, in most cases the contractual obligation
is fulfilled before the date of the contract without having to make or take
delivery of the securities or currency. The offsetting of a contractual
obligation is accomplished by buying (or selling, as appropriate) on a
commodities exchange an identical futures contract calling for delivery in the
same month. Such a transaction, which is effected through a member of an
exchange, cancels the obligation to make or take delivery of the securities or
currency. Since all transactions in the futures market are made, offset or
fulfilled through a clearinghouse associated with the exchange on which the
contracts are traded, a Portfolio will incur brokerage fees when it purchases or
sells futures contracts.
Under certain circumstances, futures exchanges may establish daily limits
on the amount that the price of a futures contract can vary from the previous
day's settlement price; once that limit is reached, no trades may be made that
day at a price beyond the limit. Daily price limits do not limit potential
losses because prices could move to the daily limit for several consecutive days
with little or no trading, thereby preventing liquidation of unfavorable
positions.
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.
27
<PAGE> 178
To the extent that a Portfolio enters into futures contracts, in each case
other than for bona fide hedging purposes (as defined by the Commodities Futures
Trading Commission ("CFTC"), the aggregate initial margin will not exceed 5% of
the liquidation value of a Portfolio's portfolio, after taking into account
unrealized profits and unrealized losses on any contracts that the Portfolio has
entered into. This policy does not limit to 5% the percentage of the Portfolio's
assets that are at risk in futures contracts.
Futures contracts require the deposit of initial margin valued at a certain
percentage of the contract and possibly adding "variation margin" should the
price of the contract move in an unfavorable direction. As with forward
contracts, the segregated assets must be either cash or high-grade liquid debt
securities.
The ordinary spreads between prices in the cash and futures market, due to
differences in the nature of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
deposit requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may
cause temporary price distortions. Due to the possibility of distortion, a
correct forecast of securities price or currency exchange rate trends by the
investment adviser may still not result in a successful transaction.
In addition, futures contracts entail risks. Although an investment adviser
believes that use of such contracts will benefit a particular Portfolio, if that
investment adviser's investment judgment about the general direction of, for
example, an index is incorrect, a Portfolio's overall performance would be
poorer than if it had not entered into any such contract.
General Obligation Bonds-General obligation bonds are secured by the pledge
of the issuer's full faith, credit, and usually, taxing power. The taxing power
may be an unlimited ad valorem tax or a limited tax, usually on real estate and
personal property. Most states do not tax real estate, but leave that power to
local units of government.
Illiquid Securities - Historically, illiquid securities have included
securities subject to contractual or legal restrictions on resale because they
have not been registered under the 1933 Act, securities that are otherwise not
readily marketable and repurchase agreements having a remaining maturity of
longer than seven calendar days. Securities that have not been registered under
the 1933 Act are referred to as private placements or restricted securities and
are purchased directly from the issuer or in the secondary market. Mutual funds
do not typically hold a significant amount of these restricted or other illiquid
securities because of the potential for delays on resale and uncertainty in
valuation. Limitations on resale may have an adverse effect on the marketability
of portfolio securities and a mutual fund might be unable to dispose of
restricted or other illiquid securities promptly or at reasonable prices and
might thereby experience difficulty satisfying redemptions within seven calendar
days. A mutual fund also might have to register such restricted securities in
order to dispose of them resulting in additional expense and delay. Adverse
market conditions could impede such a public offering of securities.
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the 1933 Act, including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. However, 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
28
<PAGE> 179
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.
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
29
<PAGE> 180
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
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
30
<PAGE> 181
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,
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
31
<PAGE> 182
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 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.
32
<PAGE> 183
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 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.
33
<PAGE> 184
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.
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 Manager 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
34
<PAGE> 185
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 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
35
<PAGE> 186
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.
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.
36
<PAGE> 187
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, 1999 and the S&P 500 Index Fund's Annual Report to
Shareholders for the period ended December 31, 1999 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.
37
<PAGE> 188
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>
1999 x.xx% 1973 (14.66)% 1948 5.50%
1998 28.76% 1972 18.98% 1947 5.71%
1997 33.26% 1971 14.31% 1946 (8.07)%
1996 23.03% 1970 4.01% 1945 36.44%
1995 37.49% 1969 (8.51)% 1944 19.75%
1994 1.32% 1968 11.06% 1943 25.90%
1993 9.99% 1967 23.98% 1942 20.34%
1992 7.67% 1966 (10.06)% 1941 (11.59)%
1991 30.55% 1965 12.45% 1940 (9.78)%
1990 (3.17)% 1964 16.48% 1939 (0.41)%
1989 31.49% 1963 22.08% 1938 31.12)%
1988 16.81% 1962 (8.73)% 1937 (35.03)%
1987 5.23% 1961 26.89% 1936 33.92%
1986 18.47% 1960 0.47% 1935 47.67%
1985 32.16% 1959 11.96% 1934 (1.44)%
1984 6.27% 1958 43.36% 1933 53.99%
1983 22.51% 1957 (10.78)% 1932 (8.19)%
1982 21.41% 1956 6.56% 1931 (43.34)%
1981 (4.91)% 1955 31.56% 1930 (24.90)%
1980 32.42% 1954 52.62% 1929 (8.42%
1979 18.44% 1953 (0.99)% 1928 43.61%
1978 6.56% 1952 18.73% 1927 37.49%
1977 (7.18)% 1951 24.02% 1926 11.62%
1976 23.84% 1950 31.71%
1975 37.20% 1949 18.79%
1974 (26.47)%
</TABLE>
<PAGE> 189
STATEMENT OF ADDITIONAL INFORMATION
AMERICAN AADVANTAGE FUNDS(R)
AMERICAN AADVANTAGE MILEAGE FUNDS(R)
-- PLATINUM CLASS(SM) --
MARCH 1, 2000
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 "Money Market
Mileage Fund"), the American AAdvantage Municipal Money Market Mileage Fund (the
"Municipal Money Market Mileage Fund"), and the American AAdvantage U.S.
Government Money Market Mileage Fund (the "U.S. Government Money Market Mileage
Fund") (collectively, the "Mileage Funds") are three separate investment
portfolios 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, 2000 ("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>
<S> <C>
Non-Principal Investment Strategies and Risks..................................2
Investment Restrictions........................................................2
Trustees and Officers of the Trusts and the AMR Trust..........................4
Control Persons and 5% Shareholders............................................6
Management, Administrative Services and Distribution Fees......................6
Other Service Providers........................................................7
Redemptions in Kind............................................................7
Net Asset Value................................................................8
Tax Information................................................................8
Yield and Total Return Quotations.............................................10
Description of the Trusts.....................................................12
Other Information.............................................................12
Financial Statements..........................................................20
</TABLE>
<PAGE> 190
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.
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's Board of
Trustees ("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
2
<PAGE> 191
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.
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 (except for the banking
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
3
<PAGE> 192
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.
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* (52) 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); Trustee, American Select Funds (1999-Present).
Alan D. Feld (63) 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 (1996-
Present); Trustee, American AAdvantage Mileage Funds
(1996-Present); Trustee, American Select Funds (1999-Present).
Ben J. Fortson (67) 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); Trustee, American Select Funds
(1999-Present).
John S. Justin (83) Trustee Chairman (1969-Present), Chief Executive Officer (1969-1999),
2821 West Seventh Street Justin Industries, Inc. (a diversified holding company);
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); Trustee, American Select Funds (1999-Present).
</TABLE>
4
<PAGE> 193
<TABLE>
<CAPTION>
POSITION WITH
NAME, AGE AND ADDRESS EACH TRUST PRINCIPAL OCCUPATION DURING PAST 5 YEARS
- --------------------- ------------- ----------------------------------------
<S> <C> <C>
Stephen D. O'Sullivan* (64) Trustee Consultant (1994-Present); Vice President and Controller,
American Airlines, Inc. (1985-1994); Trustee, American
AAdvantage Funds (1987-Present); Trustee, American AAdvantage
Mileage Funds (1995-Present); Trustee, American Select Funds
(1999-Present).
Roger T. Staubach (58) 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, Brinker International
(1993-Present); Director, International Home Foods, Inc.
(1997-Present); 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 Funds (1995-Present); Trustee, American
AAdvantage Mileage Funds (1995-Present); Trustee, American Select
Funds (1999-Present).
Kneeland Youngblood (44) Trustee Managing Partner, Pharos Capital Group, L.L.C. (a private
100 Crescent Court equity firm) (1998-Present); Trustee, Teachers Retirement
Suite 1740 System of Texas (1993-Present); Director, United States
Dallas, Texas 75201 Enrichment Corporation (1993-1998), 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); Trustee, American Select Funds (1999-Present).
Nancy A. Eckl (37) Vice President Vice President, Trust Investments, AMR Investment Services, Inc.
(December 1990-Present).
Michael W. Fields (46) Vice President Vice President, Fixed Income Investments, AMR Investment Services,
Inc. (August 1988-Present).
Barry Y. Greenberg (36) 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. Trust Investments.
Rebecca L. Harris (33) Treasurer Vice President, Finance (1995-Present), Controller
(1991-1995), AMR Investment Services, Inc. Trust Investments.
John B. Roberson (41) Vice President Vice President, Sales and Marketing, AMR Investments Services, Inc.
(1991-Present).
Robert J. Zutz (47) Secretary Partner, Kirkpatrick & Lockhart LLP (law firm).
1800 Massachusetts Ave. NW
Washington, D.C. 20036
</TABLE>
* Messrs. Quinn and O'Sullivan are deemed to be "interested persons" 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.
5
<PAGE> 194
As compensation for their service to the Trusts, the American Select Funds
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 pay American Airlines the flight service charges incurred for
these travel arrangements. The Trusts and the AMR Trust compensate each Trustee
with payments in an amount equal to the Trustees' income tax on the value of
this free airline travel. Mr. O'Sullivan, as a retiree of American Airlines,
Inc., already receives flight benefits. The Trusts compensate Mr. O'Sullivan up
to $10,000 annually 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, 1999. The
compensation amounts below include the flight service charges paid by the Trusts
and the AMR Trust to American Airlines.
<TABLE>
<CAPTION>
Pension or Total
Retirement Compensation
Aggregate Aggregate Benefits Estimated From
Compensation Compensation Accrued as Annual AAdvantage
From the From the Part of the Benefits Funds
AAdvantage Mileage Trusts' Upon Complex
Name of Trustee Trust Trust Expenses Retirement (31 Funds)
- --------------- ------------ ------------ ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
William F. Quinn $ 0 $ 0 $0 $0 $ 0
Alan D. Feld $ xxx $ xxx $0 $0 $ xxx
Ben J. Fortson $ xxx $ xxx $0 $0 $ xxx
John S. Justin $ xxx $ xxx $0 $0 $ xxx
Stephen D. O'Sullivan $ xxx $ xxx $0 $0 $ xxx
Roger T. Staubach $ xxx $ xxx $0 $0 $ xxx
Kneeland Youngblood $ xxx $ xxx $0 $0 $ 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, 2000.
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, 2000:
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
MANAGEMENT, ADMINISTRATIVE SERVICES AND DISTRIBUTION FEES
The Manager is paid a management fee as compensation for paying investment
advisory fees and for providing the Trusts and the AMR Trust with advisory and
asset allocation services. Pursuant to management and
6
<PAGE> 195
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.
Management fees for the AAdvantage Trust for the fiscal years ended October
31 were approximately as follows: 1997, $13,730,443, of which approximately
$7,061,014 was paid by the Manager to other investment advisers; 1998,
$17,230,000, of which approximately $8,675,000 was paid by the Manager to other
investment advisers; and 1999, $xxx, of which approximately $xxx was paid by the
Manager to other investment advisers. Management fees in the amount of
approximately $7,309, $407,195, and $xxx were waived by the Manager during the
fiscal years ended October 31, 1997, 1998, and 1999 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: 1997, $13,730,443, of which $7,061,014 was paid
by the Manager to other investment advisers; 1998, $17,230,000 of which
approximately $8,675,000 was paid by the Manager to other investment advisers;
and 1999, $xxx , of which approximately $xxx was paid by the Manager to other
investment advisers. Management fees in the amount of approximately $7,309,
$407,195, and $xxx were waived by the Manager during the fiscal years ended
October 31, 1997, 1998, and 1999.
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: 1997, $4,538,345; 1998, $7,476,000; and 1999, $xxx. 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, 1997, 1998, and 1999 were approximately $275,120, $548,000 and $xxx,
respectively.
The Manager (or another entity approved by the Board) under a distribution
plan adopted pursuant to Rule 12b-1 under the 1940 Act, is paid 0.25% per annum
of the average daily net assets of each Mileage Fund for distribution-related
services, including costs of advertising and AAdvantage Miles. Distribution fees
pursuant to Rule 12b-1 under the 1940 Act for the fiscal years ended October 31,
1997, 1998, and 1999 were approximately $470,306, $632,000 and $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, 1998 and 1999 were approximately $81,113, $175,025 and $xxx.
SWS Financial Services, 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 shares
of the AAdvantage and Mileage Trusts and the American Select Funds.
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
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.
7
<PAGE> 196
NET ASSET VALUE
It is the policy of the Funds to attempt to maintain a constant price per
share of $1.00. There can be no assurance that a $1.00 net asset value per share
will be maintained. The portfolio instruments held by each Fund's corresponding
Portfolio are valued based on the amortized cost valuation technique pursuant to
Rule 2a-7 under the 1940 Act. This involves valuing an instrument at its cost
and thereafter assuming a constant amortization to maturity of any discount or
premium, even though the portfolio security may increase or decrease in market
value. Such market fluctuations are generally in response to changes in interest
rates. Use of the amortized cost valuation method requires the Funds'
corresponding Portfolios to purchase instruments having remaining maturities of
397 days or less, to maintain a dollar-weighted average portfolio maturity of 90
days or less, and to invest only in securities determined by the AMR Trust Board
to be of high quality with minimal credit risks. The corresponding portfolios of
the Money Market Funds may invest in issuers or instruments that at the time of
purchase have received the highest short-term rating by two Rating
Organizations, such as "D-1" by Duff & Phelps and "F-1" by Fitch IBCA, Inc., and
have received the next highest short-term rating by other Rating Organizations,
such as "A-2" by Standard & Poors and "P-2" by Moody's Investors Service, Inc.
See "Ratings of Municipal Obligations" and "Ratings of Short-Term Obligations"
for further information concerning ratings.
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 Funds, 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.
8
<PAGE> 197
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 Funds' corresponding Portfolio may acquire zero
coupon or other securities issued with original issue discount. As investors in
the Portfolio that holds those securities, the Municipal Money Market Funds
would have to include in their income their share of the original issue discount
that accrues on the securities during the taxable year, even if the Portfolio
(and, hence, the Funds) receive 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, each 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 each 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 each 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 Funds of the amount by which the
Funds' shares of their corresponding Portfolio's income on tax-exempt securities
exceeds certain amounts disallowed as deductions, designated by the Funds as
"exempt-interest dividends," generally may be excluded from gross income by
their shareholders. Dividends paid by the Municipal Money Market Funds will
qualify as exempt-interest dividends if, at the close of each quarter of the
taxable year, at least 50% of the value of each Fund's 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 Funds intend to continue to
satisfy this requirement. The aggregate dividends excludable from shareholders'
gross income may not exceed the Municipal Money Market Funds' net tax-exempt
income. The shareholders' treatment of dividends from the Municipal Money Market
Funds 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 either 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 Funds) plus
50% of their benefits exceeds certain base amounts. Exempt-interest dividends
from the Municipal Money Market Funds 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.
9
<PAGE> 198
YIELD AND TOTAL RETURN QUOTATIONS
The Platinum Class of the AAdvantage Trust commenced operations on November
7, 1995, the Platinum Class of the Money Market Mileage Fund commenced
operations on January 29, 1996, and the Platinum Class of the Municipal Money
Market Mileage Fund and the U.S. Government Money Market Mileage Fund commenced
operations on November 1, 1999. 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 Funds have adopted the performance of the Institutional Class
of the Funds in the AAdvantage Trust (except the Municipal Money Market Mileage
Fund), the Mileage Class of the Funds in the AAdvantage Trust, and the Mileage
Class of the Funds in the Mileage Trust for periods prior to the inception date.
The performance results for the Platinum Class will be lower, because the
figures for the other classes (except for the Mileage Funds) do not reflect the
12b-1 fees, Administrative Services Plan fees or other class expenses that will
be borne by the Platinum Class.
A quotation of yield on shares of the Funds may appear from time to time in
advertisements and in communications to shareholders and others. Quotations of
yields are indicative of yields for the limited historical period used but not
for the future. Yield will vary as interest rates and other conditions change.
Yield also depends on the quality, length of maturity and type of instruments
invested in by the Funds, and the applicable Fund's operating expenses. A
comparison of the quoted yields offered for various investments is valid only if
yields are calculated in the same manner. In addition, other similar investment
companies may have more or less risk due to differences in the quality or
maturity of securities held.
The yields of the Funds may be calculated in one of two ways:
(1) Current Yield--the net average annualized return without compounding
accrued interest income. For a 7-day current yield, this is computed by
dividing the net change in value over a 7 calendar-day period of a
hypothetical account having one share at the beginning of a 7
calendar-day period by the value of the account at the beginning of this
period to determine the "base period return". The quotient is multiplied
by 365 divided by 7 and stated to two decimal places. A daily current
yield is calculated by multiplying the net change in value over one day
by 365 and stating it to two decimal places. Income other than
investment income and capital changes, such as realized gains and losses
from the sale of securities and unrealized appreciation and
depreciation, are excluded in calculating the net change in value of an
account. However, this calculation includes the aggregate fees and other
expenses that are charged to all shareholder accounts in a Fund. In
determining the net change in value of a hypothetical account, this
value is adjusted to reflect the value of any additional shares
purchased with dividends from the original share and dividends declared
on both the original share and any such additional shares.
(2) Effective Yield--the net average annualized return as computed by
compounding accrued interest income. In determining the 7-day effective
yield, a Fund will compute the "base period return" in the same manner
used to compute the "current yield" over a 7 calendar-day period as
described above. One is then added to the base period return and the sum
is raised to the 365/7 power. One is subtracted from the result,
according to the following formula:
(365/7)
EFFECTIVE YIELD = [ (BASE PERIOD RETURN + 1) ] - 1
The current and effective yields for the Funds are as follows:
<TABLE>
<CAPTION>
Current daily Current yield for Effective yield for
yield as of the seven-day period the seven-day period
October 31, ended October 31, ended October 31,
1999 1999 1999
---- ---- ----
<S> <C> <C> <C>
Platinum Class
Money Market Fund 4.68% 4.65% 4.76%
Municipal Money Market Fund 2.55% 2.52% 2.55%
U.S. Government Money Market Fund 4.36% 4.35% 4.44%
Money Market Mileage Fund 4.60% 4.58% 4.68%
</TABLE>
10
<PAGE> 199
The Municipal Money Market Funds 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, 1999
were 4.17% and 4.22%, respectively (based upon a 39.6% personal tax rate).
The advertised total return for a class of a Fund would be calculated by
equating an initial amount invested in a class of a Fund to the ending
redeemable value, according to the following formula:
(N)
P(1 + T) = ERV
where "P" is a hypothetical initial payment of $1,000; "T" is the average
annual total return for the Fund; "n" is the number of years involved; and
"ERV" is the ending redeemable value of a hypothetical $1,000 payment made in
the Fund at the beginning of the investment period covered.
Based on this formula, annualized total returns were as follows for the
periods indicated:
<TABLE>
<CAPTION>
For the For the For the For the period from
one-year five-year ten-year commencement of
period ended period ended period ended operations through
October 31, October 31, October 31, October 31,
1999(1) 1999(1) 1999(1) 1999(1)
------- ------- ------- --------------------
<S> <C> <C> <C> <C>
Platinum Class
Money Market Fund 4.33% 4.98% 5.20% 5.76%
Municipal Money Market Fund 2.27% 2.89% N/A(2) 2.81%
U. S. Government Money Mkt. Fund (3) 4.09% 4.73% N/A(2) 4.29%
Money Market Mileage Fund 4.22% 4.81% 5.04% 5.62%
Municipal Money Market Mileage Fund 2.69% 3.12% N/A(2) 2.97%
U.S. Government Money Market Mileage 4.50% 4.98% N/A(2) 4.41%
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 Money
Market Mileage Fund represents total returns 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. Performance of the Municipal Money Market Mileage Fund
represents total returns of the Municipal Money Market Fund-Mileage Class
(11/10/93-10/31/95) and the Municipal Money Market Mileage Fund-Mileage Class
(11/1/95-10/31/99). Performance of the U.S. Government Money Market Mileage Fund
represents total returns of the U.S. Government Money Market Fund-Institutional
Class (3/2/92-10/31/93); the U.S. Government Money Market Fund-Mileage Class
(11/1/93-10/31/95) and the U.S. Government Money Market Mileage Fund-Mileage
Class (11/1/95-10/31/99). 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
11
<PAGE> 200
services such as Standard & Poor's, Merrill Lynch, 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. A
description of the characteristics of the AAdvantage program may appear in Fund
advertisements, including its ranking as compared to other frequent flyer
programs by various publications.
From time to time, the Manager may offer special promotions as a means to
attract new Mileage Fund shareholders. Such promotions may include contests with
free air travel and/or hotel accommodations as prizes. In addition, the Manager
may offer special AAdvantage mile awards to those who open a Mileage Fund
account during a certain limited time period. In these type of promotion, an
investor would receive one AAdvantage mile for each dollar invested a in Mileage
Fund (up to a maximum investment dollar limit), in addition to one AAdvantage
mile for each ten dollars maintained in a Mileage Fund on an ongoing basis. This
offer may be targeted to a specific number of individuals selected from the
AAdvantage program membership database by applying various search criteria.
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.
12
<PAGE> 201
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
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.
General Obligation Bonds-General obligation bonds are secured by the
pledge of the issuer's full faith, credit, and usually, taxing power. The
taxing power may be an unlimited ad valorem tax or a limited tax, usually on
real estate and personal property. Most states do not tax real estate, but
leave that power to local units of government.
Illiquid Securities-Historically, illiquid securities have included
securities subject to contractual or legal restrictions on resale because they
have not been registered under the 1933 Act, securities that are otherwise not
readily marketable and repurchase agreements having a remaining maturity of
longer than seven calendar days. Securities that have not been registered under
the 1933 Act are referred to as private placements or restricted securities and
are purchased directly from the issuer or in the secondary market. Mutual funds
do not typically hold a significant amount of these restricted or other
illiquid securities because of the potential for delays on resale and
uncertainty in valuation. Limitations on resale may have an adverse effect on
the marketability of portfolio securities and a mutual fund might be unable to
dispose of restricted or other illiquid securities promptly or at reasonable
prices and might thereby experience difficulty satisfying redemptions within
seven calendar days. A mutual fund also might have to register such restricted
securities in order to dispose of them resulting in additional expense and
delay. Adverse market conditions could impede such a public offering of
securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the 1933 Act, including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be
readily resold or on an issuer's ability to honor a demand for repayment.
However, 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
13
<PAGE> 202
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.
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.
14
<PAGE> 203
(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 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.
15
<PAGE> 204
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. 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.
16
<PAGE> 205
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.
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 Manager 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.
17
<PAGE> 206
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.
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.
18
<PAGE> 207
U. S. Government agencies or instrumentalities that issue or guarantee
securities include, but are not limited to, the Federal Housing Administration,
Farmers Home Administration, Export-Import Bank of the United States, Small
Business Administration, GNMA, General Services Administration, Central Bank for
Cooperatives, Federal Home Loan Banks, FHLMC, Federal Intermediate Credit Banks,
Federal Land Banks, Maritime Administration, Tennessee Valley Authority,
District of Columbia Armory Board, Inter-American Development Bank,
Asian-American Development Bank, Agency for International Development, Student
Loan Marketing Association and International Bank of Reconstruction and
Development.
Obligations of U.S. Government agencies and instrumentalities may or may not
be supported by the full faith and credit of the United States. Some are backed
by the right of the issuer to borrow from the Treasury; others are supported by
discretionary authority of the U.S. Government to purchase the agencies'
obligations; while still others, such as the Student Loan Marketing Association,
are supported only by the credit of the instrumentality. In the case of
securities not backed by the full faith and credit of the United States, the
investor must look principally to the agency issuing or guaranteeing the
obligation for ultimate repayment, and may not be able to assert a claim against
the United States itself in the event the agency or instrumentality does not
meet its commitment.
U.S. Treasury Obligations-U.S. Treasury obligations include bills, notes and
bonds issued by the U.S. Treasury and Separately Traded Registered Interest and
Principal component parts of such obligations known as STRIPS.
Variable or Floating Rate Obligations-A variable rate obligation is one
whose terms provide for the adjustment of its interest rate on set dates and
which, upon such adjustment, can reasonably be expected to have a market value
that approximates its par value. A floating rate obligation is one whose terms
provide for the adjustment of its interest rate whenever a specified interest
rate changes and which, at any time, can reasonably be expected to have a market
value that approximates its par value. Variable or floating rate obligations may
be secured by bank letters of credit.
Pursuant to Rule 2a-7 under the 1940 Act, variable or floating rate
obligations with stated maturities of more than 397 days may be deemed to have
shorter maturities as follows:
(1) An obligation that is issued or guaranteed by the United States
Government or any agency thereof which has a variable rate of interest
readjusted no less frequently than every 762 days will be deemed by a Portfolio
to have a maturity equal to the period remaining until the next readjustment of
the interest rate.
(2) A variable rate obligation, the principal amount of which is scheduled
on the face of the instrument to be paid in 397 days or less, will be deemed by
a Portfolio to have a maturity equal to the period remaining until the next
readjustment of the interest rate.
(3) A variable rate obligation that is subject to a demand feature will be
deemed by a Portfolio to have a maturity equal to the longer of the period
remaining until the next readjustment of the interest rate or the period
remaining until the principal amount can be recovered through demand.
(4) A floating rate obligation that is subject to a demand feature will be
deemed by a Portfolio to have a maturity equal to the period remaining until the
principal amount can be recovered through demand.
As used above, an obligation is "subject to a demand feature" when a
Portfolio is entitled to receive the principal amount of the obligation either
at any time on no more than 30 days' notice or at specified intervals not
exceeding one year and upon no more than 30 days' notice.
Variable Rate Auction and Residual Interest Obligations-Variable rate
auction and residual interest obligations are created when an issuer or dealer
separates the principal portion of a long-term, fixed-rate municipal bond into
two long-term, variable-rate instruments. The interest rate on one portion
reflects short-term interest rates, while the interest rate on the other portion
is typically higher than the rate available on the original fixed-rate bond.
19
<PAGE> 208
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, 1999, 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.
20
<PAGE> 209
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**
(i)(B) Supplement to Fund Management Agreement dated
August 1, 1994 - (iv)
(i)(C) Supplement to Fund Management Agreement dated
August 1, 1995 - (iv)
(i)(D) Supplement to Fund Management Agreement dated
November 1, 1995 - filed herewith
(i)(E) Amendment to Schedule A of Fund Management Agreement
dated December 1, 1995 - (i)
(i)(F) Supplement to Fund Management Agreement dated
December 17, 1996 - (ii)
(i)(G) Supplement to Fund Management Agreement dated
July 25, 1997 - (iii)
(i)(H) Supplement to Fund Management Agreement dated
September 1, 1998 - (vi)
(i)(I) Supplement to Fund Management Agreement dated
January 1, 1999 - filed herewith
(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)
<PAGE> 210
(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) Form of Investment Advisory Agreement between AMR
Investment Services, Inc. and Lazard Asset
Management - filed herewith
(ii)(I) Amendment to Schedule A of Advisory Agreement
between AMR Investment Services, Inc. and Brandywine
Asset Management, Inc. dated October 15, 1998 - (vi)
(ii)(J) 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)
(ii)(K) Form of Amendment to Schedule A of Advisory Agreement
between AMR Investment Services, Inc. and
Independence Investment Associates, Inc. - filed
herewith
(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)
(iii)(C) Supplement to Administrative Services Agreement
dated January 1, 1999 - filed herewith
(iv) Administrative Services Plan for the Platinum Class
- (iv)
(v)(A) Administrative Agreement for S&P 500 Index Fund with
Bankers Trust Company- (iv)
(B) Administrative Agreement for S&P 500 Index Fund with
State Street Bank & Trust Company*
(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)
C-2
<PAGE> 211
(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)
(iv) Credit Agreement between American AAdvantage Funds
and AMR Investment Services, Inc., dated December 1,
1999 - filed herewith
(v) Administrative Services Agreement among American
AAdvantage Funds, American AAdvantage Mileage Funds,
AMR Investment Services Trust, AMR Investment
Services, Inc. and State Street Bank and Trust
Company dated November 29, 1999 - filed herewith
(i) Opinion and consent of counsel*
(j) Consent of Independent Auditors*
(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) Amended and Restated Plan pursuant to Rule 18f-3
- (iv)
Other: Powers of Attorney for all Trustees - (ii)
Powers of Attorney for Trustees of the State Street
Equity 500 Index Portfolio - filed herewith
Power of Attorney for the President of the State
Street Equity 500 Index Portfolio filed herewith
- -------------------------
** Incorporated by reference to PEA No. 4 to the Registration Statement of
the Trust on Form N-1A as filed with the SEC on December 31, 1990.
(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.
C-3
<PAGE> 212
(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.
* To be filed by subsequent amendment.
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,
C-4
<PAGE> 213
that any Shareholder may, by appropriate legal proceedings, challenge any such
determination by the Trustees, or by independent counsel.
(c) The rights of indemnification herein provided may be insured
against by policies maintained by the Trust, shall be severable, shall not be
exclusive of or affect any other rights to which any Covered Person may now or
hereafter be entitled, shall continue as to a person who has ceased to be such
Trustee or officer and shall inure to the benefit of the heirs, executors and
administrators of such a person. Nothing contained herein shall affect any
rights to indemnification to which Trust personnel, other than Trustees and
officers, and other persons may be entitled by contract or otherwise under law.
(d) Expenses in connection with the preparation and presentation
of a defense to any claim, action, suit, or proceeding of the character
described in paragraph (a) of this Section 2 may be paid by the applicable
Portfolio from time to time prior to final disposition thereof upon receipt of
an undertaking by or on behalf of such Covered Person that such amount will be
paid over by him to the Trust if it is ultimately determined that he is not
entitled to indemnification under this Section 2; provided, however, that:
(i) such Covered Person shall have provided appropriate
security for such undertaking;
(ii) the Trust is insured against losses arising out of any
such advance payments; or
(iii) either a majority of the Trustees who are neither
interested persons of the Trust nor parties to the matter, or independent legal
counsel in a written opinion, shall have determined, based upon a review of
readily available facts (as opposed to a trial-type inquiry or full
investigation), that there is reason to believe that such Covered Person will be
found entitled to indemnification under this Section 2.
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
C-5
<PAGE> 214
as to the officers and directors of the Manager is included in its current Form
ADV filed with the SEC and is incorporated by reference herein.
II. Business and Other Connections of Investment Advisers
The investment advisers listed below provide investment advisory
services to the Trust.
Barrow, Hanley, Mewhinney & Strauss, 3232 McKinney Avenue, 15th Floor,
Dallas, Texas 75204.
Brandywine Asset Management, Inc., 201 North Walnut Street,
Wilmington, Delaware 19801.
GSB Investment Management, Inc., 301 Commerce Street, Suite 1501, Fort
Worth, Texas 76102.
Hotchkis and Wiley, 800 West Sixth Street, 5th Floor, Los Angeles,
California 90017.
Independence Investment Associates, Inc., 53 State Street, Boston,
Massachusetts 02109.
Lazard Asset Management, 30 Rockefeller Plaza, New York,
New York 10112.
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) SWS Financial 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-6
<PAGE> 215
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 25
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
C-7
<PAGE> 216
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-8
<PAGE> 217
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. 28 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 21,
1999.
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. 28 to the Registration Statement has been
signed below by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ William F. Quinn President and December 21, 1999
- --------------------------------------- Trustee
William F. Quinn
Alan D. Feld* Trustee December 21, 1999
- ---------------------------------------
Alan D. Feld
Ben J. Fortson* Trustee December 21, 1999
- ---------------------------------------
Ben J. Fortson
John S. Justin* Trustee December 21, 1999
- ---------------------------------------
John S. Justin
Stephen D. O'Sullivan* Trustee December 21, 1999
- ---------------------------------------
Stephen D. O'Sullivan
Roger T. Staubach* Trustee December 21, 1999
- ---------------------------------------
Roger T. Staubach
Dr. Kneeland Youngblood * Trustee December 21, 1999
- ---------------------------------------
Dr. Kneeland Youngblood
*By /s/ William F. Quinn
- ---------------------------------------
William F. Quinn, Attorney-In-Fact
</TABLE>
<PAGE> 218
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. 28 to its Registration
Statement on Form N-1A as it relates to 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 21, 1999.
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. 28 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.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ William F. Quinn President and December 21, 1999
- ---------------------------------------- Trustee
William F. Quinn
Alan D. Feld* Trustee December 21, 1999
- ----------------------------------------
Alan D. Feld
Ben J. Fortson* Trustee December 21, 1999
- ----------------------------------------
Ben J. Fortson
John S. Justin* Trustee December 21, 1999
- ----------------------------------------
John S. Justin
Stephen D. O'Sullivan* Trustee December 21, 1999
- ----------------------------------------
Stephen D. O'Sullivan
Roger T. Staubach* Trustee December 21, 1999
- ----------------------------------------
Roger T. Staubach
Dr. Kneeland Youngblood * Trustee December 21, 1999
- ----------------------------------------
Dr. Kneeland Youngblood
*By /s/ William F. Quinn
----------------------------------
William F. Quinn, Attorney-In-Fact
</TABLE>
<PAGE> 219
SIGNATURES
State Street Equity 500 Index Portfolio has duly caused this
Post-Effective Amendment No. 28 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 Boston and the Commonwealth of Massachusetts on
December 21, 1999.
STATE STREET EQUITY 500 INDEX PORTFOLIO
By: James B. Little*
----------------------------------
James B. Little
President and Treasurer
This Post-Effective Amendment No. 28 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 State Street Equity 500 Index Portfolio on
December 21, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
<S> <C>
William L. Boyan* Trustee
- -------------------------------------
William L. Boyan
Michael F. Holland* Trustee
- -------------------------------------
Michael F. Holland
Rina K. Spence* Trustee
- -------------------------------------
Rina K. Spence
Douglas T. Williams* Trustee
- -------------------------------------
Douglas T. Williams
James B. Little* President and Treasurer
- -------------------------------------
James B. Little
*By: /s/ Stephen C. Schuyler,
--------------------------------
as Attorney-in-Fact pursuant to a Power of Attorney
</TABLE>
<PAGE> 220
POWER OF ATTORNEY
Each of the undersigned Trustees of State Street Master Trust (the "Trust")
hereby constitutes and appoints Stephen C. Schuyler, Esq., and Jennifer S.
From, Esq. each of them with full powers of substitution, as his or her true
and lawful attorney-in-fact and agent to execute in his or her name and on his
or her behalf in any and all capacities the Registration Statements on Form
N-1A, and any and all amendments thereto, and all other documents, filed by the
Trust or its affiliates with the Securities and Exchange Commission (the "SEC"')
under the Investment Company Act of 1940, as amended, and (as applicable) the
Securities Act of 1933, as amended, and any and all instruments which such
attorneys and agents, or any of them, deem necessary or advisable to enable the
Trust or its affiliates to comply with such Acts, the rules, regulations and
requirements of the SEC, and the securities or Blue Sky laws of any state or
other jurisdiction, and to file the same, with all exhibits thereto and other
documents in connection therewith, with the SEC and such other jurisdictions,
and the undersigned each hereby ratifies and confirms as his or her own act and
deed any and all acts that such attorneys and agents, or any of them, shall do
or cause to be done by virtue hereof. Any one of such attorneys and agents has,
and may exercise, all of the powers hereby conferred. The undersigned each
hereby revokes any Powers of Attorney previously granted with respect to the
Trust or its affiliates concerning the filings and actions described herein.
IN WITNESS WHEREOF, the undersigned have hereunto set their hands as of the 1st
day of November, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
<S> <C>
/s/ Rina K. Spence Trustee
- --------------------------------
Rina K. Spence
/s/ William L. Boyan Trustee
- --------------------------------
William L. Boyan
/s/ Michael F. Holland Trustee
- --------------------------------
Michael F. Holland
/s/ Douglas T. Williams Trustee
- --------------------------------
Douglas T. Williams
</TABLE>
<PAGE> 221
POWER OF ATTORNEY
The undersigned officer of State Street Master Trust (the "Trust") hereby
constitutes and appoints Stephen C. Schuyler, Esq., and Jennifer S. From, Esq.
each of them with full powers of substitution, as his true and lawful
attorney-in-fact and agent to execute in his name and on his behalf in any and
all capacities the Registration Statements on Form N-1A, and any and all
amendments thereto, and all other documents, filed by the Trust or its
affiliates with the Securities and Exchange Commission (the "SEC"') under the
Investment Company Act of 1940, as amended, and (as applicable) the Securities
Act of 1933, as amended, and any and all instruments which such attorneys and
agents, or any of them, deem necessary or advisable to enable the Trust or its
affiliates to comply with such Acts, the rules, regulations and requirements of
the SEC, and the securities or Blue Sky laws of any state or other jurisdiction,
and to file the same, with all exhibits thereto and other documents in
connection therewith, with the SEC and such other jurisdictions, and the
undersigned each hereby ratifies and confirms as his own act and deed any and
all acts that such attorneys and agents, or any of them, shall do or cause to be
done by virtue hereof. Any one of such attorneys and agents has, and may
exercise, all of the powers hereby conferred. The undersigned hereby revokes any
Powers of Attorney previously granted with respect to the Trust or its
affiliates concerning the filings and actions described herein.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand as of the 20th day
of December, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
<S> <C>
/s/ James B. Little President and Treasurer
- ----------------------------
James B. Little
</TABLE>
<PAGE> 222
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
(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**
(i)(B) Supplement to Fund Management Agreement dated
August 1, 1994 - (iv)
(i)(C) Supplement to Fund Management Agreement dated
August 1, 1995 - (iv)
(i)(D) Supplement to Fund Management Agreement dated
November 1, 1995 - filed herewith
(i)(E) Amendment to Schedule A of Fund Management Agreement
dated December 1, 1995 - (i)
(i)(F) Supplement to Fund Management Agreement dated
December 17, 1996 - (ii)
(i)(G) Supplement to Fund Management Agreement dated
July 25, 1997 - (iii)
(i)(H) Supplement to Fund Management Agreement dated
September 1, 1998 - (vi)
(i)(I) Supplement to Fund Management Agreement dated
January 1, 1999 - filed herewith
(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) Form of Investment Advisory Agreement between AMR
Investment Services, Inc. and Lazard Asset
Management - filed herewith
</TABLE>
<PAGE> 223
<TABLE>
<S> <C>
(ii)(I) Amendment to Schedule A of Advisory Agreement
between AMR Investment Services, Inc. and Brandywine
Asset Management, Inc. dated October 15, 1998 - (vi)
(ii)(J) 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)
(ii)(K) Form of Amendment to Schedule A of Advisory Agreement
between AMR Investment Services, Inc. and
Independence Investment Associates, Inc. - filed
herewith
(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)
(iii)(C) Supplement to Administrative Services Agreement
dated January 1, 1999 - filed herewith
(iv) Administrative Services Plan for the Platinum Class
- (iv)
(v)(A) Administrative Agreement for S&P 500 Index Fund with
Bankers Trust Company- (iv)
(B) Administrative Agreement for S&P 500 Index Fund with
State Street Bank & Trust Company*
(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)
(iv) Credit Agreement between American AAdvantage Funds
and AMR Investment Services, Inc., dated December 1,
1999 - filed herewith
(v) Administrative Services Agreement among American
AAdvantage Funds, American AAdvantage Mileage Funds,
AMR Investment Services Trust, AMR Investment
Services, Inc. and State Street Bank and Trust
Company dated November 29, 1999 - filed herewith
(i) Opinion and consent of counsel*
(j) Consent of Independent Auditors*
</TABLE>
<PAGE> 224
<TABLE>
<S> <C>
(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) Amended and Restated Plan pursuant to Rule 18f-3
- (iv)
Other: Powers of Attorney for all Trustees - (ii)
Powers of Attorney for Trustees of the State Street
Equity 500 Index Portfolio - filed herewith
Power of Attorney for the President of the State
Street Equity 500 Index Portfolio filed herewith
</TABLE>
- -------------------------
** Incorporated by reference to PEA No. 4 to the Registration Statement of
the Trust on Form N-1A as filed with the SEC on December 31, 1990.
(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.
* To be filed by subsequent amendment.
<PAGE> 1
EXHIBIT (d)(i)(D)
SUPPLEMENTAL TERMS AND CONDITIONS OF
THE MANAGEMENT AGREEMENT BETWEEN
THE AMERICAN AADVANTAGE FUNDS
AND
AMR INVESTMENT SERVICES, INC.
The following terms and conditions hereby are incorporated into the
Management Agreement dated April 3, 1987, as supplemented on August 1, 1994
("Agreement"), between American AAdvantage Funds (the "Trust") and AMR
Investment Services, Inc. (the "Manager") on behalf of the American AAdvantage
Balanced Fund, the American AAdvantage Growth and Income Fund, the American
AAdvantage International Equity Fund, the American AAdvantage Limited-Term
Income Fund, the American AAdvantage Money Market Fund, the American AAdvantage
Municipal Money Market Fund, the American AAdvantage U.S. Treasury Money Market
Fund and such other portfolios of the Trust as the Trust and the Manager may
hereafter agree upon (each a "Fund" and collectively, the "Funds"). To the
extent that there is any conflict between the terms of the Agreement and these
Supplemental Terms and Conditions ("Supplement"), this Supplement shall govern.
1. Paragraph 6 of the Management Agreement is hereby amended, in its
entirety, by replacing paragraph 6 with the following:
6. Compensation of the Manager. In consideration of the Manager's
services as specified in this Agreement, the Manager shall receive an
advisory fee as specified in the Schedule(s) attached hereto. This
advisory fee constitutes the Manager's compensation solely with respect
to the investment advisory and portfolio allocation services performed
pursuant to Paragraphs 2(B) and 3 of this Agreement. To the extent that
a Fund invests all of its investable assets (i.e., securities and cash)
in another registered investment company, however, no portion of the
advisory fee attributable to that Fund as specified in the Schedule(s)
attached hereto shall be paid for the period that such Fund's assets
are so invested. In addition, the Trust agrees to pay to the Manager an
administrative fee pursuant to the Administrative Services Agreement.
The Trust and the Manager each acknowledge that this administrative fee
represents the Manager's compensation for all services performed under
this Agreement other than the investment advisory and portfolio
allocation services specified in Paragraphs 2(B) and 3.
<PAGE> 2
2. Notice is hereby given that the Management Agreement and this
Supplement are executed on behalf of the Trustees of the Trust and not
individually and that the obligations of the Agreement and Supplement are not
binding upon any of the Trustees, officers, or shareholders of the Trust
individually, but are binding only upon the assets and property of the Fund to
which the Agreement and this Supplement relate.
Dated: November 1, 1995
AMERICAN AADVANTAGE FUNDS
By:
-------------------------------
Title:
-----------------------------
AMR INVESTMENT SERVICES, INC.
By:
-------------------------------
Title:
-----------------------------
<PAGE> 1
EXHIBIT (d)(i)(I)
SUPPLEMENTAL TERMS AND CONDITIONS TO
THE MANAGEMENT AGREEMENT BETWEEN
THE AMERICAN AADVANTAGE FUNDS
AND
AMR INVESTMENT SERVICES, INC.
The attached amended Schedule A is hereby incorporated into the
Management Agreement dated April 3, 1987, as supplemented on August 1, 1994,
November 1, 1995, December 17, 1996, July 25, 1997 and September 1, 1998 (the
"Agreement") between the American AAdvantage Funds and AMR Investment Services,
Inc. To the extent that there is any conflict between the terms of the Agreement
and these Supplemental Terms and Conditions ("Supplement"), this Supplement
shall govern.
Dated: January 1, 1999
American AAdvantage Funds
By:
------------------------------
Barry Y. Greenberg
Vice President and Assistant
Secretary
AMR Investment Services, Inc.
By:
------------------------------
William F. Quinn
President
<PAGE> 2
AMENDED
SCHEDULE A
TO THE
MANAGEMENT AGREEMENT
BETWEEN
AMR INVESTMENT SERVICES, INC.
AND THE
AMERICAN AADVANTAGE FUNDS
I. BASE FEE
As compensation pursuant to section 6 of the Management Agreement
between AMR Investment Services, Inc. (the "Manager") and the American
AAdvantage Funds (the "AAdvantage Trust"), the AAdvantage Trust shall pay to the
Manager a fee, computed daily and paid monthly, at the following annual rates as
percentages of each Fund's average daily net assets:
(1) 0.10% of the net assets of the Balanced Fund, the Large Cap Value
Fund, the International Equity Fund, the Small Cap Value Fund and the
S&P 500 Index Fund plus all fees payable by the Manager with respect to
such Funds pursuant to any Investment Advisory Agreement entered into
pursuant to Paragraph 2(d) of said Management Agreement;
(2) 0.10% of the net assets of the Money Market Fund, the Municipal
Money Market Fund and the U.S. Government Money Market Fund; and
(3) 0.25% of the net assets of the Intermediate Bond Fund and the
Short-Term Bond Fund.
To the extent that a Fund invests all of its investable assets (i.e.,
securities and cash) in another registered investment company, however, the
AAdvantage Trust will not pay the Manager any fee pursuant to Section 6 of the
Agreement.
II. SECURITIES LENDING DUTIES AND FEES
A. Manager Duties
The Manager agrees to provide the following services in connection with
the investment of cash collateral received from the securities lending
activities of each Fund of the
<PAGE> 3
AAdvantage Trust: (a) assist the securities lending agent (the "Agent") in
determining which specific securities are available for loan, (b) monitor the
Agent to ensure that securities loans are effected in accordance with its
instructions and within the procedures adopted by the Board of Trustees of the
AAdvantage Trust, (c) prepare appropriate periodic reports for, and seek
appropriate approvals from, the Board of Trustees of the AAdvantage Trust with
respect to securities lending activities, (d) respond to Agent inquiries
concerning Agent's compliance with applicable guidelines, and (e) perform such
other duties as necessary.
B. Securities Lending Fees
As compensation for services provided by the Manager in connection with
securities lending activities of each Fund of the AAdvantage Trust, the lending
Fund shall pay to the Manager, with respect to cash collateral posted by
borrowers, a fee up to 25% of the net monthly interest income (the gross
interest income earned by the investment of cash collateral, less the amount
paid to borrowers as well as related expenses) from such activities and, with
respect to loan fees paid by borrowers when a borrower posts collateral other
than cash, a fee up to 25% of such loan fees.
To the extent that a Fund invests all of its investable assets (i.e.,
securities and cash) in another registered investment company, however, the
AAdvantage Trust will not pay the Manager any fee for services provided by the
Manager in connection with securities lending activities.
DATED: January 1, 1999
<PAGE> 1
EXHIBIT (d)(ii)(H)
AMERICAN AADVANTAGE FUNDS
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made this 1st day of March, 1999 by and between AMR
Investment Services, Inc., a Delaware Corporation (the "Manager"), and Lazard
Asset Management, a division of Lazard Freres & Co. LLC (the "Adviser");
WHEREAS, American AAdvantage Funds (the "Trust"), a Massachusetts
Business Trust, is an open-end, diversified management investment company
registered under the Investment Company Act of 1940, as amended ("1940 Act"),
consisting of several portfolios of shares, each having its own investment
policies; and
WHEREAS, the Trust has retained the Manager to provide the Trust with
business and asset management services, subject to the control of the Trust's
Board of Trustees;
WHEREAS, the Trust's agreement with the Manager permits the Manager to
delegate to other parties certain of its asset management responsibilities; and
WHEREAS, the Manager desires to retain the Adviser to render
investment management services to the Trust with respect to certain of its
investment portfolios and such other investment portfolios as the Trust and the
Adviser may agree upon and so specify in the Schedule(s) attached hereto
(collectively, the "Portfolios") and as described in the Trust's registration
statement on Form N-1A as amended from time to time, and the Adviser is willing
to render such services;
NOW THEREFORE, in consideration of mutual covenants herein contained,
the parties hereto agree as follows:
1. DUTIES OF ADVISER. The Manager employs the Adviser to manage the
investment and reinvestment of such portion, if any, of the Portfolios' assets
as is designated by the Manager from time to time, and, with respect to such
assets, to continuously review, supervise, and administer the investment
program of the Portfolios, to determine in the Adviser's discretion the
securities to be purchased or sold, to provide the Manager and the Trust with
records concerning the Adviser's activities which the Trust is required to
maintain, and to render regular reports to the Manager and to the Trust's
officers and Trustees concerning the Adviser's discharge of the foregoing
responsibilities. The Adviser shall discharge the foregoing responsibilities
subject to the Manager's oversight and the control of the officers and the
Trustees of the Trust and in compliance with such policies as the Trustees may
from time to time establish, and in compliance with the objectives, policies,
and limitations for each such Portfolio set forth in the Trust's current
registration statement as amended from time to time, and applicable laws and
regulations. The Adviser accepts such employment and agrees to render the
services for the compensation specified herein and to provide at its own
expense the office space, furnishings and equipment and the personnel required
by it to perform the services on the terms and for the compensation provided
herein. (With respect to any of the Portfolio assets allocated for management
by the Adviser, the Adviser can request that the Manager make the investment
<PAGE> 2
decisions with respect to that portion of assets which the Adviser deems should
be invested in short-term money market instruments. The Manager agrees to
provide this service.) The Manager will instruct the Trust's Custodian(s) to
hold and/or transfer the Portfolios' assets in accordance with Proper
Instructions received from the Adviser. (For this purpose, the term "Proper
Instructions" shall have the meaning(s) specified in the applicable
agreement(s) between the Trust and its custodian(s).) The Adviser will not be
responsible for the cost of securities or brokerage commissions or any other
Trust expenses except as specified in this Agreement.
2. PORTFOLIO TRANSACTIONS. The Adviser is authorized to select the
brokers or dealers (including, to the extent permitted by law and applicable
Trust guidelines, the Adviser or any of its affiliates) that will execute the
purchases and sales of portfolio securities for the Portfolios and is directed
to use its best efforts to obtain the best net results with respect to brokers'
commissions and discounts as described in the Trust's current registration
statement as amended from time to time. In selecting brokers or dealers, the
Adviser may give consideration to factors other than price, including, but not
limited to, research services and market information. Any such services or
information which the Adviser receives in connection with activities for the
Trust may also be used for the benefit of other clients and customers of the
Adviser or any of its affiliates. The Adviser will promptly communicate to the
Manager and to the officers and the Trustees of the Trust such information
relating to portfolio transactions as they may reasonably request.
3. COMPENSATION OF THE ADVISER. For the services to be rendered by the
Adviser as provided in Sections 1 and 2 of this Agreement, the Manager shall
pay to the Adviser compensation at the rate specified in Schedule A attached
hereto and made a part of this Agreement. Such compensation shall be paid to
the Adviser quarterly in arrears, and shall be calculated by applying the
annual percentage rate(s) as specified in the attached Schedule A to the
average month-end assets of the specified portfolios during the relevant
quarter. Solely for the purpose of calculating the applicable annual percentage
rates specified in the attached Schedule(s), there shall be included such other
assets as are specified in said Schedule(s).
The Adviser agrees that the fee charged to the Manager will be no more
than that charged for any other client of similar type. Furthermore, the
Adviser agrees to notify the Manager on a timely basis of any fee schedule it
enters into with any other client of similar type which is lower than the fee
paid by the Manager.
4. OTHER SERVICES. At the request of the Trust or the Manager, the
Adviser in its discretion may make available to the Trust office facilities,
equipment, personnel, and other services. Such office facilities, equipment,
personnel and services shall be provided for or rendered by the Adviser and
billed to the Trust or the Manager at a price to be agreed upon by the Adviser
and the Trust or the Manager.
5. REPORTS. The Manager (on behalf of the Trust) and the Adviser agree
to furnish to each other, if applicable, current prospectuses, proxy
statements, reports to shareholders, certified
2
<PAGE> 3
statements of financial condition, and such other information with regard to
their affairs as each may reasonably request.
6. STATUS OF ADVISER. The services of the Adviser to the Trust are not
to be deemed exclusive, and the Adviser and its directors, officers, employees
and affiliates shall be free to render similar services to others so long as
its services to the Trust are not impaired thereby. The Adviser shall be deemed
to be an independent contractor and shall, unless otherwise expressly provided
or authorized, have no authority to act for or represent the Manager or the
Trust in any way or otherwise be deemed an agent to the Manager or the Trust.
7. CERTAIN RECORDS. Any records required to be maintained and
preserved pursuant to the provisions of Rule 31a-1 and Rule 31a-2 promulgated
under the 1940 Act which are prepared or maintained by the Adviser on behalf of
the Manager or the Trust are the property of the Manager or the Trust and will
be surrendered promptly to the Manager or Trust on request.
8. LIABILITY OF ADVISER. No provision of this Agreement shall be
deemed to protect the Adviser against any liability to the Trust or its
shareholders to which it might otherwise be subject by reason of any willful
misfeasance, bad faith, or gross negligence in the performance of its duties or
the reckless disregard of its obligations under this Agreement.
9. PERMISSIBLE INTERESTS. To the extent permitted by law, Trustees,
agents, and shareholders of the Trust are or may be interested in the Adviser
(or any successor thereof) as directors, partners, officers, or shareholders,
or otherwise; directors, partners, officers, agents, and shareholders of the
Adviser are or may be interested in the Trust as Trustees, shareholders or
otherwise; and the Adviser (or any successor thereof) is or may be interested
in the Trust as a shareholder or otherwise; provided that all such interests
shall be fully disclosed between the parties on an ongoing basis and in the
Trust's registration statement as required by law.
10. DURATION AND TERMINATION. This Agreement, unless sooner terminated
as provided herein, shall continue for two years after its initial approval as
to each Portfolio and thereafter for periods of one year for so long as such
continuance thereafter is specifically approved at least annually (a) by the
vote of a majority of those Trustees of the Trust who are not parties to this
Agreement or interested persons of any such party, cast in person at a meeting
called for the purpose of voting on such approval, and (b) by the Trustees of
the Trust or by vote of a majority of the outstanding voting securities of each
Portfolio; provided, however, that if the shareholders of any Portfolio fail to
approve the Agreement as provided herein, the Adviser may continue to serve
hereunder in the manner and to the extent permitted by the 1940 Act and rules
thereunder. The foregoing requirement that continuance of this Agreement be
"specifically approved at least annually" shall be construed in a manner
consistent with the 1940 Act and the rules and regulations thereunder. This
Agreement may be terminated as to any Portfolio at any time, without the
payment of any penalty, by the Manager, by vote of a majority of the Trustees
of the Trust or by vote of a majority of the outstanding voting securities of
the Portfolio on not less than 30 days' nor more than 60 days' written notice
to the Adviser, or by the Adviser at any time
3
<PAGE> 4
without the payment of any penalty, on 60 days' written notice to the Trust.
This Agreement will automatically and immediately terminate in the event of its
assignment. Any notice under this Agreement shall be given in writing, addressed
and delivered, or mailed postpaid, to the other party at the primary office of
such party, unless such party has previously designated another address.
As used in this Section 10, the terms "assignment," "interested
persons," and a "vote of a majority of the outstanding voting securities" shall
have the respective meanings set forth in the 1940 Act and the rules and
regulations thereunder, subject to such exemptions as may be granted by the
Securities and Exchange Commission under said Act.
11. SEVERABILITY. If any provision of this Agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby.
A copy of the Declaration of Trust of the Trust is on file with the
Secretary of the Commonwealth of Massachusetts, and notice is hereby given that
this instrument is not binding upon any of the Trustees, officers, or
shareholders of the Trust individually.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as of the day and year first written above.
Lazard Asset Management, Inc. AMR Investment Services, Inc.
By: By:
-------------------------- --------------------------
Name: William F. Quinn
------------------------ President
Title:
-----------------------
4
<PAGE> 5
Schedule A to the
American AAdvantage Funds
Investment Advisory Agreement
between
AMR Investment Services, Inc.
and
Lazard Asset Management
AMR Investment Services, Inc. shall pay compensation to Lazard Asset
Management pursuant to section 3 of the Investment Advisory Agreement between
said for rendering investment management services with respect to the
International Equity Fund in accordance with the following annual percentage
rates:
0.50% per annum for the first $100 million
0.325% per annum for the next $400 million
0.20% per annum on all excess assets
In calculating the amount of assets under management solely for the
purpose of determining the applicable percentage rate, there shall be included
all other assets managed by the Adviser on behalf of American Airlines, Inc.
To the extent that a Fund invests all of its investable assets (i.e.,
securities and cash) in another investment company, however, no portion of the
advisory fee attributable to that Fund as specified above shall be paid for the
period that such Fund's assets are so invested.
DATED: March 1, 1999
<PAGE> 1
EXHIBIT (d)(ii)(K)
Amendment dated March 1, 1999
to the
American AAdvantage Funds
Investment Advisory Agreement
between
AMR Investment Services, Inc.
and
Independence Investment Associates, Inc.
AMR Investment Services, Inc. shall pay compensation to Independence
Investment Associates, Inc. pursuant to section 3 of the Investment Advisory
Agreement between said parties for rendering investment management services with
respect to the Balanced, Growth and Income and International Equity Funds in
accordance with the following annual percentage rates:
0.50% per annum of the first $30 million
0.25% per annum of the next $70 million
0.20% per annum of all excess assets
In calculating the amount of assets under management solely for the
purpose of determining the applicable percentage rate, there shall be included
all other assets or trust assets of American Airlines, Inc. also under
management by the Adviser.
To the extent that a Fund invests all of its investable assets (i.e.,
securities and cash) in another investment company, however, no portion of the
advisory fee attributable to that Fund as specified above shall be paid for the
period that such Fund's assets are so invested.
IN WITNESS WHEREOF, the parties have executed the foregoing amendment
effective as of March 1, 1999.
Independence Investment Associates AMR Investment Services, Inc.
By: By:
---------------------------- -----------------------------
William F. Quinn
Name: President
---------------------------
Title:
--------------------------
<PAGE> 1
EXHIBIT (d)(iii)(C)
SUPPLEMENTAL TERMS AND CONDITIONS TO
THE ADMINISTRATIVE SERVICES AGREEMENT BETWEEN THE
AMERICAN AADVANTAGE FUNDS
AND
AMR INVESTMENT SERVICES, INC.
The following terms and conditions hereby are incorporated into the
Administrative Services Agreement ("Agreement") dated November 1, 1995 as
supplemented November 21, 1997, between the American AAdvantage Funds ("Trust")
and AMR Investment Services, Inc. ("Manager"). To the extent that there is any
conflict between the terms and conditions of the Agreement and these
Supplemental Terms and Conditions ("Supplement"), this Supplement shall govern.
1. Paragraph 3 of the Agreement is hereby amended to read, in its
entirety, as follows:
3. Fees for Administrative Services. As compensation for its
administrative services pursuant to Section 2 of this Agreement, the
Trust shall pay AMR an annualized fee equal as follows:
a. If a Fund manages its assets directly or invests all of its
investable assets (i.e., securities and cash) in another registered
investment company where AMR does not act as Manager and Administrator,
the Trust shall pay AMR an annualized fee equal to: (1) 0.05% of the
net assets of the AMR Class of the Balanced Fund, the Large Cap Value
Fund, the International Equity Fund, the Intermediate Bond Fund, the
Short-Term Bond Fund and the Small Cap Value Fund, 0.05% of the net
assets of the Institutional Class of the S&P 500 Index Fund, and 0.30%
of the net assets of all other classes of the Balanced Fund, the Large
Cap Value Fund, the International Equity Fund, the Intermediate Bond
Fund, the Short-Term Bond Fund, the Small Cap Value Fund and the S&P
500 Index Fund; (2) 0.10% of the net assets of the Money Market Fund
and the Municipal Money Market Fund; (3) 0.01% of the net assets of the
Institutional Class of the U.S. Government Money Market Fund and 0.10%
of the net assets of all other classes of the U.S. Government Money
Market Fund; and (4) such percentage of any other class or Fund
encompassed by this Agreement as specified by one or more schedules
attached hereto.
b. If a Fund invests all of its investable assets (i.e., securities and
cash) in another registered investment company for which AMR acts as
Manager and Administrator, the Trust shall pay AMR an annualized fee
equal to: (1) 0.00% of the net assets of the AMR Class, 0.05% of the
net assets of the Institutional Class of the S&P 500 Index Fund, and
0.25% of the net assets of all other classes of the Balanced Fund, the
Large Cap Value Fund, the International Equity Fund, the Intermediate
Bond Fund, the Short-Term Bond Fund, the Small Cap Value Fund
<PAGE> 2
and the S&P 500 Index Fund; (2) 0.10% of the net assets of the Money
Market Fund and the Municipal Money Market Fund; (3) 0.01% of the net
assets of the Institutional Class of the U.S. Government Money Market
Fund and 0.10% of all other classes of the U.S. Government Money
Market Fund; and (4) such percentage of any other class or Fund
encompassed by this Agreement as specified by one or more schedules
attached hereto.
The above-described compensation shall be calculated and accrued daily
and be payable quarterly. The Trust acknowledges that none of the compensation
paid pursuant to this Agreement is compensation for portfolio allocation or
investment advisory functions performed by AMR pursuant to its separate
Management Agreement with the Trust; rather, AMR is compensated for those
services pursuant to a separate Management Agreement between the Trust and AMR.
2. Notice is hereby given that the Agreement and this Supplement are
executed on behalf of the Trustees of the Trust and not individually and that
the obligations of the Agreement and the Supplement are not binding upon any of
the Trustees, officers, or shareholders of the Trust, but are binding only upon
the assets and property of the Fund to which the Agreement and this Supplement
relate.
Dated: January 1, 1999
AMERICAN AADVANTAGE FUNDS
By:
----------------------------
Barry Y. Greenberg
Vice President and Assistant
Secretary
AMR INVESTMENT SERVICES, INC.
By:
----------------------------
William F. Quinn
President
<PAGE> 1
EXHIBIT (h)(iv)
CREDIT AGREEMENT
CREDIT AGREEMENT, dated as of December 1, 1999, by and among AMR
INVESTMENT SERVICES TRUST, AMERICAN AADVANTAGE FUNDS AND AMERICAN AADVANTAGE
MILEAGE FUNDS (the "Trusts), each acting on behalf of its portfolios or funds,
as indicated on Schedule I hereto, as the same may from time to time be amended
(each such portfolio or fund being hereafter referred to as a "Borrower" and
collectively as the "Borrowers") and AMR INVESTMENT SERVICES INC. ("AMR").
WHEREAS, each of the Borrowers is authorized to borrow money for
temporary or emergency purposes to satisfy redemption requests; and
WHEREAS, from time to time and on a discretionary basis, AMR would be
willing to advance funds to the Borrowers for such purposes, on the terms and
subject to the conditions set forth below;
NOW, THEREFORE, in consideration of the mutual promises and agreements
set forth herein, the parties hereto agree as follows:
1. DEFINITIONS. As used herein, the following terms shall have the following
meanings:
Agreement. This Credit Agreement, together with any exhibits and
schedules hereto, as originally executed or as amended or supplemented from time
to time.
Business Day. Any day other than a Saturday, Sunday or legal holiday in
Dallas, Texas and which is also a day on which the New York Stock Exchange is
open for trading.
Event of Default. As defined in Section 6.1 hereof.
Base Rate. For any day, a fluctuating interest rate per annum equal to
the weighted average of the rates on overnight federal funds transactions with
members of the Federal Reserve System arranged by federal funds brokers, as
published for such day (or, if such day is not a Business Day, for the next
preceding Business Day) by the Federal Reserve Bank of New York (as accessible
through BLOOMBERG(R) under FEDL01 Index HP <Go>), or if such rate is not so
published for any day that is a Business Day, the average of the quotations for
such day on such transactions received by AMR from three federal funds brokers
of recognized standing selected by AMR.
Indebtedness. All obligations, contingent and otherwise, that in
accordance with generally accepted accounting principles should be classified
upon the obligor's balance sheet as indebtedness, including, without limitation,
all debt for money borrowed and similar extensions of credit, whether direct or
indirect.
Loan or Loans. As defined in Section 2.1 hereof.
Loan Request. As defined in Section 2.2(a) hereof.
<PAGE> 2
Total Assets. As determined for each Borrower, all assets of such
Borrower classified as such on its books and records in accordance with the
Investment Company Act of 1940, as amended, and the rules and regulations of the
Securities and Exchange Commission thereunder.
2. CREDIT FACILITY.
2.1. Credit Facility. Subject to the terms and conditions set forth in
this Agreement and in its sole discretion, AMR may make loans ("Loans") to one
or more Borrowers from time to time on any Business Day during the period from
the date hereof to (but not including) the Termination Date, as may be requested
by any such Borrower. Each Loan shall be in the principal amount stated in the
applicable Loan Request, and shall be in a minimum amount of at least $100,000
and an integral multiple of $1,000.
2.2. Notice and Manner of Borrowing. All Loans shall be requested and
funded in accordance with the procedures set forth below:
(a) Loan Requests. Each request by a Borrower for a Loan
hereunder shall be made by telephonic notice to AMR (a "Loan Request") prior to
11:00 a.m., Dallas time, on a Business Day. Each Loan Request shall be
irrevocable and shall state the principal amount of the requested Loan and the
name of the Borrower for which the Loan is being requested. Each Loan Request
shall be made by a duly authorized representative of such Borrower and may be
made electronically or by telephone, provided that each telephonic Loan Request
shall be promptly confirmed to AMR in writing or by an electronic record
acceptable to AMR.
(b) Funding the Loans. If, upon receipt of a Loan Request, AMR
is willing to make a Loan to the requesting Borrower, AMR will do so by
depositing or wiring the proceeds thereof, on the same day and in immediately
available funds, to such custodial account of such Borrower as the Borrower
shall have designated by notice to AMR.
2.3. Loan Account. AMR will maintain a separate loan account on its
books for each Borrower and will recorded on the appropriate loan account: (a)
all Loans made by AMR to such Borrower, (b) all payments on such Loans made by
such Borrower, and (c) all other charges and expenses properly chargeable to
such Borrower hereunder. The debit balance of each loan account shall reflect
the amount of the applicable Borrower's indebtedness from time to time to AMR
hereunder and shall constitute evidence of such indebtedness.
2.4. Repayment of Loans. Each Loan made hereunder shall be due and
payable no later than thirty (30) days following the date on which the Loan is
made, provided, however, that any Loan may be prepaid in accordance with Section
2.7. Only the relevant Borrower shall be liable for the payment of the principal
amount of or any interest or other charges payable on or in connection with the
Loans made to such Borrower (or to a Trust for the account of such Borrower).
2
<PAGE> 3
2.5. Interest.
(a) Interest Rate on Loans. The outstanding principal amount
of each Loan shall bear interest until maturity at the Base Rate. Interest
accrued on each Loan shall be paid by the applicable Borrower on the last day of
each month and upon the maturity of such Loan.
(b) Overdue Principal and Interest. Overdue principal and (to
the extent permitted by applicable law) interest on each Loan and all other
overdue amounts payable hereunder shall bear interest compounded monthly and
payable on demand at a rate per annum equal to two percent above the Base Rate
until such amount is paid in full.
(c) Limitation on Interest. No provision of this Agreement
shall require the payment or permit the collection of interest in excess of the
rate then permitted by applicable law.
2.6. Place and Mode of Payments; Computations.
(a) Each payment made or caused to be made by a Borrower to
AMR under this Agreement shall be made directly to AMR at its principal offices
in Dallas, Texas, or at such other address as AMR may specify by notice to the
Borrowers from time to time, not later than 11:00 a.m., Dallas time, on the due
date of each such payment, in immediately available and freely transferable
funds.
(b) If any sum would, but for the provisions of this paragraph
(b), become due and payable to AMR by any Borrower on any day that is not a
Business Day, then such sum shall become due and payable on the next succeeding
Business Day, and interest payable to AMR under this Agreement shall be adjusted
by AMR accordingly.
(c) All computations of interest and fees hereunder shall be
made by AMR on the basis of a 360-day year and paid for the actual number of
days elapsed.
(d) AMR will determine the Base Rate in effect from time to
time. Any change in the Base Rate shall, for all purposes of this Agreement,
become effective on, and from the beginning of, the day on which such change
shall first be determined by AMR. AMR shall notify each Borrower having
outstanding Loans of any change in the Base Rate.
(e) Each payment by a Borrower under this Agreement shall be
made without set-off or counterclaim and free and clear of and without deduction
or withholding of any kind.
2.7. Optional and Mandatory Prepayments.
(a) Each Borrower may prepay any outstanding Loan to it, in
whole or in part, at any time and without charge or penalty, upon telephonic
notice to AMR of its intention to repay such Loan prior to 2:00 p.m., Dallas
time, on the date such prepayment is to be made.
(b) Upon each repayment or prepayment of any principal of any
Loan pursuant to
3
<PAGE> 4
any of the provisions of this Agreement, the applicable Borrower shall pay to
AMR, and there shall become due and payable on the date of each such repayment
or prepayment, all of the unpaid interest accrued to such date on the amount of
the principal of the Loans being repaid or prepaid by such Borrower on such
date. Whenever any interest on and any principal of the Loans are paid
simultaneously hereunder, the whole amount paid shall be applied first to
interest then due and payable.
2.8. Use of Proceeds. The proceeds of each Loan shall be used by the
applicable Borrower for temporary or emergency purposes to meet requests for
shareholder redemptions.
2.9. Discretionary Facility. It is acknowledged and agreed by each
Borrower that AMR has no obligation to make any Loan hereunder, and that the
decision whether or not to make any Loan requested by any Borrower is within the
sole and exclusive discretion of AMR. AMR may terminate the credit facilities
provided for herein either in whole or in part with respect to one or more
Borrowers at any time by written notice to the affected Borrower(s).
3. EFFECTIVENESS AND TERM OF AGREEMENT; CONDITIONS PRECEDENT.
3.1. Effectiveness of Agreement; Termination. This Agreement shall
become effective upon the receipt by AMR of executed original counterparts of
this Agreement, signed by AMR and each Borrower and shall remain in effect until
terminated by AMR by at least thirty (30) days notice to the Borrowers,
provided, however, that no such termination shall affect the obligations of any
Borrower with respect to any outstanding Loan.
3.2. Conditions of Loans. The willingness of AMR in its discretion to
make any Loan to a Borrower shall be subject to the satisfaction, at or before
the time each such Loan is made, of each of the following conditions precedent
(unless and to the extent that satisfaction of such conditions precedent or any
of them is waived by AMR):
(a) AMR shall have received a Loan Request from the applicable
Borrower, as required by Section 2.2(a);
(b) the representations made by such Borrower hereunder are
true and correct as of the date of such request and will be true and correct
after giving effect to the requested Loan;
(c) no Event of Default shall have occurred and be continuing
with respect to such Borrower; and
(d) the making of such Loan shall not contravene any law,
regulation, decree or order binding on such Borrower or AMR.
4. REPRESENTATIONS AND WARRANTIES BY BORROWERS. Each Borrower, severally and not
jointly, represents and warrants to AMR that, as of the date hereof and at the
time of each Loan Request by such Borrower:
4.1. Organization. The Trust of which such Borrower is a part is duly
organized and
4
<PAGE> 5
validly existing as a business trust under the laws of its jurisdiction of
organization.
4.2. Authorization. The execution, delivery and performance by such
Borrower of this Agreement and the borrowing of Loans for its account are within
the powers of such Borrower, have been duly authorized by all necessary and
proper action on the part of such Borrower, and do not and will not (i) violate
or contravene any provision of such Borrower's charter documents or bylaws, or
any amendment thereof; (ii) violate or contravene any provision of such
Borrower's investment policies; (iii) conflict with, or result in a breach of
any material term, condition or provision of, or constitute a default under, any
material agreement to which such Borrower is a party or by which such Borrower
or any of its assets are bound; or (iv) violate or contravene any provision of
any material law, regulation, order, ruling or interpretation thereunder or any
decree, order or judgment of any court or governmental or regulatory authority.
4.3. Compliance with Borrowing Limits. The Loan requested by each Loan
Request by such Borrower:
(a) Is permitted under the Borrower's investment policies;
(b) Will not, when made, cause the aggregate principal amount
of all outstanding Loans to such Borrower to exceed 5%, or cause the aggregate
principal amount of all outstanding Loans plus all other outstanding
Indebtedness of such Borrower to exceed 10%, of the current market value of such
Borrower Total Assets; and
(c) The proceeds of such Loan will be applied by such Borrower
to meet shareholder redemptions.
5. REPRESENTATIONS AND WARRANTIES BY AMR. AMR represents and warrants to each of
the Borrowers that:
5.1. Organization. AMR is duly organized and validly existing as a
corporation under the laws of its jurisdiction of organization.
5.2. Authorization. The execution, delivery and performance by such AMR
of this Agreement and the making of the Loans to Borrowers as contemplated
hereby are within the powers of AMR, have been duly authorized by all necessary
and proper action on the part of AMR, and do not and will not (i) violate or
contravene any provision of AMR's charter documents or bylaws, or any amendment
thereof; (ii) conflict with, or result in a breach of any material term,
condition or provision of, or constitute a default under, any material agreement
to which AMR is a party or by which AMR or any of its assets are bound; or (iii)
violate or contravene any provision of any material law, regulation, order,
ruling or interpretation thereunder or any decree, order or judgment of any
court or governmental or regulatory authority.
6. EVENTS OF DEFAULT; ACCELERATION. If any of the following events ("Events of
Default") shall occur:
5
<PAGE> 6
(a) if any Borrower shall fail to pay any principal of or
interest on any Loan to it when due and payable, and such failure shall continue
for three Business Days;
(b) if any Borrower shall fail to perform, discharge, observe
or comply with any other term, covenant and agreement contained herein, and such
failure shall continue unremedied for 30 days after written notice of such
failure has been given to such Borrower by AMR;
(c) if an representation or warranty of any Borrower contained
in this Agreement shall prove to have been materially false or misleading when
made;
(d) if any Borrower (or a Trust of which it is a portfolio or
fund) makes an assignment for the benefit of creditors, or admits in writing its
inability to pay or generally fails to pay its debts as the mature or become
due, or petitions or applies for the appointment of a trustee in bankruptcy or
other custodian, liquidator or receiver for such Borrower or of any substantial
part of its assets, or commences any case or other proceeding relating to such
Borrower under any bankruptcy, reorganization, arrangement, insolvency,
dissolution or liquidation or similar law of any jurisdiction, now or hereafter
in effect, or authorizes the foregoing; or
(e) if any such petition or application is filed or any such
case or other proceeding is commenced against such Borrower (or Trust) and such
Borrower (or Trust) indicates its approval thereof or consent thereto, or an
order for relief or appointing any such trustee in bankruptcy or other
custodian, liquidator or receiver is entered adjudicating such Borrower (or
Trust) bankrupt or insolvent, or approving a petition in any such case or other
proceeding, and such order remains unstayed and in effect for more than 60 days;
then, in such event and without notice or demand by AMR, all outstanding Loans
to such Borrower, all interest thereon and all other amounts payable by such
Borrower under this Agreement shall become and be due and payable without
presentment, demand, protest or notice, all of which are expressly waived by
such Borrower. If any Event of Default shall have occurred and be continuing,
AMR may proceed to protect or enforce its rights against such Borrower by suit
in equity, action at law or other appropriate proceeding, and may proceed to
enforce the payment of all amounts that shall have become due. No remedy
conferred upon AMR herein is intended to be exclusive of any other remedy and
each and every remedy shall be cumulative and shall be in addition to every
other remedy given hereunder or existing at law or in equity.
7. NOTICES. Except as otherwise expressly provided in this Agreement, all
notices, demands and other communications made or required to be given pursuant
to this agreement shall be in writing and shall be delivered to the principal
offices of the recipient, addressed to the attention of such person or persons
as the recipient may specify from time to time.
8. Governing Law; Miscellaneous. This Agreement shall be deemed to be a contract
under the laws of the State of Texas and shall for all purposes be construed in
accordance with and governed by the laws of such State. The rights and remedies
herein expressed are cumulative and not exclusive of any other rights that AMR
or any Borrower as the case may be, would otherwise have. The captions in this
Agreement are for convenience of reference only and shall
6
<PAGE> 7
not define or limit the provisions hereof. This Agreement and any amendment
hereof may be executed in several counterparts, each of which shall be an
original, but all of which together shall constitute one instrument. In proving
this Agreement, it shall not be necessary to produce or account for more than
one such counterpart signed by the party against whom enforcement is sought.
9. Severability. If any of the provisions of this Agreement or the application
thereof to any party is held to be invalid, illegal or unenforceable in any
respect, such invalidity, illegality or unenforceability shall not affect any
other term or provision hereof or the application thereof to any other party
hereto or to any other person or entity or circumstance.
10. Entire Agreement, AMENDMENTS, Etc. This Agreement constitutes the entire
understanding of the parties with respect to the transactions contemplated
hereby. Any consent or approval required or permitted by this Agreement to be
given by AMR may be given, and any term of this Agreement may be amended, and
the performance or observance by any Borrower of any terms of this Agreement or
the continuance of any Event or Default by such Borrower, or any condition or
term hereof, may be waived (either generally or in a particular instance and
either retroactively or prospectively) with, but only with, the written consent
of such Borrower and AMR. No waiver shall extend to or affect any obligation not
expressly waived or impair any right consequent thereon. No course of dealing or
delay or omission on the part of AMR in exercising any right shall operate as a
waiver thereof or otherwise be prejudicial thereto. No notice to or demand on
any Borrower shall entitle such Borrower to other or further notice in similar
or other circumstances.
11. WAIVER OF JURY TRIAL. AMR AND EACH BORROWER AGREE THAT NONE OF THEM NOR ANY
ASSIGNEE OR SUCESSOR SHALL SEEK A JURY TRIAL IN ANY LAWSUIT, PROCEEDING,
COUNTERCLAIM OR ANY OTHER ACTION BASED UPON, OR ARISING OUT OF, THIS AGREEMENT.
12. OBLIGATIONS SEVERAL; BUSINESS TRUSTS. AMR acknowledges that the Obligations
of each Borrower hereunder are several and that AMR shall have no recourse
against any Borrower for the payment or performance of the Obligations of any
other Borrower. AMR acknowledges that the Trusts are business trusts organized
under the laws of the Commonwealth of Massachusetts and that the trustees of
each Trust are entering into this Agreement as trustees and not personally. AMR
agrees that neither the officers, trustees nor shareholders of the Borrowers
shall be personally liable for any obligation, loss, claim, expense, fee or
other charge arising hereunder.
7
<PAGE> 8
IN WITNESS WHREOF, each Trust, acting for and on behalf of each of its
Borrower portfolios or funds, and AMR have caused this Agreement to be duly
executed as an instrument under seal by its duly authorized representatives as
of the date first above written.
AMR INVESTMENT SERVICES TRUST
AMERICAN AADVANTAGE FUNDS
AMERICAN AADVANTAGE MILAGE FUNDS
For and on behalf of each
Borrower listed on Schedule I
hereto
By:
----------------------------
Title:
--------------------------
AMR INVESTMENT SERVICES INC.
By:
-----------------------------
Title:
--------------------------
8
<PAGE> 9
SCHEDULE I
BORROWERS
<TABLE>
<CAPTION>
Investment Company Portfolio or Fund
- ------------------ -----------------
<S> <C>
AMR INVESTMENT SERVICES TRUST
Balanced Portfolio
Large Cap Value Portfolio
Small Cap Value Portfolio
International Equity Portfolio
AMERICAN AADVANTAGE FUNDS
American AAdvantage Balanced Fund
American AAdvantage Large Cap Value Fund
American AAdvantage Small Cap Value Fund
American AAdvantage International Equity Fund
AMERICAN AADVANTAGE MILEAGE FUNDS
American AAdvantage Balanced Mileage Fund
American AAdvantage Large Cap Value Mileage Fund
American AAdvantage Small Cap Value Mileage Fund
American AAdvantage International Equity Mileage Fund
</TABLE>
<PAGE> 1
EXHIBIT (h)(v)
ADMINISTRATIVE SERVICES AGREEMENT
This Agreement, dated as of date set forth below, is made by and among
AMERICAN AADVANTAGE FUNDS, a Massachusetts business trust, AMERICAN AADVANTAGE
MILEAGE FUNDS, a Massachusetts business trust, AMR INVESTMENT SERVICES TRUST, a
New York common law trust (collectively, the "Trusts"), AMR INVESTMENT SERVICES,
INC., a Texas corporation ("AMR"), and STATE STREET BANK AND TRUST COMPANY, a
Massachusetts trust company ("State Street").
WHEREAS, AMR serves as the manager and investment adviser to the
Trusts; and
WHEREAS, State Street serves as the custodian to the Trusts under
various Custodian Agreements (as amended from time to time, the "Custodian
Agreements"); and
WHEREAS, AMR desires to invest certain excess cash balances of certain
series of the Trusts (each, a "Fund") in various futures contracts;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
hereinafter contained, the parties hereto agree as follows:
SECTION 1. ESTABLISHMENT OF ACCOUNTS. State Street shall establish and
maintain a segregated account or accounts for and on behalf of each Fund listed
on Schedule A hereto (each, an "Account"). All investment transactions governed
herein with respect to a Fund shall flow through that Fund's Account. The rights
and obligations of the parties with respect to the Account shall continue to be
governed by the provisions of the Custodian Agreements between each Trust and
State Street, as amended from time to time, in addition to the provisions of
this Agreement. In the event of a conflict, the provisions herein shall control.
Unless defined herein, all terms used in this Agreement shall have the meaning
assigned to them in the Custodian Agreements.
SECTION 2. SERVICE. State Street is hereby given the following standing
instructions: (i) to transfer all incremental cash flows of each Fund on a daily
basis to such Fund's Account, (ii) to determine the amount of "liquid assets"
held in each Fund's Account consisting of cash, short-term holdings, United
States Treasury securities, investments in the AMR Investment Services Trust
Money Market Portfolios and the American Select Cash Reserve Fund and variation
margin ("Liquid Assets") as of 12 noon on each day the New York Stock Exchange
is open for business,. (iii) to then instruct the futures commission merchant
specified in Schedule A (the "FCM") to purchase the futures contracts on behalf
of a Fund specified in Schedule A in an amount equal to the amount by which
Liquid Assets on such day exceed the outstanding amount of such futures
contracts or to sell such futures contracts in an amount equal to the amount by
which Liquid Assets on such day are less than the outstanding amount of such
futures contracts, as appropriate, (iv) to purchase a United States Treasury
security in the amount of the margin required to be maintained with the FCM with
respect to such futures contract as advised by the FCM and to deliver the same
to the FCM to be held as margin for the futures contracts purchased, and
thereafter to purchase a United States Treasury security in the amount of the
additional margin required to be provided to the FCM with respect to such
futures contract as advised by the FCM, and in each case to deliver such
securities to the FCM to be held as margin under the terms of the relevant
Futures Account Agreement. Each Trust hereby declares that
1
<PAGE> 2
each payment or delivery of securities made for its account to an FCM as
contemplated hereby is for a proper trust purpose, and represents and agrees
that the instructions to State Street set forth in this Agreement shall
constitute "Proper Instructions" under its Custodian Agreement.
SECTION 3. LIMITATIONS. All Liquid Assets shall be invested in
accordance with the instructions of AMR as set forth in Schedule A and State
Street is not permitted to substitute other investments for those specified in
this Agreement. Subject to the limitations set forth therein, AMR, in its sole
discretion, may amend from time to time, Schedule A upon notice to State Street.
SECTION 4. STANDARD OF CARE. In performing its obligations hereunder,
State Street shall be subject to the standard of care specified in the relevant
Custodian Agreement.
SECTION 5. REPRESENTATIONS AND WARRANTIES. Each party hereto represents
and warrants that (a) it has the power to execute and deliver this Agreement, to
enter into the transactionscontemplated hereby, and to perform its obligations
hereunder; (b) has taken all necessary action to authorize such execution,
delivery, and performance; (c) this Agreement constitutes a legal, valid, and
binding obligation enforceable against it; and (d) the execution, delivery, and
performance by it of this Agreement will at all times comply with all applicable
laws and regulations.
SECTION 6. COMPENSATION. AMR shall pay State Street an annualized fee
equal to 0.05% of the assets invested in futures contracts for domestic equity
funds and 0.10% of the assets invested in futures contracts for international
equity funds. This fee shall be calculated and accrued daily and paid quarterly.
SECTION 7. EFFECTIVE PERIOD; TERMINATION AND AMENDMENT. This Agreement
shall become effective as of its execution and shall continue in full force and
effect until terminated by either party by an instrument in writing delivered or
mailed, postage prepaid to the other party, such termination to take effect not
sooner than sixty (60) days after the date of such delivery or mailing, or such
shorter period as both parties hereto shall agree upon in writing. Except for
Schedule A hereto (which, subject to the limitations set forth therein, can be
amended by written notice from AMR to State Street), this Agreement may be
amended by either party in writing with the consent of both parties.
SECTION 8. GOVERNING LAW. This Agreement shall be construed and the
provisions hereof interpreted under and in accordance with the laws of the
Commonwealth of Massachusetts.
SECTION 9. ASSIGNMENT. This Agreement may not be assigned by either
party without the written consent of the other.
SECTION 10. SEVERABILITY. In the event that any provision of this
Agreement is held illegal, void or unenforceable, the balance shall remain in
effect.
2
<PAGE> 3
IN WITNESS WHEREOF, each of the parties has caused this instrument to be
executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of this 29th day of November, 1999.
AMERICAN AADVANTAGE FUNDS
AMERICAN AADVANTAGE MILEAGE
FUNDS AMR INVESTMENT
SERVICES TRUST, and AMR
INVESTMENT SERVICES, INC.
By:
-------------------------------
William F. Quinn
President
STATE STREET BANK AND TRUST COMPANY
By:
-------------------------------
Name:
Title:
3
<PAGE> 4
SCHEDULE A
TO THE
ADMINISTRATIVE SERVICES AGREEMENT
STATEMENT OF INTENT/OPERATING PROCEDURES
State Street Bank and Trust Company ("State Street") shall fulfill its
duties set forth in Section 2 and Section 3 of the Administrative Services
Agreement in accordance with the following:
I. SCOPE OF THE ENGAGEMENT.
AMR is seeking to equitize the cash balances of certain mutual fund
portfolios. AMR will manage the underlying cash balances and will direct State
Street to purchase the futures contract to maintain appropriate equity exposure.
AMR anticipates maintaining a 5% equity (10% for small cap) exposure on a daily
basis.
The mutual funds to be equitized, the equitized amounts and the futures
contracts used are listed below. AMR may in its judgement direct State Street to
implement the equitization using futures contracts other than those listed
below.
II. IMPLEMENTATION.
AMR will direct State Street to equitize the initial portfolio
balances, and State Street will buy and or sell the appropriate number of
approved contracts to reflect changes in the underlying cash balances using the
procedures listed in Section III. Such procedures may be modified by the mutual
consent of AMR and State Street. With respect to the International Equity
Portfolio of the AMR Investment Services Trust, AMR hereby instructs that
contracts to be purchased from the list set forth in Section VI be purchased
substantially in proportion to the capitalization weights of the nine countries
as they comprise the Morgan Stanley Capital International Europe, Asia and Far
East Index.
III. DAILY OPERATING PROCEDURES
Noon State Street's Mutual Fund Custody Group (MFG)
transfers appropriate cash into AMR's STIF account.
MFG e-mails activity spreadsheet to State Street's
investment group (SSgA) and AMR.
12:00pm MFG calls SSgA if spreadsheet will be delayed.
1
<PAGE> 5
12:00-1:00pm AMR and SSgA Operational Procedures followed:
o Values on spreadsheet are validated.
o Consistency Checks conducted.
o Confirm if special notice re-balancing is
requested.
Action steps if validity questioned:
o Assumptions checked.
o Designated MFG team notified - problem
logged.
1:00pm SSgA Operations forwards activity spreadsheet to
Portfolio Management Team.
1:00-1:30pm Portfolio Manager loads cash balance data into
trading system. Futures volume is determined by
asset pool.
1:30pm Portfolio Manager sends trades to broker
4:45pm Porfolio Manager electronically receives trade
confirmation data. Prices are confirmed. Trades are
sent to custody.
8:00am(next day) SSgA Operations sends daily Margin Calculation to
MFG who conduct a second reconciliation.
IV. TRUST FUND
AMR INVESTMENT SERVICES TRUST Balanced Portfolio
Large Cap Value Portfolio
International Equity Portfolio
Small Cap Value Portfolio
AMERICAN AADVANTAGE FUNDS* Balanced Fund
Large Cap Value Fund
International Equity Fund
Small Cap Value Fund
AMERICAN AADVANTAGE MILEAGE FUNDS* Balanced Mileage Fund
Large Cap Value Mileage Fund
International Equity Mileage Fund
Small Cap Value Mileage Fund
*Inactive for purposes of this Agreement. To be activated upon prior notice
from Trust.
2
<PAGE> 6
V. APPROVED FUTURES CONTRACTS
<TABLE>
<CAPTION>
PORTFOLIO FUTURES CONTRACT USED FCM
--------- --------------------- ---
<S> <C> <C>
Balanced S&P 500 Goldman Sachs & Co.
Large Cap Value S&P 500 Goldman Sachs& Co.
International Equity Approved List of CFTC Futures
Contracts - Goldman Sachs& Co.
See Section VI
Small Cap Equity Russell 2000 Goldman Sachs& Co.
</TABLE>
VI. LIST OF APPROVED FUTURES CONTRACTS FOR INTERNATIONAL EQUITY PORTFOLIO
<TABLE>
<CAPTION>
Country Contract Name
------- -------------
<S> <C>
U.K. FTSE
Germany DAX
France CAC 40
Sweden OMX
Italy MIB 30
Spain IBEX 35
Japan TOPIX
Nikkei 300
Hong Kong Hang Seng
Australia All Ords
Canada TSE 35
</TABLE>
3
<PAGE> 7
ACCEPTED AND APPROVED BY:
AMERICAN AADVANTAGE FUNDS
AMERICAN AADVANTAGE MILEAGE
FUNDS AMR INVESTMENT
SERVICES TRUST, and AMR
INVESTMENT SERVICES, INC.
By:
--------------------------------
William F. Quinn
President
ACCEPTED AND APPROVED BY:
STATE STREET BANK AND TRUST COMPANY
By:
--------------------------------
Name:
Title:
DATED: November 29, 1999
