-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GEu7aqz9EAVUR64aAXlO/719+q6+w/Tlyk1brz3sN+PinRER+p/B6giYyi+vC6Qd gtNAYae/u3eMPLpjNQUngA== 0000950134-98-001610.txt : 19980302 0000950134-98-001610.hdr.sgml : 19980302 ACCESSION NUMBER: 0000950134-98-001610 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 19980227 EFFECTIVENESS DATE: 19980227 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN AADVANTAGE FUNDS CENTRAL INDEX KEY: 0000809593 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] STATE OF INCORPORATION: MA FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: SEC FILE NUMBER: 033-11387 FILM NUMBER: 98552659 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: SEC FILE NUMBER: 811-04984 FILM NUMBER: 98552660 BUSINESS ADDRESS: STREET 1: 4333 AMON CARTER BLVD CITY: FORT WORTH STATE: TX ZIP: 76155 BUSINESS PHONE: 8179673500 MAIL ADDRESS: STREET 1: PO BOX 619003 MD 5645 CITY: DFW AIRPORT STATE: TX ZIP: 75261-9003 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN EAGLE FUNDS DATE OF NAME CHANGE: 19890813 485BPOS 1 POST-EFFECTIVE AMENDMENT NOS. 24 & 25 TO FORM N-1A 1 As filed with the Securities and Exchange Commission on February 26, 1998 1933 Act File No. 33-11387 1940 Act File No. 811-4984 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-1A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X] Pre-Effective Amendment No. [ ] ---- Post-Effective Amendment No. 24 [X] ---- and/or REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X] Amendment No. 25 ---- (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 It is proposed that this filing will become effective (check appropriate box) [ ] immediately upon filing pursuant to paragraph (b) [X] on March 2, 1998 pursuant to paragraph (b) [ ] 60 days after filing pursuant to paragraph (a)(1) [ ] on (date) pursuant to paragraph (a)(1) [ ] 75 days after filing pursuant to paragraph (a)(2) [ ] on (date) pursuant to paragraph (a)(2) of Rule 485. Title of Securities Being Registered ...........Shares of Beneficial Interest Registrant has adopted a master-feeder operating structure for each of its series except the American AAdvantage Short-Term Income Fund. This Post-Effective Amendment includes signature pages for the AMR Investment Services Trust and the Equity 500 Index Portfolios, the master trusts. 2 AMERICAN AADVANTAGE FUNDS CONTENTS OF REGISTRATION STATEMENT This registration statement is comprised of the following: Cover Sheet Contents of Registration Statement Cross Reference Sheets Prospectus for the Institutional Class consisting of the following American AAdvantage Funds: Balanced Fund, Growth and Income Fund, International Equity Fund, S&P 500 Index Fund, Intermediate Bond Fund, Short-Term Bond Fund, Money Market Fund, Municipal Money Market Fund and U.S. Government Money Market Fund. Prospectus for the PlanAhead Class consisting of the following American AAdvantage Funds: Balanced Fund, Growth and Income Fund, International Equity Fund, S&P 500 Index Fund, Intermediate Bond Fund, Short-Term Bond Fund, Money Market Fund, Municipal Money Market Fund and U.S. Government Money Market Fund. Prospectus for the AMR Class and Institutional Class consisting of the following American AAdvantage Funds: AMR Class -- Balanced Fund, Growth and Income Fund, International Equity Fund, Intermediate Bond Fund and Short-Term Bond Fund, and Institutional Class -- S&P 500 Index Fund. Prospectus for the Platinum Class of the American AAdvantage Money Market Fund, American AAdvantage Municipal Money Market Fund, American AAdvantage U.S. Government Money Market Fund and American AAdvantage Money Market Mileage Fund. Statement of Additional Information for the AMR Class, Institutional Class and PlanAhead Class of the following American AAdvantage Funds: Balanced Fund, Growth and Income Fund, International Equity Fund, S&P 500 Index Fund, Intermediate Bond Fund, Short-Term Bond Fund, Money Market Fund, Municipal Money Market Fund, and U.S. Government Money Market Fund. Statement of Additional Information for the Platinum Class of the American AAdvantage Money Market Fund, American AAdvantage Municipal Money Market Fund, American AAdvantage U.S. Government Money Market Fund and American AAdvantage Money Market Mileage Fund. Part C Signature Pages Exhibits The purpose of this filing is to include updated financial information of the Registrant for the fiscal year ended October 31, 1997 and to update other information with respect to the 3 Institutional Class, the PlanAhead Class, the AMR Class and the Platinum Class of the Registrant. This filing in no way affects the Prospectus and SAI of the American AAdvantage Short-Term Income Fund. 4 AMERICAN AADVANTAGE FUNDS INSTITUTIONAL CLASS FORM N-1A CROSS-REFERENCE SHEET Part A
FORM N-1A ITEM NO. PROSPECTUS CAPTION - --------- ------------------ 1 Cover Page 2 Table of Fees and Expenses 3 Financial Highlights; Yields and Total Returns 4 Cover Page; Introduction; Investment Objectives, Policies and Risks; Investment Restrictions 5 Management and Administration of the Trusts; Investment Advisers 5A Not Applicable 6 Dividends, Other Distributions and Tax Matters; General Information; Shareholder Communications 7 Management and Administration of the Trusts; Purchase, Redemption and Valuation of Shares 8 Purchase, Redemption and Valuation of Shares 9 Inapplicable
Part B
FORM N-1A STATEMENT OF ADDITIONAL ITEM NO. INFORMATION CAPTION - --------- ----------------------- 10 Cover Page 11 Table of Contents 12 Cover Page 13 Investment Restrictions; Approach to Stock Selection; Other Information 14 Trustees and Officers of the Trust and the AMR Trust; Trustees and Officers of the Equity 500 Index Portfolio 15 Control Persons and 5% Shareholders
5 16 Management, Administrative Services and Distribution Fees; Investment Advisory Agreements 17 Portfolio Securities Transactions 18 Description of the Trust; Other Information 19 Net Asset Value; Redemptions in Kind 20 Tax Information 21 Inapplicable 22 Yield and Total Return Quotations 23 Financial Statements
6 AMERICAN AADVANTAGE FUNDS PLANAHEAD CLASS FORM N-1A CROSS-REFERENCE SHEET Part A
FORM N-1A ITEM NO. PROSPECTUS CAPTION - --------- ------------------ 1 Cover Page 2 Table of Fees and Expenses 3 Financial Highlights; Yields and Total Returns 4 Cover Page; Introduction; Investment Objectives, Policies and Risks; Investment Restrictions 5 Management and Administration of the Trusts; Investment Advisers 5A Not Applicable 6 Dividends, Other Distributions and Tax Matters; General Information; Shareholder Communications 7 Management and Administration of the Trusts; How to Purchase Shares; Retirement Accounts; Distribution of Trust Shares; Valuation of Shares 8 How to Redeem Shares; Exchange Privilege 9 Inapplicable
Part B
FORM N-1A STATEMENT OF ADDITIONAL ITEM NO. INFORMATION CAPTION - --------- ----------------------- 10 Cover Page 11 Table of Contents 12 Not Applicable 13 Investment Restrictions; Approach to Stock Selection; Other Information 14 Trustees and Officers of the Trust and the AMR Trust; Trustees and Officers of the Equity 500 Index Portfolio 15 Control Persons and 5% Shareholders
7 16 Management, Administrative Services and Distribution Fees; Investment Advisory Agreements 17 Portfolio Securities Transactions 18 Description of the Trust; Other Information 19 Net Asset Value; Redemptions in Kind 20 Tax Information 21 Inapplicable 22 Yield and Total Return Quotations 23 Financial Statements
8 AMERICAN AADVANTAGE FUNDS AMR CLASS FORM N-1A CROSS-REFERENCE SHEET Part A
FORM N-1A ITEM NO. PROSPECTUS CAPTION - --------- ------------------ 1 Cover Page 2 Table of Fees and Expenses 3 Financial Highlights; Yields and Total Returns 4 Cover Page; Introduction; Investment Objectives, Policies and Risks; Investment Restrictions 5 Management and Administration of the Trusts; Investment Advisers 5A Not Applicable 6 Dividends, Other Distributions and Tax Matters; General Information; Shareholder Communications 7 Management and Administration of the Trusts; Purchase, Redemption and Valuation of Shares 8 Purchase, Redemption and Valuation of Shares 9 Inapplicable
Part B
FORM N-1A STATEMENT OF ADDITIONAL ITEM NO. INFORMATION CAPTION - --------- ----------------------- 10 Cover Page 11 Table of Contents 12 Not Applicable 13 Investment Restrictions; Approach to Stock Selection; Other Information 14 Trustees and Officers of the Trust and the AMR Trust; Trustees and Officers of the Equity 500 Index Portfolio 15 Control Persons and 5% Shareholders 16 Management, Administrative Services and Distribution Fees; Investment Advisory Agreements
9 17 Portfolio Securities Transactions 18 Description of the Trust; Other Information 19 Net Asset Value; Redemptions in Kind 20 Tax Information 21 Inapplicable 22 Yield and Total Return Quotations 23 Financial Statements
10 AMERICAN AADVANTAGE FUNDS PLATINUM CLASS FORM N-1A CROSS-REFERENCE SHEET Part A
FORM N-1A ITEM NO. PROSPECTUS CAPTION - --------- ------------------ 1 Cover Page 2 Table of Fees and Expenses 3 Financial Highlights; Yields and Total Returns 4 Cover Page; Introduction; Investment Objectives, Policies and Risks; Investment Restrictions 5 Management and Administration of the Trusts 5A Not Applicable 6 Dividends and Tax Matters; General Information; Shareholder Communications 7 Management and Administration of the Trusts; AAdvantage(R)Miles; How to Purchase Shares; Valuation of Shares 8 How to Redeem Shares 9 Inapplicable
Part B
FORM N-1A STATEMENT OF ADDITIONAL ITEM NO. INFORMATION CAPTION - --------- ----------------------- 10 Cover Page 11 Table of Contents 12 Not Applicable 13 Investment Restrictions; Other Information 14 Trustees and Officers of the Trusts and the AMR Trust 15 Control Persons and 5% Shareholders 16 Management, Administrative Services and Distribution Fees 17 Portfolio Securities Transactions 18 Description of the Trust; Other Information
11 19 Net Asset Value; Redemptions in Kind 20 Tax Information 21 Inapplicable 22 Yield and Total Return Quotations 23 Financial Statements
12 PART C. OTHER INFORMATION Information required to be included in Part C is set forth under the appropriate item, so numbered, in Part C of this Registration Statement. 13 THIS PROSPECTUS contains important information about the INSTITUTIONAL CLASS OF THE AMERICAN AADVANTAGE FUNDS ("Trust"), an open-end management investment company which consists of multiple investment portfolios. This Prospectus pertains only to the nine funds listed on this cover page (individually referred to as a "Fund" and, collectively, the "Funds"). EACH FUND, EXCEPT THE S&P 500 INDEX FUND, SEEKS ITS INVESTMENT OBJECTIVE BY INVESTING ALL OF ITS INVESTABLE ASSETS IN A CORRESPONDING PORTFOLIO OF THE AMR INVESTMENT SERVICES TRUST ("AMR TRUST"). THE S&P 500 INDEX FUND INVESTS ALL OF ITS INVESTABLE ASSETS IN THE EQUITY 500 INDEX PORTFOLIO. (THE EQUITY 500 INDEX PORTFOLIO AND THE PORTFOLIOS OF THE AMR TRUST ARE REFERRED TO HEREIN INDIVIDUALLY AS A "PORTFOLIO" AND, COLLECTIVELY, THE "PORTFOLIOS.") EACH PORTFOLIO HAS AN INVESTMENT OBJECTIVE IDENTICAL TO THE INVESTING FUND. The investment experience of each Fund will correspond directly with the investment experience of each Portfolio. Each Fund consists of multiple classes of shares designed to meet the needs of different groups of investors. Institutional Class shares are offered primarily to institutional investors, investing at least $2 million in the Funds. Prospective Institutional Class investors should read this Prospectus carefully before making an investment decision and retain it for future reference. IN ADDITION TO THIS PROSPECTUS, a Statement of Additional Information ("SAI") dated March 1, 1998 has been filed with the Securities and Exchange Commission and is incorporated herein by reference. The SAI contains more detailed information about the Funds. For a free copy of the SAI, call (817) 967-3509. For further information about the Institutional Class or for information on the other classes of shares, please refer to the appropriate address and phone number on the back cover of this Prospectus. The Securities and Exchange Commission maintains a Web site (http://www.sec.gov) that contains the SAI, material incorporated by reference and other information regarding the Funds and the Portfolios. AN INVESTMENT IN ANY OF THE MONEY MARKET FUNDS IS NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT AND THERE CAN BE NO ASSURANCE THAT THEY WILL BE ABLE TO MAINTAIN A STABLE PRICE OF $1.00 PER SHARE. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY SUCH STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. PROSPECTUS March 1, 1998 [AMERICAN AADVANTAGE LOGO] AMERICAN AADVANTAGE FUNDS(R) - Institutional Class - BALANCED FUND GROWTH AND INCOME FUND INTERNATIONAL EQUITY FUND S&P 500 INDEX FUND INTERMEDIATE BOND FUND SHORT-TERM BOND FUND MONEY MARKET FUND MUNICIPAL MONEY MARKET FUND U.S. GOVERNMENT MONEY MARKET FUND MANAGED BY AMR INVESTMENT SERVICES, INC. 14 The AMERICAN AADVANTAGE BALANCED FUND(SM) ("Balanced Fund") seeks income and capital appreciation by investing all of its investable assets in the Balanced Portfolio of the AMR Trust ("Balanced Portfolio") which in turn primarily invests in equity and debt securities (such as stocks and bonds). The AMERICAN AADVANTAGE GROWTH AND INCOME FUND(SM) ("Growth and Income Fund") seeks long-term capital appreciation and current income by investing all of its investable assets in the Growth and Income Portfolio of the AMR Trust ("Growth and Income Portfolio") which in turn primarily invests in equity securities (such as stocks). The AMERICAN AADVANTAGE INTERNATIONAL EQUITY FUND(SM) ("International Equity Fund") seeks long-term capital appreciation by investing all of its investable assets in the International Equity Portfolio of the AMR Trust ("International Equity Portfolio") which in turn primarily invests in equity securities of issuers based outside the United States (such as foreign stocks). The AMERICAN AADVANTAGE S&P 500 INDEX FUND(1) ("S&P 500 Index Fund") seeks to provide investment results that, before expenses, correspond to the total return of common stocks publicly traded in the United States, as represented by the Standard & Poor's 500 Composite Stock Price Index (the "S&P 500" or "Index"), by investing all of its investable assets in the Equity 500 Index Portfolio which in turn invests in common stocks of companies that compose the S&P 500. The AMERICAN AADVANTAGE INTERMEDIATE BOND FUND(SM) ("Intermediate Bond Fund") and the AMERICAN AADVANTAGE SHORT-TERM BOND FUND(SM) ("Short-Term Bond Fund," formerly the American AAdvantage Limited-Term Income Fund) each seeks income and capital appreciation by investing all of its investable assets in the Intermediate Bond Portfolio of the AMR Trust ("Intermediate Bond Portfolio") and the Short-Term Bond Portfolio of the AMR Trust ("Short-Term Bond Portfolio," formerly the Limited-Term Income Portfolio), respectively, which in turn primarily invest in debt obligations. The Intermediate Bond Portfolio seeks to maintain a dollar weighted average duration of three to seven years and the Short-Term Bond Portfolio seeks to maintain a weighted average duration of one to three years. The AMERICAN AADVANTAGE MONEY MARKET FUND(SM) ("Money Market Fund"), AMERICAN AADVANTAGE MUNICIPAL MONEY MARKET FUND(SM) ("Municipal Money Market Fund") and AMERICAN AADVANTAGE U.S. GOVERNMENT MONEY MARKET FUND(SM) ("U.S. Government Money Market Fund" (collectively, the "Money Market Funds") each seeks current income, liquidity, and the maintenance of a stable price per share of $1.00 by investing all of its investable assets in the Money Market Portfolio of the AMR Trust ("Money Market Portfolio"), the Municipal Money Market Portfolio of the AMR Trust ("Municipal Money Market Portfolio") and the U.S. Government Money Market Portfolio of the AMR Trust ("U.S. Government Money Market Portfolio"), respectively (collectively the "Money Market Portfolios"), which in turn invest in high quality, short-term obligations. The Municipal Money Market Portfolio invests primarily in municipal obligations and the U.S. Government Money Market Portfolio invests exclusively in obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities and in repurchase agreements that are collateralized by such obligations. Under a master-feeder operating structure, each Fund seeks its investment objective by investing all of its investable assets in a corresponding Portfolio as described above. Each Portfolio's investment objective is identical to that of its corresponding Fund. Whenever the phrase "all of the Fund's investable assets" is used, it means that the only investment securities that will be held by a Fund will be that Fund's interest in its corresponding Portfolio. AMR Investment Services, Inc. ("Manager") provides investment management and administrative services to the Portfolios, except for the Equity 500 Index Portfolio, and administrative services to the Funds. Bankers Trust Company, ("BT") provides investment advisory, administrative and other services to the Equity 500 Index Portfolio. This master-feeder operating structure is different from that of many other - --------------- (1) S&P is a trademark of The McGraw-Hill Companies, Inc. and has been licensed for use. "Standard and Poor's(R)," "S&P(R)," "Standard & Poor's 500," "S&P 500(R)" and "500" are all trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use by Bankers Trust Company. The S&P 500 Index Fund is not sponsored, sold or promoted by Standard & Poor's, and Standard & Poor's makes no representation regarding the advisability of investing in that Fund. PROSPECTUS 2 15 investment companies which directly acquire and manage their own portfolios of securities. Accordingly, investors should carefully consider this investment approach. See "Investment Objectives, Policies and Risks -- Additional Information About the Portfolios." A Fund may withdraw its investment in a corresponding Portfolio at any time if the Trust's Board of Trustees ("Board") determines that it would be in the best interest of that Fund and its shareholders to do so. Upon any such withdrawal, that Fund's assets would be invested in accordance with the investment policies and restrictions described in this Prospectus and the SAI. - -------------------------------------------------------------------------------- Table of Fees and Expenses........................ 3 Financial Highlights.............................. 4 Introduction...................................... 11 Investment Objectives, Policies and Risks......... 12 Investment Restrictions........................... 24 Yields and Total Returns.......................... 25 Management and Administration of the Trusts....... 25 Investment Advisers............................... 28 Purchase, Redemption and Valuation of Shares...... 30 Dividends, Other Distributions and Tax Matters.... 33 General Information............................... 35 Shareholder Communications........................ 37 - --------------------------------------------------------------------------------
TABLE OF FEES AND EXPENSES Annual Operating Expenses (as a percentage of average net assets):
U.S. GROWTH INTER- SHORT- MUNICIPAL GOVERNMENT AND INT'L S&P 500 MEDIATE TERM MONEY MONEY MONEY BALANCED INCOME EQUITY INDEX BOND BOND MARKET MARKET MARKET FUND FUND FUND FUND FUND(1) FUND FUND FUND FUND Management Fees 0.33% 0.33% 0.48% 0.05%(2) 0.25% 0.25% 0.15% 0.15% 0.15% 12b-1 Fees 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Other Expenses 0.27 0.28 0.35 0.15(3) 0.34 0.32 0.08 0.16(3) 0.12 ---- --- --- ---- ---- --- --- ----- ----- Total Operating Expenses 0.60% 0.61% 0.83% 0.20%(4) 0.59% 0.57% 0.23% 0.31%(4) 0.27% ==== === === ==== ==== === === ===== =====
(1) Because the Intermediate Bond Fund's shares were not offered for sale prior to September 15, 1997, annual operating expenses are based on estimated expenses. (2) The investment adviser has voluntarily agreed to waive a portion of its investment advisory fee. Without such waiver, the "Management Fee" would be equal to 0.10%. (3) "Other Expenses" before fee waivers are estimated to be 0.53% for the S&P 500 Index Fund and 0.17% for the Municipal Money Market Fund. (4) "Total Operating Expenses" before fee waivers are estimated to be 0.63% for the S&P 500 Index Fund and 0.32% for the Municipal Money Market Fund. The above expenses reflect the expenses of each Fund and the Portfolio in which it invests. The Board believes that the aggregate per share expenses of each Fund and its corresponding Portfolio will be approximately equal to the expenses that the Fund would incur if its assets were invested directly in the type of securities held by the Portfolio. The expenses of the S&P 500 Index Fund reflect expenses of the AMR Class of the Fund, whose assets were transferred to the Institutional Class effective March 1, 1998. PROSPECTUS 3 16 EXAMPLES An Institutional Class investor in each Fund would directly or indirectly pay on a cumulative basis the following expenses on a $1,000 investment assuming a 5% annual return:
1 YEAR 3 YEARS 5 YEARS 10 YEARS Balanced Fund $6 $19 $33 $75 Growth and Income Fund 6 20 34 76 International Equity Fund 8 26 46 103 S&P 500 Index Fund 2 6 11 26 Intermediate Bond Fund 6 19 33 74 Short-Term Bond Fund 6 18 32 71 Money Market Fund 2 7 13 29 Municipal Money Market Fund 3 10 17 39 U.S. Government Money Market Fund 3 9 15 34
The purpose of the table above is to assist a potential investor in understanding the various costs and expenses to be incurred directly or indirectly as a shareholder in the Institutional Class of a Fund. Additional information may be found under "Management and Administration of the Trusts" and "Investment Advisers." THE FOREGOING EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN AND PERFORMANCE MAY BE BETTER OR WORSE THAN THE 5% ANNUAL RETURN ASSUMED IN THE EXAMPLES. FINANCIAL HIGHLIGHTS The financial highlights in the following tables have been derived from financial statements of the Trust. Financial highlights for each Fund except the S&P 500 Index Fund have been audited by Ernst & Young LLP, independent auditors. The financial highlights of the S&P 500 Index Fund have been audited by Coopers & Lybrand, L.L.P., independent auditors. Such information should be read in conjunction with the financial statements and the report of the independent auditors appearing in the Annual Report incorporated by reference in the SAI, which contains further information about performance of the Funds and can be obtained by investors without charge. PROSPECTUS 4 17 (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
BALANCED FUND -- INSTITUTIONAL CLASS(1) ------------------------------------------------------------------------ YEAR ENDED OCTOBER 31, ------------------------------------------------------------------------ 1997(5) 1996(5)(6) 1995(4)(5) 1994(3) 1993 1992 ------------------------------------------------------------------------ Net asset value, beginning of period $ 15.14 $ 13.95 $ 12.36 $ 13.23 $ 11.99 $ 11.60 ----- -------- -------- ----- ----- ----- Income from investment operations: Net investment income 0.63(7) 0.59(7) 0.54 0.57 0.49 0.55 Net gains or (losses) on securities (both realized and unrealized) 2.16(7) 1.61(7) 1.71 (0.54) 1.57 0.41 ----- -------- -------- ----- ----- ----- Total from investment operations 2.79 2.20 2.25 0.03 2.06 0.96 ----- -------- -------- ----- ----- ----- Less distributions: Dividends from net investment income (0.59) (0.57) (0.52) (0.56) (0.52) (0.56) Distributions from net realized gains on securities (1.16) (0.44) (0.14) (0.34) (0.30) (0.01) ----- -------- -------- ----- ----- ----- Total distributions (1.75) (1.01) (0.66) (0.90) (0.82) (0.57) ----- -------- -------- ----- ----- ----- Net asset value, end of period $ 16.18 $ 15.14 $ 13.95 $ 12.36 $ 13.23 $ 11.99 ===== ======== ======== ===== ===== ===== Total return (annualized)(8) 20.04% 16.46% 19.39% (0.08%) 19.19% 8.75% ===== ======== ======== ===== ===== ===== Ratios/supplemental data: Net assets, end of period (in thousands) $148,176 $298,009 $249,913 $222,873(13) $532,543 $370,087 Ratios to average net assets(9)(10)(11): Expenses 0.60%(7) 0.62%(7) 0.63% 0.36% 0.34% 0.35% Net investment income 3.88%(7) 4.00%(7) 4.30% 4.77% 4.91% 5.31% Portfolio turnover rate(12) 105% 76% 73% 48% 83% 80% Average commission rate paid(12) $ 0.0385 $ 0.0409 -- -- -- -- BALANCED FUND -- INSTITUTIONAL CLASS(1) ----------------------------------------- YEAR ENDED OCTOBER 31, ----------------------------------------- 1991 1990(2) 1989 1988 ----------------------------------------- Net asset value, beginning of period $ 9.87 $ 11.05 $ 10.13 $ 9.08 ----- ----- ----- ----- Income from investment operations: Net investment income 0.58 0.57 0.53 0.56 Net gains or (losses) on securities (both realized and unrealized) 1.79 (1.18) 0.90 0.73 ----- ----- ----- ----- Total from investment operations 2.37 (0.61) 1.43 1.29 ----- ----- ----- ----- Less distributions: Dividends from net investment income (0.64) (0.51) (0.51) (0.24) Distributions from net realized gains on securities -- (0.06) -- -- ----- ----- ----- ----- Total distributions (0.64) (0.57) (0.51) (0.24) ----- ----- ----- ----- Net asset value, end of period $ 11.60 $ 9.87 $ 11.05 $ 10.13 ===== ===== ===== ===== Total return (annualized)(8) 25.35% (5.24%) 15.49% 14.63% ===== ===== ===== ===== Ratios/supplemental data: Net assets, end of period (in thousands) $311,906 $233,702 $210,119 $147,581 Ratios to average net assets(9)(10)(11): Expenses 0.37% 0.44% 0.47% 0.52% Net investment income 6.06% 6.50% 6.32% 6.25% Portfolio turnover rate(12) 55% 62% 78% 77% Average commission rate paid(12) -- -- -- --
(1) The Balanced Fund commenced active operations on July 17, 1987. (2) Penmark Investments, Inc. was replaced by Independence Investment Associates, Inc. as an investment adviser to the Fund as of the close of business on February 28, 1990. (3) Average shares outstanding for the period rather than end of period shares were used to compute net investment income per share. (4) GSB Investment Management, Inc. was added as an investment adviser to the Balanced Fund on January 1, 1995. (5) Class expenses per share were subtracted from net investment income per share for the Fund before class expenses to determine net investment income per share. (6) Brandywine Asset Management, Inc. replaced Capital Guardian Trust Company as an investment adviser to the Fund as of April 1, 1996. (7) The per share amounts and ratios reflect income and expenses assuming inclusion of the Fund's proportionate share of the income and expenses of the Balanced Portfolio. (8) Total return reflects accrual for the maximum shareholder services fee of .30% for periods prior to August 1, 1994. (9) Effective August 1, 1994, expenses include administrative services fees paid by the Fund to the Manager. Prior to that date, expenses exclude shareholder services fees paid directly by shareholders to the Manager, which amounted to approximately $.01 per share in each period on an annualized basis. (10) The method of determining average net assets was changed from a monthly average to a daily average starting with the year ended October 31, 1994. (11) Annualized. (12) On November 1, 1995 the Balanced Fund began investing all of its investable assets in the Balanced Portfolio. Portfolio turnover rate and average commission rate paid for the years ended October 31, 1996 and 1997 are those of the Balanced Portfolio. Calculation and disclosure of the average commission rate paid was not required prior to 1996. (13) On August 1, 1994, assets of AMR Corporation and its employee benefit plans were transferred to the AMR Class of the Fund. PROSPECTUS 5 18 (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
GROWTH AND INCOME FUND--INSTITUTIONAL CLASS(1) ------------------------------------------------------- YEAR ENDED OCTOBER 31, ------------------------------------------------------- 1997(5) 1996(5)(6) 1995(5) 1994(4) 1993 ------------------------------------------------------- Net asset value, beginning of period $ 18.50 $ 15.91 $ 14.19 $ 14.63 $ 12.79 ----- ------- ----- ----- ----- Income from investment operations: Net investment income 0.42(7) 0.42(7) 0.41 0.43 0.36 Net gains (losses) on securities (both realized and unrealized) 4.43%(7) 3.15(7) 2.28 0.08 2.21 ----- ------- ----- ----- ----- Total from investment operations 4.85 3.57 2.69 0.51 2.57 ----- ------- ----- ----- ----- Less distributions: Dividends from net investment income (0.41) (0.41) (0.43) (0.41) (0.37) Distributions from net realized gains on securities (1.31) (0.57) (0.54) (0.54) (0.36) ----- ------- ----- ----- ----- Total distributions (1.72) (0.98) (0.97) (0.95) (0.73) ----- ------- ----- ----- ----- Net asset value, end of period $ 21.63 $ 18.50 $ 15.91 $ 14.19 $ 14.63 ===== ======= ===== ===== ===== Total return (annualized)(8) 28.05% 23.37% 20.69% 3.36% 21.49% ===== ======= ===== ===== ===== Ratio/supplemental data: Net assets, end of period (in thousands) $200,887 $81,183 $71,608 $22,737>(13) $477,088 Ratios to average net assets(9)(10)(11): Expenses 0.61%(7) 0.62%(7) 0.62% 0.33% 0.34% Net investment income 2.10%(7) 2.55%(7) 2.84% 3.28% 3.12% Portfolio turnover rate(12) 35% 40% 26% 23% 30% Average commission rate paid(12) $ 0.0395 $0.0412 -- -- -- GROWTH AND INCOME FUND--INSTITUTIONAL CLASS(1) ---------------------------------------------------- YEAR ENDED OCTOBER 31, ---------------------------------------------------- 1992(3) 1991 1990(2) 1989 1988 ---------------------------------------------------- Net asset value, beginning of period $ 12.10 $ 9.47 $ 11.59 $ 9.96 $ 8.30 ----- ----- ----- ----- ----- Income from investment operations: Net investment income 0.39 0.42 0.42 0.42 0.42 Net gains (losses) on securities (both realized and unrealized) 0.77 2.70 (1.94) 1.59 1.40 ----- ----- ----- ----- ----- Total from investment operations 1.16 3.12 (1.52) 2.01 1.82 ----- ----- ----- ----- ----- Less distributions: Dividends from net investment income (0.39) (0.49) (0.43) (0.38) (0.16) Distributions from net realized gains on securities (0.08) -- (0.17) -- -- ----- ----- ----- ----- ----- Total distributions (0.47) (0.49) (0.60) (0.38) (0.16) ----- ----- ----- ----- ----- Net asset value, end of period $ 12.79 $ 12.10 $ 9.47 $ 11.59 $ 9.96 ===== ===== ===== ===== ===== Total return (annualized)(8) 10.00% 33.83% (13.52%) 20.94% 22.20% ===== ===== ===== ===== ===== Ratio/supplemental data: Net assets, end of period (in thousands) $339,739 $264,628 $182,430 $187,869 $140,073 Ratios to average net assets(9)(10)(11): Expenses 0.36% 0.37% 0.45% 0.45% 0.53% Net investment income 3.57% 4.19% 4.49% 4.40% 4.20% Portfolio turnover rate(12) 35% 52% 41% 50% 56% Average commission rate paid(12) -- -- -- -- --
(1) The Growth and Income Fund commenced active operations on July 17, 1987. (2) GSB Investment Management, Inc. was added as an investment adviser to the Growth and Income Fund on April 10, 1990. (3) The assets of the Growth and Income Fund previously managed by Atlanta Capital Management were transferred to GSB Investment Management, Inc. as of the close of business on December 5, 1991. (4) Average shares outstanding for the period rather than end of period shares were used to compute net investment income per share. (5) Class expenses per share were subtracted from net investment income per share for the Fund before class expenses to determine net investment income per share. (6) Brandywine Asset Management, Inc. replaced Capital Guardian Trust Company as an investment adviser to the Fund as of April 1, 1996. (7) The per share amounts and ratios reflect income and expenses assuming inclusion of the Fund's proportionate share of the income and expenses of the Growth and Income Portfolio. (8) Total return reflects accrual for the maximum shareholder services fee of .30% for periods prior to August 1, 1994. (9) Effective August 1, 1994, expenses include administrative services fees paid by the Fund to the Manager. Prior to that date, expenses exclude shareholder services fees paid directly by shareholders to the Manager, which amounted to less than $.01 per share in each period on an annualized basis. (10) The method of determining average net assets was changed from a monthly average to a daily average starting with the year ended October 31, 1994. (11) Annualized. (12) On November 1, 1995 the Growth and Income Fund began investing all of its investable assets in the Growth and Income Portfolio. Portfolio turnover rate and average commission rate paid for the years ended October 31, 1996 and 1997 are those of the Growth and Income Portfolio. Calculation and disclosure of the average commission rate paid was not required prior to 1996. (13) On August 1, 1994, assets of AMR Corporation and its employee benefit plans were transferred to the AMR Class of the Fund. PROSPECTUS 6 19 (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
INTERNATIONAL EQUITY FUND--INSTITUTIONAL CLASS ----------------------------------------------------------------------------------------- YEAR ENDED OCTOBER 31, PERIOD ENDED ------------------------------------------------------------------------- OCTOBER 31, 1997(5) 1996(5) 1995(5) 1994(3)(4) 1993(2) 1992 1991(1) ----------------------------------------------------------------------------------------- Net asset value, beginning of period $ 15.01 $ 13.29 $ 12.87 $ 12.07 $ 8.93 $ 10.13 $ 10.00 ----- ----- ----- ------- ----- ----- -------- Income from investment operations: Net investment income 0.34(6) 0.28(6) 0.27 0.32 0.17 0.12 -- Net gains (losses) on securities (both realized and unrealized) 2.44(6) 1.95(6) 0.68 1.10 3.09 (1.31) 0.13 ----- ----- ----- ------- ----- ----- -------- Total from investment operations 2.78 2.23 0.95 1.42 3.26 (1.19) 0.13 ----- ----- ----- ------- ----- ----- -------- Less distributions: Dividends from net investment income (0.30) (0.27) (0.21) (0.17) (0.12) (0.01) -- Distributions from net realized gains on securities (0.41) (0.24) (0.32) (0.45) -- -- -- ----- ----- ----- ------- ----- ----- -------- Total distributions (0.71) (0.51) (0.53) (0.62) (0.12) (0.01) -- ----- ----- ----- ------- ----- ----- -------- Net asset value, end of period $ 17.08 $ 15.01 $ 13.29 $ 12.87 $ 12.07 $ 8.93 $ 10.13 ===== ===== ===== ======= ===== ===== ======== Total return (annualized)(7) 19.08% 17.27% 7.90% 11.77% 36.56% (12.07%) 5.69% ===== ===== ===== ======= ===== ===== ======== Ratios/supplemental data: Net assets, end of period (in thousands) $231,793 $62,992 $25,757 $23,115(13) $66,652 $38,837 $10,536 Ratios to average net assets (annualized)(8)(9)(10): Expenses 83%(6) 0.85%(6) 0.85% 0.61% 0.78% 1.17% 1.90%(11) Net investment income 2.35%(6) 2.19%(6) 2.37% 2.74% 2.00% 2.04% 0.38%(11) Portfolio turnover rate(12) 15% 19% 21% 37% 61% 21% 2% Average commission rate paid(12) $ 0.0164 $0.0192 -- -- -- -- --
(1) The International Equity Fund commenced active operations on August 7, 1991. (2) HD International Limited was replaced by Hotchkis and Wiley as an investment adviser to the International Equity Fund as of the close of business on May 21, 1993. (3) Morgan Stanley Asset Management Inc. was added as an investment adviser to the International Equity Fund as of August 1, 1994. (4) Average shares outstanding for the period rather than end of period shares were used to compute net investment income per share. (5) Class expenses per share were subtracted from net investment income per share for the Fund before class expenses to determine net investment income per share. (6) The per share amounts and ratios reflect income and expenses assuming inclusion of the Fund's proportionate share of the income and expenses of the International Equity Portfolio. (7) Total return reflects accrual for the maximum shareholder services fee of .30% for periods prior to August 1, 1994. (8) Effective August 1, 1994, expenses include administrative services fees paid by the Fund to the Manager. Prior to that date, expenses exclude shareholder services fees paid directly by shareholders to the Manager, which amounted to less than $.04 per share in each period on an annualized basis and were waived by the Manager for the period ended October 31, 1991. (9) The method of determining average net assets was changed from a monthly average to a daily average starting with the year ended October 31, 1994. (10) Annualized. (11) Estimated based on expected annual expenses and actual average net assets. (12) On November 1, 1995 the International Equity Fund began investing all of its investable assets in the International Equity Portfolio. Portfolio turnover rate and average commission rate paid for the years ended October 31, 1996 and 1997 are those of the International Equity Portfolio. Calculation and disclosure of the average commission rate paid was not required in prior to 1996. (13) On August 1, 1994 assets of AMR Corporation and its employee benefit plans were transferred to the AMR Class of the Fund. PROSPECTUS 7 20 (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
S&P 500 INDEX FUND -- AMR CLASS --------------------- YEAR ENDED DECEMBER 31, 1997(1) --------------------- Net asset value, beginning of period $10.00 ------------- Income from investment operations: Net investment income 0.14 Net gains (losses) on securities (both realized and unrealized)(2) 3.16 ------------- Total from investment operations 3.30 ------------- Less distributions: Dividends from net investment income (0.14) Distributions from net realized gains on securities -- ------------- Total distributions (0.14) ------------- Net asset value, end of period $13.16 ============= Total return (annualized) 33.09% ============= Ratios/supplemental data: Net assets, end of period (in thousands) $7,862 Ratios to average net assets (annualized)(2): Net investment income 1.61% Expenses 0.20% Decrease reflected in above expense ratio due to absorption of expenses by Bankers Trust and the Manager 0.43% Portfolio turnover rate(3) 19% Average commission rate paid(3) $.0230
(1) The S&P 500 Index Fund commenced active operations January 1, 1997 and on March 1, 1998, existing shares of the Fund were designated Institutional Class shares. (2) The per share amounts and ratios reflect income and expenses assuming inclusion of the Fund's proportionate share of the income and expenses of its corresponding Portfolio. (3) Portfolio turnover rate and average commission rate paid is that of the Equity 500 Index Portfolio. PROSPECTUS 8 21 (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
INTERMEDIATE BOND FUND -- INSTITUTIONAL CLASS ------------------------- PERIOD ENDED OCTOBER 31, ------------------------- 1997(1) ------------------------- > Net asset value, beginning of period $ 10.00 -------- Income from investment operations: Net investment income 0.07 Net gains (losses) on securities (both realized and unrealized)(2) 0.17 -------- Total from investment operations 0.24 -------- Less distributions: Dividends from net investment income (0.07) Distributions from net realized gains on securities -- -------- Total distributions (0.07) -------- Net asset value, end of period $ 10.17 ======== Total return (annualized) 2.41% ======== Ratios/supplemental data: Net assets, end of period (in thousands) $216,249 Ratios to average net assets (annualized)(2): Expenses 0.59% Net investment income 5.63% Portfolio turnover rate(3) 47% Average commission rate paid --
(1) The Intermediate Bond Fund commenced active operation September 15, 1997. (2) The per share amounts and ratios reflect income and expenses assuming inclusion of the Fund's proportionate share of the income and expenses of its corresponding Portfolio. (3) Portfolio turnover rate is that of the Fund's corresponding Portfolio. PROSPECTUS 9 22 (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
SHORT-TERM BOND FUND--INSTITUTIONAL CLASS ------------------------------------------------------------------- YEAR ENDED OCTOBER 31, ------------------------------------------------------------------- 1997 1996 1995 1994 1993 1992 ------------------------------------------------------------------- Net asset value, beginning of period $ 9.68 $ 9.82 $ 9.67 $ 10.23 $ 10.13 $ 10.07 ----- ----- ----- ----- ----- ----- Income from investment operations: Net investment income 0.64(3) 0.62(3) 0.62 0.52 0.58 0.75 Net gains or (losses) on securities (both realized and unrealized) (0.05)(3) (0.14)(3) 0.15 (0.46) 0.15 0.06 ----- ----- ----- ----- ----- ----- Total from investment operations 0.59 0.48 0.77 0.06 0.73 0.81 ----- ----- ----- ----- ----- ----- Less distributions: Dividends from net investment income (0.64) (0.62) (0.62) (0.52) (0.58) (0.75) Distributions from net realized gains on securities -- -- -- (0.10) (0.05) -- ----- ----- ----- ----- ----- ----- Total distributions (0.64) (0.62) (0.62) (0.62) (0.63) (0.75) ----- ----- ----- ----- ----- ----- Net asset value, end of period $ 9.63 $ 9.68 $ 9.82 $ 9.67 $ 10.23 $ 10.13 ===== ===== ===== ===== ===== ===== Total return (annualized)(4) 6.29% 5.10% 8.18% 0.42% 7.20% 7.94% ===== ===== ===== ===== ===== ===== Ratios/supplemental data: Net assets, end of period (in thousands) $22,947 $108,929 $137,293 $112,141(9) $238,874 $209,928 Ratios to average net assets(5)(6)(7): Expenses 0.57%(3) 0.60%(3) 0.60% 0.31% 0.26% 0.27% Net investment income 6.67%(3) 6.41%(3) 6.36% 5.26% 5.76% 7.40% Portfolio turnover rate(8) 282% 304% 183% 94% 176% 133% SHORT-TERM BOND FUND--INSTITUTIONAL CLASS ------------------------------------------- YEAR ENDED OCTOBER 31, PERIOD ENDED ---------------------------- OCTOBER 31, 1991(2) 1990 1989 1988(1) ------------------------------------------- Net asset value, beginning of period $ 9.76 $ 9.94 $ 10.12 $ 10.00 ----- ----- ----- -------- Income from investment operations: Net investment income 0.83 0.92 0.96 0.64 Net gains or (losses) on securities (both realized and unrealized) 0.31 (0.18) (0.12) 0.05 ----- ----- ----- -------- Total from investment operations 1.14 0.74 0.84 0.69 ----- ----- ----- -------- Less distributions: Dividends from net investment income (0.83) (0.92) (1.02) (0.57) Distributions from net realized gains on securities -- -- -- -- ----- ----- ----- -------- Total distributions (0.83) (0.92) (1.02) (0.57) ----- ----- ----- -------- Net asset value, end of period $ 10.07 $ 9.76 $ 9.94 $ 10.12 ===== ===== ===== ======== Total return (annualized)(4) 11.87% 7.51% 7.62% 7.41% ===== ===== ===== ======== Ratios/supplemental data: Net assets, end of period (in thousands) $141,629 $83,265 $60,507 $40,855 Ratios to average net assets(5)(6)(7): Expenses 0.35% 0.48% 0.59% 0.50% Net investment income 8.42% 9.44% 9.77% 8.01% Portfolio turnover rate(8) 165% 156% 158% 127%
(1) The Short-Term Bond Fund commenced active operations on December 3, 1987. Prior to March 1, 1998, the Short-Term Income Fund was known as the American AAdvantage Limited-Term Income Fund. (2) AMR Investment Services, Inc. began portfolio management of the Short-Term Bond Fund on March 1, 1991, replacing Brown Brothers, Harriman & Co. and Barrow, Hanley, Mewhinney & Strauss, Inc. (3) The per share amounts and ratios reflect income and expenses assuming inclusion of the Fund's proportionate share of the income and expenses of the Limited-Term Income Portfolio. (4) Total return is calculated assuming an initial investment is made at the net asset value last calculated on the business day before the first day of each period reported, reinvestment of all dividends and capital gains distributions on the payable date, accrual for the maximum shareholder services fee of .30% (for periods prior to August 1, 1994) and a sale at net asset value on the last day of each period reported. (5) Effective August 1, 1994, expenses include administrative services fees paid by the Fund to the Manager. Prior to that date, expenses exclude shareholder services fees paid directly by shareholders to the Manager. Such fees amounted to less than $.03 per share in each period on an annualized basis. (6) The method of determining average net assets was changed from a monthly average to a daily average starting with the year ended October 31, 1994. (7) Annualized. (8) On November 1, 1995 the Short-Term Bond Fund began investing all of its investable assets in the Short-Term Bond Portfolio. Portfolio turnover rate for the years ended October 31, 1996 and 1997 is that of the Short-Term Bond Portfolio. (9) On August 1, 1994, assets of AMR Corporation and its employee benefit plans were transferred to the AMR Class of the Fund. PROSPECTUS 9 23 (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
MONEY MARKET FUND--INSTITUTIONAL CLASS(1) -------------------------------------------------------------------- YEAR ENDED OCTOBER 31, -------------------------------------------------------------------- 1997 1996 1995 1994 1993 -------------------------------------------------------------------- Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 ------ ------ ------ ------ ------ Net investment income 0.06(2) 0.05(2) 0.06 0.04 0.03 Less dividends from net investment income (0.06) (0.05) (0.06) (0.04) (0.03) ------ ------ ------ ------ ------ Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 ====== ====== ====== ====== ====== Total return (annualized) 5.60% 5.57% 5.96% 3.85% 3.31% ====== ====== ====== ====== ====== Ratios/supplemental data: Net assets, end of period (in thousands) $1,123,649 $1,406,939 $1,206,041 $1,893,144 $2,882,947 Ratios to average net assets (3)(4)(5): Expenses 0.23%(2) 0.24%(2) 0.23% 0.21% 0.23% Net investment income 5.46%(2) 5.41%(2) 5.79% 3.63% 3.23% MONEY MARKET FUND--INSTITUTIONAL CLASS(1) ------------------------------------------------------ YEAR ENDED OCTOBER 31, ------------------------------------------------------ 1992 1991 1990 1989 1988 ------------------------------------------------------ Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 ------ ----- ----- ----- ----- Net investment income 0.04 0.07 0.08 0.09 0.08 Less dividends from net investment income (0.04) (0.07) (0.08) (0.09) (0.08) ------ ----- ----- ----- ----- Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 ====== ===== ===== ===== ===== Total return (annualized) 4.41% 7.18% 8.50% 9.45% 7.54% ====== ===== ===== ===== ===== Ratios/supplemental data: Net assets, end of period (in thousands) $2,223,829 $715,280 $745,405 $385,916 $330,230 Ratios to average net assets (3)(4)(5): Expenses 0.26% 0.24% 0.20% 0.22% 0.28% Net investment income 4.06% 6.93% 8.19% 9.11% 7.54%
(1) The Money Market Fund commenced active operations on September 1, 1987. (2) The per share amounts and ratios reflect income and expenses assuming inclusion of the Fund's proportionate share of the income and expenses of the Money Market Portfolio. (3) The method of determining average net assets was changed from a monthly average to a daily average starting with the year ended October 31, 1992. (4) Effective October 1, 1990, expenses include administrative services fees paid by the Fund to the Manager. Prior to that date, expenses exclude shareholder services fees paid directly by shareholders to the Manager, which amounted to less than $.01 per share in each period on an annualized basis. (5) Annualized. PROSPECTUS 10 24 (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
MUNICIPAL MONEY MARKET FUND -- U.S. GOVERNMENT MONEY MARKET FUND -- INSTITUTIONAL CLASS INSTITUTIONAL CLASS ------------------------------------------ ---------------------------------------------------- PERIOD YEAR ENDED OCTOBER 31, ENDED YEAR ENDED OCTOBER 31, ---------------------------- OCTOBER 31, ---------------------------------------------------- 1997 1996 1995 1994(1) 1997 1996 1995 1994 1993 ------------------------------------------ ---------------------------------------------------- Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 ---- ---- ---- ------- ----- ----- ----- ----- ------ Net investment income 0.04(2) 0.04(2) 0.04 0.02 0.05(2) 0.05(2) 0.06 0.04 0.03 Less dividends from net investment income (0.04) (0.04) (0.04) (0.02) (0.05) (0.05) (0.06) (0.04) (0.03) ---- ---- ---- ------- ----- ----- ----- ----- ------ Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 ---- ---- ---- ------- ----- ----- ----- ----- ------ ---- ---- ---- ------- ----- ---- ----- ----- ------ Total return (annualized) 3.52% 3.59% 3.75% 2.44% 5.36% 5.29% 5.67% 3.70% 3.07% ---- ---- ---- ------- ----- ----- ----- ----- ------ ---- ---- ---- ------- ----- ---- ----- ----- ------ Ratios/supplemental data: Net assets, end of period (in thousands) $ 369 $ 6 $ 7 $$9,736 $29,946 $25,595 $47,184 $67,607 $136,813 Ratios to average net assets(3)(4)(5): Expenses 0.31%(2) 0.27%(2) 0.35% 0.30% 0.27%(2) 0.32%(2) 0.32% 0.25% 0.23% Net investment income 3.49%(2) 3.49%(2) 3.70% 2.38% 5.24%(2) 5.16%(2) 5.49% 3.44% 2.96% U.S. GOVERNMENT MONEY MARKET FUND -- INSTITUTIONAL CLASS ----------- PERIOD ENDED OCTOBER 31, 1992(1) ----------- Net asset value, beginning of period $ 1.00 ------- Net investment income 0.02 Less dividends from net investment income (0.02) ------- Net asset value, end of period $ 1.00 ======= Total return (annualized) 3.61% ======= Ratios/supplemental data: Net assets, end of period (in thousands) $91,453 Ratios to average net assets(3)(4)(5): Expenses 0.27%(6) Net investment income 3.46%(6)
(1) The U.S. Government Money Market Fund commenced active operations on March 2, 1992 and the Municipal Money Market Fund commenced active operations on November 10, 1993. (2) The per share amounts and ratios reflect income and expenses assuming inclusion of the Fund's proportionate share of the income and expenses of the U.S. Government Money Market Portfolio and the Municipal Money Market Portfolio, respectively. (3) The method of determining average net assets was changed from a monthly average to a daily average starting with the period ended October 31, 1994. (4) Operating results for the Municipal Money Market Fund exclude management and administrative services fees waived by the Manager. Had the Fund paid such fees, the ratio of expenses and net investment income to average net assets would have been 0.50% and 2.18%, respectively, for the period ended October 31, 1994, 0.55% and 3.50%, respectively, for the 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. (5) Annualized. (6) Estimated based on expected annual expenses and actual average net assets. INTRODUCTION The Trust is an open-end, diversified management investment company organized as a Massachusetts business trust on January 16, 1987. The Funds are nine of ten investment portfolios of the Trust. Each Fund has a distinctive investment objective and investment policies. Each Fund, except the S&P 500 Index Fund, invests all of its investable assets in a corresponding Portfolio of the AMR Trust which has an identical investment objective. The S&P 500 Index Fund invests all of its investable assets in the Equity 500 Index Portfolio, which is a separate investment company advised by BT with an identical investment objective. The Manager provides the Portfolios, except the Equity 500 Index Portfolio, with business and asset management services, including the evaluation and monitoring of the investment advisers, and it provides the Funds with administrative services. BT provides the Equity 500 Index Portfolio with investment advisory, administrative and other services. PROSPECTUS 11 25 The Funds, except the S&P 500 Index Fund, currently consist of three classes of shares and the S&P 500 Index Fund currently consists of two classes of shares, including the "Institutional Class" which is primarily for institutional investors investing at least $2 million in the Funds. For further information about the Funds' other classes, please refer to the address and phone number on the back cover of this Prospectus. Although each class of shares is designed to meet the needs of different categories of investors, all classes of each Fund share the same portfolio of investments and a common investment objective. See "Investment Objectives, Policies and Risks." There is no guarantee that a Fund will achieve its investment objective. Based on its value, a share of a Fund, regardless of class, will receive a proportionate share of the investment income and the gains (losses) earned (or incurred) by the Fund. It also will bear its proportionate share of expenses that are allocated to the Fund as a whole. However, certain expenses are allocated separately to each class of shares. The assets of the Balanced Portfolio, the Growth and Income Portfolio and the International Equity Portfolio are allocated by the Manager among investment advisers designated for each of those Portfolios. BT serves as the investment adviser to the Equity 500 Index Portfolio. The assets of the Intermediate Bond Portfolio are allocated by the Manager between the Manager and another investment adviser. Investment decisions for the Short-Term Bond Portfolio and the Money Market Portfolios are made directly by the Manager. With the exception of the S&P 500 Index Fund, each investment adviser has discretion to purchase and sell portfolio securities in accordance with the investment objectives, policies and restrictions described in this Prospectus, the SAI, and by specific investment strategies developed by the Manager. See "Investment Advisers." Institutional Class shares are offered without a sales charge at the net asset value next determined after an investment is received and accepted. Shares will be redeemed at the next share price calculated after receipt of a redemption order. See "Purchase, Redemption and Valuation of Shares." INVESTMENT OBJECTIVES, POLICIES AND RISKS The investment objective and policies of each Fund and its corresponding Portfolio are described below. Except as otherwise indicated, the investment policies of any Fund may be changed at any time by the Board to the extent that such changes are consistent with the investment objective of the applicable Fund. However, each Fund's investment objective may not be changed without a majority vote of that Fund's outstanding shares, which is defined as the lesser of (a) 67% of the shares of the applicable Fund present or represented if the holders of more than 50% of the shares are present or represented at the shareholders' meeting, or (b) more than 50% of the shares of the applicable Fund (hereinafter, "majority vote"). Except for the Equity 500 Index Portfolio, a Portfolio's investment objective may not be changed without a majority vote of that Portfolio's interest holders. The investment objective of the Equity 500 Index Portfolio is not a fundamental policy. Shareholders of the S&P 500 Index Fund will receive 30 days' written notice with respect to any change in the investment objective of the Equity 500 Index Portfolio. Each Fund has a fundamental investment policy which allows it to invest all of its investable assets in its corresponding Portfolio. All other fundamental investment policies and the non-fundamental investment policies of each Fund and its corresponding Portfolio are identical. Therefore, although the following discusses the investment policies of each Portfolio, the AMR Trust's Board of Trustees ("AMR Trust Board") and the Equity 500 Index Portfolio's Board of Trustees ("Equity 500 Index Portfolio Board"), it applies equally to each Fund and each Board. AMERICAN AADVANTAGE BALANCED FUND -- This Fund's investment objective is to realize both income and capital appreciation. This Fund seeks its investment objective by investing all of its investable assets in the Balanced Portfolio, which invests primarily in equity and debt securities. Although equity securities (such as stocks) will be purchased primarily for capital appreciation and debt securities (such as bonds) will be purchased primarily for income purposes, income and capital appreciation potential will be considered in connection with all such investments. Excluding collateral for securities loaned, ordinarily the Portfolio will have a minimum of 30% and a maximum of 70% of its assets invested in equity securities and a minimum of 30% and a maximum of 70% of its assets invested in debt securities which, at the time of purchase, are rated in one of the four highest rating PROSPECTUS 12 26 categories by all nationally recognized statistical rating organizations ("Rating Organizations") rating that security such as Standard & Poor's ("S&P") or Moody's Investor Services, Inc. ("Moody's") or, if unrated, are deemed to be of comparable quality by the applicable investment adviser. Obligations rated in the fourth highest rating category are limited to 25% of the Portfolio's debt allocation. Obligations rated in the BBB or Baa categories by any Rating Organization have speculative characteristics and thus changes in economic conditions or other circumstances are more likely to lead to a weakened capacity to make principal and interest payments than is the case with higher grade bonds. See the SAI for a description of debt ratings. The Portfolio, at the discretion of the investment advisers, may retain a security that has been downgraded below the initial investment criteria. The Portfolio usually invests between 50% and 65% of its assets in equity securities and between 35% and 50% of its assets in debt securities. The remainder of the Portfolio's assets may be invested in cash or cash equivalents, including obligations that are permitted investments for the Money Market Portfolio and in other investment companies. However, when its investment advisers deem that market conditions warrant, the Portfolio may, for temporary defensive purposes, invest up to 100% of its assets in cash, cash equivalents and investment grade short-term obligations. The Portfolio's investments in debt securities may include investments in obligations of the U.S. Government and its agencies and instrumentalities, including separately traded registered interest and principal securities ("STRIPS") and other zero coupon obligations; corporate bonds, notes and debentures; non-convertible preferred stocks; mortgage-backed securities; asset-backed securities; and domestic, Yankeedollar and Eurodollar bank deposit notes, certificates of deposit, bonds and notes. Such obligations may have a fixed, variable or floating rate of interest. See the SAI for a further description of the foregoing securities. The value of the Portfolio's debt investments will vary in response to interest rate changes as described in "American AAdvantage Intermediate Bond Fund and American AAdvantage Short-Term Bond Fund." The Portfolio also may engage in dollar rolls or purchase or sell securities on a "when-issued" or "forward commitment" basis. The purchase or sale of when-issued securities enables an investor to hedge against anticipated changes in interest rates and prices by locking in an attractive price or yield. The price of when-issued securities is fixed at the time the commitment to purchase or sell is made, but delivery and payment for the when-issued securities take place at a later date, normally one to two months after the date of purchase. During the period between purchase and settlement, no payment is made by the purchaser to the issuer and no interest accrues to the purchaser. Such transactions therefore involve a risk of loss if the value of the security to be purchased declines prior to the settlement date or if the value of the security to be sold increases prior to the settlement date. A sale of a when-issued security also involves the risk that the other party will be unable to settle the transaction. Dollar rolls are a type of forward commitment transaction. Purchases and sales of securities on a forward commitment basis involve a commitment to purchase or sell securities with payment and delivery to take place at some future date, normally one to two months after the date of the transaction. As with when-issued securities, these transactions involve certain risks, but they also enable an investor to hedge against anticipated changes in interest rates and prices. Forward commitment transactions are executed for existing obligations, whereas in a when-issued transaction, the obligations have not yet been issued. When purchasing securities on a when-issued or forward commitment basis, a segregated account of liquid assets at least equal to the value of purchase commitments for such securities will be maintained until the settlement date. The Portfolio's equity investments may consist of common stocks, preferred stocks and convertible securities, including foreign securities that are represented by U.S. dollar-denominated American Depositary Receipts traded in the United States on exchanges and in the over-the-counter market. When purchasing equity securities, primary emphasis will be placed on undervalued securities with above average growth expectations. The Manager believes that purchasing securities which the investment advisers believe are undervalued in the market and that have above average growth potential will outperform other investment styles over the longer term while minimizing volatility and downside risk. The Manager will recommend that, with respect to portfolio management of equity assets, the Trust retain only those investment advisers who, in the Manager's opinion, utilize such an approach. PROSPECTUS 13 27 BARROW, HANLEY, MEWHINNEY & STRAUSS, INC.; BRANDYWINE ASSET MANAGEMENT, INC.; GSB INVESTMENT MANAGEMENT, INC.; HOTCHKIS AND WILEY; and INDEPENDENCE INVESTMENT ASSOCIATES, INC. currently manage the assets of the Balanced Portfolio. See "Investment Advisers." AMERICAN AADVANTAGE GROWTH AND INCOME FUND -- This Fund's investment objective is to realize long-term capital appreciation and current income. This Fund seeks its investment objective by investing all of its investable assets in the Growth and Income Portfolio, which invests primarily in equity securities. Excluding collateral for securities loaned, ordinarily at least 80% of the Portfolio's assets will be invested in equity securities consisting of common stocks, preferred stocks, securities convertible into common stocks, and securities having common stock characteristics, such as rights and warrants, and foreign equity securities that are represented by U.S. dollar-denominated American Depositary Receipts traded in the United States on exchanges and in the over-the-counter market. When purchasing equity securities, primary emphasis will be placed on undervalued securities with above average growth expectations. In order to seek either above average current income or capital appreciation when interest rates are expected to decline, the Portfolio may invest in debt securities which, at the time of purchase, are rated in one of the four highest rating categories by all Rating Organizations rating that security or, if unrated, are deemed to be of comparable quality by the applicable investment adviser. Obligations rated in the fourth highest rating category are limited to 25% of the Portfolio's debt allocation. See "American AAdvantage Balanced Fund" for a description of the risks involved with these obligations. See the SAI for definitions of the foregoing securities and for a description of debt ratings. The Portfolio also may invest in other investment companies or in cash and cash equivalents, including obligations that are permitted investments for the Money Market Portfolio. However, when its investment advisers deem that market conditions warrant, the Portfolio may, for temporary defensive purposes, invest up to 100% of its assets in cash, cash equivalents and investment grade short-term obligations. In addition, the Portfolio may purchase or sell securities on a when-issued or forward commitment basis. See "American AAdvantage Balanced Fund" for a description of these transactions. BARROW, HANLEY, MEWHINNEY & STRAUSS, INC.; BRANDYWINE ASSET MANAGEMENT, INC.; GSB INVESTMENT MANAGEMENT, INC.; HOTCHKIS AND WILEY; and INDEPENDENCE INVESTMENT ASSOCIATES, INC. currently manage the assets of the Growth and Income Portfolio. See "Investment Advisers." AMERICAN AADVANTAGE INTERNATIONAL EQUITY FUND -- This Fund's investment objective is to realize long-term capital appreciation. This Fund seeks its investment objective by investing all of its investable assets in the International Equity Portfolio, which invests primarily in equity securities of issuers based outside the United States. Ordinarily the Portfolio will invest at least 65% of its assets in common stocks and securities convertible into common stocks of issuers in at least three different countries located outside the United States. However, excluding collateral for securities loaned, the Portfolio generally invests in excess of 80% of its assets in such securities. The remainder of the Portfolio's assets will be invested in non-U.S. debt securities which, at the time of purchase, are rated in one of the three highest rating categories by any Rating Organization or, if unrated, are deemed to be of comparable quality by the applicable investment adviser and traded publicly on a world market, or in cash or cash equivalents, including obligations that are permitted investments for the Money Market Portfolio or in other investment companies. However, when its investment advisers deem that market conditions warrant, the Portfolio may, for temporary defensive purposes, invest up to 100% of its assets in cash, cash equivalents, other investment companies and investment grade short-term obligations. The investment advisers select securities based upon a country's economic outlook, market valuation and potential changes in currency exchange rates. When purchasing equity securities, primary emphasis will be placed on undervalued securities with above average growth expectations. Overseas investing carries potential risks not associated with domestic investments. Such risks include, but are not limited to: (1) political and financial instability abroad, including risk of nationalization or expropriation of assets and the risk of war; (2) less liquidity and greater volatility of foreign investments; (3) less public information regarding foreign companies; (4) less government regulation and supervision of foreign stock exchanges, brokers and listed companies; (5) lack of uniform accounting, auditing and financial reporting standards; (6) delays in transaction settlement in some foreign markets; (7) possible imposition of confiscatory PROSPECTUS 14 28 foreign taxes; (8) possible limitation on the removal of securities or other assets of the Portfolio; (9) restrictions on foreign investments and repatriation of capital; (10) currency fluctuations; (11) cost and possible restrictions of currency conversion; (12) withholding taxes on dividends in foreign countries; and (13) possible higher commissions, custodial fees and management costs than in the U.S. market. These risks are often greater for investments in emerging or developing countries. The Portfolio will limit its investments to those in countries which have been recommended by the Manager and which have been approved by the AMR Trust Board. Countries may be added or deleted with AMR Trust Board approval. In determining which countries will be approved, the AMR Trust Board will evaluate the risk factors set forth above and will particularly focus on the ability to repatriate funds, the size and liquidity aspects of a particular country's market and the investment climate for foreign investors. The current countries in which the Portfolio may invest are Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Italy, Japan, Malaysia, Mexico, Netherlands, New Zealand, Norway, Portugal, Singapore, South Korea, Spain, Sweden, Switzerland and the United Kingdom. The Portfolio may trade forward foreign currency contracts ("forward contracts"), which are derivatives, to hedge currency fluctuations of underlying stock or bond positions, or in other circumstances permitted by the Commodity Futures Trading Commission ("CFTC"). Forward contracts to sell foreign currency may be used when the management of the Portfolio believes that the currency of a particular foreign country may suffer a decline against the U.S. dollar. Forward contracts are also entered into to set the exchange rate for a future transaction. In this manner, the Portfolio may protect itself against a possible loss resulting from an adverse change in the relationship between the U.S. dollar or other currency which is being used for the security purchase and the foreign currency in which the security is denominated during the period between the date on which the security is purchased or sold and the date on which payment is made or received. Forward contracts involve certain risks which include, but are not limited to: (1) imperfect correlation between the securities hedged and the contracts themselves; and (2) possible decrease in the total return of the Portfolio. Forward contracts are discussed in greater detail in the SAI. The Portfolio also may trade currency futures for the same reasons as for entering into forward contracts as set forth above. Currency futures are traded on U.S. and foreign currency exchanges. The use of currency futures also entails certain risks which include, but are not limited to: (1) less liquidity due to daily limits on price fluctuation; (2) imperfect correlation between the securities hedged and the contracts themselves; (3) possible decrease in the total return of the Portfolio due to hedging; (4) possible reduction in value for both the contracts and the securities being hedged; and (5) potential losses in excess of the amounts invested in the currency futures contracts themselves. The Portfolio may not enter into currency futures contracts if the purchase or sale of such contract would cause the sum of the Portfolio's initial and any variation margin deposits to exceed 5% of its total assets. Currency futures contracts, which are derivatives, are discussed in greater detail in the SAI. HOTCHKIS AND WILEY, MORGAN STANLEY ASSET MANAGEMENT INC. and TEMPLETON INVESTMENT COUNSEL, INC. currently serve as investment advisers to the International Equity Portfolio. See "Investment Advisers." AMERICAN AADVANTAGE S&P 500 INDEX FUND -- This Fund's investment objective is to provide investment results that, before expenses, correspond to the total return (the combination of capital changes and income) of common stocks publicly traded in the United States, as represented by the S&P 500. This Fund seeks its investment objective by investing all of its investable assets in the Equity 500 Index Portfolio which invests in common stocks of companies that compose the S&P 500. The Fund offers investors a convenient means of diversifying their holdings of common stocks while relieving those investors of the administrative burdens typically associated with purchasing and holding these instruments. The Portfolio is not managed according to traditional methods of "active" investment management, which involve the buying and selling of securities based upon economic, financial and market analyses and investment judgment. Instead, the Portfolio, utilizing a "passive" or "indexing" investment approach, attempts to replicate, before expenses, the performance of the S&P 500. PROSPECTUS 15 29 Under normal conditions, the Portfolio will invest at least 80% of its assets in common stocks of companies that compose the S&P 500. In seeking to replicate the performance of the S&P 500, BT, the Portfolio's investment adviser, will attempt over time to allocate the Portfolio's investments among common stocks in approximately the same weightings as the S&P 500, beginning with the heaviest-weighted stocks that make up a larger portion of the Index's value. Over the long term, BT normally seeks a correlation between the performance of the Portfolio, before expenses, and that of the S&P 500 of 0.95 or better. A figure of 1.00 would indicate perfect correlation. In the unlikely event that the correlation is not achieved, the Equity 500 Index Portfolio Board will consider alternative structures. BT utilizes a two-stage sampling approach in seeking to obtain the objective. Stage one, which encompasses large capitalization stocks, maintains the stock holdings at or near their benchmark weights. Large capitalization stocks are defined as those securities that represent 0.10% or more of the Index. In stage two, smaller stocks are analyzed and selected using risk characteristics and industry weights in order to match the sector and risk characteristics of the smaller companies in the S&P 500. This approach helps to maximize portfolio liquidity while minimizing costs. BT generally will seek to match the composition of the S&P 500, but usually will not invest the Portfolio's stock portfolio to mirror the Index exactly. Because of the difficulty and expense of executing relatively small stock transactions, the Portfolio may not always be invested in the less heavily weighted S&P 500 stocks and may at times have its portfolio weighted differently from the S&P 500. When the Portfolio's size is greater, BT expects to purchase more of the stocks in the S&P 500 and to match the relative weighting of the S&P 500 more closely and anticipates that the Portfolio will be able to mirror, before expenses, the performance of the S&P 500 with little variance. In addition, the Portfolio may omit or remove any S&P 500 stock from the Portfolio if, following objective criteria, BT judges the stock to be insufficiently liquid or believes the merit of the investment has been substantially impaired by extraordinary events or financial conditions. BT will not purchase the stock of Bankers Trust New York Corporation, which is included in the Index, and instead will overweight its holdings of companies engaged in similar businesses. Under normal conditions, BT will attempt to invest as much of the Portfolio's assets as is practical in common stocks included in the S&P 500. However, the Portfolio may maintain up to 20% of its assets in short-term debt securities and money market instruments hedged with stock index futures and options to meet redemption requests or to facilitate the investment in common stocks. When the Portfolio has cash from new investments in the Portfolio or holds a portion of its assets in money market instruments, it may enter into stock index futures or options to attempt to increase its exposure to the stock market. Strategies the Portfolio could use to accomplish this include purchasing futures contracts, writing put options, and purchasing call options. When the Portfolio wishes to sell securities, because of shareholder redemptions or otherwise, it may use stock index futures or options thereon to hedge against market risk until the sale can be completed. These strategies could include selling futures contracts, writing call options, and purchasing put options. BT will choose among futures and options strategies based on its judgment of how best to meet the Portfolio's goals. In selecting futures and options, BT will assess such factors as current and anticipated stock prices, relative liquidity and price levels in the options and futures markets compared to the securities markets, and the Portfolio's cash flow and cash management needs. If BT judges these factors incorrectly, or if price changes in the Portfolio's futures and options positions are not well correlated with those of its other investments, the Portfolio could be hindered in the pursuit of the objective and could suffer losses. The Portfolio could also be exposed to risks if it could not close out its futures or options positions because of an illiquid secondary market. BT will only use these strategies for cash management purposes. Futures and options will not be used to increase portfolio risk above the level that could be achieved using only traditional investment securities or to acquire exposure to changes in the value of assets or indices that by themselves would not be purchased for the Portfolio. Futures and options are discussed in greater detail in the SAI. PROSPECTUS 16 30 The Portfolio intends to stay invested in the securities described above to the extent practical in light of the objective and long-term investment perspective. However, the Portfolio's assets may be invested in short-term instruments with remaining maturities of 397 days or less to meet anticipated redemptions and expenses or for day-to-day operating purposes. Short-term instruments consist of (1) short-term obligations of the U.S. Government, its agencies, instrumentalities, authorities or political subdivisions; (2) other short-term debt securities rated Aa or higher by Moody's or AA or higher by S&P or, if unrated, of comparable quality in the opinion of BT; (3) commercial paper; (4) bank obligations, including negotiable certificates of deposit, time deposits and bankers' acceptances; and (5) repurchase agreements. At the time the Portfolio invests in commercial paper, bank obligations or repurchase agreements, the issuer or the issuer's parent must have outstanding debt rated Aa or higher by Moody's or AA or higher by S&P or outstanding commercial paper or bank obligations rated Prime-1 by Moody's or A-1 by S&P; or, if no such ratings are available, the instrument must be of comparable quality in the opinion of BT. The S&P 500 is a well-known stock market index that includes common stocks of 500 companies from several industrial sectors representing a significant portion of the market value of all common stocks publicly traded in the United States, most of which are listed on the New York Stock Exchange (the "Exchange"). Stocks in the S&P 500 are weighted according to their market capitalization (the number of shares outstanding multiplied by the stock's current price). BT believes that the performance of the S&P 500 is representative of the performance of publicly traded common stocks in general. The composition of the S&P 500 is determined by Standard & Poor's Corporation and is based on such factors as the market capitalization and trading activity of each stock and its adequacy as a representation of stocks in a particular industry group, and may be changed from time to time. The Fund and the Portfolio are not sponsored, endorsed, sold or promoted by Standard & Poor's Corporation. Standard & Poor's Corporation makes no representation or warranty, express or implied, to the owners of the Fund or the Portfolio or any member of the public regarding the advisability of investing in securities generally or in the Fund and the Portfolio particularly or the ability of the S&P 500 to track general stock market performance. Standard & Poor's Corporation does not guarantee the accuracy and/or the completeness of the S&P 500 or any data included therein. STANDARD & POOR'S CORPORATION MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE RESULTS TO BE OBTAINED BY THE FUND OR THE PORTFOLIO, OWNERS OF THE FUND OR THE PORTFOLIO, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500 OR ANY DATA INCLUDED THEREIN. STANDARD & POOR'S CORPORATION MAKES NO EXPRESS OR IMPLIED WARRANTIES AND HEREBY EXPRESSLY DISCLAIMS ALL SUCH WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE S&P 500 OR ANY DATA INCLUDED THEREIN. The ability of the Fund and the Portfolio to meet their investment objective depends to some extent on the cash flow experienced by the Fund and by the other investors in the Portfolio, since investments and redemptions by shareholders of the Fund generally will require the Portfolio to purchase or sell securities. BT will make investment changes to accommodate cash flow in an attempt to maintain the similarity of the Portfolio to the S&P 500. An investor should also be aware that the performance of the S&P 500 is a hypothetical number that does not take into account brokerage commissions and other costs of investing, unlike the Portfolio which must bear these costs. Finally, since the Portfolio seeks to track the S&P 500, BT generally will not attempt to judge the merits of any particular stock as an investment. AMERICAN AADVANTAGE INTERMEDIATE BOND FUND and AMERICAN AADVANTAGE SHORT-TERM BOND FUND -- The investment objective of each of these Funds is to realize income and capital appreciation. As an investment policy, each Fund primarily seeks income and secondarily seeks capital appreciation. The Intermediate Bond Fund and the Short-Term Bond Fund seek their investment objective by investing all of their investable assets in the Intermediate Bond Portfolio and the Short-Term Bond Portfolio, respectively, which invest primarily in debt obligations. Permissible investments include securities of the U.S. Government and its agencies and instrumentalities, including STRIPS and other zero coupon obligations; corporate bonds, notes and debentures; non-convertible preferred stocks; PROSPECTUS 17 31 mortgage-backed securities; asset-backed securities; domestic, Yankeedollar and Eurodollar certificates of deposit, bank deposit notes, and bank notes; other investment companies; and cash or cash equivalents including obligations that are permitted investments for the Money Market Portfolio. Such obligations may have a fixed, variable or floating rate of interest. At the time of purchase, all such securities will be rated in one of the four highest rating categories by all Rating Organizations rating such obligation or, if unrated, will be deemed to be of comparable quality by the Manager or the investment adviser. Obligations rated in the fourth highest rating category are limited to 25% of each Portfolio's total assets. See "American AAdvantage Balanced Fund" for a description of the risks involved with these obligations. The Portfolios, at the discretion of the Manager and the investment adviser, may retain a security which has been downgraded below the initial investment criteria. See the SAI for definitions of the foregoing securities and for a description of debt ratings. Principal and/or interest payments for obligations of the U.S. Government's agencies or instrumentalities may or may not be backed by the full faith and credit of the U.S. Government. Although investments will not be restricted by either maturity or duration of the securities purchased, under normal circumstances, the Intermediate Bond Portfolio will seek to maintain a dollar weighted average duration of three to seven years and the Short-Term Bond Portfolio will seek to maintain a dollar weighted average duration of one to three years. Because the timing on return of principal for both asset-backed and mortgage-backed securities is uncertain, in calculating the average weighted duration of the Portfolios, the duration of these securities may be based on certain industry conventions. Mortgage-backed securities are securities representing interests in "pools" of mortgages in which payments of both interest and principal on the securities are made monthly, in effect, "passing through" monthly payments made by the individual borrowers on the mortgage loans which underlie the securities (net of fees paid to the issuer or guarantor of the securities). Early repayment of principal on mortgage pass-through securities (arising from prepayments of principal due to sale of the underlying property, refinancing, or foreclosure, net of fees and costs which may be incurred) may expose the Portfolios to a lower rate of return upon reinvestment of principal. Also, if a security subject to prepayment has been purchased at a premium, in the event of prepayment, the value of the premium would be lost. Like other debt securities, when interest rates rise, the value of mortgage-related securities generally will decline; however, when interest rates decline, the value of mortgage-related securities with prepayment features may not increase as much as other debt securities. Payment of principal and interest on some mortgage pass-through securities (but not the market value of the securities themselves) may be guaranteed by the full faith and credit of the U.S. Government (in the case of securities guaranteed by the Government National Mortgage Association ("GNMA")) or guaranteed by agencies or instrumentalities of the U.S. Government (in the case of securities guaranteed by the Federal National Mortgage Association ("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC"), which are supported only by the discretionary authority of the U.S. Government to purchase the agency's obligations). Mortgage pass-through securities created by non-governmental issuers (such as commercial banks, savings and loan institutions, private mortgage insurance companies, mortgage bankers and other secondary market issuers) may be supported with various credit enhancements such as pool insurance, guarantees issued by governmental entities, a letter of credit from a bank or senior/subordinated structures. Collateralized mortgage obligations ("CMOs") are hybrid instruments with characteristics of both mortgage-backed bonds and mortgage pass-through securities. Similar to a mortgage pass-through, interest and prepaid principal on a CMO are paid, in most cases, monthly. CMOs may be collateralized by whole mortgage loans but are more typically collateralized by portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC or FNMA. CMOs are structured in multiple classes, with each class bearing a different stated maturity or interest rate. The Portfolios are permitted to invest in asset-backed securities, subject to the Portfolios' rating and quality requirements. Through the use of trusts and special purpose subsidiaries, various types of assets, primarily home equity loans, automobile and credit card receivables, and other types of receivables or other assets as well as purchase contracts, financing leases and sales agreements entered into by municipalities, are securitized in pass-through structures similar to the mortgage pass-through structures described above. Consistent with the Funds' PROSPECTUS 18 32 and the Portfolios' investment objective, policies and quality standards, the Portfolios may invest in these and other types of asset-backed securities which may be developed in the future. Asset-backed securities involve certain risks that do not exist with mortgage-related securities, resulting mainly from the fact that asset-backed securities do not usually contain the benefit of a complete security interest in the related collateral. For example, credit card receivables generally are unsecured and the debtors are entitled to the protection of a number of state and federal consumer credit laws, some of which may reduce the ability to obtain full payment. In the case of automobile receivables, due to various legal and economic factors, proceeds from repossessed collateral may not always be sufficient to support payments on the securities. The risks associated with asset-backed securities are often reduced by the addition of credit enhancements, such as a letter of credit from a bank, excess collateral or a third-party guarantee. Investments in Yankeedollar and Eurodollar bonds, notes and certificates of deposit involve risks that differ from investments in securities of domestic issuers. See "American AAdvantage Money Market Fund" for a description of these risks. The Portfolios also may engage in dollar rolls, or purchase or sell securities on a when-issued or forward commitment basis as described under "American AAdvantage Balanced Fund." The market value of fixed rate securities, and thus the net asset value of these Portfolios' shares, is expected to vary inversely with movements in interest rates. The market value of variable and floating rate instruments should not vary as much due to the periodic adjustments in their interest rates. An adjustment which increases the interest rate of such securities should reduce or eliminate declines in market value resulting from a prior upward movement in interest rates, and an adjustment which decreases the interest rate of such securities should reduce or eliminate increases in market value resulting from a prior downward movement in interest rates. The MANAGER serves as the sole active investment adviser to the Short-Term Bond Portfolio. The MANAGER and BARROW, HANLEY, MEWHINNEY & STRAUSS, INC. currently manage the assets of the Intermediate Bond Portfolio. See "Investment Advisers." MONEY MARKET FUNDS -- The investment objectives of the Money Market Funds are to seek current income, liquidity and the maintenance of a stable $1.00 price per share. The Money Market Funds seek to achieve these objectives by investing all of their investable assets in the Money Market Portfolios, which invest in high quality, U.S. dollar-denominated short-term obligations that have been determined by the Manager or the AMR Trust Board to present minimal credit risks. Portfolio investments are valued based on the amortized cost valuation technique pursuant to Rule 2a-7 under the Investment Company Act of 1940 ("1940 Act"). See the SAI for an explanation of the amortized cost valuation method. Obligations in which the Money Market Portfolios invest generally have remaining maturities of 397 days or less, although instruments subject to repurchase agreements and certain variable and floating rate obligations may bear longer final maturities. The average dollar-weighted portfolio maturity of each Money Market Portfolio will not exceed 90 days. The Manager serves as the sole investment adviser to the Money Market Funds. See "Management and Administration of the Trust." AMERICAN AADVANTAGE MONEY MARKET FUND -- The Fund's corresponding Portfolio may invest in obligations permitted to be purchased under Rule 2a-7 of the 1940 Act including, but not limited to, (1) obligations of the U.S. Government or its agencies or instrumentalities; (2) loan participation interests, medium-term notes, funding agreements and asset-backed securities; (3) domestic, Yankeedollar and Eurodollar certificates of deposit, time deposits, bankers' acceptances, commercial paper, bank deposit notes and other promissory notes, including floating or variable rate obligations issued by U.S. or foreign bank holding companies and their bank subsidiaries, branches and agencies; and (4) repurchase agreements involving the obligations listed above. The Money Market Portfolio will invest only in issuers or instruments that at the time of purchase (1) have received the highest short-term rating by two Rating Organizations such as "A-1" by S&P and "P-1" by Moody's; (2) are single rated and have received the highest short-term rating by a Rating Organization; or (3) are unrated, but are determined to be of comparable quality by the Manager pursuant to guidelines approved by the AMR Trust Board and subject to ratification by the AMR Trust Board. See the SAI for definitions of the foregoing instruments and rating systems. PROSPECTUS 19 33 The Portfolio may invest in other investment companies. The Portfolio also may purchase or sell securities on a when-issued or a forward commitment basis as described in "American AAdvantage Balanced Fund." The Portfolio will invest more than 25% of its assets in obligations issued by the banking industry. However, for temporary defensive purposes during periods when the Manager believes that maintaining this concentration may be inconsistent with the best interest of shareholders, the Portfolio may not maintain this concentration. Investments in Eurodollar (U.S. dollar obligations issued outside the United States by domestic or foreign entities) and Yankeedollar (U.S. dollar obligations issued inside the United States by foreign entities) obligations involve additional risks. Most notably, there generally is less publicly available information about foreign issuers; there may be less governmental regulation and supervision; foreign issuers may use different accounting and financial standards; and the adoption of foreign governmental restrictions may affect adversely the payment of principal and interest on foreign investments. In addition, not all foreign branches of United States banks are supervised or examined by regulatory authorities as are United States banks, and such branches may not be subject to reserve requirements. Variable amount master demand notes in which the Portfolio may invest are unsecured demand notes that permit the indebtedness thereunder to vary, and provide for periodic adjustments in the interest rate. Because master demand notes are direct lending arrangements between the Portfolio and the issuer, they are not normally publicly traded. There is no secondary market for the notes; however, the period of time remaining until payment of principal and accrued interest can be recovered under a variable amount master demand note generally will not exceed seven days. To the extent this period is exceeded, the note in question would be considered illiquid. Issuers of variable amount master demand notes must satisfy the same criteria as set forth for other promissory notes (e.g. commercial paper). The Portfolio will invest in variable amount master demand notes only when such notes are determined by the Manager, pursuant to guidelines established by the AMR Trust Board, to be of comparable quality to rated issuers or instruments eligible for investment by the Portfolio. In determining average dollar weighted portfolio maturity, a variable amount master demand note will be deemed to have a maturity equal to the longer of the period of time remaining until the next readjustment of the interest rate or the period of time remaining until the principal amount can be recovered from the issuer on demand. AMERICAN AADVANTAGE MUNICIPAL MONEY MARKET FUND -- The Fund's corresponding Portfolio may invest in municipal obligations issued by or on behalf of the governments of states, territories, or possessions of the United States; the District of Columbia; and their political subdivisions, agencies and instrumentalities if the interest these obligations provide is generally exempt from federal income tax. The Municipal Money Market Portfolio will invest only in issuers or instruments that at the time of purchase (1) are guaranteed by the U.S. Government, its agencies, or instrumentalities; (2) are secured by letters of credit that are irrevocable and issued by banks which qualify as authorized issuers for the Money Market Portfolio (see "American AAdvantage Money Market Fund"); (3) are guaranteed by one or more municipal bond insurance policies that cannot be canceled and are issued by third-party guarantors possessing the highest claims-paying rating from a Rating Organization; (4) have received one of the two highest short-term ratings from at least two Rating Organizations; (5) are single rated and have received one of the two highest short-term ratings from that Rating Organization; (6) have no short-term rating but the instrument is comparable to the issuer's rated short-term debt; (7) have no short-term rating (or comparable rating) but have received one of the top two long-term ratings from all Rating Organizations rating the issuer or instrument; or (8) are unrated, but are determined to be of comparable quality by the Manager pursuant to guidelines approved by, and subject to the oversight of, the AMR Trust Board. The Portfolio also may invest in other investment companies. Ordinarily at least 80% of the Portfolio's net assets will be invested in municipal obligations, the interest from which is exempt from federal income tax. However, should market conditions warrant, the Portfolio may invest up to 20% (or for temporary defensive purposes, up to 100%) of its assets in eligible investments for the Money Market Portfolio which are subject to federal income tax. The Portfolio may invest in certain municipal obligations which have rates of interest that are adjusted periodically according to formulas intended to minimize fluctuations in the values of these instruments. These instruments, commonly known as variable rate demand obligations, are long-term instruments which allow the PROSPECTUS 20 34 purchaser, at its discretion, to redeem securities before their final maturity at par plus accrued interest upon notice (typically 7 to 30 days). Municipal obligations may be backed by the full taxing power of a municipality ("general obligations"), or by the revenues from a specific project or the credit of a private organization ("revenue obligations"). Some municipal obligations are collateralized as to payment of principal and interest by an escrow of U.S. Government or federal agency obligations, while others are insured by private insurance companies, while still others may be supported by letters of credit furnished by domestic or foreign banks. The Portfolio's investments in municipal obligations may include fixed, variable, or floating rate general obligations and revenue obligations (including municipal lease obligations and resource recovery obligations); zero coupon and asset-backed obligations; variable rate auction and residual interest obligations; tax, revenue, or bond anticipation notes; tax-exempt commercial paper; and purchase obligations that are subject to restrictions on resale. See the SAI for a further discussion of the foregoing obligations. The Portfolio may purchase or sell obligations on a when-issued or forward commitment basis, as described under "American AAdvantage Balanced Fund." The Portfolio may invest more than 25% of the value of its total assets in municipal obligations which are related in such a way that an economic, business or political development or change affecting one such security would also affect the other securities; for example, securities the interest of which is paid from revenues of similar types of projects, or securities whose issuers are located in the same state. As a result, the Portfolio may be subject to greater risk compared to a fund that does not follow this practice. However, the Manager believes this risk is mitigated because it is anticipated that most of the Portfolio's assets will be insured or backed by bank letters of credit. Additionally, the Portfolio may invest more than 25% of the value of its total assets in industrial development bonds which, although issued by industrial development authorities, may be backed only by the assets and revenues of the non-governmental users. The Portfolio also may invest in municipal obligations that constitute "private activity obligations." These include obligations that finance student loans, residential rental projects, and solid waste disposal facilities. To the extent the Portfolio earns interest income on private activity obligations, shareholders will be required to treat the portion of the Fund's distributions attributable to its share of such interest as a "tax preference item" for purposes of determining their liability for the federal alternative minimum tax ("AMT") and, as a result, may become subject to (or increase their liability for) the AMT. Shareholders should consult their own tax advisers to determine whether they may be subject to the AMT. The Portfolio may invest in private activity obligations without limitation and it is anticipated that a substantial portion of the Portfolio's assets will be invested in these obligations. As a result, a substantial portion of the Fund's distributions may be a tax preference item, which will reduce the net return from the Fund for taxpayers subject to the AMT. Interest on "qualified" private activity obligations is exempt from federal income tax. AMERICAN AADVANTAGE U.S. GOVERNMENT MONEY MARKET FUND -- The Fund's corresponding Portfolio will invest exclusively in obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities and repurchase agreements which are collateralized by such obligations. U.S. Government securities include direct obligations of the U.S. Treasury (such as Treasury bills, Treasury notes and Treasury bonds). The Fund may invest in securities issued by the Agency for International Development, Farmers Home Administration, Farm Credit Banks, Federal Home Loan Bank, Federal Intermediate Credit Bank, Federal Financing Bank, Federal Land Bank, FNMA, GNMA, General Services Administration, Rural Electrification Administration, Small Business Administration, Tennessee Valley Authority, and others. Some of these obligations, such as those issued by the Federal Home Loan Bank and FHLMC, are supported only by the credit of the agency or instrumentality issuing the obligation and the discretionary authority of the U.S. Government to purchase the agency's obligations. See the SAI for a further discussion of the foregoing obligations. Counterparties for repurchase agreements must be approved by the AMR Trust Board. The Portfolio may purchase or sell securities on a when-issued or forward commitment basis, as described under "American AAdvantage Balanced Fund." OTHER INVESTMENT POLICIES -- In addition to the investment policies described previously, each Portfolio also may lend its securities, enter into fully collateralized repurchase agreements and invest in private placement offerings. PROSPECTUS 21 35 SECURITIES LENDING. Each Portfolio may lend securities to broker-dealers or other institutional investors pursuant to agreements requiring that the loans be continuously secured by any combination of cash, securities of the U.S. Government and its agencies and instrumentalities and approved bank letters of credit that at all times equal at least 100% of the market value of the loaned securities. Although the Equity 500 Index Portfolio may lend its securities, it has agreed to abstain from doing so. Securities loans will not be made if, as a result, the aggregate amount of all outstanding securities loans by any Portfolio of the AMR Trust would exceed 33 1/3% of its total assets (including the market value of collateral received). A Portfolio continues to receive interest on the securities loaned and simultaneously earns either interest on the investment of the cash collateral or fee income if the loan is otherwise collateralized. Should the borrower of the securities fail financially, there is a risk of delay in recovery of the securities loaned or loss of rights in the collateral. However, the Portfolios seek to minimize this risk by making loans only to borrowers which are deemed to be of good financial standing and which have been approved by the AMR Trust Board. For purposes of complying with each Portfolio's investment policies and restrictions, collateral received in connection with securities loans will be deemed an asset of a Portfolio to the extent required by law. Except for the Equity 500 Index Portfolio, the Manager will receive compensation for administrative and oversight functions with respect to securities lending. The amount of such compensation will depend on the income generated by the loan of each Portfolio's securities. The SEC has granted exemptive relief that permits the Portfolios to invest cash collateral received from securities lending transactions in shares of one or more private investment companies managed by the Manager. Subject to receipt of exemptive relief from the SEC, the Portfolios also may invest cash collateral received from securities lending transactions in shares of one or more registered investment companies managed by the Manager. See the SAI for further information regarding loan transactions. REPURCHASE AGREEMENTS. A repurchase agreement is an agreement under which securities are acquired by a Portfolio from a securities dealer or bank subject to resale at an agreed upon price on a later date. The acquiring Portfolio bears a risk of loss in the event that the other party to a repurchase agreement defaults on its obligations and the Portfolio is delayed or prevented from exercising its rights to dispose of the collateral securities. However, the investment advisers or the Manager attempt to minimize this risk by entering into repurchase agreements only with financial institutions which are deemed to be of good financial standing and which have been approved by the AMR Trust Board or the Equity 500 Index Portfolio Board, as appropriate. See the SAI for more information regarding repurchase agreements. PRIVATE PLACEMENT OFFERINGS. Investments in private placement offerings are made in reliance on the "private placement" exemption from registration afforded by Section 4(2) of the Securities Act of 1933 (the "1933 Act"), and resold to qualified institutional buyers under Rule 144A under the 1933 Act ("Section 4(2) securities"). Section 4(2) securities are restricted as to disposition under the federal securities laws, and generally are sold to institutional investors, such as the Portfolios, that agree they are purchasing the securities for investment and not with an intention to distribute to the public. Any resale by the purchaser must be pursuant to an exempt transaction and may be accomplished in accordance with Rule 144A. Section 4(2) securities normally are resold to other institutional investors such as the Portfolios through or with the assistance of the issuer or dealers that make a market in the Section 4(2) securities, thus providing liquidity. The Money Market Portfolios will not invest more than 10% (and the other Funds' respective Portfolios, will not invest more than 15%) of their respective net assets in Section 4(2) securities and illiquid securities unless the applicable investment adviser determines, by continuous reference to the appropriate trading markets and pursuant to guidelines approved by the AMR Trust Board or the Equity 500 Index Portfolio Board, that any Section 4(2) securities held by such Portfolio in excess of this level are at all times liquid. The AMR Trust Board, the Equity 500 Index Portfolio Board and the applicable investment adviser, pursuant to the guidelines approved by their respective Boards, will carefully monitor the Portfolios' investments in Section 4(2) securities offered and sold under Rule 144A, focusing on such important factors, among others, as: valuation, liquidity, and availability of information. Investments in Section 4(2) securities could have the effect of reducing a Portfolio's liquidity to the extent that qualified institutional buyers no longer wish to purchase these restricted securities. PROSPECTUS 22 36 BROKERAGE PRACTICES AND PORTFOLIO TURNOVER -- Each investment adviser will place its own orders to execute securities transactions which are designed to implement the applicable Portfolio's investment objective and policies. In placing such orders, each investment adviser will seek the best available price and most favorable execution. The full range and quality of services offered by the executing broker or dealer will be considered when making these determinations. Pursuant to written guidelines approved by the AMR Trust Board or the Equity 500 Index Portfolio Board, as appropriate, an investment adviser of a Portfolio, or its affiliated broker-dealer, may execute portfolio transactions and receive usual and customary brokerage commissions (within the meaning of Rule 17e-1 of the 1940 Act) for doing so. The Money Market Portfolios, the Intermediate Bond Portfolio and the Short-Term Bond Portfolio normally will not incur any brokerage commissions on their transactions because money market and debt instruments are generally traded on a "net" basis with dealers acting as principal for their own accounts and without a stated commission. The price of the obligation, however, usually includes a profit to the dealer. Obligations purchased in underwritten offerings include a fixed amount of compensation to the underwriter, generally referred to as the underwriter's concession or discount. No commissions or discounts are paid when securities are purchased directly from an issuer. No Portfolio, other than the Short-Term Bond Portfolio, currently expects its portfolio turnover rate to exceed 100%. The portfolio turnover rate for the Short-Term Bond Portfolio for the fiscal year ended October 31, 1997 was 282%. The portfolio turnover rate for the Balanced Portfolio for the fiscal year ended October 31, 1997 was 105%. This was due to an unusually large redemption in the Balanced Fund, which is not expected to reoccur. A Portfolio's turnover rate, or the frequency of portfolio transactions, will vary from year to year depending on market conditions and the Portfolio's cash flows. High portfolio activity increases a Portfolio's transaction costs, including brokerage commissions and may result in a greater number of taxable transactions. ADDITIONAL INFORMATION ABOUT THE PORTFOLIOS -- As previously described, investors should be aware that each Fund, unlike mutual funds that directly acquire and manage their own portfolios of securities, seeks to achieve its investment objective by investing all of its investable assets in a corresponding Portfolio of the AMR Trust, which is a separate investment company, or in the Equity 500 Index Portfolio, which is a separate investment company advised by BT. Since a Fund will invest only in its corresponding Portfolio, that Fund's shareholders will acquire only an indirect interest in the investments of the Portfolio. The Manager expects, although it cannot guarantee, that the Trust will achieve economies of scale by investing in the AMR Trust and the Equity 500 Index Portfolio. In addition to selling their interests to the Funds, the Portfolios sell their interests to other non-affiliated investment companies and/or other institutional investors. All institutional investors in a Portfolio pay a proportionate share of the Portfolio's expenses and invest in that Portfolio on the same terms and conditions. However, other investment companies investing all of their assets in a Portfolio are not required to sell their shares at the same public offering price as a Fund and are allowed to charge different sales commissions. Therefore, investors in a Fund may experience different returns from investors in another investment company that invests exclusively in that Fund's corresponding Portfolio. The Fund's investment in a Portfolio may be affected materially by the actions of large investors in that Portfolio, if any. For example, as with all open-end investment companies, if a large investor were to redeem its interest in a Portfolio, that Portfolio's remaining investors could experience higher pro rata operating expenses, thereby producing lower returns. As a result, that Portfolio's security holdings may become less diverse, resulting in increased risk. Institutional investors in a Portfolio that have a greater pro rata ownership interest in the Portfolio than the Fund could have effective voting control over the operation of that Portfolio. A change in a Portfolio's fundamental objective, policies and restrictions, that is not approved by the shareholders of its corresponding Fund could require that Fund to redeem its interest in the Portfolio. Any such redemption could result in a distribution in kind of portfolio securities (as opposed to a cash distribution) by the Portfolio. Should such a distribution occur, that Fund could incur brokerage fees or other transaction costs in converting such securities to cash. In addition, a distribution in kind could result in a less diversified portfolio of investments for that Fund and could affect its liquidity adversely. PROSPECTUS 23 37 The Portfolios' and their corresponding Funds' investment objectives and policies are described above. See "Investment Restrictions" for a description of their investment restrictions. The investment objective of a Fund can be changed only with shareholder approval. The approval of a Fund and of other investors in its corresponding Portfolio, if any, is not required to change the investment objective, policies or limitations of that Portfolio, unless otherwise specified. Written notice will be provided to shareholders of a Fund within thirty days prior to any changes in its corresponding Portfolio's investment objective. If the investment objective of a Portfolio changes and the shareholders of its corresponding Fund do not approve a parallel change in that Fund's investment objective, the Fund would seek an alternative investment vehicle or the Manager and the investment advisers would actively manage the Fund. See "Management and Administration of the Trusts" for a complete description of the investment management fee and other expenses associated with a Fund's investment in its corresponding Portfolio. This Prospectus and the SAI contain more detailed information about each Fund and its corresponding Portfolio, including information related to (1) the investment objective, policies and restrictions of each Fund and its corresponding Portfolio, (2) the Board of Trustees and officers of the Trust, the AMR Trust and the Equity 500 Index Portfolio Board, (3) brokerage practices, (4) the Funds' shares, including the rights and liabilities of its shareholders, (5) additional performance information, including the method used to calculate yield and total return, and (6) the determination of the value of each Fund's shares. INVESTMENT RESTRICTIONS The following fundamental investment restrictions and the non-fundamental investment restriction are identical for each Fund and its corresponding Portfolio. Therefore, although the following discusses the investment restrictions of each Portfolio, it applies equally to each Fund. The following fundamental investment restrictions may be changed with respect to a particular Fund by the majority vote of that Fund's outstanding shares or with respect to a Portfolio by the majority vote of that Portfolio's interest holders. No Portfolio may: - Invest more than 5% of its total assets (taken at market value) in securities of any one issuer, other than obligations issued by the U.S. Government, its agencies and instrumentalities, or purchase more than 10% of the voting securities of any one issuer, with respect to 75% of a Portfolio's total assets. In addition, although not a fundamental investment restriction and therefore subject to change without shareholder vote, the Money Market Portfolio and the U.S. Government Money Market Portfolio apply this restriction with respect to 100% of their assets. - Invest more than 25% of its total assets in the securities of companies primarily engaged in any one industry, provided that: (i) this limitation does not apply to obligations issued or guaranteed by the U.S. Government, its agencies and instrumentalities; (ii) municipalities and their agencies and authorities are not deemed to be industries; and (iii) financial service companies are classified according to the end users of their services (for example, automobile finance, bank finance, and diversified finance will be considered separate industries). With respect to the Money Market Portfolio, this restriction does not apply to the banking industry. The following non-fundamental investment restriction may be changed with respect to a particular Fund by a vote of a majority of the Board or with respect to a Portfolio by a vote of a majority of the AMR Trust Board or the Equity 500 Index Portfolio Board, as appropriate: no Portfolio may invest more than 15% (or, with respect to any Money Market Portfolio, 10%) of its net assets in illiquid securities, including time deposits and repurchase agreements that mature in more than seven days. The above percentage limits are based upon asset values at the time of the applicable transaction; accordingly, a subsequent change in asset values will not affect a transaction that was in compliance with the investment restrictions at the time such transaction was effected. See the SAI for other investment limitations. PROSPECTUS 24 38 YIELDS AND TOTAL RETURNS From time to time each class of the Money Market Funds may advertise their "current yield" and "effective yield." Both yield figures are based on historical earnings and are not intended to indicate future performance. The current yield refers to the investment income generated over a seven calendar-day period (which period will be stated in the advertisement). This yield is then annualized by assuming the amount of investment income generated during that week is earned each week over a one-year period, and is shown as a percentage of the investment. The effective yield is calculated similarly but, when annualized, the investment income earned is assumed to be reinvested. The effective yield will be slightly higher than the current yield because of the compounding effect of this assumed reinvestment. The Municipal Money Market Fund also may quote "tax equivalent yields," which show the taxable yields a shareholder would have to earn before federal income taxes to equal this Fund's tax-exempt yields. The tax equivalent yield is calculated by dividing the Fund's tax-exempt yield by the result of one minus a stated federal income tax rate. If only a portion of the Fund's investment income was tax-exempt, only that portion is adjusted in the calculation. As stated earlier, the Fund considers interest on private activity obligations to be exempt from federal income tax. Each class of a Fund has different expenses which will impact its performance. Advertised yields for the Institutional Class of the Balanced Fund, the Growth and Income Fund, the International Equity Fund, the S&P 500 Index Fund, the Intermediate Bond Fund and the Short-Term Bond Fund (collectively, the "Variable NAV Funds") will be computed by dividing the net investment income per share earned by the applicable class during the relevant time period by the maximum offering price per share for that class on the last day of the period. Additionally, each class of the Intermediate Bond Fund and the Short-Term Bond Fund may advertise a "monthly distribution rate." This rate is based on an annualized monthly dividend accrual rate per share compared with the month-end share price of each class of the Fund. Total return quotations advertised by the Funds may reflect the average annual compounded (or aggregate compounded) rate of return during the designated time period based on a hypothetical initial investment and the redeemable value of that investment at the end of the period. The Funds will at times compare their performance to applicable published indices, and also may disclose their performance as ranked by certain ranking entities. See the SAI for more information about the calculation of yields and total returns. MANAGEMENT AND ADMINISTRATION OF THE TRUSTS FUND MANAGEMENT AGREEMENT -- The Board has general supervisory responsibility over the Trust's affairs, while the business affairs of the AMR Trust and the Equity 500 Index Portfolio are subject to the supervision of their respective Boards. The Manager provides or oversees all administrative, investment advisory and portfolio management services for the Trust pursuant to a Management Agreement dated April 3, 1987, as amended July 25, 1997, together with the Administrative Services Agreement described below. The AMR Trust and the Manager also entered into a Management Agreement dated October 1, 1995, as amended July 25, 1997, that obligates the Manager to provide or oversee all administrative, investment advisory and portfolio management services for the AMR Trust. The Manager, located at 4333 Amon Carter Boulevard, MD 5645, Fort Worth, Texas 76155, is a wholly owned subsidiary of AMR Corporation ("AMR"), the parent company of American Airlines, Inc., and was organized in 1986 to provide investment management, advisory, administrative and asset management consulting services. The assets of the Balanced Portfolio, the Growth and Income Portfolio and the International Equity Portfolio are allocated by the Manager among multiple investment advisers designated for that Portfolio. The assets of the Intermediate Bond Portfolio are allocated by the Manager between the Manager and another investment adviser. BT serves as investment adviser and administrator of, and provides custody and transfer agency services to, the Equity 500 Index Portfolio. See "Investment Advisers." The Manager serves as the sole active investment adviser to the Money Market Portfolios and the Short-Term Bond Portfolio. In addition, with the exception of the International Equity Portfolio and the Equity 500 Index Portfolio, if so requested by any investment adviser, the Manager will make the investment decisions with respect to assets allocated to that investment adviser which the investment adviser determines should be invested in short-term obligations of the type permitted for investment by the Money Market Portfolio. As of December 31, 1997, the Manager had assets PROSPECTUS 25 39 under management totaling approximately $18.4 billion including approximately $6.1 billion under active management and $12.3 billion as named fiduciary or fiduciary adviser. Of the total, approximately $14.2 billion of assets are related to AMR. American Airlines, Inc. is not responsible for investments made in the American AAdvantage Funds. The Manager provides the Trust and the AMR Trust with office space, office equipment and personnel necessary to manage and administer the Trusts' operations. This includes complying with reporting requirements; corresponding with shareholders; maintaining internal bookkeeping, accounting and auditing services and records; and supervising the provision of services to the Trusts by third parties. The Manager oversees each Portfolio's participation in securities lending activities and any actions taken by the securities lending agent in connection with those activities to ensure compliance with all applicable regulatory and investment guidelines. The Manager also develops the investment programs for each Portfolio of the AMR Trust, selects and changes investment advisers (subject to approval by the AMR Trust Board and appropriate interest holders), allocates assets among investment advisers, monitors the investment advisers' investment programs and results, and coordinates the investment activities of the investment advisers to ensure compliance with regulatory restrictions. Except as otherwise provided below, the Manager bears the expense of providing the above services and pays the fees of the investment advisers of the Funds and the Portfolios of the AMR Trust. As compensation for paying the investment advisory fees and for providing the Portfolios with advisory and asset allocation services, the Manager receives from the AMR Trust an annualized advisory fee that is calculated and accrued daily, equal to the sum of (1) 0.15% of the net assets of the Money Market Portfolios, (2) 0.25% of the net assets of the Intermediate Bond Portfolio and the Short-Term Bond Portfolio, (3) 0.10% of the net assets of the other Portfolios of the AMR Trust, plus (4) all fees payable by the Manager to the investment advisers of the Balanced, the Growth and Income and the International Equity Portfolios, as described in "Investment Advisers." The advisory fee is payable quarterly in arrears. To the extent that a Fund invests all of its investable assets in its corresponding Portfolio, the Manager will not receive an advisory fee under its Management Agreement with the Trust. The Manager receives compensation in connection with securities lending activities. If a Portfolio lends its portfolio securities and receives cash collateral from the borrower, the Manager may receive up to 25% of the net annual interest income (the gross interest earned by the investment less the amount paid to the borrower as well as related expenses) received from the investment of such cash. If a borrower posts collateral other than cash, the borrower will pay to the lender a loan fee. The Manager may receive up to 25% of the loan fees posted by borrowers. Currently, the Manager receives 10% of the net annual interest income from the investment of cash collateral or 10% of the loan fees posted by borrowers. In addition, the Manager is compensated through the Administrative Services Agreement as described below for other services provided. Each Management Agreement will continue in effect provided that annually such continuance is specifically approved by a vote of the Board and the AMR Trust Board, including the affirmative votes of a majority of the Trustees of each Board who are not parties to the Management Agreement or "interested persons" as defined in the 1940 Act of any such party ("Independent Trustees"), cast in person at a meeting called for the purpose of considering such approval, or by the vote of a Fund's shareholders or a Portfolio's interest holders. A Management Agreement may be terminated with respect to a Fund or a Portfolio at any time, without penalty, by a majority vote of outstanding Fund shares or Portfolio interests on sixty (60) days' written notice to the Manager, or by the Manager, on sixty (60) days' written notice to the Trust or the AMR Trust. A Management Agreement will automatically terminate in the event of its "assignment" as defined in the 1940 Act. The Trust is responsible for expenses not otherwise assumed by the Manager, including the following: audits by independent auditors; transfer agency, custodian, dividend disbursing agent and shareholder recordkeeping services; taxes, if any, and the preparation of each Fund's tax returns; interest; costs of Trustee and shareholder meetings; printing and mailing prospectuses and reports to existing shareholders; fees for filing reports with regulatory bodies and the maintenance of the Funds' existence; legal fees; fees to federal and state authorities for the registration of shares; fees and expenses of Independent Trustees; insurance and fidelity bond premiums; fees paid to consultants providing reports regarding adherence by investment advisers to the investment style of a Portfolio; and any extraordinary expenses of a nonrecurring nature. PROSPECTUS 26 40 A majority of the Independent Trustees of the Board have adopted written procedures reasonably appropriate to deal with potential conflicts of interest between the Trust and the AMR Trust. FUND ADVISORY AGREEMENTS -- Each investment adviser, except BT, has entered into a separate investment advisory agreement with the Manager to provide investment advisory services to the Funds and the Portfolios of the AMR Trust. To the extent that a Fund invests all of its investable assets in a corresponding Portfolio, however, an investment adviser will receive an advisory fee only on behalf of the Portfolio and not on behalf of its corresponding Fund. As described below, the assets of the Balanced, the Growth and Income and the International Equity Portfolios are allocated among the investment advisers designated for each Portfolio and the assets of the Intermediate Bond Portfolio are allocated between the Manager and another investment adviser. The Manager is permitted to enter into new or modified advisory agreements with existing or new investment advisers without approval of Fund shareholders or Portfolio interest holders, but subject to approval of the Board and the AMR Trust Board. The Securities and Exchange Commission issued an exemptive order which eliminates the need for shareholder/interest holder approval subject to compliance with certain conditions. These conditions include the requirement that within 90 days of hiring a new adviser or implementing a material change with respect to an advisory contract, the applicable Fund send a notice to shareholders containing information about the change that would be included in a proxy statement. The Manager recommends investment advisers to the Board and the AMR Trust Board based upon its continuing quantitative and qualitative evaluation of the investment advisers' skill in managing assets using specific investment styles and strategies. The allocation of assets among investment advisers may be changed at any time by the Manager. Allocations among investment advisers will vary based upon a variety of factors, including the overall investment performance of each investment adviser, the Portfolio's cash flow needs and market conditions. The Manager need not allocate assets to each investment adviser designated for a Portfolio. The investment advisers can be terminated without penalty to the AMR Trust by the Manager, the AMR Trust Board or the interest holders of the applicable Portfolio. Short-term investment performance, by itself, is not a significant factor in selecting or terminating an investment adviser, and the Manager does not expect to recommend frequent changes of investment advisers. The Prospectus will be supplemented if additional investment advisers are retained or the contract with any existing investment adviser is terminated. Each investment adviser has discretion to purchase and sell securities for its segment of a Portfolio's assets in accordance with that Portfolio's objectives, policies and restrictions and the more specific strategies provided by the Manager. Although the investment advisers are subject to general supervision by the AMR Trust Board, the Equity 500 Index Portfolio Board and the Manager, as appropriate, these parties do not evaluate the investment merits of specific securities transactions. As compensation for its services, each investment adviser, except BT, is paid a fee by the Manager out of the proceeds of the management fee received by the Manager from the AMR Trust. ADMINISTRATIVE SERVICES AGREEMENTS -- The Manager and the Trust entered into an Administrative Services Agreement which obligates the Manager to provide the Funds those administrative and management services (other than investment advisory services) described in the Management Agreement. As compensation for these services, the Manager receives an annualized fee of 0.25% of the net assets of the Institutional Class of the Variable NAV Funds and 0.05% of the net assets of the Institutional Class of the Money Market Funds. The fee is payable quarterly in arrears. BT serves as the administrator to the Equity 500 Index Portfolio. Under an Administration and Services Agreement with the Portfolio, BT calculates the value of the assets of the Portfolio and generally assists the Equity 500 Index Portfolio Board in all aspects of the administration and operation of the Portfolio. The Administration and Services Agreement provides for the Portfolio to pay BT a fee, computed daily and paid monthly, at the rate of 0.05% of the average daily net assets of the Portfolio. Under the Administration and Services Agreement, BT may delegate one or more of its responsibilities to others, including Federated Services Company, at BT's expense. PROSPECTUS 27 41 DISTRIBUTION OF TRUST SHARES -- Shares are distributed through the Funds' principal underwriter, BTS. BTS is compensated by the Manager, and not the Trust. The Trust does not incur any direct distribution expenses related to Institutional Class shares. However, the Trust has adopted a Distribution Plan in accordance with Rule 12b-1 under the 1940 Act which authorizes the use of any fees received by the Manager in accordance with the Administrative Services and Management Agreements and any fees received by the investment advisers pursuant to their Advisory Agreements with the Manager, to be used for distribution purposes. ALLOCATION OF FUND EXPENSES -- Expenses of each Fund generally are allocated equally among the shares of that Fund, regardless of class. However, certain expenses approved by the Board will be allocated solely to the class to which they relate. PRINCIPAL UNDERWRITER -- BROKERS TRANSACTION SERVICES, INC. ("BTS"), 7001 Preston Road, Dallas, Texas 75205, serves as the principal underwriter of the Trust. CUSTODIAN -- STATE STREET BANK & TRUST COMPANY ("State Street"), Boston, Massachusetts, serves as custodian for the Portfolios of the AMR Trust and the Funds. BANKERS TRUST COMPANY, New York, New York, serves as custodian and transfer agent for the assets of the Equity 500 Index Portfolio. TRANSFER AGENT -- State Street serves as transfer agent and provides transfer agency services for Fund shareholders through its affiliate NATIONAL FINANCIAL DATA SERVICES ("NFDS"), Kansas City, Missouri. INDEPENDENT AUDITOR -- The independent auditor for the Funds (except as noted otherwise) and the AMR Trust is ERNST & YOUNG LLP, Dallas, Texas. The independent auditor for the S&P 500 Index Fund and the Equity 500 Index Portfolio is COOPERS & LYBRAND L.L.P., Kansas City, Missouri. INVESTMENT ADVISERS Set forth below is a brief description of the investment advisers for each Fund and its corresponding Portfolio, except for the Money Market Funds and their corresponding Portfolios, whose sole investment adviser is the Manager. References to the investment advisers retained by a Portfolio also apply to the corresponding Fund. Except for the Manager and BT, none of the investment advisers provides any services to the Funds or the Portfolios except for portfolio investment management and related recordkeeping services, or has any affiliation with the Trust, the AMR Trust, the Equity 500 Index Portfolio or the Manager. BT provides investment advisory, administrative and other services to the Equity 500 Index Portfolio. See "Bankers Trust Company" below for a discussion of those services. William F. Quinn has served as President of the Manager since it was founded in 1986 and Nancy A. Eckl serves as Vice President-Trust Investments of the Manager. Ms. Eckl previously served as Vice President-Finance and Compliance of the Manager from December 1990 to May 1995. In these capacities, Mr. Quinn and Ms. Eckl have primary responsibility for the day-to-day operations of the Balanced Fund, the Growth and Income Fund, the International Equity Fund, the Intermediate Bond Fund and their corresponding Portfolios. These responsibilities include oversight of the investment advisers, regular review of each investment adviser's performance and asset allocations among them. Michael W. Fields is responsible for the portfolio management oversight of the Short-Term Bond Fund and its corresponding Portfolio as well as the portion of the Intermediate Bond Fund and its corresponding Portfolio, allocated to the Manager. Mr. Fields has been with the Manager since it was founded in 1986 and serves as Vice President-Fixed Income Investments. Benjamin L. Mayer is responsible for the day-to-day portfolio management of these Funds and Portfolios. Mr. Mayer has served as Senior Portfolio Manager of the Manager since May 1995. Prior to that time, he was a Vice President of Institutional Fixed Income Sales at Merrill Lynch, Pierce, Fenner & Smith from January 1994 to April 1995 and Vice President, Regional Senior Strategist from April 1989 to January 1994. PROSPECTUS 28 42 Frank Salerno, Managing Director of BT, is responsible for the day-to-day management of the Equity 500 Index Portfolio. Mr. Salerno has been employed by BT since prior to 1989 and has managed the Equity 500 Index Portfolio's assets since the Portfolio commenced operations December 31, 1992. BANKERS TRUST COMPANY, 130 Liberty Street (One Bankers Trust Plaza), New York, New York 10006, is a New York banking corporation and is a wholly owned subsidiary of Bankers Trust New York Corporation. BT conducts a variety of general banking and trust activities and is a major wholesale supplier of financial services to the international and domestic institutional market, with a global network of over 90 offices in more than 50 countries. As of September 30, 1997, Bankers Trust New York Corporation was the seventh largest bank holding company in the United States with total assets of approximately $100 billion and approximately $300 billion in assets under management globally. Of that total, approximately $143 billion are in U.S. equity index assets alone. BT serves as investment adviser and administrator to the Equity 500 Index Portfolio. For its services, BT receives a fee from the Equity 500 Index Portfolio, computed daily and paid monthly, at the annual rate of 0.10% of the average daily net assets of the Portfolio, of which BT is currently waiving 0.05%. BARROW, HANLEY, MEWHINNEY & STRAUSS, INC. ("Barrow"), 3232 McKinney Avenue, 15th Floor, Dallas, Texas 75204, is a professional investment counseling firm which has been providing investment advisory services since 1979. The firm is wholly owned by United Asset Management Corporation, a Delaware corporation. As of December 31, 1997, Barrow had discretionary investment management authority with respect to approximately $28.8 billion of assets, including approximately $1.9 billion of assets of AMR and its subsidiaries and affiliated entities. Barrow serves as an investment adviser to the Balanced Portfolio, the Growth and Income Portfolio, the Intermediate Bond Portfolios and the Short-Term Bond Portfolio, although the Manager does not presently intend to allocate any of the assets in the Short-Term Bond Portfolio to Barrow. The Manager pays Barrow an annualized fee equal to .30% on the first $200 million in AMR Trust assets under its discretionary management, .20% on the next $300 million, .15% on the next $500 million, and .125% on assets over $1 billion. BRANDYWINE ASSET MANAGEMENT, INC. ("Brandywine"), 201 North Walnut Street, Wilmington, Delaware 19801, is a professional investment counseling firm founded in 1986. Brandywine is a wholly owned subsidiary of Legg Mason, Inc. As of December 31, 1997, Brandywine had assets under management totaling approximately $7.5 billion, including approximately $894 million of assets of AMR and its subsidiaries and affiliated entities. Brandywine serves as an investment adviser to the Balanced and the Growth and Income Portfolios. The Manager pays Brandywine an annualized fee equal to .225% of assets in the Balanced Portfolio and .25% of assets in the Growth and Income Portfolio of the first $500 million of AMR Trust assets under its discretionary management, .225% of the next $100 million on all assets and .20% on all excess assets. GSB INVESTMENT MANAGEMENT, INC. ("GSB"), 301 Commerce Street, Fort Worth, Texas 76102, is a professional investment management firm which was founded in 1987 by Frank P. Ganucheau, Mark J. Stupfel, and Lyle E. Brumley. GSB is wholly owned by United Asset Management Corporation, a Delaware corporation. As of December 31, 1997, GSB managed approximately $3.5 billion of assets, including approximately $905 million of assets of AMR and its subsidiaries and affiliated entities. GSB serves as an investment adviser to the Balanced Portfolio and the Growth and Income Portfolio. The Manager pays GSB an annualized fee equal to .30% of the first $100 million in AMR Trust assets under its discretionary management, .25% of the next $100 million, .20% of the next $100 million and .15% on all excess assets. HOTCHKIS AND WILEY, 800 West Sixth Street, 5th Floor, Los Angeles, California 90017, is a professional investment counseling firm which was founded in 1980 by John F. Hotchkis and George Wiley. Hotchkis and Wiley is a division of the Capital Management Group of Merrill Lynch Asset Management, L.P., a wholly owned indirect subsidiary of Merrill Lynch & Co., Inc. Assets under management as of December 31, 1997 were approximately $12.3 billion, which included approximately $1.1 billion of assets of AMR and its subsidiaries and affiliated entities. Hotchkis and Wiley serves as an investment adviser to the Balanced Portfolio, the Growth and Income Portfolio and the International Equity Portfolio. The Manager pays Hotchkis and Wiley an annualized fee equal to .60% of the first $10 million of AMR Trust assets under its discretionary management, .50% of the PROSPECTUS 29 43 next $140 million of assets, .30% of the next $50 million of assets, .20% of the next $800 million of assets and .15% of all excess assets. INDEPENDENCE INVESTMENT ASSOCIATES, INC. ("IIA"), 53 State Street, Boston, Massachusetts 02109, is a professional investment counseling firm which was founded in 1982. The firm is a wholly owned subsidiary of John Hancock Mutual Life Insurance Company. Assets under management as of December 31, 1997, including funds managed for its parent company, were approximately $26.7 billion, which included approximately $1.1 billion of assets of AMR and its subsidiaries and affiliated entities. IIA serves as an investment adviser to the Balanced Portfolio and the Growth and Income Portfolio. The Manager pays IIA an annualized fee equal to .50% of the first $30 million of AMR Trust assets under its discretionary management, .25% of the next $70 million of assets, and .20% of all excess assets. MORGAN STANLEY ASSET MANAGEMENT INC. ("MSAM"), 25 Cabot Square, London, United Kingdom E14 4QA, is a wholly owned subsidiary of Morgan Stanley, Dean Witter, Discover & Co. MSAM provides portfolio management and named fiduciary services to taxable and nontaxable institutions, international organizations and individuals investing in United States and international equity and debt securities. As of September 30, 1997, MSAM, together with its other asset management affiliates, had assets under management (including assets under fiduciary advisory control) totaling approximately $142.5 billion, including approximately $112.3 billion under active management and $20.2 billion as named fiduciary or fiduciary adviser. As of December 31, 1997, MSAM had investment authority over approximately $561.9 million of assets of AMR and its subsidiaries and affiliated entities. MSAM serves as an investment adviser to the International Equity Portfolio. The Manager pays MSAM an annual fee equal to .80% of the first $25 million of AMR Trust assets under its discretionary management, .60% of the next $25 million in assets, .50% of the next $25 million in assets and .40% on all excess assets. TEMPLETON INVESTMENT COUNSEL, INC. ("Templeton"), 500 East Broward Blvd., Suite 2100, Fort Lauderdale, Florida 33394-3091, is a professional investment counseling firm which has been providing investment services since 1979. Templeton is indirectly owned by Franklin Resources, Inc. As of December 31, 1997, Templeton had discretionary investment management authority with respect to approximately $21.7 billion of assets, including approximately $511.6 million of assets of AMR and its subsidiaries and affiliated entities. Templeton serves as an investment adviser to the International Equity Portfolio. The Manager pays Templeton an annualized fee equal to .50% of the first $100 million of AMR Trust assets under its discretionary management, .35% of the next $50 million in assets, .30% of the next $250 million in assets and .25% on assets over $400 million. Solely for the purpose of determining the applicable percentage rates when calculating the fees for each investment adviser other than MSAM and BT, there shall be included all other assets or trust assets of American Airlines, Inc. also under management by each respective investment adviser (except assets managed by Barrow under the HALO Bond Program). For the purpose of determining the applicable percentage rates when calculating MSAM's fees, all equity account assets managed by MSAM on behalf of American Airlines, Inc. shall be included. The inclusion of any such assets will result in lower overall fee rates being applied to the applicable Portfolio. PURCHASE, REDEMPTION AND VALUATION OF SHARES PURCHASING SHARES OF THE TRUST -- Institutional Class shares are offered without a sales charge to institutions -- including bank trust departments acting on behalf of their clients (such as employee benefit plans, personal trusts and other accounts for which the bank acts as agent or fiduciary); endowment funds and charitable foundations; employee welfare plans which are tax-exempt under Section 501(c)(9) of the Internal Revenue Code of 1986, as amended ("Code"); qualified pension and profit sharing plans, and cash or deferred arrangements under Section 401(k) of the Code; corporations; and other institutional investors who make an initial investment of at least $2 million. The Manager may allow a reasonable period of time after opening an account for an investor to meet the initial investment requirement. The Manager may waive the minimum investment requirement for certain individuals associated with AMR or the Manager, as more fully described in the SAI. In addition, for investors such as investment advisors, trust companies and financial advisors who make investments for a group of clients, PROSPECTUS 30 44 the minimum initial investment can be met through an aggregated purchase order for more than one client. Shares purchased through financial intermediaries may be subject to transaction fees. Trust shares are sold without a sales charge at the net asset value next determined after the acceptance of a purchase order. Shares of the Variable NAV Funds are offered and purchase orders accepted until the close of the New York Stock Exchange, generally 4:00 p.m. Eastern time, on each day on which the Exchange is open for trading which excludes the following business holidays: New Year's Day, Martin Luther King's Birthday, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day ("Business Day"). Shares of the Money Market Fund are offered and orders accepted until 3:00 p.m. Eastern time, or the close of the Exchange (whichever comes first) on each day on which the Exchange is open for business except for Columbus Day and Veteran's Day ("Money Market Business Day") and during which federal funds become available to the Fund. Shares are offered and orders are accepted for the Municipal Money Market Fund until 11:45 a.m. Eastern time, or the close of the Exchange (whichever comes first) and for the U.S. Government Money Market Fund until 2:00 p.m. Eastern time, or the close of the Exchange (whichever comes first) on each Money Market Business Day. The Trust reserves the right to reject any order for the purchase of shares and to limit or suspend, without prior notice, the offering of shares. BY WIRE -- Purchases may be made by wiring funds. If opening a new account, an investor should first forward a completed new account application to the Manager at P.O. Box 619003, MD 5645, DFW Airport, TX 75261-9003 or by facsimile to (817) 967-0768. To ensure prompt receipt of a transmission by wire, the investor should: telephone NFDS at (800) 658-5811 and specify the Fund whose shares are to be purchased; provide the name, address, telephone number and account number of the investor; and identify the amount being wired and by which bank. NFDS will provide the investor with an account number. The investor should instruct its bank to designate the account number and transmit the federal funds to: State Street Bank & Trust Co., ABA Routing #0110-0002-8; AC-9905-342-3; Attention: American AAdvantage Funds-Institutional Class and reference the specific Fund. BY DEPOSITING SECURITIES -- Shares of a Fund may be purchased in exchange for an investor's securities if the securities are acceptable to that Fund's corresponding Portfolio and satisfy applicable investment objectives and policies. Investors interested in exchanging securities must first contact the Manager and acquire instructions regarding submission of a written description of the securities which the investor wishes to exchange. The investor must represent that all such securities offered to any Fund are not subject to any sale restrictions. Within five business days after receipt of the written description, the Manager will advise the investor whether the securities to be exchanged are acceptable. There is no charge for this review by the Manager. Securities accepted by a Fund must have a readily ascertainable value as evidenced by a listing on the Exchange, American Stock Exchange or The Nasdaq Stock Market. Securities are valued in the manner described for valuing Portfolio assets in the section entitled "Valuation of Shares." Acceptance of such orders may occur on any day during the five-day period afforded the Manager to review the acceptability of the securities. Upon notice of acceptance of such orders, the securities must be delivered in fully negotiable form within three days. The Manager will provide delivery instructions at the time of acceptance. A gain or loss for federal income tax purposes may be realized by the investor upon the securities exchange, depending upon the adjusted tax basis and value of the securities tendered. A Fund will accept securities in this manner only for purposes of investment by its corresponding Portfolio, and not for resale. BY MAIL -- Share purchases of any Fund may be made by mail by sending a check or other negotiable bank draft payable to American AAdvantage Funds to: "American AAdvantage Funds, P.O. Box 419643, Kansas City, MO, 64141-6643." An additional purchase of shares should be accompanied by the Fund name and shareholder's account number. Purchase checks are accepted subject to collection at full face value in U.S. funds and must be drawn in U.S. dollars on a U.S. bank. REDEEMING SHARES OF THE TRUST -- Shares of the Funds may be redeemed by telephone or by mail on any Business Day for the Variable NAV Funds and on any Money Market Business Day for the Money Market Funds. PROSPECTUS 31 45 BY TELEPHONE -- Shares may be redeemed by telephone. Proceeds from redemption orders placed by the following deadlines generally will be transmitted to shareholders on the same day: 2:00 p.m. Eastern time for the Money Market Fund and the U.S. Government Money Market Fund, and 11:45 a.m. Eastern time for the Municipal Money Market Fund. Proceeds from redemption orders received by 4:00 p.m. Eastern Time for the Variable NAV Funds generally will be transmitted to shareholders the next Business Day. Neither the Trust, its transfer agent, nor their respective officers, trustees, directors, employees, or agents will be responsible for the authenticity of instructions provided by telephone, nor for any loss, liability, cost or expense for acting upon instructions furnished thereunder if they reasonably believe that such instructions are genuine. The Funds employ procedures reasonably designed to confirm that instructions communicated by telephone are genuine. BY MAIL -- Variable NAV Fund shares may be redeemed on any Business Day by writing directly to the Funds at the address above under "Purchasing Shares of the Trust -- By Mail." Shares of the Money Market Funds may be redeemed on any Money Market Business Day by writing to the same address. The redemption price will be the net asset value per share next determined after receipt by the transfer agent of all required documents in good order. "Good order" means that the request must include a letter of instruction or stock assignment specifying (1) the account number and Fund name; (2) the number of shares or dollar amount to be redeemed; (3) signature of an authorized signatory for the owners of the shares in the exact names in which they appear on the account; (4) other supporting legal documents, if required, in the case of estates, trusts, guardianships, custodians, corporations, IRAs and welfare, pension and profit-sharing plans; and (5) any share certificates being redeemed must be returned duly endorsed or accompanied by a stock assignment with signatures guaranteed by a bank, trust company or member of a recognized stock exchange. Shares redeemed through financial intermediaries may be subject to transaction fees. Payment for redeemed shares generally will be made in cash within seven days after the receipt of a redemption request in good order. However, the Fund reserves the right to suspend redemptions or postpone the date of payment (a) for any periods during which the Exchange is closed (other than for customary weekend and holiday closings), or when trading on the Exchange is restricted, (b) at such time as an emergency exists as determined by the Securities and Exchange Commission so that disposal of a Fund's investments or determination of its net asset value is not reasonably practicable, or (c) for such other periods as the Securities and Exchange Commission by order may permit for protection of the Funds' shareholders. Shares purchased by check may not be redeemed until the funds have cleared, which may take up to 15 days. Although the Funds intend to redeem shares in cash, each Fund reserves the right to pay the redemption price in whole or in part by a distribution of readily marketable securities held by the applicable Fund's corresponding Portfolio. See the SAI for further information concerning redemptions in kind. FULL REDEMPTIONS -- Unpaid dividends credited to an account up to the date of redemption of all shares of a Money Market Fund generally will be paid at the time of redemption. EXCHANGE PRIVILEGE -- Institutional Class shares which have been registered in a shareholder's name for at least 15 days may be exchanged into shares of the Institutional Class of another Fund. Shareholders may exchange shares by sending the Funds a written request or by calling NFDS at (800) 658-5811. The exchange will be processed at the next share price calculated after the request is received in good order by the Funds. The general redemption policies apply to redemptions by telephone exchange. The exchange privilege may be modified or terminated at any time by the Funds. The Funds reserve the right to limit the number of telephone exchanges an investor may exercise. VALUATION OF SHARES -- The net asset value of each share (share price) of the Variable NAV Funds is determined as of the close of the Exchange, generally 4:00 p.m. Eastern time, on each Business Day and the net asset value of each share of the Money Market Funds is determined as of the close of the Exchange, generally 4:00 p.m. Eastern time, on each Money Market Business Day. The net asset value of all outstanding shares of a Fund will be PROSPECTUS 32 46 determined by computing the Fund's total assets (which is the value of the Fund's investment in its corresponding Portfolio), subtracting all of the Fund's liabilities, and dividing the result by the total number of Fund shares outstanding at such time. The net asset value of shares of the Institutional Class will be determined based on a pro rata allocation of the value of the Fund's corresponding Portfolio's investment income, expenses and total capital gains and losses. The allocation will be based on comparative net asset value at the beginning of the day except for expenses related solely to one class of shares ("Class Expenses") which will be borne only by the appropriate class of shares. Because of the Class Expenses, the net income attributable to and the dividends payable for each class of shares may be different. Additionally, the Variable NAV Funds may compute differing share prices as a result of Class Expenses. Equity securities listed on securities exchanges, including all but United Kingdom securities of the International Equity Portfolio, are valued at the last quoted sales price on a designated exchange prior to the close of trading on the Exchange or, lacking any sales, on the basis of the last current bid price prior to the close of trading on the Exchange. Securities of the United Kingdom held in the International Equity Portfolio are priced at the last jobber price (mid of the bid and offer prices quoted by the leading stock jobber in the security) prior to close of trading on the Exchange. Trading in foreign markets is usually completed each day prior to the close of the Exchange. However, events may occur which affect the values of such securities and the exchange rates between the time of valuation and the close of the Exchange. Should events materially affect the value of such securities during this period, the securities are priced at fair value, as determined in good faith and pursuant to procedures approved by the AMR Trust Board. Over-the-counter equity securities are valued on the basis of the last bid price on that date prior to the close of trading. Debt securities (other than short-term securities) will normally be valued on the basis of prices provided by a pricing service and may take into account appropriate factors such as institution-size trading in similar groups of securities, yield, quality, coupon rate, maturity, type of issue, trading characteristics and other market data. In some cases, the prices of debt securities may be determined using quotes obtained from brokers. Securities for which market quotations are not readily available are valued at fair value, as determined in good faith and pursuant to procedures approved by the AMR Trust Board for the AMR Trust Portfolios. Assets and liabilities denominated in foreign currencies and forward currency contracts are translated into U.S. dollar equivalents based on prevailing market rates. Portfolio obligations held by the Money Market Portfolios are valued in accordance with the amortized cost method, which is designed to enable those Portfolios and their corresponding Funds to maintain a consistent $1.00 per share net asset value. Investment grade short-term obligations with 60 days or less to maturity held by all other Portfolios also are valued using the amortized cost method as described in the SAI. DIVIDENDS, OTHER DISTRIBUTIONS AND TAX MATTERS DIVIDENDS AND OTHER DISTRIBUTIONS -- Dividends and other distributions paid on each class of a Fund's shares are calculated at the same time and in the same manner. Dividends from the net investment income of the Balanced Fund, the Growth and Income Fund and the International Equity Fund normally are declared annually. Dividends consisting of substantially all of the net investment income of the Intermediate Bond Fund and the Short-Term Bond Fund, which are paid monthly, normally are declared on each Business Day immediately prior to the determination of the net asset value and are payable to shareholders of record as of the close of business on the day on which declared. The S&P 500 Index Fund distributes income dividends on the first Business Day in April, July and October. In December, the S&P 500 Index Fund will distribute another income dividend, plus any capital gains. Each Fund may make an additional dividend or other distribution, if necessary, to avoid a 4% excise tax on certain undistributed income and gain. A Fund's net investment income attributable to the Institutional Class consists of that class's pro rata share of the Fund's share of dividends and interest (including discount) accrued on the securities held by its corresponding Portfolio, less applicable expenses of the Fund and the Portfolio attributable to the Institutional Class. Distributions of a Fund's share of its corresponding Portfolio's realized net short-term capital gain, net capital gain (the excess of net long-term capital gain over net short-term capital loss), and net gains from foreign currency transactions, if any, normally will be made annually. All of each Money Market Fund's net investment income and net short-term capital gain, if any, generally is declared as dividends on each Money Market Business Day immediately prior to the determination of the net PROSPECTUS 33 47 asset value. Dividends generally will be paid on the first day of the following month. Each Money Market Fund's net investment income attributable to the Institutional Class will consist of (1) that class' pro rata share of the Fund's share of interest accrued and discount earned on its corresponding Portfolio's securities, less amortization of premium and expenses of both the Portfolio and (2) the Fund's expenses attributable to the Institutional Class. The Money Market Portfolios do not expect to realize net capital gain and, therefore, the Money Market Funds do not foresee paying any capital gain distributions. If any Money Market Fund (either directly or indirectly through its corresponding Portfolio) incurs or anticipates any unusual expenses, loss or depreciation that would affect its net asset value or income for a particular period adversely, the Board would at that time consider whether to adhere to the dividend policy described above or to revise it in the light of the then prevailing circumstances. Unless a shareholder elects otherwise on the account application, all dividends and other distributions on a Fund's Institutional Class shares will be automatically paid in additional Institutional Class shares of that Fund. However, a shareholder may choose to have distributions of net capital gain (and, if applicable, net foreign currency gains) paid in shares and dividends paid in cash or to have all such distributions and dividends paid in cash. An election may be changed at any time by delivering written notice that is received by the transfer agent at least ten days prior to the payment date for a dividend or other distribution. TAX INFORMATION -- Each Fund is treated as a separate corporation for federal income tax purposes and intends to qualify or to continue to qualify for treatment as a regulated investment company under the Code. In each taxable year that a Fund so qualifies, the Fund (but not its shareholders) will be relieved of federal income tax on that part of its investment company taxable income (generally, net investment income plus any net short-term capital gain and gains from certain foreign currency transactions) and net capital gain that it distributes to its shareholders. However, a Fund will be subject to a nondeductible 4% excise tax to the extent that it fails to distribute by the end of any calendar year substantially all of its ordinary income for that calendar year and its capital gain net income for the one-year period ending on October 31 of that year, plus certain other amounts. For these and other purposes, dividends and other distributions declared by a Fund in October, November or December of any year and payable to shareholders of record on a date in one of those months will be deemed to have been paid by the Fund and received by the shareholders on December 31 of that year if they are paid by the Fund during the following January. Each Portfolio received a ruling from the Internal Revenue Service or an opinion of counsel that it is or should be classified for federal income tax purposes as a partnership; accordingly, no Portfolio is subject to federal income tax. Dividends from a Fund's investment company taxable income are taxable to its shareholders as ordinary income to the extent of the Fund's earnings and profits, whether received in cash or paid in additional Fund shares. Distributions of a Fund's net capital gain (whether received in cash or paid in additional Fund shares), when designated as such, generally are taxable to its shareholders as long-term capital gain, regardless of how long they have held their Fund shares. A capital gain distribution from a Fund also may be offset by capital losses from other sources. Under the Taxpayer Relief Act of 1997, different maximum tax rates apply to a noncorporate taxpayer's net capital gain depending on the taxpayer's holding period and marginal rate of federal income tax -- generally, 28% for gain recognized on securities held for more than one year but not more than 18 months and 20% (10% for taxpayers in the 15% marginal tax bracket) for gain recognized on securities held for more than 18 months. Pursuant to an Internal Revenue Service notice, the Fund may divide each net capital gain distribution into a 28% rate gain distribution and a 20% rate gain distribution (in accordance with the Fund's holding periods for the securities it sold that generated the distributed gain) and its shareholders must treat those portions accordingly. Some foreign countries may impose income or withholding taxes on certain dividends payable to the International Equity Portfolio. The International Equity Fund's share of any such withheld taxes may be treated by that Fund as a deduction or, if it satisfies certain requirements, it may elect to flow the tax through to its shareholders, who in turn may either deduct the taxes or use them in calculating credits against their federal income tax. A portion of the income dividends paid by the Balanced Fund, the Growth and Income Fund and the S&P 500 Index Fund is eligible for the dividends-received deduction allowed to corporations. The eligible portion may PROSPECTUS 34 48 not exceed the respective Fund's aggregate dividends received from U.S. corporations. However, dividends received by a corporate shareholder and deducted by it pursuant to the dividends-received deduction may be subject indirectly to the AMT. The International Equity Fund's dividends most likely will not qualify for the dividends-received deduction because none of the dividends received by that Fund are expected to be paid by U.S. corporations. Distributions by the Municipal Money Market Fund that it designates as "exempt-interest dividends" generally may be excluded from gross income by its shareholders. If the Municipal Money Market Portfolio earns taxable income from any of its investments, the Municipal Money Market Fund's share of income will be distributed to its shareholders as a taxable dividend. To the extent that Portfolio invests in private activity obligations, that Fund's shareholders will be required to treat a portion of its dividends as a "tax preference item" in determining their liability for the AMT. Exempt-interest dividends also may be subject to state and local income tax laws. Because some states exempt from income tax the interest on their own obligations and obligations of governmental agencies and municipalities in the state, shareholders will receive tax information each year regarding the Municipal Money Market Fund's exempt-interest income by state. Interest on indebtedness incurred or continued by a shareholder to purchase or carry shares of that Fund is not deductible. Redemption of Fund shares (other than shares of the Money Market Funds) may result in taxable gain or loss to the redeeming shareholder, depending upon whether the redemption proceeds exceed or are less than the shareholder's adjusted basis for the redeemed shares. If shares of a Fund are redeemed at a loss after being held for six months or less, the loss will be treated as long-term, instead of short-term, capital loss to the extent of any capital gain distributions received on those shares. If shares are purchased shortly before the record date for a dividend (other than an exempt-interest dividend) or other distribution, the investor will pay full price for the shares and receive some portion of the price back as a taxable distribution. Each Fund notifies its shareholders following the end of each calendar year of the amounts of dividends and capital gain distributions paid (or deemed paid) (and for the International Equity Fund, if it satisfies the requirements and makes the election referred to above, their share of that Fund's share of any foreign taxes paid by the International Equity Portfolio) that year and of any portion of those dividends that qualifies for the corporate dividends-received deduction. The information regarding capital gain distributions designates the portions thereof subject to the different maximum rates of tax applicable to noncorporate taxpayers' net capital gain indicated above. The notice sent by the Municipal Money Market Fund specifies the amounts of exempt-interest dividends (and the portion thereof, if any, that is a tax preference item for purposes of the AMT) and any taxable dividends. Each Fund is required to withhold 31% of all taxable dividends, and, for all Funds other than the Money Market Funds, capital gain distributions and redemption proceeds payable to any individuals and certain other non-corporate shareholders who do not provide the Fund with a correct taxpayer identification number or (except with respect to redemption proceeds) who otherwise are subject to back-up withholding. The foregoing is only a summary of some of the important tax considerations generally affecting the Funds and their shareholders. Prospective investors are urged to consult their own tax advisers regarding specific questions as to the effect of federal, state or local income taxes on any investment in the Trust. For further tax information, see the SAI. GENERAL INFORMATION The Trust currently is comprised of ten separate investment portfolios. Each Fund included in this Prospectus is comprised of three classes of shares, which can be issued in an unlimited number. Each share represents an equal proportionate beneficial interest in that Fund and is entitled to one vote. Only shares of a particular class may vote on matters affecting that class. Only shares of a particular Fund may vote on matters affecting that Fund. All shares of the Trust vote on matters affecting the Trust as a whole. Share voting rights are not cumulative, and shares have no preemptive or conversion rights. Shares of the Trust are nontransferable. Each series in the Trust will not be involved in any vote involving a Portfolio in which it does not invest its assets. PROSPECTUS 35 49 Shareholders of all of the series of the Trust, however, will vote together to elect Trustees of the Trust and for certain other matters. Under certain circumstances, the shareholders of one or more series could control the outcome of these votes. On most issues subjected to a vote of a Portfolio's interest holders, as required by the 1940 Act, its corresponding Fund will solicit proxies from its shareholders and will vote its interest in the Portfolio in proportion to the votes cast by that Fund's shareholders. Because a Portfolio interest holder's votes are proportionate to its percentage interests in that Portfolio, one or more other Portfolio investors could, in certain instances, approve an action against which a majority of the outstanding voting securities of its corresponding Fund had voted. This could result in that Fund's redeeming its investment in its corresponding Portfolio, which could result in increased expenses for that Fund. Whenever the shareholders of a Fund are called to vote on matters related to its corresponding Portfolio, the Board shall vote shares for which they receive no voting instructions in the same proportion as the shares for which they do receive voting instructions. Any information received from a Portfolio in the Portfolio's report to shareholders will be provided to the shareholders of its corresponding Fund. As a Massachusetts business trust, the Trust is not obligated to conduct annual shareholder meetings. However, the Trust will hold special shareholder meetings whenever required to do so under the federal securities laws or the Trust's Declaration of Trust or By-Laws. Trustees can be removed by a shareholder vote at special shareholder meetings. As more fully described in the SAI, the following persons may be deemed to control certain Funds by virtue of their ownership of more than 25% of the outstanding shares of a Fund as of January 31, 1998: AMERICAN AADVANTAGE BALANCED FUND AMR Corporation and subsidiary companies and Employee Benefit Trusts thereof 81% AMERICAN AADVANTAGE GROWTH AND INCOME FUND AMR Corporation and subsidiary companies and Employee Benefit Trusts thereof 85% AMERICAN AADVANTAGE INTERNATIONAL EQUITY FUND AMR Corporation and subsidiary companies and Employee Benefit Trusts thereof 60% AMERICAN AADVANTAGE S&P 500 INDEX FUND AMR Corporation and subsidiary companies and Employee Benefit Trusts thereof 100% AMERICAN AADVANTAGE SHORT-TERM BOND FUND AMR Corporation and subsidiary companies and Employee Benefit Trusts thereof 72% The Manager has taken steps that it believes are reasonably designed to address the potential failure of computer programs used by the Manager and the Funds' service providers to address the Year 2000 issue. There can be no assurance that these steps will be sufficient to avoid any adverse impact. PROSPECTUS 36 50 SHAREHOLDER COMMUNICATIONS Shareholders will receive periodic reports, including annual and semi-annual reports which will include financial statements showing the results of the Funds' operations and other information. The financial statements of the Funds will be audited by the independent auditors at least annually. Shareholder inquiries and requests for information regarding the other investment companies which also invest in the AMR Trust should be made in writing to the Funds at P.O. Box 619003, MD 5645, Dallas/Fort Worth Airport, Texas 75261-9003, or by calling (800) 388-3344. Shareholder inquiries and requests for information regarding the other investment companies that also invest in the Equity 500 Index Portfolio should be made by calling (800) 730-1313. NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND IN SALES LITERATURE SPECIFICALLY APPROVED BY OFFICERS OF THE TRUST FOR USE IN CONNECTION WITH THE OFFER OF ANY INSTITUTIONAL CLASS SHARES, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUNDS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN ANY JURISDICTION IN WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFERING MAY NOT LAWFULLY BE MADE. American AAdvantage Funds is a registered service mark of AMR Corporation. PlanAhead Class is a registered service mark, and Platinum Class, American AAdvantage Balanced Fund, American AAdvantage Growth and Income Fund, American AAdvantage International Equity Fund, American AAdvantage Intermediate Bond Fund, American AAdvantage Short-Term Bond Fund, American AAdvantage Money Market Fund, American AAdvantage Municipal Money Market Fund and American AAdvantage U.S. Government Money Market Fund are service marks of AMR Investment Services, Inc. PROSPECTUS 37 51 -- NOTES -- 52 -- NOTES -- 53 American Advantage Funds(R) Logo - INSTITUTIONAL CLASS - P.O. Box 419643 Kansas City, MO 64141-6643 (800) 658-5811 - PLANAHEAD CLASS(R) - P.O. Box 419643 Kansas City, MO 64141-6643 (800) 388-3344 - PLATINUM CLASS(sm) - P.O. Box 619003 Dallas/Fort Worth Airport, Texas 75261-9003 (800) 967-9009 Access our website at www.aafunds.com INST-PRO-0398 54 THIS PROSPECTUS contains important information about the PLANAHEAD CLASS OF THE AMERICAN AADVANTAGE FUNDS ("Trust"), an open-end management investment company which consists of multiple investment portfolios. This Prospectus pertains only to the nine funds listed on this cover page (individually referred to as a "Fund" and, collectively, the "Funds"). EACH FUND, EXCEPT THE S&P 500 INDEX FUND, SEEKS ITS INVESTMENT OBJECTIVE BY INVESTING ALL OF ITS INVESTABLE ASSETS IN A CORRESPONDING PORTFOLIO OF THE AMR INVESTMENT SERVICES TRUST ("AMR TRUST"). THE S&P 500 INDEX FUND INVESTS ALL OF ITS INVESTABLE ASSETS IN THE EQUITY 500 INDEX PORTFOLIO. (THE EQUITY 500 INDEX PORTFOLIO AND THE PORTFOLIOS OF THE AMR TRUST ARE REFERRED TO HEREIN AS A "PORTFOLIO" AND, COLLECTIVELY, THE "PORTFOLIOS.") EACH PORTFOLIO HAS AN INVESTMENT OBJECTIVE IDENTICAL TO THE INVESTING FUND. The investment experience of each Fund will correspond directly with the investment experience of each Portfolio. Each Fund consists of multiple classes of shares designed to meet the needs of different groups of investors. PlanAhead Class shares are available to all investors, including smaller institutional investors, investors using intermediary organizations such as discount brokers or plan sponsors, individual retirement accounts, and self-employed individual retirement plans. Prospective PlanAhead Class investors should read this Prospectus carefully before making an investment decision and retain it for future reference. IN ADDITION TO THIS PROSPECTUS, a Statement of Additional Information ("SAI") dated March 1, 1998 has been filed with the Securities and Exchange Commission and is incorporated herein by reference. The SAI contains more detailed information about the Funds. For a free copy of the SAI, call (800) 388-3344. For further information about the PlanAhead Class or for information on the other classes of shares, please refer to the appropriate address and phone number on the back cover of this Prospectus. The Securities and Exchange Commission maintains a Web Site (http://www.sec.gov) that contains the SAI, material incorporated by reference and other information regarding the Funds and the Portfolios. AN INVESTMENT IN THE MONEY MARKET FUNDS IS NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT AND THERE CAN BE NO ASSURANCE THAT THEY WILL BE ABLE TO MAINTAIN A STABLE PRICE OF $1.00 PER SHARE. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY SUCH STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. PROSPECTUS March 1, 1998 [AMERICAN AADVANTAGE LOGO] AMERICAN AADVANTAGE FUNDS(R) BALANCED FUND - PlanAhead Class(R) - GROWTH AND INCOME FUND INTERNATIONAL EQUITY FUND S&P 500 INDEX FUND INTERMEDIATE BOND FUND SHORT-TERM BOND FUND MONEY MARKET FUND MUNICIPAL MONEY MARKET FUND U.S. GOVERNMENT MONEY MARKET FUND MANAGED BY AMR INVESTMENT SERVICES, INC. 55 The AMERICAN AADVANTAGE BALANCED FUND(SM) ("Balanced Fund") seeks income and capital appreciation by investing all of its investable assets in the Balanced Portfolio of the AMR Trust ("Balanced Portfolio") which in turn primarily invests in equity and debt securities (such as stocks and bonds). The AMERICAN AADVANTAGE GROWTH AND INCOME FUND(SM) ("Growth and Income Fund") seeks long-term capital appreciation and current income by investing all of its investable assets in the Growth and Income Portfolio of the AMR Trust ("Growth and Income Portfolio") which in turn primarily invests in equity securities (such as stocks). The AMERICAN AADVANTAGE INTERNATIONAL EQUITY FUND(SM) ("International Equity Fund") seeks long-term capital appreciation by investing all of its investable assets in the International Equity Portfolio of the AMR Trust ("International Equity Portfolio") which in turn primarily invests in equity securities of issuers based outside the United States (such as foreign stocks). The AMERICAN AADVANTAGE S&P INDEX FUND(1) ("S&P 500 Index Fund") seeks to provide investment results that, before expenses, correspond to the total return of common stocks publicly traded in the United States, as represented by the Standard & Poor's 500 Composite Stock Price Index (the "S&P 500" or "Index"), by investing all of its investable assets in the Equity 500 Index Portfolio which in turn invests in common stocks of companies that compose the S&P 500. The AMERICAN AADVANTAGE INTERMEDIATE BOND FUND(SM) ("Intermediate Bond Fund") and the AMERICAN AADVANTAGE SHORT-TERM BOND FUND(SM) ("Short-Term Bond Fund," formerly the American AAdvantage Limited-Term Income Fund) each seeks income and capital appreciation by investing all of its investable assets in the Intermediate Bond Portfolio of the AMR Trust ("Intermediate Bond Portfolio"), and the Short-Term Bond Portfolio of the AMR Trust ("Short-Term Bond Portfolio," formerly the "Limited-Term Income Portfolio"), respectively, which in turn primarily invest in debt obligations. The Intermediate Bond Fund seeks to maintain a dollar weighted average duration of three to seven years and the Short-Term Bond Fund seeks to maintain a dollar weighted average duration of one to three years. The AMERICAN AADVANTAGE MONEY MARKET FUND(SM) ("Money Market Fund"), AMERICAN AADVANTAGE MUNICIPAL MONEY MARKET FUND(SM) ("Municipal Money Market Fund") and AMERICAN AADVANTAGE U.S. GOVERNMENT MONEY MARKET FUND(SM) ("U.S. Government Money Market Fund") (collectively, the "Money Market Funds") each seeks current income, liquidity, and the maintenance of a stable price per share of $1.00 by investing all of its investable assets in the Money Market Portfolio of the AMR Trust ("Money Market Portfolio"), the Municipal Money Market Portfolio of the AMR Trust ("Municipal Money Market Portfolio") and the U.S. Government Money Market Portfolio of the AMR Trust ("U.S. Government Money Market Portfolio"), respectively (collectively the "Money Market Portfolios"), which in turn invest in high quality, short-term obligations. The Municipal Money Market Portfolio invests primarily in municipal obligations and the U.S. Government Money Market Portfolio invests exclusively in obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities and in repurchase agreements that are collateralized by such obligations. Under a master-feeder operating structure, each Fund seeks its investment objective by investing all of its investable assets in a corresponding Portfolio as described above. Each Portfolio's investment objective is identical to that of its corresponding Fund. Whenever the phrase "all of the Fund's investable assets" is used, it means that the only investment securities that will be held by a Fund will be that Fund's interest in its corresponding Portfolio. AMR Investment Services, Inc. ("Manager") provides investment management and administrative services to the Portfolios, except for the Equity 500 Index Portfolio, and administrative services to the Funds. Bankers Trust Company ("BT") provides investment advisory, administrative and other services to the Equity 500 Index Portfolio. This master-feeder operating structure is different from that of many other investment companies which directly acquire and manage their own portfolios of securities. Accordingly, investors should carefully consider this investment approach. See "Investment Objectives, Policies and Risks -- Additional Information About the Portfolios." A Fund may withdraw its investment in a corresponding Portfolio at any time if the - --------------- (1) S&P is a trademark of The McGraw-Hill Companies, Inc. and has been licensed for use. "Standard and Poor's(R)," "S&P(R)," "Standard & Poor's 500," "S&P(R)" and "500" are all trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use by Bankers Trust Company. The S&P 500 Index Fund is not sponsored, sold or promoted by Standard & Poor's, and Standard & Poor's makes no representation regarding the advisability of investing in that Fund. PROSPECTUS 2 56 Trust's Board of Trustees ("Board") determines that it would be in the best interest of that Fund and its shareholders to do so. Upon any such withdrawal, that Fund's assets would be invested in accordance with the investment policies and restrictions described in this Prospectus and the SAI. - -------------------------------------------------------------------------------- TABLE OF FEES AND EXPENSES.............. 3 FINANCIAL HIGHLIGHTS.................... 4 INTRODUCTION............................ 11 INVESTMENT OBJECTIVES, POLICIES AND RISKS................................... 11 INVESTMENT RESTRICTIONS................. 23 YIELDS AND TOTAL RETURNS................ 24 MANAGEMENT AND ADMINISTRATION OF THE TRUSTS.................................. 25 INVESTMENT ADVISERS..................... 28 HOW TO PURCHASE SHARES.................. 30 HOW TO REDEEM SHARES.................... 31 RETIREMENT ACCOUNTS..................... 33 EXCHANGE PRIVILEGE...................... 33 VALUATION OF SHARES..................... 33 DIVIDENDS, OTHER DISTRIBUTIONS AND TAX MATTERS................................. 34 GENERAL INFORMATION..................... 36 SHAREHOLDER COMMUNICATIONS.............. 37
- -------------------------------------------------------------------------------- TABLE OF FEES AND EXPENSES Annual Operating Expenses (as a percentage of average net assets):
U.S. GROWTH INTER- S&P INTER- SHORT- MUNICIPAL GOVERNMENT AND NATIONAL 500 MEDIATE TERM MONEY MONEY MONEY BALANCED INCOME EQUITY INDEX BOND BOND MARKET MARKET MARKET FUND FUND FUND FUND(1) FUND(1) FUND FUND FUND FUND Management Fees 0.33% 0.33% 0.48% 0.05%(2) 0.25% 0.25% 0.15% 0.15% 0.15% 12b-1 Fees 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Other Expenses 0.57 0.60 0.66 0.50(3) 0.61(3) 0.60(3) 0.39 0.45(3) 0.37 ---- ---- ---- ---- ---- ---- ---- ---- ---- Total Operating Expenses 0.90% 0.93% 1.14% 0.55%(4) 0.86%(4) 0.85%(4) 0.54% 0.60%(4) 0.52% ==== ==== ==== ==== ==== ==== ==== ==== ====
(1) Because the S&P 500 Index Fund and the Intermediate Bond Fund shares were not offered for sale prior to March 1, 1998, their Annual Operating Expenses are based on estimates. (2) The investment adviser has voluntarily agreed to waive a portion of the investment advisory fee of the S&P 500 Index Fund. Without such waiver, the "Management Fee" would be equal to 0.10%. (3) "Other Expenses" before fee waivers are estimated to be 0.85% for the S&P 500 Index Fund, 0.65% for the Short-Term Bond Fund and 0.46% for the Municipal Money Market Fund. (4) "Total Operating Expenses" before fee waivers are estimated to be 0.95% for the S&P 500 Index Fund, 0.90% for the Short-Term Bond Fund and 0.61% for the Municipal Money Market Fund. The above expenses reflect the expenses of each Fund and the Portfolio in which it invests. The Board believes that the aggregate per share expenses of each Fund and its corresponding Portfolio will be approximately equal to the expenses that the Fund would incur if its assets were invested directly in the type of securities held by the Portfolio. PROSPECTUS 3 57 EXAMPLES A PlanAhead Class investor in each Fund would directly or indirectly pay on a cumulative basis the following expenses on a $1,000 investment assuming a 5% annual return:
1 YEAR 3 YEARS 5 YEARS 10 YEARS Balanced Fund $ 9 $29 $50 $111 Growth and Income Fund 9 30 51 114 International Equity Fund 12 36 63 139 S&P 500 Index Fund 6 18 31 69 Intermediate Bond Fund 9 27 48 106 Short-Term Bond Fund 9 27 47 105 Money Market Fund 6 17 30 68 Municipal Money Market Fund 6 19 33 75 U.S. Government Money Market Fund 5 17 29 65
The purpose of the table above is to assist a potential investor in understanding the various costs and expenses to be incurred directly or indirectly as a shareholder in the PlanAhead Class of a Fund. Additional information may be found under "Management and Administration of the Trusts" and "Investment Advisers." THE FOREGOING EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN AND PERFORMANCE MAY BE BETTER OR WORSE THAN THE 5% ANNUAL RETURN ASSUMED IN THE EXAMPLES. FINANCIAL HIGHLIGHTS The financial highlights in the following tables have been derived from financial statements of the Trust. The information has been audited by Ernst & Young LLP, independent auditors. Such information should be read in conjunction with the financial statements and the report of the independent auditors appearing in the Annual Report incorporated by reference in the SAI, which contains further information about performance of the Funds and can be obtained by investors without charge. Financial highlights are not available for the S&P 500 Index Fund and the Intermediate Bond Fund because they had not commenced operations as of October 31, 1997. PROSPECTUS 4 58 (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
BALANCED FUND ------------------------------------------------------------------------------------------------ PLANAHEAD CLASS INSTITUTIONAL CLASS(1) --------------------------------------------------- ----------------------------------------- YEAR ENDED OCTOBER 31, PERIOD ENDED YEAR ENDED OCTOBER 31, ------------------------------------ OCTOBER 31, ----------------------------------------- 1997(5) 1996(5)(6) 1995(4)(5) 1994(1)(3) 1994(3) 1993 1992 1991 ------------------------------------------------------------------------------------------------ Net asset value, beginning of period $15.03 $13.90 $12.35 $12.35 $13.23 $11.99 $11.60 $9.87 ----- ------ ------ ------- ---- ---- ---- ---- Income from investment operations: Net investment income 0.63(7) 0.57(7) 0.54 0.12 0.57 0.49 0.55 0.58 Net gains (losses) on securities (both realized and unrealized) 2.10(7) 1.56(7) 1.67 (0.12) (0.54) 1.57 0.41 1.79 ----- ------ ------ ------- ---- ---- ---- ---- Total from investment operations 2.73 2.13 2.21 0.00 0.03 2.06 0.96 2.37 ----- ------ ------ ------- ---- ---- ---- ---- Less distributions: Dividends from net investment income (0.57) (0.56) (0.52) -- (0.56) (0.52) (0.56) (0.64) Distributions from net realized gains on securities (1.16) (0.44) (0.14) -- (0.34) (0.30) (0.01) -- ----- ------ ------ ------- ---- ---- ---- ---- Total distributions (1.73) (1.00) (0.66) -- (0.90) (0.82) (0.57) (0.64) ----- ------ ------ ------- ---- ---- ---- ---- Net asset value, end of period $16.03 $15.03 $13.90 $12.35 $12.36 $13.23 $11.99 $11.60 ===== ====== ====== ======= ==== ==== ==== ==== Total return (annualized)(8) 19.75% 16.01% 19.06% (0.16%)(9) (0.08%) 19.19% 8.75% 25.35% ===== ====== ====== ======= ==== ==== ==== ==== Ratios/supplemental data: Net assets, end of period (in thousands) $34,354 $18,000 $5,450 $528 $222,873 $532,543 $370,087 $311,906 Ratios to average net assets(10)(11)(12)(13): Expenses 0.90%(7) 0.97%(7) 0.99% 0.92% 0.36% 0.34% 0.35% 0.37% Net investment income 3.52%(7) 3.64%(7) 3.70% 4.04% 4.77% 4.91% 5.31% 6.06% Portfolio turnover rate(14) 105% 76% 73% 48% 48% 83% 80% 55% Average commission rate paid(14) $0.0385 $0.0409 -- -- -- -- -- -- BALANCED FUND ------------------------------ INSTITUTIONAL CLASS(1) ------------------------------ YEAR ENDED OCTOBER 31, ------------------------------ 1990(2) 1989 1988 ------------------------------ Net asset value, beginning of period $11.05 $10.13 $9.08 ---- ---- ---- Income from investment operations: Net investment income 0.57 0.53 0.56 Net gains (losses) on securities (both realized and unrealized) (1.18) 0.90 0.73 ---- ---- ---- Total from investment operations (0.61) 1.43 1.29 ---- ---- ---- Less distributions: Dividends from net investment income (0.51) (0.51) (0.24) Distributions from net realized gains on securities (0.06) -- -- ---- ---- ---- Total distributions (0.57) (0.51) (0.24) ---- ---- ---- Net asset value, end of period $9.87 $11.05 $10.13 ==== ==== ==== Total return (annualized)(8) (5.24%) 15.49% 14.63% ==== ==== ==== Ratios/supplemental data: Net assets, end of period (in thousands) $233,702 $210,119 $147,581 Ratios to average net assets(10)(11)(12)(13): Expenses 0.44% 0.47% 0.52% Net investment income 6.50% 6.32% 6.25% Portfolio turnover rate(14) 62% 78% 77% Average commission rate paid(14) -- -- --
(1) The Balanced Fund commenced active operations on July 17, 1987. The PlanAhead Class commenced active operations on August 1, 1994 and at that time, existing shares of the Balanced Fund were designated as Institutional Class shares. (2) Penmark Investments, Inc. was replaced by Independence Investment Associates, Inc. as an investment adviser to the Fund as of the close of business on February 28, 1990. (3) Average shares outstanding for the period rather than end of period shares were used to compute net investment income per share. (4) GSB Investment Management, Inc. was added as an investment adviser to the Balanced Fund on January 1, 1995. (5) Class expenses per share were subtracted from net investment income per share for the Fund before class expenses to determine net investment income per share. (6) Capital Guardian Trust Company was replaced by Brandywine Asset Management, Inc. as an investment adviser to the Balanced Fund on April 1, 1996. (7) The per share amounts and ratios reflect income and expenses assuming inclusion of the Fund's proportionate share of the income and expenses of the Balanced Portfolio. (8) Total return reflects accrual for the maximum shareholder services fee of 0.30% for periods prior to August 1, 1994. (9) Total return for the period ended October 31, 1994 reflects Institutional Class returns from November 1, 1993 through July 31, 1994 and returns of the PlanAhead Class for the period August 1, 1994 (commencement of operations) through October 31, 1994. Due to the different expense structures between the classes, total return for the PlanAhead Class would vary from the results shown had it been in operation for the entire year. (10) Effective August 1, 1994, expenses include administrative services fees paid by the Fund to the Manager. Prior to that date, expenses exclude shareholder services fees paid directly by shareholders to the Manager, which amounted to approximately $.01 per share in each period on an annualized basis. (11) The method of determining average net assets was changed from a monthly average to a daily average starting with the periods ended October 31, 1994. (12) Operating results of the PlanAhead Class exclude fees waived by the Manager. Had the PlanAhead Class paid such fees during the period, the ratio of expenses and net investment income to average net assets would have been 0.99% and 3.97%, respectively, for the period ended October 31, 1994 and 1.09% and 3.60%, respectively, for the year ended October 31, 1995. (13) Annualized. (14) On November 1, 1995, the Balanced Fund began investing all of its investable assets in the Balanced Portfolio. Portfolio turnover rate and average commission rate paid for the years ended October 31, 1996 and 1997 are those of the Balanced Portfolio. Calculation and disclosure of the average commission rate paid was not required prior to 1996. PROSPECTUS 5 59 (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
GROWTH AND INCOME FUND --------------------------------------------------------------------------------------------- PLANAHEAD CLASS INSTITUTIONAL CLASS(1) ------------------------------------------------- ---------------------------------------- YEAR ENDED OCTOBER 31, PERIOD ENDED YEAR ENDED OCTOBER 31, ---------------------------------- OCTOBER 31, ---------------------------------------- 1997(5) 1996(5)(6) 1995(5) 1994(1)(4) 1994(4) 1993 1992(3) 1991 --------------------------------------------------------------------------------------------- Net asset value, beginning of period $18.33 $15.81 $14.17 $13.99 $14.63 $12.79 $12.10 $9.47 ----- ------- ----- ------- ----- ----- ----- ----- Income from investment operations: Net investment income 0.35(7) 0.39(7) 0.40 0.05 0.43 0.36 0.39 0.42 Net gains (losses) on securities (both realized and unrealized) 4.39(7) 3.10(7) 2.22 0.13 0.08 2.21 0.77 2.70 ----- ------- ----- ------- ----- ----- ----- ----- Total from investment operations 4.74 3.49 2.62 0.18 0.51 2.57 1.16 3.12 ----- ------- ----- ------- ----- ----- ----- ----- Less distributions: Dividends from net investment income (0.38) (0.40) (0.44) -- (0.41) (0.37) (0.39) (0.49) Distributions from net realized gains on securities (1.31) (0.57) (0.54) -- (0.54) (0.36) (0.08) -- ----- ------- ----- ------- ----- ----- ----- ----- Total distributions (1.69) (0.97) (0.98) -- (0.95) (0.73) (0.47) (0.49) ----- ------- ----- ------- ----- ----- ----- ----- Net asset value, end of period $ 21.38 $18.33 $15.81 $14.17 $14.19 $14.63 $12.79 $12.10 ===== ======= ===== ======= ===== ===== ===== ===== Total return (annualized)(8) 27.64% 22.98% 20.14% 3.21%(9) 3.36% 21.49% 10.00% 33.83% ===== ======= ===== ======= ===== ===== ===== ===== Ratios/supplemental data: Net assets, end of period (in thousands) $29,684 $16,084 $4,821 $56 $22,737 $477,088 $339,739 $264,628 Ratios to average net assets(10)(11)(12)(13): Expenses 0.93%(7) 0.94%(7) 0.99% 0.95% 0.33% 0.34% 0.36% 0.37% Net investment income 1.85%(7) 2.16%(7) 2.23% 1.50% 3.28% 3.12% 3.57% 4.19% Portfolio turnover rate(14) 35% 40% 26% 23% 23% 30% 35% 52% Average commission rate paid(14) $.0395 $0.0412 -- -- -- -- -- -- GROWTH AND INCOME FUND ------------------------------ INSTITUTIONAL CLASS(1) ------------------------------ YEAR ENDED OCTOBER 31, ------------------------------ 1990(2) 1989 1988 ------------------------------ Net asset value, beginning of period $11.59 $9.96 $8.30 ----- ----- ----- Income from investment operations: Net investment income 0.42 0.42 0.42 Net gains (losses) on securities (both realized and unrealized) (1.94) 1.59 1.40 ----- ----- ----- Total from investment operations (1.52) 2.01 1.82 ----- ----- ----- Less distributions: Dividends from net investment income (0.43) (0.38) (0.16) Distributions from net realized gains on securities (0.17) -- -- ----- ----- ----- Total distributions (0.60) (0.38) (0.16) ----- ----- ----- Net asset value, end of period $9.47 $11.59 $9.96 ===== ===== ===== Total return (annualized)(8) (13.52%) 20.94% 22.20% ===== ===== ===== Ratios/supplemental data: Net assets, end of period (in thousands) $182,430 $187,869 $140,073 Ratios to average net assets(10)(11)(12)(13): Expenses 0.45% 0.45% 0.53% Net investment income 4.49% 4.40% 4.20% Portfolio turnover rate(14) 41% 50% 56% Average commission rate paid(14) -- -- --
(1) The Growth and Income Fund commenced active operations on July 17, 1987. The PlanAhead Class commenced active operations on August 1, 1994 and at that time, existing shares of the Growth and Income Fund were designated as Institutional Class shares. (2) GSB Investment Management, Inc. was added as an investment adviser to the Growth and Income Fund on April 10, 1990. (3) The assets of the Growth and Income Fund previously managed by Atlanta Capital Management were transferred to GSB Investment Management, Inc. as of the close of business on December 5, 1991. (4) Average shares outstanding for the period rather than end of period shares were used to compute net investment income per share. (5) Class expenses per share were subtracted from net investment income per share for the Fund before class expenses to determine net investment income per share. (6) Capital Guardian Trust Company was replaced by Brandywine Asset Management, Inc. as an investment adviser to the Growth and Income Fund on April 1, 1996. (7) The per share amounts and ratios reflect income and expenses assuming inclusion of the Fund's proportionate share of the income and expenses of the Growth and Income Portfolio. (8) Total return reflects accrual for the maximum shareholder services fee of 0.30% for periods prior to August 1, 1994. (9) Total return for the period ended October 31, 1994 reflects Institutional Class returns from November 1, 1993 through July 31, 1994 and returns of the PlanAhead Class for the period August 1, 1994 (commencement of operations) through October 31, 1994. Due to the different expense structures between the classes, total return for the PlanAhead Class would vary from the results shown had it been in operation for the entire year. (10) Effective August 1, 1994, expenses include administrative services fees paid by the Fund to the Manager. Prior to that date, expenses exclude shareholder services fees paid directly by shareholders to the Manager, which amounted to less than $.01 per share in each period on an annualized basis. (11) The method of determining average net assets was changed from a monthly average to a daily average starting with the periods ended October 31, 1994. (12) Operating results of the PlanAhead Class exclude fees waived by the Manager. Had the PlanAhead Class paid such fees during the period, the ratio of expenses and net investment income to average net assets would have been 1.05% and 1.40%, respectively, for the period ended October 31, 1994, 1.08% and 2.14%, respectively, for the year ended October 31, 1995, and 0.96% and 2.14%, respectively, for the year ended October 31, 1996. (13) Annualized. (14) On November 1, 1995 the Growth and Income Fund began investing all of its investable assets in the Growth and Income Portfolio. Portfolio turnover rate and average commission rate paid for the years ended October 31, 1996 and 1997 are those of the Growth and Income Portfolio. Calculation and disclosure of the average commission rate paid was not required prior to 1996. PROSPECTUS 6 60 (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
INTERNATIONAL EQUITY FUND ------------------------------------------------------------------------------------------------ PLANAHEAD CLASS INSTITUTIONAL CLASS ----------------------------------------------- ---------------------------------------------- YEAR ENDED OCTOBER 31, PERIOD ENDED YEAR ENDED OCTOBER 31, PERIOD ENDED ------------------------------- OCTOBER 31, ------------------------------- OCTOBER 31, 1997(5) 1996(5) 1995(5) 1994(1)(3)(4) 1994(3)(4) 1993(2) 1992 1991(1) ------------------------------------------------------------------------------------------------ Net asset value, beginning of period $14.90 $13.20 $12.85 $12.61 $12.07 $8.93 $10.13 $10.00 ----- ---- ----- -------- ------- ----- ----- -------- Income from investment operations: Net investment income 0.30(6) 0.26(6) 0.24 0.06 0.32 0.17 0.12 -- Net gains (losses) on securities (both realized and unrealized) 2.41(6) 1.92(6) 0.64 0.18 1.10 3.09 (1.31) 0.13 ----- ---- ----- -------- ------- ----- ----- -------- Total from investment operations 2.71 2.18 0.88 0.24 1.42 3.26 (1.19) 0.13 ----- ---- ----- -------- ------- ----- ----- -------- Less distributions: Dividends from net investment income (0.28) (0.24) (0.21) -- (0.17) (0.12) (0.01) -- Distributions from net realized gains on securities (0.41) (0.24) (0.32) -- (0.45) -- -- -- ----- ---- ----- -------- ------- ----- ----- -------- Total distributions (0.69) (0.48) (0.53) -- (0.62) (0.12) (0.01) -- ----- ---- ----- -------- ------- ----- ----- Net asset value, end of period $16.92 $14.90 $13.20 $12.85 $12.87 $12.07 $8.93 $10.13 ===== ==== ===== ======== ======= ===== ===== ======== Total return (annualized)(7) 18.71% 16.95% 7.37% 11.60%(8) 11.77% 36.56% (12.07%) 5.69% ===== ==== ===== ======== ======= ===== ===== ======== Ratios/supplemental data: Net assets, end of period (in thousands) $20,075 $7,138 $1,456 $375 $23,115 $66,652 $38,837 $10,536 Ratios to average net assets(9)(10)(11): Expenses 1.14%(6) 1.17%(6) 1.33% 1.25% 0.61% 0.78% 1.17% 1.90%(12) Net investment income 1.95%(6) 1.76%(6) 2.08% 1.86% 2.74% 2.00% 2.04% 0.38%(12) Portfolio turnover rate(13) 15% 19% 21% 37% 37% 61% 21% 2% Average commission rate paid(13) $0.0164 $0.0192 -- -- -- -- -- --
(1) The International Equity Fund commenced active operations on August 7, 1991. The PlanAhead Class commenced active operations on August 1, 1994 and at that time, existing shares of the International Equity Fund were designated as Institutional Class shares. (2) HD International Limited was replaced by Hotchkis and Wiley as an investment adviser to the International Equity Fund as of the close of business on May 21, 1993. (3) Morgan Stanley Asset Management Inc. was added as an investment adviser to the International Equity Fund as of August 1, 1994. (4) Average shares outstanding for the period rather than end of period shares were used to compute net investment income per share. (5) Class expenses per share were subtracted from net investment income per share for the Fund before class expenses to determine net investment income per share. (6) The per share amounts and ratios reflect income and expenses assuming inclusion of the Fund's proportionate share of the income and expenses of the International Equity Portfolio. (7) Total return reflects accrual for the maximum shareholder services fee of 0.30% for periods prior to August 1, 1994. (8) Total return for the period ended October 31, 1994 reflects Institutional Class returns from November 1, 1993 through July 31, 1994 and returns of the PlanAhead Class for the period August 1, 1994 (commencement of operations) through October 31, 1994. Due to the different expense structures between the classes, total return for the PlanAhead Class would vary from the results shown had it been in operation for the entire year. (9) Effective August 1, 1994, expenses include administrative services fees paid by the Fund to the Manager. Prior to that date, expenses exclude shareholder services fees paid directly by shareholders to the Manager. Such fees amounted to less than $.04 per share in each period on an annualized basis and were waived by the Manager for the period ended October 31, 1991. (10) The method of determining average net assets was changed from a monthly average to a daily average starting with the periods ended October 31, 1994. (11) Annualized. (12) Estimated based on expected annual expenses and actual average net assets. (13) On November 1, 1995 the International Equity Fund began investing all of its investable assets in the International Equity Portfolio. Portfolio turnover rate and average commission rate paid for the years ended October 31, 1996 and 1997 are those of the International Equity Portfolio. Calculation and disclosure of the average commission rate paid was not required prior to 1996. PROSPECTUS 7 61 (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
SHORT-TERM BOND FUND ----------------------------------------------------------------------------- PLANAHEAD CLASS INSTITUTIONAL CLASS -------------------------------------------- ------------------------------ YEAR ENDED OCTOBER 31, PERIOD ENDED YEAR ENDED OCTOBER 31, ----------------------------- OCTOBER 31, ------------------------------ 1997 1996 1995 1994(1) 1994 1993 1992 ----------------------------------------------------------------------------- Net asset value, beginning of period $9.68 $9.82 $9.68 $9.78 $10.23 $10.13 $10.07 --- --- --- ------ --- --- --- Income from investment operations: Net investment income 0.61(3) 0.60(3) 0.59 0.13 0.52 0.58 0.75 Net gains (losses) on securities (both realized and unrealized) 0.05(3) (0.14)(3) 0.14 (0.10) (0.46) 0.15 0.06 --- --- --- ------ --- --- --- Total from investment operations 0.56 0.46 0.73 0.03 0.06 0.73 0.81 --- --- --- ------ --- --- --- Less distributions: Dividends from net investment income (0.61) (0.60) (0.59) (0.13) (0.52) (0.58) (0.75) Distributions from net realized gains on securities -- -- -- -- (0.10) (0.05) -- --- --- --- ------ --- --- --- Total distributions (0.61) (0.60) (0.59) (0.13) (0.62) (0.63) (0.75) --- --- --- ------ --- --- --- Net asset value, end of period $9.63 $9.68 $9.82 $9.68 $9.67 $10.23 $10.13 === === === ====== === === === Total return (annualized)(4) 6.01% 4.83% 7.83% 0.45%(5) 0.42% 7.20% 7.94% === === === ====== === === === Ratios/supplemental data: Net assets, end of period (in thousands) $5,096 $3,399 $1,576 $403 $112,141 $238,874 $209,928 Ratios to average net assets(6)(7)(8)(9): Expenses 0.85%(3) 0.85%(3) 0.83% 0.79% 0.31% 0.26% 0.27% Net investment income 6.36%(3) 6.11%(3) 6.16% 5.10% 5.26% 5.76% 7.40% Portfolio turnover rate(10) 282% 304% 183% 94% 94% 176% 133% SHORT-TERM BOND FUND ------------------------------------------- INSTITUTIONAL CLASS ------------------------------------------- YEAR ENDED OCTOBER 31, PERIOD ENDED ---------------------------- OCTOBER 31, 1991(2) 1990 1989 1988(1) ------------------------------------------- Net asset value, beginning of period $9.76 $9.94 $10.12 $10.00 --- --- --- Income from investment operations: Net investment income 0.83 0.92 0.96 0.64 Net gains (losses) on securities (both realized and unrealized) 0.31 (0.18) (0.12) 0.05 --- --- --- ------ Total from investment operations 1.14 0.74 0.84 0.69 --- --- --- ------ Less distributions: Dividends from net investment income (0.83) (0.92) (1.02) (0.57) Distributions from net realized gains on securities -- -- -- -- --- --- --- ------ Total distributions (0.83) (0.92) (1.02) (0.57) --- --- --- ------ Net asset value, end of period $10.07 $9.76 $9.94 $10.12 === === === ====== Total return (annualized)(4) 11.87% 7.51% 7.62% 7.41% === === === ====== Ratios/supplemental data: Net assets, end of period (in thousands) $141,629 $83,265 $60,507 $40,855 Ratios to average net assets(6)(7)(8)(9): Expenses 0.35% 0.48% 0.59% 0.50% Net investment income 8.42% 9.44% 9.77% 8.01% Portfolio turnover rate(10) 165% 156% 158% 127%
(1) The Short-Term Bond Fund commenced active operations on December 3, 1987. Prior to March 1, 1998, the Short-Term Bond Fund was known as the Limited-Term Income Fund. The PlanAhead Class commenced active operations on August 1, 1994 and at that time existing shares of the Short-Term Bond Fund were designated as Institutional Class shares. (2) AMR Investment Services, Inc. began portfolio management of the Short-Term Bond Fund on March 1, 1991 replacing Brown Brothers, Harriman & Co. and Barrow, Hanley, Mewhinney & Strauss, Inc. (3) The per share amounts and ratios reflect income and expenses assuming inclusion of the Fund's proportionate share of the income and expenses of the Limited-Term Income Portfolio. (4) Total return reflects accrual for the maximum shareholder services fee of 0.30% for periods prior to August 1, 1994. (5) Total return for the period ended October 31, 1994 reflects Institutional Class returns from November 1, 1993 through July 31, 1994 and returns of the PlanAhead Class for the period August 1, 1994 (commencement of operations) through October 31, 1994. Due to the different expense structures between the classes, total return for the PlanAhead Class would vary from the results shown had it been in operation for the entire year. (6) Effective August 1, 1994, expenses include administrative services fees paid by the Fund to the Manager. Prior to that date, expenses exclude shareholder services fees paid directly by shareholders to the Manager. Such fees amounted to less than $.03 per share in each period on an annualized basis. (7) The method of determining average net assets was changed from a monthly average to a daily average starting with the periods ended October 31, 1994. (8) Operating results of the PlanAhead Class exclude fees waived by the Manager. Had the PlanAhead Class paid such fees during the period, the ratio of expenses and net investment income to average net assets would have been 1.00% and 4.89%, respectively, for the period ended October 31, 1994, 1.06% and 5.94%, respectively, for the year ended October 31, 1995, 0.94% and 6.02%, respectively, for the year ended October 31, 1996, and 0.90% and 6.31%, respectively, for the year ended October 31, 1997. (9) Annualized. (10) On November 1, 1995 the Short-Term Bond Fund began investing all of its investable assets in the Short-Term Bond Portfolio. Portfolio turnover rate for the years ended October 31, 1996 and 1997 is that of the Short-Term Bond Portfolio. PROSPECTUS 8 62 (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
MONEY MARKET FUND ------------------------------------------------------------------------------------- PLANAHEAD CLASS INSTITUTIONAL CLASS ---------------------------------------------- ------------------------------------ YEAR ENDED OCTOBER 31, PERIOD ENDED YEAR ENDED OCTOBER 31, ------------------------------- OCTOBER 31, ------------------------------------ 1997 1996 1995 1994(1) 1994 1993 1992 ------------------------------------------------------------------------------------- Net asset value, beginning of period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 --- --- --- ------ --- --- --- Net investment income 0.05(2) 0.05(2) 0.05 0.01 0.04 0.03 0.04 Less dividends from net investment income (0.05) (0.05) (0.05) (0.01) (0.04) (0.03) (0.04) --- --- --- ------ --- --- --- Net asset value, end of period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 === === === ====== === === === Total return (annualized) 5.28% 5.21% 5.60% 3.73%(3) 3.85% 3.31% 4.41% === === === ====== === === === Ratios/supplemental data: Net assets, end of period (in thousands) $189,189 $106,890 $41,989 $25 $1,893,144 $2,882,974 $2,223,829 Ratios to average net assets(4)(5)(6): Expenses 0.54%(2) 0.58%(2) 0.55% 0.70% 0.21% 0.23% 0.26% Net investment income 5.17%(2) 5.06%(2) 5.56% 4.42% 3.63% 3.23% 4.06% MONEY MARKET FUND ----------------------------------------- INSTITUTIONAL CLASS ----------------------------------------- YEAR ENDED OCTOBER 31, ----------------------------------------- 1991(1) 1990 1989 1988 ----------------------------------------- Net asset value, beginning of period $1.00 $1.00 $1.00 $1.00 --- --- --- --- Net investment income 0.07 0.08 0.09 0.08 Less dividends from net investment income (0.07) (0.08) (0.09) (0.08) --- --- --- --- Net asset value, end of period $1.00 $1.00 $1.00 $1.00 === === === === Total return (annualized) 7.18% 8.50% 9.45% 7.54% === === === === Ratios/supplemental data: Net assets, end of period (in thousands) $715,280 $745,405 $385,916 $330,230 Ratios to average net assets(4)(5)(6): Expenses 0.24% 0.20% 0.22% 0.28% Net investment income 6.93% 8.19% 9.11% 7.54%
(1) The Money Market Fund commenced active operations on September 1, 1987 and on November 1, 1991, the existing shares of the Fund were designated as Institutional Class shares. The PlanAhead Class commenced active operations on August 1, 1994. (2) The per share amounts and ratios reflect income and expenses assuming inclusion of the Fund's proportionate share of the income and expenses of the Money Market Portfolio. (3) Total return for the period ended October 31, 1994 reflects Institutional Class returns from November 1, 1993 through July 31, 1994 and returns of the PlanAhead Class for the period August 1, 1994 (commencement of operations) through October 31, 1994. Due to the different expense structures between the classes, total return for the PlanAhead Class would vary from the results shown had it been in operation for the entire year. (4) The method of determining average net assets was changed from a monthly average to a daily average starting with the year ended October 31, 1992. (5) Effective October 1, 1990, expenses include administrative services fees paid by the Fund to the Manager. Prior to that date, expenses exclude shareholder services fees paid directly by shareholders to the Manager, which amounted to less than $.01 per share in each period on an annualized basis. (6) Annualized. PROSPECTUS 9 63 (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
MUNICIPAL MONEY MARKET FUND U.S. GOVERNMENT MONEY MARKET FUND --------------------------------------------------------- ------------------------------------------ PLANAHEAD CLASS INSTIT. CLASS PLANAHEAD CLASS ----------------------------------------- ------------- ------------------------------------------ YEAR ENDED OCTOBER 31, PERIOD ENDED PERIOD ENDED YEAR ENDED OCTOBER 31, PERIOD ENDED -------------------------- OCTOBER 31, OCTOBER 31, --------------------------- OCTOBER 31, 1997 1996 1995 1994(1) 1994(1) 1997 1996 1995 1994(1) --------------------------------------------------------- ------------------------------------------ Net asset value, beginning of period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 --- --- --- ------ ------- --- --- --- ------ Net investment income 0.03(2) 0.03(2) 0.03 0.01 0.02 0.05(2) 0.05(2) 0.05 0.01 Less dividends from net investment income (0.03) (0.03) (0.03) (0.01) (0.02) (0.05) (0.05) (0.05) (0.01) --- --- --- ------ ------- --- --- --- ------ Net asset value, end of period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 === === === ====== ======= === === === ====== Total return (annualized) 3.24% 3.27% 3.39% 2.35%(3) 2.44% 5.08% 4.94% 5.19% 3.58%(3) === === === ====== ======= === === === ====== Ratios/supplemental data: Net assets, end of period (in thousands) $9,590 $2,340 $129 $0 $9,736 $4,046 $1,822 $530 $0 Ratios to average net assets(4)(5)(6): Expenses 0.60%(2) 0.62%(2) 0.72% 0.77% 0.30% 0.52%(2) 0.67%(2) 0.76% 0.75% Net investment income 3.18%(2) 3.12%(2) 3.32% 2.49% 2.38% 5.00%(2) 4.74%(2) 5.19% 3.94% U.S. GOVERNMENT MONEY MARKET FUND ------------------------------------- INSTITUTIONAL CLASS ------------------------------------- YEAR ENDED OCTOBER 31, PERIOD ENDED ---------------------- OCTOBER 31, 1994 1993 1992(1) ------------------------------------- Net asset value, beginning of period $1.00 $1.00 $1.00 ----- ----- ------- Net investment income 0.04 0.03 0.02 Less dividends from net investment income (0.04) (0.03) (0.02) ----- ----- ------- Net asset value, end of period $1.00 $1.00 $1.00 ===== ===== ======= Total return (annualized) 3.70% 3.07% 3.61% ===== ===== ======= Ratios/supplemental data: Net assets, end of period (in thousands) $67,607 $136,813 $91,453 Ratios to average net assets(4)(5)(6): Expenses 0.25% 0.23% 0.27%(7) Net investment income 3.44% 2.96% 3.46%(7)
(1) The U.S. Government Money Market Fund commenced active operations on March 2, 1992. The PlanAhead Class of the U.S. Government Money Market Fund commenced active operations on August 1, 1994. The Institutional Class of the Municipal Money Market Fund commenced active operations on November 10, 1993 and the PlanAhead Class commenced active operations on August 1, 1994. (2) The per share amounts and ratios reflect income and expenses assuming inclusion of the Fund's proportionate share of the income and expenses of the Fund's corresponding Portfolio. (3) Total return for the period ended October 31, 1994 reflects Institutional Class returns from the beginning of the period through July 31, 1994 and returns of the PlanAhead Class for the period August 1, 1994 (commencement of operations) through October 31, 1994. Due to the different expense structures between the classes, total return for the PlanAhead Class would vary from the results shown had it been in operation for the entire year. (4) The method of determining average net assets was changed from a monthly average to a daily average starting with the periods ended October 31, 1994. (5) Annualized. (6) Operating results for the Municipal Money Market Fund exclude fees waived by the Manager. Had the Fund paid such fees, the ratio of expenses and net investment income to average net assets would have been 0.97% and 2.29%, respectively, for the period ended October 31, 1994, 0.92% and 3.12%, respectively, for the year ended October 31, 1995, 0.67% and 3.07%, respectively, for the year ending October 31, 1996 and 0.61% and 3.17%, respectively, for the year ending October 31, 1997 for the PlanAhead Class, and 0.50% and 2.18%, respectively, for the Institutional Class for the period ended October 31, 1994. (7) Estimated based on expected annual expenses and actual average net assets. PROSPECTUS 10 64 INTRODUCTION The Trust is an open-end, diversified management investment company organized as a Massachusetts business trust on January 16, 1987. The Funds are nine of ten investment portfolios of the Trust. Each Fund has a distinctive investment objective and investment policies. Each Fund, except the S&P 500 Index Fund, invests all of its investable assets in a corresponding Portfolio of the AMR Trust which has an identical investment objective. The S&P 500 Index Fund invests all of its investable assets in the Equity 500 Index Portfolio, which is a separate investment company, advised by BT with an identical investment objective. The Manager provides the Portfolios, except the Equity 500 Index Portfolio, with business and asset management services, including the evaluation and monitoring of the investment advisers, and it provides the Funds with administrative services. BT provides the Equity 500 Index Portfolio with investment advisory, administrative and other services. The Funds, except the S&P 500 Index Fund, currently consist of three classes of shares and the S&P 500 Index Fund currently consists of two classes of shares, including the "PlanAhead Class" which is available to all investors, including smaller institutional investors, investors using intermediary organizations such as discount brokers or plan sponsors, individual retirement accounts ("IRAs"), and self-employed individual retirement plans ("HR-10 Plans" or "Keogh Plans"). For further information about the Funds' other classes, including eligibility requirements, refer to the appropriate address and phone number on the back cover of this Prospectus. Although each class of shares is designed to meet the needs of different categories of investors, all classes of each Fund share the same portfolio of investments and a common investment objective. See "Investment Objectives, Policies and Risks." There is no guarantee that a Fund will achieve its investment objective. Based on its value, a share of a Fund, regardless of class, will receive a proportionate share of the investment income and the gains (losses) earned (or incurred) by the Fund. It also will bear its proportionate share of expenses that are allocated to the Fund as a whole. However, certain expenses are allocated separately to each class of shares. The assets of the Balanced Portfolio, the Growth and Income Portfolio and the International Equity Portfolio are allocated by the Manager among investment advisers designated for each of those Portfolios. BT serves as the investment adviser to the Equity 500 Index Portfolio. The assets of the Intermediate Bond Portfolio are allocated by the Manager between the Manager and another investment adviser. Investment decisions for the Short-Term Bond Portfolio and the Money Market Portfolios are made directly by the Manager. With the exception of the S&P 500 Index Fund, each investment adviser has discretion to purchase and sell portfolio securities in accordance with the investment objectives, policies and restrictions described in this Prospectus, the SAI, and specific investment strategies developed by the Manager. See "Investment Advisers." PlanAhead Class shares are offered without a sales charge at the net asset value next determined after an investment is received and accepted. Shares will be redeemed at the next share price calculated after receipt of a redemption order. See "How to Purchase Shares" and "How to Redeem Shares." INVESTMENT OBJECTIVES, POLICIES AND RISKS The investment objective and policies of each Fund and its corresponding Portfolio are described below. Except as otherwise indicated, the investment policies of any Fund may be changed at any time by the Board to the extent that such changes are consistent with the investment objective of the applicable Fund. However, each Fund's investment objective may not be changed without a majority vote of that Fund's outstanding shares, which is defined as the lesser of (a) 67% of the shares of the applicable Fund present or represented if the holders of more than 50% of the shares are present or represented at the shareholders' meeting, or (b) more than 50% of the shares of the applicable Fund (hereinafter, "majority vote"). Except for the Equity 500 Index Portfolio, a Portfolio's investment objective may not be changed without a majority vote of that Portfolio's interest holders. The investment objective of the Equity 500 Index Portfolio is not a fundamental policy. Shareholders of the S&P 500 Index Fund will receive thirty days' prior written notice with respect to any change in the investment objective of the Equity 500 Index Portfolio. PROSPECTUS 11 65 Each Fund has a fundamental investment policy which allows it to invest all of its investable assets in its corresponding Portfolio. All other fundamental investment policies and the non-fundamental investment policies of each Fund and its corresponding Portfolio are identical. Therefore, although the following discusses the investment policies of each Portfolio, the AMR Trust's Board of Trustees ("AMR Trust Board") and the Equity 500 Index Portfolio's Board of Trustees ("Equity 500 Index Portfolio Board"), it applies equally to each Fund and each Board. AMERICAN AADVANTAGE BALANCED FUND -- This Fund's investment objective is to realize both income and capital appreciation. This Fund seeks its investment objective by investing all of its investable assets in the Balanced Portfolio, which invests primarily in equity and debt securities. Although equity securities (such as stocks) will be purchased primarily for capital appreciation and debt securities (such as bonds) will be purchased primarily for income purposes, income and capital appreciation potential will be considered in connection with all such investments. Excluding collateral for securities loaned, ordinarily the Portfolio will have a minimum of 30% and a maximum of 70% of its assets invested in equity securities and a minimum of 30% and a maximum of 70% of its assets invested in debt securities which, at the time of purchase, are rated in one of the four highest rating categories by all nationally recognized statistical rating organizations ("Rating Organizations") rating that security such as Standard & Poor's ("S&P") or Moody's Investor Services, Inc. ("Moody's") or, if unrated, are deemed to be of comparable quality by the applicable investment adviser. Obligations rated in the fourth highest rating category are limited to 25% of the Portfolio's debt allocation. Obligations rated in the BBB or Baa categories by any Rating Organization have speculative characteristics and thus changes in economic conditions or other circumstances are more likely to lead to a weakened capacity to make principal and interest payments than is the case with higher grade bonds. See the SAI for a description of debt ratings. The Portfolio, at the discretion of the investment advisers, may retain a security that has been downgraded below the initial investment criteria. The Portfolio usually invests between 50% and 65% of its assets in equity securities and between 35% and 50% of its assets in debt securities. The remainder of the Portfolio's assets may be invested in cash or cash equivalents, including obligations that are permitted investments for the Money Market Portfolio and in other investment companies. However, when its investment advisers deem that market conditions warrant, the Portfolio may, for temporary defensive purposes, invest up to 100% of its assets in cash, cash equivalents and investment grade short-term obligations. The Portfolio's investments in debt securities may include investments in obligations of the U.S. Government and its agencies and instrumentalities, including separately traded registered interest and principal securities ("STRIPS") and other zero coupon obligations; corporate bonds, notes and debentures; non-convertible preferred stocks; mortgage-backed securities; asset-backed securities; and domestic, Yankeedollar and Eurodollar bank deposit notes, certificates of deposit, bonds and notes. Such obligations may have a fixed, variable or floating rate of interest. See the SAI for a further description of the foregoing securities. The value of the Portfolio's debt investments will vary in response to interest rate changes as described in "American AAdvantage Intermediate Bond Fund and American AAdvantage Short-Term Bond Fund." The Portfolio also may engage in dollar rolls or purchase or sell securities on a "when-issued" or "forward commitment" basis. The purchase or sale of when-issued securities enables an investor to hedge against anticipated changes in interest rates and prices by locking in an attractive price or yield. The price of when-issued securities is fixed at the time the commitment to purchase or sell is made, but delivery and payment for the when-issued securities take place at a later date, normally one to two months after the date of purchase. During the period between purchase and settlement, no payment is made by the purchaser to the issuer and no interest accrues to the purchaser. Such transactions therefore involve a risk of loss if the value of the security to be purchased declines prior to the settlement date or if the value of the security to be sold increases prior to the settlement date. A sale of a when-issued security also involves the risk that the other party will be unable to settle the transaction. Dollar rolls are a type of forward commitment transaction. Purchases and sales of securities on a forward commitment basis involve a commitment to purchase or sell securities with payment and delivery to take place at some future date, normally one to two months after the date of the transaction. As with when-issued securities, these transactions involve certain risks, but they also enable an investor to hedge against anticipated PROSPECTUS 12 66 changes in interest rates and prices. Forward commitment transactions are executed for existing obligations, whereas in a when-issued transaction, the obligations have not yet been issued. When purchasing securities on a when-issued or forward commitment basis, a segregated account of liquid assets at least equal to the value of purchase commitments for such securities will be maintained until the settlement date. The Portfolio's equity investments may consist of common stocks, preferred stocks and convertible securities, including foreign securities that are represented by U.S. dollar-denominated American Depositary Receipts traded in the United States on exchanges and in the over-the-counter market. When purchasing equity securities, primary emphasis will be placed on undervalued securities with above average growth expectations. The Manager believes that purchasing securities which the investment advisers believe are undervalued in the market and that have above average growth potential will outperform other investment styles over the longer term while minimizing volatility and downside risk. The Manager will recommend that, with respect to portfolio management of equity assets, the Trust retain only those investment advisers who, in the Manager's opinion, utilize such an approach. BARROW, HANLEY, MEWHINNEY & STRAUSS, INC.; BRANDYWINE ASSET MANAGEMENT, INC.; GSB INVESTMENT MANAGEMENT, INC.; HOTCHKIS AND WILEY; and INDEPENDENCE INVESTMENT ASSOCIATES, INC. currently manage the assets of the Balanced Portfolio. See "Investment Advisers." AMERICAN AADVANTAGE GROWTH AND INCOME FUND -- This Fund's investment objective is to realize long-term capital appreciation and current income. This Fund seeks its investment objective by investing all of its investable assets in the Growth and Income Portfolio, which invests primarily in equity securities. Excluding collateral for securities loaned, ordinarily at least 80% of the Portfolio's assets will be invested in equity securities consisting of common stocks, preferred stocks, securities convertible into common stocks, and securities having common stock characteristics, such as rights and warrants, and foreign equity securities that are represented by U.S. dollar-denominated American Depositary Receipts traded in the United States on exchanges and in the over-the-counter market. When purchasing equity securities, primary emphasis will be placed on undervalued securities with above average growth expectations. In order to seek either above average current income or capital appreciation when interest rates are expected to decline, the Portfolio may invest in debt securities which, at the time of purchase, are rated in one of the four highest rating categories by all Rating Organizations rating that security or, if unrated, are deemed to be of comparable quality by the applicable investment adviser. Obligations rated in the fourth highest rating category are limited to 25% of the Portfolio's debt allocation. See "American AAdvantage Balanced Fund" for a description of the risks involved with these obligations. See the SAI for definitions of the foregoing securities and for a description of debt ratings. The Portfolio also may invest in other investment companies or in cash and cash equivalents, including obligations that are permitted investments for the Money Market Portfolio. However, when its investment advisers deem that market conditions warrant, the Portfolio may, for temporary defensive purposes, invest up to 100% of its assets in cash, cash equivalents and investment grade short-term obligations. In addition, the Portfolio may purchase or sell securities on a when-issued or forward commitment basis. See "American AAdvantage Balanced Fund" for a description of these transactions. BARROW, HANLEY, MEWHINNEY & STRAUSS, INC.; BRANDYWINE ASSET MANAGEMENT, INC.; GSB INVESTMENT MANAGEMENT, INC.; HOTCHKIS AND WILEY; and INDEPENDENCE INVESTMENT ASSOCIATES, INC. currently manage the assets of the Growth and Income Portfolio. See "Investment Advisers." AMERICAN AADVANTAGE INTERNATIONAL EQUITY FUND -- This Fund's investment objective is to realize long-term capital appreciation. This Fund seeks its investment objective by investing all of its investable assets in the International Equity Portfolio, which invests primarily in equity securities of issuers based outside the United States. Ordinarily the Portfolio will invest at least 65% of its assets in common stocks and securities convertible into common stocks of issuers in at least three different countries located outside the United States. However, excluding collateral for securities loaned, the Portfolio generally invests in excess of 80% of its assets in such securities. The remainder of the Portfolio's assets will be invested in non-U.S. debt securities which, at the time of purchase, are rated in one of the three highest rating categories by any Rating Organization or, if unrated, are deemed to be of comparable quality by the applicable investment adviser and traded publicly on a world market, or in cash or cash PROSPECTUS 13 67 equivalents, including obligations that are permitted investments for the Money Market Portfolio or in other investment companies. However, when its investment advisers deem that market conditions warrant, the Portfolio may, for temporary defensive purposes, invest up to 100% of its assets in cash, cash equivalents, other investment companies and investment grade short-term obligations. The investment advisers select securities based upon a country's economic outlook, market valuation and potential changes in currency exchange rates. When purchasing equity securities, primary emphasis will be placed on undervalued securities with above average growth expectations. Overseas investing carries potential risks not associated with domestic investments. Such risks include, but are not limited to: (1) political and financial instability abroad, including risk of nationalization or expropriation of assets and the risk of war; (2) less liquidity and greater volatility of foreign investments; (3) less public information regarding foreign companies; (4) less government regulation and supervision of foreign stock exchanges, brokers and listed companies; (5) lack of uniform accounting, auditing and financial reporting standards; (6) delays in transaction settlement in some foreign markets; (7) possible imposition of confiscatory foreign taxes; (8) possible limitation on the removal of securities or other assets of the Portfolio; (9) restrictions on foreign investments and repatriation of capital; (10) currency fluctuations; (11) cost and possible restrictions of currency conversion; (12) withholding taxes on dividends in foreign countries; and (13) possible higher commissions, custodial fees and management costs than in the U.S. market. These risks are often greater for investments in emerging or developing countries. The Portfolio will limit its investments to those in countries which have been recommended by the Manager and which have been approved by the AMR Trust Board. Countries may be added or deleted with AMR Trust Board approval. In determining which countries will be approved, the AMR Trust Board will evaluate the risk factors set forth above and will particularly focus on the ability to repatriate funds, the size and liquidity aspects of a particular country's market and the investment climate for foreign investors. The current countries in which the Portfolio may invest are Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Italy, Japan, Malaysia, Mexico, Netherlands, New Zealand, Norway, Portugal, Singapore, South Korea, Spain, Sweden, Switzerland and the United Kingdom. The Portfolio may trade forward foreign currency contracts ("forward contracts"), which are derivatives, to hedge currency fluctuations of underlying stock or bond positions, or in other circumstances permitted by the Commodity Futures Trading Commission ("CFTC"). Forward contracts to sell foreign currency may be used when the management of the Portfolio believes that the currency of a particular foreign country may suffer a decline against the U.S. dollar. Forward contracts also are entered into to set the exchange rate for a future transaction. In this manner, the Portfolio may protect itself against a possible loss resulting from an adverse change in the relationship between the U.S. dollar or other currency which is being used for the security purchase and the foreign currency in which the security is denominated during the period between the date on which the security is purchased or sold and the date on which payment is made or received. Forward contracts involve certain risks which include, but are not limited to: (1) imperfect correlation between the securities hedged and the contracts themselves; and (2) possible decrease in the total return of the Portfolio. Forward contracts are discussed in greater detail in the SAI. The Portfolio also may trade currency futures for the same reasons as for entering into forward contracts as set forth above. Currency futures are traded on U.S. and foreign currency exchanges. The use of currency futures also entails certain risks which include, but are not limited to: (1) less liquidity due to daily limits on price fluctuation; (2) imperfect correlation between the securities hedged and the contracts themselves; (3) possible decrease in the total return of the Portfolio due to hedging; (4) possible reduction in value for both the contracts and the securities being hedged; and (5) potential losses in excess of the amounts invested in the currency futures contracts themselves. The Portfolio may not enter into currency futures contracts if the purchase or sale of such contract would cause the sum of the Portfolio's initial and any variation margin deposits to exceed 5% of its total assets. Currency futures contracts, which are derivatives, are discussed in greater detail in the SAI. PROSPECTUS 14 68 HOTCHKIS AND WILEY, MORGAN STANLEY ASSET MANAGEMENT INC. and TEMPLETON INVESTMENT COUNSEL, INC. currently serve as investment advisers to the International Equity Portfolio. See "Investment Advisers." AMERICAN AADVANTAGE S&P 500 INDEX FUND -- This Fund's investment objective is to provide investment results that, before expenses, correspond to the total return (the combination of capital changes and income) of common stocks publicly traded in the United States, as represented by the S&P 500. This Fund seeks its investment objective by investing all of its investable assets in the Equity 500 Index Portfolio which invests in common stocks of companies that compose the S&P 500. The Fund offers investors a convenient means of diversifying their holdings of common stocks while relieving those investors of the administrative burdens typically associated with purchasing and holding these instruments. The Portfolio is not managed according to traditional methods of "active" investment management, which involve the buying and selling of securities based upon economic, financial and market analyses and investment judgment. Instead, the Portfolio, utilizing a "passive" or "indexing" investment approach, attempts to replicate, before expenses, the performance of the S&P 500. Under normal conditions, the Portfolio will invest at least 80% of its assets in common stocks of companies that compose the S&P 500. In seeking to replicate the performance of the S&P 500, BT, the Portfolio's investment adviser, will attempt over time to allocate the Portfolio's investments among common stocks in approximately the same weightings as the S&P 500, beginning with the heaviest-weighted stocks that make up a larger portion of the Index's value. Over the long term, BT normally seeks a correlation between the performance of the Portfolio, before expenses, and that of the S&P 500 of 0.98 or better. A figure of 1.00 would indicate perfect correlation. In the unlikely event that the correlation is not achieved, the Equity 500 Index Portfolio Board will consider alternative structures. BT utilizes a two-stage sampling approach in seeking to obtain the objective. Stage one, which encompasses large capitalization stocks, maintains the stock holdings at or near their benchmark weights. Large capitalization stocks are defined as those securities that represent 0.10% or more of the Index. In stage two, smaller stocks are analyzed and selected using risk characteristics and industry weights in order to match the sector and risk characteristics of the smaller companies in the S&P 500. This approach helps to maximize portfolio liquidity while minimizing costs. BT generally will seek to match the composition of the S&P 500, but usually will not invest the Portfolio's stock portfolio to mirror the Index exactly. Because of the difficulty and expense of executing relatively small stock transactions, the Portfolio may not always be invested in the less heavily weighted S&P 500 stocks and may at times have its portfolio weighted differently from the S&P 500. When the Portfolio's size is greater, BT expects to purchase more of the stocks in the S&P 500 and to match the relative weighting of the S&P 500 more closely and anticipates that the Portfolio will be able to mirror, before expenses, the performance of the S&P 500 with little variance. In addition, the Portfolio may omit or remove any S&P 500 stock from the Portfolio if, following objective criteria, BT judges the stock to be insufficiently liquid or believes the merit of the investment has been substantially impaired by extraordinary events or financial conditions. BT will not purchase the stock of Bankers Trust New York Corporation, which is included in the Index, and instead will overweight its holdings of companies engaged in similar businesses. Under normal conditions, BT will attempt to invest as much of the Portfolio's assets as is practical in common stocks included in the S&P 500. However, the Portfolio may maintain up to 20% of its assets in short-term debt securities and money market instruments hedged with stock index futures and options to meet redemption requests or to facilitate the investment in common stocks. When the Portfolio has cash from new investments in the Portfolio or holds a portion of its assets in money market instruments, it may enter into stock index futures or options to attempt to increase its exposure to the stock market. Strategies the Portfolio could use to accomplish this include purchasing futures contracts, writing PROSPECTUS 15 69 put options, and purchasing call options. When the Portfolio wishes to sell securities, because of shareholder redemptions or otherwise, it may use stock index futures or options thereon to hedge against market risk until the sale can be completed. These strategies could include selling futures contracts, writing call options, and purchasing put options. BT will choose among futures and options strategies based on its judgment of how best to meet the Portfolio's goals. In selecting futures and options, BT will assess such factors as current and anticipated stock prices, relative liquidity and price levels in the options and futures markets compared to the securities markets, and the Portfolio's cash flow and cash management needs. If BT judges these factors incorrectly, or if price changes in the Portfolio's futures and options positions are not well correlated with those of its other investments, the Portfolio could be hindered in the pursuit of the objective and could suffer losses. The Portfolio could also be exposed to risks if it could not close out its futures or options positions because of an illiquid secondary market. BT will only use these strategies for cash management purposes. Futures and options will not be used to increase portfolio risk above the level that could be achieved using only traditional investment securities or to acquire exposure to changes in the value of assets or indices that by themselves would not be purchased for the Portfolio. Futures and options are discussed in greater detail in the SAI. The Portfolio intends to stay invested in the securities described above to the extent practical in light of the objective and long-term investment perspective. However, the Portfolio's assets may be invested in short-term instruments with remaining maturities of 397 days or less to meet anticipated redemptions and expenses or for day-to-day operating purposes. Short-term instruments consist of (1) short-term obligations of the U.S. Government, its agencies, instrumentalities, authorities or political subdivisions; (2) other short-term debt securities rated Aa or higher by Moody's or AA or higher by S&P or, if unrated, of comparable quality in the opinion of BT; (3) commercial paper; (4) bank obligations, including negotiable certificates of deposit, time deposits and bankers' acceptances; and (5) repurchase agreements. At the time the Portfolio invests in commercial paper, bank obligations or repurchase agreements, the issuer or the issuer's parent must have outstanding debt rated Aa or higher by Moody's or AA or higher by S&P or outstanding commercial paper or bank obligations rated Prime-1 by Moody's or A-1 by S&P; or, if no such ratings are available, the instrument must be of comparable quality in the opinion of BT. The S&P 500 is a well-known stock market index that includes common stocks of 500 companies from several industrial sectors representing a significant portion of the market value of all common stocks publicly traded in the United States, most of which are listed on the New York Stock Exchange (the "Exchange"). Stocks in the S&P 500 are weighted according to their market capitalization (the number of shares outstanding multiplied by the stock's current price). BT believes that the performance of the S&P 500 is representative of the performance of publicly traded common stocks in general. The composition of the S&P 500 is determined by S&P and is based on such factors as the market capitalization and trading activity of each stock and its adequacy as a representation of stocks in a particular industry group, and may be changed from time to time. The Fund and the Portfolio are not sponsored, endorsed, sold or promoted by S&P. S&P makes no representation or warranty, express or implied, to the owners of the Fund or the Portfolio or any member of the public regarding the advisability of investing in securities generally or in the Fund and the Portfolio particularly or the ability of the S&P 500 to track general stock market performance. S&P does not guarantee the accuracy and/or the completeness of the S&P 500 or any data included therein. S&P MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE RESULTS TO BE OBTAINED BY THE FUND OR THE PORTFOLIO, OWNERS OF THE FUND OR THE PORTFOLIO, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500 OR ANY DATA INCLUDED THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES AND HEREBY EXPRESSLY DISCLAIMS ALL SUCH WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE S&P 500 OR ANY DATA INCLUDED THEREIN. PROSPECTUS 16 70 The ability of the Fund and the Portfolio to meet their investment objective depends to some extent on the cash flow experienced by the Fund and by the other investors in the Portfolio, since investments and redemptions by shareholders of the Fund generally will require the Portfolio to purchase or sell securities. BT will make investment changes to accommodate cash flow in an attempt to maintain the similarity of the Portfolio to the S&P 500. An investor should also be aware that the performance of the S&P 500 is a hypothetical number that does not take into account brokerage commissions and other costs of investing, unlike the Portfolio which must bear these costs. Finally, since the Portfolio seeks to track the S&P 500, BT generally will not attempt to judge the merits of any particular stock as an investment. AMERICAN AADVANTAGE INTERMEDIATE BOND FUND and AMERICAN AADVANTAGE SHORT-TERM BOND FUND -- The investment objective of these Funds is to realize income and capital appreciation. As an investment policy, each Fund primarily seeks income and secondarily seeks capital appreciation. The Intermediate Bond Fund and the Short-Term Bond Fund seek their investment objective by investing all of their investable assets in the Intermediate Bond Portfolio and the Short-Term Bond Portfolio, respectively, which invest primarily in debt obligations. Permissible investments include securities of the U.S. Government and its agencies and instrumentalities, including STRIPS and other zero coupon obligations; corporate bonds, notes and debentures; non-convertible preferred stocks; mortgage-backed securities; asset-backed securities; domestic, Yankeedollar and Eurodollar certificates of deposit, bank deposit notes, and bank notes; other investment companies; and cash or cash equivalents including obligations that are permitted investments for the Money Market Portfolio. Such obligations may have a fixed, variable or floating rate of interest. At the time of purchase, all such securities will be rated in one of the four highest rating categories by all Rating Organizations rating such obligation or, if unrated, will be deemed to be of comparable quality by the Manager or the investment adviser. Obligations rated in the fourth highest rating category are limited to 25% of each Portfolio's total assets. See "American AAdvantage Balanced Fund" for a description of the risks involved with these obligations. The Portfolios, at the discretion of the Manager and the investment adviser, may retain a security which has been downgraded below the initial investment criteria. See the SAI for definitions of the foregoing securities and for a description of debt ratings. Principal and/or interest payments for obligations of the U.S. Government's agencies or instrumentalities may or may not be backed by the full faith and credit of the U.S. Government. Although investments will not be restricted by either maturity or duration of the securities purchased, under normal circumstances, the Intermediate Bond Portfolio will seek to maintain a dollar weighted average duration of three to seven years and the Short-Term Bond Portfolio will seek to maintain a dollar weighted average duration of one to three years. Because the timing on return of principal for both asset-backed and mortgage-backed securities is uncertain, in calculating the average weighted duration of the Portfolios, the duration of these securities may be based on certain industry conventions. Mortgage-backed securities are securities representing interests in "pools" of mortgages in which payments of both interest and principal on the securities are made monthly, in effect, "passing through" monthly payments made by the individual borrowers on the mortgage loans which underlie the securities (net of fees paid to the issuer or guarantor of the securities). Early repayment of principal on mortgage pass-through securities (arising from prepayments of principal due to sale of the underlying property, refinancing, or foreclosure, net of fees and costs which may be incurred) may expose the Portfolios to a lower rate of return upon reinvestment of principal. Also, if a security subject to prepayment has been purchased at a premium, in the event of prepayment, the value of the premium would be lost. Like other debt securities, when interest rates rise, the value of mortgage-related securities generally will decline; however, when interest rates decline, the value of mortgage-related securities with prepayment features may not increase as much as other debt securities. Payment of principal and interest on some mortgage pass-through securities (but not the market value of the securities themselves) may be guaranteed by the full faith and credit of the U.S. Government (in the case of securities guaranteed by the Government National Mortgage Association ("GNMA")) or guaranteed by agencies or instrumentalities of the U.S. Government (in the case of securities guaranteed by the Federal National Mortgage Association ("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC"), which are PROSPECTUS 17 71 supported only by the discretionary authority of the U.S. Government to purchase the agency's obligations). Mortgage pass-through securities created by non-governmental issuers (such as commercial banks, savings and loan institutions, private mortgage insurance companies, mortgage bankers and other secondary market issuers) may be supported with various credit enhancements such as pool insurance, guarantees issued by governmental entities, a letter of credit from a bank or senior/subordinated structures. Collateralized mortgage obligations ("CMOs") are hybrid instruments with characteristics of both mortgage-backed bonds and mortgage pass-through securities. Similar to a mortgage pass-through, interest and prepaid principal on a CMO are paid, in most cases, monthly. CMOs may be collateralized by whole mortgage loans but are more typically collateralized by portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC or FNMA. CMOs are structured in multiple classes, with each class bearing a different stated maturity or interest rate. The Portfolios are permitted to invest in asset-backed securities, subject to the Portfolios' rating and quality requirements. Through the use of trusts and special purpose subsidiaries, various types of assets, primarily home equity loans, automobile and credit card receivables, and other types of receivables or other assets as well as purchase contracts, financing leases and sales agreements entered into by municipalities, are securitized in pass-through structures similar to the mortgage pass-through structures described above. Consistent with the Funds' and the Portfolios' investment objective, policies and quality standards, the Portfolios may invest in these and other types of asset-backed securities which may be developed in the future. Asset-backed securities involve certain risks that do not exist with mortgage-related securities, resulting mainly from the fact that asset-backed securities do not usually contain the benefit of a complete security interest in the related collateral. For example, credit card receivables generally are unsecured and the debtors are entitled to the protection of a number of state and federal consumer credit laws, some of which may reduce the ability to obtain full payment. In the case of automobile receivables, due to various legal and economic factors, proceeds from repossessed collateral may not always be sufficient to support payments on the securities. The risks associated with asset-backed securities are often reduced by the addition of credit enhancements, such as a letter of credit from a bank, excess collateral or a third-party guarantee. Investments in Yankeedollar and Eurodollar bonds, notes and certificates of deposit involve risks that differ from investments in securities of domestic issuers. See "American AAdvantage Money Market Fund" for a description of these risks. The Portfolios also may engage in dollar rolls, or purchase or sell securities on a when-issued or forward commitment basis as described under "American AAdvantage Balanced Fund." The market value of fixed rate securities, and thus the net asset value of these Portfolios' shares, is expected to vary inversely with movements in interest rates. The market value of variable and floating rate instruments should not vary as much due to the periodic adjustments in their interest rates. An adjustment which increases the interest rate of such securities should reduce or eliminate declines in market value resulting from a prior upward movement in interest rates, and an adjustment which decreases the interest rate of such securities should reduce or eliminate increases in market value resulting from a prior downward movement in interest rates. The MANAGER serves as the sole active investment adviser to the Short-Term Bond Portfolio. The MANAGER and BARROW, HANLEY, MEWHINNEY & STRAUSS, INC. currently manage the assets of the Intermediate Bond Portfolio. See "Investment Advisers." MONEY MARKET FUNDS -- The investment objectives of the Money Market Funds are to seek current income, liquidity and the maintenance of a stable $1.00 price per share. The Money Market Funds seek to achieve these objectives by investing all of their investable assets in the Money Market Portfolios, which invest in high quality, U.S. dollar-denominated short-term obligations that have been determined by the Manager or the AMR Trust Board to present minimal credit risks. Portfolio investments are valued based on the amortized cost valuation technique pursuant to Rule 2a-7 under the Investment Company Act of 1940 ("1940 Act"). See the SAI for an explanation PROSPECTUS 18 72 of the amortized cost valuation method. Obligations in which the Money Market Portfolios invest generally have remaining maturities of 397 days or less, although instruments subject to repurchase agreements and certain variable and floating rate obligations may bear longer final maturities. The average dollar-weighted portfolio maturity of each Money Market Portfolio will not exceed 90 days. The Manager serves as the sole investment adviser to the Money Market Funds. See "Management and Administration of the Trust." AMERICAN AADVANTAGE MONEY MARKET FUND -- The Fund's corresponding Portfolio may invest in obligations permitted to be purchased under Rule 2a-7 of the 1940 Act including, but not limited to, (1) obligations of the U.S. Government or its agencies or instrumentalities; (2) loan participation interests, medium-term notes, funding agreements and asset-backed securities; (3) domestic, Yankeedollar and Eurodollar certificates of deposit, time deposits, bankers' acceptances, commercial paper, bank deposit notes and other promissory notes, including floating or variable rate obligations issued by U.S. or foreign bank holding companies and their bank subsidiaries, branches and agencies; and (4) repurchase agreements involving the obligations listed above. The Money Market Portfolio will invest only in issuers or instruments that at the time of purchase (1) have received the highest short-term rating by two Rating Organizations such as "A-1" by S&P and "P-1" by Moody's; (2) are single rated and have received the highest short-term rating by a Rating Organization; or (3) are unrated, but are determined to be of comparable quality by the Manager pursuant to guidelines approved by the AMR Trust Board and subject to ratification by the AMR Trust Board. See the SAI for definitions of the foregoing instruments and rating systems. The Portfolio may invest in other investment companies. The Portfolio also may purchase or sell securities on a when-issued or forward commitment basis as described under "American AAdvantage Balanced Fund." The Portfolio will invest more than 25% of its assets in obligations issued by the banking industry. However, for temporary defensive purposes during periods when the Manager believes that maintaining this concentration may be inconsistent with the best interest of shareholders, the Portfolio may not maintain this concentration. Investments in Eurodollar (U.S. dollar obligations issued outside the United States by domestic or foreign entities) and Yankeedollar (U.S. dollar obligations issued inside the United States by foreign entities) obligations involve additional risks. Most notably, there generally is less publicly available information about foreign issuers; there may be less governmental regulation and supervision; foreign issuers may use different accounting and financial standards; and the adoption of foreign governmental restrictions may affect adversely the payment of principal and interest on foreign investments. In addition, not all foreign branches of United States banks are supervised or examined by regulatory authorities as are United States banks, and such branches may not be subject to reserve requirements. Variable amount master demand notes in which the Portfolio may invest are unsecured demand notes that permit the indebtedness thereunder to vary, and provide for periodic adjustments in the interest rate. Because master demand notes are direct lending arrangements between the Portfolio and the issuer, they are not normally publicly traded. There is no secondary market for the notes; however, the period of time remaining until payment of principal and accrued interest can be recovered under a variable amount master demand note generally will not exceed seven days. To the extent this period is exceeded, the note in question would be considered illiquid. Issuers of variable amount master demand notes must satisfy the same criteria as set forth for other promissory notes (e.g. commercial paper). The Portfolio will invest in variable amount master demand notes only when such notes are determined by the Manager, pursuant to guidelines established by the AMR Trust Board, to be of comparable quality to rated issuers or instruments eligible for investment by the Portfolio. In determining average dollar weighted portfolio maturity, a variable amount master demand note will be deemed to have a maturity equal to the longer of the period of time remaining until the next readjustment of the interest rate or the period of time remaining until the principal amount can be recovered from the issuer on demand. AMERICAN AADVANTAGE MUNICIPAL MONEY MARKET FUND -- The Fund's corresponding Portfolio may invest in municipal obligations issued by or on behalf of the governments of states, territories, or possessions of the United States; the District of Columbia; and their political subdivisions, agencies and instrumentalities if the interest these obligations provide is generally exempt from federal income tax. The Municipal Money Market Portfolio will PROSPECTUS 19 73 invest only in issuers or instruments that at the time of purchase (1) are guaranteed by the U.S. Government, its agencies, or instrumentalities; (2) are secured by letters of credit that are irrevocable and issued by banks which qualify as authorized issuers for the Money Market Portfolio (see "American AAdvantage Money Market Fund"); (3) are guaranteed by one or more municipal bond insurance policies that cannot be canceled and are issued by third-party guarantors possessing the highest claims- paying rating from a Rating Organization; (4) have received one of the two highest short-term ratings from at least two Rating Organizations; (5) are single rated and have received one of the two highest short-term ratings from that Rating Organization; (6) have no short-term rating but the instrument is comparable to the issuer's rated short-term debt; (7) have no short-term rating (or comparable rating) but have received one of the top two long-term ratings from all Rating Organizations rating the issuer or instrument; or (8) are unrated, but are determined to be of comparable quality by the Manager pursuant to guidelines approved by, and subject to the oversight of, the AMR Trust Board. The Portfolio also may invest in other investment companies. Ordinarily at least 80% of the Portfolio's net assets will be invested in municipal obligations the interest from which is exempt from federal income tax. However, should market conditions warrant, the Portfolio may invest up to 20% (or for temporary defensive purposes, up to 100%) of its assets in eligible investments for the Money Market Portfolio which are subject to federal income tax. The Portfolio may invest in certain municipal obligations which have rates of interest that are adjusted periodically according to formulas intended to minimize fluctuations in the values of these instruments. These instruments, commonly known as variable rate demand obligations, are long-term instruments which allow the purchaser, at its discretion, to redeem securities before their final maturity at par plus accrued interest upon notice (typically 7 to 30 days). Municipal obligations may be backed by the full taxing power of a municipality ("general obligations"), or by the revenues from a specific project or the credit of a private organization ("revenue obligations"). Some municipal obligations are collateralized as to payment of principal and interest by an escrow of U.S. Government or federal agency obligations, while others are insured by private insurance companies, while still others may be supported by letters of credit furnished by domestic or foreign banks. The Portfolio's investments in municipal obligations may include fixed, variable, or floating rate general obligations and revenue obligations (including municipal lease obligations and resource recovery obligations); zero coupon and asset-backed obligations; variable rate auction and residual interest obligations; tax, revenue, or bond anticipation notes; tax-exempt commercial paper; and purchase obligations that are subject to restrictions on resale. See the SAI for a further discussion of the foregoing obligations. The Portfolio may purchase or sell obligations on a when-issued or forward commitment basis, as described under "American AAdvantage Balanced Fund." The Portfolio may invest more than 25% of the value of its total assets in municipal obligations which are related in such a way that an economic, business or political development or change affecting one such security would also affect the other securities; for example, securities the interest of which is paid from revenues of similar types of projects, or securities whose issuers are located in the same state. As a result, the Portfolio may be subject to greater risk compared to a fund that does not follow this practice. However, the Manager believes this risk is mitigated because it is anticipated that most of the Portfolio's assets will be insured or backed by bank letters of credit. Additionally, the Portfolio may invest more than 25% of the value of its total assets in industrial development bonds which, although issued by industrial development authorities, may be backed only by the assets and revenues of the non-governmental users. The Portfolio also may invest in municipal obligations that constitute "private activity obligations." These include obligations that finance student loans, residential rental projects, and solid waste disposal facilities. To the extent the Portfolio earns interest income on private activity obligations, shareholders will be required to treat the portion of the Fund's distributions attributable to its share of such interest as a "tax preference item" for purposes of determining their liability for the federal alternative minimum tax ("AMT") and, as a result, may become subject to (or increase their liability for) the AMT. Shareholders should consult their own tax advisers to determine whether they may be subject to the AMT. The Portfolio may invest in private activity obligations without limitation and it is anticipated that a substantial portion of the Portfolio's assets will be invested in these PROSPECTUS 20 74 obligations. As a result, a substantial portion of the Fund's distributions may be a tax preference item, which will reduce the net return from the Fund for taxpayers subject to the AMT. Interest on "qualified" private activity obligations is exempt from federal income tax. AMERICAN AADVANTAGE U.S. GOVERNMENT MONEY MARKET FUND -- The Fund's corresponding Portfolio will invest exclusively in obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities and repurchase agreements which are collateralized by such obligations. U.S. Government securities include direct obligations of the U.S. Treasury (such as Treasury bills, Treasury notes and Treasury bonds). The Fund may invest in securities issued by the Agency for International Development, Farmers Home Administration, Farm Credit Banks, Federal Home Loan Bank, Federal Intermediate Credit Bank, Federal Financing Bank, Federal Land Bank, FNMA, GNMA, General Services Administration, Rural Electrification Administration, Small Business Administration, Tennessee Valley Authority, and others. Some of these obligations, such as those issued by the Federal Home Loan Bank and FHLMC, are supported only by the credit of the agency or instrumentality issuing the obligation and the discretionary authority of the U.S. Government to purchase the agency's obligations. See the SAI for a further discussion of the foregoing obligations. Counterparties for repurchase agreements must be approved by the AMR Trust Board. The Portfolio may purchase or sell securities on a when-issued or forward commitment basis, as described under "American AAdvantage Balanced Fund." OTHER INVESTMENT POLICIES -- In addition to the investment policies described previously, each Portfolio also may lend its securities, enter into fully collateralized repurchase agreements and invest in private placement offerings. SECURITIES LENDING. Each Portfolio may lend securities to broker-dealers or other institutional investors pursuant to agreements requiring that the loans be continuously secured by any combination of cash, securities of the U.S. Government and its agencies and instrumentalities and approved bank letters of credit that at all times equal at least 100% of the market value of the loaned securities. Although the Equity 500 Index Portfolio may lend its securities, it has agreed that it will abstain from doing so. Securities loans will not be made if, as a result, the aggregate amount of all outstanding securities loans by any Portfolio of the AMR Trust would exceed 33 1/3% of its total assets (including the market value of collateral received). A Portfolio continues to receive interest on the securities loaned and simultaneously earns either interest on the investment of the cash collateral or fee income if the loan is otherwise collateralized. Should the borrower of the securities fail financially, there is a risk of delay in recovery of the securities loaned or loss of rights in the collateral. However, the Portfolios seek to minimize this risk by making loans only to borrowers which are deemed to be of good financial standing and which have been approved by the AMR Trust Board. For purposes of complying with each Portfolio's investment policies and restrictions, collateral received in connection with securities loans will be deemed an asset of a Portfolio to the extent required by law. Except for the Equity 500 Index Portfolio, the Manager will receive compensation for administrative and oversight functions with respect to securities lending. The amount of such compensation will depend on the income generated by the loan of each Portfolio's securities. The SEC has granted exemptive relief that permits the Portfolios to invest cash collateral received from securities lending transactions in shares of one or more private investment companies managed by the Manager. Subject to receipt of exemptive relief from the SEC, the Portfolios also may invest cash collateral received from securities lending transactions in shares of one or more registered investment companies managed by the Manager. See the SAI for further information regarding loan transactions. REPURCHASE AGREEMENTS. A repurchase agreement is an agreement under which securities are acquired by a Portfolio from a securities dealer or bank subject to resale at an agreed upon price on a later date. The acquiring Portfolio bears a risk of loss in the event that the other party to a repurchase agreement defaults on its obligations and the Portfolio is delayed or prevented from exercising its rights to dispose of the collateral securities. However, the investment advisers or the Manager attempt to minimize this risk by entering into repurchase agreements only with financial institutions which are deemed to be of good financial standing and which have been approved by the AMR Trust Board or the Equity 500 Index Portfolio Board, as appropriate. See the SAI for more information regarding repurchase agreements. PROSPECTUS 21 75 PRIVATE PLACEMENT OFFERINGS. Investments in private placement offerings are made in reliance on the "private placement" exemption from registration afforded by Section 4(2) of the Securities Act of 1933 (the "1933 Act"), and resold to qualified institutional buyers under Rule 144A under the 1933 Act ("Section 4(2) securities"). Section 4(2) securities are restricted as to disposition under the federal securities laws, and generally are sold to institutional investors, such as the Portfolios, that agree they are purchasing the securities for investment and not with an intention to distribute to the public. Any resale by the purchaser must be pursuant to an exempt transaction and may be accomplished in accordance with Rule 144A. Section 4(2) securities normally are resold to other institutional investors such as the Portfolios through or with the assistance of the issuer or dealers that make a market in the Section 4(2) securities, thus providing liquidity. The Money Market Portfolios will not invest more than 10% (and the other Funds' respective Portfolios, no more than 15%) of their respective net assets in Section 4(2) securities and illiquid securities unless the applicable investment adviser determines, by continuous reference to the appropriate trading markets and pursuant to guidelines approved by the AMR Trust Board or the Equity 500 Index Portfolio Board that any Section 4(2) securities held by such Portfolio in excess of this level are at all times liquid. The AMR Trust Board, the Equity 500 Index Portfolio Board and the applicable investment adviser, pursuant to the guidelines approved by their respective Boards, will carefully monitor the Portfolios' investments in Section 4(2) securities offered and sold under Rule 144A, focusing on such important factors, among others, as: valuation, liquidity, and availability of information. Investments in Section 4(2) securities could have the effect of reducing a Portfolio's liquidity to the extent that qualified institutional buyers no longer wish to purchase these restricted securities. BROKERAGE PRACTICES AND PORTFOLIO TURNOVER -- Each investment adviser will place its own orders to execute securities transactions which are designed to implement the applicable Portfolio's investment objective and policies. In placing such orders, each investment adviser will seek the best available price and most favorable execution. The full range and quality of services offered by the executing broker or dealer will be considered when making these determinations. Pursuant to written guidelines approved by the AMR Trust Board or the Equity 500 Index Portfolio Board, as appropriate, an investment adviser of a Portfolio, or its affiliated broker-dealer, may execute portfolio transactions and receive usual and customary brokerage commissions (within the meaning of Rule 17e-1 under the 1940 Act) for doing so. The Money Market Portfolios, the Intermediate Bond Portfolio and the Short-Term Bond Portfolio normally will not incur any brokerage commissions on their transactions because money market and debt instruments are generally traded on a "net" basis with dealers acting as principal for their own accounts and without a stated commission. The price of the obligation, however, usually includes a profit to the dealer. Obligations purchased in underwritten offerings include a fixed amount of compensation to the underwriter, generally referred to as the underwriter's concession or discount. No commissions or discounts are paid when securities are purchased directly from an issuer. No Portfolio, other than the Short-Term Bond Portfolio, currently expects its portfolio turnover rate to exceed 100%. The portfolio turnover rate for the Short-Term Bond Portfolio for the fiscal year ended October 31, 1997 was 282%. The portfolio turnover rate for the Balanced Portfolio for the fiscal year ended October 31, 1997 was 105%. This was due to an unusually large redemption in the Balanced Fund, which is not expected to reoccur. A Portfolio's turnover rate, or the frequency of portfolio transactions, will vary from year to year depending on market conditions and the Portfolio's cash flows. High portfolio activity increases a Portfolio's transaction costs, including brokerage commissions and may result in a greater number of taxable transactions. ADDITIONAL INFORMATION ABOUT THE PORTFOLIOS -- As previously described, investors should be aware that each Fund, unlike mutual funds that directly acquire and manage their own portfolios of securities, seeks to achieve its investment objective by investing all of its investable assets in a corresponding Portfolio of the AMR Trust, which is a separate investment company, or in the Equity 500 Index Portfolio, which is a separate investment company advised by BT. Since a Fund will invest only in its corresponding Portfolio, that Fund's shareholders will acquire only an indirect interest in the investments of the Portfolio. PROSPECTUS 22 76 The Manager expects, although it cannot guarantee, that the Trust will achieve economies of scale by investing in the AMR Trust and the Equity 500 Index Portfolio. In addition to selling their interests to the Funds, the Portfolios sell their interests to other non-affiliated investment companies and/or other institutional investors. All institutional investors in a Portfolio pay a proportionate share of the Portfolio's expenses and invest in that Portfolio on the same terms and conditions. However, other investment companies investing all of their assets in a Portfolio are not required to sell their shares at the same public offering price as a Fund and are allowed to charge different sales commissions. Therefore, investors in a Fund may experience different returns from investors in another investment company that invests exclusively in that Fund's corresponding Portfolio. The Fund's investment in a Portfolio may be affected materially by the actions of large investors in that Portfolio, if any. For example, as with all open-end investment companies, if a large investor were to redeem its interest in a Portfolio, that Portfolio's remaining investors could experience higher pro rata operating expenses, thereby producing lower returns. As a result, that Portfolio's security holdings may become less diverse, resulting in increased risk. Institutional investors in a Portfolio that have a greater pro rata ownership interest in the Portfolio than the Fund could have effective voting control over the operation of that Portfolio. A change in a Portfolio's fundamental objective, policies and restrictions, that is not approved by the shareholders of its corresponding Fund could require that Fund to redeem its interest in the Portfolio. Any such redemption could result in a distribution in kind of portfolio securities (as opposed to a cash distribution) by the Portfolio. Should such a distribution occur, that Fund could incur brokerage fees or other transaction costs in converting such securities to cash. In addition, a distribution in kind could result in a less diversified portfolio of investments for that Fund and could affect its liquidity adversely. The Portfolios' and their corresponding Funds' investment objectives and policies are described above. See "Investment Restrictions" for a description of their investment restrictions. The investment objective of a Fund can be changed only with shareholder approval. The approval of a Fund and of other investors in its corresponding Portfolio, if any, is not required to change the investment objective, policies or limitations of that Portfolio, unless otherwise specified. Written notice will be provided to shareholders of a Fund within thirty days prior to any changes in its corresponding Portfolio's investment objective. If the investment objective of a Portfolio changes and the shareholders of its corresponding Fund do not approve a parallel change in that Fund's investment objective, the Fund would seek an alternative investment vehicle or the Manager and the investment advisers would actively manage the Fund. See "Management and Administration of the Trusts" for a complete description of the investment management fee and other expenses associated with the Fund's investment in its corresponding Portfolio. This Prospectus and the SAI contain more detailed information about each Fund and its corresponding Portfolio, including information related to (1) the investment objective, policies and restrictions of each Fund and its corresponding Portfolio, (2) the Board of Trustees and officers of the Trust, the AMR Trust and the Equity 500 Index Portfolio Board, (3) brokerage practices, (4) the Funds' shares, including the rights and liabilities of its shareholders, (5) additional performance information, including the method used to calculate yield and total return, and (6) the determination of the value of each Fund's shares. INVESTMENT RESTRICTIONS The following fundamental investment restrictions and the non-fundamental investment restriction are identical for each Fund and its corresponding Portfolio. Therefore, although the following discusses the investment restrictions of each Portfolio, it applies equally to each Fund. The following fundamental investment restrictions may be changed with respect to a particular Fund by the majority vote of that Fund's outstanding shares or with respect to a Portfolio by the majority vote of that Portfolio's interest holders. No Portfolio may: - Invest more than 5% of its total assets (taken at market value) in securities of any one issuer, other than obligations issued by the U.S. Government, its agencies and instrumentalities, or purchase more than 10% of the voting securities of any one issuer, with respect to 75% of a Portfolio's total assets. In addition, PROSPECTUS 23 77 although not a fundamental investment restriction and therefore subject to change without shareholder vote, the Money Market Portfolio and the U.S. Government Money Market Portfolio apply this restriction with respect to 100% of their assets. - Invest more than 25% of its total assets in the securities of companies primarily engaged in any one industry, provided that: (i) this limitation does not apply to obligations issued or guaranteed by the U.S. Government, its agencies and instrumentalities; (ii) municipalities and their agencies and authorities are not deemed to be industries; and (iii) financial service companies are classified according to the end users of their services (for example, automobile finance, bank finance, and diversified finance will be considered separate industries). With respect to the Money Market Portfolio, this restriction does not apply to the banking industry. The following non-fundamental investment restriction may be changed with respect to a particular Fund by a vote of a majority of the Board or with respect to a Portfolio by a vote of a majority of the AMR Trust Board or the Equity 500 Index Portfolio Board, as appropriate: no Portfolio may invest more than 15% (or, with respect to any Money Market Portfolio, 10%) of its net assets in illiquid securities, including time deposits and repurchase agreements that mature in more than seven days. The above percentage limits are based upon asset values at the time of the applicable transaction; accordingly, a subsequent change in asset values will not affect a transaction that was in compliance with the investment restrictions at the time such transaction was effected. See the SAI for other investment limitations. YIELDS AND TOTAL RETURNS From time to time each class of the Money Market Funds may advertise their "current yield" and "effective yield." Both yield figures are based on historical earnings and are not intended to indicate future performance. The current yield refers to the investment income generated over a seven calendar-day period (which period will be stated in the advertisement). This yield is then annualized by assuming the amount of investment income generated during that week is earned each week over a one-year period and is shown as a percentage of the investment. The effective yield is calculated similarly but, when annualized, the investment income earned is assumed to be reinvested. The effective yield will be slightly higher than the current yield because of the compounding effect of this assumed reinvestment. The Municipal Money Market Fund also may quote "tax equivalent yields," which show the taxable yields a shareholder would have to earn before federal income taxes to equal this Fund's tax-exempt yields. The tax equivalent yield is calculated by dividing the Fund's tax-exempt yield by the result of one minus a stated federal income tax rate. If only a portion of the Fund's investment income was tax-exempt, only that portion is adjusted in the calculation. As stated earlier, the Fund considers interest on private activity obligations to be exempt from federal income tax. Each class of a Fund has different expenses which will impact its performance. Advertised yields for the PlanAhead Class of the Balanced Fund, the Growth and Income Fund, the International Equity Fund, the S&P 500 Index Fund, the Intermediate Bond Fund and the Short-Term Bond Fund (collectively, the "Variable NAV Funds") will be computed by dividing the net investment income per share earned by that class during the relevant time period by the maximum offering price per share for that class on the last day of the period. Additionally, each class of the Intermediate Bond Fund and the Short-Term Bond Fund may advertise a "monthly distribution rate." This rate is based on an annualized monthly dividend accrual rate per share compared with the month-end share price of each class of the Fund. Total return quotations advertised by the Funds may reflect the average annual compounded (or aggregate compounded) rate of return during the designated time period based on a hypothetical initial investment and the redeemable value of that investment at the end of the period. The Funds will at times compare their performance to applicable published indices, and also may disclose their performance as ranked by certain ranking entities. See the SAI for more information about the calculation of yields and total returns. PROSPECTUS 24 78 MANAGEMENT AND ADMINISTRATION OF THE TRUSTS FUND MANAGEMENT AGREEMENT -- The Board has general supervisory responsibility over the Trust's affairs, while the business affairs of the AMR Trust and the Equity 500 Index Portfolio are subject to the supervision of their respective Board of Trustees. The Manager provides or oversees all administrative, investment advisory and portfolio management services for the Trust pursuant to a Management Agreement dated April 3, 1987, as amended July 25, 1997, together with the Administrative Services Agreement described below. The AMR Trust and the Manager also entered into a Management Agreement dated October 1, 1995, as amended July 25, 1997, that obligates the Manager to provide or oversee all administrative, investment advisory and portfolio management services for the AMR Trust. The Manager, located at 4333 Amon Carter Boulevard, MD 5645, Fort Worth, Texas 76155, is a wholly owned subsidiary of AMR Corporation ("AMR"), the parent company of American Airlines, Inc., and was organized in 1986 to provide investment management, advisory, administrative and asset management consulting services. The assets of the Balanced Portfolio, the Growth and Income Portfolio and the International Equity Portfolio are allocated by the Manager among multiple investment advisers designated for that Portfolio. The assets of the Intermediate Bond Portfolio are allocated by the Manager between the Manager and another investment adviser. BT serves as investment adviser and administrator of, and provides custody and transfer agency services to, the Equity 500 Index Portfolio. See "Investment Advisers." The Manager serves as the sole active investment adviser to the Money Market Portfolios and the Short-Term Bond Portfolio. In addition, with the exception of the International Equity Portfolio and the Equity 500 Index Portfolio, if so requested by any investment adviser, the Manager will make the investment decisions with respect to assets allocated to that investment adviser which the investment adviser determines should be invested in short-term obligations of the type permitted for investment by the Money Market Portfolio. As of December 31, 1997, the Manager had assets under management totaling approximately $18.4 billion including approximately $6.1 billion under active management and $12.3 billion as named fiduciary or fiduciary adviser. Of the total, approximately $14.2 billion of assets are related to AMR. American Airlines, Inc. is not responsible for investments made in the American AAdvantage Funds. The Manager provides the Trust and the AMR Trust with office space, office equipment and personnel necessary to manage and administer the Trusts' operations. This includes complying with reporting requirements; corresponding with shareholders; maintaining internal bookkeeping, accounting and auditing services and records; and supervising the provision of services to the Trusts by third parties. The Manager oversees each Portfolio's participation in securities lending activities and any actions taken by the securities lending agent in connection with those activities to ensure compliance with all applicable regulatory and investment guidelines. The Manager also develops the investment programs for each Portfolio of the AMR Trust, selects and changes investment advisers (subject to approval by the AMR Trust Board and appropriate interest holders), allocates assets among investment advisers, monitors the investment advisers' investment programs and results, and coordinates the investment activities of the investment advisers to ensure compliance with regulatory restrictions. Except as otherwise provided below, the Manager bears the expense of providing the above services and pays the fees of the investment advisers of the Funds and the Portfolios of the AMR Trust. As compensation for paying the investment advisory fees and for providing the Portfolios with advisory and asset allocation services, the Manager receives from the AMR Trust an annualized advisory fee that is calculated and accrued daily, equal to the sum of (1) 0.15% of the net assets of the Money Market Portfolios, (2) 0.25% of the net assets of the Intermediate Bond Portfolio and the Short-Term Bond Portfolio, (3) 0.10% of the net assets of the other Portfolios of the AMR Trust, plus (4) all fees payable by the Manager to the investment advisers of the Balanced, the Growth and Income and the International Equity Portfolios as described in "Investment Advisers." The advisory fee is payable quarterly in arrears. To the extent that a Fund invests all of its investable assets in its corresponding Portfolio, the Manager will not receive an advisory fee under its Management Agreement with the Trust. The Manager receives compensation in connection with securities lending activities. If a Portfolio lends its portfolio securities and receives cash collateral from the borrower, the Manager may receive up to 25% of the net annual interest income (the gross interest earned by the investment less the amount paid to the borrower as well as related expenses) received from the investment of such cash. If a borrower posts collateral other than cash, the PROSPECTUS 25 79 borrower will pay to the lender a loan fee. The Manager may receive up to 25% of the loan fees posted by borrowers. Currently, the Manager receives 10% of the net annual interest income from the investment of cash collateral or 10% of the loan fees posted by borrowers. In addition, the Manager is compensated through the Administrative Services Agreement as described below for other services provided. Each Management Agreement will continue in effect provided that annually such continuance is specifically approved by a vote of the Board and the AMR Trust Board, including the affirmative votes of a majority of the Trustees of each Board who are not parties to the Management Agreement or "interested persons" as defined in the 1940 Act of any such party ("Independent Trustees"), cast in person at a meeting called for the purpose of considering such approval, or by the vote of a Fund's shareholders or a Portfolio's interest holders. A Management Agreement may be terminated with respect to a Fund or a Portfolio at any time, without penalty, by a majority vote of outstanding Fund shares or Portfolio interests on sixty (60) days' written notice to the Manager, or by the Manager, on sixty (60) days' written notice to the Trust or the AMR Trust. A Management Agreement will automatically terminate in the event of its "assignment" as defined in the 1940 Act. The Trust is responsible for expenses not otherwise assumed by the Manager, including the following: audits by independent auditors; transfer agency, custodian, dividend disbursing agent and shareholder recordkeeping services; taxes, if any, and the preparation of each Fund's tax returns; interest; costs of Trustee and shareholder meetings; printing and mailing prospectuses and reports to existing shareholders; fees for filing reports with regulatory bodies and the maintenance of the Funds' existence; legal fees; fees to federal and state authorities for the registration of shares; fees and expenses of Independent Trustees; insurance and fidelity bond premiums; fees paid to consultants providing reports regarding adherence by investment advisers to the investment style of a Portfolio; and any extraordinary expenses of a nonrecurring nature. A majority of the Independent Trustees of the Board have adopted written procedures reasonably appropriate to deal with potential conflicts of interest between the Trust and the AMR Trust. FUND ADVISORY AGREEMENTS -- Each investment adviser, except BT, has entered into a separate investment advisory agreement with the Manager to provide investment advisory services to the Funds and the Portfolios of the AMR Trust. To the extent that a Fund invests all of its investable assets in a corresponding Portfolio, however, an investment adviser will receive an advisory fee only on behalf of the Portfolio and not on behalf of its corresponding Fund. As described below, the assets of the Balanced, the Growth and Income and the International Equity Portfolios are allocated among the investment advisers designated for each Portfolio and the assets of the Intermediate Bond Portfolio are allocated between the Manager and another investment adviser. The Manager is permitted to enter into new or modified advisory agreements with existing or new investment advisers without the approval of Fund shareholders or Portfolio interest holders, but subject to approval of the Board and the AMR Trust Board. The Securities and Exchange Commission issued an exemptive order which eliminates the need for shareholder/interest holder approval, subject to compliance with certain conditions. These conditions include the requirement that within 90 days of hiring a new adviser or implementing a material change with respect to an advisory contract, the applicable Fund send a notice to shareholders containing information about the change that would be included in a proxy statement. The Manager recommends investment advisers to the Board and the AMR Trust Board based upon its continuing quantitative and qualitative evaluation of the investment advisers' skill in managing assets using specific investment styles and strategies. The allocation of assets among investment advisers may be changed at any time by the Manager. Allocations among investment advisers will vary based upon a variety of factors, including the overall investment performance of each investment adviser, the Portfolio's cash flow needs and market conditions. The Manager need not allocate assets to each investment adviser designated for a Portfolio. The investment advisers can be terminated without penalty to the AMR Trust by the Manager, the AMR Trust Board or the interest holders of the applicable Portfolio. Short-term investment performance, by itself, is not a significant factor in selecting or terminating an investment adviser, and the Manager does not expect to recommend frequent changes of investment advisers. The Prospectus will be supplemented if additional investment advisers are retained or the contract with any existing investment adviser is terminated. PROSPECTUS 26 80 Each investment adviser has discretion to purchase and sell securities for its segment of a Portfolio's assets in accordance with that Portfolio's objectives, policies and restrictions and the more specific strategies provided by the Manager. Although the investment advisers are subject to general supervision by the AMR Trust Board, the Equity 500 Index Portfolio Board and the Manager, as appropriate, these parties do not evaluate the investment merits of specific securities transactions. As compensation for its services, each investment adviser, except BT, is paid a fee by the Manager out of the proceeds of the management fee received by the Manager from the AMR Trust. ADMINISTRATIVE SERVICES AGREEMENTS -- The Manager and the Trust entered into an Administrative Services Agreement which obligates the Manager to provide the Funds those administrative and management services (other than investment advisory services) described in the Management Agreement. As compensation for these services, the Manager receives an annualized fee of 0.25% of the net assets of the PlanAhead Class of the Variable NAV Funds and 0.05% of the net assets of the PlanAhead Class of the Money Market Funds. The fee is payable quarterly in arrears. BT serves as the administrator to the Equity 500 Index Portfolio. Under an Administration and Services Agreement with the Portfolio, BT calculates the value of the assets of the Portfolio and generally assists the Equity 500 Index Portfolio Board in all aspects of the administration and operation of the Portfolio. The Administration and Services Agreement provides for the Portfolio to pay BT a fee, computed daily and paid monthly, at the rate of 0.05% of the average daily net assets of the Portfolio. Under the Administration and Services Agreement, BT may delegate one or more of its responsibilities to others, including Federated Services Company, at BT's expense. DISTRIBUTION OF TRUST SHARES -- Shares are distributed through the Funds' principal underwriter, Brokers Transaction Services, Inc. ("BTS"). BTS is compensated by the Manager, and not the Trust. The Trust does not incur any direct distribution expenses relating to the PlanAhead Class. However, the Trust has adopted a Distribution Plan in accordance with Rule 12b-1 under the 1940 Act which authorizes the use of any fees received by the Manager in accordance with the Administrative Services and the Management Agreements and any fees received by the investment advisers pursuant to their Advisory Agreements with the Manager, to be used for distribution purposes. SERVICE PLAN -- The PlanAhead Class has adopted a service plan ("Service Plan") which provides that each Fund's PlanAhead Class will pay 0.25% per annum of its average daily net assets to the Manager (or another entity approved by the Board). The Manager or these approved entities may spend such amounts on any activities or expenses primarily intended to result in or relate to the servicing of PlanAhead Class shares including but not limited to payment of shareholder service fees and transfer agency or sub-transfer agency expenses. The fee, which is included as part of a Fund's "Other Expenses" in the Table of Fees and Expenses of this Prospectus, will be payable monthly in arrears without regard to whether the amount of the fee is more or less than the actual expenses incurred in a particular month by the entity for the services provided pursuant to the Service Plan. The primary expenses expected to be incurred under the Service Plan are transfer agency fees and servicing fees paid to financial intermediaries such as plan sponsors and discount brokers. The Service Plan will continue in effect so long as its continuance is approved at least annually by a majority of the Trustees, including the affirmative votes of a majority of the Trustees of the Board who are not parties to the Service Plan or "interested persons" (as defined in the 1940 Act) of any such party, cast in person at a meeting called for the purpose of considering such approval, or by the vote of shareholders. The Service Plan may be terminated with respect to a particular PlanAhead Class at any time, without the payment of any penalty, by a vote of a majority of the Independent Trustees or by a vote of a majority of the outstanding voting securities of the applicable Fund's PlanAhead Class. PROSPECTUS 27 81 ALLOCATION OF FUND EXPENSES -- Expenses of each Fund generally are allocated equally among the shares of that Fund, regardless of class. However, certain expenses approved by the Board will be allocated solely to the class to which they relate. PRINCIPAL UNDERWRITER -- BROKERS TRANSACTION SERVICES, INC. ("BTS"), 7001 Preston Road, Dallas, Texas 75205, serves as the principal underwriter of the Trust. CUSTODIAN -- STATE STREET BANK & TRUST COMPANY ("State Street"), Boston, Massachusetts, serves as custodian for the Portfolios of the AMR Trust and the Funds. BANKERS TRUST COMPANY, New York, New York, serves as custodian and transfer agent for the assets of the Equity 500 Index Portfolio. TRANSFER AGENT -- State Street serves as transfer agent and provides transfer agency services for Fund shareholders through its affiliate NATIONAL FINANCIAL DATA SERVICES, ("NFDS"), Kansas City, Missouri. INDEPENDENT AUDITOR -- The independent auditor for the Funds except the S&P 500 Index Fund and the AMR Trust is ERNST & YOUNG LLP, Dallas, Texas. The independent auditor for the S&P 500 Index Fund and the Equity 500 Index Portfolio is COOPERS & LYBRAND L.L.P., Kansas City, Missouri. INVESTMENT ADVISERS Set forth below is a brief description of the investment advisers for each Fund and its corresponding Portfolio, except for the Money Market Funds and their corresponding Portfolios, whose sole investment adviser is the Manager. References to the investment advisers retained by a Portfolio also apply to the corresponding Fund. Except for the Manager and BT, none of the investment advisers provides any services to the Funds or the Portfolios except for portfolio investment management and related recordkeeping services, or has any affiliation with the Trust, the AMR Trust, the Equity 500 Index Portfolio or the Manager. BT provides investment advisory, administrative and other services to the Equity 500 Index Portfolio. See "Bankers Trust Company" below for a discussion of those services. William F. Quinn has served as President of the Manager since it was founded in 1986, and Nancy A. Eckl serves as Vice President - Trust Investments of the Manager. Ms. Eckl previously served as Vice President - Finance and Compliance of the Manager from December 1990 to May 1995. In these capacities, Mr. Quinn and Ms. Eckl have primary responsibility for the day-to-day operations of the Balanced Fund, the Growth and Income Fund, the International Equity Fund, the Intermediate Bond Fund and their corresponding Portfolios. These responsibilities include oversight of the investment advisers, regular review of each investment adviser's performance and asset allocations among them. Michael W. Fields is responsible for the portfolio management oversight of the Short-Term Bond Fund and its corresponding Portfolio as well as the portion of the Intermediate Bond Fund and its corresponding Portfolio allocated to the Manager. Mr. Fields has been with the Manager since it was founded in 1986 and serves as Vice President-Fixed Income Investments. Benjamin L. Mayer is responsible for the day-to-day portfolio management of these Funds and Portfolios. Mr. Mayer has served as Senior Portfolio Manager of the Manager since May 1995. Prior to that time, he was a Vice President of Institutional Fixed Income Sales at Merrill, Lynch, Pierce, Fenner & Smith from January 1994 to April 1995 and Vice President, Regional Senior Strategist from April 1989 to January 1994. Frank Salerno, Managing Director of BT, is responsible for the day-to-day management of the Equity 500 Index Portfolio. Mr. Salerno has been employed by BT since prior to 1989 and has managed the Equity 500 Index Portfolio's assets since the Portfolio commenced operations December 31, 1992. BANKERS TRUST COMPANY, 130 Liberty Street (One Bankers Trust Plaza), New York, New York 10006, is a New York banking corporation and is a wholly owned subsidiary of Bankers Trust New York Corporation. BT PROSPECTUS 28 82 conducts a variety of general banking and trust activities and is a major wholesale supplier of financial services to the international and domestic institutional market, with a global network of over 90 offices in more than 50 countries. As of September 30, 1997, Bankers Trust New York Corporation was the seventh largest bank holding company in the United States with total assets of approximately $100 billion and approximately $300 billion in assets under management globally. Of that total, approximately $143 billion are in U.S. equity index assets alone. BT serves as investment adviser and administrator to the Equity 500 Index Portfolio. For its services, BT receives a fee from the Equity 500 Index Portfolio, computed daily and paid monthly, at the annual rate of 0.10% of the average daily net assets of the Portfolio, of which BT is currently waiving 0.05%. BARROW, HANLEY, MEWHINNEY & STRAUSS, INC. ("Barrow"), 3232 McKinney Avenue, 15th Floor, Dallas, Texas 75204, is a professional investment counseling firm which has been providing investment advisory services since 1979. The firm is wholly owned by United Asset Management Corporation, a Delaware corporation. As of December 31, 1997, Barrow had discretionary investment management authority with respect to approximately $28.8 billion of assets, including approximately $1.9 billion of assets of AMR and its subsidiaries and affiliated entities. Barrow serves as an investment adviser to the Balanced Portfolio, the Growth and Income Portfolio, the Intermediate Bond Portfolio and the Short-Term Bond Portfolio, although the Manager does not presently intend to allocate any of the assets in the Short-Term Bond Portfolio to Barrow. The Manager pays Barrow an annualized fee equal to .30% on the first $200 million in AMR Trust assets under its discretionary management, .20% on the next $300 million, .15% on the next $500 million and .125% on assets over $1 billion. BRANDYWINE ASSET MANAGEMENT, INC., ("Brandywine"), 201 North Walnut Street, Wilmington, Delaware 19801, is a professional investment counseling firm founded in 1986. Brandywine is a wholly owned subsidiary of Legg Mason, Inc. As of December 31, 1997, Brandywine had assets under management totaling approximately $7.5 billion, including approximately $894 million of assets of AMR and its subsidiaries and affiliated entities. Brandywine serves as an investment adviser to the Balanced and the Growth and Income Portfolios. The Manager pays Brandywine an annualized fee equal to .225% of assets in the Balanced Portfolio and .25% of assets in the Growth and Income Portfolio of the first $500 million of AMR Trust assets under its discretionary management, .225% of the next $100 million on all assets and .20% on all excess assets. GSB INVESTMENT MANAGEMENT, INC. ("GSB"), 301 Commerce Street, Fort Worth, Texas 76102, is a professional investment management firm which was founded in 1987 by Frank P. Ganucheau, Mark J. Stupfel, and Lyle E. Brumley. GSB is wholly owned by United Asset Management Corporation, a Delaware corporation. As of December 31, 1997, GSB managed approximately $3.5 billion of assets, including approximately $905 million of assets of AMR and its subsidiaries and affiliated entities. GSB serves as an investment adviser to the Balanced Portfolio and the Growth and Income Portfolio. The Manager pays GSB an annualized fee equal to .30% of the first $100 million in AMR Trust assets under its discretionary management, .25% of the next $100 million, .20% of the next $100 million and .15% on all excess assets. HOTCHKIS AND WILEY, 800 West Sixth Street, 5th Floor, Los Angeles, California 90017, is a professional investment counseling firm which was founded in 1980 by John F. Hotchkis and George Wiley. Hotchkis and Wiley is a division of the Capital Management Group of Merrill Lynch Asset Management, L.P., a wholly owned indirect subsidiary of Merrill Lynch & Co., Inc. Assets under management as of December 31, 1997 were approximately $12.3 billion, which included approximately $1.1 billion of assets of AMR and its subsidiaries and affiliated entities. Hotchkis and Wiley serves as an investment adviser to the Balanced Portfolio, the Growth and Income Portfolio and the International Equity Portfolio. The Manager pays Hotchkis and Wiley an annualized fee equal to .60% of the first $10 million of AMR Trust assets under its discretionary management, .50% of the next $140 million of assets, .30% on the next $50 million of assets, .20% of the next $800 million of assets and .15% of all excess assets. INDEPENDENCE INVESTMENT ASSOCIATES, INC. ("IIA"), 53 State Street, Boston, Massachusetts 02109, is a professional investment counseling firm which was founded in 1982. The firm is a wholly owned subsidiary of John Hancock Mutual Life Insurance Company. Assets under management as of December 31, 1997, including funds managed for its parent company, were approximately $26.7 billion, which included approximately PROSPECTUS 29 83 $1.1 billion of assets of AMR and its subsidiaries and affiliated entities. IIA serves as an investment adviser to the Balanced Portfolio and the Growth and Income Portfolio. The Manager pays IIA an annualized fee equal to .50% of the first $30 million of AMR Trust assets under its discretionary management, .25% of the next $70 million of assets and .20% of all excess assets. MORGAN STANLEY ASSET MANAGEMENT INC. ("MSAM"), 25 Cabot Square, London, United Kingdom, E14 4QA, is a wholly owned subsidiary of Morgan Stanley, Dean Witter, Discover & Co. MSAM provides portfolio management and named fiduciary services to taxable and nontaxable institutions, international organizations and individuals investing in United States and international equity and debt securities. As of September 30, 1997, MSAM, together with its other asset management affiliates, had assets under management (including assets under fiduciary advisory control) totaling approximately $142.5 billion, including approximately $112.3 billion under active management and $20.2 billion as named fiduciary or fiduciary adviser. As of December 31, 1997, MSAM had investment authority over approximately $561.9 million of assets of AMR and its subsidiaries and affiliated entities. MSAM serves as an investment adviser to the International Equity Portfolio. The Manager pays MSAM an annual fee equal to .80% of the first $25 million of AMR Trust assets under its discretionary management, .60% of the next $25 million in assets, .50% of the next $25 million in assets and .40% on all excess assets. TEMPLETON INVESTMENT COUNSEL, INC. ("Templeton"), 500 East Broward Blvd., Suite 2100, Fort Lauderdale, Florida 33394-3091, is a professional investment counseling firm which has been providing investment services since 1979. Templeton is indirectly owned by Franklin Resources, Inc. As of December 31, 1997, Templeton had discretionary investment management authority with respect to approximately $21.7 billion of assets, including approximately $511.6 million of assets of AMR and its subsidiaries and affiliated entities. Templeton serves as an investment adviser to the International Equity Portfolio. The Manager pays Templeton an annualized fee equal to .50% of the first $100 million of AMR Trust assets under its discretionary management, .35% of the next $50 million of assets, .30% of the next $250 million of assets and .25% on assets over $400 million. Solely for the purpose of determining the applicable percentage rates when calculating the fees for each investment adviser other than MSAM and BT, there shall be included all other assets or trust assets of American Airlines, Inc. also under management by each respective investment adviser (except assets managed by Barrow under the HALO Bond Program). For the purpose of determining the applicable percentage rates when calculating MSAM's fees, all equity account assets managed by MSAM on behalf of American Airlines, Inc. shall be included. The inclusion of any such assets will result in lower overall fee rates being applied to the applicable Portfolio. HOW TO PURCHASE SHARES Shares are offered on a continuous basis. Purchase orders should be directed to NFDS either by mail, by pre-authorized investment or by wire as described below. The minimum initial purchase for each Fund is $2,500, except for IRA accounts for which a $2,000 minimum applies. The Funds have no obligation to accept purchase requests or maintain accounts which do not meet minimum purchase requirements. Accounts opened through financial intermediaries may be subject to lower or higher minimums. The minimum for subsequent purchases is $50, except for wire purchases for which a $500 minimum applies. Shares purchased through financial intermediaries may be subject to transaction fees. The management of the Fund reserves the right to waive or change the minimum investment requirements and to charge an annual fee of $12 (to offset the costs of servicing accounts with low balances) if an account balance falls below certain asset levels. An order to purchase shares of a Variable NAV Fund will be executed at the next share price calculated Monday through Friday on each day on which the Exchange is open for trading, which excludes the following business holidays: New Year's Day, Martin Luther King's Birthday, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day ("Business Day"). Shares of the Variable NAV Funds are offered and purchase orders are accepted until the close of the Exchange, generally 4:00 p.m. PROSPECTUS 30 84 Eastern time, on each Business Day. An order to purchase shares of the Money Market Funds will be executed at the Fund's next determined net asset value per share on any day on which the Exchange is open for business except for Columbus Day and Veteran's Day ("Money Market Business Day") and during which federal funds become available to the Fund. Shares are offered and orders are accepted for the Municipal Money Market Fund until 11:45 a.m. Eastern time, or the close of the Exchange (whichever comes first); for the U.S. Government Money Market Fund until 2:00 p.m. Eastern time, or the close of the Exchange (whichever comes first) and for the Money Market Fund until 3:00 p.m. Eastern time, or the close of the Exchange (whichever comes first), on each Money Market Business Day. The Trust reserves the right to reject any order for the purchase of shares and to limit or suspend, without prior notice, the offering of shares. "Federal funds" are funds deposited by a commercial bank in an account at a federal reserve bank that can be transferred to a similar account of another bank in one day and thus may be made immediately available to a Money Market Fund through its custodian. OPENING AN ACCOUNT -- A completed and signed PlanAhead Class application is required for each new account opened, regardless of the method chosen for making an initial investment. If assistance is required in filling out the application, or if extra applications are required, call (800) 388-3344. See "Retirement Accounts" for information on opening retirement accounts. PURCHASING BY MAIL -- To open an account by mail, complete the application form, include a check payable to the American AAdvantage Funds ($2,500 minimum or $2,000 for IRAs) and mail both to: American AAdvantage Funds c/o NFDS P.O. Box 419643 Kansas City, MO 64141-6643 Purchase checks are accepted subject to collection at full face value in U.S. funds and must be drawn in U.S. dollars on a U.S. bank. The Funds will not accept "starter" checks or third party checks. If your order to purchase shares of a Fund is canceled because your check does not clear, you will be responsible for any resulting loss incurred by the Fund. For subsequent purchases by mail make your check payable to the American AAdvantage Funds ($50 minimum) and include your account number on your check. Mail to the address printed above. Include either the detachable form from your account statement, the deposit slips from your checkbook (if you have a Money Market account and opted for checking) or a letter with the account name and number. SUBSEQUENT PURCHASES BY PRE-AUTHORIZED AUTOMATIC INVESTMENT -- Pre-Authorized Automatic Investment allows you to make monthly or quarterly, automatic transfers ($50 minimum) from your bank account to purchase shares in the Fund of your choice after an account has been open. To establish this option, provide the appropriate information on the application form and attach a voided check from your bank account. Funds will be transferred automatically from your bank account via Automated Clearing House ("ACH") on the 5th day of each month or quarter. PURCHASES BY WIRE -- A completed application form must precede an initial purchase by wire. Call (800) 388-3344 to wire funds. Federal funds ($2,500 for initial purchases or $2,000 for IRAs and $500 for subsequent purchases) should be wired to: State Street Bank & Trust Co. ABA Routing #0110-0002-8, AC-9905-342-3 Attention: American AAdvantage Funds-PlanAhead Class, and specify the Fund to be purchased. You will be responsible for any charges assessed by your bank to handle wire transfers. HOW TO REDEEM SHARES Shares of the Variable NAV Funds may be redeemed by telephone, by pre-authorized automatic redemption or by mail on any Business Day. Shares of the Money Market Funds may be redeemed by telephone, by writing a PROSPECTUS 31 85 check, by pre-authorized automatic redemption or by mail on any Money Market Business Day. Shares will be redeemed at the net asset value next calculated after the applicable Fund has received and accepted the redemption request. Proceeds from a redemption of shares purchased by check or pre-authorized automatic purchase may be withheld until the funds have cleared, which may take up to 15 days. Although the Funds intend to redeem shares in cash, each Fund reserves the right to pay the redemption price in whole or in part by a distribution of readily marketable securities held by the applicable Fund's corresponding Portfolio. See the SAI for further information concerning redemptions in kind. Redemption proceeds generally will be sent within one Business Day or Money Market Business Day, as applicable. However, if making immediate payment could affect a Fund adversely, it may take up to seven days to send payment. A minimum of $2,500 ($2,000 for IRAs) is required in order to maintain an account in a Fund. Otherwise, a Fund may give a shareholder 60 days' notice to increase the account balance to this level in order to avoid the imposition of an account fee or account closure. If a shareholder does not increase the account balance to $2,500 within the 60 day period, the Fund is entitled to close the account and mail the proceeds to the address of record. To ensure timely acceptance of a redemption request, please adhere to the following procedures. REDEEMING BY TELEPHONE -- Shares may be redeemed by telephone if your account application reflects that option. Telephone redemptions in any 30 day period shall not exceed $25,000 without the express written consent of the Trust. In order to redeem by telephone, you should call NFDS at (800) 388-3344. Redemption proceeds will be mailed only to the address of record or mailed or wired to a commercial bank account designated on the account application. By establishing the telephone redemption service, you authorize the Funds or their agent to act upon verbal instructions to redeem shares for any account for which such service has been authorized. In an effort to prevent unauthorized or fraudulent redemption requests by telephone, NFDS will employ reasonable procedures specified by the Funds to confirm that such instructions are genuine. For instance, all telephone redemption requests will be recorded and proceeds of telephone redemption requests will be sent only to the address or account designated in the application. Neither the Funds, the Trusts, the Equity 500 Index Portfolio, the Manager, State Street, NFDS, or their trustees, directors or officers will be liable for any unauthorized or fraudulent redemption instructions received by telephone. Due to the volume of calls or other unusual circumstances, telephone redemptions may be difficult to implement during certain time periods. This service may be amended or terminated at any time by the transfer agent or the Trust without prior notice. REDEEMING BY CHECK -- If you elect so on the application, shares of the Money Market Funds may be redeemed through the check writing feature. There is no limit on the number of checks written per month and no check redemption fees. Checks must be written in amounts of $100 or more. Check drafts however, are not returned to you. If copies of drafts are required, a service charge of $2 per check will be assessed to you. PRE-AUTHORIZED AUTOMATIC REDEMPTIONS -- You can arrange to have a pre-authorized amount ($100 or more) redeemed from your account and automatically deposited into a bank account, via ACH, on the 15th day of each month. For more information regarding pre-authorized automatic redemptions, contact NFDS at (800) 388-3344. REDEEMING BY MAIL -- Except for certain intermediary accounts, a letter of instruction may be mailed to American AAdvantage Funds -- PlanAhead Class, c/o NFDS, P.O. Box 419643, Kansas City, MO 64141-6643 to redeem shares. The letter should specify the Fund (Balanced, Growth and Income, International Equity, S&P 500 Index, Intermediate Bond, Short-Term Bond, Money Market, Municipal Money Market or U.S. Government Money Market Fund), the number of shares or dollar amount to be redeemed, the shareholder's name and account number. The letter of instruction must be signed by all persons required to sign for the account, exactly as it is registered. For redemption requests over $25,000 seeking (i) authorization to send redemption proceeds to PROSPECTUS 32 86 an address other than the address of record or to a commercial bank account other than the account designated on the application, or (ii) redemptions for an account whose address of record has been changed within thirty days, the letter of instruction must be accompanied by a signature guarantee by a financial institution satisfying the standards established by NFDS. REDEEMING BY WIRE -- Shares may be redeemed by wire if your account application reflects that option. Redemption proceeds will be transmitted directly to your predesignated account at a domestic bank upon request, for amounts of at least $500. In order to redeem by wire, call (800) 388-3344. Your account will be charged $10 for wire redemptions to cover transaction costs. FULL REDEMPTIONS -- Unpaid dividends credited to an account up to the date of redemption of all shares of a Money Market Fund generally will be paid at the time of redemption. RETIREMENT ACCOUNTS Individual retirement accounts, including SEPs and Keoghs, are eligible investors in the PlanAhead Class. State Street generally serves as custodian for retirement accounts in the PlanAhead Class. A special retirement account application is required in order to open this type of account. Each shareholder is charged an administrative fee of $12.00 per year for each retirement account regardless of the number of Funds. To receive a retirement account application, or if you have any questions about establishing this type of account, call NFDS at (800) 388-3344. EXCHANGE PRIVILEGE PlanAhead Class shares which have been registered in a shareholder's name for at least 15 days may be exchanged into shares of the PlanAhead Class of another Fund. A minimum exchange of $50 is required into existing accounts. If a shareholder wishes to establish a new account in the PlanAhead Class of another Fund by making an exchange, a $2,500 minimum is required. Except for certain intermediary accounts, shareholders may exchange shares by sending the Funds a written request or by calling NFDS at (800) 388-3344. The exchange will be processed at the next share price calculated after the request is received in good order by the Funds. In establishing a telephone exchange service, shareholders authorize the Funds or their agent to act upon verbal instructions to exchange shares from any account for which such service is authorized to any identically registered PlanAhead Class account(s). NFDS will use reasonable procedures specified by the Funds to confirm that such instructions are genuine such as the recording of all telephone exchange requests. If reasonable procedures as described above are implemented, neither the Funds, the Trusts, the Equity 500 Index Portfolio, the Manager, State Street, NFDS, nor their trustees, directors or officers will be liable for any unauthorized or fraudulent instructions. The general redemption policies apply to redemptions by telephone exchange. The exchange privilege may be modified or terminated at any time by the Funds. The Funds reserve the right to limit the number of exchanges an investor may exercise. VALUATION OF SHARES The net asset value of each share (share price) of the Variable NAV Funds is determined as of the close of the Exchange, generally 4:00 p.m. Eastern time, on each Business Day and the net asset value of each share of the Money Market Funds is determined as of the close of the Exchange, generally 4:00 p.m. Eastern time, on each Money Market Business Day. The net asset value of all outstanding shares of a Fund will be determined by computing the Fund's total assets (which is the value of the Fund's investment in its corresponding Portfolio), subtracting all of the Fund's liabilities, and dividing the result by the total number of Fund shares outstanding at such time. The net asset value of shares of the PlanAhead Class will be determined based on a pro rata allocation PROSPECTUS 33 87 of the value of the Fund's corresponding Portfolio's investment income, expenses and total capital gains and losses. The allocation will be based on comparative net asset value at the beginning of the day except for expenses related solely to one class of shares ("Class Expenses") which will be borne only by the appropriate class of shares. Because of the Class Expenses, the net income attributable to and the dividends payable may be different for each class of shares. Additionally, the Variable NAV Funds may compute differing share prices as a result of Class Expenses. Equity securities listed on securities exchanges, including all but United Kingdom securities of the International Equity Portfolio, are valued at the last quoted sales price on a designated exchange prior to the close of trading on the Exchange or, lacking any sales, on the basis of the last current bid price prior to the close of trading on the Exchange. Securities of the United Kingdom held in the International Equity Portfolio are priced at the last jobber price (mid of the bid and offer prices quoted by the leading stock jobber in the security) prior to close of trading on the Exchange. Trading in foreign markets is usually completed each day prior to the close of the Exchange. However, events may occur which affect the values of such securities and the exchange rates between the time of valuation and the close of the Exchange. Should events materially affect the value of such securities during this period, the securities are priced at fair value, as determined in good faith and pursuant to procedures approved by the AMR Trust Board. Over-the-counter equity securities are valued on the basis of the last bid price on that date prior to the close of trading. Debt securities (other than short-term securities) will normally be valued on the basis of prices provided by a pricing service and may take into account appropriate factors such as institution-size trading in similar groups of securities, yield, quality, coupon rate, maturity, type of issue, trading characteristics and other market data. In some cases, the prices of debt securities may be determined using quotes obtained from brokers. Securities for which market quotations are not readily available are valued at fair value, as determined in good faith and pursuant to procedures approved by the AMR Trust Board for the AMR Trust Portfolios. Assets and liabilities denominated in foreign currencies and forward currency contracts are translated into U.S. dollar equivalents based on prevailing market rates. Portfolio obligations held by the Money Market Portfolios are valued in accordance with the amortized cost method, which is designed to enable those Portfolios and their corresponding Funds to maintain a consistent $1.00 per share net asset value. Investment grade short-term obligations with 60 days or less to maturity held by all other Portfolios also are valued using the amortized cost method as described in the SAI. DIVIDENDS, OTHER DISTRIBUTIONS AND TAX MATTERS DIVIDENDS AND OTHER DISTRIBUTIONS -- Dividends and other distributions paid on each class of a Fund's shares are calculated at the same time and in the same manner. Dividends from the net investment income of the Balanced Fund, the Growth and Income Fund and the International Equity Fund normally are declared annually. Dividends consisting of substantially all of the net investment income of the Intermediate Bond Fund and the Short-Term Bond Fund, which are paid monthly, normally are declared on each Business Day immediately prior to the determination of the net asset value and are payable to shareholders of record as of the close of business on the day on which declared. The S&P 500 Index Fund distributes income dividends on the first Business Day in April, July and October. In December, the S&P 500 Index Fund will distribute another income dividend, plus any capital gains. Each Fund may make an additional dividend or other distribution, if necessary, to avoid a 4% excise tax on certain undistributed income and gain. A Fund's net investment income attributable to the PlanAhead Class consists of that class's pro rata share of the Fund's share of dividends and interest (including discount) accrued on its corresponding Portfolio's securities, less applicable expenses of the Fund and the Portfolio attributable to the PlanAhead Class. Distributions of a Fund's share of its corresponding Portfolio's realized net short-term capital gain, net capital gain (the excess of net long-term capital gain over net short-term capital loss), and net gains from foreign currency transactions, if any, normally will be made annually. All of each Money Market Fund's net investment income and net short-term capital gain, if any, generally is declared as dividends on each Money Market Business Day immediately prior to the determination of the net asset value. Dividends generally will be paid on the first day of the following month. Each Money Market Fund's net investment income attributable to the PlanAhead Class will consist of (1) that class' pro rata share of the PROSPECTUS 34 88 Fund's share of interest accrued and discount earned on its corresponding Portfolio's securities less amortization of premium and expenses of both the Portfolio and (2) the Fund's expenses attributable to the PlanAhead Class. The Money Market Portfolios do not expect to realize net capital gain, and, therefore, the Money Market Funds do not foresee paying any capital gain distributions. If any Money Market Fund (either directly or indirectly through its corresponding portfolio) incurs or anticipates any unusual expenses, loss or depreciation that would affect its net asset value or income for a particular period adversely, the Board would at that time consider whether to adhere to the dividend policy described above or to revise it in the light of the then prevailing circumstances. Unless a shareholder elects otherwise on the account application, all dividends and other distributions on a Fund's PlanAhead Class shares will be automatically paid in additional PlanAhead Class shares of that Fund. However, a shareholder may choose to have distributions of net capital gain (and, if applicable, net foreign currency gains) paid in shares and dividends paid in cash or to have all such distributions and dividends paid in cash. An election may be changed at any time by delivering written notice that is received by the transfer agent at least ten days prior to the payment date for a dividend or other distribution. TAX INFORMATION -- Each Fund is treated as a separate corporation for federal income tax purposes and intends to qualify or to continue to qualify for treatment as a regulated investment company under the Internal Revenue Code of 1986, as amended. In each taxable year that a Fund so qualifies, the Fund (but not its shareholders) will be relieved of federal income tax on that part of its investment company taxable income (generally, net investment income plus any net short-term capital gain and gains from certain foreign currency transactions) and net capital gain that it distributes to its shareholders. However, a Fund will be subject to a nondeductible 4% excise tax to the extent that it fails to distribute by the end of any calendar year substantially all of its ordinary income for that calendar year and its capital gain net income for the one-year period ending on October 31 of that year, plus certain other amounts. For these and other purposes, dividends and other distributions declared by a Fund in October, November or December of any year and payable to shareholders of record on a date in one of those months will be deemed to have been paid by the Fund and received by the shareholders on December 31 of that year if they are paid by the Fund during the following January. Each Portfolio has received a ruling from the Internal Revenue Service or an opinion of counsel that it is or should be classified for federal income tax purposes as a partnership; accordingly, no Portfolio is subject to federal income tax. Dividends from a Fund's investment company taxable income are taxable to its shareholders as ordinary income to the extent of the Fund's earnings and profits, whether received in cash or paid in additional Fund shares. Distributions of a Fund's net capital gain (whether received in cash or paid in additional Fund shares), when designated as such, generally are taxable to its shareholders as long-term capital gain, regardless of how long they have held their Fund shares. A capital gain distribution from a Fund also may be offset by capital losses from other sources. Under the Taxpayer Relief Act of 1997, different maximum tax rates apply to a noncorporate taxpayer's net capital gain depending on the taxpayer's holding period and marginal rate of federal income tax -- generally, 28% for gain recognized on securities held for more than one year but not more than 18 months and 20% (10% for taxpayers in the 15% marginal tax bracket) for gain recognized on securities held for more than 18 months. Pursuant to an Internal Revenue Service notice, the Fund may divide each net capital gain distribution into a 28% rate gain distribution and a 20% rate gain distribution (in accordance with the Fund's holding periods for the securities it sold that generated the distributed gain) and its shareholders must treat those portions accordingly. Some foreign countries may impose income or withholding taxes on certain dividends payable to the International Equity Portfolio. The International Equity Fund's share of any such withheld taxes may be treated by that Fund as a deduction or, if it satisfies certain requirements, it may elect to flow the tax through to its shareholders, who in turn may deduct the taxes or use them in calculating credits against their federal income tax. A portion of the income dividends paid by the Balanced Fund, the Growth and Income Fund and the S&P 500 Index Fund is eligible for the dividends-received deduction allowed to corporations. The eligible portion may not exceed the respective Fund's aggregate dividends received from U.S. corporations. However, dividends PROSPECTUS 35 89 received by a corporate shareholder and deducted by it pursuant to the dividends-received deduction may be subject indirectly to the AMT. The International Equity Fund's dividends most likely will not qualify for the dividends-received deduction because none of the dividends received by that Fund are expected to be paid by U.S. corporations. Distributions by the Municipal Money Market Fund that it designates as "exempt-interest dividends" generally may be excluded from gross income by its shareholders. If the Municipal Money Market Portfolio earns taxable income from any of its investments, the Municipal Money Market Fund's share of income will be distributed to its shareholders as a taxable dividend. To the extent that Portfolio invests in certain private activity obligations, that Fund's shareholders will be required to treat a portion of its dividends as a "tax preference item" in determining their liability for the AMT. Exempt-interest dividends also may be subject to state and local income tax laws. Because some states exempt from income tax the interest on their own obligations and obligations of governmental agencies of and municipalities in the state, shareholders will receive tax information each year regarding the Municipal Money Market Fund's exempt-interest income by state. Interest on indebtedness incurred or continued by a shareholder to purchase or carry shares of that Fund is not deductible. Redemption of Fund shares (other than shares of the Money Market Funds) may result in taxable gain or loss to the redeeming shareholder, depending upon whether the redemption proceeds exceed or are less than the shareholder's adjusted basis for the redeemed shares. An exchange of shares of a Fund for shares of any other Fund (see "Exchange Privileges") generally will have similar tax consequences. If shares of a Fund are sold at a loss after being held for six months or less, the loss will be treated as long-term, instead of short-term, capital loss to the extent of any capital gain distributions received on those shares. If shares are purchased shortly before the record date for a dividend (other than an exempt-interest dividend) or other distribution, the investor will pay full price for the shares and receive some portion of the price back as a taxable distribution. Each Fund notifies its shareholders following the end of each calendar year of the amounts of dividends and capital gain distributions paid (or deemed paid) (and for the International Equity Fund, if it satisfies the requirements and makes the election referred to above, their share of that Fund's share of any foreign taxes paid by the International Equity Portfolio) that year and of any portion of those dividends that qualifies for the corporate dividends-received deduction. The information regarding capital gain distributions designates the portions thereof subject to the different maximum rates of tax applicable to noncorporate taxpayers' net capital gain indicated above. The notice sent by the Municipal Money Market Fund specifies the amounts of exempt-interest dividends (and the portion thereof, if any, that is a tax preference item for purposes of the AMT) and any taxable dividends. Each Fund is required to withhold 31% of all taxable dividends, and, for all Funds other than the Money Market Funds, capital gain distributions and redemption proceeds payable to any individuals and certain other non-corporate shareholders who do not provide the Fund with a correct taxpayer identification number or (except with respect to redemption proceeds) who otherwise are subject to back-up withholding. The foregoing is only a summary of some of the important tax considerations generally affecting the Funds and their shareholders. Prospective investors are urged to consult their own tax advisers regarding specific questions as to the effect of federal, state or local income taxes on any investment in the Trust. For further tax information, see the SAI. GENERAL INFORMATION The Trust currently is comprised of ten separate investment portfolios. Each Fund included in this Prospectus is comprised of three classes of shares, which can be issued in an unlimited number. Each share represents an equal proportionate beneficial interest in that Fund and is entitled to one vote. Only shares of a particular class may vote on matters affecting that class. Only shares of a particular Fund may vote on matters PROSPECTUS 36 90 affecting that Fund. All shares of the Trust vote on matters affecting the Trust as a whole. Share voting rights are not cumulative, and shares have no preemptive or conversion rights. Shares of the Trust are nontransferable. Each series in the Trust will not be involved in any vote involving a Portfolio in which it does not invest its assets. Shareholders of all of the series of the Trust, however, will vote together to elect Trustees of the Trust and for certain other matters. Under certain circumstances, the shareholders of one or more series could control the outcome of these votes. On most issues subjected to a vote of a Portfolio's interest holders, as required by the 1940 Act, its corresponding Fund will solicit proxies from its shareholders and will vote its interest in the Portfolio in proportion to the votes cast by that Fund's shareholders. Because a Portfolio interest holder's votes are proportionate to its percentage interests in that Portfolio, one or more other Portfolio investors could, in certain instances, approve an action against which a majority of the outstanding voting securities of its corresponding Fund had voted. This could result in that Fund's redeeming its investment in its corresponding Portfolio, which could result in increased expenses for that Fund. Whenever the shareholders of a Fund are called to vote on matters related to its corresponding Portfolio, the Board shall vote shares for which they receive no voting instructions in the same proportion as the shares for which they do receive voting instructions. Any information received from a Portfolio in the Portfolio's report to shareholders will be provided to the shareholders of its corresponding Fund. As a Massachusetts business trust, the Trust is not obligated to conduct annual shareholder meetings. However, the Trust will hold special shareholder meetings whenever required to do so under the federal securities laws or the Trust's Declaration of Trust or By-Laws. Trustees can be removed by a shareholder vote at special shareholder meetings. As more fully described in the SAI, the following persons may be deemed to control certain Funds by virtue of their ownership of more than 25% of the outstanding shares of a Fund as of January 31, 1998: AMERICAN AADVANTAGE BALANCED FUND AMR Corporation and subsidiary companies and Employee Benefit Trusts thereof 81% AMERICAN AADVANTAGE GROWTH AND INCOME FUND AMR Corporation and subsidiary companies and Employee Benefit Trusts thereof 85% AMERICAN AADVANTAGE INTERNATIONAL EQUITY FUND AMR Corporation and subsidiary companies and Employee Benefit Trusts thereof 60% AMERICAN AADVANTAGE S&P 500 INDEX FUND AMR Corporation and subsidiary companies and Employee Benefit Trusts thereof 100% AMERICAN AADVANTAGE SHORT-TERM BOND FUND AMR Corporation and subsidiary companies and Employee Benefit Trusts thereof 72%
The Manager has taken steps that it believes are reasonably designed to address the potential failure of computer programs used by the Manager and the Funds' service providers to address the Year 2000 issue. There can be no assurance that these steps will be sufficient to avoid any adverse impact. SHAREHOLDER COMMUNICATIONS Shareholders will receive periodic reports, including annual and semi-annual reports which will include financial statements showing the results of the Funds' operations and other information. The financial statements of the Funds will be audited by the independent auditors at least annually. Shareholder inquiries and requests for information regarding the other investment companies which also invest in the AMR Trust should be made in writing to the Funds at P.O. Box 619003, MD5645, Dallas/Fort Worth Airport, Texas 75261-9003, or by PROSPECTUS 37 91 calling (800) 388-3344. Shareholder inquiries and requests for information regarding the other investment companies that also invest in the Equity 500 Index Portfolio should be made by calling (800) 730-1313. NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND IN SALES LITERATURE SPECIFICALLY APPROVED BY OFFICERS OF THE TRUST FOR USE IN CONNECTION WITH THE OFFER OF ANY PLANAHEAD CLASS SHARES, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUNDS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN ANY JURISDICTION IN WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFERING MAY NOT LAWFULLY BE MADE. American AAdvantage Funds is a registered service mark of AMR Corporation. PlanAhead Class is a registered service mark and Platinum Class, American AAdvantage Balanced Fund, American AAdvantage Growth and Income Fund, American AAdvantage International Equity Fund, American AAdvantage Intermediate Bond Fund, American AAdvantage Short-Term Bond Fund, American AAdvantage Money Market Fund, American AAdvantage Municipal Money Market Fund and American AAdvantage U.S. Government Money Market Fund are service marks of AMR Investment Services, Inc. PROSPECTUS 38 92 -- NOTES -- 93 American Advantage Funds(R) - PLANAHEAD CLASS(R) - P.O. Box 419643 Kansas City, MO 64141-6643 (800) 388-3344 - PLATINUM CLASS(sm) - P.O. Box 619003 Dallas/Fort Worth Airport, Texas 75261-9003 (800) 967-9009 - INSTITUTIONAL CLASS - P.O. Box 419643 Kansas City, MO 64141-6643 (800) 658-5811 Access our website at www.aafunds.com PLAN-PRO-0398 94 THIS PROSPECTUS contains important information about the AMR Class of the AMERICAN AADVANTAGE FUNDS ("Trust") and the Institutional Class of the S&P 500 Index Fund of the Trust. The Trust is an open-end management investment company comprised of multiple investment portfolios. This Prospectus pertains only to the six funds listed on this cover page (individually referred to as a "Fund" and, collectively, the "Funds"). EACH FUND, EXCEPT THE S&P 500 INDEX FUND, SEEKS ITS INVESTMENT OBJECTIVE BY INVESTING ALL OF ITS INVESTABLE ASSETS IN A CORRESPONDING PORTFOLIO OF THE AMR INVESTMENT SERVICES TRUST ("AMR TRUST"). THE S&P 500 INDEX FUND INVESTS ALL OF ITS INVESTABLE ASSETS IN THE EQUITY 500 INDEX PORTFOLIO. (THE EQUITY 500 INDEX PORTFOLIO AND THE PORTFOLIOS OF THE AMR TRUST ARE REFERRED TO HEREIN INDIVIDUALLY AS A "PORTFOLIO" AND, COLLECTIVELY, THE "PORTFOLIOS.") EACH PORTFOLIO HAS AN INVESTMENT OBJECTIVE IDENTICAL TO THE INVESTING FUND. The investment experience of each Fund will correspond directly with the investment experience of each Portfolio. Each Fund, except the S&P 500 Index Fund, offers the AMR Class of shares to tax exempt retirement and benefit plans of AMR Corporation and its affiliates, and the S&P 500 Index Fund offers the Institutional Class of shares to institutional investors, investing at least $2 million in the Fund. Prospective investors should read this Prospectus carefully before making an investment decision and retain it for future reference. IN ADDITION TO THIS PROSPECTUS, a Statement of Additional Information ("SAI") dated March 1, 1998 has been filed with the Securities and Exchange Commission and is incorporated herein by reference. The SAI contains more detailed information about the Funds. For a free copy of the SAI, call (817) 967-3509. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY SUCH STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. PROSPECTUS March 1, 1998 [AMERICAN AADVANTAGE LOGO] - AMR Class - BALANCED FUND GROWTH AND INCOME FUND INTERNATIONAL EQUITY FUND INTERMEDIATE BOND FUND SHORT-TERM BOND FUND - Institutional Class - S&P 500 INDEX FUND Managed by AMR Investment Services, Inc. 95 The AMERICAN AADVANTAGE BALANCED FUND(SM) ("Balanced Fund") seeks income and capital appreciation by investing all of its investable assets in the Balanced Portfolio of the AMR Trust ("Balanced Portfolio") which in turn primarily invests in equity and debt securities (such as stocks and bonds). The AMERICAN AADVANTAGE GROWTH AND INCOME FUND(SM) ("Growth and Income Fund") seeks long-term capital appreciation and current income by investing all of its investable assets in the Growth and Income Portfolio of the AMR Trust ("Growth and Income Portfolio") which in turn primarily invests in equity securities (such as stocks). The AMERICAN AADVANTAGE INTERNATIONAL EQUITY FUND(SM) ("International Equity Fund") seeks long-term capital appreciation by investing all of its investable assets in the International Equity Portfolio of the AMR Trust ("International Equity Portfolio") which in turn primarily invests in equity securities of issuers based outside the United States (such as foreign stocks). The AMERICAN AADVANTAGE S&P 500 INDEX FUND(1) - INSTITUTIONAL CLASS ("S&P 500 Index Fund") seeks to provide investment results that, before expenses, correspond to the total return of common stocks publicly traded in the United States, as represented by the Standard & Poor's 500 Composite Stock Price Index (the "S&P 500" or "Index"), by investing all of its investable assets in the Equity 500 Index Portfolio which in turn invests in common stocks of companies that compose the S&P 500. The AMERICAN AADVANTAGE INTERMEDIATE BOND FUND(SM) ("Intermediate Bond Fund") and the AMERICAN AADVANTAGE SHORT-TERM BOND FUND(SM) ("Short-Term Bond Fund," formerly the American AAdvantage Limited-Term Income Fund) each seeks income and capital appreciation by investing all of its investable assets in the Intermediate Bond Portfolio of the AMR Trust ("Intermediate Bond Portfolio") and the Short-Term Bond Portfolio of the AMR Trust ("Short-Term Bond Portfolio," formerly the Limited-Term Income Portfolio), respectively, which in turn primarily invest in debt obligations. The Intermediate Bond Fund seeks to maintain a dollar weighted average duration of three to seven years and the Short-Term Bond Fund seeks to maintain a dollar weighted average duration of one to three years. Under a master-feeder operating structure, each Fund seeks its investment objective by investing all of its investable assets in a corresponding Portfolio as described above. Each Portfolio's investment objective is identical to that of its corresponding Fund. Whenever the phrase "all of the Fund's investable assets" is used, it means that the only investment securities that will be held by a Fund will be that Fund's interest in its corresponding Portfolio. AMR Investment Services, Inc. ("Manager") provides investment management and administrative services to the Portfolios, except for the Equity 500 Index Portfolio, and administrative services to the Funds. Bankers Trust Company ("BT") provides investment advisory, administrative and other services to the Equity 500 Index Portfolio. This master-feeder structure is different from that of many other investment companies which directly acquire and manage their own portfolios of securities. Accordingly, investors should carefully consider this investment approach. See "Investment Objectives, Policies and Risks -- Additional Information About the Portfolios." A Fund may withdraw its investment in a corresponding Portfolio at any time if the Trust's Board of Trustees ("Board") determines that it would be in the best interest of that Fund and its shareholders to do so. Upon any such withdrawal, that Fund's assets would be invested in accordance with the investment policies and restrictions described in this Prospectus and the SAI. Table of Fees and Expenses...................................3 Financial Highlights.........................................4 Introduction.................................................9 Investment Objectives, Policies and Risks.......................................................9 Investment Restrictions......................................19 Yields and Total Returns.....................................20 Management and Administration of the Trusts..................20 Investment Advisers..........................................23 Purchase, Redemption and Valuation of Shares......................................................25 Dividends, Other Distributions and Tax Matters.....................................................27 General Information..........................................28 Shareholder Communications...................................29
- --------------- (1) S&P is a trademark of The McGraw-Hill Companies, Inc. and has been licensed for use. "Standard & Poor's(R)", "S&P(R)", "Standard & Poor's 500", "S&P 500(R)", and "500" are all trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use by Bankers Trust Company. The S&P 500 Index Fund is not sponsored, sold or promoted by Standard & Poor's, and Standard & Poor's makes no representation regarding the advisability of investing in that Fund. PROSPECTUS 2 96 TABLE OF FEES AND EXPENSES Annual Operating Expenses (as a percentage of average net assets):
INSTITUTIONAL AMR CLASS CLASS ------------------------------------------------------------------------ ------------- GROWTH AND INTERNATIONAL INTERMEDIATE SHORT-TERM S&P 500 BALANCED FUND INCOME FUND EQUITY FUND BOND FUND(1) BOND FUND INDEX FUND Management Fees 0.33% 0.33% 0.48% 0.25% 0.25% 0.05%(2) 12b-1 Fees 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Other Expenses 0.01% 0.01% 0.10% 0.13% 0.07% 0.15%(3) ---- ---- ---- ---- ---- ---- Total Operating Expenses 0.34% 0.34% 0.58% 0.38% 0.32% 0.20%(4) ==== ==== ==== ==== ==== ====
(1) Because the Intermediate Bond Fund had not commenced active operations prior to October 31, 1997, its Annual Operating Expenses are based on estimates. (2) The investment adviser has voluntarily agreed to waive a portion of its investment advisory fee. Without such waiver, the "Management Fee" would be equal to 0.10%. (3) "Other Expenses" before fee waivers are 0.53%. (4) "Total Operating Expenses" before fee waivers are 0.63%. The above expenses reflect the expenses of each Fund and the Portfolio in which it invests. The Board believes that the aggregate per share expenses of each Fund and its corresponding Portfolio will be approximately equal to the expenses that the Fund would incur if its assets were invested directly in the type of securities held by the Portfolio. The expenses of the S&P 500 Index Fund reflect expenses of the AMR Class of the Fund, whose assets were transferred to the Institutional Class effective March 1, 1998. EXAMPLES An investor in each Fund would directly or indirectly pay on a cumulative basis the following expenses on a $1,000 investment assuming a 5% annual return:
1 YEAR 3 YEARS 5 YEARS 10 YEARS Balanced Fund $3 $11 $ 19 $ 43 Growth and Income Fund 3 11 19 43 International Equity Fund 6 19 32 73 Intermediate Bond Fund 4 12 21 48 Short-Term Bond Fund 3 10 18 41 S&P 500 Index Fund 2 6 11 26
The purpose of the table above is to assist a potential investor in understanding the various costs and expenses to be incurred directly or indirectly as a shareholder in the AMR Class of a Fund or the Institutional Class of the S&P 500 Index Fund. Additional information may be found under "Management and Administration of the Trusts" and "Investment Advisers." THE FOREGOING EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN AND PERFORMANCE MAY BE BETTER OR WORSE THAN THE 5% ANNUAL RETURN ASSUMED IN THE EXAMPLES. PROSPECTUS 3 97 FINANCIAL HIGHLIGHTS The financial highlights in the following tables have been derived from financial statements of the Trust. The financial highlights for each Fund except the S&P 500 Index Fund and the Intermediate Bond Fund, have been audited by Ernst & Young LLP, independent auditors. The financial highlights of the S&P 500 Index Fund have been audited by Coopers & Lybrand, L.L.P., independent auditors. Such information should be read in conjunction with the financial statements and the report of the independent auditors appearing in the Annual Report incorporated by reference in the SAI, which contains further information about performance of the Funds and can be obtained by investors without charge. Financial highlights are not available for the Intermediate Bond Fund because as of October 31, 1997 it had not commenced active operations. (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
BALANCED FUND --------------------------------------------------------------------------------------- AMR CLASS INSTITUTIONAL CLASS(1) ---------------------------------------------------- ------------------------------ PERIOD YEAR ENDED OCTOBER 31, ENDED YEAR ENDED OCTOBER 31, -------------------------------------- OCTOBER 31, ------------------------------ 1997(5) 1996(5)(6) 1995(4)(5) 1994 (1)(3) 1994(3) 1993 1992 --------------------------------------------------------------------------------------- Net asset value, beginning of period $ 15.18 $ 13.98 $ 12.36 $ 12.35 $ 13.23 $ 11.99 $ 11.60 -------- -------- -------- -------- -------- -------- -------- Income from investment operations: Net investment income 0.70(7) 0.63(7) 0.58 0.14 0.57 0.49 0.55 Net gains (losses) on securities (both realized and unrealized) 2.13(7) 1.61(7) 1.71 (0.13) (0.54) 1.57 0.41 -------- -------- -------- -------- -------- -------- -------- Total from investment operations 2.83 2.24 2.29 0.01 0.03 2.06 0.96 -------- -------- -------- -------- -------- -------- -------- Less distributions: Dividends from net investment income (0.62) (0.60) (0.53) -- (0.56) (0.52) (0.56) Distributions from net realized gains on securities (1.16) (0.44) (0.14) -- (0.34) (0.30) (0.01) -------- -------- -------- -------- -------- -------- -------- Total distributions (1.78) (1.04) (0.67) -- (0.90) (0.82) (0.57) -------- -------- -------- -------- -------- -------- -------- Net asset value, end of period $ 16.23 $ 15.18 $ 13.98 $ 12.36 $ 12.36 $ 13.23 $ 11.99 ======== ======== ======== ======== ======== ======== ======== Total return (annualized)(8) 20.36% 16.77% 19.77% (0.08)%(9) (0.08)% 19.19% 8.75% ======== ======== ======== ======== ======== ======== ======== Ratios/supplemental data: Net assets, end of period (in thousands) $769,289 $576,673 $542,619 $393,504 $222,873 $532,543 $370,087 Ratios to average net assets(10)(11)(12): Expenses 0.34%(7) 0.37%(7) 0.38% 0.36% 0.36% 0.34% 0.35% Net investment income 4.09%(7) 4.26%(7) 4.54% 4.65% 4.77% 4.91% 5.31% Portfolio turnover rate(13) 105% 76% 73% 48% 48% 83% 80% Average commission rate paid(13) $ 0.0385 $ 0.0409 -- -- -- -- -- BALANCED FUND ----------------------------------------- INSTITUTIONAL CLASS(1) ----------------------------------------- YEAR ENDED OCTOBER 31, ----------------------------------------- 1991 1990(2) 1989 1988 ----------------------------------------- Net asset value, beginning of period $ 9.87 $ 11.05 $ 10.13 $ 9.08 -------- -------- -------- -------- Income from investment operations: Net investment income 0.58 0.57 0.53 0.56 Net gains (losses) on securities (both realized and unrealized) 1.79 (1.18) 0.90 0.73 -------- -------- -------- -------- Total from investment operations 2.37 (0.61) 1.43 1.29 -------- -------- -------- -------- Less distributions: Dividends from net investment income (0.64) (0.51) (0.51) (0.24) Distributions from net realized gains on securities -- (0.06) -- -- -------- -------- -------- -------- Total distributions (0.64) (0.57) (0.51) (0.24) -------- -------- -------- -------- Net asset value, end of period $ 11.60 $ 9.87 $ 11.05 $ 10.13 ======== ======== ======== ======== Total return (annualized)(8) 25.35% (5.24)% 15.49% 14.63% ======== ======== ======== ======== Ratios/supplemental data: Net assets, end of period (in thousands) $311,906 $233,702 $210,119 $147,581 Ratios to average net assets(10)(11)(12): Expenses 0.37% 0.44% 0.47% 0.52% Net investment income 6.06% 6.50% 6.32% 6.25% Portfolio turnover rate(13) 55% 62% 78% 77% Average commission rate paid(13) -- -- -- --
(1) The Balanced Fund commenced active operations on July 17, 1987. The AMR Class commenced active operations on August 1, 1994 and at that time existing shares of the Balanced Fund were designated as Institutional Class shares. (2) Penmark Investments, Inc. was replaced by Independence Investment Associates, Inc. as an investment adviser to the Fund as of the close of business on February 28, 1990. (3) Average shares outstanding for the period rather than end of period shares were used to compute net investment income per share. (4) GSB Investment Management, Inc. was added as an investment adviser to the Balanced Fund on January 1, 1995. (5) Class expenses per share were subtracted from net investment income per share for the Fund before class expenses to determine net investment income per share. (6) Capital Guardian Trust Company was replaced by Brandywine Asset Management, Inc. as an investment adviser to the Balanced Fund on April 1, 1996. (7) The per share amounts and ratios reflect income and expenses assuming inclusion of the Fund's proportionate share of the income and expenses of the Balanced Portfolio. (8) Total return reflects accrual for the maximum shareholder services fee of .30% for periods prior to August 1, 1994. (9) Total return for the AMR Class for the period ended October 31, 1994 reflects Institutional Class returns from November 1, 1993 through July 31, 1994 and returns of the AMR Class for the period August 1, 1994 (commencement of operations) through October 31, 1994. Due to the different expense structures between the classes, total returns for the AMR Class would vary from the results shown had it been in operation for the entire year. (10) Effective August 1, 1994, expenses include administrative services fees paid by the Fund to the Manager. Prior to that date, expenses exclude shareholder services fees paid directly by shareholders to the Manager, which amounted to approximately $.01 per share in each period on an annualized basis. (11) The method of determining average net assets was changed from a monthly average to a daily average starting with the periods ended October 31, 1994. (12) Annualized. (13) On November 1, 1995 the Balanced Fund began investing all of its investable assets in the Balanced Portfolio. Portfolio turnover rate and average commission rate paid for the years ended October 31, 1996 and 1997 are those of the Balanced Portfolio. Calculation and disclosure of the average commission rate paid was not required prior to 1996. PROSPECTUS 4 98 (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
GROWTH AND INCOME FUND ----------------------------------------------------------------------------------------------------- AMR CLASS INSTITUTIONAL CLASS(1) ---------------------------------------------------- -------------------------------------------- PERIOD YEAR ENDED OCTOBER 31, ENDED YEAR ENDED OCTOBER 31, -------------------------------------- OCTOBER 31, -------------------------------------------- 1997(5) 1996(5)(6) 1995(5) 1994(1)(4) 1994(4) 1993 1992(3) 1991 ----------------------------------------------------------------------------------------------------- Net asset value, beginning of period $ 18.56 $ 15.95 $ 14.20 $ 13.99 $ 14.63 $ 12.79 $ 12.10 $ 9.47 ---------- ---------- -------- -------- -------- -------- -------- -------- Income from investment operations: Net investment income 0.45(7) 0.47(7) 0.44 0.11 0.43 0.36 0.39 0.42 Net gains (losses) on securities (both realized and unrealized) 4.47(7) 3.15(7) 2.30 0.10 0.08 2.21 0.77 2.70 ---------- ---------- -------- -------- -------- -------- -------- -------- Total from investment operations 4.92 3.62 2.74 0.21 0.51 2.57 1.16 3.12 ---------- ---------- -------- -------- -------- -------- -------- -------- Less distributions: Dividends from net investment income (0.47) (0.44) (0.45) -- (0.41) (0.37) (0.39) (0.49) Distributions from net realized gains on securities (1.31) (0.57) (0.54) -- (0.54) (0.36) (0.08) -- ---------- ---------- -------- -------- -------- -------- -------- -------- Total distributions (1.78) (1.01) (0.99) -- (0.95) (0.73) (0.47) (0.49) ---------- ---------- -------- -------- -------- -------- -------- -------- Net asset value, end of period $ 21.70 $ 18.56 $ 15.95 $ 14.20 $ 14.19 $ 14.63 $ 12.79 $ 12.10 ========== ========== ======== ======== ======== ======== ======== ======== Total return (annualized)(8) 28.40% 23.66% 21.03% 3.43%(9) 3.36% 21.49% 10.00% 33.83% ========== ========== ======== ======== ======== ======== ======== ======== Ratios/supplemental data: Net assets, end of period (in thousands) $1,431,805 $1,008,518 $706,884 $505,892 $ 22,737 $477,088 $339,739 $264,628 Ratios to average net assets(10)(11)(12): Expenses 0.34%(7) 0.36%(7) 0.38% 0.37% 0.33% 0.34% 0.36% 0.37% Net investment income 2.45%(7) 2.80%(7) 3.20% 3.18% 3.28% 3.12% 3.57% 4.19% Portfolio turnover rate(13) 35% 40% 26% 23% 23% 30% 35% 52% Average commission rate paid(13) $ 0.0395 $ 0.0412 -- -- -- -- -- -- GROWTH AND INCOME FUND ------------------------------ INSTITUTIONAL CLASS(1) ------------------------------ YEAR ENDED OCTOBER 31, ------------------------------ 1990(2) 1989 1988 ------------------------------ Net asset value, beginning of period $ 11.59 $ 9.96 $ 8.30 -------- -------- -------- Income from investment operations: Net investment income 0.42 0.42 0.42 Net gains (losses) on securities (both realized and unrealized) (1.94) 1.59 1.40 -------- -------- -------- Total from investment operations (1.52) 2.01 1.82 -------- -------- -------- Less distributions: Dividends from net investment income (0.43) (0.38) (0.16) Distributions from net realized gains on securities (0.17) -- -- -------- -------- -------- Total distributions (0.60) (0.38) (0.16) -------- -------- -------- Net asset value, end of period $ 9.47 $ 11.59 $ 9.96 ======== ======== ======== Total return (annualized)(8) (13.52)% 20.94% 22.20% ======== ======== ======== Ratios/supplemental data: Net assets, end of period (in thousands) $182,430 $187,869 $140,073 Ratios to average net assets(10)(11)(12): Expenses 0.45% 0.45% 0.53% Net investment income 4.49% 4.40% 4.20% Portfolio turnover rate(13) 41% 50% 56% Average commission rate paid(13) -- -- --
(1) The Growth and Income Fund commenced active operations on July 17, 1987. The AMR Class commenced active operations on August 1, 1994 and at that time existing shares of the Growth and Income Fund were designated as Institutional Class shares. (2) GSB Investment Management, Inc. was added as an investment adviser to the Growth and Income Fund on April 10, 1990. (3) The assets of the Growth and Income Fund previously managed by Atlanta Capital Management were transferred to GSB Investment Management, Inc. as of the close of business on December 5, 1991. (4) Average shares outstanding for the period rather than end of period shares were used to compute net investment income per share. (5) Class expenses per share were subtracted from net investment income per share for the Fund before class expenses to determine net investment income per share. (6) Capital Guardian Trust Company was replaced by Brandywine Asset Management, Inc. as an investment adviser to the Growth and Income Fund on April 1, 1996. (7) The per share amounts and ratios reflect income and expenses assuming inclusion of the Fund's proportionate share of the income and expenses of the Growth and Income Portfolio. (8) Total return reflects accrual for the maximum shareholder services fee of .30% for periods prior to August 1, 1994. (9) Total return for the AMR Class for the period ended October 31, 1994 reflects Institutional Class returns from November 1, 1993 through July 31, 1994 and returns of the AMR Class for the period August 1, 1994 (commencement of operations) through October 31, 1994. Due to the different expense structures between the classes, total returns for the AMR Class would vary from the results shown had it been in operation for the entire year. (10) Effective August 1, 1994, expenses include administrative services fees paid by the Fund to the Manager. Prior to that date, expenses exclude shareholder services fees paid directly by shareholders to the Manager, which amounted to less than $.01 per share in each period on an annualized basis. (11) The method of determining average net assets was changed from a monthly average to a daily average starting with the periods ended October 31, 1994. (12) Annualized. (13) On November 1, 1995 the Growth and Income Fund began investing all of its investable assets in the Growth and Income Portfolio. Portfolio turnover rate and average commission rate paid for the years ended October 31, 1996 and 1997 are those of the Growth and Income Portfolio. Calculation and disclosure of the average commission rate paid was not required prior to 1996. PROSPECTUS 5 99 (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
INTERNATIONAL EQUITY FUND ----------------------------------------------------- AMR CLASS ----------------------------------------------------- YEAR ENDED OCTOBER 31, PERIOD ENDED ------------------------------------ OCTOBER 31, 1997(5) 1996(5) 1995(5) 1994(1)(3)(4) ----------------------------------------------------- Net asset value, beginning of period $ 15.06 $ 13.31 $ 12.87 $ 12.61 -------- -------- -------- -------- Income from investment operations: Net investment income 0.37(6) 0.31(6) 0.30 0.05 Net gains (losses) on securities (both realized and unrealized) 2.46(6) 1.98(6) 0.68 0.21 -------- -------- -------- -------- Total from investment operations 2.83 2.29 0.98 0.26 -------- -------- -------- -------- Less distributions: Dividends from net investment income (0.33) (0.30) (0.22) -- Distributions from net realized gains on securities (0.41) (0.24) (0.32) -- -------- -------- -------- -------- Total distributions (0.74) (0.54) (0.54) -- -------- -------- -------- -------- Net asset value, end of period $ 17.15 $ 15.06 $ 13.31 $ 12.87 ======== ======== ======== ======== Total return (annualized)(7) 19.39% 17.72% 8.18% 11.77% ======== ======== ======== ======== Ratios/supplemental data: Net assets, end of period (in thousands) $464,588 $330,898 $227,939 $165,524 Ratios to average net assets(9)(10)(11): Expenses 0.58%(6) 0.57%(6) 0.60% 0.63% Net investment income 2.51%(6) 2.49%(6) 2.65% 1.41% Portfolio turnover rate(13) 15% 19% 21% 37% Average commission rate paid(13) $ 0.0164 $ 0.0192 -- -- INTERNATIONAL EQUITY FUND -------------------------------------------------- INSTITUTIONAL CLASS -------------------------------------------------- YEAR ENDED OCTOBER 31, PERIOD ENDED ---------------------------------- OCTOBER 31, 1994(3)(4) 1993(2) 1992 1991(1) -------------------------------------------------- Net asset value, beginning of period $ 12.07 $ 8.93 $ 10.13 $ 10.00 ------- ------- ------- ------- Income from investment operations: Net investment income 0.32 0.17 0.12 -- Net gains (losses) on securities (both realized and unrealized) 1.10 3.09 (1.31) 0.13 ------- ------- ------- ------- Total from investment operations 1.42 3.26 (1.19) 0.13 ------- ------- ------- ------- Less distributions: Dividends from net investment income (0.17) (0.12) (0.01) -- Distributions from net realized gains on securities (0.45) -- -- -- ------- ------- ------- ------- Total distributions (0.62) (0.12) (0.01) -- ------- ------- ------- ------- Net asset value, end of period $ 12.87 $ 12.07 $ 8.93 $ 10.13 ======= ======= ======= ======= Total return (annualized)(7) 11.77%(8) 36.56% (12.07)% 5.69% ======= ======= ======= ======= Ratios/supplemental data: Net assets, end of period (in thousands) $23,115 $66,652 $38,837 $10,536 Ratios to average net assets(9)(10)(11): Expenses 0.61% 0.78% 1.17% 1.90%(12) Net investment income 2.74% 2.00% 2.04% 0.38%(12) Portfolio turnover rate(13) 37% 61% 21% 2% Average commission rate paid(13) -- -- -- --
(1) The International Equity Fund commenced active operations on August 7, 1991. The AMR Class commenced active operations on August 1, 1994 and at that time existing shares of the International Equity Fund were designated as Institutional Class shares. (2) HD International Limited was replaced by Hotchkis and Wiley as an investment adviser to the International Equity Fund as of May 21, 1993. (3) Morgan Stanley Asset Management Inc. was added as an investment adviser to the International Equity Fund as of August 1, 1994. (4) Average shares outstanding for the period rather than end of period shares were used to compute net investment income per share. (5) Class expenses per share were subtracted from net investment income per share for the Fund before class expenses to determine net investment income per share. (6) The per share amounts and ratios reflect income and expenses assuming inclusion of the Fund's proportionate share of the income and expenses of the International Equity Portfolio. (7) Total return reflects accrual for the maximum shareholder services fee of .30% for periods prior to August 1, 1994. (8) Total return for the AMR Class for the period ended October 31, 1994 reflects Institutional Class returns from November 1, 1993 through July 31, 1994 and returns of the AMR Class for the period August 1, 1994 (commencement of operations) through October 31, 1994. Due to the different expense structures between the classes, total returns for the AMR Class would vary from the results shown had it been in operation for the entire year. (9) Effective August 1, 1994, expenses include administrative services fees paid by the Fund to the Manager. Prior to that date, expenses exclude shareholder services fees paid directly by shareholders to the Manager. Such fees amounted to less than $.04 per share in each period on an annualized basis and were waived by the Manager for the period ended October 31, 1991. (10) The method of determining average net assets was changed from a monthly average to a daily average starting with the periods ended October 31, 1994. (11) Annualized. (12) Estimated based on expected annual expenses and actual average net assets. (13) On November 1, 1995 the International Equity Fund began investing all of its investable assets in the International Equity Portfolio. Portfolio turnover rate and average commission rate paid for the years ended October 31, 1996 and 1997 are those of the International Equity Portfolio. Calculation and disclosure of the average commission rate paid was not required prior to 1996. PROSPECTUS 6 100 (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
S&P 500 INDEX FUND -- AMR CLASS --------------------- YEAR ENDED DECEMBER 31, 1997(1) --------------------- Net asset value, beginning of period $10.00 ------------- Income from investment operations: Net investment income 0.14 Net gains (losses) on securities (both realized and unrealized)(2) 3.16 ------------- Total from investment operations 3.30 ------------- Less distributions: Dividends from net investment income (0.14) Distributions from net realized gains on securities -- ------------- Total distributions (0.14) ------------- Net asset value, end of period $13.16 ============= Total return (annualized) 33.09% ============= Ratios/supplemental data: Net assets, end of period (in thousands) $7,862 Ratios to average net assets (annualized)(2): Net investment income 1.61% Expenses 0.20% Decrease reflected in above expense ratio due to absorption of expenses by Bankers Trust and the Manager 0.43% Portfolio turnover rate(3) 19% Average commission rate paid(3) $.0230
(1) The S&P 500 Index Fund commenced active operations January 1, 1997 and on March 1, 1998, existing shares of the Fund were designated Institutional Class shares. (2) The per share amounts and ratios reflect income and expenses assuming inclusion of the Fund's proportionate share of the income and expenses of its corresponding Portfolio. (3) Portfolio turnover rate and average commission rate paid is that of the Equity 500 Index Portfolio. PROSPECTUS 7 101 (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
SHORT-TERM BOND FUND ---------------------------------------------------------------------------- AMR CLASS INSTITUTIONAL CLASS ------------------------------------------- ------------------------------ PERIOD YEAR ENDED OCTOBER 31, ENDED YEAR ENDED OCTOBER 31, ----------------------------- OCTOBER 31, ------------------------------ 1997 1996 1995 1994(1)(3) 1994(3) 1993 1992 ---------------------------------------------------------------------------- Net asset value, beginning of period $ 9.67 $ 9.81 $ 9.68 $ 9.78 $ 10.23 $ 10.13 $ 10.07 Income from investment operations: Net investment income 0.66(4) 0.65(4) 0.64 0.14 0.52 0.58 0.75 Net gains (losses) on securities (both realized and unrealized) (0.05)(4) (0.14)(4) 0.13 (0.10) (0.46) 0.15 0.06 ------- ------- ------- ------- -------- -------- -------- Total from investment operations 0.61 0.51 0.77 0.04 0.06 0.73 0.81 ------- ------- ------- ------- -------- -------- -------- Less distributions: Dividends from net investment income (0.66) (0.65) (0.64) (0.14) (0.52) (0.58) (0.75) Distributions from net realized gains on securities -- -- -- -- (0.10) (0.05) -- ------- ------- ------- ------- -------- -------- -------- Total distributions (0.66) (0.65) (0.64) (0.14) (0.62) (0.63) (0.75) ------- ------- ------- ------- -------- -------- -------- Net asset value, end of period $ 9.62 $ 9.67 $ 9.81 $ 9.68 $ 9.67 $ 10.23 $ 10.13 ======= ======= ======= ======= ======== ======== ======== Total return (annualized)(5) 6.57% 5.38% 8.22% 0.59%(6) 0.42% 7.20% 7.94% ======= ======= ======= ======= ======== ======== ======== Ratios/supplemental data: Net assets, end of period (in thousands) $64,010 $59,526 $64,595 $53,445 $112,141 $238,874 $209,928 Ratios to average net assets(7)(8)(9): Expenses 0.32%(4) 0.33%(4) 0.36% 0.33% 0.31% 0.26% 0.27% Net investment income 6.90%(4) 6.66%(4) 6.60% 5.77% 5.26% 5.76% 7.40% Portfolio turnover rate(10) 282% 304% 183% 94% 94% 176% 133% SHORT-TERM BOND FUND ------------------------------------------ INSTITUTIONAL CLASS ------------------------------------------ PERIOD YEAR ENDED OCTOBER 31, ENDED ---------------------------- OCTOBER 31, 1991(2) 1990 1989 1988(1) ------------------------------------------ Net asset value, beginning of period $ 9.76 $ 9.94 $ 10.12 $ 10.00 Income from investment operations: Net investment income 0.83 0.92 0.96 0.64 Net gains (losses) on securities (both realized and unrealized) 0.31 (0.18) (0.12) 0.05 -------- ------- ------- ------- Total from investment operations 1.14 0.74 0.84 0.69 -------- ------- ------- ------- Less distributions: Dividends from net investment income (0.83) (0.92) (1.02) (0.57) Distributions from net realized gains on securities -- -- -- -- -------- ------- ------- ------- Total distributions (0.83) (0.92) (1.02) (0.57) -------- ------- ------- ------- Net asset value, end of period $ 10.07 $ 9.76 $ 9.94 $ 10.12 ======== ======= ======= ======= Total return (annualized)(5) 11.87% 7.51% 7.62% 7.41% ======== ======= ======= ======= Ratios/supplemental data: Net assets, end of period (in thousands) $141,629 $83,265 $60,507 $40,855 Ratios to average net assets(7)(8)(9): Expenses 0.35% 0.48% 0.59% 0.50% Net investment income 8.42% 9.44% 9.77% 8.01% Portfolio turnover rate(10) 165% 156% 158% 127%
(1) The Short-Term Bond Fund commenced active operations on December 3, 1987. Prior to March 1, 1998, the Short-Term Bond Fund was known as the Limited-Term Income Fund. The AMR Class commenced active operations on August 1, 1994 and at that time existing shares of the Short-Term Bond Fund were designated as Institutional Class shares. (2) AMR Investment Services, Inc. began portfolio management of the Short-Term Bond Fund on March 1, 1991 replacing Brown Brothers, Harriman & Co. and Barrow, Hanley, Mewhinney & Strauss, Inc. (3) Average shares outstanding for the period rather than end of period shares were used to compute net investment income per share. (4) The per share amounts and ratios reflect income and expenses assuming inclusion of the Fund's proportionate share of the income and expense of the Short-Term Bond Portfolio. (5) Total return reflects accrual for the maximum shareholder services fee of .30% for periods prior to August 1, 1994. (6) Total return for the AMR Class for the period ended October 31, 1994 reflects Institutional Class returns from November 1, 1993 through July 31, 1994 and returns of the AMR Class for the period August 1, 1994 (commencement of operations) through October 31, 1994. Due to the different expense structures between the classes, total returns for the AMR Class would vary from the results shown had it been in operation for the entire year. (7) Effective August 1, 1994, expenses include administrative services fees paid by the Fund to the Manager. Prior to that date, expenses exclude shareholder services fees paid directly by shareholders to the Manager. Such fees amounted to less than $.03 per share in each period on an annualized basis. (8) The method of determining average net assets was changed from a monthly average to a daily average starting with the periods ended October 31, 1994. (9) Annualized. (10) On November 1, 1995 the Short-Term Bond Fund began investing all of its investable assets in the Short-Term Bond Portfolio. Portfolio turnover rate for the years ended October 31, 1996 and 1997 is that of the Short-Term Bond Portfolio. PROSPECTUS 8 102 INTRODUCTION The Trust is an open-end, diversified management investment company organized as a Massachusetts business trust on January 16, 1987. The Funds are six of the several investment portfolios of the Trust. Each Fund has a distinctive investment objective and investment policies. Each Fund, except the S&P 500 Index Fund, invests all of its investable assets in a corresponding Portfolio of the AMR Trust that has an identical investment objective. The S&P 500 Index Fund invests all of its investable assets in the Equity 500 Index Portfolio, which is a separate investment company, advised by BT, that has an identical investment objective. The Manager provides the Portfolios, except the Equity 500 Index Portfolio, with business and asset management services, including the evaluation and monitoring of the investment advisers, and it provides the Funds with administrative services. BT provides the Equity 500 Index Portfolio with investment advisory, administrative and other services. The Funds, except the S&P 500 Index Fund, are comprised of three classes of shares, including the "AMR Class," for tax-exempt retirement and benefit plans of AMR Corporation and its affiliates. The S&P 500 Index Fund is comprised of two classes of shares, including the "Institutional Class" which is available to large institutional investors investing at least $2 million in the Funds. For further information about the Funds' other classes, call (800) 388-3344. Although each class of shares is designed to meet the needs of different categories of investors, all classes of each Fund share the same portfolio of investments and a common investment objective. See "Investment Objectives, Policies and Risks." There is no guarantee that a Fund will achieve its investment objective. Based on its value, a share of a Fund, regardless of class, will receive a proportionate share of the investment income and the gains (losses) earned (or incurred) by the Fund. It also will bear its proportionate share of expenses that are allocated to the Fund as a whole. However, certain expenses are allocated separately to each class of shares. The assets of the Balanced Portfolio, the Growth and Income Portfolio and the International Equity Portfolio are allocated by the Manager among investment advisers designated for each of those Portfolios. BT serves as the investment adviser to the Equity 500 Index Portfolio. The assets of the Intermediate Bond Portfolio are allocated by the Manager between the Manager and another investment adviser. Investment decisions for the Short-Term Bond Portfolio are made directly by the Manager. With the exception of the S&P 500 Index Fund, each investment adviser has discretion to purchase and sell portfolio securities in accordance with the investment objectives, policies and restrictions described in this Prospectus and in the SAI and by specific investment strategies developed by the Manager. See "Investment Advisers." AMR Class and Institutional Class shares are offered without a sales charge at the net asset value next determined after an investment is received and accepted. Shares will be redeemed at the net asset value next determined after receipt of a redemption order. See "Purchase, Redemption and Valuation of Shares." INVESTMENT OBJECTIVES, POLICIES AND RISKS The investment objective and policies of each Fund and its corresponding Portfolio are described below. Except as otherwise indicated, the investment policies of any Fund may be changed at any time by the Board to the extent that such changes are consistent with the investment objective of the applicable Fund. However, each Fund's investment objective may not be changed without a majority vote of that Fund's outstanding shares, which is defined as the lesser of (a) 67% of the shares of the applicable Fund present or represented if the holders of more than 50% of the shares are present or represented at the shareholders' meeting, or (b) more than 50% of the shares of the applicable Fund (hereinafter, "majority vote"). Except for the Equity 500 Index Portfolio, a Portfolio's investment objective may not be changed without a majority vote of that Portfolio's interest holders. The investment objective of the Equity 500 Index Portfolio is not a fundamental policy. Shareholders of the S&P 500 Index Fund will receive thirty days' prior written notice with respect to any change in the investment objective of the Equity 500 Index Portfolio. PROSPECTUS 9 103 Each Fund has a fundamental investment policy which allows it to invest all of its investable assets in its corresponding Portfolio. All other fundamental investment policies and the non-fundamental investment policies of each Fund and its corresponding Portfolio are identical. Therefore, although the following discusses the investment policies of each Portfolio, the AMR Trust's Board of Trustees ("AMR Trust Board") and the Equity 500 Index Portfolio's Board of Trustees ("Equity 500 Index Portfolio Board"), it applies equally to each Fund and each Board. AMERICAN AADVANTAGE BALANCED FUND -- This Fund's investment objective is to realize both income and capital appreciation. This Fund seeks its investment objective by investing all of its investable assets in the Balanced Portfolio, which invests primarily in equity and debt securities. Although equity securities (such as stocks) will be purchased primarily for capital appreciation and debt securities (such as bonds) will be purchased primarily for income purposes, income and capital appreciation potential will be considered in connection with all such investments. Excluding collateral for securities loaned, ordinarily the Portfolio will have a minimum of 30% and a maximum of 70% of its assets invested in equity securities and a minimum of 30% and a maximum of 70% of its assets invested in debt securities which, at the time of purchase, are rated in one of the four highest rating categories by all nationally recognized statistical rating organizations ("Rating Organizations") rating that security such as Standard & Poor's ("S&P") or Moody's Investor Services, Inc. ("Moody's") or, if unrated, are deemed to be of comparable quality by the applicable investment adviser. Obligations rated in the fourth highest rating category are limited to 25% of the Portfolio's debt allocation. Obligations rated in the BBB or Baa categories by any Rating Organization have speculative characteristics and thus changes in economic conditions or other circumstances are more likely to lead to a weakened capacity to make principal and interest payments than is the case with higher grade bonds. See the SAI for a description of debt ratings. The Portfolio, at the discretion of the investment advisers, may retain a security that has been downgraded below the initial investment criteria. The Portfolio usually invests between 50% and 65% of its assets in equity securities and between 35% and 50% of its assets in debt securities. The remainder of the Portfolio's assets may be invested in other investment companies and in cash or cash equivalents, including investment-grade short-term obligations. However, when its investment advisers deem that market conditions warrant, the Portfolio may, for temporary defensive purposes, invest up to 100% of its assets in cash, cash equivalents and investment grade short-term obligations. The Portfolio's investments in debt securities may include investments in obligations of the U.S. Government and its agencies and instrumentalities, including separately traded registered interest and principal securities ("STRIPS") and other zero coupon obligations; corporate bonds, notes and debentures; non-convertible preferred stocks; mortgage-backed securities; asset-backed securities; and domestic, Yankeedollar and Eurodollar bank deposit notes, certificates of deposit, bonds and notes. Such obligations may have a fixed, variable or floating rate of interest. See the SAI for a further description of the foregoing securities. The value of the Portfolio's debt investments will vary in response to interest rate changes as described in "American AAdvantage Intermediate Bond Fund and American AAdvantage Short-Term Bond Fund." The Portfolio also may engage in dollar rolls or purchase or sell securities on a "when-issued" or "forward commitment" basis. The purchase or sale of when-issued securities enables an investor to hedge against anticipated changes in interest rates and prices by locking in an attractive price or yield. The price of when-issued securities is fixed at the time the commitment to purchase or sell is made, but delivery and payment for the when-issued securities take place at a later date, normally one to two months after the date of purchase. During the period between purchase and settlement, no payment is made by the purchaser to the issuer and no interest accrues to the purchaser. Such transactions therefore involve a risk of loss if the value of the security to be purchased declines prior to the settlement date or if the value of the security to be sold increases prior to the settlement date. A sale of a when-issued security also involves the risk that the other party will be unable to settle the transaction. Dollar rolls are a type of forward commitment transaction. Purchases and sales of securities on a forward commitment basis involve a commitment to purchase or sell securities with payment and delivery to take place at some future date, normally one to two months after the date of the transaction. As with when-issued securities, these transactions involve certain risks, but they also enable an investor to hedge against anticipated changes in interest rates and prices. Forward commitment transactions are executed for existing obligations, PROSPECTUS 10 104 whereas in a when-issued transaction, the obligations have not yet been issued. When purchasing securities on a when-issued or on a forward commitment basis, a segregated account of liquid assets at least equal to the value of purchase commitments for such securities will be maintained until the settlement date. The Portfolio's equity investments may consist of common stocks, preferred stocks and convertible securities, including foreign securities that are represented by U.S. dollar-denominated American Depositary Receipts traded in the United States on exchanges and in the over-the-counter market. When purchasing equity securities, emphasis will be placed on undervalued securities with above average growth expectations. The Manager believes that purchasing securities which the investment advisers believe are undervalued in the market and that have above average growth potential will outperform other investment styles over the longer term while minimizing volatility and downside risk. The Manager will recommend that, with respect to portfolio management of equity assets, the Trust retain only those investment advisers who, in the Manager's opinion, utilize such an approach. BARROW, HANLEY, MEWHINNEY & STRAUSS, INC.; BRANDYWINE ASSET MANAGEMENT, INC.; GSB INVESTMENT MANAGEMENT, INC.; HOTCHKIS AND WILEY; and INDEPENDENCE INVESTMENT ASSOCIATES, INC. currently manage the assets of the Balanced Portfolio. See "Investment Advisers." AMERICAN AADVANTAGE GROWTH AND INCOME FUND -- This Fund's investment objective is to realize long-term capital appreciation and current income. This Fund seeks its investment objective by investing all of its investable assets in the Growth and Income Portfolio, which invests primarily in equity securities. Excluding collateral for securities loaned, ordinarily at least 80% of the Portfolio's assets will be invested in equity securities consisting of common stocks, preferred stocks, securities convertible into common stocks, and securities having common stock characteristics, such as rights and warrants, and foreign equity securities that are represented by U.S. dollar-denominated American Depositary Receipts traded in the United States on exchanges and in the over-the-counter market. When purchasing equity securities, primary emphasis will be placed on undervalued securities with above average growth expectations. In order to seek either above average current income or capital appreciation when interest rates are expected to decline, the Portfolio may invest in debt securities which, at the time of purchase, are rated in one of the four highest rating categories by all Rating Organizations rating that security or, if unrated, are deemed to be of comparable quality by the applicable investment adviser. Obligations rated in the fourth highest rating category are limited to 25% of the Portfolio's debt allocation. See "American AAdvantage Balanced Fund" for a description of the risks involved with these obligations. See the SAI for definitions of the foregoing securities and for a description of debt ratings. The Portfolio also may invest in other investment companies or in cash and cash equivalents, including investment grade short-term obligations. However, when its investment advisers deem that market conditions warrant, the Portfolio may, for temporary defensive purposes, invest up to 100% of its assets in cash, cash equivalents and investment grade short-term obligations. In addition, the Portfolio may purchase or sell securities on a when-issued or forward commitment basis. See "American AAdvantage Balanced Fund" for a description of these transactions. BARROW, HANLEY, MEWHINNEY & STRAUSS, INC.; BRANDYWINE ASSET MANAGEMENT, INC.; GSB INVESTMENT MANAGEMENT, INC.; HOTCHKIS AND WILEY; and INDEPENDENCE INVESTMENT ASSOCIATES, INC. currently manage the assets of the Growth and Income Portfolio. See "Investment Advisers." AMERICAN AADVANTAGE INTERNATIONAL EQUITY FUND -- This Fund's investment objective is to realize long-term capital appreciation. This Fund seeks its investment objective by investing all of its investable assets in the International Equity Portfolio, which invests primarily in equity securities of issuers based outside the United States. Ordinarily the Portfolio will invest at least 65% of its assets in common stocks and securities convertible into common stocks of issuers in at least three different countries located outside the United States. However, excluding collateral for securities loaned, the Portfolio generally invests in excess of 80% of its assets in such securities. The remainder of the Portfolio's assets will be invested in non-U.S. debt securities which, at the time of purchase, are rated in one of the three highest rating categories by any Rating Organization or, if unrated, are deemed to be of comparable quality by the applicable investment adviser and traded publicly on a world market, or in cash or cash equivalents, including investment grade short-term obligations, or in other investment companies. However, when PROSPECTUS 11 105 its investment advisers deem that market conditions warrant, the Portfolio may, for temporary defensive purposes, invest up to 100% of its assets in cash, cash equivalents, other investment companies and investment grade short-term obligations. The investment advisers select securities based upon a country's economic outlook, market valuation and potential changes in currency exchange rates. When purchasing equity securities, primary emphasis will be placed on undervalued securities with above average growth expectations. Overseas investing carries potential risks not associated with domestic investments. Such risks include but are not limited to: (1) political and financial instability abroad, including risk of nationalization or expropriation of assets and the risk of war; (2) less liquidity and greater volatility of foreign investments; (3) less public information regarding foreign companies; (4) less government regulation and supervision of foreign stock exchanges, brokers and listed companies; (5) lack of uniform accounting, auditing and financial reporting standards; (6) delays in transaction settlement in some foreign markets; (7) possible imposition of confiscatory foreign taxes; (8) possible limitation on the removal of securities or other assets of the Portfolio; (9) restrictions on foreign investments and repatriation of capital; (10) currency fluctuations; (11) cost and possible restrictions of currency conversion; (12) withholding taxes on dividends in foreign countries; and (13) possible higher commissions, custodial fees and management costs than in the U.S. market. These risks are often greater for investments in emerging or developing countries. The Portfolio will limit its investments to those in countries which have been recommended by the Manager and which have been approved by the AMR Trust Board. Countries may be added or deleted with AMR Trust Board approval. In determining which countries will be approved, the AMR Trust Board will evaluate the risk factors set forth above and will particularly focus on the ability to repatriate funds, the size and liquidity aspects of a particular country's market and the investment climate for foreign investors. The current countries in which the Portfolio may invest are Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Italy, Japan, Malaysia, Mexico, Netherlands, New Zealand, Norway, Portugal, Singapore, South Korea, Spain, Sweden, Switzerland and the United Kingdom. The Portfolio may trade forward foreign currency contracts ("forward contracts"), which are derivatives, to hedge currency fluctuations of underlying stock or bond positions or in other circumstances permitted by the Commodity Futures Trading Commission ("CFTC"). Forward contracts to sell foreign currency may be used when the management of the Portfolio believes that the currency of a particular foreign country may suffer a decline against the U.S. dollar. Forward contracts are also entered into to set the exchange rate for a future transaction. In this manner, the Portfolio may protect itself against a possible loss resulting from an adverse change in the relationship between the U.S. dollar or other currency which is being used for the security purchase and the foreign currency in which the security is denominated during the period between the date on which the security is purchased or sold and the date on which payment is made or received. Forward contracts involve certain risks which include, but are not limited to: (1) imperfect correlation between the securities hedged and the contracts themselves; and (2) possible decrease in the total return of the Portfolio. Forward contracts are discussed in greater detail in the SAI. The Portfolio also may trade currency futures for the same reasons as for entering into forward contracts as set forth above. Currency futures are traded on U.S. and foreign currency exchanges. The use of currency futures also entails certain risks which include, but are not limited to: (1) less liquidity due to daily limits on price fluctuation; (2) imperfect correlation between the securities hedged and the contracts themselves; (3) possible decrease in the total return of the Portfolio due to hedging; (4) possible reduction in value for both the contracts and the securities being hedged; and (5) potential losses in excess of the amounts invested in the currency futures contracts themselves. The Portfolio may not enter into currency futures contracts if the purchase or sale of such contract would cause the sum of the Portfolio's initial and any variation margin deposits to exceed 5% of its total assets. Currency futures contracts, which are derivatives, are discussed in greater detail in the SAI. PROSPECTUS 12 106 HOTCHKIS AND WILEY, MORGAN STANLEY ASSET MANAGEMENT INC. and TEMPLETON INVESTMENT COUNSEL, INC. currently serve as investment advisers to the International Equity Portfolio. AMERICAN AADVANTAGE S&P 500 INDEX FUND -- This Fund's investment objective is to provide investment results that, before expenses, correspond to the total return (the combination of capital changes and income) of common stocks publicly traded in the United States, as represented by the S&P 500. This Fund seeks its investment objective by investing all of its investable assets in the Equity 500 Index Portfolio which invests in common stocks of companies that compose the S&P 500. The Fund offers investors a convenient means of diversifying their holdings of common stocks while relieving those investors of the administrative burdens typically associated with purchasing and holding these instruments. The Portfolio is not managed according to traditional methods of "active" investment management, which involve the buying and selling of securities based upon economic, financial and market analyses and investment judgment. Instead, the Portfolio, utilizing a "passive" or "indexing" investment approach, attempts to replicate, before expenses, the performance of the S&P 500. Under normal conditions, the Portfolio will invest at least 80% of its assets in common stocks of companies that compose the S&P 500. In seeking to replicate the performance of the S&P 500, BT, the Portfolio's investment adviser, will attempt over time to allocate the Portfolio's investments among common stocks in approximately the same weightings as the S&P 500, beginning with the heaviest-weighted stocks that make up a larger portion of the Index's value. Over the long term, BT normally seeks a correlation between the performance of the Portfolio, before expenses, and that of the S&P 500 of 0.98 or better. A figure of 1.00 would indicate perfect correlation. In the unlikely event that the correlation is not achieved, the Equity 500 Index Portfolio Board will consider alternative structures. BT utilizes a two-stage sampling approach in seeking to obtain the objective. Stage one, which encompasses large capitalization stocks, maintains the stock holdings at or near their benchmark weights. Large capitalization stocks are defined as those securities that represent 0.10% or more of the Index. In stage two, smaller stocks are analyzed and selected using risk characteristics and industry weights in order to match the sector and risk characteristics of the smaller companies in the S&P 500. This approach helps to maximize portfolio liquidity while minimizing costs. BT generally will seek to match the composition of the S&P 500, but usually will not invest the Portfolio's stock portfolio to mirror the Index exactly. Because of the difficulty and expense of executing relatively small stock transactions, the Portfolio may not always be invested in the less heavily weighted S&P 500 stocks and may at times have its portfolio weighted differently from the S&P 500. When the Portfolio's size is greater, BT expects to purchase more of the stocks in the S&P 500 and to match the relative weighting of the S&P 500 more closely and anticipates that the Portfolio will be able to mirror, before expenses, the performance of the S&P 500 with little variance. In addition, the Portfolio may omit or remove any S&P 500 stock from the Portfolio if, following objective criteria, BT judges the stock to be insufficiently liquid or believes the merit of the investment has been substantially impaired by extraordinary events or financial conditions. BT will not purchase the stock of Bankers Trust New York Corporation, which is included in the Index, and instead will overweight its holdings of companies engaged in similar businesses. Under normal conditions, BT will attempt to invest as much of the Portfolio's assets as is practical in common stocks included in the S&P 500. However, the Portfolio may maintain up to 20% of its assets in short-term debt securities and money market instruments hedged with stock index futures and options to meet redemption requests or to facilitate the investment in common stocks. When the Portfolio has cash from new investments in the Portfolio or holds a portion of its assets in money market instruments, it may enter into stock index futures or options to attempt to increase its exposure to the stock market. Strategies the Portfolio could use to accomplish this include purchasing futures contracts, writing PROSPECTUS 13 107 put options, and purchasing call options. When the Portfolio wishes to sell securities, because of shareholder redemptions or otherwise, it may use stock index futures or options thereon to hedge against market risk until the sale can be completed. These strategies could include selling futures contracts, writing call options, and purchasing put options. BT will choose among futures and options strategies based on its judgment of how best to meet the Portfolio's goals. In selecting futures and options, BT will assess such factors as current and anticipated stock prices, relative liquidity and price levels in the options and futures markets compared to the securities markets, and the Portfolio's cash flow and cash management needs. If BT judges these factors incorrectly, or if price changes in the Portfolio's futures and options positions are not well correlated with those of its other investments, the Portfolio could be hindered in the pursuit of the objective and could suffer losses. The Portfolio could also be exposed to risks if it could not close out its futures or options positions because of an illiquid secondary market. BT will only use these strategies for cash management purposes. Futures and options will not be used to increase portfolio risk above the level that could be achieved using only traditional investment securities or to acquire exposure to changes in the value of assets or indices that by themselves would not be purchased for the Portfolio. Futures and options are discussed in greater detail in the SAI. The Portfolio intends to stay invested in the securities described above to the extent practical in light of the objective and long-term investment perspective. However, the Portfolio's assets may be invested in short-term instruments with remaining maturities of 397 days or less to meet anticipated redemptions and expenses or for day-to-day operating purposes. Short-term instruments consist of (1) short-term obligations of the U.S. Government, its agencies, instrumentalities, authorities or political subdivisions; (2) other short-term debt securities rated Aa or higher by Moody's or AA or higher by S&P or, if unrated, of comparable quality in the opinion of BT; (3) commercial paper; (4) bank obligations, including negotiable certificates of deposit, time deposits and bankers' acceptances; and (5) repurchase agreements. At the time the Portfolio invests in commercial paper, bank obligations or repurchase agreements, the issuer or the issuer's parent must have outstanding debt rated Aa or higher by Moody's or AA or higher by S&P or outstanding commercial paper or bank obligations rated Prime-1 by Moody's or A-1 by S&P; or, if no such ratings are available, the instrument must be of comparable quality in the opinion of BT. The S&P 500 is a well-known stock market index that includes common stocks of 500 companies from several industrial sectors representing a significant portion of the market value of all common stocks publicly traded in the United States, most of which are listed on the New York Stock Exchange (the "Exchange"). Stocks in the S&P 500 are weighted according to their market capitalization (the number of shares outstanding multiplied by the stock's current price). BT believes that the performance of the S&P 500 is representative of the performance of publicly traded common stocks in general. The composition of the S&P 500 is determined by Standard & Poor's Corporation and is based on such factors as the market capitalization and trading activity of each stock and its adequacy as a representation of stocks in a particular industry group, and may be changed from time to time. The Fund and the Portfolio are not sponsored, endorsed, sold or promoted by Standard & Poor's Corporation. Standard & Poor's Corporation makes no representation or warranty, express or implied, to the owners of the Fund or the Portfolio or any member of the public regarding the advisability of investing in securities generally or in the Fund and the Portfolio particularly or the ability of the S&P 500 to track general stock market performance. Standard & Poor's Corporation does not guarantee the accuracy and/or the completeness of the S&P 500 or any data included therein. STANDARD & POOR'S CORPORATION MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE RESULTS TO BE OBTAINED BY THE FUND OR THE PORTFOLIO, OWNERS OF THE FUND OR THE PORTFOLIO, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500 OR ANY DATA INCLUDED THEREIN. STANDARD & POOR'S CORPORATION MAKES NO EXPRESS OR IMPLIED WARRANTIES AND HEREBY EXPRESSLY DISCLAIMS ALL SUCH WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE S&P 500 OR ANY DATA INCLUDED THEREIN. PROSPECTUS 14 108 The ability of the Fund and the Portfolio to meet their investment objective depends to some extent on the cash flow experienced by the Fund and by the other investors in the Portfolio, since investments and redemptions by shareholders of the Fund generally will require the Portfolio to purchase or sell securities. BT will make investment changes to accommodate cash flow in an attempt to maintain the similarity of the Portfolio to the S&P 500. An investor should also be aware that the performance of the S&P 500 is a hypothetical number that does not take into account brokerage commissions and other costs of investing, unlike the Portfolio which must bear these costs. Finally, since the Portfolio seeks to track the S&P 500, BT generally will not attempt to judge the merits of any particular stock as an investment. AMERICAN AADVANTAGE INTERMEDIATE BOND FUND AND AMERICAN AADVANTAGE SHORT-TERM BOND FUND -- The investment objective of each of these Funds is to realize income and capital appreciation. As an investment policy, each Fund primarily seeks income and secondarily seeks capital appreciation. The Intermediate Bond Fund and the Short-Term Bond Fund each seeks its investment objective by investing all of its investable assets in the Intermediate Bond Portfolio and the Short-Term Bond Portfolio, respectively, which invest primarily in debt obligations. Permissible investments include securities of the U.S. Government and its agencies and instrumentalities, including STRIPS and other zero coupon obligations; corporate bonds, notes and debentures; nonconvertible preferred stocks; mortgage-backed securities; asset-backed securities; domestic, Yankeedollar and Eurodollar certificates of deposit, bank deposit notes, and bank notes; other investment companies; and cash or cash equivalents including investment grade short-term obligations. Such obligations may have a fixed, variable or floating rate of interest. At the time of purchase, all such securities will be rated in one of the four highest rating categories by all Rating Organizations rating such obligation or, if unrated, will be deemed to be of comparable quality by the Manager or the investment adviser. Obligations rated in the fourth highest rating category are limited to 25% of each Portfolio's total assets. See "American AAdvantage Balanced Fund" for a description of the risks involved with these obligations. The Portfolios, at the discretion of the Manager and the investment adviser, may retain a security which has been downgraded below the initial investment criteria. See the SAI for definitions of the foregoing securities and for a description of debt ratings. Principal and/or interest payments for obligations of the U.S. Government's agencies or instrumentalities may or may not be backed by the full faith and credit of the U.S. Government. Although investments will not be restricted by either maturity or duration of the securities purchased, under normal circumstances, the Intermediate Bond Portfolio will seek to maintain a dollar weighted average duration of three to seven years and the Short-Term Bond Portfolio will seek to maintain a dollar weighted average duration of one to three years. Because the timing on return of principal for both asset-backed and mortgage-backed securities is uncertain, in calculating the average weighted duration of the Portfolio, the duration of these securities may be based on certain industry conventions. Mortgage-backed securities are securities representing interests in "pools" of mortgages in which payments of both interest and principal on the securities are made monthly, in effect, "passing through" monthly payments made by the individual borrowers on the mortgage loans which underlie the securities (net of fees paid to the issuer or guarantor of the securities). Early repayment of principal on mortgage pass-through securities (arising from prepayments of principal due to sale of the underlying property, refinancing, or foreclosure, net of fees and costs which may be incurred) may expose the Portfolios to a lower rate of return upon reinvestment of principal. Also, if a security subject to prepayment has been purchased at a premium, in the event of prepayment, the value of the premium would be lost. Like other debt securities, when interest rates rise, the value of mortgage-related securities generally will decline; however, when interest rates decline, the value of mortgage-related securities with prepayment features may not increase as much as other debt securities. Payment of principal and interest on some mortgage pass-through securities (but not the market value of the securities themselves) may be guaranteed by the full faith and credit of the U.S. Government (in the case of securities guaranteed by the Government National Mortgage Association ("GNMA")) or guaranteed by agencies or instrumentalities of the U.S. Government (in the case of securities guaranteed by the Federal National Mortgage Association ("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC"), which are PROSPECTUS 15 109 supported only by the discretionary authority of the U.S. Government to purchase the agency's obligations). Mortgage pass-through securities created by non-governmental issuers (such as commercial banks, savings and loan institutions, private mortgage insurance companies, mortgage bankers and other secondary market issuers) may be supported with various credit enhancements such as pool insurance, guarantees issued by governmental entities, a letter of credit from a bank or senior/subordinated structures. Collateralized mortgage obligations ("CMOs") are hybrid instruments with characteristics of both mortgage-backed bonds and mortgage pass-through securities. Similar to a mortgage pass-through, interest and prepaid principal on a CMO are paid, in most cases, monthly. CMOs may be collateralized by whole mortgage loans but are more typically collateralized by portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC or FNMA. CMOs are structured in multiple classes, with each class bearing a different stated maturity or interest rate. The Portfolios are permitted to invest in asset-backed securities, subject to each Portfolio's rating and quality requirements. Through the use of trusts and special purpose subsidiaries, various types of assets, primarily home equity loans, automobile and credit card receivables, and other types of receivables or other assets as well as purchase contracts, financing leases and sales agreements entered into by municipalities, are securitized in pass-through structures similar to the mortgage pass-through structures described above. Consistent with each Fund's and Portfolio's investment objective, policies and quality standards, the Portfolios may invest in these and other types of asset-backed securities which may be developed in the future. Asset-backed securities involve certain risks that do not exist with mortgage-related securities, resulting mainly from the fact that asset-backed securities do not usually contain the benefit of a complete security interest in the related collateral. For example, credit card receivables generally are unsecured and the debtors are entitled to the protection of a number of state and federal consumer credit laws, some of which may reduce the ability to obtain full payment. In the case of automobile receivables, due to various legal and economic factors, proceeds from repossessed collateral may not always be sufficient to support payments on the securities. The risks associated with asset-backed securities are often reduced by the addition of credit enhancements such as a letter of credit from a bank, excess collateral or a third-party guarantee. Investments in Eurodollar (U.S. dollar obligations issued outside the United States by domestic or foreign entities) and Yankeedollar (U.S. dollar obligations issued inside the United States by foreign entities) obligations involve additional risks. Most notably, there generally is less publicly available information about foreign issuers; there may be less governmental regulation and supervision; foreign issuers may use different accounting and financial standards; and the adoption of foreign governmental restrictions may affect adversely the payment of principal and interest on foreign investments. In addition, not all foreign branches of United States banks are supervised or examined by regulatory authorities as are United States banks, and such branches may not be subject to reserve requirements. The Portfolios also may engage in dollar rolls or purchase or sell securities on a when-issued or forward commitment basis as described under "American AAdvantage Balanced Fund." The market value of fixed rate securities, and thus the net asset value of each Portfolio's shares, is expected to vary inversely with movements in interest rates. The market value of variable and floating rate instruments will not vary as much due to the periodic adjustments in their interest rates. An adjustment which increases the interest rate of such securities should reduce or eliminate declines in market value resulting from a prior upward movement in interest rates, and an adjustment which decreases the interest rate of such securities should reduce or eliminate increases in market value resulting from a prior downward movement in interest rates. The Manager serves as the sole investment adviser to the Short-Term Bond Portfolio. The Manager and Barrow, Hanley, Mewhinney & Strauss, Inc. currently manage the assets of the Intermediate Bond Portfolio. See "Investment Advisers." PROSPECTUS 16 110 OTHER INVESTMENT POLICIES -- In addition to the investment policies described previously, each Portfolio also may lend its securities, enter into fully collateralized repurchase agreements and invest in private placement offerings. SECURITIES LENDING. Each Portfolio may lend securities to broker-dealers or other institutional investors pursuant to agreements requiring that the loans be continuously secured by any combination of cash, securities of the U.S. Government and its agencies and instrumentalities and approved bank letters of credit that at all times equal at least 100% of the market value of the loaned securities. Although the Equity 500 Index Portfolio may lend its securities, it has agreed that it will abstain from doing so. Securities loans will not be made if, as a result, the aggregate amount of all outstanding securities loans by any Portfolio of the AMR Trust would exceed 33 1/3% of its total assets (including the market value of collateral received). A Portfolio continues to receive interest on the securities loaned and simultaneously earns either interest on the investment of the cash collateral or fee income if the loan is otherwise collateralized. Should the borrower of the securities fail financially, there is a risk of delay in recovery of the securities loaned or loss of rights in the collateral. However, the Portfolios seek to minimize this risk by making loans only to borrowers which are deemed to be of good financial standing and which have been approved by the AMR Trust Board. For purposes of complying with each Portfolio's investment policies and restrictions, collateral received in connection with securities loans will be deemed an asset of a Portfolio to the extent required by law. Except for the Equity 500 Index Portfolio, the Manager will receive compensation for administrative and oversight functions with respect to securities lending. The amount of such compensation will depend on the income generated by the loan of each Portfolio's securities. The SEC has granted exemptive relief that permits the Portfolios to invest cash collateral received from securities lending transactions in shares of one or more private investment companies managed by the Manager. Subject to receipt of exemptive relief from the SEC, the Portfolios also may invest cash collateral received from securities lending transactions in shares of one or more registered investment companies managed by the Manager. See the SAI for further information regarding loan transactions. REPURCHASE AGREEMENTS. A repurchase agreement is an agreement under which securities are acquired by a Portfolio from a securities dealer or bank subject to resale at an agreed upon price on a later date. The acquiring Portfolio bears a risk of loss in the event that the other party to a repurchase agreement defaults on its obligations and the Portfolio is delayed or prevented from exercising its rights to dispose of the collateral securities. However, the investment advisers or the Manager attempt to minimize this risk by entering into repurchase agreements only with financial institutions which are deemed to be of good financial standing and which have been approved by the AMR Trust Board or the Equity 500 Index Portfolio Board, as appropriate. See the SAI for more information regarding repurchase agreements. PRIVATE PLACEMENT OFFERINGS. Investments in private placement offerings are made in reliance on the "private placement" exemption from registration afforded by Section 4(2) of the Securities Act of 1933 (the "1933 Act"), and resold to qualified institutional buyers under Rule 144A under the 1933 Act ("Section 4(2) securities"). Section 4(2) securities are restricted as to disposition under the federal securities laws and generally are sold to institutional investors, such as the Portfolios, that agree they are purchasing the securities for investment and not with an intention to distribute to the public. Any resale by the purchaser must be pursuant to an exempt transaction and may be accomplished in accordance with Rule 144A. Section 4(2) securities normally are resold to other institutional investors such as the Portfolios through or with the assistance of the issuer or dealers that make a market in the Section 4(2) securities, thus providing liquidity. The Portfolios will not invest more than 15% of their respective net assets in Section 4(2) securities and illiquid securities unless the applicable investment adviser determines, by continuous reference to the appropriate trading markets and pursuant to guidelines approved by the AMR Trust Board or the Equity 500 Index Portfolio Board that any Section 4(2) securities held by such Portfolio in excess of this level are at all times liquid. The AMR Trust Board, the Equity 500 Index Portfolio Board and the applicable investment adviser, pursuant to the guidelines approved by the respective Boards, will carefully monitor the respective Portfolios' investments in Section 4(2) securities offered and sold under Rule 144A, focusing on such important factors, among others, as: valuation, liquidity, and availability of information. Investments in Section 4(2) securities could PROSPECTUS 17 111 have the effect of reducing a Portfolio's liquidity to the extent that qualified institutional buyers no longer wish to purchase these restricted securities. BROKERAGE PRACTICES AND PORTFOLIO TURNOVER -- Each investment adviser will place its own orders to execute securities transactions which are designed to implement the applicable Portfolio's investment objective and policies. In placing such orders, each investment adviser will seek the best available price and most favorable execution. The full range and quality of services offered by the executing broker or dealer will be considered when making these determinations. Pursuant to written guidelines approved by the AMR Trust Board or the Equity 500 Index Portfolio Board, as appropriate, an investment adviser of a Portfolio, or its affiliated broker-dealer, may execute portfolio transactions and receive usual and customary brokerage commissions (within the meaning of Rule 17e-1 under the Investment Company Act of 1940, as amended ("1940 Act")) for doing so. The Intermediate Bond Portfolio and the Short-Term Bond Portfolio normally will not incur any brokerage commissions on their transactions because debt instruments are generally traded on a "net" basis with dealers acting as principal for their own accounts and without a stated commission. The price of the obligation, however, usually includes a profit to the dealer. Obligations purchased in underwritten offerings include a fixed amount of compensation to the underwriter, generally referred to as the underwriter's concession or discount. No commissions or discounts are paid when securities are purchased directly from an issuer. No Portfolio, other than the Short-Term Bond Portfolio, currently expects its portfolio turnover rate to exceed 100%. The portfolio turnover rate for the Short-Term Bond Portfolio for the fiscal year ended October 31, 1997 was 282%. The portfolio turnover rate for the Balanced Portfolio for the fiscal year ended October 31, 1997 was 105%. This was due to an unusually large redemption in the Balanced Fund which is not expected to reoccur. A Portfolio's turnover rate, or the frequency of portfolio transactions, will vary from year to year depending on market conditions and the Portfolio's cash flows. High portfolio activity increases a Portfolio's transaction costs, including brokerage commissions, and may result in a greater number of taxable transactions. ADDITIONAL INFORMATION ABOUT THE PORTFOLIOS -- As previously described, investors should be aware that each Fund, unlike mutual funds that directly acquire and manage their own portfolios of securities, seeks to achieve its investment objective by investing all of its investable assets in a corresponding Portfolio of the AMR Trust, which is a separate investment company managed by the Manager, or in the Equity 500 Index Portfolio, which is a separate investment company advised by BT. Since a Fund will invest only in its corresponding Portfolio, that Fund's shareholders will acquire only an indirect interest in the investments of the Portfolio. The Manager expects, although it cannot guarantee, that the Trust will achieve economies of scale by investing in the AMR Trust and the Equity 500 Index Portfolio. In addition to selling their interests to the Funds, the Portfolios sell their interests to other nonaffiliated investment companies and/or other institutional investors. All institutional investors in a Portfolio pay a proportionate share of the Portfolio's expenses and invest in that Portfolio on the same terms and conditions. However, other investment companies investing all of their assets in a Portfolio are not required to sell their shares at the same public offering price as a Fund and are allowed to charge different sales commissions. Therefore, investors in a Fund may experience different returns from investors in another investment company that invests exclusively in that Fund's corresponding Portfolio. The Fund's investment in a Portfolio may be affected materially by the actions of large investors in that Portfolio, if any. For example, as with all open-end investment companies, if a large investor were to redeem its interest in a Portfolio, that Portfolio's remaining investors could experience higher pro rata operating expenses, thereby producing lower returns. As a result, that Portfolio's security holdings may become less diverse, resulting in increased risk. Institutional investors in a Portfolio that have a greater pro rata ownership interest in the Portfolio than the Fund could have effective voting control over the operation of that Portfolio. A change in a Portfolio's fundamental objective, policies and restrictions, that is not approved by the shareholders of its corresponding Fund could require that Fund to redeem its interest in the Portfolio. Any such redemption could result in a distribution "in kind" of portfolio securities (as opposed to a cash distribution) by the Portfolio. PROSPECTUS 18 112 Should such a distribution occur, that Fund could incur brokerage fees or other transaction costs in converting such securities to cash. In addition, a distribution "in kind" could result in a less diversified portfolio of investments for that Fund and could affect its liquidity adversely. The Portfolios' and their corresponding Funds' investment objectives and policies are described above. See "Investment Restrictions" for a description of their investment restrictions. The investment objective of a Fund can be changed only with shareholder approval. The approval of a Fund and of other investors in its corresponding Portfolio, if any, is not required to change the investment objective, policies or limitations of that Portfolio, unless otherwise specified. Written notice will be provided to shareholders of a Fund within thirty days prior to any changes in its corresponding Portfolio's investment objective. If the investment objective of a Portfolio changes and the shareholders of its corresponding Fund do not approve a parallel change in that Fund's investment objective, the Fund would seek an alternative investment vehicle or the Manager and the investment advisers would actively manage the Fund. See "Management and Administration of the Trusts" for a complete description of the investment management fee and other expenses associated with a Fund's investment in its corresponding Portfolio. This Prospectus and the SAI contain more detailed information about each Fund and its corresponding Portfolio, including information related to (1) the investment objective, policies and restrictions of each Fund and its corresponding Portfolio, (2) the Board of Trustees and officers of the Trust, the AMR Trust, and the Equity 500 Index Portfolio Board, (3) brokerage practices, (4) the Funds' shares, including the rights and liabilities of its shareholders, (5) additional performance information, including the method used to calculate yield and total return, and (6) the determination of the value each Fund's shares. INVESTMENT RESTRICTIONS The following fundamental investment restrictions and the non-fundamental investment restriction are identical for each Fund and its corresponding Portfolio. Therefore, although the following discusses the investment restrictions of each Portfolio, the AMR Trust Board and the Equity 500 Index Portfolio, it applies equally to each Fund and Board. The following fundamental investment restrictions may be changed with respect to a particular Fund by the majority vote of that Fund's outstanding shares or with respect to a Portfolio by the majority vote of that Portfolio's interest holders. No Portfolio may: o Invest more than 5% of its total assets (taken at market value) in securities of any one issuer, other than obligations issued by the U.S. Government, its agencies and instrumentalities, or purchase more than 10% of the voting securities of any one issuer, with respect to 75% of a Portfolio's total assets. o Invest more than 25% of its total assets in the securities of companies primarily engaged in any one industry other than the U.S. Government, its agencies and instrumentalities, provided that: (i) this limitation does not apply to obligations issued or guaranteed by the U.S. Government, its agencies and instrumentalities; (ii) municipalities and their agencies and authorities are not deemed to be industries; and (iii) financial service companies are classified according to the end users of their services (for example, automobile finance, bank finance, and diversified finance will be considered separate industries). The following non-fundamental investment restriction may be changed with respect to a particular Fund by a vote of a majority of the Board or with respect to a Portfolio by a vote of a majority of the AMR Trust Board or the Equity 500 Index Portfolio Board, as appropriate: no Portfolio may invest more than 15% of its net assets in illiquid securities, including time deposits and repurchase agreements that mature in more than seven days. The above percentage limits are based upon asset values at the time of the applicable transaction; accordingly, a subsequent change in asset values will not affect a transaction that was in compliance with the investment restrictions at the time such transaction was effected. See the SAI for other investment limitations. PROSPECTUS 19 113 YIELDS AND TOTAL RETURNS Yields for the each class of the Funds will be computed by dividing the net investment income per share earned by the applicable class during the relevant time period by the maximum offering price per share for that class on the last day of the period. Additionally, each class of the Intermediate Bond Fund and the Short-Term Bond Fund may advertise a "monthly distribution rate." This rate is based on an annualized monthly dividend accrual rate per share compared with the month-end share price of the each class of the Fund. Total return quotations for each class of the Funds may reflect the average annual compounded (or aggregate compounded) rate of return during the designated time period based on a hypothetical initial investment and the redeemable value of that investment at the end of the period. The Funds will at times compare their performance to applicable published indices, and also may disclose their performance as ranked by certain ranking entities. Each class of a Fund has different expenses which will impact its performance. See the SAI for more information about the calculation of yields and total returns. MANAGEMENT AND ADMINISTRATION OF THE TRUSTS FUND MANAGEMENT AGREEMENT -- The Board has general supervisory responsibility over the Trust's affairs, while the business affairs of the AMR Trust and the Equity 500 Index Portfolio are subject to the supervision of their respective Board of Trustees. The Manager provides or oversees all administrative, investment advisory and portfolio management services for the Trust pursuant to a Management Agreement dated April 3, 1987, as amended July 25, 1997, together with the Administrative Services Agreement described below. The AMR Trust and the Manager also entered into a Management Agreement dated October 1, 1995, as amended July 25, 1997, that obligates the Manager to provide or oversee all administrative, investment advisory and portfolio management services for the AMR Trust. The Manager, located at 4333 Amon Carter Boulevard, MD 5645, Fort Worth, Texas 76155, is a wholly owned subsidiary of AMR Corporation ("AMR"), the parent company of American Airlines, Inc., and was organized in 1986 to provide investment management, advisory, administrative and asset management consulting services. The assets of the Balanced Portfolio, the Growth and Income Portfolio and the International Equity Portfolio are allocated by the Manager among multiple investment advisers designated for that Portfolio. The assets of the Intermediate Bond Portfolio are allocated by the Manager between the Manager and another investment adviser. See "Investment Advisers." BT serves as investment adviser and administrator of, and provides custody and transfer agency services to, the Equity 500 Index Portfolio. The Manager serves as the sole active investment adviser to the Short-Term Bond Portfolio. In addition, with the exception of the International Equity Portfolio and the Equity 500 Index Portfolio, if so requested by any of its investment advisers, the Manager will make the investment decisions with respect to assets allocated to that investment adviser which the investment adviser determines should be invested in investment grade short-term obligations. As of December 31, 1997, the Manager had assets under management totaling approximately $ billion, including approximately $ billion under active management and $ billion as named fiduciary or fiduciary adviser. Of the total, approximately $ billion of assets are related to AMR. American Airlines, Inc. is not responsible for investments made in the American AAdvantage Funds. The Manager provides the Trust and the AMR Trust with office space, office equipment and personnel necessary to manage and administer the Trusts' operations. This includes complying with reporting requirements; corresponding with shareholders; maintaining internal bookkeeping, accounting and auditing services and records; and supervising the provision of services to the Trusts by third parties. The Manager also oversees each Portfolio's participation in securities lending activities and any actions taken by the securities lending agent in connection with those activities to ensure compliance with all applicable regulatory and investment guidelines. The Manager also develops the investment programs for each Portfolio of the AMR Trust, selects and changes investment advisers (subject to approval by the AMR Trust Board and appropriate interest holders), allocates assets among investment advisers, monitors the investment advisers' investment programs and results, and coordinates the investment activities of the investment advisers to ensure compliance with regulatory restrictions. PROSPECTUS 20 114 Except as otherwise provided below, the Manager bears the expense of providing the above services and pays the fees of the investment advisers of the Funds and the Portfolios of the AMR Trust. As compensation for paying the investment advisory fees and for providing the Portfolios with advisory and asset allocation services, the Manager receives from the AMR Trust an annualized advisory fee that is calculated and accrued daily, equal to the sum of (1) 0.25% of the net assets of the Intermediate Bond Portfolio and the Short-Term Bond Portfolio, (2) 0.10% of the net assets of the other Portfolios of the AMR Trust, plus (3) all fees payable by the Manager to the investment advisers of the Balanced, the Growth and Income and the International Equity Portfolios as described in "Investment Advisers." The advisory fee is payable quarterly in arrears. To the extent that a Fund invests all of its investable assets in its corresponding Portfolio, the Manager will not receive an advisory fee under its Management Agreement with the Trust. The Manager receives compensation in connection with securities lending activities. If a Portfolio lends its portfolio securities and receives cash collateral from the borrower, the Manager may receive up to 25% of the net annual interest income (the gross interest earned by the investment less the amount paid to the borrower as well as related expenses) received from the investment of such cash. If a borrower posts collateral other than cash, the borrower will pay to the lender a loan fee. The Manager may receive up to 25% of the loan fees posted by borrowers. Currently, the Manager receives 10% of the net annual interest income from the investment of cash collateral or 10% of the loan fees posted by borrowers. In addition, the manager is compensated through the Administrative Services Agreement described below for other services provided. Each Management Agreement will continue in effect provided that annually such continuance is specifically approved by a vote of the Board and the AMR Trust Board, including the affirmative votes of a majority of the Trustees of each Board who are not parties to the Management Agreement or "interested persons" as defined in the 1940 Act of any such party ("Independent Trustees"), cast in person at a meeting called for the purpose of considering such approval, or by the vote of a Fund's shareholders or a Portfolio's interest holders. A Management Agreement may be terminated with respect to a Fund or a Portfolio at any time, without penalty, by a majority vote of outstanding Fund shares or Portfolio interests on sixty (60) days' written notice to the Manager, or by the Manager, on sixty (60) days' written notice to the Trust or the AMR Trust. A Management Agreement will automatically terminate in the event of its "assignment" as defined in the 1940 Act. The Trust is responsible for expenses not otherwise assumed by the Manager, including the following: audits by independent auditors; transfer agency, custodian, dividend disbursing agent and shareholder recordkeeping services; taxes, if any, and the preparation of each Fund's tax returns; interest; costs of Trustee and shareholder meetings; printing and mailing prospectuses and reports to existing shareholders; fees for filing reports with regulatory bodies and the maintenance of the Funds' existence; legal fees; fees to federal and state authorities for the registration of shares; fees and expenses of Independent Trustees; insurance and fidelity bond premiums; fees paid to consultants providing reports regarding adherence by investment advisers to the investment style of a Portfolio; and any extraordinary expenses of a nonrecurring nature. A majority of the Independent Trustees of the Board have adopted written procedures reasonably appropriate to deal with potential conflicts of interest between the Trust and the AMR Trust, including creating a separate Board of Trustees of the AMR Trust. FUND ADVISORY AGREEMENTS -- Each investment adviser, except BT, has entered into a separate investment advisory agreement with the Manager to provide investment advisory services to the Funds and Portfolios of the AMR Trust. To the extent that a Fund invests all of its investable assets in a corresponding Portfolio, however, an investment adviser will receive an advisory fee only on behalf of the Portfolio and not on behalf of its corresponding Fund. As described below, the assets of the Balanced, the Growth and Income and the International Equity Portfolios are allocated among the investment advisers designated for each Portfolio and the assets of the Intermediate Bond Portfolio are allocated between the Manager and another investment adviser. The Manager is permitted to enter into new or modified advisory agreements with existing or new investment advisers without approval of Fund shareholders or Portfolio interest holders, but subject to approval of the Board and the AMR Trust Board. The Securities and Exchange Commission issued an exemptive order which eliminates the PROSPECTUS 21 115 need for shareholder/interest holder approval, subject to compliance with certain conditions. These conditions include the requirement that within 90 days of hiring a new adviser or implementing a material change with respect to an advisory contract, the applicable Fund send a notice to shareholders containing information about the change that would be included in a proxy statement. The Manager recommends investment advisers to the Board and the AMR Trust Board based upon its continuing quantitative and qualitative evaluation of the investment advisers' skill in managing assets using specific investment styles and strategies. The allocation of assets among investment advisers may be changed at any time by the Manager. Allocations among advisers will vary based upon a variety of factors, including the overall investment performance of each investment adviser, the Portfolio's cash flow needs and market conditions. The Manager need not allocate assets to each investment adviser designated for a Portfolio. The investment advisers can be terminated without penalty to the AMR Trust by the Manager, the AMR Trust Board or the interest holders of the applicable Portfolio. Short-term investment performance, by itself, is not a significant factor in selecting or terminating an investment adviser, and the Manager does not expect to recommend frequent changes of investment advisers. The Prospectus will be supplemented if additional investment advisers are retained or the contract with any existing investment adviser is terminated. Each investment adviser has discretion to purchase and sell securities for its segment of a Portfolio's assets in accordance with that Portfolio's objective, policies and restrictions and the more specific strategies provided by the Manager. Although the investment advisers are subject to general supervision by the AMR Trust Board, the Equity 500 Index Portfolio Board and the Manager, as appropriate, these parties do not evaluate the investment merits of specific securities transactions. As compensation for its services, each investment adviser, except BT, is paid a fee by the Manager out of the proceeds of the management fee received by the Manager from the AMR Trust. ADMINISTRATIVE SERVICES AGREEMENTS -- The Manager and the Trust entered into an Administrative Services Agreement which obligates the Manager to provide the Funds those administrative and management services (other than investment advisory services) described in the Management Agreement. As compensation for these services, the Manager receives an annualized fee of 0.25% of the net assets of the Institutional Class of the S&P 500 Index Fund. BT serves as the administrator to the Equity 500 Index Portfolio. Under an Administration and Services Agreement with the Portfolio, BT calculates the value of the assets of the Portfolio and generally assists the Equity 500 Index Portfolio Board in all aspects of the administration and operation of the Portfolio. The Administration and Services Agreement provides for the Portfolio to pay BT a fee, computed daily and paid monthly, at the rate of 0.05% of the average daily net assets of the Portfolio. Under the Administration and Services Agreement, BT may delegate one or more of its responsibilities to others, including Federated Services Company, at BT's expense. DISTRIBUTION OF TRUST SHARES -- Shares are distributed through the Funds' principal underwriter, Brokers Transaction Services, Inc. ("BTS"). BTS is compensated by the Manager, and not the Trust. 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 1940 Act which authorizes the use of any fees received by the Manager in accordance with the Administrative Services and the Management Agreements and any fees received by the investment advisers pursuant to their Advisory Agreements with the Manager, to be used for distribution purposes. ALLOCATION OF FUND EXPENSES -- Expenses of each Fund generally are allocated equally among the shares of that Fund, regardless of class. However, certain expenses approved by the Board will be allocated solely to the class to which they relate. PRINCIPAL UNDERWRITER -- BROKERS TRANSACTION SERVICES, INC., 7001 Preston Road, Dallas, Texas, 75205 serves as the principal underwriter of the Trust. PROSPECTUS 22 116 CUSTODIAN AND TRANSFER AGENT -- STATE STREET BANK & TRUST COMPANY, Boston, Massachusetts, serves as custodian for the Portfolios of the AMR Trust and the Funds and as transfer agent for the AMR Trust and the Funds. NATIONAL FINANCIAL DATA SERVICES, INC. ("NFDS"), Kansas City, Missouri, provides transfer agency services to the Institutional Class. BANKERS TRUST COMPANY, New York, New York, serves as custodian and transfer agent for the assets of the Equity 500 Index Portfolio. INDEPENDENT AUDITOR -- The independent auditor for the Funds, except the S&P 500 Index Fund, and the AMR Trust is ERNST & YOUNG LLP, Dallas, Texas. The independent auditor for the S&P 500 Index Fund and the Equity 500 Index Portfolio is COOPERS & LYBRAND L.L.P., Kansas City, Missouri. INVESTMENT ADVISERS Set forth below is a brief description of the investment advisers for each Fund and its corresponding Portfolio. References to the investment advisers retained by a Portfolio also apply to the corresponding Fund. Except for the Manager and BT, the investment advisers do not provide any services to the Funds or the Portfolios except for portfolio investment management and related recordkeeping services, or has any affiliation with the Trust, the AMR Trust, the Equity 500 Index Portfolio or the Manager. BT provides investment advisory, administrative and other services to the Equity 500 Index Portfolio. See "Bankers Trust Company" below for a discussion of those services. William F. Quinn has served as President of the Manager since it was founded in 1986 and Nancy A. Eckl serves as Vice President - Trust Investments of the Manager. Ms. Eckl previously served as Vice President - Finance and Compliance of the Manager from December 1990 to May 1995. In these capacities, Mr. Quinn and Ms. Eckl have primary responsibility for the day-to-day operations of the Balanced Fund, the Growth and Income Fund, the International Equity Fund, the Intermediate Bond Fund and their corresponding Portfolios. These responsibilities include oversight of the investment advisers to these Funds, regular review of their performance and asset allocations among them. Michael W. Fields is responsible for the portfolio management oversight of the Short-Term Bond Fund and its corresponding Portfolio as well as the portion of the Intermediate Bond Fund and its corresponding Portfolio allocated to the Manager. Mr. Fields has been with the Manager since it was founded in 1986 and serves as Vice President - Fixed Income Investments. Benjamin L. Mayer is responsible for the day-to-day portfolio management of these Funds and Portfolios. Mr. Mayer has served as Senior Portfolio Manager of the Manager since May 1995. Prior to that time, he was a Vice President, Institutional Fixed Income Sales at Merrill, Lynch, Pierce, Fenner & Smith from January 1994 to April 1995 and Vice President, Regional Senior Strategist from April 1989 to January 1994. Frank Salerno, Managing Director of BT, is responsible for the day-to-day management of the Equity 500 Index Portfolio. Mr. Salerno has been employed by BT since prior to 1989 and has managed the Equity 500 Index Portfolio's assets since the Portfolio commenced operations December 31, 1992. BANKERS TRUST COMPANY, 130 Liberty Street (One Bankers Trust Plaza), New York, New York 10006, is a New York banking corporation and is a wholly owned subsidiary of Bankers Trust New York Corporation. BT conducts a variety of general banking and trust activities and is a major wholesale supplier of financial services to the international and domestic institutional market, with a global network of over 90 offices in more than 50 countries. As of September 30, 1997, Bankers Trust New York Corporation was the seventh largest bank holding company in the United States with total assets of approximately $100 billion and approximately $300 billion in assets under management globally. Of that total, approximately $143 billion are in U.S. equity index assets alone. BT serves as investment adviser and administrator to the Equity 500 Index Portfolio. For its services, BT receives a fee from the Equity 500 Index Portfolio, computed daily and paid monthly, at the annual rate of 0.10% of the average daily net assets of the Portfolio of which BT currently is waiving 0.05%. PROSPECTUS 23 117 BARROW, HANLEY, MEWHINNEY & STRAUSS, INC. ("Barrow"), 3232 McKinney Avenue, 15th Floor, Dallas, Texas 75204, is a professional investment counseling firm which has been providing investment advisory services since 1979. The firm is wholly owned by United Asset Management Corporation, a Delaware corporation. As of December 31, 1997, Barrow had discretionary investment management authority with respect to approximately $28.8 billion of assets, including approximately $1.9 billion of assets of AMR and its subsidiaries and affiliated entities. Barrow serves as an investment adviser to the Balanced Portfolio, the Growth and Income Portfolio, the Intermediate Bond Portfolio and the Short-Term Bond Portfolio, although the Manager does not presently intend to allocate any of the assets in the Short-Term Bond Portfolio to Barrow. The Manager pays Barrow an annualized fee equal to .30% on the first $200 million in AMR Trust assets under its discretionary management, .20% on the next $300 million, .15% on the next $500 million, and .125% on assets over $1 billion. BRANDYWINE ASSET MANAGEMENT, INC. ("Brandywine"), 201 North Walnut Street, Wilmington, Delaware 19801, is a professional investment counseling firm founded in 1986. Brandywine is a wholly owned subsidiary of Legg Mason, Inc. As of December 31, 1997, Brandywine had assets under management totaling approximately $7.5 billion, including approximately $894 million of assets of AMR and its subsidiaries and affiliated entities. Brandywine serves as an investment adviser to the Balanced Portfolio and the Growth and Income Portfolio. The Manager pays Brandywine an annualized fee equal to .225% of assets in the Balanced Portfolio and .25% of assets in the Growth and Income Portfolio of the first $500 million of AMR Trust assets under its discretionary management, .225% of the next $100 million on all assets and .20% on all excess assets. GSB INVESTMENT MANAGEMENT, INC. ("GSB"), 301 Commerce Street, Fort Worth, Texas 76102, is a professional investment management firm which was founded in 1987 by Frank P. Ganucheau, Mark J. Stupfel, and Lyle E. Brumley. GSB is wholly owned by United Asset Management Corporation, a Delaware corporation. As of December 31, 1997, GSB managed approximately $3.5 billion of assets, including approximately $905 million of assets of AMR and its subsidiaries and affiliated entities. GSB serves as an investment adviser to the Balanced Portfolio and the Growth and Income Portfolio. The Manager pays GSB an annualized fee equal to .30% of the first $100 million in AMR Trust assets under its discretionary management, .25% of the next $100 million, .20% of the next $100 million, and .15% of all excess assets. HOTCHKIS AND WILEY, 800 West Sixth Street, 5th Floor, Los Angeles, California 90017, is a professional investment counseling firm which was founded in 1980 by John F. Hotchkis and George Wiley. Hotchkis and Wiley is a division of the Capital Management Group of Merrill Lynch Asset Management, L.P., a wholly owned indirect subsidiary of Merrill Lynch & Co., Inc. Assets under management as of December 31, 1997 were approximately $12.3 billion, which included approximately $1.1 billion of assets of AMR and its subsidiaries and affiliated entities. Hotchkis and Wiley serves as an investment adviser to the Balanced Portfolio, the Growth and Income Portfolio and the International Equity Portfolio. The Manager pays Hotchkis and Wiley an annualized fee equal to .60% of the first $10 million of AMR Trust assets under its discretionary management, .50% of the next $140 million of assets, .30% of the next $50 million of assets, .20% of the next $800 million of assets and .15% of all excess assets. INDEPENDENCE INVESTMENT ASSOCIATES, INC. ("IIA"), 53 State Street, Boston, Massachusetts 02109, is a professional investment counseling firm which was founded in 1982. The firm is a wholly owned subsidiary of John Hancock Mutual Life Insurance Company. Assets under management as of December 31, 1997, including funds managed for its parent company, were approximately $26.7 billion, which included approximately $1.1 billion of assets of AMR and its subsidiaries and affiliated entities. IIA serves as an investment adviser to the Balanced Portfolio and the Growth and Income Portfolio. The Manager pays IIA an annualized fee equal to .50% of the first $30 million of AMR Trust assets under its discretionary management, .25% of the next $70 million of assets, and .20% of all excess assets. MORGAN STANLEY ASSET MANAGEMENT INC. ("MSAM"), 25 Cabot Square, London, United Kingdom, E14 4QA, is a wholly owned subsidiary of Morgan Stanley, Dean Witter, Discover & Co. MSAM provides portfolio management and named fiduciary services to taxable and nontaxable institutions, international organizations and individuals investing in United States and international equity and debt securities. As of September 30, 1997, PROSPECTUS 24 118 MSAM, together with its other asset management affiliates, had assets under management (including assets under fiduciary advisory control) totaling approximately $142.5 billion, including approximately $112.3 billion under active management and $20.2 billion as named fiduciary or fiduciary adviser. As of December 31, 1997, MSAM had investment authority over approximately $561.9 million of assets of AMR and its subsidiaries and affiliated entities. MSAM serves as an investment adviser to the International Equity Portfolio. The Manager pays MSAM an annual fee equal to .80% of the first $25 million of AMR Trust assets under its discretionary management, .60% of the next $25 million in assets, .50% of the next $25 million in assets and .40% of all excess assets. TEMPLETON INVESTMENT COUNSEL, INC. ("Templeton"), 500 East Broward Blvd., Suite 2100, Fort Lauderdale, Florida 33394-3091, is a professional investment counseling firm which has been providing investment services since 1979. Templeton is indirectly owned by Franklin Resources, Inc. As of December 31, 1997, Templeton had discretionary investment management authority with respect to approximately $21.7 billion of assets, including approximately $511.6 million of assets of AMR and its subsidiaries and affiliated entities. Templeton serves as an investment adviser to the International Equity Portfolio. The Manager pays Templeton an annualized fee equal to .50% of the first $100 million of AMR Trust assets under its discretionary management, .35% of the next $50 million in assets, .30% of the next $250 million in assets and .25% on assets over $400 million. Solely for the purpose of determining the applicable percentage rates when calculating the fees for each investment adviser other than MSAM and BT, there shall be included all other assets or trust assets of American Airlines, Inc. also under management by each respective investment adviser (except assets managed by Barrow under the HALO Bond Program). For the purpose of determining the applicable percentage rates when calculating MSAM's fees, all equity account assets managed by MSAM on behalf of American Airlines, Inc. shall be included. The inclusion of any such assets will result in lower overall fee rates being applied to the applicable Portfolio. PURCHASE, REDEMPTION AND VALUATION OF SHARES PURCHASING SHARES OF THE TRUST -- Shares are sold without a sales charge at the next share price calculated after the acceptance of a purchase order. Shares are offered and orders accepted until the close of the Exchange, generally 4:00 p.m. Eastern time on each day on which the Exchange is open for trading, which excludes the following business holidays: New Year's Day, Martin Luther King's Birthday, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day ("Business Day"). The Trust reserves the right to reject any order for the purchase of shares and to limit or suspend, without prior notice, the offering of shares. BY WIRE -- Purchases may be made by wiring funds. To ensure prompt receipt of a transmission by wire, the investor should: telephone the transfer agent at (800) 492-9063 and specify the Fund whose shares are to be purchased; provide the name, address, telephone number and account number of the investor; and identify the amount being wired and by which bank. If you are opening a new account, the transfer agent will provide you with an account number. You should instruct your bank to designate the account number which the transfer agent has assigned to you and to transmit the federal funds to: State Street Bank & Trust Co., ABA Routing #0110-0002-8, Account No. 0002-888-6, reference American AAdvantage Funds. BY DEPOSITING SECURITIES -- Shares of a Fund may be purchased in exchange for an investor's securities if the securities are acceptable to its corresponding Portfolio and satisfy applicable investment objectives and policies. If you are interested in exchanging securities you must first contact the Manager and acquire instructions regarding submission of a written description of the securities which you wish to exchange. You must represent that all such securities offered to any Fund are not subject to any sale restrictions. Within five business days after receipt of the written description, the Manager will advise you whether the securities to be exchanged are acceptable. There is no charge for this review by the Manager. Securities accepted by a Fund must have a readily ascertainable value as evidenced by a listing on the Exchange, the American Stock Exchange or The Nasdaq Stock Market. Securities are valued in the manner described for valuing Portfolio assets in the section entitled "Valuation of Shares." PROSPECTUS 25 119 Acceptance of such orders may occur on any day during the five-day period afforded the Manager to review the acceptability of the securities. Upon notice of acceptance of such orders, the securities must be delivered in fully negotiable form within three days. The Manager will provide delivery instructions at the time of acceptance. You may realize gain or loss for federal income tax purposes upon the securities exchange, depending upon the adjusted tax basis and value of the securities tendered. A Fund will accept securities in this manner only for investment by its corresponding Portfolio, and not for resale. BY MAIL -- Share purchases of any Fund may be made by mail by sending a check or other negotiable bank draft payable to the applicable Fund to "State Street Bank & Trust Co., P.O. Box 1978, Boston, MA 02105-1978, Attn.: American AAdvantage Funds." An additional purchase of shares should be accompanied by your account number. Purchase checks are accepted subject to collection at full face value in U.S. funds and must be drawn in U.S. dollars on a U.S. bank. Courier and overnight deliveries should be addressed to State Street Bank & Trust Co., Transfer Agency Operations, One Heritage Drive, MSP-5 South, North Quincy, MA, 02171. REDEMPTION OF SHARES -- Shares of the Funds may be redeemed by telephone or by mail on any Business Day. BY TELEPHONE -- Shares may be redeemed by telephone. Proceeds from redemption orders received by 4:00 p.m. Eastern Time generally will be transmitted to shareholders the next Business Day. BY MAIL -- Fund shares may be redeemed on any Business Day by writing directly to State Street Bank & Trust Co. at the address above under "Purchasing Shares of the Trust." The redemption price will be the net asset value per share next determined after receipt by State Street of all required documents in good order. "Good order" means that the request must include a letter of instruction or stock assignment specifying (1) the account number and Fund name; (2) the number of shares or dollar amount to be redeemed; (3) signature of an authorized signatory for the owners of the shares in the exact names in which they appear on the account; (4) other supporting legal documents, if required, in the case of estates, trusts, guardianships, custodians, corporations, IRAs and welfare, pension and profit-sharing plans; and (5) any share certificates being redeemed must be returned duly endorsed or accompanied by a stock assignment with signatures guaranteed by a bank, trust company or member of a recognized stock exchange. Payment for redeemed shares will be made in cash within seven days after the receipt of a redemption request in good order. However, the Fund reserves the right to suspend redemptions or postpone the date of payment (a) for any periods during which the Exchange is closed (other than for customary weekend and holiday closings), or when trading on the Exchange is restricted, (b) at such time as an emergency exists as determined by the Securities and Exchange Commission so that disposal of a Fund's investments or determination of its net asset value is not reasonably practicable, or (c) for such other periods as the Securities and Exchange Commission by order may permit for protection of the Funds' shareholders. Shares purchased by check may not be redeemed until the funds have cleared, which may take up to 15 days. Although each Fund intends to redeem shares in cash, each reserves the right to pay the redemption price in whole or in part by a distribution of readily marketable securities held by the applicable Fund's corresponding Portfolio. See the SAI for further information concerning redemptions in kind. VALUATION OF SHARES -- The net asset value of each share (share price) of the Funds is determined as of the close of the Exchange, generally 4:00 p.m. Eastern time on each Business Day. The net asset value of all outstanding shares of a Fund will be determined by computing the Fund's total assets (which is the value of the Fund's investment in its corresponding Portfolio), subtracting all of the Fund's liabilities, and dividing the result by the total number of Fund shares outstanding at such time. The net asset value of all outstanding shares of all classes will be determined based on a pro rata allocation of the value of the Fund's corresponding Portfolio's investment income, expenses and total capital gains and losses. The allocation will be based on comparative net asset value at the beginning of the day except for expenses related solely to one class of shares ("Class Expenses") which will be borne only by the appropriate class of shares. Because of the Class Expenses, the net income attributable to and PROSPECTUS 26 120 the dividends payable for each class of shares may be different. Additionally, the Funds may compute differing share prices as a result of Class Expenses. Equity securities listed on securities exchanges, including all but United Kingdom securities of the International Equity Portfolio, are valued at the last quoted sales price on a designated exchange prior to the close of trading on the Exchange or, lacking any sales, on the basis of the last current bid price prior to the close of trading on the Exchange. Securities of the United Kingdom held in the International Equity Portfolio are priced at the last jobber price (mid of the bid and offer prices quoted by the leading stock jobber in the security) prior to close of trading on the Exchange. Trading in foreign markets is usually completed each day prior to the close of the Exchange. However, events may occur which affect the values of such securities and the exchange rates between the time of valuation and the close of the Exchange. Should events materially affect the value of such securities during this period, the securities are priced at fair value, as determined in good faith and pursuant to procedures approved by the AMR Trust Board. Over-the-counter equity securities are valued on the basis of the last bid price on that date prior to the close of trading. Debt securities (other than short-term securities) will normally be valued on the basis of prices provided by a pricing service and may take into account appropriate factors such as institution-size trading in similar groups of securities, yield, quality, coupon rate, maturity, type of issue, trading characteristics and other market data. In some cases, the prices of debt securities may be determined using quotes obtained from brokers. Securities for which market quotations are not readily available are valued at fair value, as determined in good faith and pursuant to procedures approved by the AMR Trust Board for the AMR Trust Portfolios. Assets and liabilities denominated in foreign currencies and forward currency contracts are translated into U.S. dollar equivalents based on prevailing market rates. Investment grade short-term obligations with 60 days or less to maturity held by the Portfolios are valued using the amortized cost method as described in the SAI. DIVIDENDS, OTHER DISTRIBUTIONS AND TAX MATTERS DIVIDENDS AND OTHER DISTRIBUTIONS -- Dividends and other distributions paid on each class of a Fund's shares are calculated at the same time and in the same manner. Dividends from the net investment income of the Balanced Fund, the Growth and Income Fund and the International Equity Fund normally are declared annually. Dividends consisting of substantially all of the net investment income of the Intermediate Bond Fund and the Short-Term Bond Fund, which are paid monthly, normally are declared on each Business Day immediately prior to the determination of the net asset value, and are payable to shareholders of record as of the close of business on the day on which declared. The S&P 500 Index Fund distributes income dividends on the first Business Day in April, July and October. In December, the S&P 500 Index Fund will distribute another income dividend, plus any capital gains. Each Fund may make an additional dividend or other distribution, if necessary, to avoid a 4% excise tax on certain undistributed income and gain. A Fund's net investment income attributable to the each class consists of that class's share of the Fund's share of dividends and interest (including discount) accrued on its corresponding Portfolio's securities, less expenses of the Fund and the Portfolio attributable to the class. Distributions of a Fund's share of its corresponding Portfolio's realized net short-term capital gain, net capital gain (the excess of net long-term capital gain over net short-term capital loss), and net gains from foreign currency transactions, if any, normally will be made annually. Unless a shareholder elects otherwise on the account application, all dividends and other distributions on each class of a Fund's shares will be automatically paid in additional shares of the same class of that Fund. However, a shareholder may choose to have distributions of net capital gain (and, if applicable, net foreign currency gains) paid in shares and dividends paid in cash or to have all such distributions and dividends paid in cash. An election may be changed at any time by delivering written notice that is received by the transfer agent at least ten days prior to the payment date for a dividend or other distribution. TAX INFORMATION -- Each Fund is treated as a separate corporation for federal income tax purposes and intends to qualify or to continue to qualify for treatment as a regulated investment company under the Internal Revenue Code of 1986, as amended. In each taxable year that a Fund so qualifies, the Fund (but not its shareholders) will PROSPECTUS 27 121 be relieved of federal income tax on that part of its investment company taxable income (generally, taxable net investment income plus any net short-term capital gain and gains from certain foreign currency transactions) and net capital gain that it distributes to its shareholders. However, a Fund will be subject to a nondeductible 4% excise tax to the extent that it fails to distribute by the end of any calendar year substantially all of its ordinary income for that calendar year and its capital gain net income for the one-year period ending on October 31 of that year, plus certain other amounts. For these and other purposes, dividends and other distributions declared by a Fund in October, November or December of any year and payable to shareholders of record on a date in one of those months will be deemed to have been paid by the Fund and received by the shareholders on December 31 of that year if they are paid by the Fund during the following January. Each Portfolio has received a ruling from the Internal Revenue Service, or an opinion of counsel, that it is or should be classified for federal income tax purposes as a partnership; accordingly, no Portfolio is subject to federal income tax. 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. The foregoing is only a summary of some of the important tax considerations generally affecting the Funds and their shareholders. Prospective investors are urged to consult their own tax advisers regarding specific questions as to the effect of federal, state or local income taxes on any investment in the Trust. For further tax information, see the SAI. GENERAL INFORMATION The Trust currently is comprised of ten separate investment portfolios. Each Fund in this Prospectus, except the S&P 500 Index Fund is comprised of three classes of shares, which can be issued in an unlimited number. The S&P 500 Index Fund is comprised of two classes of shares which can be issued in an unlimited number. Each share represents an equal proportionate beneficial interest in that Fund and is entitled to one vote. Only shares of a particular class may vote on matters affecting that class. Only shares of a particular Fund may vote on matters affecting that Fund. All shares of the Trust vote on matters affecting the Trust as a whole. Share voting rights are not cumulative, and shares have no preemptive or conversion rights. Shares of the Trust are nontransferable. Each series in the Trust will not be involved in any vote involving a Portfolio in which it does not invest its assets. Shareholders of all of the series of the Trust, however, will vote together to elect Trustees of the Trust and for certain other matters. Under certain circumstances, the shareholders of one or more series could control the outcome of these votes. On most issues subjected to a vote of a Portfolio's interest holders, as required by the 1940 Act, its corresponding Fund will solicit proxies from its shareholders and will vote its interest in the Portfolio in proportion to the votes cast by that Fund's shareholders. Because a Portfolio interest holder's votes are proportionate to its percentage interests in that Portfolio, one or more other Portfolio investors could, in certain instances, approve an action against which a majority of the outstanding voting securities of its corresponding Fund had voted. This could result in that Fund's redeeming its investment in its corresponding Portfolio, which could result in increased expenses for that Fund. Whenever the shareholders of a Fund are called to vote on matters related to its corresponding Portfolio, the Board shall vote shares for which they receive no voting instructions in the same proportion as the shares for which they do receive voting instructions. Any information received from a Portfolio in the Portfolio's report to shareholders will be provided to the shareholders of its corresponding Fund. As a Massachusetts business trust, the Trust is not obligated to conduct annual shareholder meetings. However, the Trust will hold special shareholder meetings whenever required to do so under the federal securities laws or the Trust's Declaration of Trust or By-Laws. Trustees can be removed by a shareholder vote at special shareholder meetings. PROSPECTUS 28 122 As more fully described in the SAI, the following persons may be deemed to control certain Funds by virtue of their ownership of more than 25% of the outstanding shares of a Fund as of January 31, 1998: AMERICAN AADVANTAGE BALANCED FUND AMR Corporation and subsidiary companies and Employee Benefit Trusts thereof 81% AMERICAN AADVANTAGE GROWTH AND INCOME FUND AMR Corporation and subsidiary companies and Employee Benefit Trusts thereof 85% AMERICAN AADVANTAGE INTERNATIONAL EQUITY FUND AMR Corporation and subsidiary companies and Employee Benefit Trusts thereof 60% AMERICAN AADVANTAGE S&P 500 INDEX FUND AMR Corporation and subsidiary companies and Employee Benefit Trusts thereof 100% AMERICAN AADVANTAGE SHORT-TERM BOND FUND AMR Corporation and subsidiary companies and Employee Benefit Trusts thereof 72%
The Manager has taken steps that it believes are reasonably designed to address the potential failure of computer programs used by the Manager and the Funds' service providers to address the Year 2000 issue. There can be no assurance that these steps will be sufficient to avoid any adverse impact. SHAREHOLDER COMMUNICATIONS Shareholders will receive periodic reports, including annual and semi-annual reports which will include financial statements showing the results of the Funds' operations and other information. The financial statements of the Funds will be audited by independent auditors at least annually. Shareholder inquiries and requests for information regarding the other investment companies which also invest in the AMR Trust should be made in writing to the Funds at P.O. Box 619003, MD 5645, Dallas/Fort Worth Airport, Texas 75261-9003 or by calling (800) 388-3344. Shareholder inquiries and requests for information regarding the other investment companies that also invest in the Equity 500 Index Portfolio should be made by calling (800) 730-1313. NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND IN SALES LITERATURE SPECIFICALLY APPROVED BY OFFICERS OF THE TRUST FOR USE IN CONNECTION WITH THE OFFER OF ANY AMR CLASS OR INSTITUTIONAL CLASS SHARES, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUNDS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN ANY JURISDICTION IN WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFERING MAY NOT LAWFULLY BE MADE. American AAdvantage Funds is a registered service mark of AMR Corporation. American AAdvantage Balanced Fund, American AAdvantage Growth and Income Fund, American AAdvantage International Equity Fund, American AAdvantage Intermediate Bond Fund and American AAdvantage Short-Term Bond Fund are service marks and PlanAhead Class is a registered service mark of AMR Investment Services, Inc. PROSPECTUS 29 123 -- NOTES -- 124 -- NOTES -- 125 American Advantage Funds(R) - AMR CLASS - P.O. Box 1978 Boston, MA 02105-1978 (800) 492-9063 - INSTITUTIONAL CLASS - P.O. Box 419643 Kansas City, MO 64141-6643 (800) 658-5811 AMRC-PRO-0398 126 THIS PROSPECTUS contains important information about the Platinum Class of the AMERICAN AADVANTAGE FUNDS ("AAdvantage Trust") and the AMERICAN AADVANTAGE MILEAGE FUNDS ("Mileage Trust"), each an open-end management investment company which consists of multiple investment portfolios. This prospectus pertains only to the four funds listed on this cover page (individually referred to as a "Fund" and, collectively, the "Funds"). EACH FUND SEEKS ITS INVESTMENT OBJECTIVE BY INVESTING ALL OF ITS INVESTABLE ASSETS IN A CORRESPONDING PORTFOLIO (INDIVIDUALLY REFERRED TO AS A "PORTFOLIO" AND, COLLECTIVELY, "PORTFOLIOS") OF THE AMR INVESTMENT SERVICES TRUST ("AMR TRUST") WHICH HAS AN INVESTMENT OBJECTIVE IDENTICAL TO THE INVESTING FUND. The investment experience of each Fund will correspond directly with the investment experience of each Portfolio. Each Fund consists of multiple classes of shares designed to meet the needs of different groups of investors. Platinum Class shares are offered exclusively to customers of certain broker-dealers. Prospective Platinum Class investors should read this Prospectus carefully before making an investment decision and retain it for future reference. IN ADDITION TO THIS PROSPECTUS, a Statement of Additional Information ("SAI") for the Platinum Class dated March 1, 1998 has been filed with the Securities and Exchange Commission and is incorporated herein by reference. The SAI contains more detailed information about the Funds. For a free copy of the SAI, call (800) 967-9009. AN INVESTMENT IN THE FUNDS IS NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT AND THERE CAN BE NO ASSURANCE THAT THEY WILL BE ABLE TO MAINTAIN A STABLE PRICE OF $1.00 PER SHARE. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. PROSPECTUS MARCH 1, 1998 [AMERICAN AADVANTAGE LOGO] - PLATINUM CLASS(sm) - AMERICAN AADVANTAGE FUNDS(R) AMERICAN AADVANTAGE MILEAGE FUNDS(R) MONEY MARKET FUND MONEY MARKET MILEAGE FUND MUNICIPAL MONEY MARKET FUND U.S. GOVERNMENT MONEY MARKET FUND 127 The AMERICAN AADVANTAGE MONEY MARKET FUND(sm) ("Money Market Fund"), AMERICAN AADVANTAGE MUNICIPAL MONEY MARKET FUND(sm) ("Municipal Money Market Fund") and AMERICAN AADVANTAGE U.S. GOVERNMENT MONEY MARKET FUND(sm)("U.S. Government Money Market Fund") (collectively, "AAdvantage Funds") and the AMERICAN AADVANTAGE MONEY MARKET MILEAGE FUND(sm) ("Mileage Fund") each seeks current income, liquidity, and the maintenance of a stable price per share of $1.00. The Money Market Fund and the Mileage Fund seek their investment objective by investing all of their investable assets in the Money Market Portfolio of the AMR Trust ("Money Market Portfolio"), the Municipal Money Market Fund seeks its investment objective by investing all of its investable assets in the Municipal Money Market Portfolio of the AMR Trust ("Municipal Money Market Portfolio") and the U.S. Government Money Market Fund seeks its investment objective by investing all of its investable assets in the U.S. Government Money Market Portfolio of the AMR Trust ("U.S. Government Money Market Portfolio"), (collectively, the "Portfolios"), which in turn invest in high quality, short-term obligations. The Municipal Money Market Portfolio invests primarily in municipal obligations and the U.S. Government Money Market Portfolio invests exclusively in obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities and in repurchase agreements that are collateralized by such obligations. Under a master-feeder operating structure, each Fund seeks its investment objective by investing all of its investable assets in a corresponding Portfolio as described above. Each Portfolio's investment objective is identical to that of its corresponding Fund. Whenever the phrase "all of the Fund's investable assets" is used, it means that the only investment securities that will be held by a Fund will be that Fund's interest in its corresponding Portfolio. AMR Investment Services, Inc. ("Manager") provides investment management and administrative services to the Portfolios and administrative services to the Funds. This master-feeder operating structure is different from that of many other investment companies which directly acquire and manage their own portfolios of securities. Accordingly, investors should carefully consider this investment approach. See "Investment Objectives, Policies and Risks -- Additional Information About the Portfolios." An AAdvantage Fund or the Mileage Fund may withdraw its investment in a corresponding Portfolio at any time if the applicable Trust's Board of Trustees ("Board") determines that it would be in the best interest of that Fund and its shareholders to do so. Upon any such withdrawal, that Fund's assets would be invested in accordance with the investment policies and restrictions described in this Prospectus and the SAI. TABLE OF FEES AND EXPENSES.....................3 FINANCIAL HIGHLIGHTS...........................4 INTRODUCTION...................................8 INVESTMENT OBJECTIVES, POLICIES AND RISKS...........................9 INVESTMENT RESTRICTIONS........................16 YIELDS AND TOTAL RETURNS.......................17 MANAGEMENT AND ADMINISTRATION OF THE TRUSTS....18 AADVANTAGE(R) MILES............................21 HOW TO PURCHASE SHARES.........................22 HOW TO REDEEM SHARES...........................23 VALUATION OF SHARES............................25 DIVIDENDS AND TAX MATTERS......................25 GENERAL INFORMATION............................27 SHAREHOLDER COMMUNICATIONS.....................28
PROSPECTUS 2 128 TABLE OF FEES AND EXPENSES Annual Operating Expenses (as a percentage of average net assets):
MUNICIPAL U.S. GOVERNMENT MONEY MONEY MONEY MONEY MARKET MARKET MARKET MARKET MILEAGE FUND FUND FUND FUND Management Fees 0.15% 0.15% 0.15% 0.15% 12b-1 Fees 0.25% 0.25% 0.25% 0.20%(1) Other Expenses 0.53% 0.63%(2) 0.59% 0.74% ---- ---- ---- ---- Total Operating Expenses 0.93% 1.03%(3) 0.99% 1.09%(3) ==== ==== ==== =====
(1) Absent fee waivers, "12b-1 Fees" for the Money Market Mileage Fund would be 0.25%. The Mileage Trust anticipates that a portion of the "12b-1 Fees" charged for the current fiscal year will be used to pay for AAdvantage miles. See "AAdvantage Miles." (2) "Other Expenses" before fee waivers are estimated to be 0.64% for the Municipal Money Market Fund. (3) "Total Operating Expenses" before fee waivers are estimated to be 1.04% for the Municipal Money Market Fund and 1.14% for the Money Market Mileage Fund. The above expenses reflect the expenses of each Fund and the Portfolio in which it invests. The Board believes that the aggregate per share expenses of each Fund and its corresponding Portfolio will be approximately equal to the expenses that the Fund would incur if its assets were invested directly in the type of securities held by the Portfolio. EXAMPLES A Platinum Class investor in each Fund would directly or indirectly pay on a cumulative basis the following expenses on a $1,000 investment assuming a 5% annual return:
1 3 5 10 YEAR YEARS YEARS YEARS Money Market Fund 9 30 51 114 Municipal Money Market Fund 11 33 57 126 U.S. Government Money Market Fund 10 32 55 121 Money Market Mileage Fund 11 35 60 133
The purpose of the table above is to assist a potential investor in understanding the various costs and expenses expected to be incurred directly or indirectly as a Platinum Class shareholder in a Fund. Additional information may be found under "Management and Administration of the Trusts." THE FOREGOING EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN AND PERFORMANCE MAY BE BETTER OR WORSE THAN THE 5% ANNUAL RETURN ASSUMED IN THE EXAMPLES. PROSPECTUS 3 129 FINANCIAL HIGHLIGHTS The financial highlights in the following tables for the AAdvantage Funds and the Mileage Fund have been derived from financial statements of the AAdvantage Trust and the Mileage Trust, respectively. The information has been audited by Ernst & Young LLP, independent auditor. Such information should be read in conjunction with the financial statements and the report of the independent auditor appearing in the Annual Report of the AAdvantage Trust and the Mileage Trust incorporated by reference in the SAI, which contains further information about performance of the Funds and can be obtained by investors without charge. (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
MONEY MARKET FUND ----------------------------------------------------------------------------------------------- PLATINUM CLASS ------------------------ INSTITUTIONAL CLASS(1) YEAR PERIOD ------------------------------------------------------------------ ENDED ENDED YEAR ENDED OCTOBER 31, OCT. 31, OCT. 31, ------------------------------------------------------------------ 1997 1996(1) 1996 1995 1994 1993 1992 ----------------------------------------------------------------------------------------------- Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 -------- -------- ---------- ---------- ---------- ---------- ---------- Net investment income 0.05(2) 0.05(2) 0.05(2) 0.06 0.04 0.03 0.04 Less dividends from net investment income (0.05) (0.05) (0.05) (0.06) (0.04) (0.03) (0.04) -------- -------- ---------- ---------- ---------- ---------- ---------- Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 ======== ======== ========== ========== ========== ========== ========== Total return (annualized) 4.87% 4.85%(3) 5.57% 5.96% 3.85% 3.31% 4.41% ====== ==== ===== ===== ===== ===== ===== Ratios/supplemental data: Net assets, end of period (in thousands) $494,413 $119,981 $1,406,939 $1,206,041 $1,893,144 $2,882,947 $2,223,829 Ratios to average net assets (annualized)(4)(5): Expenses 0.93%(2) 0.94%(2) 0.24%(2) 0.23% 0.21% 0.23% 0.26% Net investment income 4.80%(2) 4.63%(2) 5.41%(2) 5.79% 3.63% 3.23% 4.06% MONEY MARKET FUND ----------------------------------------- INSTITUTIONAL CLASS(1) ----------------------------------------- YEAR ENDED OCTOBER 31, ----------------------------------------- 1991 1990 1989 1988 ----------------------------------------- Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 ---- ---- ---- ---- Net investment income 0.07 0.08 0.09 0.08 Less dividends from net investment income (0.07) (0.08) (0.09) (0.08) ---- ---- ---- ---- Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 ==== ==== ==== ==== Total return (annualized) 7.18% 8.50% 9.45% 7.54% ==== ==== ==== ==== Ratios/supplemental data: Net assets, end of period (in thousands) $715,280 $745,405 $385,916 $330,230 Ratios to average net assets (annualized)(4)(5): Expenses 0.24% 0.20% 0.22% 0.28% Net investment income 6.93% 8.19% 9.11% 7.54%
(1) The Money Market Fund commenced active operations on September 1, 1987. The Platinum Class commenced active operations on November 7, 1995. (2) The per share amounts and ratios reflect income and expenses assuming inclusion of the Fund's proportionate share of the income and expenses of the Money Market Portfolio. (3) Total return for the Platinum Class for the period ended October 31, 1996, reflects Institutional Class returns from November 1, 1995 through November 6, 1995 and returns of the Platinum Class through October 31, 1996. Due to the different expense structures between the classes, total return would vary from the results shown had the Platinum Class been in operation for the entire year. (4) The method of determining average net assets was changed from a monthly average to a daily average starting with the year ended October 31, 1992. (5) Effective October 1, 1990, expenses include administrative services fees paid by the Fund to the Manager. Prior to that date, expenses exclude shareholder services fees paid directly by shareholders to the Manager, which amounted to less than $.01 per share in each period on an annualized basis. PROSPECTUS 4 130 (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
MUNICIPAL MONEY MARKET FUND ---------------------------------------------------------------------------- PLATINUM CLASS INSTITUTIONAL CLASS ------------------------------ -------------------------------------- YEAR ENDED PERIOD ENDED YEAR ENDED OCT. 31, PERIOD ENDED OCT. 31, OCT. 31, -------------------- OCT. 31, 1997 1996(1) 1996 1995 1994(1) ---------------------------------------------------------------------------- Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 ------- ------- ------ ------ ------ Net investment income 0.03(2) 0.03(2) 0.04(2) 0.04 0.02 Less dividends from net investment income (0.03) (0.03) (0.04) (0.04) (0.02) ------- ------- ------ ------ ------ Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 ======= ======= ====== ====== ======= Total return (annualized) 2.79% 2.88%(3) 3.59% 3.75% 2.44% ======= ======== ====== ====== ====== Ratios/supplemental data: Net assets, end of period (in thousands) $63,883 $49,862 $ 6 $ 7 $9,736 Ratios to average net assets (annualized)(4)(5): Expenses 1.03%(2) 0.97%(2) 0.27%(2) 0.35% 0.30% Net investment income 2.75%(2) 2.72%(2) 3.49%(2) 3.70% 2.38%
(1) The Municipal Money Market Fund commenced active operations on November 10, 1993. The Platinum Class commenced active operations on November 7, 1995. (2) The per share amounts and ratios reflect income and expenses assuming inclusion of the Fund's proportionate share of the income and expenses of its corresponding Portfolio. (3) Total return for the Platinum Class for the period ended October 31, 1996, reflects Institutional Class returns from November 1, 1995 through November 6, 1995 and returns of the Platinum Class through October 31, 1996. Due to the different expense structures between the classes, total return would vary from the results shown had the Platinum Class been in operation for the entire year. (4) Operating results of the Municipal Money Market Fund exclude management and administrative services fees waived by the Manager. Had the Fund paid such fees, the ratio of expenses and net investment income to average net assets of the Institutional Class would have been 0.50% and 2.18%, respectively for the period ended October 31, 1994; 0.55% and 3.50%, respectively, for the year ended October 31, 1995; 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. The ratio of expenses and net investment income to average net assets of the Platinum Class would have been 1.02% and 2.67%, respectively for the period ended October 31, 1996 and 1.04% and 2.74%, respectively, for the year ending October 31, 1997. (5) The method of determining average net assets was changed from a monthly average to a daily average starting with the period ended October 31, 1994. PROSPECTUS 5 131 (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
U.S. GOVERNMENT MONEY MARKET FUND ------------------------------------------------------------------------------------------------ PLATINUM CLASS INSTITUTIONAL CLASS ---------------------------- --------------------------------------------- YEAR ENDED PERIOD ENDED YEAR ENDED OCTOBER 31, PERIOD ENDED OCT. 31, OCT. 31, --------------------------------------------- OCT. 31, 1997 1996(1) 1996 1995 1994(2) 1993 1992(1) ------------------------------------------------------------------------------------------------ Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 ------- ------- ------- ------- ------- -------- -------- Net investment income 0.05(3) 0.04(3) 0.05(3) 0.06 0.04 0.03 0.02 Less dividends from net investment income (0.05) (0.04) (0.05) (0.06) (0.04) (0.03) (0.02) ------- ------- ------- ------- ------- -------- -------- Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 ======= ======== ======= ======= ======= ======== ======== Total return (annualized) 4.61% 4.58%(4) 5.29% 5.67% 3.70% 3.07% 3.61% ======= ======== ======= ======= ======= ======== ======== Ratios/supplemental data: Net assets, end of period (in thousands) $68,439 $52,153 $25,595 $47,184 $67,607 $136,813 $91,453 Ratios to average net assets (annualized)(5): Expenses 0.99%(3) 1.00%(3) 0.32%(3) 0.32% 0.25% 0.23% 0.27%(6) Net investment income 4.53%(3) 4.35%(3) 5.16%(3) 5.49% 3.44% 2.96% 3.46%(6)
(1) The American AAdvantage U.S. Government Money Market Fund commenced active operations on March 2, 1992. The Platinum Class commenced active operations on November 7, 1995. (2) Average shares outstanding for the period rather than end of period shares were used to compute net investment income per share. (3) The per share amounts and ratios reflect income and expenses assuming inclusion of the Fund's proportionate share of the income and expenses of its corresponding Portfolio. (4) Total return for the Platinum Class for the period ended October 31, 1996, reflects Institutional Class returns from November 1, 1995 through November 6, 1995 and returns of the Platinum Class through October 31, 1996. Due to the different expense structures between the classes, total return would vary from the results shown had the Platinum Class been in operation for the entire year. (5) The method of determining average net assets was changed from a monthly average to a daily average starting with the period ended October 31, 1994. (6) Estimated based on expected annual expenses and actual average net assets. PROSPECTUS 6 132 (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
MONEY MARKET MILEAGE FUND ------------------------------------------------------------- PLATINUM CLASS MILEAGE CLASS ---------------------------------------- ----------------- YEAR ENDED PERIOD ENDED ----------------- ------------------- YEAR ENDED OCTOBER 31, 1997 OCTOBER 31, 1996(1) OCTOBER 31, 1996 ----------------- ------------------- ----------------- Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 ------- ------- -------- Net investment income 0.05 0.03 0.05 Less dividends from net investment income (0.05) (0.03) (0.05) ------- ------- -------- Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 ======= ======= ======== Total return (annualized) 4.71% 4.78%(2) 5.12% ======= ======= ======== Ratios/supplemental data: Net assets, end of period (in thousands) $49,184 $15,429 $106,709 Ratios to average net assets (annualized)(3)(4): Expenses 1.09% 1.09% 0.67% Net investment income 4.64% 4.48% 5.02%
(1) The Platinum Class of the Money Market Mileage Fund commenced active operations on January 29, 1996, and at that time the existing shares of the Fund were designated as Mileage Class shares. (2) Total return for the Platinum Class for the period ended October 31, 1996, reflects Mileage Class returns from November 1, 1995 through January 27, 1996 and returns of the Platinum Class through October 31, 1996. Due to the different expense structures between the classes, total return would vary from the results shown had the Platinum Class been in operation for the entire year. (3) The per share amounts reflect income and expenses assuming inclusion of the Fund's proportionate share of the income and expenses of the Money Market Portfolio. (4) Operating results exclude expenses reimbursed by the Manager. Had the Fund paid such fees, the ratio of expenses and net investment income to average net assets would have been 1.24% and 4.33%, respectively, for the period ended October 31, 1996 and 1.14% and 4.59%, respectively, for the year ended October 31, 1997 for the Platinum Class and 0.78% and 4.91%, respectively for the year ended October 31, 1996 and 0.74% and 4.95%, respectively, for the year ended October 31, 1997 for the Mileage Class. PROSPECTUS 7 133 INTRODUCTION The AAdvantage Trust and the Mileage Trust are open-end, diversified management investment companies, organized as Massachusetts business trusts on January 16, 1987 and February 22, 1995, respectively. The AAdvantage Funds are three of the several investment portfolios of the AAdvantage Trust and the Mileage Fund is a separate investment portfolio of the Mileage Trust. Each Fund has the same investment objective but may have different investment policies. Each Fund invests all of its investable assets in a corresponding Portfolio of the AMR Trust with an identical investment objective. Each AAdvantage Fund currently consists of three classes of shares, including the "Platinum Class," which is available to customers of certain broker-dealers. The Money Market Mileage Fund currently consists of two classes of shares including the "Platinum Class," as described above. The Money Market Mileage Fund is available only to individuals and certain grantor trusts. Qualified retirement plans (i.e., IRAs, Keogh, profit sharing plans) and institutional investors are not eligible to invest in the Money Market Mileage Fund. This Prospectus relates only to the Platinum Class. For further information about the other classes, or to obtain a prospectus free of charge, call (800) 967-9009 or write to P.O. Box 619003, MD 5645, Dallas/Ft. Worth Airport, Texas 75261. Although each class of shares is designed to meet the needs of different categories of investors, all classes of each Fund share the same portfolio of investments and a common investment objective. See "Investment Objectives, Policies and Risks." There is no guarantee that a Fund will achieve its investment objective. Based on its value, a share of a Fund, regardless of class, will receive a proportionate share of the investment income and the gains (or losses) earned (or incurred) by the Fund. It also will bear its proportionate share of expenses that are allocated to the Fund as a whole. However, certain expenses are allocated separately to each class of shares. The Manager provides the Funds and their corresponding Portfolios with investment advisory and administrative services. Investment decisions for the Portfolios are made by the Manager in accordance with the investment objectives, policies and restrictions described in this Prospectus and in the SAI. Shares are sold without a sales charge at the next share price calculated after an investment is received and accepted. Shares will be redeemed at the next share price calculated after receipt of a redemption order. See "How to Purchase Shares" and "How to Redeem Shares." Each shareholder in the Mileage Fund will receive American Airlines(R) AAdvantage(R) travel awards program ("AAdvantage") miles.((1)) AAdvantage miles will - --------------- (1) American Airlines and AAdvantage are registered trademarks of American Airlines, Inc. PROSPECTUS 8 134 be posted monthly to each shareholder's AAdvantage account at an annual rate of one mile for every $10 invested in the Fund. See "AAdvantage Miles." INVESTMENT OBJECTIVES, POLICIES AND RISKS The investment objective and policies of each Fund and its corresponding Portfolio are described below. Except as otherwise indicated, the investment policies of any Fund may be changed at any time by the applicable Board to the extent that such changes are consistent with the investment objective of the applicable Fund. However, each Fund's investment objective may not be changed without a majority vote of that Fund's outstanding shares, which is defined as the lesser of (a) 67% of the shares of the applicable Fund present or represented if the holders of more than 50% of the shares are present or represented at the shareholders' meeting, or (b) more than 50% of the shares of the applicable Fund (hereinafter, "majority vote"). A Portfolio's investment objective may not be changed without a majority vote of that Portfolio's interest holders. Each Fund has a fundamental investment policy which allows it to invest all of its investable assets in its corresponding Portfolio. All other fundamental investment policies and the non-fundamental investment policies of each Fund and its corresponding Portfolio are identical. Therefore, although the following discusses the investment policies of each Portfolio and the AMR Trust's Board of Trustees ("AMR Trust Board"), it applies equally to each Fund and the applicable Board. INVESTMENT OBJECTIVE OF THE FUNDS -- The investment objective of each of the Funds is to seek current income, liquidity and the maintenance of a stable $1.00 price per share. The Funds seek to achieve this objective by investing all of their investable assets in their corresponding Portfolios, which invest in high quality, U.S. dollar-denominated short-term obligations that have been determined by the Manager or the AMR Trust Board to present minimal credit risks. Portfolio investments are valued based on the amortized cost valuation technique pursuant to Rule 2a-7 under the Investment Company Act of 1940 ("1940 Act"). See the SAI for an explanation of amortized cost. Obligations in which the Portfolios invest generally have remaining maturities of 397 days or less, although instruments subject to repurchase agreements and certain variable and floating rate obligations may bear longer final maturities. The average dollar-weighted portfolio maturity of each Portfolio will not exceed 90 days. AMERICAN AADVANTAGE MONEY MARKET FUND AND AMERICAN AADVANTAGE MONEY MARKET MILEAGE FUND -- The Funds' corresponding Portfolio may invest in obligations permitted to be purchased under Rule 2a-7 of the 1940 Act including, but not limited to, (1) obligations of the U.S. Government or its agencies or instrumentalities; (2) loan participation interests, medium-term notes, funding agreements and asset-backed PROSPECTUS 9 135 securities; (3) domestic, Yankeedollar and Eurodollar certificates of deposit, time deposits, bankers' acceptances, commercial paper, bank deposit notes and other promissory notes including floating or variable rate obligations issued by U.S. or foreign bank holding companies and their bank subsidiaries, branches and agencies; and (4) repurchase agreements involving the obligations listed above. The Money Market Portfolio will invest only in issuers or instruments that at the time of purchase (1) have received the highest short-term rating by two nationally recognized statistical rating organizations ("Rating Organizations") such as "A-1" by Standard & Poor's and "P-1" by Moody's Investor Services, Inc.; (2) are single rated and have received the highest short-term rating by a Rating Organization; or (3) are unrated, but are determined to be of comparable quality by the Manager pursuant to guidelines approved by the AMR Trust Board and subject to ratification by the AMR Trust Board. See the SAI for definitions of the foregoing instruments and rating systems. The Portfolio may invest in other investment companies. The Portfolio will invest more than 25% of its assets in obligations issued by the banking industry. However, for temporary defensive purposes during periods when the Manager believes that maintaining this concentration may be inconsistent with the best interests of shareholders, the Portfolio may not maintain this concentration. Investments in Eurodollar (U.S. dollar obligations issued outside the United States by domestic or foreign entities) and Yankeedollar (U.S. dollar obligations issued inside the United States by foreign entities) obligations involve additional risks. Most notably, there generally is less publicly available information about foreign issuers; there may be less governmental regulation and supervision; foreign issuers may use different accounting and financial standards; and the adoption of foreign governmental restrictions may affect adversely the payment of principal and interest on foreign investments. In addition, not all foreign branches of United States banks are supervised or examined by regulatory authorities as are United States banks, and such branches may not be subject to reserve requirements. Variable amount master demand notes in which the Portfolio may invest are unsecured demand notes that permit the indebtedness thereunder to vary, and provide for periodic adjustments in the interest rate. Because master demand notes are direct lending arrangements between the Portfolio and the issuer, they are not normally traded. There is no secondary market for the notes; however, the period of time remaining until payment of principal and accrued interest can be recovered under a variable amount master demand note generally will not exceed seven days. To the extent this period is exceeded, the note in question would be considered illiquid. Issuers of variable amount master demand notes must satisfy the same criteria as set forth for other promissory notes (e.g. commercial paper). The Portfolio will invest in variable amount master demand notes only when such notes are determined by the Manager, pursuant to guidelines established by the AMR Trust Board, to be of comparable quality to rated issuers or instruments eligible for investment by the Portfolio. In PROSPECTUS 10 136 determining average dollar-weighted portfolio maturity, a variable amount master demand note will be deemed to have a maturity equal to the longer of the period of time remaining until the next readjustment of the interest rate or the period of time remaining until the principal amount can be recovered from the issuer on demand. The Portfolio also may engage in dollar rolls or purchase or sell securities on a "when-issued" or "forward commitment" basis. The purchase or sale of when-issued securities enables an investor to hedge against anticipated changes in interest rates and prices by locking in an attractive price or yield. The price of when-issued securities is fixed at the time the commitment to purchase or sell is made, but delivery and payment for the when-issued securities take place at a later date, normally one to two months after the date of purchase. During the period between purchase and settlement, no payment is made by the purchaser to the issuer and no interest accrues to the purchaser. Such transactions therefore involve a risk of loss if the value of the security to be purchased declines prior to the settlement date or if the value of the security to be sold increases prior to the settlement date. A sale of a when-issued security also involves the risk that the other party will be unable to settle the transaction. Dollar rolls are a type of forward commitment transaction. Purchases and sales of securities on a forward commitment basis involve a commitment to purchase or sell securities with payment and delivery to take place at some future date, normally one to two months after the date of the transaction. As with when-issued securities, these transactions involve certain risks, but they also enable an investor to hedge against anticipated changes in interest rates and prices. Forward commitment transactions are executed for existing obligations, whereas in a when-issued transaction, the obligations have not yet been issued. When purchasing securities on a when-issued or forward commitment basis, a segregated account of liquid assets at least equal to the value of purchase commitments for such securities will be maintained until the settlement date. AMERICAN AADVANTAGE MUNICIPAL MONEY MARKET FUND -- The Fund's corresponding Portfolio may invest in municipal obligations issued by or on behalf of the governments of states, territories, or possessions of the United States; the District of Columbia; and their political subdivisions, agencies and instrumentalities if the interest these obligations provide is generally exempt from federal income tax. The Municipal Money Market Portfolio will invest only in issuers or instruments that at the time of purchase (1) are guaranteed by the U.S. Government, its agencies, or instrumentalities; (2) are secured by letters of credit that are irrevocable and issued by banks which qualify as authorized issuers for the Money Market Portfolio (see "American AAdvantage Money Market Fund"); (3) are guaranteed by one or more municipal bond insurance policies that cannot be canceled and are issued by third-party guarantors possessing the highest claims-paying rating from a Rating Organization; (4) have received one of the two highest short-term ratings from at least two Rating Organizations; (5) are single rated and have received one of the two highest short-term ratings from that Rating Organization; (6) have no short-term rating but the instrument is comparable to the issuer's rated short-term debt; (7) have no short-term rating (or comparable rating) PROSPECTUS 11 137 but have received one of the top two long-term ratings from all Rating Organizations rating the issuer or instrument; or (8) are unrated, but are determined to be of comparable quality by the Manager pursuant to guidelines approved by, and subject to the oversight of, the AMR Trust Board. The Portfolio also may invest in other investment companies. Ordinarily at least 80% of the Portfolio's net assets will be invested in municipal obligations the interest from which is exempt from federal income tax. However, should market conditions warrant, the Portfolio may invest up to 20% (or for temporary defensive purposes, up to 100%) of its assets in eligible investments for the Money Market Portfolio which are subject to federal income tax. The Portfolio may invest in certain municipal obligations which have rates of interest that are adjusted periodically according to formulas intended to minimize fluctuations in the values of these instruments. These instruments, commonly known as variable rate demand obligations, are long-term instruments which allow the purchaser, at its discretion, to redeem securities before their final maturity at par plus accrued interest upon notice (typically 7 to 30 days). Municipal obligations may be backed by the full taxing power of a municipality ("general obligations"), or by the revenues from a specific project or the credit of a private organization ("revenue obligations"). Some municipal obligations are collateralized as to payment of principal and interest by an escrow of U.S. Government or federal agency obligations, while others are insured by private insurance companies, while still others may be supported by letters of credit furnished by domestic or foreign banks. The Portfolio's investments in municipal obligations may include fixed, variable, or floating rate general obligations and revenue obligations (including municipal lease obligations and resource recovery obligations); zero coupon and asset-backed obligations; variable rate auction and residual interest obligations; tax, revenue, or bond anticipation notes; and tax-exempt commercial paper. See the SAI for a further discussion of the foregoing obligations. The Portfolio may purchase or sell securities on a when-issued or a forward commitment basis as described under "American AAdvantage Money Market Fund and American AAdvantage Money Market Mileage Fund." The Portfolio may invest more than 25% of the value of its total assets in municipal obligations which are related in such a way that an economic, business or political development or change affecting one such security would also affect the other securities; for example, securities the interest of which is paid from revenues of similar types of projects, or securities whose issuers are located in the same state. As a result, the Portfolio may be subject to greater risk compared to a fund that does not follow this practice. However, this risk is mitigated because it is anticipated that most of the Portfolio's assets will be insured or backed by bank letters of credit. Additionally, the Portfolio may invest more than 25% of the value of its total assets in industrial development bonds which, although issued by industrial development authorities, may be backed only by the assets and revenues of the non-governmental users. PROSPECTUS 12 138 The Portfolio also may invest in municipal obligations that constitute "private activity obligations." These include obligations that finance student loans, residential rental projects, and solid waste disposal facilities. To the extent the Portfolio earns interest income on private activity obligations, shareholders will be required to treat the portion of the Fund's distributions attributable to its share of such interest as a "tax preference item" for purposes of determining their liability for the federal alternative minimum tax ("AMT") and, as a result, may become subject to (or increase their liability for) the AMT. Shareholders should consult their own tax advisers to determine whether they may be subject to the AMT. The Portfolio may invest in private activity obligations without limitation and it is anticipated that a substantial portion of the Portfolio's assets will be invested in these obligations. As a result, a substantial portion of the Fund's distributions may be a tax preference item, which will reduce the net return from the Fund for taxpayers subject to the AMT. Interest on "qualified" private activity obligations is exempt from federal income tax. AMERICAN AADVANTAGE U.S. GOVERNMENT MONEY MARKET FUND -- The Fund's corresponding Portfolio will invest exclusively in obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities and repurchase agreements which are collateralized by such obligations. U.S. Government securities include direct obligations of the U.S. Treasury (such as Treasury bills, Treasury notes and Treasury bonds). The Fund may invest in securities issued by the Agency for International Development, Farmers Home Administration, Farm Credit Banks, Federal Home Loan Bank, Federal Intermediate Credit Bank, Federal Financing Bank, Federal Land Bank, FNMA, GNMA, General Services Administration, Rural Electrification Administration, Small Business Administration, Tennessee Valley Authority and others. Some of these obligations, such as those issued by the Federal Home Loan Bank and FHLMC, are supported only by the credit of the agency or instrumentality issuing the obligation and the discretionary authority of the U.S. Government to purchase the agency's obligations. See the SAI for a further discussion of the foregoing obligations. Counterparties for repurchase agreements must be approved by the AMR Trust Board. The Portfolio may purchase or sell securities on a when-issued or a forward commitment basis as described under "American AAdvantage Money Market Fund and American AAdvantage Money Market Mileage Fund." OTHER INVESTMENT POLICIES -- In addition to the investment policies described previously, each Portfolio also may lend its securities, enter into fully collateralized repurchase agreements, and invest in private placement offerings. SECURITIES LENDING. Each Portfolio may lend securities to broker-dealers or other institutional investors pursuant to agreements requiring that the loans be continuously secured by any combination of cash, securities of the U.S. Government and its agencies and instrumentalities and approved bank letters of credit that at all times equal at least 100% of the market value of the loaned securities. Such loans will not be made if, as a result, the aggregate amount of all outstanding securities loans by any Portfolio would PROSPECTUS 13 139 exceed 33 1/3% of its total assets (including the market value of collateral received). A Portfolio continues to receive interest on the securities loaned and simultaneously earns either interest on the investment of the cash collateral or fee income if the loan is otherwise collateralized. Should the borrower of the securities fail financially, there is a risk of delay in recovery of the securities loaned or loss of rights in the collateral. However, the Portfolios seek to minimize this risk by making loans only to borrowers which are deemed to be of good financial standing and which have been approved by the AMR Trust Board. For purposes of complying with each Portfolio's investment policies and restrictions, collateral received in connection with securities loans will be deemed an asset of a Portfolio to the extent required by law. The Manager will receive compensation for administrative and oversight functions with respect to securities lending. The amount of such compensation will depend on the income generated by the loan of each Portfolio's securities. The SEC has granted exemptive relief that permits the Portfolios to invest cash collateral received from securities lending transactions in shares of one or more private investment companies managed by the Manager. Subject to receipt of exemptive relief from the SEC, the Portfolios also may invest cash collateral received from securities lending transactions in shares of one or more registered investment companies managed by the Manager. See the SAI for further information regarding loan transactions. REPURCHASE AGREEMENTS. A repurchase agreement is an agreement under which securities are acquired by a Portfolio from a securities dealer or bank subject to resale at an agreed upon price on a later date. The acquiring Portfolio bears a risk of loss in the event that the other party to a repurchase agreement defaults on its obligations and the Portfolio is delayed or prevented from exercising its rights to dispose of the collateral securities. However, the Manager attempts to minimize this risk by entering into repurchase agreements only with financial institutions which are deemed to be of good financial standing and which have been approved by the AMR Trust Board. See the SAI for more information regarding repurchase agreements. PRIVATE PLACEMENT OFFERINGS. Investments in private placement offerings are made in reliance on the "private placement" exemption from registration afforded by Section 4(2) of the Securities Act of 1933 (the "1933 Act"), and resold to qualified institutional buyers under Rule 144A under the 1933 Act ("Section 4(2) securities"). Section 4(2) securities are restricted as to disposition under the federal securities laws, and generally are sold to institutional investors such as the Portfolios, that agree they are purchasing the securities for investment and not with an intention to distribute to the public. Any resale by the purchaser must be pursuant to an exempt transaction and may be accomplished in accordance with Rule 144A. Section 4(2) securities normally are resold to other institutional investors such as the Portfolios through or with the assistance of the issuer or dealers that make a market in the Section 4(2) securities, thus providing liquidity. The Portfolios will not invest more than 10% of their respective net assets in Section 4(2) securities and other illiquid securities unless the Manager determines, by continuous reference to the appropriate trading markets and PROSPECTUS 14 140 pursuant to guidelines approved by the AMR Trust Board, that any Section 4(2) securities held by such Portfolio in excess of this level are at all times liquid. The AMR Trust Board and the Manager, pursuant to the guidelines approved by the AMR Trust Board, will carefully monitor the Portfolios' investments in Section 4(2) securities offered and sold under Rule 144A, focusing on such important factors, among others, as: valuation, liquidity, and availability of information. Investments in Section 4(2) securities could have the effect of reducing a Portfolio's liquidity to the extent that qualified institutional buyers no longer wish to purchase these restricted securities. BROKERAGE PRACTICES -- The Portfolios normally will not incur any brokerage commissions on their transactions because money market instruments are generally traded on a "net" basis with dealers acting as principal for their own accounts without a stated commission. The price of the obligation, however, usually includes a profit to the dealer. Obligations purchased in underwritten offerings include a fixed amount of compensation to the underwriter, generally referred to as the underwriter's concession or discount. No commissions or discounts are paid when securities are purchased directly from an issuer. ADDITIONAL INFORMATION ABOUT THE PORTFOLIOS -- As previously described, investors should be aware that each Fund, unlike mutual funds that directly acquire and manage their own portfolios of securities, seeks to achieve its investment objective by investing all of its investable assets in a corresponding Portfolio of the AMR Trust, which is a separate investment company. Since a Fund will invest only in its corresponding Portfolio, that Fund's shareholders will acquire only an indirect interest in the investments of the Portfolio. The Manager expects, although it cannot guarantee, that the AAdvantage Trust and the Mileage Trust will achieve economies of scale by investing in the AMR Trust. In addition to selling their interests to the Funds, the Portfolios sell their interests to other non-affiliated investment companies and/or other institutional investors. All institutional investors in a Portfolio pay a proportionate share of the Portfolio's expenses and invest in that Portfolio on the same terms and conditions. However, other investment companies investing all of their assets in a Portfolio, are not required to sell their shares at the same public offering price as a Fund and are allowed to charge different sales commissions. Therefore, investors in a Fund may experience different returns from investors in another investment company that invests exclusively in that Fund's corresponding Portfolio. The Fund's investment in a Portfolio may be affected materially by the actions of large investors in that Portfolio, if any. For example, as with all open-end investment companies, if a large investor were to redeem its interest in a Portfolio, that Portfolio's remaining investors could experience higher pro rata operating expenses, thereby PROSPECTUS 15 141 producing lower returns. As a result, that Portfolio's security holdings may become less diverse, resulting in increased risk. Institutional investors in a Portfolio that have a greater pro rata ownership interest in the Portfolio than the Fund could have effective voting control over the operation of that Portfolio. A material change in a Portfolio's fundamental objective, policies and restrictions, that is not approved by the shareholders of its corresponding Fund could require that Fund to redeem its interest in the Portfolio. Any such redemption could result in a distribution in kind of portfolio securities (as opposed to a cash distribution) by the Portfolio. Should such a distribution occur, that Fund could incur brokerage fees or other transaction costs in converting such securities to cash. In addition, a distribution in kind could result in a less diversified portfolio of investments for that Fund and could affect its liquidity adversely. The Portfolios' and their corresponding Funds' investment objectives and policies are described above. See "Investment Restrictions" for a description of their investment restrictions. The investment objective of a Fund can be changed only with shareholder approval. The approval of a Fund and of other investors in its corresponding Portfolio, if any, is not required to change the investment objective, policies or limitations of that Portfolio, unless otherwise specified. Written notice will be provided to shareholders of a Fund within thirty days prior to any changes in its corresponding Portfolio's investment objective. If the investment objective of a Portfolio changes and the shareholders of its corresponding Fund do not approve a parallel change in that Fund's investment objective, the Fund would seek an alternative investment vehicle or the Manager would actively manage the Fund. See "Management and Administration of the Trusts" for a complete description of the investment management fee and other expenses associated with a Fund's investment in its corresponding Portfolio. This Prospectus and the SAI contain more detailed information about each Fund and its corresponding Portfolio, including information related to (1) the investment objective, policies and restrictions of each Fund and its corresponding Portfolio, (2) the Board of Trustees and officers of the AAdvantage Trust, the MileageTrust and the AMR Trust, (3) brokerage practices, (4) the Funds' shares, including the rights and liabilities of its shareholders, (5) additional performance information, including the method used to calculate yield and total return, and (6) the determination of the value of each Fund's shares. INVESTMENT RESTRICTIONS The following fundamental investment restrictions and the non-fundamental investment restriction are identical for each Fund and its corresponding Portfolio. Therefore, although the following discusses the investment restrictions of each Portfolio and the AMR Trust Board, it applies equally to each Fund and its respective PROSPECTUS 16 142 Board. The following fundamental investment restrictions may be changed with respect to a particular Fund by the majority vote of that Fund's outstanding shares or with respect to a Portfolio by the majority vote of that Portfolio's interest holders. No Portfolio may: o Invest more than 5% of its total assets (taken at market value) in securities of any one issuer, other than obligations issued by the U.S. Government, its agencies and instrumentalities, or purchase more than 10% of the voting securities of any one issuer, with respect to 75% of a Portfolio's total assets. In addition, although not a fundamental investment restriction and therefore subject to change without shareholder vote, the Money Market Portfolio and the U.S. Government Money Market Portfolio apply this restriction with respect to 100% of their assets. o Invest more than 25% of its total assets in the securities of companies primarily engaged in any one industry, provided that: (i) this limitation does not apply to obligations issued or guaranteed by the U.S. Government, its agencies and instrumentalities; (ii) municipalities and their agencies and authorities are not deemed to be industries; and (iii) financial service companies are classified according to the end users of their services (for example, automobile finance, bank finance, and diversified finance will be considered separate industries). With respect to the Money Market Portfolio, this restriction does not apply to the banking industry. The following non-fundamental investment restriction may be changed with respect to a particular Fund by a vote of a majority of its respective Board or with respect to a Portfolio by a vote of a majority of the AMR Trust Board: no Portfolio may invest more than 10% of its net assets in illiquid securities, including time deposits and repurchase agreements that mature in more than seven days. The above percentage limits are based upon asset values at the time of the applicable transaction; accordingly, a subsequent change in asset values will not affect a transaction that was in compliance with the investment restrictions at the time such transaction was effected. See the SAI for other investment limitations. YIELDS AND TOTAL RETURNS From time to time the Platinum Class of the Funds may advertise its "current yield" and "effective yield." Both yield figures are based on historical earnings and are not intended to indicate future performance. The current yield refers to the investment income generated over a seven calendar-day period (which period will be stated in the advertisement). This yield is then annualized by assuming the amount of investment PROSPECTUS 17 143 income generated during that week is earned each week over a one-year period, and is shown as a percentage of the investment. The effective yield is calculated similarly but, when annualized, the investment income earned is assumed to be reinvested. The effective yield will be slightly higher than the current yield because of the compounding effect of this assumed reinvestment. The Municipal Money Market Fund also may quote "tax equivalent yields," which show the taxable yields a shareholder would have to earn before federal income taxes to equal this Fund's tax-exempt yields. The tax equivalent yield is calculated by dividing the Fund's tax-exempt yield by the result of one minus a stated federal income tax rate. If only a portion of the Fund's income was tax-exempt, only that portion is adjusted in the calculation. As stated earlier, the Fund considers interest on private activity obligations to be exempt from federal income tax. Total return quotations advertised by the Funds may reflect the average annual compounded (or aggregate compounded) rate of return during the designated time period based on a hypothetical initial investment and the redeemable value of that investment at the end of the period. The Funds will at times compare their performance to applicable published indices, and also may disclose their performance as ranked by certain ranking entities. Each class of a Fund has different expenses which will impact its performance. See the SAI for more information about the calculation of yields and total returns. MANAGEMENT AND ADMINISTRATION OF THE TRUSTS FUND MANAGEMENT AGREEMENT -- The AAdvantage Trust's Board and the Mileage Trust's Board have general supervisory responsibility over their respective Trust's affairs. The Manager provides or oversees all administrative, investment advisory and portfolio management services for the AAdvantage Trust pursuant to a Management Agreement, dated April 3, 1987, as amended on July 25, 1997, together with the Administrative Services Agreement described below. The Manager provides or oversees all administrative, investment advisory and portfolio management services for the Mileage Trust pursuant to a Management Agreement, dated October 1, 1995 as amended November 21, 1997. The AMR Trust and the Manager also entered into a Management Agreement dated, October 1, 1995, as amended July 25, 1997, which obligates the Manager to provide or oversee all administrative, investment advisory and portfolio management services for the AMR Trust. The Manager, located at 4333 Amon Carter Boulevard, MD 5645, Fort Worth, Texas 76155, is a wholly owned subsidiary of AMR Corporation ("AMR"), the parent company of American Airlines, Inc., and was organized in 1986 to provide investment management, advisory, administrative and asset management consulting services. The Manager serves as the sole investment adviser to the Portfolios. As of December 31, 1997, the Manager had assets under management totaling approximately $18.4 billion, including approximately $6.1 billion under active management and $12.3 billion as named fiduciary or fiduciary adviser. Of the total, approximately $14.2 billion of assets are PROSPECTUS 18 144 related to AMR. American Airlines, Inc. is not responsible for investments made in the American AAdvantage Funds or the American AAdvantage Mileage Funds. The Manager provides the Trust and the AMR Trust with office space, office equipment and personnel necessary to manage and administer the Trusts' operations. This includes complying with reporting requirements; corresponding with shareholders; maintaining internal bookkeeping, accounting and auditing services and records; and supervising the provision of services to the Trusts by third parties. The Manager also oversees each Portfolio's participation in securities lending activities and any actions taken by the securities lending agent in connection with those activities to ensure compliance with all applicable regulatory and investment guidelines. The Manager also develops the investment programs for each Portfolio. Except as otherwise provided below, the Manager bears the expense of providing the above services. As compensation for providing the Portfolios with advisory services, the Manager receives from the AMR Trust an annualized advisory fee that is calculated and accrued daily, equal to 0.15% of the net assets of the Portfolios. To the extent that a Fund invests all of its investable assets in its corresponding Portfolio, the Manager receives no advisory fee from the AAdvantage Trust or the Mileage Trust. The Manager is entitled to receive compensation in connection with securities lending activities. If a Portfolio lends its portfolio securities and receives cash collateral from the borrower, the Manager may receive up to 25% of the net annual interest income (the gross interest earned by the investment less the amount paid to the borrower as well as related expenses) received from the investment of such cash. If a borrower posts collateral other than cash, the borrower will pay to the lender a loan fee. The Manager may receive up to 25% of the loan fees posted by borrowers. The fees received by the Manager from the AMR Trust are payable quarterly in arrears. In addition, the Manager is compensated through the Administrative Services Agreement as described below for other services provided. Each Management Agreement will continue in effect provided that annually such continuance is specifically approved by a vote of the applicable Board including the affirmative votes of a majority of the Trustees of each Board who are not parties to the Management Agreement or "interested persons" as defined in the 1940 Act of any such party ("Independent Trustees"), cast in person at a meeting called for the purpose of considering such approval, or by the vote of a Fund's shareholders or a Portfolio's interest holders. A Management Agreement may be terminated with respect to a Fund or a Portfolio at any time, without penalty, by a majority vote of outstanding Fund shares or Portfolio interests on sixty (60) days' written notice to the Manager, or by the Manager, on sixty (60) days' written notice to the AAdvantage Trust, the Mileage Trust or the AMR Trust. A Management Agreement will automatically terminate in the event of its "assignment" as defined in the 1940 Act. PROSPECTUS 19 145 The AAdvantage Trust and the Mileage Trust are each responsible for expenses not otherwise assumed by the Manager, including: audits by independent auditors; transfer agency, custodian, dividend disbursing agent and shareholder recordkeeping services; taxes, if any, and the preparation of each Fund's tax returns; interest; costs of Trustee and shareholder meetings; printing and mailing prospectuses and reports to existing shareholders; fees for filing reports with regulatory bodies and the maintenance of the Funds' existence; legal fees; fees to federal and state authorities for the registration of shares; fees and expenses of Independent Trustees; insurance and fidelity bond premiums; fees paid to consultants providing reports regarding the adherence by investment advisers to the investment style of a Portfolio and any extraordinary expenses of a nonrecurring nature. A majority of the Independent Trustees of each Board has adopted written procedures reasonably appropriate to deal with potential conflicts of interest between the AAdvantage Trust or the Mileage Trust and the AMR Trust. ADMINISTRATIVE SERVICES PLAN -- The Manager has entered into separate Administrative Services Plans with the AAdvantage Trust and the Mileage Trust which obligate the Manager to provide the Platinum Class with administrative services either directly or through the various broker-dealers that offer Platinum Class shares. These services include, but are not limited to, the payment of fees for record maintenance, forwarding shareholder communications to the shareholders and aggregating and processing orders for the purchase and redemption of Platinum Class shares. As compensation for these services, the Manager receives an annualized fee of up to 0.50% and 0.55% of the net assets of the Platinum Class of the AAdvantage Funds and the Mileage Fund, respectively. The fee is payable quarterly in arrears. DISTRIBUTION PLAN -- The AAdvantage Trust and the Mileage Trust have each adopted a Platinum Class distribution plan (the "Plans") pursuant to Rule 12b-1 under the 1940 Act which will continue in effect so long as approved at least annually by a majority of the applicable Board's Trustees, including the affirmative votes of a majority of the Independent Trustees of the applicable Board, cast in person at a meeting called for the purpose of considering such approval, or by the vote of shareholders of the Platinum Class. The Plans may be terminated with respect to a particular Platinum Class at any time, without payment of any penalty, by a vote of a majority of the Independent Trustees of the applicable Board or by a vote of a majority of the outstanding voting securities of that class. The Plans provide that each Platinum Class will pay 0.25% per annum of its average daily net assets to the Manager (or another entity approved by the applicable Board) for distribution-related services. The fee will be payable quarterly in arrears without regard to whether the amount of the fee is more or less than the actual expenses incurred in a particular quarter by the entity for the services provided pursuant to the Plans. The Plans authorize the Manager, or any other entity approved PROSPECTUS 20 146 by the applicable Board, to spend Rule 12b-1 fees on any activities or expenses intended to result in the sale or servicing of Platinum Class shares including but not limited to, advertising, expenses of various broker-dealers relating to selling efforts, transfer agency fees and the preparation and distribution of advertising material and sales literature. In addition, the Mileage Fund's Plan authorizes expenses incurred in connection with participation in the AAdvantage program. ALLOCATION OF FUND EXPENSES -- Expenses of each Fund generally are allocated equally among the shares of that Fund, regardless of class. However, certain expenses approved by the applicable Board will be allocated solely to the class to which they relate. PRINCIPAL UNDERWRITER -- BROKERS TRANSACTION SERVICES, INC. ("BTS"), 7001 Preston Road, Dallas, Texas, 75205 serves as the principal underwriter of the AAdvantage Trust and the Mileage Trust. CUSTODIAN AND TRANSFER AGENT -- STATE STREET BANK & TRUST COMPANY, BOSTON, MASSACHUSETTS, serves as custodian for the Portfolios and the Funds and as transfer agent for the Platinum Class. INDEPENDENT AUDITOR -- The independent auditor for the Funds and the AMR Trust is ERNST & YOUNG LLP, Dallas, Texas. AADVANTAGE(R) MILES The AAdvantage program offers the opportunity to obtain free upgrades and travel awards on American Airlines and AAdvantage airline participants, as well as upgrades and discounts on car rentals and hotel accommodations. For more information about the AAdvantage program, call American Airlines at (800) 433-7300. AAdvantage miles will be posted monthly in arrears to each shareholder's AAdvantage account based on the shareholder's average daily account balance during the previous month. Miles are posted at an annual rate of one mile per $10 maintained in the Mileage Fund. Mileage is calculated on the average daily balance and posted monthly. The average daily balance is calculated by adding each day's balance and dividing by the number of days in the month. For example, the average daily balance on a $50,000 account funded on the 16th day of a month having 30 days (and 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. PROSPECTUS 21 147 In the case of Trust Accounts, AAdvantage miles will be posted only in a trustee's individual name, and not in the name of the Trust Account. Before investing in a Fund, trustees of the Trust Accounts should consult their own legal and tax advisers as to the tax effect of this arrangement and whether this arrangement is consistent with their legal duties as trustees. American Airlines has informed the Funds that in administering an AAdvantage member's AAdvantage account, it shall not be required to distinguish between AAdvantage miles accumulated by the individual in his/her capacity as trustee to a Trust Account from AAdvantage miles accumulated in an individual capacity or from other sources. The Manager reserves the right to discontinue the posting of AAdvantage miles or to change the mileage calculation at any time upon notice to shareholders. See also "Dividends and Tax Matters." American Airlines may find it necessary to change AAdvantage program rules, regulations, travel awards and special offers at any time. This means that American Airlines may initiate changes impacting, for example, participant affiliations, rules for earning mileage credit, mileage levels and rules for the use of travel awards, continued availability of travel awards, blackout dates and limited seating for travel awards, and the features of special offers. American Airlines reserves the right to end the AAdvantage program with six months' notice. AAdvantage travel awards, mileage accrual and special offers are subject to governmental regulations. HOW TO PURCHASE SHARES Platinum Class shares are offered on a continuous basis at net asset value through selected financial services firms. The Platinum Class has established a minimum initial investment of $1,000 and $100 minimum for subsequent investments, but these minimums may be changed at any time at the AAdvantage Trust's or the Mileage Trust's discretion. An order to purchase Platinum Class shares received by wire transfer in the form of federal funds will be effected at the next determined net asset value. Shares are offered and orders are accepted for the Money Market Fund, and the Mileage Fund until 3:00 p.m. Eastern time, or the close of the Exchange (whichever comes first) Monday through Friday, excluding the following business holidays: New Year's Day, Martin Luther King's Birthday, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans Day, Thanksgiving Day and Christmas Day ("Business Day"). Shares are offered and orders are accepted for the U.S. Government Money Market Fund until 2:00 p.m. Eastern time, or the close of the Exchange (whichever comes first) on each Business Day and for the Municipal Money Market Fund until 11:45 a.m. Eastern time, or the close of the Exchange PROSPECTUS 22 148 (whichever comes first) on each Business Day. These purchases will receive that day's dividend. Orders for purchase accompanied by a check or other negotiable bank draft will be accepted and effected as of 3:00 p.m. Eastern time on the next Business Day following receipt and such shares will receive the dividend for the Business Day following the day the purchase is effected. If an order is accompanied by a check drawn on a foreign bank, funds must normally be collected from such check before shares will be purchased. The AAdvantage Trust and the Mileage Trust reserve the right to reject any order for the purchase of shares and to limit or suspend, without prior notice, the offering of shares. Firms provide varying arrangements for their clients with respect to the purchase and redemption of Platinum Class shares and the confirmation thereof and may arrange with their clients for other investment or administrative services. Such firms are responsible for the prompt transmission of purchase and redemption orders. Some firms may establish higher or lower minimum investment requirements than set forth above. Such firms may independently establish and charge additional amounts to their clients for their services, which charges would reduce their clients' yield or return. Firms also may hold Platinum Class shares in nominee or street name as agent for and on behalf of their clients. In such instances, the transfer agent will have no information with respect to or control over the accounts of specific shareholders. Such shareholders may obtain access to their accounts and information about their accounts only from their firm. Certain of these firms may receive compensation from the Manager for recordkeeping and other expenses relating to these nominee accounts. In addition, certain privileges with respect to the purchase and redemption of shares (such as check writing or a debit card) may not be available through such firms or may only be available subject to certain conditions or limitations. Some firms may participate in a program allowing them access to their clients' accounts for servicing, including, without limitation, transfers of registration and dividend payee changes, and may perform functions such as generation of confirmation statements and disbursements of cash dividends. HOW TO REDEEM SHARES Shareholders should contact the firm through which their shares were purchased for redemption instructions. Shares of a Fund may be redeemed by telephone, by writing a check, by pre-authorized automatic redemption or by mail on any Business Day. Shares will be redeemed at the net asset value next calculated after the applicable Fund has received and accepted the redemption request. Proceeds from a redemption of shares purchased by check or pre-authorized automatic purchase may be withheld until the funds have cleared, which may take up to 15 days. Although the Funds intend to redeem shares in cash, each Fund reserves the right to pay the redemption price in PROSPECTUS 23 149 whole or in part by a distribution of readily marketable securities held by the applicable Fund's corresponding Portfolio. See the SAI for further information concerning redemptions in kind. Firms may charge a fee for wire redemptions to cover transaction costs. Redemption proceeds generally will be sent within one Business Day. However, if making immediate payment could affect a Fund adversely, it may take up to seven days to send payment. To ensure acceptance of a redemption request, be sure to adhere to the following procedures. REDEEMING BY CHECK -- Upon request, shareholders will be provided with drafts to be drawn on the shareholder's Fund account ("Redemption Checks"). Redemption Checks may be made payable to the order of any person for an amount not less than $250 and not more than $5 million. When a Redemption Check is presented for payment, a sufficient number of full and fractional shares in the shareholder's account will be redeemed at the next determined net asset value to cover the amount of the Redemption Check. This will enable the shareholder to continue earning dividends until the Fund receives the Redemption Check. A shareholder wishing to use this method of redemption must complete and file an account application which is available from the Funds or firm through which shares were purchased. Redemption Checks should not be used to close an account since the account normally includes accrued but unpaid dividends. The Funds reserve the right to terminate or modify this privilege at any time. This privilege may not be available through some firms that distribute shares of the Funds. In addition, firms may impose minimum balance requirements in order to obtain this feature. Firms also may impose fees on investors for this privilege or, if approved by the Funds, establish variations on minimum check amounts. Unless only one signature is authorized on the account application, Redemption Checks must be signed by all shareholders. Any change in the signature authorization must be made by written notice to the firm. Shares purchased by check or through an Automated Clearing House ("ACH") transaction may not be redeemed by Redemption Check until the shares have been on the Fund's books for at least 15 days. The Funds reserve the right to terminate or modify this privilege at any time. The Funds may refuse to honor Redemption Checks whenever the right of redemption has been suspended or postponed, or whenever the account is otherwise impaired. A $15 service fee will be charged when a Redemption Check is presented to redeem Fund shares in excess of the value of that Fund account or for an amount less than $250 or when a Redemption Check is presented that would require redemption of shares that were purchased by check or ACH transaction within 15 days. A fee of $12 will be charged when "stop payment" of a Redemption Check is requested. Firms may charge different service fees in place of or in addition to these fees. PROSPECTUS 24 150 PRE-AUTHORIZED AUTOMATIC REDEMPTIONS -- Shareholders purchasing through some firms can arrange to have a pre-authorized amount ($100 or more) redeemed from their shareholder account and automatically deposited into a bank account on one or more specified day(s) of each month. For more information regarding pre-authorized automatic redemptions, contact your firm. FULL REDEMPTIONS -- Unpaid dividends credited to an account up to the date of redemption of all shares of a Fund generally will be paid at the time of redemption. VALUATION OF SHARES The net asset value of each share (share price) of the Funds is determined as of the close of the Exchange, generally 4:00 p.m. Eastern time on each Business Day. The net asset value of Platinum Class Shares of the Funds will be determined based on a pro rata allocation of the Fund's corresponding Portfolio's investment income, expenses and total capital gains and losses. The allocation will be based on comparative net asset value at the beginning of the day except for expenses related solely to one class of shares ("Class Expenses") which will be borne only by the appropriate class of shares. Because of Class Expenses, the net income attributable to and the dividends payable may be different for each class of shares. Obligations held by the Portfolios are valued in accordance with the amortized cost method, which is designed to enable those Portfolios and their corresponding Funds to maintain a consistent $1.00 per share net asset value. The amortized cost method is described in the SAI. DIVIDENDS AND TAX MATTERS Dividends paid on each class of a Fund's shares are calculated at the same time and in the same manner. All of each Fund's net investment income and net short-term capital gain, if any, generally will be declared as dividends on each Business Day immediately prior to the determination of the net asset value. Dividends generally are paid on the first day of the following month. A Fund's net investment income attributable to the Platinum Class consists of that class' pro rata share of the Fund's share of interest accrued and discount earned on its corresponding Portfolio's securities, less amortization of premium, and the estimated expenses of both the Portfolio and the Fund attributable to the Platinum Class. The Portfolios do not expect to realize net capital gain, therefore the Funds do not foresee paying any capital gain distributions. If any Fund (either directly or indirectly through its corresponding Portfolio) incurred or anticipated any unusual expenses, loss or depreciation that would adversely affect its net asset value or income for a particular period, the Board would at that time consider PROSPECTUS 25 151 whether to adhere to the dividend policy described above or to revise it in the light of the then prevailing circumstances. Unless a shareholder elects otherwise on the account application, all dividends on a Fund's Platinum Class shares will be automatically paid in additional Platinum Class shares of that Fund. However, a shareholder may choose to have dividends paid in cash. An election may be changed at any time by delivering written notice to your firm at least ten days prior to the payment date for a dividend. Each Fund is treated as a separate corporation for federal income tax purposes and intends to continue to qualify for treatment as a regulated investment company under the Internal Revenue Code of 1986, as amended. In each taxable year that a Fund so qualifies, the Fund (but not its shareholders) will be relieved of federal income tax on that part of its investment company taxable income (generally, taxable net investment income plus any net short-term capital gain) that it distributed to its shareholders. However, a Fund will be subject to a nondeductible 4% excise tax to the extent that it fails to distribute by the end of any calendar year substantially all of its ordinary income for that calendar year and its net capital gain for the one-year period ending on October 31 of that year, plus certain other amounts. For these and other purposes, dividends declared by a Fund in December of any year and payable to shareholders of record on a date in that month will be deemed to have been paid by the Fund and received by the shareholders on December 31 of that year if they are paid by the Fund during the following January. Each Portfolio has received a ruling from the Internal Revenue Service that it is classified for federal income tax purposes as a partnership; accordingly, no Portfolio is subject to federal income tax. Dividends from a Fund's investment company taxable income are taxable to its shareholders as ordinary income to the extent of the Fund's earnings and profits, whether received in cash or paid in additional Platinum Class shares. Distributions by the Municipal Money Market Fund that it designates as "exempt-interest dividends" generally may be excluded from gross income by its shareholders. If the Municipal Money Market Portfolio earns taxable income from any of its investments, the Municipal Money Market Fund's share of that income will be distributed to its shareholders as a taxable dividend. To the extent that Portfolio invests in certain private activity obligations, that Fund's shareholders will be required to treat a portion of its dividends as a "tax preference item" in determining their liability for the AMT. Exempt-interest dividends also may be subject to tax under state and local income tax laws. Because some states exempt from income tax the interest on their own obligations and obligations of governmental agencies and municipalities in the state, shareholders will receive tax information each year regarding the Municipal Money Market Fund's exempt-interest income by state. Interest on indebtedness incurred or continued by a shareholder to purchase or carry shares of that Fund is not deductible. PROSPECTUS 26 152 Each Fund notifies its shareholders following the end of each calendar year of the amounts of dividends paid (or deemed paid) that year. The notice sent by the Municipal Money Market Fund specifies the amounts of exempt-interest dividends (and the portion thereof, if any, that is a tax preference item for purposes of the AMT) and any taxable dividends. The Mileage Fund's notice also might include in taxable dividends a nominal amount reflecting the value of AAdvantage Miles credited to the shareholders' accounts, which are deemed by the Internal Revenue Service to constitute taxable distributions by the Fund. Each Fund is required to withhold 31% of all taxable dividends payable to any individuals and certain other non-corporate shareholders who do not provide the Fund with a correct taxpayer identification number or who otherwise are subject to back-up withholding. The foregoing is only a summary of some of the important tax considerations generally affecting the Funds and their shareholders. Prospective investors are urged to consult their own tax advisers regarding specific questions as to the effect of federal, state or local income taxes on any investment in the AAdvantage Trust or the Mileage Trust or any tax consequences as a result of the receipt of AAdvantage miles. For further tax information, see the SAI. GENERAL INFORMATION The AAdvantage Trust currently is comprised of ten separate investment portfolios and the Mileage Trust currently is comprised of nine separate investment portfolios. Each AAdvantage Fund included in this Prospectus is comprised of three classes of shares. The Mileage Fund is comprised of two classes of shares. Shares of each AAdvantage Fund and each Mileage Fund can be issued in an unlimited number. Each AAdvantage Fund and Mileage Fund share represents an equal proportionate beneficial interest in that Fund and is entitled to one vote. Only shares of a particular class may vote on matters affecting that class. Only shares of a particular Fund may vote on matters affecting that Fund. All shares of a Trust vote on matters affecting that Trust as a whole. Share voting rights are not cumulative, and shares have no preemptive or conversion rights. Shares of the AAdvantage Trust and the Mileage Trust are nontransferable. On most issues subjected to a vote of a Portfolio's interest holders, as required by the 1940 Act, its corresponding Fund will solicit proxies from its shareholders and will vote its interest in the Portfolio in proportion to the votes cast by the Fund's shareholders. Because a Portfolio interest holder's votes are proportionate to its percentage interests in that Portfolio, one or more other Portfolio investors could, in certain instances, approve an action against which a majority of the outstanding voting securities of its corresponding Fund had voted. This could result in that Fund's redeeming its investment in its corresponding Portfolio, which could result in increased PROSPECTUS 27 153 expenses for that Fund. Whenever the shareholders of a Fund are called to vote on matters related to its corresponding Portfolio, the Board shall vote shares for which they receive no voting instructions in the same proportion as the shares for which they do receive voting instructions. Any information received from a Portfolio in the Portfolio's report to shareholders will be provided to the shareholders of its corresponding Fund. As Massachusetts business trusts, the AAdvantage Trust and the Mileage Trust are not obligated to conduct annual shareholder meetings. However, the Trusts will hold special shareholder meetings whenever required to do so under the federal securities laws or their Declarations of Trust or By-Laws. Trustees of either Trust can be removed by a shareholder vote at special shareholder meetings. The Manager has taken steps that it believes are reasonably designed to address the potential failure of computer programs used by the Manager and the Funds' service providers to address the Year 2000 issue. There can be no assurance that these steps will be sufficient to avoid any adverse impact. SHAREHOLDER COMMUNICATIONS Shareholders will receive periodic reports, including annual and semi-annual reports, which will include financial statements showing the results of the Funds' operations and other information. The financial statements of the Funds and the AMR Trust will be audited by Ernst & Young LLP, independent auditor, at least annually. Shareholder inquiries and requests for information regarding the other investment companies which also invest in the AMR Trust should be made by contacting your firm or by calling (800) 388-3344 or by writing to the Funds at P.O. Box 619003, MD 5645, Dallas/Fort Worth Airport, Texas 75261-9003. NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND IN SALES LITERATURE SPECIFICALLY APPROVED BY OFFICERS OF THE AADVANTAGE TRUST AND THE MILEAGE TRUST FOR USE IN CONNECTION WITH THE OFFER OF ANY FUND'S SHARES, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUNDS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN ANY JURISDICTION IN WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFERING MAY NOT LAWFULLY BE MADE. American AAdvantage Funds and American AAdvantage Mileage Funds are registered service marks of AMR Corporation. Mileage Class, American AAdvantage Money Market Fund is a registered service mark and Platinum Class, American AAdvantage Money Market Mileage Fund, American AAdvantage Municipal Money Market Fund and American AAdvantage U.S. Government Money Market Fund are service marks of AMR Investment Services, Inc. PROSPECTUS 28 154 -- NOTES -- 155 -- NOTES -- 156 -- NOTES -- 157 AMERICAN AADVANTAGE FUNDS(R) - PLATINUM CLASS(sm) AMERICAN AADVANTAGE MILEAGE FUNDS(R) - PLATINUM CLASS(sm) P.O. BOX 619003 DALLAS/FORT WORTH AIRPORT, TEXAS 75261-9003 (800) 967-9009 PLAT-PRO-0398 158 STATEMENT OF ADDITIONAL INFORMATION AMERICAN AADVANTAGE FUNDS(R) -- AMR CLASS(sm) -- -- INSTITUTIONAL CLASS -- -- PLANAHEAD CLASS(R) -- MARCH 1, 1998 The American AAdvantage Balanced Fund(sm) (the "Balanced Fund"), American AAdvantage Growth and Income Fund(sm), formerly the American AAdvantage Equity Fund (the "Growth and Income Fund"), American AAdvantage International Equity Fund(sm) (the "International Equity Fund"), American AAdvantage S&P 500 Index Fund (the "S&P 500 Index Fund"), American AAdvantage Intermediate Bond Fund(sm) (the "Intermediate Bond Fund"), American AAdvantage Short-Term Bond Fund(sm), formerly the American AAdvantage Limited-Term Income Fund (the "Short-Term Bond Fund"), American AAdvantage Money Market Fund(sm) (the "Money Market Fund"), American AAdvantage Municipal Money Market Fund(sm) (the "Municipal Money Market Fund") and American AAdvantage U.S. Government Money Market Fund(sm), formerly the American AAdvantage U.S. Treasury Money Market Fund (the "U.S. Government Money Market Fund"), (individually, a "Fund" and collectively, the "Funds") are nine separate investment portfolios of the American AAdvantage Funds (the "Trust") a no-load, open-end, diversified management investment company. Each Fund constitutes a separate investment portfolio with a distinct investment objective, and distinct purpose and strategy. Each Fund is comprised of multiple classes of shares designed to meet the needs of different groups of investors. This Statement of Additional Information ("SAI") relates to the AMR, Institutional and PlanAhead Classes of the Trust. Each Fund, except the S&P 500 Index Fund, seeks its investment objective by investing all of its investable assets in a corresponding portfolio of the AMR Investment Services Trust ("AMR Trust") that has a similar name and an identical investment objective to the investing Fund. The S&P 500 Index Fund invests all of its investable assets in the Equity 500 Index Portfolio, which has an identical investment objective. The Equity 500 Index Portfolio and the portfolios of the AMR Trust are referred to herein individually as a "Portfolio" and, collectively, the "Portfolios." Each Portfolio has an investment objective identical to the investing Fund. The AMR Trust is a separate investment company managed by AMR Investment Services, Inc. (the "Manager"). The Equity 500 Index Portfolio is a separate investment company managed by Bankers Trust Company ("BT"). This SAI should be read in conjunction with an AMR Class, an Institutional Class or a PlanAhead Class prospectus, dated March 1, 1998, (individually, a "Prospectus"), copies of which may be obtained without charge by calling (800) 388-3344 for a PlanAhead Class Prospectus or (817) 967-3509 for an Institutional or AMR Class Prospectus. This SAI is not a prospectus and is authorized for distribution to prospective investors only if preceded or accompanied by a current Prospectus. INVESTMENT RESTRICTIONS Each Fund has the following fundamental investment policy that enables it to invest in its corresponding Portfolio: Notwithstanding any other limitation, the Fund may invest all of its investable assets in an open-end management investment company with substantially the same investment objectives, policies and limitations as the Fund. For this purpose, "all of the Fund's investable assets" means that the only investment securities that will be held by the Fund will be the Fund's interest in the investment company. All other fundamental investment policies and the non-fundamental policies of each Fund and its corresponding Portfolio are identical. Therefore, although the following discusses the investment policies of each Portfolio, the AMR Trust's Board of Trustees ("AMR Trust Board") and the Equity 500 Index Portfolio's Board of Trustees ("Equity 500 Index Portfolio Board"), it applies equally to each Fund and the Trust's Board of Trustees ("Board"). 159 PORTFOLIOS OF THE AMR TRUST In addition to the investment limitations noted in the Prospectus, the following seven restrictions have been adopted by each Portfolio of the AMR Trust, and may be changed with respect to any such Portfolio only by the majority vote of that Portfolio's outstanding interests. "Majority of the outstanding voting securities" under the Investment Company Act of 1940, as amended (the "1940 Act"), and as used herein means, with respect to the Portfolio, the lesser of (a) 67% of the interests of the Portfolio present at the meeting if the holders of more than 50% of the interests are present and represented at the interest holders' meeting or (b) more than 50% of the interests of the Portfolio. Whenever a Fund is requested to vote on a change in the investment restrictions of its corresponding Portfolio, that Fund will hold a meeting of its shareholders and will cast its votes as instructed by its shareholders. The percentage of a Fund's votes representing that Fund's shareholders not voting will be voted by the Board in the same proportion as those Fund shareholders who do, in fact, vote. No Portfolio of the AMR Trust may: 1. Purchase or sell real estate or real estate limited partnership interests, provided, however, that the Portfolio may invest in securities secured by real estate or interests therein or issued by companies which invest in real estate or interests therein when consistent with the other policies and limitations described in the Prospectus. 2. Purchase or sell commodities (including direct interests and/or leases in oil, gas or minerals) or commodities contracts, except with respect to forward foreign currency exchange contracts, foreign currency futures contracts and when-issued securities when consistent with the other policies and limitations described in the Prospectus. 3. Engage in the business of underwriting securities issued by others, except to the extent that, in connection with the disposition of securities, the Portfolio may be deemed an underwriter under federal securities law. 4. Make loans to any person or firm, provided, however, that the making of a loan shall not be construed to include (i) the acquisition for investment of bonds, debentures, notes or other evidences of indebtedness of any corporation or government which are publicly distributed or (ii) the entry into repurchase agreements and further provided, however, that each Portfolio may lend its portfolio securities to broker-dealers or other institutional investors in accordance with the guidelines stated in the Prospectus. 5. Purchase from or sell portfolio securities to its officers, Trustees or other "interested persons" of the Trust, as defined in the 1940 Act, including its investment advisers and their affiliates, except as permitted by the 1940 Act and exemptive rules or orders thereunder. 6. Issue senior securities except that the Portfolio may engage in when-issued securities and forward commitment transactions and the International Equity Portfolio may engage in currency futures and forward currency contracts. 7. Borrow money, except from banks or through reverse repurchase agreements for temporary purposes in an aggregate amount not to exceed 10% of the value of its total assets at the time of borrowing. In addition, although not a fundamental policy, the Portfolios intend to repay any money borrowed before any additional portfolio securities are purchased. See "Other Information" for a further description regarding reverse repurchase agreements. The following non-fundamental investment restriction applies to each Portfolio of the AMR Trust and may be changed with respect to a Portfolio by a majority vote of the AMR Trust Board: no Portfolio of the AMR Trust may purchase securities on margin, effect short sales (except that the Portfolio may obtain such short term credits as may be necessary for the clearance of purchases or sales of securities) or purchase or sell call options or engage in the writing of such options. All Portfolios of the AMR Trust may invest up to 10% of their total assets in the securities of other investment companies to the extent permitted by law. A Portfolio of the AMR Trust may incur duplicate advisory or management fees when investing in another mutual fund. 2 160 EQUITY 500 INDEX PORTFOLIO The following investment restrictions are "fundamental policies" of the Equity 500 Index Portfolio and may be changed with respect to the Portfolio only by the majority vote of the Portfolio's outstanding interests, as defined above. Whenever the S&P 500 Index Fund is requested to vote on a change in the fundamental policy of the Portfolio, the Fund will hold a meeting of its shareholders and will cast its votes as instructed by its shareholders. The percentage of the Fund's votes representing Fund shareholders not voting will be voted by the Board in the same proportion as the Fund shareholders who do, in fact, vote. The Equity 500 Index Portfolio may not: 1. Borrow money or mortgage or hypothecate assets of the Portfolio, except that in an amount not to exceed 1/3 of the current value of the Portfolio's net assets, it may borrow money as a temporary measure for extraordinary or emergency purposes and enter into reverse repurchase agreements or dollar roll transactions, and except that it may pledge, mortgage or hypothecate not more than 1/3 of such assets to secure such borrowings (it is intended that money would be borrowed only from banks and only either to accommodate requests for the withdrawal of beneficial interests (redemption of shares) while effecting an orderly liquidation of portfolio securities or to maintain liquidity in the event of an unanticipated failure to complete a portfolio security transaction or other similar situations) or reverse repurchase agreements, provided that collateral arrangements with respect to options and futures, including deposits of initial deposit and variation margin, are not considered a pledge of assets for purposes of this restriction and except that assets may be pledged to secure letters of credit solely for the purpose of participating in a captive insurance company sponsored by the Investment Company Institute; for additional related restrictions, see clause (1) below. (As an operating policy, the Portfolio may not engage in dollar roll transactions). 2. Underwrite securities issued by other persons except insofar as the Portfolio may technically be deemed an underwriter under the Securities Act of 1933 (the "1933 Act") in selling a portfolio security. 3. Make loans to other persons except: (a) through the use of repurchase agreements or the purchase of short-term obligations; or (b) by purchasing a portion of an issue of debt securities of types distributed publicly or privately. 4. Purchase or sell real estate (including limited partnership interests but excluding securities secured by real estate or interests therein), interests in oil, gas or mineral leases, commodities or commodity contracts (except futures and option contracts) in the ordinary course of business (except that the Portfolio may hold and sell, for the Portfolio's portfolio, real estate acquired as a result of the Portfolio's ownership of securities). 5. Concentrate its investments in any particular industry (excluding U.S. Government securities), but if it is deemed appropriate for the achievement of the Portfolio's investment objective, up to 25% of its total assets may be invested in any one industry. 6. Issue any senior security (as that term is defined in the 1940 Act) if such issuance is specifically prohibited by the 1940 Act or the rules and regulations promulgated thereunder, provided that collateral arrangements with respect to options and futures, including deposits of initial deposit and variation margin, are not considered to be the issuance of a senior security for purposes of this restriction. In order to comply with certain statutes and policies the Equity 500 Index Portfolio will not as a matter of operating policy: 1. Borrow money (including through dollar roll transactions) for any purpose in excess of 10% of the Portfolio's total assets (taken at cost) except that the Portfolio may borrow for temporary or emergency purposes up to 1/3 of its total assets. 2. Pledge, mortgage or hypothecate for any purpose in excess of 10% of the Portfolio's total assets (taken at market value), provided that collateral arrangements with respect to options and futures, including deposits of initial deposit and variation margin, are not considered a pledge of assets for purposes of this restriction. 3 161 3. Purchase any security or evidence of interest therein on margin, except that such short-term credit as may be necessary for the clearance of purchases and sales of securities may be obtained and except that deposits of initial deposit and variation margin may be made in connection with the purchase, ownership, holding or sale of futures. 4. Sell any security that it does not own unless by virtue of its ownership of other securities it has at the time of sale a right to obtain securities, without payment of further consideration, equivalent in kind and amount to the securities sold and provided that if such right is conditional the sale is made upon the same conditions. 5. Invest for the purpose of exercising control or management. 6. Purchase securities issued by any investment company except by purchase in the open market where no commission or profit to a sponsor or dealer results from such purchase other than the customary broker's commission, or except when such purchase, though not made in the open market, is part of a plan of merger or consolidation; provided, however, that securities of any investment company will not be purchased for the Portfolio if such purchase at the time thereof would cause: (a) more than 10% of the Portfolio's total assets (taken at the greater of cost or market value) to be invested in the securities of such issuers; (b) more than 5% of the Portfolio's total assets (taken at the greater of cost or market value) to be invested in any one investment company; or (c) more than 3% of the outstanding voting securities of any such issuer to be held for the Portfolio; and, provided further that, except in the case of merger or consolidation, the Portfolio shall not invest in any other open-end investment company unless the Portfolio (1) waives the investment advisory fee with respect to assets invested in other open-end investment companies and (2) incurs no sales charge in connection with the investment (as an operating policy, the Portfolio will not invest in another open-end registered investment company). 7. Invest more than 15% of the Portfolio's net assets (taken at the greater of cost or market value) in securities that are illiquid or not readily marketable not including (a) Rule 144A securities that have been determined to be liquid by the Equity 500 Index Portfolio Board; and (b) commercial paper that is sold under section 4(2) of the 1933 Act which: (i) is not traded flat or in default as to interest or principal; and (ii) is rated in one of the two highest categories by at least two nationally recognized statistical rating organizations and the Equity 500 Index Portfolio Board has determined the commercial paper to be liquid; or (iii) is rated in one of the two highest categories by one nationally recognized statistical rating agency and the Equity 500 Index Portfolio Board has determined that the commercial paper is equivalent quality and is liquid. 8. Invest more than 10% of the Portfolio's total assets (taken at the greater of cost or market value) in securities that are restricted as to resale under the 1933 Act (other than Rule 144A securities deemed liquid by the Equity 500 Index Portfolio Board). 9. No more than 5% of the Portfolio's total assets are invested in securities issued by issuers which (including predecessors) have been in operation less than three years. 10. With respect to 75% of the Portfolio's total assets, purchase securities of any issuer if such purchase at the time thereof would cause the Portfolio to hold more than 10% of any class of securities of such issuer, for which purposes all indebtedness of an issuer shall be deemed a single class and all preferred stock of an issuer shall be deemed a single class, except that futures or option contracts shall not be subject to this restriction. 11. If the Portfolio is a "diversified" fund with respect to 75% of its assets, invest more than 5% of its total assets in the securities (excluding U.S. Government securities) of any one issuer. 12. Purchase or retain in the Portfolio's portfolio any securities issued by an issuer any of whose officers, directors, trustees or security holders is an officer or Trustee of the Equity 500 Index Portfolio, or is an officer or partner of BT, if after the purchase of the securities of such issuer for the Portfolio one or more of such persons owns beneficially more than 1/2 of 1% of the shares or securities, or both, all taken at market value, of such issuer, and such persons owning more than 1/2 of 1% of such shares or securities together own beneficially more than 5% of such shares or securities, or both, all taken at market value. 4 162 13. Invest more than 5% of the Portfolio's net assets in warrants (valued at the lower of cost or market) (other than warrants acquired by the Portfolio as part of a unit or attached to securities at the time of purchase), but not more than 2% of the Portfolio's net assets may be invested in warrants not listed on the NYSE or the AMEX. 14. Make short sales of securities or maintain a short position, unless at all times when a short position is open it owns an equal amount of such securities or securities convertible into or exchangeable, without payment of any further consideration, for securities of the same issue and equal in amount to, the securities sold short, and unless not more than 10% of the Portfolio's net assets (taken at market value) is represented by such securities, or securities convertible into or exchangeable for such securities, at any one time (the Portfolio has no current intention to engage in short selling). 15. Write puts and calls on securities unless each of the following conditions are met: (a) the security underlying the put or call is within the investment policies of the Portfolio and the option is issued by the Options Clearing Corporation, except for put and call options issued by non-U.S. entities or listed on non-U.S. securities or commodities exchanges; (b) the aggregate value of the obligations underlying the puts determined as of the date the options are sold shall not exceed 5% of the Portfolio's net assets; (c) the securities subject to the exercise of the call written by the Portfolio must be owned by the Portfolio at the time the call is sold and must continue to be owned by the Portfolio until the call has been exercised, has lapsed, or the Portfolio has purchased a closing call, and such purchase has been confirmed, thereby extinguishing the Portfolio's obligation to deliver securities pursuant to the call it has sold; and (d) at the time a put is written, the Portfolio establishes a segregated account with its custodian consisting of cash or short-term U.S. Government securities equal in value to the amount the Portfolio will be obligated to pay upon exercise of the put (this account must be maintained until the put is exercised, has expired, or the Portfolio has purchased a closing put, which is a put of the same series as the one previously written). 16. Buy and sell puts and calls on securities, stock index futures or options on stock index futures, or, financial futures or options on financial futures unless such options are written by other persons and: (a) the options or futures are offered through the facilities of a national securities association or are listed on a national securities or commodities exchange, except for put and call options issued by non-U.S. entities or listed on non-U.S. securities or commodities exchanges; (b) the aggregate premiums paid on all such options which are held at any time do not exceed 20% of the Portfolio's total net assets; and (c) the aggregate margin deposits required on all such futures or options thereon held at any time do not exceed 5% of the Portfolio's total assets. TRUSTEES AND OFFICERS OF THE TRUST AND THE AMR TRUST The Board provides broad supervision over the Trust's affairs. The Manager is responsible for the management of Trust assets, and the Trust's officers are responsible for the Trust's operations. The Trustees and officers of the Trust and AMR Trust are listed below, together with their principal occupations during the past five years. Unless otherwise indicated, the address of each person listed below is 4333 Amon Carter Boulevard, MD 5645, Fort Worth, Texas 76155.
POSITION WITH NAME, AGE AND ADDRESS EACH TRUST PRINCIPAL OCCUPATION DURING PAST 5 YEARS --------------------- ------------- ---------------------------------------- William F. Quinn* (50) Trustee and President President, AMR Investment Services, Inc. (1986-Present); Chairman, American Airlines Employees Federal Credit Union (1989-Present); Trustee, American Performance Funds (1990-1994); Director, Crescent Real Estate Equities, Inc. (1994-Present); Trustee, American AAdvantage Mileage Funds (1995-Present).
5 163
POSITION WITH NAME, AGE AND ADDRESS EACH TRUST PRINCIPAL OCCUPATION DURING PAST 5 YEARS --------------------- ------------- ---------------------------------------- Alan D. Feld (60) Trustee Partner, Akin, Gump, Strauss, Hauer & Feld, LLP (1960- 1700 Pacific Avenue Present)#; Director, Clear Channel Communications (1984- Suite 4100 Present); Director, CenterPoint Properties, Inc. (1994- Dallas, Texas 75201 Present); Trustee, American AAdvantage Mileage Funds (1996-Present). Ben J. Fortson (65) Trustee President and CEO, Fortson Oil Company (1958-Present); 301 Commerce Street Director, Kimbell Art Foundation (1964-Present); Suite 3301 Director, Burnett Foundation (1987-Present); Honorary Fort Worth, Texas 76102 Trustee, Texas Christian University (1986-Present); Trustee, American AAdvantage Mileage Funds (1996- Present). John S. Justin (81) Trustee Chairman and Chief Executive Officer, Justin Industries, 2821 West Seventh Street Inc. (a diversified holding company) (1969-Present); Fort Worth, Texas 76107 Executive Board Member, Blue Cross/Blue Shield of Texas (1985-Present); Board Member, Zale Lipshy Hospital (1993-Present); Trustee, Texas Christian University (1980-Present); Director and Executive Board Member, Moncrief Radiation Center (1985-Present); Director, Texas New Mexico Enterprises (1984-1993); Director, Texas New Mexico Power Company (1979-1993); Trustee, American AAdvantage Mileage Funds (1995-Present). Stephen D. O'Sullivan* (62) Trustee Consultant (1994-Present); Vice President and Controller (1985-1994), American Airlines, Inc.; Trustee, American AAdvantage Mileage Funds (1995-Present). Roger T. Staubach (56) Trustee Chairman of the Board and Chief Executive Officer of The 6750 LBJ Freeway Staubach Company (a commercial real estate company) Dallas, Texas 75240 (1982-Present); Director, Halliburton Company (1991- Present); Director, Brinker International (1993- Present); Director, International Home Foods, Inc. (1997-Present); National Advisory Board, The Salvation Army; Trustee, Institute for Aerobics Research; Member, Executive Council, Daytop/Dallas; Member, National Board of Governors, United Way of America, former quarterback of the Dallas Cowboys professional football team; Trustee, American AAdvantage Mileage Funds (1995- Present). Kneeland Youngblood (41) Trustee President, Youngblood Enterprises, Inc. (a private 2305 Cedar Springs Road retirement/management firm) (1983-Present); Trustee, Suite 401 Teachers Retirement System of Texas (1993-Present); Dallas, Texas 75201 Director, United States Enrichment Corporation (1993- Present), Director, Just For the Kids (1995-Present); Director, Starwood Financial Trust (1998-Present); Member, Council on Foreign Relations (1995-Present); Trustee, American AAdvantage Mileage Funds (1996- Present). Nancy A. Eckl (35) Vice President Vice President, AMR Investment Services, Inc.(1990- Present).
6 164
POSITION WITH NAME, AGE AND ADDRESS EACH TRUST PRINCIPAL OCCUPATION DURING PAST 5 YEARS --------------------- ------------- ---------------------------------------- Michael W. Fields (44) Vice President Vice President, AMR Investment Services, Inc. (1988- Present). Barry Y. Greenberg (34) Vice President and Director, Legal and Compliance, AMR Investment Services, Assistant Secretary Inc. (1995-Present); Branch Chief (1992-1995) and Staff Attorney (1988-1992), Securities and Exchange Commission. Rebecca L. Harris (31) Treasurer Director of Finance (1995-Present), Controller (1991- 1995), AMR Investment Services, Inc. John B. Roberson (39) Vice President Vice President, AMR Investment Services, Inc. (1991- Present). Thomas E. Jenkins, Jr. (31) Assistant Secretary Senior Compliance Analyst, AMR Investment Services, Inc. (1996-Present); Staff Accountant (1994-1996) and Compliance Examiner (1991-1994), Securities and Exchange Commission. Adriana R. Posada (43) Assistant Secretary Senior Compliance Analyst (1996-Present) and Compliance Analyst (1993-1996), AMR Investment Services, Inc.; Special Sales Representative, American Airlines, Inc. (1991-1993). Robert J. Zutz (45) Secretary Partner, Kirkpatrick & Lockhart LLP (law firm) 1800 Massachusetts Ave. NW Washington, D.C. 20036
# The law firm of Akin, Gump, Strauss, Hauer & Feld LLP ("Akin, Gump") provides legal services to American Airlines, Inc., an affiliate of the Manager. Mr. Feld has advised the Trusts that he has had no material involvement in the services provided by Akin, Gump to American Airlines, Inc. and that he has received no material benefit in connection with these services. Akin, Gump does not provide legal services to the Manager or AMR Corporation. * Messrs. Quinn and O'Sullivan, by virtue of their current or former positions, are deemed to be "interested persons" of the Trust and AMR Trust as defined by the 1940 Act. All Trustees and officers as a group own less than 1% of the outstanding shares of any of the Funds. As compensation for their service to the Trust and the AMR Trust, the Independent Trustees and their spouses receive free air travel from American Airlines, Inc., an affiliate of the Manager. The Trust and the AMR Trust do not pay for these travel arrangements. However, the Trusts compensate each Trustee with payments in an amount equal to the Trustees' income tax on the value of this free airline travel. Mr. O'Sullivan, who as a retiree of American Airlines, Inc. already receives free airline travel, receives compensation annually of up to three round trip airline tickets for each of his three adult children. Trustees are also reimbursed for any expenses incurred in attending Board meetings. These amounts (excluding reimbursements) are reflected in the following table for the fiscal year ended October 31, 1997. 7 165
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 (27 Funds) --------------- ----- ---------------- ---------- ---------- William F. Quinn $0 $0 $0 $0 Alan D. Feld $15,962 $0 $0 $63,850 Ben J. Fortson $6,802 $0 $0 $27,209 John S. Justin $225 $0 $0 $901 Stephen D. O'Sullivan $493 $0 $0 $1,973 Roger T. Staubach $8,269 $0 $0 $33,076 Kneeland Youngblood, M.D. $9,525 $0 $0 $38,099
TRUSTEES AND OFFICERS OF THE EQUITY 500 INDEX PORTFOLIO The Equity 500 Index Portfolio Board oversees the activities of the Equity 500 Index Portfolio and reviews contractual arrangements with companies that provide services to the Portfolio. The Trustees and officers of the Equity 500 Index Portfolio and their principal occupations during the past five years are set forth below. Their titles may have varied during that period. Unless otherwise indicated, the address of each Trustee and officer is c/o Edgewood Services, Inc., Clearing Operations, P.O. Box 897, Pittsburgh, PA 15230-0897.
POSITION WITH EQUITY 500 INDEX NAME, AGE AND ADDRESS PORTFOLIO PRINCIPAL OCCUPATION DURING PAST 5 YEARS --------------------- ------------------- ---------------------------------------- Charles P. Biggar (67) Trustee Retired; Director of Chase/NBW Bank Advisory Board; 12 Hitching Post Lane Director, Batemen, Eichler, Hill Richards Inc.; formerly Chappaqua, NY 10514 Vice President of International Business Machines and President of the National Services and the Field Engineering Divisions of IBM. S. Leland Dill (67) Trustee Retired; Director, Coutts Group, Coutts (U.S.A.) 5070 North Ocean Drive International, and Coutts Trust Holdings Ltd.; Director, Singer Island, FL 33404 Zweig Series Trust; formerly Partner of KPMG Peat Marwick; Director, Vinters International Company Inc.; General Partner of Pemco (an investment company registered under the 1940 Act). Philip Saunders, Jr. (62) Trustee Principal, Philip Saunders Associates (Consulting); 445 Glen Road former Director of Financial Industry Consulting, Wolf & Weston, MA 02193 Company; President, John Hancock Home Mortgage Corporation; and Senior Vice President of Treasury and Financial Services, John Hancock Mutual Life Insurance Company, Inc. Ronald M. Petnuch (38) President and Senior Vice President, Federated Services Company Treasurer ("FSC"); formerly Director of Proprietary Client Services, Federated Administrative Services ("FAS") and formerly Associate Corporate Counsel, Federated Investors ("FI"). Charles L. Davis, Jr. (37) Vice President and Vice President, FAS. Assistant Treasurer Jay S. Neuman (47) Secretary Corporate Counsel, FI.
8 166 No person who is an officer or director of BT is an officer or Trustee of the Equity 500 Index Portfolio. No director, officer or employee of Edgewood Services, Inc. ("Edgewood") or any of its affiliates will receive any compensation from the Equity 500 Index Portfolio for serving as an officer or Trustee of the Equity 500 Index Portfolio. The Portfolio and certain other investment companies advised by BT (the "BT Funds Complex") collectively pay each Trustee who is not a director, officer or employee of BT, Edgewood, or any of their affiliates an annual fee of $10,000, respectively, per annum plus $1,250, respectively, per meeting attended and reimburses them for travel and out-of-pocket expenses. For the years ended December 31, 1996 and 1997, the Equity 500 Index Portfolio incurred Trustees fees equal to $9,865 and $2,723, respectively. The following table reflects fees paid to the Trustees of the Equity 500 Index Portfolio for their services to that Portfolio and to certain other investment companies advised by BT (the "BT Funds Complex") for the year ended December 31, 1997.
AGGREGATE COMPENSATION TOTAL COMPENSATION FROM FROM THE EQUITY BT FUNDS COMPLEX NAME OF TRUSTEE 500 INDEX PORTFOLIO PAID TO TRUSTEES --------------- ------------------- ---------------- Charles P. Biggar $640.56 $27,500 S. Leland Dill $640.56 $27,500 Philip Saunders, Jr. $640.56 $27,500
MANAGEMENT, ADMINISTRATIVE SERVICES AND DISTRIBUTION FEES As described more fully in the Prospectus, the Manager is paid a management fee as compensation for paying investment advisory fees and for providing the Trust and the AMR Trust with advisory and asset allocation services. Management fees for the fiscal years ended October 31 were approximately as follows: 1995, $7,603,000 of which approximately $3,985,000 was paid by the Manager to the other investment advisers; 1996, $10,853,000 of which approximately $5,403,000 was paid by the Manager to the other investment advisers and 1997, $13,730,443 of which $7,061,014 was paid by the Manager to the other investment advisers. Management fees in the amount of approximately $29,000, $44,000 and $7,309 were waived by the Manager during the fiscal years ended October 31, 1995, 1996 and 1997. Under the Management Agreement, the Manager presently monitors the services provided by BT to the Equity 500 Index Portfolio. The Manager receives no fee for providing these monitoring services. In the event that the Board determines that it is in the best interest of the S&P 500 Index Fund's shareholders to withdraw its investment from the Equity 500 Index Portfolio, the Manager would become responsible for directly managing the assets of the S&P 500 Index Fund. In such event, the Fund would pay the Manager an annual fee of up to 0.10% of the Fund's average net assets, accrued daily and paid monthly. In addition to the management fee, the Manager is paid an administrative services fee for providing administrative and management services (other than investment advisory services) to the Funds. Administrative services fees for the fiscal years ended October 31 were approximately as follows: 1995, $2,731,000; 1996, $2,893,400 and 1997, $4,538,345. Administrative service fees in the amount of approximately $9,000 were waived by the Manager during the fiscal year ended October 31, 1995. 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 year ended October 31, 1997 were approximately $81,113. 9 167 BT provides administrative services to the Equity 500 Index Portfolio. Under the administration and services agreement between the Equity 500 Index Portfolio and BT, BT is obligated on a continuous basis to provide such administrative services as the Equity 500 Index Portfolio Board reasonably deems necessary for the proper administration of the Portfolio. BT generally will assist in all aspects of the Portfolio's operations; supply and maintain office facilities (which may be in BT's own offices), statistical and research data, data processing services, clerical, accounting, bookkeeping and recordkeeping services (including without limitation the maintenance of such books and records as are required under the 1940 Act and the rules thereunder, except as maintained by other agents), internal auditing, executive and administrative services, and stationary and office supplies; prepare reports to investors; prepare and file tax returns; supply financial information and supporting data for reports to and filing with the SEC and various state Blue Sky authorities; supply supporting documentation for meetings of the Equity 500 Index Portfolio Board; provide monitoring reports and assistance regarding compliance with its Declaration of Trust, By-Laws, investment objectives and policies and with Federal and state securities laws; arrange for appropriate insurance coverage; calculate net asset values, net income and realized capital gains or losses; and negotiate arrangements with, and supervise and coordinate the activities of, agents and others to supply services. Pursuant to a sub-administration agreement between BT and Federated Services Company ("Federated") (the "Sub- Administration Contract"), Federated performs such sub-administration duties for the Equity 500 Index Portfolio as from time to time may be agreed upon by BT and Federated. The Sub-Administration Contract provides that Federated will receive such compensation as from time to time may be agreed upon by Federated and BT. All such compensation will be paid by BT. For the years ended December 31, 1995, 1996 and 1997, BT earned, $385,265, $752,981 and $1,215,073, respectively, as compensation for administrative and other services provided to the Equity 500 Index Portfolio. Brokers Transaction Services, Inc. ("BTS") is the distributor of the Funds' shares, and, as such, began receives an annualized fee of $50,000 from the Manager for distributing the shares of the Trust and the American AAdvantage Mileage Funds. APPROACH TO STOCK SELECTION Investment advisers to the corresponding Portfolios of the Balanced, the Growth and Income and the International Equity Funds will select equity securities which, in their opinion, have above average growth potential and are also selling at a discount to the market. This approach focuses on the purchase of a diverse group of stocks below their perceived economic value. Each of the investment advisers determines the growth prospects of firms based upon a combination of internal and external research using fundamental economic cycle analysis and considering changing economic trends. The determination of value is based upon the analysis of several characteristics of the issuer and its equity securities including price to earnings ratio, price to book value ratio, assets carried below market value, financial strength and dividend yield. REDEMPTIONS IN KIND Although each Fund intends to redeem shares in cash, each reserves the right to pay the redemption price in whole or in part by a distribution of readily marketable securities held by the applicable Fund's corresponding Portfolio. However, shareholders always will be entitled to redeem shares for cash up to the lesser of $250,000 or 1% of the applicable Fund's net asset value during any 90-day period. Redemption in kind is not as liquid as a cash redemption. In addition, if redemption is made in kind, shareholders who receive securities and sell them could receive less than the redemption value of their securities and could incur certain transactions costs. INVESTMENT ADVISORY AGREEMENTS With the exception of Investment Advisory Agreements ("Advisory Agreements") with Brandywine Asset Management, Inc. ("Brandywine"), separate Advisory Agreements between the investment advisers of the Balanced, the Growth and Income, the International Equity, the Intermediate Bond and the Short-Term Bond Funds and their corresponding Portfolios, as described in the Prospectus, were approved and became effective as of October 1, 1995. Prior to that date, these Funds had entered into Advisory Agreements with the same investment advisers. On October 1, 1995, each Fund Advisory Agreement was amended to provide that to the extent a Fund invests all of its 10 168 investable assets in its corresponding Portfolio, the adviser will not receive an advisory fee under that Advisory Agreement. Brandywine was approved as an investment adviser to the Balanced Fund and the Growth and Income Fund and their corresponding Portfolios effective April 1, 1996. Following the acquisition of Hotchkis and Wiley ("Hotchkis") by Merrill Lynch, Pierce, Fenner & Smith, Inc., a new Advisory Agreement with Hotchkis was approved, effective November 12, 1996. Following the merger of Morgan Stanley Group Inc. and Dean, Witter, Discover & Co., a new Advisory Agreement with Morgan Stanley Asset Management Inc. was approved, effective May 31, 1997. Following the acquisition of Brandywine by Legg Mason, Inc., a new Advisory Agreement was approved, effective January 16, 1998. 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, 1995, 1996 and 1997:
Investment Advisory Investment Advisory Investment Advisory Adviser Fees for 1995 Fees for 1996 Fees for 1997 ------- ------------- ------------- ------------- Barrow, Hanley Mewhinney & Strauss, Inc. $660,836 $862,335 $1,052,749 Brandywine Asset Management, Inc. N/A* $297,073 $857,875 GSB Investment Management, Inc. $339,126 $575,720 $804,221 Hotchkis and Wiley $985,695 $1,327,731 $1,607,851 Independence Investment Associates, Inc. $660,824 $893,078 $1,110,438 Morgan Stanley Asset Management $356,643 $504,731 $885,253 Templeton Investment Counsel, Inc. $319,881 $410,013 $669,848
*Brandywine was not an investment adviser of the Funds during this period. Under the terms of the Equity 500 Index Portfolio's Investment Advisory Agreement with BT, BT manages the Equity 500 Index Portfolio subject to the supervision and direction of the Equity 500 Index Portfolio Board. BT has agreed to: (1) act in strict conformity with the Equity 500 Index Portfolio's Declaration of Trust and the 1940 Act, as the same may from time to time be amended; (2) manage the Equity 500 Index Portfolio in accordance with the Portfolio's investment objective, restrictions and policies; (3) make investment decisions for the Equity 500 Index Portfolio; and (4) place purchase and sale orders for securities and other financial institutions on behalf of the Equity 500 Index Portfolio. BT bears all expenses in connection with the performance of services under the Agreement. The S&P 500 Index Fund and the Equity 500 Index Portfolio each bear certain other expenses incurred in their operation, including: taxes, interest, brokerage fees and commissions, if any; fees of Trustees of the Portfolio or Trustees of the Trust who are not officers, directors or employees of BT, Edgewood, the Manager or any of their affiliates; SEC fees and state Blue Sky qualification fees; charges of custodians and transfer and dividend disbursing agents; certain insurance premiums; outside auditing and legal expenses; costs attributable to investor services, including telephone and personnel expenses; costs of preparing and printing prospectuses and statements of additional information for regulatory purposes and for distribution to existing shareholders; costs of shareholders' reports and meetings of shareholders, officers and Trustees of the Equity 500 Index Portfolio or Trustees of the Trust, and any extraordinary expenses. For the years ended December 31, 1995, 1996 and 1997, BT earned $770,530, $1,505,963 and $2,430,147, respectively, as compensation for investment advisory services provided to the Equity 500 Index Portfolio. During the same periods, BT reimbursed $418,814, $870,024 and $1,739,490, respectively, to the Equity 500 Index Portfolio to cover expenses. BT may have deposit, loan and other commercial banking relationships with the issuers of obligations that may be purchased on behalf of the Equity 500 Index Portfolio, including outstanding loans to such issuers that could be repaid in whole or in part with the proceeds of securities so purchased. Such affiliates deal, trade and invest for their own accounts in such obligations and are among the leading dealers of various types of such obligations. BT has informed the Equity 500 Index Portfolio that, in making its investment decisions, it does not obtain or use material inside information in its possession or in the possession of any of its affiliates. In making investment recommendations for the Equity 500 Index Portfolio, BT will not inquire or take into consideration whether an issuer of securities proposed for purchase or sale by the Equity 500 Index Portfolio is a customer of BT, its parent or its 11 169 subsidiaries or affiliates and, in dealing with its customers, BT, its parent, subsidiaries and affiliates will not inquire or take into consideration whether securities of such customers are held by any fund managed by BT or any such affiliate. Each Investment Advisory Agreement will automatically terminate if assigned, and may be terminated without penalty at any time by the Manager, by a vote of a majority of the Trustees or by a vote of a majority of the outstanding voting securities of the applicable Fund on no less than thirty (30) days' nor more than sixty (60) days' written notice to the investment adviser, or by the investment adviser upon sixty (60) days' written notice to the Trust. The Investment Advisory Agreements will continue in effect provided that annually such continuance is specifically approved by a vote of the Trustees, including the affirmative votes of a majority of the Trustees who are not parties to the Agreement or "interested persons" (as defined in the 1940 Act) of any such party, cast in person at a meeting called for the purpose of considering such approval, or by the vote of shareholders. 12 170 PORTFOLIO SECURITIES TRANSACTIONS The Investment Advisory Agreements provide, in substance, that in executing portfolio transactions and selecting brokers or dealers, the principal objective of each investment adviser is to seek the best net price and execution available. It is expected that securities ordinarily will be purchased in the primary markets, and that in assessing the best net price and execution available, each investment adviser shall consider all factors it deems relevant, including the breadth of the market in the security, the price of the security, the financial condition and execution capability of the broker or dealer and the reasonableness of the commission, if any, for the specific transaction and on a continuing basis. BT may utilize the expertise of any of its worldwide subsidiaries and affiliates to assist in its role as investment adviser. All orders for investment transactions on behalf of the Equity 500 Index Portfolio are placed by BT with broker-dealers and other financial intermediaries that it selects, including those affiliated with BT. A BT affiliate will be used in connection with a purchase or sale of an investment for the Equity 500 Index Portfolio only if BT believes that the affiliate's charge for the transaction does not exceed usual and customary levels. The Equity 500 Index Portfolio will not invest in obligations for which BT or any of its affiliates is the ultimate obligor or accepting bank. The Portfolio may, however, invest in the obligations of correspondents and customers of BT. In selecting brokers or dealers to execute particular transactions, investment advisers are authorized to consider "brokerage and research services" (as those terms are defined in Section 28(e) of the Securities Exchange Act of 1934), provision of statistical quotations (including the quotations necessary to determine a Portfolio's net asset value), the sale of Trust shares by such broker-dealer or the servicing of Trust shareholders by such broker-dealer, and other information provided to the applicable Portfolio, to the Manager, BT and/or to the investment advisers (or their affiliates), provided, however, that the investment adviser determines that it has received the best net price and execution available. The investment advisers are also authorized to cause a Portfolio to pay a commission to a broker or dealer who provides such brokerage and research services for executing a portfolio transaction which is in excess of the amount of the commission another broker or dealer would have charged for effecting that transaction. The Trustees, the Manager or the investment advisers, as appropriate, must determine in good faith, however, that such commission was reasonable in relation to the value of the brokerage and research services provided viewed in terms of that particular transaction or in terms of all the accounts over which the Manager or the investment adviser exercises investment discretion. For the fiscal year ended October 31, 1995, the following brokerage commissions were paid by the Funds, and for 1996 and 1997, by their corresponding Portfolios.
Fund/Portfolio 1995 1996 1997 -------------- ---- ---- ---- Balanced $388,253 $503,947 $562,493 Growth and Income $590,364 $956,767 $1,192,792 International Equity $422,670 $544,844 $956,160 Intermediate Bond* N/A N/A $0 Short-Term Bond $0 $0 $0 Money Market Funds $0 $0 $0
*The Intermediate Bond Portfolio commenced operations on September 15, 1997. The commissions listed above were paid directly by the Funds for the fiscal year ended October 31, 1995. For the fiscal years ended October 31, 1996 and October 31, 1997, the commissions were paid by the corresponding Portfolios of the AMR Trust, and shareholders of the Funds bear only the pro-rata portion of brokerage commissions. For the fiscal years ended December 31, 1995, 1996 and 1997 the Equity 500 Index Portfolio paid the following brokerage commissions: $172,924, $289,791 and $341,058. The S&P 500 Index Fund was not operational during 1995 and 1996. Shareholders of the S&P 500 Index Fund bear only their pro-rata portion of the brokerage commissions paid during 1997. Following is the portfolio turnover rate for the Funds' corresponding Portfolios for the fiscal years ended October 31, 1996 and 1997. The portfolio turnover rate for the Intermediate Bond Portfolio is for the period from September 15, 1997 through October 31, 1997. The portfolio turnover rate for the Equity 500 Index Portfolio is for its fiscal years ended December 31, 1996 and 1997. 13 171
Portfolio 1996 1997 --------- ---- ---- Balanced 76% 105% Growth and Income 40% 35% International Equity 19% 15% Intermediate Bond N/A 47% Short-Term Bond 304% 282% Equity 500 Index Portfolio 15% 19%
High portfolio turnover can increase a Fund's transaction costs and generate additional capital gains or losses. The high portfolio turnover rate for the Balanced Portfolio for 1997 was due to an unusually large redemption in the Balanced Fund, which is not expected to reoccur. The portfolio turnover rate for the Short-Term Bond Fund is expected to exceed 100% due to the active style in which the portfolio is managed in response to changes in market conditions. The fees of the investment advisers are not reduced by reason of receipt of such brokerage and research services. However, with disclosure to and pursuant to written guidelines approved by the AMR Trust Board, or the Equity 500 Index Portfolio Board, an investment adviser of a Portfolio or its affiliated broker-dealer may execute portfolio transactions and receive usual and customary brokerage commissions (within the meaning of Rule 17e-1 under the 1940 Act) for doing so. During the fiscal year ended October 31, 1995, the following commissions were paid to affiliated brokers:
Portfolio Broker Affiliated With Commission --------- ------- --------------- ---------- Balanced Sutro & Company Independence Investment Associates $18 International Equity Morgan Stanley, Inc. Morgan Stanley Asset Management Inc. $18,937
The percentage of total commission of the International Equity Fund paid to Morgan Stanley in 1995 was 4%, representing 8% of the International Equity Fund's total dollar value of transactions. The percentage of total commission of the Balanced Fund paid to Sutro & Company in 1995 was 0.005%, representing 0.03% of the Balanced Fund's total dollar value of transactions. During the fiscal year ended October 31, 1996, the following commissions were paid to affiliated brokers:
Portfolio Broker Affiliated With Commission --------- ------- --------------- ---------- Balanced Sutro & Company Independence Investment Associates $125 Growth and Income Sutro & Company Independence Investment Associates $2,750 International Equity Fleming Martin Rowe-Price Fleming International, Inc. $2,142 International Equity Jardine Fleming Rowe-Price Fleming International, Inc. $1,002 International Equity Ord Minnett Rowe-Price Fleming International, Inc. $2,051 International Equity Robert Fleming & Co. Rowe-Price Fleming International, Inc. $20,129 International Equity Morgan Stanley Intl. Morgan Stanley Asset Management Inc. $3,892
The percentages of total commissions of the Balanced Portfolio, the Growth and Income Portfolio and the International Equity Portfolio paid to affiliated brokers in 1996 were 0.02%, 0.29% and 2.68%, respectively. The transactions represented 0.03% of the Balanced Portfolio, 0.25% of the Growth and Income Portfolio and 2.2% of the International Equity Portfolio's total dollar value of portfolio transactions for the fiscal year ended October 31, 1996. During the fiscal year ended October 31, 1997, the following commissions were paid to affiliated brokers:
Portfolio Broker Affiliated With Commission --------- ------- --------------- ---------- Balanced Merrill Lynch & Co. Hotchkis and Wiley $105,166 Growth and Income Merrill Lynch & Co. Hotchkis and Wiley $43,886 International Equity Jardine Fleming Rowe-Price Fleming International, Inc. $3,260 International Equity Ord Minnett Rowe-Price Fleming International, Inc. $13,141 International Equity Robert Fleming & Co. Rowe-Price Fleming International, Inc. $81,109 International Equity Morgan Stanley Intl. Morgan Stanley Asset Management Inc. $5,413 International Equity Merrill Lynch & Co. Hotchkis and Wiley $13,141
14 172 The percentages of total commissions of the Balanced Portfolio, the Growth and Income Portfolio and the International Equity Portfolio paid to affiliated brokers in 1997 were 8.82%, 7.80% and 16.04%, respectively. The transactions represented 5.75% of the Balanced Portfolio, 6.20% of the Growth and Income Portfolio and 9.2% of the International Equity Portfolio's total dollar value of portfolio transactions for the fiscal year ended October 31, 1997. In certain instances there may be securities that are suitable for the Equity 500 Index Portfolio as well as for one or more of BT's other clients. Investment decisions for the Equity 500 Index Portfolio and for BT's other clients are made with a view to achieving their respective investment objectives. It may develop that a particular security is bought or sold for only one client even though it might be held by, or bought or sold for, other clients. Likewise, a particular security may be bought for one or more clients when one or more clients are selling that same security. Some simultaneous transactions are inevitable when several clients receive investment advice from the same investment adviser, particularly when the same security is suitable for the investment objectives of more than one client. When two or more clients are simultaneously engaged in the purchase or sale of the same security, the securities are allocated among clients in a manner believed to be equitable to each. It is recognized that in some cases this system could have a detrimental effect on the price or volume of the security as far as the Equity 500 Index Portfolio is concerned. However, it is believed that the ability of the Equity 500 Index Portfolio to participate in volume transactions will produce better executions for the Portfolio. NET ASSET VALUE It is the policy of the Money Market Fund, the Municipal Money Market Fund and the U.S. Government Money Market Fund (collectively the "Money Market Funds") to attempt to maintain a constant price per share of $1.00. There can be no assurance that a $1.00 net asset value per share will be maintained. The portfolio instruments held by the Money Market Funds' corresponding Portfolios are valued based on the amortized cost valuation technique pursuant to Rule 2a-7 under the 1940 Act. This involves valuing an instrument at its cost and thereafter assuming a constant amortization to maturity of any discount or premium, even though the portfolio security may increase or decrease in market value. Such market fluctuations are generally in response to changes in interest rates. Use of the amortized cost valuation method requires the corresponding Portfolios of the Money Market Funds to purchase instruments having remaining maturities of 397 days or less, to maintain a dollar weighted average portfolio maturity of 90 days or less, and to invest only in securities determined by the Trustees to be of high quality with minimal credit risks. The corresponding portfolios of the Money Market Funds may invest in issuers or instruments that at the time of purchase have received the highest short-term rating by two Rating Organizations, such as "D-1" by Duff & Phelps and "F-1" by Fitch IBCA,, Inc., and have received the next highest short-term rating by other Rating Organizations, such as "A-2" by Standard & Poors and "P-2" by Moody's Investors Service, Inc. See "Ratings of Municipal Obligations" and "Ratings of Short-Term Obligations" for further information concerning ratings. TAX INFORMATION TAXATION OF THE FUNDS To qualify as a regulated investment company ("RIC") under the Internal Revenue Code of 1986, as amended ("Code"), each Fund (each of which is treated as a separate corporation for these purposes) must, among other requirements: o Derive at least 90% of its gross income each taxable year from dividends, interest, payments with respect to securities loans and gains from the sale or other disposition of securities or (in the case of the International Equity Fund) foreign currencies, or certain other income, including gains from options, futures or forward contracts ("Income Requirement"); o Diversify its investments in securities within certain statutory limits; and 15 173 o Distribute annually to its shareholders at least 90% of its investment company taxable income (generally, taxable net investment income plus net short-term capital gain and, in the case of the International Equity Fund, net gains from foreign currency transactions) plus, in the case of the Municipal Money Market Fund, net interest income excludable from gross income under section 103(a) of the Code ("Distribution Requirement"). Each Fund has received either a ruling from the Internal Revenue Service ("IRS") or an opinion of counsel that the Fund, as an investor in its corresponding Portfolio, is deemed to own a proportionate share of the Portfolio's assets and to earn the income on that share for purposes of determining whether the Fund satisfies the Income and Diversification Requirements described above to qualify as a RIC. See the next section for a discussion of the tax consequences to the Funds of certain investments by the Portfolios. TAXATION OF THE PORTFOLIOS Each Portfolio has received a ruling from the IRS or an opinion of counsel, to the effect that, among other things, each Portfolio is or should be classified as a separate partnership for federal income tax purposes and is not a "publicly traded partnership." As a result, each Portfolio is or should not be subject to federal income tax; instead, each investor in a Portfolio, such as a Fund, is required to take into account in determining its federal income tax liability its share of the Portfolio's income, gains, losses, deductions, credits and tax preference items, without regard to whether it has received any cash distributions from the Portfolio. Because, as noted above, each Fund is deemed to own a proportionate share of its corresponding Portfolio's assets and to earn a proportionate share of its corresponding Portfolio's income for purposes of determining whether the Fund satisfies the requirements to qualify as a RIC, each Portfolio intends to conduct its operations so that its corresponding Fund will be able to satisfy all those requirements. Distributions to a Fund from its corresponding Portfolio (whether pursuant to a partial or complete withdrawal or otherwise) will not result in the Fund's recognition of any gain or loss for federal income tax purposes, except that (1) gain will be recognized to the extent any cash that is distributed exceeds the Fund's basis for its interest in the Portfolio before the distribution, (2) income or gain will be recognized if the distribution is in liquidation of the Fund's entire interest in the Portfolio and includes a disproportionate share of any unrealized receivables held by the Portfolio and (3) loss will be recognized if a liquidation distribution consists solely of cash and/or unrealized receivables. A Fund's basis for its interest in its corresponding Portfolio generally will equal the amount of cash and the basis of any property the Fund invests in the Portfolio, increased by the Fund's share of the Portfolio's net income and gains and decreased by (a) the amount of cash and the basis of any property the Portfolio distributes to the Fund and (b) the Fund's share of the Portfolio's losses. A Portfolio may acquire zero coupon or other securities issued with original issue discount. As an investor in a Portfolio that holds those securities, a Fund would have to include in its income its share of the original issue discount that accrues on the securities during the taxable year, even if the Portfolio (and, hence, the Fund) receives no corresponding payment on the securities during the year. Because each Fund annually must distribute substantially all of its investment company taxable income, including any original issue discount, to satisfy the Distribution Requirement and avoid imposition of the 4% excise tax described in the Prospectus, a Fund may be required in a particular year to distribute as a dividend an amount that is greater than the total amount of cash it actually receives. Those distributions would be made from the Fund's cash assets, if any, or the proceeds of redemption of a portion of the Fund's interest in its corresponding Portfolio (which redemption proceeds would be paid from the Portfolio's cash assets or the proceeds of sales of portfolio securities, if necessary). The Portfolio might realize capital gains or losses from any such sales, which would increase or decrease the Fund's investment company taxable income and/or net capital gain (the excess of net long-term capital gain over net short-term capital loss). If the Balanced, the Growth and Income or the International Equity Portfolio acquires stock in a foreign corporation that is a "passive foreign investment company" ("PFIC") and holds the stock beyond the end of the year of acquisition, its corresponding Fund will be subject to federal income tax on the Fund's share of a portion of any "excess distribution" received by the Portfolio on the stock or of any gain realized by the Portfolio from disposition of the stock (collectively "PFIC income"), plus interest thereon, even if the Fund distributes the PFIC income as a taxable dividend to its shareholders. A Fund may avoid this tax and interest if its corresponding Portfolio elects to 16 174 treat the PFIC as a "qualified electing fund;" however, the requirements for that election are difficult to satisfy. These Portfolios currently do not intend to acquire securities that are considered PFICs. Hedging strategies, such as entering into forward contracts and selling and purchasing options and futures contracts, involve complex rules that will determine for federal income tax purposes the amount, character and timing of recognition of gains and losses the International Equity Portfolio and the Equity 500 Index Portfolio realize in connection therewith. The International Equity Fund's share of the International Equity Portfolio's (1) income from foreign currencies (except certain gains that may be excluded by future regulations) and (2) income from transactions in futures and forward contracts derived with respect to its business of investing in securities or foreign currencies will qualify as allowable income for that Fund under the Income Requirement. Similarly, the S&P 500 Index Fund's share of the Equity 500 Index Portfolio's income from options and futures derived with respect to its business of investing securities will so qualify for that Fund.. Dividends and interest received by the International Equity Portfolio, and gains realized thereby, may be subject to income, withholding or other taxes imposed by foreign countries and U.S. possessions that would reduce the yield and/or total return on its securities. Tax treaties between certain countries and the United States may reduce or eliminate these foreign taxes, however, and many foreign countries do not impose taxes on capital gains on investments by foreign investors. TAXATION OF THE FUNDS' SHAREHOLDERS A portion of the dividends from a Fund's investment company taxable income, whether received in cash or paid in additional Fund shares, may be eligible for the dividends-received deduction allowed to corporations. The eligible portion may not exceed the Fund's share of the aggregate dividends received by its corresponding Portfolio from U.S. corporations. However, dividends received by a corporate shareholder and deducted by it pursuant to the dividends- received deduction are subject indirectly to the alternative minimum tax. No dividends paid by the Money Market Funds, the International Equity Fund, the Intermediate Bond Fund or the Short-Term Bond Fund are expected to be eligible for this deduction. Distributions by the Municipal Money Market Fund of the amount by which the Fund's share of its corresponding Portfolio's income on tax-exempt securities exceeds certain amounts disallowed as deductions, designated by the Fund as "exempt-interest dividends," generally may be excluded from gross income by its shareholders. Dividends paid by the Fund will qualify as exempt-interest dividends if, at the close of each quarter of its taxable year, at least 50% of the value of its total assets (including its share of the Municipal Money Market Portfolio's assets) consists of securities the interest on which is excludable from gross income under section 103(a) of the Code. The Fund intends to continue to satisfy this requirement. The aggregate dividends excludable from shareholders' gross income may not exceed the Fund's net tax-exempt income. The shareholders' treatment of dividends from the Fund under state and local income tax laws may differ from the treatment thereof under the Code. Exempt-interest dividends received by a corporate shareholder may be indirectly subject to the alternative minimum tax. In addition, entities or persons who are "substantial users" (or persons related to "substantial users") of facilities financed by private activity bonds ("PABs") or industrial development bonds ("IDBs") should consult their tax advisers before purchasing shares of the Municipal Money Market Fund because, for users of certain of these facilities, the interest on those bonds is not exempt from federal income tax. For these purposes, the term "substantial user" is defined generally to include a "non-exempt person" who regularly uses in trade or business a part of a facility financed from the proceeds of PABs or IDBs. Up to 85% of social security and railroad retirement benefits may be included in taxable income for recipients whose adjusted gross income (including income from tax-exempt sources such as the Municipal Money Market Fund) plus 50% of their benefits exceeds certain base amounts. Exempt-interest dividends from the Fund still are tax-exempt to the extent described above; they are only included in the calculation of whether a recipient's income exceeds the established amounts. If more than 50% of the value of the International Equity Fund's total assets (including its share of the International Equity Portfolio's total assets) at the close of its taxable year consists of securities of foreign corporations, the Fund will be eligible to, and may, file an election with the IRS that will enable the Fund's shareholders, in effect, to receive the benefit of the foreign tax credit with respect to the Fund's share of any foreign and U.S. possessions income taxes paid by the Portfolio. If the Fund makes this election, the Fund will treat those 17 175 taxes as dividends paid to its shareholders and each shareholder will be required to (1) include in gross income, and treat as paid by him, his proportionate share of those taxes, (2) treat his share of those taxes and of any dividend paid by the Fund that represents income from foreign or U.S. possessions sources as his own income from those sources and (3) either deduct the taxes deemed paid by him in computing his taxable income or, alternatively, use the foregoing information in calculating the foreign tax credit against his federal income tax. If the election is made, the Fund will report to its shareholders shortly after each taxable year their respective share of the Portfolio's income from foreign and U.S. possessions sources and the taxes paid by the Portfolio to foreign countries and U.S. possessions. Pursuant to that election, individuals who have no more than $300 ($600 for married persons filing jointly) of creditable foreign taxes included on Forms 1099 and all of whose foreign source income is "qualified passive income" may elect each year to be exempt from the extremely complicated foreign tax credit limitation and will be able to claim a foreign tax credit without having to file the detailed Form 1116 that otherwise is required. The foregoing is only a summary of some of the important federal tax considerations affecting the Funds and their shareholders and is not intended as a substitute for careful tax planning. Accordingly, prospective investors are advised to consult their own tax advisers for more detailed information regarding the above and for information regarding federal, state, local and foreign taxes. YIELD AND TOTAL RETURN QUOTATIONS A quotation of yield on shares of each class of the Money Market Funds may appear from time to time in advertisements and in communications to shareholders and others. Quotations of yields are indicative of yields for the limited historical period used but not for the future. Yield will vary as interest rates and other conditions change. Yield also depends on the quality, length of maturity and type of instruments invested in by the corresponding Portfolios of the Money Market Funds, and the applicable class's operating expenses. A comparison of the quoted yields offered for various investments is valid only if yields are calculated in the same manner. In addition, other similar investment companies may have more or less risk due to differences in the quality or maturity of securities held. The yields of the Money Market Funds may be calculated in one of two ways: (1) Current Yield--the net average annualized return without compounding accrued interest income. For a 7-day current yield, this is computed by dividing the net change in value over a 7 calendar-day period of a hypothetical account having one share at the beginning of a 7 calendar-day period by the value of the account at the beginning of this period to determine the "base period return." The quotient is multiplied by 365 divided by 7 and stated to two decimal places. A daily current yield is calculated by multiplying the net change in value over one day by 365 and stating it to two decimal places. Income other than investment income and capital changes, such as realized gains and losses from the sale of securities and unrealized appreciation and depreciation, are excluded in calculating the net change in value of an account. However, this calculation includes the aggregate fees and other expenses that are charged to all shareholder accounts in a class of a Fund. In determining the net change in value of a hypothetical account, this value is adjusted to reflect the value of any additional shares purchased with dividends from the original share and dividends declared on both the original share and any such additional shares. (2) Effective Yield--the net average annualized return as computed by compounding accrued interest income. In determining the 7-day effective yield, a class of a Fund will compute the "base period return" in the same manner used to compute the "current yield" over a 7 calendar-day period as described above. One is then added to the base period return and the sum is raised to the 365/7 power. One is subtracted from the result, according to the following formula: EFFECTIVE YIELD = [ (BASE PERIOD RETURN + 1)(365/7 )] - 1 Based on these formulas, the current and effective yields were as follows for the periods and Funds indicated: 18 176
Current yield for Effective yield for Current daily yield the 7 day period the 7 day period as of ended ended October 31, 1997 October 31, 1997 October 31, 1997 ---------------- ---------------- ---------------- Institutional Class ------------------- Money Market Fund 5.54% 5.54% 5.69% Municipal Money Market Fund 3.41% 3.42% 3.47% U.S. Government Money Market Fund 5.44% 5.36% 5.51% PlanAhead Class --------------- Money Market Fund 5.22% 5.22% 5.36% Municipal Money Market Fund 3.12% 3.15% 3.20% U.S. Government Money Market Fund 5.15% 5.06% 5.19%
The Municipal Money Market Fund also may advertise a tax equivalent current and effective yield. The tax equivalent yields are calculated as follows: CURRENT YIELD/(1-APPLICABLE TAX RATE) = CURRENT TAX EQUIVALENT YIELD EFFECTIVE YIELD/(1-APPLICABLE TAX RATE) = EFFECTIVE TAX EQUIVALENT YIELD Based on these formulas, the current and effective tax equivalent yields for the Municipal Money Market Fund for the seven day periods ending October 31, 1997 were:
Current Effective Class Tax Equivalent Yield Tax Equivalent Yield ----- -------------------- -------------------- Institutional (based on a 35.0% corporate tax rate) 5.26% 5.34% PlanAhead (based on a 39.6% personal tax rate) 5.22% 5.30%
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: YIELD = 2{(A-B +1)(6)- 1} --- CD where, with respect to a particular class of a Fund, "a" is the dividends and interest earned during the period; "b" is the sum of the expenses accrued for the period (net of reimbursement, if any) and the aggregate fees that are charged to all shareholder accounts in proportion to the 30-day (or one month) period and the weighted average size of an account in the class; "c" is the average daily number of class shares outstanding during the period that were entitled to receive dividends; and "d" is the maximum offering price per class share on the last day of the period. Based on this formula, the estimated 30-day yield for the period ended October 31, 1997 for the Short-Term Bond Fund was 6.07%, 5.44% and 5.19%, for the AMR, Institutional and PlanAhead Classes, respectively. The estimated 30-day yield for the period ended October 31, 1997 for the Institutional Class of the Intermediate Bond Fund was 4.90%. Each class of the Intermediate Bond and the Short-Term Bond Fund also may advertise a monthly distribution rate. The distribution rate gives the return of the class based solely on the dividend payout to that class if someone was entitled to the dividends for an entire month. A monthly distribution rate is calculated from the following formula: MONTHLY DISTRIBUTION RATE = A/P*(365/N) where, with respect to a particular class of shares, "A" is the dividend accrual per share during the month, "P" is the share price at the end of the month and "N" is the number of days in the month. Based on this formula, the monthly distribution rate for the AMR, Institutional and PlanAhead Classes of the Short-Term Bond Fund for the month of October 1997 was 6.50%, 6.18% and 6.07%, respectively. The monthly distribution rate for the Institutional Class of the Intermediate Bond Fund for the month of October 1997 was 5.61%. The "monthly distribution rate" is a non- 19 177 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: P(1 + T)(n)= 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:
For the period from commencement For the five- For the ten- of active For the one- year period year period operations year period ended ended through ended October October 31, October 31, October 31, 31, 1997(1) 1997(1) 1997(1) 1997(1)(3) ----------- ------- ------- ---------- AMR Class --------- Balanced Fund 20.36% 14.92% 13.11% 11.66% Growth and Income Fund 28.40% 19.28% 16.34% 13.77% International Equity Fund 19.39% 18.34% N/A(2) 12.36% Short-Term Bond Fund 6.57% 5.56% N/A(2) 6.99% Institutional Class ------------------- Balanced Fund 20.04% 14.73% 13.02% 11.57% Growth and Income Fund 28.05% 19.08% 16.24% 13.67% International Equity Fund 19.08% 18.13% N/A(2) 12.20% Intermediate Bond N/A(2) N/A(2) N/A(2) 2.41% Short-Term Bond Fund 6.29% 5.40% N/A(2) 6.91% S&P 500 Index Fund(4) N/A(2) N/A(2) N/A(2) 25.19% Money Market Fund 5.60% 4.85% 6.12% 6.13% Municipal Money Market Fund (5) 3.52% N/A(2) N/A(2) 3.33% U.S. Government Money Market Fund 5.36% 4.61% N/A(2) 4.50% PlanAhead Class --------------- Balanced Fund (6) 19.75% 14.50% 12.91% 11.46% Growth and Income Fund 27.64% 18.78% 16.10% 13.54% International Equity Fund 18.71% 17.83% N/A(2) 11.98% Short-Term Bond Fund (6) 6.01% 5.23% N/A(2) 6.82% Money Market Fund 5.28% 4.62% 6.00% 6.01% Municipal Money Market Fund (5) 3.24% N/A(2) N/A(2) 3.07% U.S. Government Money Market Fund 5.08% 4.37% N/A(2) 4.28%
(1) The Institutional Class is the initial class for each Fund, except for the S&P 500 Index Fund. Except for the S&P 500 Index Fund, total returns for the PlanAhead and AMR Classes reflect Institutional Class returns from the date of commencement of operations of each of these Funds through July 31, 1994 and returns of the applicable class from the commencement of operations of the new classes through October 31, 1997. Due to the different expense structures between the classes, total returns would vary from the results shown had the classes been in operation for the entire periods. (2) The Fund was not operational during this period. (3) Inception dates are as follows: 20 178
Fund Institutional Class AMR Class PlanAhead Class ---- ------------------- --------- --------------- Balanced 7/17/87 8/1/94 8/1/94 Growth and Income 7/17/87 8/1/94 8/1/94 International Equity 8/7/91 8/1/94 8/1/94 S&P 500 Index(4) 1/1/97 N/A N/A Intermediate Bond 9/15/97 N/A N/A Short-Term Bond 12/3/87 8/1/94 8/1/94 Money Market 9/1/87 8/1/94 8/1/94 Municipal Money Market 11/10/93 8/1/94 8/1/94 U.S. Government Money Market 3/2/92 8/1/94 8/1/94
See Appendix A for historical performance of the S&P 500 Composite Stock Price Index. (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 Balanced, the Growth and Income and the Short-Term Bond Funds since August 1, 1994. Each class of a Fund also may use "aggregate" total return figures for various periods which represent the cumulative change in value of an investment in a class of a Fund for the specific period. Such total returns reflect changes in share prices of a class of a Fund and assume reinvestment of dividends and distributions. Each Fund may give total returns from inception using the date when the current managers began active management as the inception date. However, returns using the actual inception date of the Fund will also be provided. In reports or other communications to shareholders or in advertising material, each class of a Fund may from time to time compare its performance with that of other mutual funds in rankings prepared by Lipper Analytical Services, Inc., Morningstar, Inc., IBC Financial Data, Inc. and other similar independent services which monitor the performance of mutual funds or publications such as the "New York Times," "Barrons" and the "Wall Street Journal." Each class of a Fund may also compare its performance with various indices prepared by independent services such as Standard & Poor's, Morgan Stanley or Lehman Brothers or to unmanaged indices that may assume reinvestment of dividends but generally do not reflect deductions for administrative and management costs. Each Fund may advertise the standard deviation of its returns for various time periods and compare its standard deviation to that of various indices. Standard deviation of returns over time is a measure of volatility. It indicates the spread of a Fund's returns about their central tendency or mean. In theory, a Fund that is more volatile should receive a higher return in exchange for taking extra risk. Standard deviation is a well-accepted statistic to gauge the riskiness of an investment strategy and measure its historical volatility as a predictor of risk, although the measure is subject to time selection bias. Advertisements for the Funds may mention that the Funds offer a variety of investment options. They may also compare the Funds to federally insured investments such as bank certificates of deposit and credit union deposits, including the long-term effects of inflation on these types of investments. Advertisements may also compare the historical rate of return of different types of investments. Advertisements for the International Equity Fund may compare the differences between domestic and foreign investments. Information concerning broker-dealers who sell the Funds may also appear in advertisements for the Funds, including their ranking as established by various publications compared to other broker-dealers. From time to time, the Manager may use contests as a means of promoting the American AAdvantage Funds. Prizes may include free air travel and/or hotel accommodations. Listings for certain of the Funds may be found in newspapers under the heading "Amer AAdvant." 21 179 DESCRIPTION OF THE TRUST The Trust is an entity of the type commonly known as a "Massachusetts business trust." Under Massachusetts law, shareholders of such a trust may, under certain circumstances, be held personally liable for its obligations. However, the Trust's Declaration of Trust contains an express disclaimer of shareholder liability for acts or obligations of the Trust and provides for indemnification and reimbursement of expenses out of Trust property for any shareholder held personally liable for the obligations of the Trust. The Declaration of Trust also provides that the Trust may maintain appropriate insurance (for example, fidelity bonding) for the protection of the Trust, its shareholders, Trustees, officers, employees and agents to cover possible tort and other liabilities. Thus, the risk of a shareholder incurring financial loss due to shareholder liability is limited to circumstances in which both inadequate insurance existed and the Trust itself was unable to meet its obligations. The Trust has not engaged in any other business. The Trust was originally created to manage money for large institutional investors, including pension and 401(k) plans for American Airlines, Inc. The AMR Class is offered to tax-exempt retirement and benefit plans of AMR Corporation and its affiliates. The following individuals are eligible for purchasing shares of the Institutional Class with an initial investment of less than $2 million: (i) employees of the Manager, (ii) officers and directors of AMR and (iii) members of the Trust's Board of Trustees. The PlanAhead Class was later created to give individuals and other smaller investors an opportunity to invest in the American AAdvantage Funds. As a result, shareholders of the PlanAhead Class benefit from the economies of scale generated by being part of a larger pool of assets. The corresponding Portfolios of the Balanced, the Growth and Income and the International Equity and the Intermediate Bond Funds utilize a multi-manager approach designed to reduce volatility by diversifying assets over multiple investment management firms. Each adviser is carefully chosen by the Manager through a rigorous screening process. CONTROL PERSONS AND 5% SHAREHOLDERS The following persons may be deemed to control certain Funds by virtue of their ownership of more than 25% of the outstanding shares of a Fund as of January 31, 1998: American AAdvantage Balanced Fund - --------------------------------- AMR Corporation and subsidiary companies and Employee Benefit Trusts thereof . . . . . . . . . . . . . . . . . . 81% 4333 Amon Carter Boulevard Fort Worth, TX 76155 American AAdvantage Growth and Income Fund - ------------------------------------------ AMR Corporation and subsidiary companies and Employee Benefit Trusts thereof . . . . . . . . . . . . . . . . . . 85% 4333 Amon Carter Boulevard Fort Worth, TX 76155 American AAdvantage International Equity Fund - --------------------------------------------- AMR Corporation and subsidiary companies and Employee Benefit Trusts thereof . . . . . . . . . . . . . . . . . . 60% 4333 Amon Carter Boulevard Fort Worth, TX 76155 American AAdvantage Short-Term Bond Fund - ---------------------------------------- AMR Corporation and subsidiary companies and Employee Benefit Trusts thereof . . . . . . . . . . . . . . . . . . 72% 4333 Amon Carter Boulevard Fort Worth, TX 76155
AMR Corporation and subsidiary companies and Employee Benefit Trusts thereof own 100% of the S&P 500 Index Fund and 100% of the shares of the AMR Class of the Balanced Fund, the Growth and Income Fund, the International Equity Fund and the Short-Term Bond Fund. 22 180 In addition, the following persons own 5% or more of the outstanding shares of a Fund or Class as of January 31, 1998:
Total Institutional PlanAhead American AAdvantage Balanced Fund Fund Class Class --------------------------------- ---- ----- ----- Sky Chefs Master Trust 11% 77% 601 Ryan Plaza Drive Arlington, TX 76011 Total Institutional PlanAhead American AAdvantage Growth and Income Fund Fund Class Class ------------------------------------------ ---- ----- ----- Berg Electronics Inc. Savings Plan 22% 4 New York Plaza - EBS 4th. Floor New York, NY 10004-2413 Charles Schwab & Co.* 10%* 4500 Cherry Creek Dr. South, Suite 700 Denver, CO 80222 Coca-Cola Retirement Plan 6% Hamill and Company (Trust Operations) P.O. Box 2558 Houston, TX 77252-2558 National Financial Services Corp.* 10%* 75%* P.O. Box 3908 New York, NY 10163-3908 Technical Products Group Inc. Retirement & Savings Plan 9% 3353 Peachtree Road, Suite 920 Atlanta, GA 30326-1053 Wachovia Bank of North Carolina 7% P.O. Box 3073 Winston-Salem, NC 27150 Total Institutional PlanAhead American AAdvantage International Equity Fund Fund Class Class --------------------------------------------- ---- ----- ----- The Burnett Foundation 11% 801 Cherry Street, Suite 1400 Fort Worth, TX 76102 Charles Schwab & Co.* 5%* 13%* 13%* 101 Montgomery Street San Francisco, CA 94104-4122 Fidelity Investments Institutional Operations Co. Inc.* 11%* 100 Magellan Way Covington, KY 41015-1999 IBJ Distributor Inc. FBO INTRUST Bank* 11%* 3435 Stelzer Road, Suite 1000 Columbus, OH 43219-6004 The Kimbell Art Foundation 9% 301 Commerce Street, Suite 2240 Fort Worth, TX 76102 MAC & Co. 5% P.O. Box 3198 Pittsburgh, PA 15230-3198 NA Bank & Co.* 8%* 13%* P.O. Box 2180 Tulsa, Oklahoma 74101-2180 National Financial Services Corp.* 12%* 7%* P.O. Box 3908 New York, NY 10163-3908
*Denotes record owner of Fund shares only 23 181
Total Institutional PlanAhead American AAdvantage International Equity Fund (cont'd.) Fund Class Class ------------------------------------------------------- ---- ----- ----- University of Tulsa 6% 600 S. College Ave. Tulsa, OK 74104 Total Institutional PlanAhead American AAdvantage Intermediate Bond Fund Fund Class Class ------------------------------------------ ---- ----- ----- National Financial Services Corp.* 100%* 100%* P.O. Box 3908 New York, NY 10163-3908 Total Institutional PlanAhead American AAdvantage Short-Term Bond Fund Fund Class Class ---------------------------------------- ---- ----- ----- Berg Electronics Inc. Savings Plan 13% 770 Broadway, 10th Floor New York, NY 10003-9522 Chancellor Limited Partnership 8% c/o Retirement Advisors of America 13155 Noel Road, Floor 24 Dallas, TX 75240-5090 C.R. Smith Museum 9% P.O. Box 619616 MD 5334 Dallas/Fort Worth Airport, TX 75261-9616 EPR Limited Partnership 10% c/o Retirement Advisors of America 13155 Noel Road, Floor 24 Dallas, TX 75240-5090 Gale Force Limited Partnership 6% c/o Retirement Advisors of America 13155 Noel Road, Floor 24 Dallas, TX 75240-5090 William N. Hoffman IRA 6% 3515 Davis Rd. Granbury, TX 76049-5469 RIW Limited Partnership 10% c/o Retirement Advisors of America 13155 Noel Road, Floor 24 Dallas, TX 75240-5090 Charles Schwab & Co.* 10%* 101 Montgomery Street San Francisco, CA 94104-4122 Technical Products Group Inc. Retirement & Savings Plan 23% 3353 Peachtree Road, Suite 920 Atlanta, GA 30326-1053 Wachovia Bank of North Carolina 15% 63% P.O. Box 3073 Winston-Salem, North Carolina 27150 Total Institutional PlanAhead American AAdvantage Money Market Fund Fund Class Class ------------------------------------- ---- ----- ----- City of Chicago International Airport Revenue Bonds 6% Harris Trust and Savings Bank(Indenture Trust Division) P.O. Box 755 Chicago, Illinois 60690 Investors Bank & Trust 7%% 200 Clarendon Street, 16th Floor Boston, MA 02117-9130
*Denotes record owner of Fund shares only 24 182
Total Institutional PlanAhead American AAdvantage Money Market Fund (cont'd.) Fund Class Class ----------------------------------------------- ---- ----- ----- Michaels Stores, Inc. 11% P.O. Box 619566 Dallas, TX 75261-9566 State Street Securities Lending 8% 2 International Place, Floor 31 Boston, MA 02110-4104 Texas A&M University 6% P.O. Box 1159 College Station, TX 77841-1159 Total Institutional PlanAhead American AAdvantage Municipal Money Market Fund Fund Class Class ----------------------------------------------- ---- ----- ----- AMR Investment Services, Inc. 10% 4333 Amon Carter Blvd., MD 5645 Fort Worth, TX 76155 Larry M. and Marie S. Brown 7% 11 Crestview Drive Orinda, CA 94563-3919 Dralie Partners LTD 8% 5604 Banister Court Plano, TX 75093-4227 Georgia L. Ledbetter Revocable Trust 8% 2334 Birdwood Drive Orange Park, FL 32073-5324 Lee R. Ledbetter Revocable Trust 7% 2334 Birdwood Drive Orange Park, FL 32073-5324 Anne and Martin McNamara 6% 9307 Guernsey Lane Dallas, TX 75220-3929 Merit Partners LP 5% 77% 12222 Merit Dr., Suite 1500 Dallas, TX 75251-3206 NA Bank & Co.* 7%* P.O. Box 2180 Tulsa, Oklahoma 74101-2180 Jerome Reed Schusterman Irrevocable Trust 23% P.O. Box 699 Tulsa, OK 74101-0699 Total Institutional PlanAhead American AAdvantage U.S. Government Money Market Fund Fund Class Class ----------------------------------------------------- ---- ----- ----- Bozell Jacobs Kenyon and Eckhardt, Inc. 6% 302 South 36th Street Omaha, NE 68131-3827 British American Insurance Company 6% P.O. Box 1590 Dallas, Texas 75221-1590 Leone C. Campbell Intervivo Trust 5% 4000 N. Federal Highway, Suite 206 Boca Raton, FL 33431-4586 Dennis G. Davis 6% 8116 Golden Avenue Lemon Grove, CA 91945-2508 Entis Family Trust 5% 6645 Nancy Ridge Drive San Diego, CA 92121-2253
*Denotes record owner of Fund shares only 25 183
Total Institutional PlanAhead American AAdvantage US Gov't. Money Market Fund (cont'd.) Fund Class Class --------------------------------------------------------- ---- ----- ----- Family Orthopedic Association Profit Sharing Plan 8% 8953 Bath Road Byron, MI 48418-9785 Grapevine Industrial Development Corp. 6% 19% First National Bank of Chicago One First National Plaza, Suite 0126 Chicago, Illinois 60670 Hare & Co. 11% 36% Bank of New York One Wall Street New York, NY 10005-2505 Lone Star Airport Improvement Authority 6% 19% First National Bank of Chicago One First National Place Chicago, Illinois 60670 Ray K. Robinson Trust 11% 200 Hillview Drive, Suite 100 Richland, WA 99352-7660
OTHER INFORMATION American Depository Receipts (ADRs), European Depository Receipts (EDRs)-ADRs are depository receipts for foreign issuers in registered form traded in U.S. securities markets, whereas, EDRs are in bearer form and traded in European securities markets. These securities are not denominated in the same currency as the securities into which they may be converted. Investing in ADRs and EDRs involves greater risks than are normally present in domestic investments. There is generally less publicly available information about foreign companies and there may be less governmental regulation and supervision of foreign stock exchanges, brokers and listed companies. In addition, such companies may use different accounting and financial standards (and certain currencies may become unavailable for transfer from a foreign currency), resulting in a Fund's possible inability to convert immediately into U.S. currency proceeds realized upon the sale of portfolio securities of the affected foreign companies. Bank Deposit Notes-Bank deposit notes are obligations of a bank, rather than bank holding company corporate debt. The only structural difference between bank deposit notes and certificates of deposit is that interest on bank deposit notes is calculated on a 30/360 basis as are corporate notes/bonds. Similar to certificates of deposit, deposit notes represent bank level investments and, therefore, are senior to all holding company corporate debt. 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. 26 184 A Portfolio will not enter into any such transactions unless it owns either (1) an offsetting ("covered") position in securities, currencies, or other forward contracts, options or futures contracts, or (2) cash, receivables and liquid assets, with a value, marked-to-market daily, sufficient to cover its potential obligations to the extent not covered as provided in (1) above. Each Portfolio will comply with SEC guidelines regarding cover for these instruments and will, if the guidelines so require, set aside cash, receivables, or liquid assets in a segregated account with its custodian in the prescribed amount. Assets used as cover or held in a segregated account cannot be sold while the position in the corresponding Financial Instrument is open, unless they are replaced with other appropriate assets. As a result, the commitment of a large portion of a Portfolio's assets to cover or to segregated accounts could impede portfolio management or the Portfolio's ability to meet redemption requests or other current obligations. Commercial Paper-Commercial paper refers to promissory notes representing an unsecured debt of a corporation or finance company with a fixed maturity of no more than 270 days. A variable amount master demand note (which is a type of commercial paper) represents a direct borrowing arrangement involving periodically fluctuating rates of interest under a letter agreement between a commercial paper issuer and an institutional lender pursuant to which the lender may determine to invest varying amounts. Debentures-Debentures are unsecured debt securities. The holder of a debenture is protected only by the general creditworthiness of the issuer. Derivatives-Generally, a derivative is a financial arrangement, the value of which is based on, or "derived" from, a traditional security, asset or market index. Some "derivatives" such as mortgage-related and other asset-backed securities are in many respects like any other investment, although they may be more volatile or less liquid than more traditional debt securities. There are, in fact, many different types of derivatives and many different ways to use them. There are a range of risks associated with those uses. Forward Foreign Currency Exchange Contracts-A forward foreign currency exchange contract ("forward contract") is a contract to purchase or sell a currency at a future date. The two parties to the contract set the number of days and the price. Forward contracts are used as a hedge against movements in future foreign exchange rates. The corresponding Portfolio of the International Equity Fund may enter into forward contracts to purchase or sell foreign currencies for a fixed amount of U.S. dollars or other foreign currency. Forward contracts may serve as long hedges -- for example, the Portfolio may purchase a forward contract to lock in the U.S. dollar price of a security denominated in a foreign currency that the Portfolio intends to acquire. Forward contracts may also serve as short hedges -- for example, the Portfolio may sell a forward contract to lock in the U.S. dollar equivalent of the proceeds from the anticipated sale of a security denominated in a foreign currency or from the anticipated dividend or interest payments denominated in a foreign currency. The Manager may seek to hedge against changes in the value of a particular currency by using forward contracts on another foreign currency or basket of currencies, the value of which the Manager believes will bear a positive correlation to the value of the currency being hedged. 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. 27 185 The precise matching of forward currency contract amounts and the value of the securities involved generally will not be possible because the value of such securities, measured in the foreign currency, will change after the forward contract has been established. Thus, the Portfolio might need to purchase or sell foreign currencies in the spot (cash) market to the extent such foreign currencies are not covered by forward contracts. The projection of short-term currency market movements is extremely difficult, and the successful execution of a short-term hedging strategy is highly uncertain. Full Faith and Credit Obligations of the U.S. Government-Securities issued or guaranteed by the U.S. Treasury, backed by the full taxing power of the U.S. Government or the right of the issuer to borrow from the U.S. Treasury. Futures Contracts-Futures contracts obligate a purchaser to take delivery of a specific amount of an obligation underlying the futures contract at a specified time in the future for a specified price. Likewise, the seller incurs an obligation to deliver the specified amount of the underlying obligation against receipt of the specified price. Futures are traded on both U.S. and foreign commodities exchanges. Only currency futures will be permitted in the corresponding Portfolio of the International Equity Fund. Futures contracts will be traded for the same purposes as entering into forward contracts. The use of futures contracts by the Equity 500 Index Portfolio is explained further under "Index Futures Contracts and Options on Index Futures Contracts." The purchase of futures can serve as a long hedge, and the sale of futures can serve as a short hedge. No price is paid upon entering into a futures contract. Instead, at the inception of a futures contract a Portfolio is required to deposit "initial deposit" consisting of cash or U.S. Government Securities in an amount generally equal to 10% or less of the contract value. Margin must also be deposited when writing a call or put option on a futures contract, in accordance with applicable exchange rules. Unlike margin in securities transactions, initial margin on futures contracts does not represent a borrowing, but rather is in the nature of a performance bond or good- faith deposit that is returned to the Portfolio at the termination of the transaction if all contractual obligations have been satisfied. Under certain circumstances, such as periods of high volatility, a Portfolio may be required by a futures exchange to increase the level of its initial margin payment, and initial margin requirements might be increased generally in the future by regulatory action. Subsequent "variation margin" payments are made to and from the futures broker daily as the value of the futures position varies, a process known as "marking-to-market." Variation margin does not involve borrowing, but rather represents a daily settlement of a Portfolio's obligations to or from a futures broker. When the Portfolio purchases or sells a futures contract, it is subject to daily variation margin calls that could be substantial in the event of adverse price movements. If a Portfolio has insufficient cash to meet daily variation margin requirements, it might need to sell securities at a time when such sales are disadvantageous. Purchasers and sellers of futures contracts can enter into offsetting closing transactions, by selling or purchasing, respectively, an instrument identical to the instrument purchased or sold. Positions in futures contracts may be closed only on a futures exchange or board of trade that provides a secondary market. The Portfolios intend to enter into futures contracts only on exchanges or boards of trade where there appears to be a liquid secondary market. However, there can be no assurance that such a market will exist for a particular contract at a particular time. In such event, it may not be possible to close a futures contract. Although futures contracts by their terms call for the actual delivery or acquisition of securities or currency, in most cases the contractual obligation is fulfilled before the date of the contract without having to make or take delivery of the securities or currency. The offsetting of a contractual obligation is accomplished by buying (or selling, as appropriate) on a commodities exchange an identical futures contract calling for delivery in the same month. Such a transaction, which is effected through a member of an exchange, cancels the obligation to make or take 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. 28 186 If a Portfolio were unable to liquidate a futures contract due to the absence of a liquid secondary market or the imposition of price limits, it could incur substantial losses. The Portfolio would continue to be subject to market risk with respect to the position. In addition, the Portfolio would continue to be required to make daily variation margin payments and might be required to maintain the position being hedged by the futures contract or option thereon or to maintain cash or securities in a segregated account. To the extent that a Portfolio enters into futures contracts, in each case other than for bona fide hedging purposes (as defined by the Commodities Futures Trading Commission ("CFTC"), the aggregate initial margin will not exceed 5% of the liquidation value of a Portfolio's portfolio, after taking into account unrealized profits and unrealized losses on any contracts that the Portfolio has entered into. This policy does not limit to 5% the percentage of the Portfolio's assets that are at risk in futures contracts. Futures contracts require the deposit of initial margin valued at a certain percentage of the contract and possibly adding "variation margin" should the price of the contract move in an unfavorable direction. As with forward contracts, the segregated assets must be either cash or high grade liquid debt securities. The ordinary spreads between prices in the cash and futures market, due to differences in the nature of those markets, are subject to distortions. First, all participants in the futures market are subject to initial deposit and variation margin requirements. Rather than meeting additional variation margin deposit requirements, investors may close futures contracts through offsetting transactions which could distort the normal relationship between the cash and futures markets. Second, the liquidity of the futures market depends on participants entering into offsetting transactions rather than making or taking delivery. To the extent participants decide to make or take delivery, liquidity in the futures market could be reduced, thus producing distortion. Third, from the point of view of speculators, the margin deposit requirements in the futures market are less onerous than margin requirements in the securities market. Therefore, increased participation by speculators in the futures market may cause temporary price distortions. Due to the possibility of distortion, a correct forecast of securities price or currency exchange rate trends by the investment adviser may still not result in a successful transaction. In addition, futures contracts entail risks. Although an investment adviser believes that use of such contracts will benefit a particular Portfolio, if that investment adviser's investment judgment about the general direction of, for example, an index is incorrect, a Portfolio's overall performance would be poorer than if it had not entered into any such contract. General Obligation Bonds-General obligation bonds are secured by the pledge of the issuer's full faith, credit, and usually, taxing power. The taxing power may be an unlimited ad valorem tax or a limited tax, usually on real estate and personal property. Most states do not tax real estate, but leave that power to local units of government. Illiquid Securities - Historically, illiquid securities have included securities subject to contractual or legal restrictions on resale because they have not been registered under the 1933 Act, securities that are otherwise not readily marketable and repurchase agreements having a remaining maturity of longer than seven calendar days. Securities that have not been registered under the 1933 Act are referred to as private placements or restricted securities and are purchased directly from the issuer or in the secondary market. Mutual funds do not typically hold a significant amount of these restricted or other illiquid securities because of the potential for delays on resale and uncertainty in valuation. Limitations on resale may have an adverse effect on the marketability of portfolio securities and a mutual fund might be unable to dispose of restricted or other illiquid securities promptly or at reasonable prices and might thereby experience difficulty satisfying redemptions within seven calendar days. A mutual fund also might have to register such restricted securities in order to dispose of them resulting in additional expense and delay. Adverse market conditions could impede such a public offering of securities. In recent years, however, a large institutional market has developed for certain securities that are not registered under the 1933 Act, including repurchase agreements, commercial paper, foreign securities, municipal securities and corporate bonds and notes. Institutional investors depend on an efficient institutional market in which the unregistered security can be readily resold or on an issuer's ability to honor a demand for repayment. However, 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. 29 187 Index Futures Contracts and Options on Index Futures Contracts-The Equity 500 Index Portfolio may invest in index futures contracts, options on index futures contracts and options on securities indices. Index Futures Contracts-U.S. futures contracts have been designed by exchanges which have been designated "contracts markets" by the CFTC and must be executed through a futures commission merchant, or brokerage firm, which is a member of the relevant contract market. Futures contracts trade on a number of exchange markets, and through their clearing corporations. At the same time a futures contract on the Standard & Poor's 500 Composite Stock Price Index (the "S&P 500" or the "Index") is purchased or sold, the Portfolio must allocate cash or securities as a deposit payment ("initial deposit"). It is expected that the initial deposit would be approximately 1-1/2% to 5% of a contract's face value. Daily thereafter, the futures contract is valued and the payment of "variation margin" may be required. Options on Index Futures Contracts-The purchase of a call option on an index futures contract is similar in some respects to the purchase of a call option on such an index. The writing of a call option on a futures contract with respect to the Index constitutes a partial hedge against declining prices of the underlying securities that are deliverable upon exercise of the futures contract. If the futures price at expiration of the option is below the exercise price, the Portfolio will retain the full amount of the option premium which provides a partial hedge against any decline that may have occurred in the Portfolio's holdings. The writing of a put option on an index futures contract constitutes a partial hedge against increasing prices of the underlying securities that are deliverable upon exercise of the futures contract. If the futures price at expiration of the option is higher than the exercise price, the Portfolio will retain the full amount of the option premium which provides a partial hedge against any increase in the price of securities that the Portfolio intends to purchase. If a put or call option the Portfolio has written is exercised, the Portfolio will incur a loss that will be reduced by the amount of the premium it receives. Depending on the degree of correlation between changes in the value of its portfolio securities and changes in the value of its futures positions, the Portfolio's losses from existing options on futures may to some extent be reduced or increased by changes in the value of portfolio securities. The purchase of a put option on a futures contract with respect to the Index is similar in some respects to the purchase of protective put options on the Index. For example, the Portfolio may purchase a put option on an index futures contract to hedge against the risk of lowering securities values. The amount of risk the Portfolio assumes when it purchases an option on a futures contract with respect to the Index is the premium paid for the option plus related transaction costs. In addition to the correlation risks discussed above, the purchase of such an option also entails the risk that changes in the value of the underlying futures contract will not be fully reflected in the value of the option purchased. The Equity 500 Index Portfolio Board has adopted the requirement that index futures contracts and options on index futures contracts be used as a hedge. Stock index futures may be used on a continual basis to equitize cash so that the Portfolio may maintain maximum equity exposure. The Portfolio will not enter into any futures contracts or options on futures contracts if immediately thereafter the amount of margin deposits on all the futures contracts of the Portfolio and premiums paid on outstanding options on futures contracts owned by the Portfolio would exceed 5% of the market value of the total assets of the Portfolio. Futures Contracts on Stock Indices-The Portfolio may enter into contracts providing for the making and acceptance of a cash settlement based upon changes in the value of an index of securities ("Futures Contracts"). This investment technique is designed only to hedge against anticipated future change in general market prices which otherwise might either adversely affect the value of securities held by the Portfolio or adversely affect the prices of securities which are intended to be purchased at a later date for the Portfolio. In general, each transaction in Futures Contracts involves the establishment of a position which will move in a direction opposite to that of the investment being hedged. If these hedging transactions are successful, the futures positions taken for the Portfolio will rise in value by an amount that approximately offsets the decline in value of the portion of the Portfolio's investments that are being hedged. Should general market prices move in an unexpected manner, the full anticipated benefits of Futures Contracts may not be achieved or a loss may be realized. 30 188 Although Futures Contracts would be entered into for cash management purposes only, such transactions do involve certain risks. These risks could include a lack of correlation between the Futures Contract and the equity market, a potential lack of liquidity in the secondary market and incorrect assessments of market trends which may result in worse overall performance than if a Futures Contract had not been entered into. Brokerage costs will be incurred and "margin" will be required to be posted and maintained as a good-faith deposit against performance of obligations under Futures Contracts written into by the Portfolio. The Portfolio may not purchase or sell a Futures Contract (or options thereon) if immediately thereafter its margin deposits on its outstanding Futures Contracts (and its premium paid on outstanding options thereon) would exceed 5% of the market value of the Portfolio's total assets. Options on Securities Indices-The Portfolio may write (sell) covered call and put options to a limited extent on the Index ("covered options") in an attempt to increase income. Such options give the holder the right to receive a cash settlement during the term of the option based upon the difference between the exercise price and the value of the Index. The Portfolio may forgo the benefits of appreciation on the Index or may pay more than the market price or the Index pursuant to call and put options written by the Portfolio. By writing a covered call option, the Portfolio forgoes, in exchange for the premium less the commission ("net premium"), the opportunity to profit during the option period from an increase in the market value of the Index above the exercise price. By writing a covered put option, the Portfolio, in exchange for the net premium received, accepts the risk of a decline in the market value of the Index below the exercise price. The Portfolio may terminate its obligation as the writer of a call or put option by purchasing an option with the same exercise price and expiration date as the option previously written. When the Portfolio writes an option, an amount equal to the net premium received by the Portfolio is included in the liability section of the Portfolio's Statement of Assets and Liabilities as a deferred credit. The amount of the deferred credit will be subsequently marked to market to reflect the current market value of the option written. The current market value of a traded option is the last sale price or, in the absence of a sale, the mean between the closing bid and asked price. If an option expires on its stipulated expiration date or if the Portfolio enters into a closing purchase transaction, the Portfolio will realize a gain (or loss if the cost of a closing purchase transaction exceeds the premium received when the option was sold), and the deferred credit related to such option will be eliminated. The Portfolio has adopted certain other nonfundamental policies concerning index option transactions that are discussed above. The Portfolio's activities in index options also may be restricted by the requirements of the Code, for qualification as a RIC. The hours of trading for options on the Index may not conform to the hours during which the underlying securities are traded. To the extent that the option markets close before the markets for the underlying securities, significant price and rate movements can take place in the underlying securities markets that cannot be reflected in the option markets. It is impossible to predict the volume of trading that may exist in such options, and there can be no assurance that viable exchange markets will develop or continue. Because options on securities indices require settlement in cash, BT may be forced to liquidate portfolio securities to meet settlement obligations. Options on Stock Indices-The Portfolio may purchase and write put and call options on stock indices listed on stock exchanges. A stock index fluctuates with changes in the market values of the stocks included in the index. Options on stock indices generally are similar to options on stock except that the delivery requirements are different. Instead of giving the right to take or make delivery of stock at a specified price, an option on a stock index gives the holder the right to receive a cash "exercise settlement amount" equal to (a) the amount, if any, by which the fixed exercise price of the option exceeds (in the case of a put) or is less than (in the case of a call) the closing value of the underlying index on the date of exercise, multiplied by (b) a fixed "index multiplier." The writer of the option is obligated, in return for the premium received, to make delivery of this amount. The writer may offset its position in stock index options prior to expiration by entering into a closing transaction on an exchange or the option may expire unexercised. 31 189 Because the value of an index option depends upon movements in the level of the index rather than the price of a particular stock, whether the Portfolio will realize a gain or loss from the purchase or writing of options on an index depends upon movements in the level of stock prices in the stock market generally or, in the case of certain indices, in an industry or market segment, rather than movements in the price of a particular stock. Loan Participation Interests-Loan participation interests represent interests in bank loans made to corporations. The contractual arrangement with the bank transfers the cash stream of the underlying bank loan to the participating investor. Because the issuing bank does not guarantee the participations, they are subject to the credit risks generally associated with the underlying corporate borrower. In addition, because it may be necessary under the terms of the loan participation for the investor to assert through the issuing bank such rights as may exist against the underlying corporate borrower, in the event the underlying corporate borrower fails to pay principal and interest when due, the investor may be subject to delays, expenses and risks that are greater than those that would have been involved if the investor had purchased a direct obligation (such as commercial paper) of such borrower. Moreover, under the terms of the loan participation, the investor may be regarded as a creditor of the issuing bank (rather than of the underlying corporate borrower), so that the issuer may also be subject to the risk that the issuing bank may become insolvent. Further, in the event of the bankruptcy or insolvency of the corporate borrower, the loan participation may be subject to certain defenses that can be asserted by such borrower as a result of improper conduct by the issuing bank. The secondary market, if any, for these loan participations is extremely limited and any such participations purchased by the investor are regarded as illiquid. Loan Transactions-Loan transactions involve the lending of securities to a broker-dealer or institutional investor for its use in connection with short sales, arbitrages or other security transactions. The purpose of a qualified loan transaction is to afford a lender the opportunity to continue to earn income on the securities loaned and at the same time earn fee income or income on the collateral held by it. Securities loans will be made in accordance with the following conditions: (1) the Portfolio must receive at least 100% collateral in the form of cash or cash equivalents, securities of the U.S. Government and its agencies and instrumentalities, and approved bank letters of credit; (2) the borrower must increase the collateral whenever the market value of the loaned securities (determined on a daily basis) rises above the level of collateral; (3) the Portfolio must be able to terminate the loan after notice, at any time; (4) the Portfolio must receive reasonable interest on the loan or a flat fee from the borrower, as well as amounts equivalent to any dividends, interest or other distributions on the securities loaned, and any increase in market value of the loaned securities; (5) the Portfolio may pay only reasonable custodian fees in connection with the loan; and (6) voting rights on the securities loaned may pass to the borrower, provided, however, that if a material event affecting the investment occurs, the AMR Trust Board or the Equity 500 Index Portfolio Board, as appropriate, must be able to terminate the loan and vote proxies or enter into an alternative arrangement with the borrower to enable the AMR Trust Board or the Equity 500 Index Portfolio Board, as appropriate, to vote proxies. While there may be delays in recovery of loaned securities or even a loss of rights in collateral supplied should the borrower fail financially, loans will be made only to firms deemed by the AMR Trust Board or the Equity 500 Index Portfolio Board, as appropriate, to be of good financial standing and will not be made unless the consideration to be earned from such loans would justify the risk. Such loan transactions are referred to in this Statement of Additional Information as "qualified" loan transactions. The cash collateral so acquired through qualified loan transactions may be invested only in those categories of high quality liquid securities previously authorized by the AMR Trust Board or the Equity 500 Index Portfolio Board, as appropriate. Mortgage-Backed Securities-Mortgage-backed securities consist of both collateralized mortgage obligations and mortgage pass-through certificates. 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 32 190 entirely by Federal Home Loan Banks. The issuers of CMOs are structured as trusts or corporations established for the purpose of issuing such CMOs and often have no assets other than those underlying the securities and any credit support provided. A REMIC is a mortgage securities vehicle that holds residential or commercial mortgages and issues securities representing interests in those mortgages. A REMIC may be formed as a corporation, partnership, or segregated pool of assets. The REMIC itself is generally exempt from federal income tax, but the income from the mortgages is reported by investors. For investment purposes, interests in REMIC securities are virtually indistinguishable from CMOs. Mortgage Pass-Through Certificates-Mortgage pass-through certificates are issued by governmental, government- related and private organizations which are backed by pools of mortgage loans. (1) Government National Mortgage Association ("GNMA") Mortgage Pass-Through Certificates ("Ginnie Maes")-GNMA is a wholly-owned U.S. Government corporation within the Department of Housing and Urban Development. Ginnie Maes represent an undivided interest in a pool of mortgages that are insured by the Federal Housing Administration or the Farmers Home Administration or guaranteed by the Veterans Administration. Ginnie Maes entitle the holder to receive all payments (including prepayments) of principal and interest owed by the individual mortgagors, net of fees paid to GNMA and to the issuer which assembles the mortgage pool and passes through the monthly mortgage payments to the certificate holders (typically, a mortgage banking firm), regardless of whether the individual mortgagor actually makes the payment. Because payments are made to certificate holders regardless of whether payments are actually received on the underlying mortgages, Ginnie Maes are of the "modified pass-through" mortgage certificate type. The GNMA is authorized to guarantee the timely payment of principal and interest on the Ginnie Maes. The GNMA guarantee is backed by the full faith and credit of the United States, and the GNMA has unlimited authority to borrow funds from the U.S. Treasury to make payments under the guarantee. The market for Ginnie Maes is highly liquid because of the size of the market and the active participation in the secondary market of security dealers and a variety of investors. (2) FHLMC Mortgage Participation Certificates ("Freddie Macs")-Freddie Macs represent interests in groups of specified first lien residential conventional mortgages underwritten and owned by the FHLMC. Freddie Macs entitle the holder to timely payment of interest, which is guaranteed by the FHLMC. The FHLMC guarantees either ultimate collection or timely payment of all principal payments on the underlying mortgage loans. In cases where the FHLMC has not guaranteed timely payment of principal, the FHLMC may remit the amount due because of its guarantee of ultimate payment of principal at any time after default on an underlying mortgage, but in no event later than one year after it becomes payable. Freddie Macs are not guaranteed by the United States or by any of the Federal Home Loan Banks and do not constitute a debt or obligation of the United States or of any Federal Home Loan Bank. The secondary market for Freddie Macs is highly liquid because of the size of the market and the active participation in the secondary market of the FHLMC, security dealers and a variety of investors. (3) FNMA Guaranteed Mortgage Pass-Through Certificates ("Fannie Maes")-Fannie Maes represent an undivided interest in a pool of conventional mortgage loans secured by first mortgages or deeds of trust, on one family or two to four family, residential properties. The FNMA is obligated to distribute scheduled monthly installments of principal and interest on the mortgages in the pool, whether or not received, plus full principal of any foreclosed or otherwise liquidated mortgages. The obligation of the FNMA under its guarantee is solely its obligation and is not backed by, nor entitled to, the full faith and credit of the United States. (4) Mortgage-Related Securities Issued by Private Organizations-Pools created by non-governmental issuers generally offer a higher rate of interest than government and government-related pools because there are no direct or indirect government guarantees of payments in such pools. However, timely payment of interest and principal of these pools is often partially supported by various enhancements such as over-collateralization and senior/subordination structures and by various forms of insurance or guarantees, including individual loan, title, pool and hazard insurance. The insurance and guarantees are issued by government entities, private insurers or the mortgage poolers. Although the market for such securities is becoming increasingly liquid, securities issued by certain private organizations may not be readily marketable. 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 33 191 Trust Board has established the following guidelines for determining the liquidity of the MLOs in its portfolio, and, subject to review by the AMR Trust Board, has delegated that responsibility to the investment adviser: (1) the frequency of trades and quotes for the security; (2) the number of dealers willing to purchase or sell the security and the number of other potential buyers; (3) the willingness of dealers to undertake to make a market in the security; (4) the nature of the marketplace trades; (5) the likelihood that the marketability of the obligation will be maintained through the time the security is held by the Portfolio; (6) the credit quality of the issuer and the lessee; (7) the essentiality to the lessee of the property covered by the lease and (8) for unrated MLOs, the MLOs' credit status analyzed according to the factors reviewed by rating agencies. Private Activity Obligations-Private activity obligations are issued to finance, among other things, privately operated housing facilities, pollution control facilities, convention or trade show facilities, mass transit, airport, port or parking facilities and certain facilities for water supply, gas, electricity, sewage or solid waste disposal. Private activity obligations are also issued to privately held or publicly owned corporations in the financing of commercial or industrial facilities. The principal and interest on these obligations may be payable from the general revenues of the users of such facilities. Shareholders, depending on their individual tax status, may be subject to the federal alternative minimum tax on the portion of a distribution attributable to these obligations. Interest on private activity obligations will be considered exempt from federal income taxes; however, shareholders should consult their own tax advisers to determine whether they may be subject to the federal alternative minimum tax. Ratings of Long-Term Obligations-The Portfolio utilizes ratings provided by the following nationally recognized statistical rating organizations ("Rating Organizations") in order to determine eligibility of long-term obligations. The four highest Moody's Investors Service, Inc. ("Moody's") ratings for long-term obligations (or issuers thereof) are Aaa, Aa, A and Baa. Obligations rated Aaa are judged by Moody's to be of the best quality. Obligations rated Aa are judged to be of high quality by all standards. Together with the Aaa group, such debt comprises what is generally known as high-grade debt. Moody's states that debt rated Aa is rated lower than Aaa debt because margins of protection or other elements make long-term risks appear somewhat larger than for Aaa debt. Obligations which are rated A by Moody's possess many favorable investment attributes and are considered "upper medium-grade obligations." Obligations which are rated Baa by Moody's are considered to be medium grade obligations, i.e., they are neither highly protected or poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Moody's also supplies numerical indicators 1, 2, and 3 to rating categories. The modifier 1 indicates that the security is in the higher end of its rating category; the modifier 2 indicates a mid-range ranking; and modifier 3 indicates a ranking toward the lower end of the category. The four highest Standard & Poor's ratings for long-term obligations are AAA, AA, A and BBB. Obligations rated AAA have the highest rating assigned by Standard & Poor's. Capacity to pay interest and repay principal is extremely strong. Obligations rated AA have a very strong capacity to pay interest and repay principal and differs from the highest rated issues only in a small degree. Obligations rated A have a strong capacity to pay principal and interest, although they are somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions. Obligations rated BBB by Standard & Poor's are regarded as having adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher rated categories. Duff & Phelps' four highest ratings for long-term obligations are AAA, AA, A and BBB. Obligations rated AAA have the highest credit quality with risk factors being negligible. Obligations rated AA are of high credit quality and strong protection factors. Risk is modest but may vary slightly from time to time because of economic conditions. Obligations rated A have average but adequate protection factors. However, risk factors are more variable and greater in periods of 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 34 192 principal and interest is strong. Issues rated A could be more vulnerable to adverse developments (both internal and external) than obligations with higher ratings. BBB is the lowest investment grade category and indicates an acceptable capacity to repay principal and interest. Issues rated BBB are, however, more vulnerable to adverse developments (both internal and external) than obligations with higher ratings. Fitch IBCA, Inc. ("Fitch") investment grade bond ratings provide a guide to investors in determining the credit risk associated with a particular security. The ratings represent Fitch's assessment of the issuer's ability to meet the obligations of a specific debt issue or class of debt in a timely manner. Obligations rated AAA are considered to be investment grade and of the highest credit quality. The obligor has an exceptionally strong ability to pay interest and repay principal, which is unlikely to be affected by reasonable foreseeable events. Bonds rated AA are considered to be investment grade and of very high credit quality. The obligor's ability to pay interest and repay principal is very strong, although not quite as strong as bonds rated AAA. Bonds rated A are considered to be investment grade and of high credit quality. The obligor's ability to pay interest and repay principal is considered to be strong, but may be more vulnerable to adverse changes in economic conditions and circumstances than bonds with higher ratings. Bonds rated BBB are considered to be investment grade and of satisfactory credit quality. The obligor's ability to pay interest and repay principal is considered to be adequate. Adverse changes in economic conditions and circumstances, however, are more likely to have adverse impact on these bonds, and therefore impair timely payment. The likelihood that the ratings of these bonds will fall below investment grade is higher than for bonds with higher ratings. Standard & Poor's, Duff & Phelps and Fitch apply indicators, such as "+","-," or no character, to indicate relative standing within the major rating categories. Ratings of Municipal Obligations-Moody's ratings for state and municipal short-term obligations are designated Moody's Investment Grade or "MIG" with variable rate demand obligations being designated as "VMIG." A VMIG rating may also be assigned to commercial paper programs which are characterized as having variable short-term maturities but having neither a variable rate nor demand feature. Factors used in determination of ratings include liquidity of the borrower and short-term cyclical elements. Standard & Poor's uses SP-1, SP-2, and SP-3 to rate short-term municipal obligations. A rating of SP-1 denotes a very strong or strong capacity to pay principal and interest. Ratings of Short-Term Obligations-The rating P-1 is the highest short-term rating assigned by Moody's. Among the factors considered by Moody's in assigning ratings are the following: (1) evaluations of the management of the issuer; (2) economic evaluation of the issuer's industry or industries and an appraisal of speculative-type risks which may be inherent in certain areas; (3) evaluation of the issuer's products in relation to competition and customer acceptance; (4) liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over a period of ten years; (7) financial strength of a parent company and the relationships which exist with the issuer; and (8) recognition by the management of obligations which may be present or may arise as a result of public interest questions and preparations to meet such obligations. Short-term obligations (or issuers thereof) rated A-1 by Standard & Poor's have the following characteristics. Liquidity ratios are adequate to meet cash requirements. The issuer has access to at least two additional channels of borrowing. Basic earnings and cash flow have an upward trend with allowance made for unusual circumstances. Typically, the issuer's industry is well established and the issuer has a strong position within the industry. The reliability and quality of management are unquestioned. Relative strength or weakness of the above factors determines whether the issuer's short-term obligation is rated A-1, A-2, or A-3. IBCA's short-term rating of A-1 indicates obligations supported by the highest capacity for timely repayment. Where issues possess particularly strong credit features, a rating of A-1+ is assigned. Obligations rated A-2 are supported by a good capacity for timely repayment. The distinguishing feature of Duff & Phelps Credit Ratings' short-term rating is the refinement of the traditional 1 category. The majority of short-term debt issuers carry the highest rating, yet quality differences exist within that tier. Obligations rated D-1+ indicate the highest certainty of timely payment. Safety is just below risk-free U.S. Treasury obligations. Obligations rated D-1 have a very high certainty of timely payment. Risk factors are minor. Obligations rated D-1- have a high certainty of timely payment. Risk factors are very small. Obligations rated D-2 35 193 have good certainty of timely payment. Liquidity factors and company fundamentals are sound. Although ongoing funding needs may enlarge total financing requirements, access to capital markets is good. Risk factors are small. Thomson BankWatch short-term ratings are intended to assess the likelihood of an untimely or incomplete payment of principal or interest. Obligations rated TBW-1 indicate a very high likelihood that principal and interest will be paid on a timely basis. While the degree of safety regarding timely payment of principal and interest is strong for an obligation rated TBW-2, the relative degree of safety is not as high as for issues rated TBW-1. Fitch's short-term ratings apply to debt obligations that are payable on demand or have original maturities of generally up to three years, including commercial paper, certificates of deposit, medium-term notes, and municipal and investment notes. A rating of F-1+ indicates exceptionally strong credit quality. Issues assigned this rating are regarded as having the strongest degree of assurance for timely payment. Obligations rated F-1 have very strong credit quality. Issues assigned this rating reflect an assurance of timely payment only slightly less in degree than issues rated F-1+. Issues assigned a rating of F-2 indicate good credit quality. Issues assigned this rating have a satisfactory degree of assurance for timely payment, but the margin of safety is not as great as for issues assigned F- 1+ and F-1 ratings. Repurchase Agreements-A repurchase agreement, which provides a means to earn income on funds for periods as short as overnight, is an arrangement under which the purchaser (e.g., a Portfolio) purchases securities and the seller agrees, at the time of sale, to repurchase the securities at a specified time and price. The repurchase price will be higher than the purchase price, the difference being income to the purchaser, or the purchase and repurchase prices may be the same, with interest at a stated rate due to the purchaser together with the repurchase price on repurchase. In either case, the income to the purchaser is unrelated to the interest rate on the securities subject to the repurchase agreement. Each Portfolio may enter into repurchase agreements with any bank or registered broker-dealer who, in the opinion of the AMR Trust Board or the Equity 500 Index Portfolio Board, as appropriate, presents a minimum risk of bankruptcy during the term of the agreement based upon guidelines that periodically are reviewed by the AMR Trust Board and the Equity 500 Index Portfolio Board. Each Portfolio may enter into repurchase agreements as a short-term investment of its idle cash in order to earn income. The securities will be held by a custodian (or agent) approved by the AMR Trust Board or the Equity 500 Index Portfolio Board, as appropriate, during the term of the agreement. However, if the market value of the securities subject to the repurchase agreement becomes less than the repurchase price (including interest), the Portfolio will direct the seller of the securities to deliver additional securities so that the market value of all securities subject to the repurchase agreement will equal or exceed the repurchase price. In the event of the commencement of bankruptcy or insolvency proceedings with respect to the seller of the securities before the repurchase of the securities under a repurchase agreement, a Portfolio may encounter a delay and incur costs before being able to sell the security being held as collateral. Delays may involve loss of interest or decline in price of the securities. Apart from the risk of bankruptcy or insolvency proceedings, there is also the risk that the seller may fail to repurchase the securities, in which case a Portfolio may incur a loss if the proceeds to the Portfolio from the sale of the securities to a third party are less than the repurchase price. 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 36 194 facilities. The viability of a resource recovery project, environmental protection regulations and project operator tax incentives may affect the value and credit quality of these obligations. Revenue Obligations-Revenue obligations are backed by the revenue cash flow of a project or facility. Rights and Warrants-Rights are short-term warrants issued in conjunction with new stock issues. Warrants are options to purchase an issuer's securities at a stated price during a stated term. There is no specific limit on the percentage of assets a Portfolio may invest in rights and warrants, although the ability of some of the Portfolios to so invest is limited by their investment objectives or policies. Separately Traded Registered Interest and Principal Securities and Zero Coupon Obligations-Separately traded registered interest and principal securities or "STRIPS" and zero coupon obligations are securities that do not make regular interest payments. Instead they are sold at a discount from their face value. Each Portfolio will take into account as income a portion of the difference between these obligations' purchase prices and their face values. Because they do not pay coupon income, the prices of STRIPS and zero coupon obligations can be very volatile when interest rates change. STRIPS are zero coupon bonds issued by the U.S. Treasury. Tax, Revenue or Bond Anticipation Notes-Tax, revenue or bond anticipation notes are issued by municipalities in expectation of future tax or other revenues which are payable from these specific taxes or revenues. Bond anticipation notes usually provide interim financing in advance of an issue of bonds or notes, the proceeds of which are used to repay the anticipation notes. Tax-exempt commercial paper is issued by municipalities to help finance short-term capital or operating needs in anticipation of future tax or other revenue. U.S. Government Securities-U.S. Government securities are issued or guaranteed by the U.S. Government and include U.S. Treasury obligations (see definition below) and securities issued by U.S. agencies and instrumentalities. U. S. Government agencies or instrumentalities that issue or guarantee securities include, but are not limited to, the Federal Housing Administration, Farmers Home Administration, Export-Import Bank of the United States, Small Business Administration, GNMA, General Services Administration, Central Bank for Cooperatives, Federal Home Loan Banks, FHLMC, Federal Intermediate Credit Banks, Federal Land Banks, Maritime Administration, Tennessee Valley Authority, District of Columbia Armory Board, Inter-American Development Bank, Asian-American Development Bank, Agency for International Development, Student Loan Marketing Association and International Bank of Reconstruction and Development. Obligations of U.S. Government agencies and instrumentalities may or may not be supported by the full faith and credit of the United States. Some are backed by the right of the issuer to borrow from the Treasury; others are supported by discretionary authority of the U.S. Government to purchase the agencies' obligations; while still others, such as the Student Loan Marketing Association, are supported only by the credit of the instrumentality. In the case of securities not backed by the full faith and credit of the United States, the investor must look principally to the agency issuing or guaranteeing the obligation for ultimate repayment, and may not be able to assert a claim against the United States itself in the event the agency or instrumentality does not meet its commitment. 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: 37 195 (1) An obligation that is issued or guaranteed by the United States Government or any agency thereof which has a variable rate of interest readjusted no less frequently than every 762 days will be deemed by a Portfolio to have a maturity equal to the period remaining until the next readjustment of the interest rate. (2) A variable rate obligation, the principal amount of which is scheduled on the face of the instrument to be paid in 397 days or less, will be deemed by a Portfolio to have a maturity equal to the period remaining until the next readjustment of the interest rate. (3) A variable rate obligation that is subject to a demand feature will be deemed by a Portfolio to have a maturity equal to the longer of the period remaining until the next readjustment of the interest rate or the period remaining until the principal amount can be recovered through demand. (4) A floating rate obligation that is subject to a demand feature will be deemed by a Portfolio to have a maturity equal to the period remaining until the principal amount can be recovered through demand. As used above, an obligation is "subject to a demand feature" when a Portfolio is entitled to receive the principal amount of the obligation either at any time on no more than 30 days' notice or at specified intervals not exceeding one year and upon no more than 30 days' notice. Variable Rate Auction and Residual Interest Obligations-Variable rate auction and residual interest obligations are created when an issuer or dealer separates the principal portion of a long-term, fixed-rate municipal bond into two long-term, variable-rate instruments. The interest rate on one portion reflects short-term interest rates, while the interest rate on the other portion is typically higher than the rate available on the original fixed-rate bond. When-Issued and Delayed Delivery Securities-Delivery of and payment for securities on a when-issued or delayed delivery basis may take place as long as a month or more after the date of the purchase commitment. The value of these securities is subject to market fluctuation during this period and no income accrues to a Portfolio until settlement takes place. A Portfolio maintains with the Custodian a segregated account containing high grade liquid securities in an amount at least equal to these commitments. When entering into a when-issued or delayed delivery transaction, the Portfolio will rely on the other party to consummate the transaction; if the other party fails to do so, the Portfolio may be disadvantaged. FINANCIAL STATEMENTS The American AAdvantage Funds' Annual Report to Shareholders for the period ended October 31, 1997 is supplied with the Statement of Additional Information, and the financial statements and accompanying notes appearing therein are incorporated by reference in this Statement of Additional Information. 38 196 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.
YEAR TOTAL RETURN YEAR TOTAL RETURN YEAR TOTAL RETURN ---- ------------ ---- ------------ ---- ------------ 1997 33.26% 1973 -14.66% 1949 18.79% 1996 23.03% 1972 18.98% 1948 5.50% 1995 37.49% 1971 14.31% 1947 5.71% 1994 1.32% 1970 4.01% 1946 -8.07% 1993 9.99% 1969 -8.51% 1945 36.44% 1992 7.67% 1968 11.06% 1944 19.75% 1991 30.55% 1967 23.98% 1943 25.90% 1990 -3.17% 1966 -10.06% 1942 20.34% 1989 31.49% 1965 12.45% 1941 -11.59% 1988 16.81% 1964 16.48% 1940 -9.78% 1987 5.23% 1963 22.08% 1939 -0.41% 1986 18.47% 1962 -8.73% 1938 31.12% 1985 32.16% 1961 26.89% 1937 -35.03% 1984 6.27% 1960 0.47% 1936 33.92% 1983 22.51% 1959 11.96% 1935 47.67% 1982 21.41% 1958 43.36% 1934 -1.44% 1981 -4.91% 1957 -10.78% 1933 53.99% 1980 32.42% 1956 6.56% 1932 -8.19% 1979 18.44% 1955 31.56% 1931 -43.34% 1978 6.56% 1954 52.62% 1930 -24.90% 1977 -7.18% 1953 -0.99% 1929 -8.42% 1976 23.84% 1952 18.73% 1928 43.61% 1975 37.20% 1951 24.02% 1927 37.49% 1974 -26.47% 1950 31.71% 1926 11.62%
A-1 197 TABLE OF CONTENTS Investment Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Trustees and Officers of the Trust and the AMR Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Trustees and Officers of the Equity 500 Index Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Management, Administrative Services and Distribution Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Approach to Stock Selection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Redemptions in Kind . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Investment Advisory Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Portfolio Securities Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Net Asset Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Tax Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Yield and Total Return Quotations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Description of the Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Control Persons and 5% Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Appendix A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
198 STATEMENT OF ADDITIONAL INFORMATION AMERICAN AADVANTAGE FUNDS(R) AMERICAN AADVANTAGE MILEAGE FUNDS(sm) -- PLATINUM CLASS(sm) -- MARCH 1, 1998 The American AAdvantage Money Market Fund(sm) (the "Money Market Fund"), the American AAdvantage Municipal Money Market Fund(sm) (the "Municipal Money Market Fund"), and the American AAdvantage U.S. Government Money Market Fund(sm), formerly the American AAdvantage U.S. Treasury Money Market Fund (the "U.S. Government Money Market Fund"), are three separate investment portfolios of the American AAdvantage Funds (the "AAdvantage Trust"). The American AAdvantage Money Market Mileage Fund (the "Mileage Fund") is a separate investment portfolio of the American AAdvantage Mileage Funds (the "Mileage Trust") (individually, a "Fund" and, collectively, the "Funds"). The AAdvantage Trust and the Mileage Trust (collectively the "Trusts") are open-end, diversified management investment companies. Each Fund consists of multiple classes of shares designed to meet the needs of different groups of investors. This Statement of Additional Information ("SAI") relates only to the Platinum Class of the Funds. Each Fund seeks its investment objective by investing all of its investable assets in a corresponding portfolio (individually, a "Portfolio" and, collectively, the "Portfolios") of the AMR Investment Services Trust ("AMR Trust") that has a similar name and an identical investment objective to the investing Fund. This SAI should be read in conjunction with the Platinum Class prospectus dated March 1, 1998 ("Prospectus"), a copy of which may be obtained without charge by calling (800) 388-3344. This SAI is not a prospectus and is authorized for distribution to prospective investors only if preceded or accompanied by a current Prospectus. INVESTMENT RESTRICTIONS Each Fund has the following fundamental investment policy that enables it to invest in a corresponding Portfolio of the AMR Trust: Notwithstanding any other limitation, the Fund may invest all of its investable assets in an open-end management investment company with substantially the same investment objectives, policies and limitations as the Fund. For this purpose, "all of the Fund's investable assets" means that the only investment securities that will be held by the Fund will be the Fund's interest in the investment company. All other fundamental investment policies and the non-fundamental policies of each Fund and its corresponding Portfolio are identical. Therefore, although the following discusses the investment policies of each Portfolio and the AMR Trust's Board of Trustees ("AMR Trust Board"), it applies equally to each Fund and the AAdvantage Trust's Board of Trustees ("AAdvantage Board") and the Mileage Trust's Board of Trustees ("Mileage Trust Board"), as applicable. In addition to the investment limitations noted in the Prospectus, the following seven restrictions have been adopted by each Portfolio and may be changed with respect to any Portfolio only by the majority vote of that Portfolio's outstanding interests. "Majority of the outstanding voting securities" under the Investment Company Act of 1940, as amended (the "1940 Act"), and as used herein means, with respect to the Portfolio, the lesser of (a) 67% of the interests of the Portfolio present at the meeting if the holders of more than 50% of the interests are present and represented at the interest holders' meeting or (b) more than 50% of the interests of the Portfolio. Whenever a Fund is requested to vote on a change in the investment restrictions of its corresponding Portfolio, that Fund will hold a meeting of its shareholders and will cast its votes as instructed by its shareholders. The percentage of a Fund's votes representing that Fund's shareholders not voting will be voted by the AAdvantage Board and the Mileage Trust Board in the same proportion as those Fund shareholders who do, in fact, vote. 199 No Portfolio may: 1. Purchase or sell real estate or real estate limited partnership interests, provided, however, that the Portfolio may invest in securities secured by real estate or interests therein or issued by companies which invest in real estate or interests therein when consistent with the other policies and limitations described in the Prospectus. 2. Purchase or sell commodities (including direct interests and/or leases in oil, gas or minerals) or commodities contracts, except with respect to forward foreign currency exchange contracts, foreign currency futures contracts and when-issued securities when consistent with the other policies and limitations described in the Prospectus. 3. Engage in the business of underwriting securities issued by others except to the extent that, in connection with the disposition of securities, the Portfolio may be deemed an underwriter under federal securities law. 4. Make loans to any person or firm, provided, however, that the making of a loan shall not be construed to include (i) the acquisition for investment of bonds, debentures, notes or other evidences of indebtedness of any corporation or government which are publicly distributed or (ii) the entry into repurchase agreements and further provided, however, that each Portfolio may lend its investment securities to broker-dealers or other institutional investors in accordance with the guidelines stated in the Prospectus. 5. Purchase from or sell portfolio securities to its officers, Trustees or other "interested persons" of the AMR Trust, as defined in the 1940 Act, including its investment advisers and their affiliates, except as permitted by the 1940 Act and exemptive rules or orders thereunder. 6. Issue senior securities except that the Portfolio may engage in when-issued and forward commitment transactions. 7. Borrow money, except from banks or through reverse repurchase agreements for temporary purposes in an aggregate amount not to exceed 10% of the value of its total assets at the time of borrowing. In addition, although not a fundamental policy, the Portfolios intend to repay any money borrowed before any additional portfolio securities are purchased. See "Other Information" for a further description regarding reverse repurchase agreements. The following non-fundamental investment restriction applies to each Portfolio and may be changed with respect to a Portfolio by a majority vote of the AMR Trust Board: no Portfolio may purchase securities on margin, effect short sales (except that the Portfolio may obtain such short-term credits as may be necessary for the clearance of purchases or sales of securities) or purchase or sell call options or engage in the writing of such options. All Portfolios may invest up to 10% of their total assets in the securities of other investment companies to the extent permitted by law. A Portfolio may incur duplicate advisory or management fees when investing in another mutual fund. TRUSTEES AND OFFICERS OF THE TRUSTS AND THE AMR TRUST The AAdvantage Board, the Mileage Trust Board and the AMR Trust Board provide broad supervision over each Trust's affairs. AMR Investment Services, Inc. (the "Manager") is responsible for the management and the administration of each Trust's assets, and each Trust's officers are responsible for the respective Trust's operations. The Trustees and officers of the Trusts and the AMR Trust are listed below, together with their principal occupations during the past five years. Unless otherwise indicated, the address of each person listed below is 4333 Amon Carter Boulevard, MD 5645, Fort Worth, Texas 76155. 2 200
POSITION WITH NAME, AGE AND ADDRESS EACH TRUST PRINCIPAL OCCUPATION DURING PAST 5 YEARS - --------------------- ------------- ---------------------------------------- William F. Quinn* (50) Trustee and President, AMR Investment Services, Inc. President (1986-Present); Chairman, American Airlines Employees Federal Credit Union (October 1989-Present); Trustee, American Performance Funds (1990-1994); Director, Crescent Real Estate Equities, Inc. (1994 - Present); Trustee, American AAdvantage Funds (1987-Present); Trustee, American AAdvantage Mileage Funds (1995-Present). Alan D. Feld (60) Trustee Partner, Akin, Gump, Strauss, Hauer & Feld, LLP 1700 Pacific Avenue (1960-Present)#; Director, Clear Channel Suite 4100 Communications (1984-Present); Director, Dallas, Texas 75201 CenterPoint Properties, Inc. (1994-Present); Trustee, American AAdvantage Funds (1993-Present); Trustee, American AAdvantage Funds(1996- Present); Trustee American AAdvantage Mileage Funds (1996-Present). Ben J. Fortson (65) Trustee President and CEO, Fortson Oil Company 301 Commerce Street (1958-Present); Director, Kimbell Art Foundation Suite 3301 (1964-Present); Director, Burnett Foundation Fort Worth, Texas 76102 (1987-Present); Honorary Trustee, Texas Christian University (1986-Present); Trustee, American AAdvantage Funds (1996-Present); Trustee, American AAdvantage Mileage Funds (1996-Present). John S. Justin (81) Trustee Chairman and Chief Executive Officer, Justin 2821 West Seventh Street Industries, Inc. (a diversified holding company) Fort Worth, Texas 76107 (1969-Present); Executive Board Member, Blue Cross/Blue Shield of Texas (1985-Present); Board Member, Zale Lipshy Hospital (June 1993-Present); Trustee, Texas Christian University (1980-Present); Director and Executive Board Member, Moncrief Radiation Center (1985-Present); Director, Texas New Mexico Enterprises (1984-1993); Director, Texas New Mexico Power Company (1979-1993); Trustee, American AAdvantage Funds (1989-Present); Trustee, American AAdvantage Mileage Funds (1995-Present). Stephen D. O'Sullivan* (62) Trustee Consultant (1994-Present); Vice President and Controller (1985-1994), American Airlines, Inc.; Trustee, American AAdvantage Funds (1987-Present); Trustee, American AAdvantage Mileage Funds (1995-Present).
3 201
POSITION WITH NAME, AGE AND ADDRESS EACH TRUST PRINCIPAL OCCUPATION DURING PAST 5 YEARS - --------------------- ------------- ---------------------------------------- Roger T. Staubach (56) Trustee Chairman of the Board and Chief Executive Officer 6750 LBJ Freeway of The Staubach Company (a commercial real estate Dallas, TX 75240 company) (1982-Present); Director, Halliburton Company (1991-Present); Director, Brinker International (1993-Present); Director, International Home Foods, Inc. (1997-Present); National Advisory Board, The Salvation Army; Trustee, Institute for Aerobics Research; Member, Executive Council, Daytop/Dallas; Member, National Board of Governors, United Way of America, former quarterback of the Dallas Cowboys professional football team; Trustee, American AAdvantage Mileage Funds (1995-Present). Kneeland Youngblood, M.D. (41) (41) Trustee Physician (1982-Present);President, Youngblood 2305 Cedar Springs Road Enterprises, Inc. (a Suite 401 health care private investment Dallas, Texas 75201 and management firm) (1983-Present); Trustee, Teachers Retirement System of Texas (1996- Present); Director, United States Enrichment Corporation (1993-Present), Director, Just For the Kids (1995-Present); Director, Starwood Financial Trust (1998-Present); Member, Council on Foreign Relations (1995-Present); Trustee, American AAdvantage Funds (1996-Present); Trustee, American AAdvantage Mileage Funds (1996-Present). Nancy A. Eckl (35) Vice President Vice President, AMR Investment Services, Inc. (December 1990-Present). Michael W. Fields (44) Vice President Vice President, AMR Investment Services, Inc. (August 1988-Present). Barry Y. Greenberg (34) Vice President Director, Legal and Compliance, AMR Investment and Assistant Services, Inc. (1995-Present); Branch Chief Secretary (1992-1995) and Staff Attorney (1988-1992), Securities and Exchange Commission. Rebecca L. Harris (31) Treasurer Director of Finance (1995-Present), Controller (1991-1995), AMR Investment Services, Inc. John B. Roberson (39) Vice President Vice President, AMR Investments Services, Inc. (1991-Present). Thomas E. Jenkins, Jr. (31) Assistant Secretary Senior Compliance Analyst, AMR Investment Services, Inc. (1996-Present); Staff Accountant (1994-1996) and Compliance Examiner (1991-1994), Securities and Exchange Commission.
4 202
POSITION WITH NAME, AGE AND ADDRESS EACH TRUST PRINCIPAL OCCUPATION DURING PAST 5 YEARS - --------------------- ------------- ---------------------------------------- Adriana R. Posada (43) Assistant Secretary Senior Compliance Analyst (1996-Present) and Compliance Analyst (1993-1996), AMR Investment Services, Inc.; Special Sales Representative, American Airlines, Inc. (1991-1993). Robert J. Zutz (45) Assistant Partner, Kirkpatrick & Lockhart LLP (law firm) 1800 Massachusetts Ave. NW Secretary Washington, D.C. 20036
# The law firm of Akin, Gump, Strauss, Hauer & Feld LLP ("Akin, Gump") provides legal services to American Airlines, Inc., an affiliate of the Manager. Mr. Feld has advised the Trusts that he has had no material involvement in the services provided by Akin, Gump to American Airlines, Inc. and that he has received no material benefit in connection with these services. Akin, Gump does not provide legal services to the Manager or AMR Corporation. * Messrs. Quinn and O'Sullivan, by virtue of their current or former positions, are deemed to be "interested persons" of each Trust and the AMR Trust as defined by the 1940 Act. All Trustees and officers as a group own less than 1% of the outstanding shares of any of the Funds. As compensation for their service to the Trusts and the AMR Trust, the Independent Trustees and their spouses receive free air travel from American Airlines, Inc., an affiliate of the Manager. The Trusts and the AMR Trust do not pay for these travel arrangements. However, the Trusts and the AMR Trust compensate each Trustee with payments in an amount equal to the Trustees' income tax on the value of this free airline travel. Mr. O'Sullivan, whom as a retiree of American Airlines, Inc. already receives free airline travel, receives compensation annually of up to three round trip airline tickets for each of his three adult children. Trustees are also reimbursed for any expenses incurred in attending Board meetings. These amounts (excluding reimbursements) are reflected in the following table for the fiscal year ended October 31, 1997.
Pension or Retirement Aggregate Aggregate Benefits Total Compensation Compensation Accrued as Estimated Compensation From the From the Part of the Annual From AAdvantage AAdvantage Mileage Trusts' Benefits Upon Funds Complex Name of Trustee Trust Trust Expenses Retirement (27 Funds) - --------------- ------------ ------------ ----------- ------------- --------------- William F. Quinn $0 $0 $0 $0 $0 Alan D. Feld $15,962 $15,962 $0 $0 $63,850 Ben J. Fortson $6,802 $6,802 $0 $0 $27,209 John S. Justin $225 $225 $0 $0 $901 Stephen D. O'Sullivan $493 $493 $0 $0 $1,973 Roger T. Staubach $8,269 $8,269 $0 $0 $33,076 Kneeland Youngblood, M.D. $9,525 $9,525 $0 $0 $38,099
MANAGEMENT, ADMINISTRATIVE SERVICES AND DISTRIBUTION FEES As described more fully in the Prospectus, the Manager is paid a management fee as compensation for its administrative services, for paying investment advisory fees and for providing the Portfolios with advisory and asset allocation services. Management fees for the AAdvantage Trust for the fiscal years ended October 31 were approximately as follows: 1995, $7,603,000 of which approximately $3,985,000 was paid by the Manager to the other investment advisers; 1996, $10,853,000 of which approximately $5,403,000 was paid by the Manager to the other investment advisers; and 1997, $13,730,443 of which approximately $7,061,014 was paid by the Manager to 5 203 the other investment advisers. Management fees in the amount of approximately $29,000, $44,000 and $7,309 were waived by the Manager during the fiscal years ended October 31, 1995, 1996 and 1997, respectively. These amounts include payments by Portfolios in the AAdvantage Trust other than the Funds. In addition to the management fee, the Manager is paid an administrative services fee for providing administrative and management services (other than investment advisory services) to the Funds. Administrative services fees for the AAdvantage Trust for the fiscal years ended October 31 were approximately as follows: 1995, $2,731,000; 1996, $2,893,400; and 1997, $4,538,345. Administrative service fees in the amount of approximately $9,000 were waived by the Manager during the fiscal year ended October 31, 1995. These amounts include payments by Portfolios in the AAdvantage Trust other than the Funds. Brokers Transaction Services, Inc. ("BTS"), is the distributor of the Funds' shares and, as such, receives an annualized fee of $50,000 from the Manager for distributing the shares of the Trusts. REDEMPTIONS IN KIND Although each Fund intends to redeem shares in cash, each reserves the right to pay the redemption price in whole or in part by a distribution of readily marketable securities held by the applicable Fund's corresponding Portfolio. However, shareholders always will be entitled to redeem shares for cash up to the lesser of $250,000 or 1% of the applicable Fund's net asset value during any 90 day period. Redemption in kind is not as liquid as a cash redemption. In addition, if redemption is made in kind, shareholders who receive securities and sell them could receive less than the redemption value of their securities and could incur certain transactions costs. NET ASSET VALUE It is the policy of the Funds to attempt to maintain a constant price per share of $1.00. There can be no assurance that a $1.00 net asset value per share will be maintained. The portfolio instruments held by each Fund's corresponding Portfolio are valued based on the amortized cost valuation technique pursuant to Rule 2a-7 under the 1940 Act. This involves valuing an instrument at its cost and thereafter assuming a constant amortization to maturity of any discount or premium, even though the portfolio security may increase or decrease in market value. Such market fluctuations are generally in response to changes in interest rates. Use of the amortized cost valuation method requires the Funds' corresponding Portfolios to purchase instruments having remaining maturities of 397 days or less, to maintain a dollar-weighted average portfolio maturity of 90 days or less, and to invest only in securities determined by the AMR Trust Board to be of high quality with minimal credit risks. The corresponding portfolios of the Money Market Funds may invest in issuers or instruments that at the time of purchase have received the highest short-term rating by two Rating Organizations, such as "D-1" by Duff & Phelps and "F-1" by Fitch IBCA, Inc., and have received the next highest short-term rating by other Rating Organizations, such as "A-2" by Standard & Poors and "P-2" by Moody's Investors Service, Inc. See "Ratings of Municipal Obligations" and "Ratings of Short-Term Obligations" for further information concerning ratings. TAX INFORMATION TAXATION OF THE FUNDS To qualify for treatment as a regulated investment company ("RIC") under the Internal Revenue Code of 1986, as amended ("Code"), each Fund (each of which is treated as a separate corporation for these purposes) must, among other requirements: Derive at least 90% of its gross income each taxable year from dividends, interest, payments with respect to securities loans and gains from the sale or other disposition of securities or certain other income; Diversify its investments in securities within certain statutory limits; and 6 204 Distribute annually to its shareholders at least 90% of its investment company taxable income (generally, taxable net investment income plus net short-term capital gain) plus, in the case of the Municipal Money Market Fund, net interest income excludable from gross income under Section 103(a) of the Code ("Distribution Requirement"). Each Fund has received either a ruling from the Internal Revenue Service ("IRS") or an opinion of counsel that the Fund, as an investor in its corresponding Portfolio, is deemed to own a proportionate share of the Portfolio's assets and to earn the income on that share for purposes of determining whether the Fund satisfies the Income and Diversification Requirements described above to qualify as a RIC. See the next section for a discussion of the tax consequences to the Funds of certain investments by the Portfolios. TAXATION OF THE PORTFOLIOS Each Portfolio has received a ruling from the IRS or an opinion of counsel to the effect that, among other things, each Portfolio is or should be classified as a separate partnership for federal income tax purposes and is not a "publicly traded partnership." As a result, each Portfolio is not or should not be subject to federal income tax; instead, each investor in a Portfolio, such as a Fund, is required to take into account in determining its federal income tax liability its share of the Portfolio's income, gains, losses, deductions, credits and tax preference items, without regard to whether it has received any cash distributions from the Portfolio. Because, as noted above, each Fund is deemed to own a proportionate share of its corresponding Portfolio's assets and to earn a proportionate share of its corresponding Portfolio's income for purposes of determining whether the Fund satisfies the requirements to qualify as a RIC, each Portfolio intends to conduct its operations so that its corresponding Fund will be able to satisfy all those requirements. Distributions to a Fund from its corresponding Portfolio (whether pursuant to a partial or complete withdrawal or otherwise) will not result in the Fund's recognition of any gain or loss for federal income tax purposes, except that (1) gain will be recognized to the extent any cash that is distributed exceeds the Fund's basis for its interest in the Portfolio before the distribution, (2) income or gain will be recognized if the distribution is in liquidation of the Fund's entire interest in the Portfolio and includes a disproportionate share of any unrealized receivables held by the Portfolio and (3) loss will be recognized if a liquidation distribution consists solely of cash and/or unrealized receivables. A Fund's basis for its interest in its corresponding Portfolio generally will equal the amount of cash and the basis of any property the Fund invests in the Portfolio, increased by the Fund's share of the Portfolio's net income and gains and decreased by (a) the amount of cash and the basis of any property the Portfolio distributes to the Fund and (b) the Fund's share of the Portfolio's losses. The Municipal Money Market Fund's corresponding Portfolio may acquire zero coupon or other securities issued with original issue discount. As an investor in the Portfolio that holds those securities, the Municipal Money Market Fund would have to include in its income its share of the original issue discount that accrues on the securities during the taxable year, even if the Portfolio (and, hence, the Fund) receives no corresponding payment on the securities during the year. Because each Fund annually must distribute substantially all of its investment company taxable income, including any original issue discount, to satisfy the Distribution Requirement and avoid imposition of the 4% excise tax described in the Prospectus, the Municipal Money Market Fund may be required in a particular year to distribute as a dividend an amount that is greater than the total amount of cash it actually receives. Those distributions would be made from the Fund's cash assets, if any, or the proceeds of redemption of a portion of the Municipal Money Market Fund's interest in its corresponding Portfolio (which redemption proceeds would be paid from the Portfolio's cash assets or the proceeds of sales of portfolio securities, if necessary). The Portfolio might realize capital gains or losses from any such sales, which would increase or decrease the Municipal Money Market Fund's investment company taxable income and/or net capital gain (the excess of net long-term capital gain over net short-term capital loss). In addition, any such gains might be realized on the disposition of securities held for less than three months. Because of the Short-Short Limitation applicable to the Fund, any such gains would reduce the Portfolio's ability to sell other securities held for less than three months that it might wish to sell in the ordinary course of its portfolio management. 7 205 TAXATION OF THE FUNDS' SHAREHOLDERS Distributions by the Municipal Money Market Fund of the amount by which the Fund's share of its corresponding Portfolio's income on tax-exempt securities exceeds certain amounts disallowed as deductions, designated by the Fund as "exempt-interest dividends," generally may be excluded from gross income by its shareholders. Dividends paid by the Municipal Money Market Fund will qualify as exempt-interest dividends if, at the close of each quarter of its taxable year, at least 50% of the value of its total assets (including its share of the Municipal Money Market Portfolio's assets) consists of securities the interest on which is excludable from gross income under Section 103(a) of the Code. The Municipal Money Market Fund intends to continue to satisfy this requirement. The aggregate dividends excludable from shareholders' gross income may not exceed the Municipal Money Market Fund's net tax-exempt income. The shareholders' treatment of dividends from the Municipal Money Market Fund under state and local income tax laws may differ from the treatment thereof under the Code. Exempt-interest dividends received by a corporate shareholder may be indirectly subject to the alternative minimum tax. In addition, entities or persons who are "substantial users" (or persons related to "substantial users") of facilities financed by private activity bonds ("PABs") or industrial development bonds ("IDBs") should consult their tax advisers before purchasing shares of the Municipal Money Market Fund because, for users of certain of these facilities, the interest on those bonds is not exempt from federal income tax. For these purposes, the term "substantial user" is defined generally to include a "non-exempt person" who regularly uses in trade or business a part of a facility financed from the proceeds of PABs or IDBs. Up to 85% of social security and railroad retirement benefits may be included in taxable income for recipients whose adjusted gross income (including income from tax-exempt sources such as the Municipal Money Market Fund) plus 50% of their benefits exceeds certain base amounts. Exempt-interest dividends from the Municipal Money Market Fund still are tax-exempt to the extent described above; they are only included in the calculation of whether a recipient's income exceeds the established amounts. The foregoing is only a summary of some of the important federal tax considerations affecting the Funds and their shareholders and is not intended as a substitute for careful tax planning. Accordingly, prospective investors are advised to consult their own tax advisers for more detailed information regarding the above and for information regarding federal, state, local and foreign taxes. YIELD AND TOTAL RETURN QUOTATIONS The Platinum Class of the AAdvantage Trust commenced operations on November 7, 1995 and the Platinum Class of the Mileage Trust commenced operations on January 29, 1996. For purposes of advertising performance, and in accordance with Securities and Exchange Commission staff interpretations, the Funds in the AAdvantage Trust have adopted the performance of the Institutional Class of the Funds in the AAdvantage Trust for periods prior to the inception date. The Mileage Fund has adopted the performance of the American AAdvantage Money Market Mileage Fund - Mileage Class for periods prior to its inception date. The performance results for the Platinum Class will be lower, because the figures for the other classes (except for the Mileage Fund) do not reflect the 12b-1 fees, Administrative Services Plan fees or other class expenses that will be borne by the Platinum Class. A quotation of yield on shares of the Funds may appear from time to time in advertisements and in communications to shareholders and others. Quotations of yields are indicative of yields for the limited historical period used but not for the future. Yield will vary as interest rates and other conditions change. Yield also depends on the quality, length of maturity and type of instruments invested in by the Funds, and the applicable Fund's operating expenses. A comparison of the quoted yields offered for various investments is valid only if 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 8 206 change in value over one day by 365 and stating it to two decimal places. Income other than investment income and capital changes, such as realized gains and losses from the sale of securities and unrealized appreciation and depreciation, are excluded in calculating the net change in value of an account. However, this calculation includes the aggregate fees and other expenses that are charged to all shareholder accounts in a Fund. In determining the net change in value of a hypothetical account, this value is adjusted to reflect the value of any additional shares purchased with dividends from the original share and dividends declared on both the original share and any such additional shares. (2) Effective Yield--the net average annualized return as computed by compounding accrued interest income. In determining the 7-day effective yield, a Fund will compute the "base period return" in the same manner used to compute the "current yield" over a 7 calendar-day period as described above. One is then added to the base period return and the sum is raised to the 365/7 power. One is subtracted from the result, according to the following formula: EFFECTIVE YIELD = [ (BASE PERIOD RETURN + 1)365/7 ] - 1 The current and effective yields for the Funds are as follows:
Current yield for Effective yield for Current daily the seven-day period the seven-day period yield as of ended ended Platinum Class October 31, 1997 October 31, 1997 October 31, 1997 -------------- ---------------- -------------------- -------------------- Money Market Fund 4.83% 4.82% 4.94% Municipal Money Market Fund 2.79% 2.79% 2.83% U.S. Government Money Market Fund 4.72% 4.64% 4.75% Mileage Fund 4.69% 4.68% 4.79%
The Municipal Money Market Fund also may advertise a tax-equivalent current and effective yield. The tax-equivalent yields are calculated as follows: CURRENT YIELD/(1 - APPLICABLE TAX RATE) = CURRENT TAX-EQUIVALENT YIELD EFFECTIVE YIELD/(1 - APPLICABLE TAX RATE) = EFFECTIVE TAX-EQUIVALENT YIELD Based on these formulas, the current and effective tax-equivalent yields for the Municipal Money Market Fund for the seven day period ending October 31, 1997 were 4.62% and 4.69%, respectively (based upon a 39.6% personal tax rate). The advertised total return for a class of a Fund would be calculated by equating an initial amount invested in a class of a Fund to the ending redeemable value, according to the following formula: P(1 + T)N= 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. 9 207 Based on this formula, annualized total returns were as follows for the periods indicated:
For the For the For the five-year ten-year For the period from one-year period period ended period ended commencement of ended October October 31, October 31, operations through Platinum Class 31, 1997(1) 1997(1) 1997(1) October 31, 1997(1) - -------------- --------------- ------------ ------------ ------------------- Money Market Fund 4.88% 4.59% 5.95% 5.98% Municipal Money Market Fund 2.82% N/A(2) N/A(2) 2.97% U. S. Government Money Mkt. Fund (3) 4.63% 4.35% N/A(2) 4.25% Mileage Fund 4.72% 4.36% 5.81% 5.84%
(1) Performance of the Funds of the AAdvantage Trust represents total returns achieved by the Institutional Class from the inception date of each Fund up to the inception date of the Platinum Class on 11/7/95. Performance of the Mileage Fund represents total return of the Money Market Fund-Institutional Class (9/1/87-10/31/91); the Money Market Fund-Mileage Class (11/1/91-10/31/95); the Money Market Mileage Fund-Mileage Class (11/1/95-1/28/96) and the Money Market Mileage Fund-Platinum Class since its 1/29/96 inception. Total returns have not been adjusted for any difference between the fees and expenses of each Fund and the historical fees and expenses of the predecessor Funds. Inception dates are: Money Market Fund-Institutional Class, 9/1/87; Municipal Money Market Fund-Institutional Class, 11/10/93; U.S. Government Money Market Fund-Institutional Class, 3/1/92. (2) The Fund was not operational during this period. (3) Prior to March 1, 1997, the U.S. Government Money Market Fund was known as the U.S. Treasury Money Market Fund and operated under different investment policies. Each Fund also may use "aggregate" total return figures for various periods which represent the cumulative change in value of an investment in a Fund for the specific period. Such total returns reflect changes in share prices of a Fund and assume reinvestment of dividends and distributions. In reports or other communications to shareholders or in advertising material, each class of a Fund may from time to time compare its performance with that of other mutual funds in rankings prepared by Lipper Analytical Services, Inc., Morningstar, Inc., IBC Financial Data, Inc. and other similar independent services which monitor the performance of mutual funds or publications such as the "New York Times," "Barrons" and the "Wall Street Journal." Each Fund also may compare its performance with various indices prepared by independent services such as Standard & Poor's, Morgan Stanley or Lehman Brothers or to unmanaged indices that may assume reinvestment of dividends but generally do not reflect deductions for administrative and management costs. Advertisements for the Funds may mention that the Funds offer a variety of investment options. They also may compare the Funds to federally insured investments such as bank certificates of deposit and credit union deposits, including the long-term effects of inflation on these types of investments. Advertisements also may compare the historical rate of return of different types of investments. Information concerning broker-dealers who sell the Funds also may appear in advertisements for the Funds, including their ranking as established by various publications compared to other broker-dealers. From time to time, the Manager may use contests as a means of promoting the American AAdvantage Funds and the American AAdvantage Mileage Funds. Prizes may include free air travel and/or hotel accommodations. Listings for certain of the Funds may be found in newspapers under the heading Amer AAdvant. Each Fund may advertise the standard deviation of its returns for various time periods and compare its standard deviation to that of various indices. Standard deviation of returns over time is a measure of volatility. It indicates the spread of returns about their central tendency or mean. In theory, a Fund that is more volatile should receive a higher return in exchange for taking extra risk. Standard deviation is a well-accepted statistic to gauge the riskiness of an investment strategy and measure its historical volatility as a predictor of risk, although the measure is subject to time selection bias. DESCRIPTION OF THE TRUST The AAdvantage Trust, organized on January 16, 1987 and the Mileage Trust, organized on February 22, 1995, (originally named American AAdvantage Funds II) are entities of the type commonly known as a "Massachusetts business trust." Under Massachusetts law, shareholders of such a trust may, under certain circumstances, be held personally liable for its obligations. However, each Trust's Declaration of Trust contains an express disclaimer of shareholder liability for acts or obligations of the Trust and provides for indemnification and 10 208 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. 11 209 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, 1998. 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, 1998: American AAdvantage Money Market Fund Southwest Securities, Inc..................................................84% 1201 Elm Street, Suite 4300 Dallas, TX 75270-2180 American AAdvantage Municipal Money Market Fund Southwest Securities, Inc..................................................87% 1201 Elm Street, Suite 4300 Dallas, TX 75270-2180 American AAdvantage U.S. Government Money Market Fund Southwest Securities, Inc..................................................89% 1201 Elm Street, Suite 4300 Dallas, TX 75270-2180 American AAdvantage Money Market Mileage Fund Southwest Securities, Inc..................................................44% 1201 Elm Street, Suite 4300 Dallas, TX 75270-2180
OTHER INFORMATION Bank Deposit Notes-Bank deposit notes are obligations of a bank, rather than bank holding company corporate debt. The only structural difference between bank deposit notes and certificates of deposit is that interest on bank deposit notes is calculated on a 30/360 basis as are corporate notes/bonds. Similar to certificates of deposit, deposit notes represent bank level investments and, therefore, are senior to all holding company corporate debt. Bankers' Acceptances-Bankers' acceptances are short-term credit instruments designed to enable businesses to obtain funds to finance commercial transactions. Generally, an acceptance is a time draft drawn on a bank by an exporter or an importer to obtain a stated amount of funds to pay for specific merchandise. The draft is then "accepted" by a bank that, in effect, unconditionally guarantees to pay the face value of the instrument on its maturity date. The acceptance may then be held by the accepting bank as an earning asset or it may be sold in the secondary market at the going rate of discount for a specific maturity. Although maturities for acceptances can be as long as 270 days, most acceptances have maturities of six months or less. Cash Equivalents-Cash equivalents include certificates of deposit, bearer deposit notes, bankers' acceptances, government obligations, commercial paper, short-term corporate debt securities and repurchase agreements. Certificates of Deposit-Certificates of deposit are issued against funds deposited in an eligible bank (including its domestic and foreign branches, subsidiaries and agencies), are for a definite period of time, earn a specified rate of return and are normally negotiable. Commercial Paper-Commercial paper refers to promissory notes representing an unsecured debt of a corporation or finance company with a fixed maturity of no more than 270 days. A variable amount master demand note (which is a type of commercial paper) represents a direct borrowing arrangement involving periodically 12 210 fluctuating rates of interest under a letter agreement between a commercial paper issuer and an institutional lender pursuant to which the lender may determine to invest varying amounts. Derivatives-Generally, a derivative is a financial arrangement, the value of which is based on, or "derived" from, a traditional security, asset or market index. Some "derivatives" such as mortgage-related and other asset-backed securities are in many respects like any other investment, although they may be more volatile or less liquid than more traditional debt securities. There are, in fact, many different types of derivatives and many different ways to use them. There are a range of risks associated with those uses. Full Faith and Credit Obligations of the U.S. Government-Securities issued or guaranteed by the U.S. Treasury, backed by the full taxing power of the U.S. Government or the right of the issuer to borrow from the U.S. Treasury. Illiquid Securities. Historically, illiquid securities have included securities subject to contractual or legal restrictions on resale because they have not been registered under the 1933 Act, securities that are otherwise not readily marketable and repurchase agreements having a remaining maturity of longer than seven calendar days. Securities that have not been registered under the 1933 Act are referred to as private placements or restricted securities and are purchased directly from the issuer or in the secondary market. Mutual funds do not typically hold a significant amount of these restricted or other illiquid securities because of the potential for delays on resale and uncertainty in valuation. Limitations on resale may have an adverse effect on the marketability of portfolio securities and a mutual fund might be unable to dispose of restricted or other illiquid securities promptly or at reasonable prices and might thereby experience difficulty satisfying redemptions within seven calendar days. A mutual fund also might have to register such restricted securities in order to dispose of them resulting in additional expense and delay. Adverse market conditions could impede such a public offering of securities. In recent years, however, a large institutional market has developed for certain securities that are not registered under the 1933 Act, including repurchase agreements, commercial paper, foreign securities, municipal securities and corporate bonds and notes. Institutional investors depend on an efficient institutional market in which the unregistered security can be readily resold or on an issuer's ability to honor a demand for repayment. However, the fact that there are contractual or legal restrictions on resale of such investments to the general public or to certain institutions may not be indicative of their liquidity. Loan Participation Interests-Loan participation interests represent interests in bank loans made to corporations. The contractual arrangement with the bank transfers the cash stream of the underlying bank loan to the participating investor. Because the issuing bank does not guarantee the participations, they are subject to the credit risks generally associated with the underlying corporate borrower. In addition, because it may be necessary under the terms of the loan participation for the investor to assert through the issuing bank such rights as may exist against the underlying corporate borrower, in the event the underlying corporate borrower fails to pay principal and interest when due, the investor may be subject to delays, expenses and risks that are greater than those that would have been involved if the investor had purchased a direct obligation (such as commercial paper) of such borrower. Moreover, under the terms of the loan participation, the investor may be regarded as a creditor of the issuing bank (rather than of the underlying corporate borrower), so that the issuer also may be subject to the risk that the issuing bank may become insolvent. Further, in the event of the bankruptcy or insolvency of the corporate borrower, the loan participation may be subject to certain defenses that can be asserted by such borrower as a result of improper conduct by the issuing bank. The secondary market, if any, for these loan participations is extremely limited and any such participations purchased by the investor are regarded as illiquid. 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 13 211 the securities loaned, and any increase in market value of the loaned securities; (5) the Portfolio may pay only reasonable custodian fees in connection with the loan; and (6) voting rights on the securities loaned may pass to the borrower, provided, however, that if a material event affecting the investment occurs, the AMR Trust Board must be able to terminate the loan and vote proxies or enter into an alternative arrangement with the borrower to enable the AMR Trust Board to vote proxies. While there may be delays in recovery of loaned securities or even a loss of rights in collateral supplied should the borrower fail financially, loans will be made only to firms deemed by the AMR Trust Board to be of good financial standing and will not be made unless the consideration to be earned from such loans would justify the risk. Such loan transactions are referred to in this Statement of Additional Information as "qualified" loan transactions. The cash collateral so acquired through qualified loan transactions may be invested only in those categories of high quality liquid securities previously authorized by the AMR Trust Board. Mortgage-Backed Securities-Mortgage-backed securities consist of both collateralized mortgage obligations and mortgage pass-through certificates. Collateralized Mortgage Obligations ("CMOs")-CMOs and interests in real estate mortgage investment conduits ("REMICs") are debt securities collateralized by mortgages, or mortgage pass-through securities. CMOs divide the cash flow generated from the underlying mortgages or mortgage pass-through securities into different groups referred to as "tranches," which are then retired sequentially over time in order of priority. The principal governmental issuers of such securities are the Federal National Mortgage Association ("FNMA"), a government sponsored corporation owned entirely by private stockholders and the Federal Home Loan Mortgage Corporation ("FHLMC"), a corporate instrumentality of the United States created pursuant to an act of Congress which is owned entirely by Federal Home Loan Banks. The issuers of CMOs are structured as trusts or corporations established for the purpose of issuing such CMOs and often have no assets other than those underlying the securities and any credit support provided. A REMIC is a mortgage securities vehicle that holds residential or commercial mortgages and issues securities representing interests in those mortgages. A REMIC may be formed as a corporation, partnership, or segregated pool of assets. The REMIC itself is generally exempt from federal income tax, but the income from the mortgages is reported by investors. For investment purposes, interests in REMIC securities are virtually indistinguishable from CMOs. Mortgage Pass-Through Certificates-Mortgage pass-through certificates are issued by governmental, government-related and private organizations which are backed by pools of mortgage loans. (1) Government National Mortgage Association ("GNMA") Mortgage Pass-Through Certificates ("Ginnie Maes")-GNMA is a wholly-owned U.S. Government corporation within the Department of Housing and Urban Development. Ginnie Maes represent an undivided interest in a pool of mortgages that are insured by the Federal Housing Administration or the Farmers Home Administration or guaranteed by the Veterans Administration. Ginnie Maes entitle the holder to receive all payments (including prepayments) of principal and interest owed by the individual mortgagors, net of fees paid to GNMA and to the issuer which assembles the mortgage pool and passes through the monthly mortgage payments to the certificate holders (typically, a mortgage banking firm), regardless of whether the individual mortgagor actually makes the payment. Because payments are made to certificate holders regardless of whether payments are actually received on the underlying mortgages, Ginnie Maes are of the "modified pass-through" mortgage certificate type. The GNMA is authorized to guarantee the timely payment of principal and interest on the Ginnie Maes. The GNMA guarantee is backed by the full faith and credit of the United States, and the GNMA has unlimited authority to borrow funds from the U.S. Treasury to make payments under the guarantee. The market for Ginnie Maes is highly liquid 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 14 212 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. 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 15 213 strong. Obligations rated AA have a very strong capacity to pay interest and repay principal and differs from the highest rated issues only in a small degree. Duff & Phelps' two highest ratings for long-term obligations are AAA and AA. Obligations rated AAA have the highest credit quality with risk factors being negligible. Obligations rated AA are of high credit quality and strong protection factors. Risk is modest but may vary slightly from time to time because of economic conditions. Thomson BankWatch ("BankWatch") long-term debt ratings apply to specific issues of long-term debt and preferred stock. They specifically assess the likelihood of an untimely repayment of principal or interest over the term to maturity of the rated instrument. BankWatch's two highest ratings for long-term obligations are AAA and AA. Obligations rated AAA indicate that the ability to repay principal and interest on a timely basis is very high. Obligations rated AA indicate a superior ability to repay principal and interest on a timely basis, with limited incremental risk compared to issues rated in the highest category. Fitch IBCA, Inc. ("Fitch") investment grade bond ratings provide a guide to investors in determining the credit risk associated with a particular security. The ratings represent Fitch's assessment of the issuer's ability to meet the obligations of a specific debt issue or class of debt in a timely manner. Obligations rated AAA are considered to be investment grade and of the highest credit quality. The obligor has an exceptionally strong ability to pay interest and repay principal, which is unlikely to be affected by reasonable foreseeable events. Bonds rated AA are considered to be investment grade and of very high credit quality. The obligor's ability to pay interest and repay principal is very strong, although not quite as strong as bonds rated AAA. Standard & Poor's, Duff & Phelps and Fitch apply indicators, such as "+","-," or no character, to indicate relative standing within the major rating categories. Ratings of Municipal Obligations-Moody's ratings for state and municipal short-term obligations are designated Moody's Investment Grade or "MIG" with variable rate demand obligations being designated as "VMIG." A VMIG rating also may be assigned to commercial paper programs which are characterized as having variable short-term maturities but having neither a variable rate nor demand feature. Factors used in determination of ratings include liquidity of the borrower and short-term cyclical elements. Standard & Poor's uses SP-1, SP-2, and SP-3 to rate short-term municipal obligations. A rating of SP-1 denotes a very strong or strong capacity to pay principal and interest. Ratings of Short-term Obligations-The rating P-1 is the highest short-term rating assigned by Moody's. Among the factors considered by Moody's in assigning ratings are the following: (1) evaluations of the management of the issuer; (2) economic evaluation of the issuer's industry or industries and an appraisal of speculative-type risks which may be inherent in certain areas; (3) evaluation of the issuer's products in relation to competition and customer acceptance; (4) liquidity; (5) amount and quality of long-term debt; (6) trend of 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. 16 214 Thomson BankWatch short-term ratings are intended to assess the likelihood of an untimely or incomplete payment of principal or interest. Obligations rated TBW-1 indicate a very high likelihood that principal and interest will be paid on a timely basis. While the degree of safety regarding timely payment of principal and interest is strong for an obligation rated TBW-2, the relative degree of safety is not as high as for issues rated TBW-1. Fitch's short-term ratings apply to debt obligations that are payable on demand or have original maturities of generally up to three years, including commercial paper, certificates of deposit, medium-term notes, and municipal and investment notes. A rating of F-1+ indicates exceptionally strong credit quality. Issues assigned this rating are regarded as having the strongest degree of assurance for timely payment. Obligations rated F-1 have very strong credit quality. Issues assigned this rating reflect an assurance of timely payment only slightly less in degree than issues rated F-1+. Issues assigned a rating of F-2 indicate good credit quality. Issues assigned this rating have a satisfactory degree of assurance for timely payment, but the margin of safety is not as great as for issues assigned F-1+ and F-1 ratings. Repurchase Agreements-A repurchase agreement, which provides a means to earn income on funds for periods as short as overnight, is an arrangement under which the purchaser (e.g., a Portfolio) purchases securities and the seller agrees, at the time of sale, to repurchase the securities at a specified time and price. The repurchase price will be higher than the purchase price, the difference being income to the purchaser, or the purchase and repurchase prices may be the same, with interest at a stated rate due to the purchaser together with the repurchase price on repurchase. In either case, the income to the purchaser is unrelated to the interest rate on the securities subject to the repurchase agreement. Each Portfolio may enter into repurchase agreements with any bank or registered broker-dealer who, in the opinion of the AMR Trust Board presents a minimum risk of bankruptcy during the term of the agreement based upon guidelines that periodically are reviewed by the AMR Trust Board. Each Portfolio may enter into repurchase agreements as a short-term investment of its idle cash in order to earn income. The securities will be held by a custodian (or agent) approved by the AMR Trust Board during the term of the agreement. However, if the market value of the securities subject to the repurchase agreement becomes less than the repurchase price (including interest), the Portfolio will direct the seller of the securities to deliver additional securities so that the market value of all securities subject to the repurchase agreement will equal or exceed the repurchase price. In the event of the commencement of bankruptcy or insolvency proceedings with respect to the seller of the securities before the repurchase of the securities under a repurchase agreement, a Portfolio may encounter a delay and incur costs before being able to sell the security being held as collateral. Delays may involve loss 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. 17 215 Separately Traded Registered Interest and Principal Securities and Zero Coupon Obligations-Separately traded registered interest and principal securities or "STRIPS" and zero coupon obligations are securities that do not make regular interest payments. Instead they are sold at a discount from their face value. Each Portfolio will take into account as income a portion of the difference between these obligations' purchase prices and their face values. Because they do not pay coupon income, the prices of STRIPS and zero coupon obligations can be very volatile when interest rates change. STRIPS are zero coupon bonds issued by the U.S. Treasury. Tax, Revenue or Bond Anticipation Notes-Tax, revenue or bond anticipation notes are issued by municipalities in expectation of future tax or other revenues which are payable from these specific taxes or revenues. Bond anticipation notes usually provide interim financing in advance of an issue of bonds or notes, the proceeds of which are used to repay the anticipation notes. Tax-exempt commercial paper is issued by municipalities to help finance short-term capital or operating needs in anticipation of future tax or other revenue. U.S. Government Securities-U.S. Government securities are issued or guaranteed by the U.S. Government and include U.S. Treasury obligations (see definition below) and securities issued by U.S. agencies and instrumentalities. U. S. Government agencies or instrumentalities that issue or guarantee securities include, but are not limited to, the Federal Housing Administration, Farmers Home Administration, Export-Import Bank of the United States, Small Business Administration, GNMA, General Services Administration, Central Bank for Cooperatives, Federal Home Loan Banks, FHLMC, Federal Intermediate Credit Banks, Federal Land Banks, Maritime Administration, Tennessee Valley Authority, District of Columbia Armory Board, Inter-American Development Bank, Asian-American Development Bank, Agency for International Development, Student Loan Marketing Association and International Bank of Reconstruction and Development. Obligations of U.S. Government agencies and instrumentalities may or may not be supported by the full faith and credit of the United States. Some are backed by the right of the issuer to borrow from the Treasury; others are supported by discretionary authority of the U.S. Government to purchase the agencies' obligations; while still others, such as the Student Loan Marketing Association, are supported only by the credit of the instrumentality. In the case of securities not backed by the full faith and credit of the United States, the investor must look principally to the agency issuing or guaranteeing the obligation for ultimate repayment, and may not be able to assert a claim against the United States itself in the event the agency or instrumentality does not meet its commitment. U.S. Treasury Obligations-U.S. Treasury obligations include bills, notes and bonds issued by the U.S. Treasury and Separately Traded Registered Interest and Principal component parts of such obligations known as STRIPS. Variable or Floating Rate Obligations-A variable rate obligation is one whose terms provide for the adjustment of its interest rate on set dates and which, upon such adjustment, can reasonably be expected to have a market value that approximates its par value. A floating rate obligation is one whose terms provide for the adjustment of its interest rate whenever a specified interest rate changes and which, at any time, can reasonably be expected to have a market value that approximates its par value. Variable or floating rate obligations may be secured by bank letters of credit. Pursuant to Rule 2a-7 under the 1940 Act, variable or floating rate obligations with stated maturities of more than 397 days may be deemed to have shorter maturities as follows: (1) An obligation that is issued or guaranteed by the United States Government or any agency thereof which has a variable rate of interest readjusted no less frequently than every 762 days will be deemed by a Portfolio to have a maturity equal to the period remaining until the next readjustment of the interest rate. (2) A variable rate obligation, the principal amount of which is scheduled on the face of the instrument to be paid in 397 days or less, will be deemed by a Portfolio to have a maturity equal to the period remaining until the next readjustment of the interest rate. (3) A variable rate obligation that is subject to a demand feature will be deemed by a Portfolio to have a maturity equal to the longer of the period remaining until the next readjustment of the interest rate or the period remaining until the principal amount can be recovered through demand. 18 216 (4) A floating rate obligation that is subject to a demand feature will be deemed by a Portfolio to have a maturity equal to the period remaining until the principal amount can be recovered through demand. As used above, an obligation is "subject to a demand feature" when a Portfolio is entitled to receive the principal amount of the obligation either at any time on no more than 30 days' notice or at specified intervals not exceeding one year and upon no more than 30 days' notice. Variable Rate Auction and Residual Interest Obligations-Variable rate auction and residual interest obligations are created when an issuer or dealer separates the principal portion of a long-term, fixed-rate municipal bond into two long-term, variable-rate instruments. The interest rate on one portion reflects short-term interest rates, while the interest rate on the other portion is typically higher than the rate available on the original fixed-rate bond. FINANCIAL STATEMENTS The American AAdvantage Money Market Funds' and the American AAdvantage Mileage Funds' Annual Reports to Shareholders for the fiscal year ended October 31, 1997, as audited by Ernst & Young, LLP, are supplied with the SAI, and the financial statements and accompanying notes appearing therein are incorporated by reference in this SAI. 19 217 TABLE OF CONTENTS Investment Restrictions..................................................................................................1 Trustees and Officers of the Trust and the AMR Trust.....................................................................2 Management, Administrative Services and Distribution Fees................................................................5 Redemptions in Kind......................................................................................................6 Net Asset Value..........................................................................................................6 Tax Information..........................................................................................................6 Yield and Total Return Quotations........................................................................................8 Description of the Trust................................................................................................10 Control Persons and 5% Shareholders.....................................................................................11 Other Information.......................................................................................................11 Financial Statements....................................................................................................18
218 AMERICAN AADVANTAGE FUNDS PART C. OTHER INFORMATION Item 24. Financial Statements and Exhibits (a) Financial Statements included as a part of this Registration Statement: Included in Part A: Financial Highlights - AMR Class: Balanced Fund, Growth and Income Fund, International Equity Fund and Short-Term Bond Fund: for the period August 1, 1994 (commencement of offering of AMR Class shares) to October 31, 1994, for the three years ended October 31, 1997. S&P 500 Index Fund: for the period January 1, 1997 (commencement of operations) to December 31, 1997. Institutional Class: Balanced Fund and Growth and Income Fund: for each of the ten years ended October 31, 1997. International Equity Fund: for the period from August 7, 1991 (commencement of operations) to October 31, 1991 and for the six years ended October 31, 1997. Short-Term Bond Fund: for the period from December 3, 1987 (commencement of operations) to October 31, 1988, for each of the nine years ended October 31, 1997. Money Market Fund: for each of the ten years ended October 31, 1997. Municipal Money Market Fund: for the period November 10, 1993 (commencement of operations) to October 31, 1994, for the three years ended October 31, 1997. U.S. Government Money Market Fund: for the period March 2, 1992 (commencement of operations) to October 31, 1992, for the five years ended October 31, 1997. Intermediate Bond Fund: for the period September 15, 1997 (commencement of operations) to October 31, 1997. PlanAhead Class: Balanced Fund, Growth and Income Fund, International Equity Fund, Short-Term Bond Fund, Money Market Fund, Municipal Money Market Fund and U.S. Government Money Market Fund: for the period August 1, 1994 (commencement of offering PlanAhead Class shares) to October 31, 1994 and for the three years ended October 31, 1997. Platinum Class: Money Market Fund, Municipal Money Market Fund and U.S. Government Money Market Fund: for the period November 7, 1995 (commencement of offering Platinum Class shares) to October 31, 1996, for the one year ended October 31, 1997. Included in Part B: American AAdvantage Funds -- Statement of Assets and Liabilities dated October 31, 1997; Statement of Operations for the fiscal year ended October 31, 1997; Statements of Changes in Net Assets for the years ended October 31, 1996 and October 31, 1997; 219 Notes to Financial Statements; Report of Ernst & Young LLP, Independent Accountants dated December 19, 1997. American AAdvantage Money Market Mileage Fund - Platinum Class - Statement of Assets and Liabilities dated October 31, 1997; Statement of Operations for the fiscal year ended October 31, 1997; Statements of Changes in Net Assets for the years ended October 31, 1996 and October 31, 1997; Notes to Financial Statements; Report of Ernst & Young LLP, Independent Accountants dated December 19, 1997. AMR Investment Services Trust -- Schedule of Investments dated October 31, 1997; Statement of Assets and Liabilities dated October 31, 1997; Statement of Operations dated October 31, 1997; Statement of Changes in Net Assets dated October 31, 1997; Notes to Financial Statements; Report of Ernst & Young LLP, Independent Accountants dated December 19, 1997. (b) Exhibits: (1) Declaration of Trust - (iv) (2) Bylaws - (iv) (3) Voting trust agreement -- none (4) Specimen security -- none (a)(i) Fund Management Agreement between American AAdvantage Funds and AMR Investment Services, Inc. dated April 3, 1987 - (iv) (a)(ii) Supplement to Fund Management Agreement dated October 1, 1990 - (iv) (a)(iii) Supplement to Fund Management Agreement dated August 1, 1994 - (iv) (a)(iv) Supplement to Fund Management Agreement dated August 1, 1995 - (iv) (a)(v) Amendment to Schedule A of Fund Management Agreement dated December 1, 1995 (i) (a)(vi) Supplement to Fund Management Agreement dated December 16, 1996 (ii) (a)(vii) Supplement to the Fund Management Agreement dated July 15, 1997 (iii) (b)(i) Investment Advisory Agreement between AMR Investment Services, Inc. and Independence Investment Associates, Inc. dated November 1, 1995 - (iv) (b)(ii) Investment Advisory Agreement between AMR Investment Services, Inc. and Morgan Stanley Asset Management Inc. dated November 1, 1995 - (iv) 2 220 (b)(iii) Investment Advisory Agreement between AMR Investment Services, Inc. and Templeton Investment Counsel, Inc. dated November 1, 1995 - (iv) (b)(iv) Investment Advisory Agreement between AMR Investment Services, Inc. and Barrow, Hanley, Mewhinney & Strause, Inc. dated November 1, 1995 - (iv) (b)(v) Investment Advisory Agreement between AMR Investment Services, Inc. and GSB Investment Management, Inc. dated November 1, 1995 - (iv) (b)(vi) Investment Advisory Agreement between AMR Investment Services, Inc. and Brandywine Asset Management, Inc. dated January 16, 1998 - filed herewith (b)(vii) Investment Advisory Agreement between AMR Investment Services, Inc. and Hotchkis and Wiley, a division of the Capital Management Group of Merrill Lynch Asset Management, L.P. dated November 12, 1996 -- (ii) (c) Administrative Services Agreement between the American AAdvantage Funds and AMR Investment Services, Inc. dated November 21, 1997 - (iv) (d) Administrative Services Plan for the Platinum Class - (iv) (e) Administrative Agreement with S&P 500 Index Fund - (iv) (6) Distribution Agreement among the American AAdvantage Funds, the American AAdvantage Mileage Funds and Brokers Transaction Services, Inc. dated September 1, 1995 - (iv) (7) Bonus, profit sharing or pension plans -- none (8) Custodian Agreement between the American AAdvantage Funds and State Street Bank and Trust Company dated December 1, 1997 - filed herewith (9) (a) Transfer Agency and Service Agreement between the American AAdvantage Funds-and State Street Bank and Trust Company dated January 1, 1998 - filed herewith (b) Securities Lending Authorization Agreement between American AAdvantage Funds and State Street Bank and Trust Company dated January 2, 1998 - filed herewith (c) Service Plan Agreement for the American AAdvantage Funds PlanAhead Class dated August 1, 1994 - (iv) (10) Opinion and consent of counsel - (iv) (11) Consent of Independent Auditors - filed herewith (12) Financial statements omitted from prospectus - none 3 221 (13) Letter of investment intent - (iv) (14) Prototype retirement plan -- none (15) (a) Plan pursuant to Rule 12b-1 for the Institutional, PlanAhead and AMR Classes - (iv) (b) Plan pursuant to Rule 12b-1 for the Platinum Class - (iv) (16) Schedule for Computation of Performance Quotations - (iv) (17) Financial Data Schedules - filed herewith (18) Amended and Restated Plan pursuant to Rule 18f-3 - (iv) Other Exhibits - Powers of Attorney for all Trustees - (ii) - ------------------------- (i) Incorporated by reference to PEA No. 15 to the Registration Statement of the Trust on Form N-1A as filed with the SEC on December 22, 1995. (ii) Incorporated by reference to PEA No. 19 to the Registration Statement of the Trust on Form N-1A as filed with the SEC on February 13, 1997. (iii) Incorporated by reference to PEA No. 20 to the Registration Statement of the Trust on Form N-1A as filed with the SEC on July 1, 1997. (iv) Incorporated by reference to PEA No. 23 to the Registration Statement of the Trust on Form N-1A as filed with the SEC on December 18, 1997. Item 25. Persons Controlled by or under Common Control with Registrant None. Item 26. Number of Holders of Securities
Number of Record Holders as of November 30, 1997 ---------------------------------------------------- Inst'l PlanAhead AMR Platinum Fund Class Class Class Class ---- ------ --------- ----- -------- Balanced Fund 32 339 5 -- Growth and Income Fund 33 628 3 -- Intermediate Bond Fund 2 -- -- -- International Equity Fund 68 353 5 -- -- -- -- -- Short -Term Income Fund Money Market Fund 212 2,872 -- 2,597 Municipal Money Market 4 79 -- 145 Fund Short-Term Bond Fund 23 49 2 -- S&P 500 Index Fund -- -- 2 -- U.S. Government Money 16 105 -- 183 Market Fund
4 222 Item 27. Indemnification Article XI, Section 2 of the Declaration of Trust of the Trust provides that: (a) Subject to the exceptions and limitations contained in paragraph (b) below: (i) every person who is, or has been, a Trustee or officer of the Trust (hereinafter referred to as "Covered Person") shall be indemnified by the appropriate portfolios to the fullest extent permitted by law against liability and against all expenses reasonably incurred or paid by him in connection with any claim, action, suit or proceeding in which he becomes involved as a party or otherwise by virtue of his being or having been a Trustee or officer and against amounts paid or incurred by him in the settlement thereof; (ii) the words "claim," "action," "suit," or "proceeding" shall apply to all claims, actions, suits or proceedings (civil, criminal or other, including appeals), actual or threatened while in office or thereafter, and the words "liability" and "expenses" shall include, without limitation, attorneys' fees, costs, judgments, amounts paid in settlement, fines, penalties and other liabilities. (b) No indemnification shall be provided hereunder to a Covered Person: (i) who shall have been adjudicated by a court or body before which the proceeding was brought (A) to be liable to the Trust or its Shareholders by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office or (B) not to have acted in good faith in the reasonable belief that his action was in the best interest of the Trust; or (ii) in the event of a settlement, unless there has been a determination that such Trustee or officer did not engage in willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office (A) by the court or other body approving the settlement; (B) by at least a majority of those Trustees who are neither interested persons of the Trust nor are parties to the matter based upon a review of readily available facts (as opposed to a full trial-type inquiry); or (C) by written opinion of independent legal counsel based upon a review of readily available facts (as opposed to a full trial-type inquiry); provided, however, that any Shareholder may, by appropriate legal proceedings, challenge any such determination by the Trustees, or by independent counsel. (c) The rights of indemnification herein provided may be insured against by policies maintained by the Trust, shall be severable, shall not be exclusive of or affect any other rights to which any Covered Person may now or hereafter be entitled, shall continue as to a person who has ceased to be such Trustee or officer and shall inure to the benefit of the heirs, executors and administrators of such a person. Nothing contained herein shall affect any rights to indemnification to which Trust 5 223 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 28. I. Business and Other Connections of Investment Manager AMR Investment Services, Inc. (the "Manager"), 4333 Amon Carter Boulevard, MD 5645, Fort Worth, Texas 76155, offers investment management and administrative services. Information as to the officers and directors of the Manager is included in its current Form ADV filed with the SEC and is incorporated by reference herein. II. Business and Other Connections of Investment Advisers The investment advisers listed below provide investment advisory services to the Trust. Barrow, Hanley, Mewhinney & Strauss, 3232 McKinney Avenue, 15th Floor, Dallas, Texas 75204. 6 224 Brandywine Asset Management, Inc., 201 North Walnut Street, Wilmington, Delaware 19801. GSB Investment Management, Inc., 301 Commerce Street, Suite 1501, Fort Worth, Texas 76102. Hotchkis and Wiley, 800 West Sixth Street, 5th Floor, Los Angeles, California 90017. Independence Investment Associates, Inc., 53 State Street, Boston, Massachusetts 02109. Morgan Stanley Asset Management Inc., 1221 Avenue of the Americas, 21st Floor, New York, New York 10020. Templeton Investment Counsel, Inc. 500 East Broward Blvd., Ft. Lauderdale, Florida 33394. Information as to the officers and directors of each of the above investment advisers is included in that adviser's current Form ADV filed with the SEC and is incorporated by reference herein. Item 29. Principal Underwriter (a) Brokers Transaction Services, Inc., 7001 Preston Road, Dallas, TX 75205 is the principal underwriter for the Trust and the American AAdvantage Mileage Funds. (b) The directors and officers of the Trust's principal underwriter are:
Positions & Offices Position Name with Underwriter with Registrant - ---- ------------------- --------------- Don A. Buckholz Chairman, Director None Raymond E. Wooldridge Chief Executive Officer, None Director William D. Felder Executive Vice None President, Director Sue H. Peden President None
Item 30. Location of Accounts and Records The books and other documents required by Rule 31a-1 under the Investment Company Act of 1940 are maintained as follows: 31a-1(b)(1) - in the physical possession of the Trust's custodian; 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 7 225 31a-1(b)(5) - in the physical possession of the Trust's investment advisers 31a-1(b)(6) - A record of other purchases or sales etc. - in the physical possession of the Trust's Manager, investment advisers and custodian 31a-1(b)(7) - in the physical possession of the Trust's custodian 31a-1(b)(8) - in the physical possession of the Trust's custodian 31a-1(b)(9) - in the physical possession of the Trust's investment advisers 31a-1(b)(10) - in the physical possession of the Trust's Manager 31a-1(b)(11) - in the physical possession of the Trust's Manager 31a-1(b)(12) - in the physical possession of the Trust's Manager, investment advisers and custodian Item 31. Management Services All substantive provisions of any management-related service contract are discussed in Part A or Part B. Item 32. Undertakings Registrant hereby undertakes to furnish each person to whom a prospectus is delivered with a copy of its latest annual report to Shareholders, upon request and without charge. Registrant hereby undertakes to carry out all indemnification provisions of its Declaration of Trust in accordance with Investment Company Act Release No. 11330 (September 4, 1980) and successor releases. Insofar as indemnification for liability arising under the Securities Act of 1933, as amended ("1933 Act"), may be permitted to trustees, officers and controlling persons of the Registrant pursuant to the provisions under Item 27 herein, or otherwise, the Registrant has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the 1933 Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a trustee, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such trustee, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the 1933 Act and will be governed by the final adjudication. 8 226 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, and the Investment Company Act of 1940, as amended, the Registrant certifies that it meets the requirements for effectiveness under this amendment to its Registration Statement under Rule 485(b) under the Securities Act of 1933 and has duly caused this Post-Effective Amendment No. 24 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 February 26, 1998. AMERICAN AADVANTAGE FUNDS By: /s/ William F. Quinn --------------------------- William F. Quinn President Attest: /s/ Barry Y. Greenberg - ---------------------------------- Barry Y. Greenberg Vice President and Assistant Secretary Pursuant to the requirements of the Securities Act of 1933, as amended, this Post-Effective Amendment No. 24 to the Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ---- /s/ William F. Quinn President and February 26, 1998 - -------------------------- Trustee William F. Quinn Alan D. Feld* Trustee February 26, 1998 - -------------------------- Alan D. Feld Ben J. Fortson* Trustee February 26, 1998 - -------------------------- Ben J. Fortson John S. Justin* Trustee February 26, 1998 - -------------------------- John S. Justin Stephen D. O'Sullivan* Trustee February 26, 1998 - -------------------------- Stephen D. O'Sullivan Roger T. Staubach* Trustee February 26, 1998 - -------------------------- Roger T. Staubach Dr. Kneeland Youngblood * Trustee February 26, 1998 - -------------------------- Dr. Kneeland Youngblood
*By /s/ William F. Quinn ---------------------------------- William F. Quinn, Attorney-In-Fact 227 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 certifies that it meets the requirements for effectiveness under this amendment to its Registration Statement under Rule 485(b) under the Securities Act of 1933 and has duly caused this Post-Effective Amendment No. 24 to the Registration Statement on Form N-1A as it relates to the AMR Investment Services Trust to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Fort Worth and the State of Texas on February 26, 1998. AMR INVESTMENT SERVICES TRUST By: /s/ William F. Quinn -------------------------------- William F. Quinn President Attest: /s/ Barry Y. Greenberg - ------------------------------- Barry Y. Greenberg Vice President and Assistant Secretary Pursuant to the requirements of the Securities Act of 1933, as amended, this Post-Effective Amendment No. 24 to the Registration Statement for the American AAdvantage Funds as it relates to the AMR Investment Services Trust has been signed below by the following persons in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ---- /s/ William F. Quinn President and February 26, 1998 - ----------------------------------- Trustee William F. Quinn Alan D. Feld* Trustee February 26, 1998 - ----------------------------------- Alan D. Feld Ben J. Fortson* Trustee February 26, 1998 - ----------------------------------- Ben J. Fortson John S. Justin* Trustee February 26, 1998 - ----------------------------------- John S. Justin Stephen D. O'Sullivan* Trustee February 26, 1998 - ----------------------------------- Stephen D. O'Sullivan Roger T. Staubach* Trustee February 26, 1998 - ----------------------------------- Roger T. Staubach Dr. Kneeland Youngblood * Trustee February 26, 1998 - ----------------------------------- Dr. Kneeland Youngblood
*By /s/ William F. Quinn William F. Quinn, Attorney-In-Fact 228 SIGNATURES Equity 500 Index Portfolio certifies that it meets the requirements for effectiveness of this amendment to the Registration Statement under Rule 485(b) under the Securities Act of 1933 and has duly caused this Post-Effective Amendment No. 24 to the Registration Statement on Form N-1A of the American AAdvantage Funds, as it relates to the American AAdvantage S&P 500 Index Fund, to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Pittsburgh and the Commonwealth of Pennsylvania on February 26, 1998. EQUITY 500 INDEX PORTFOLIO By: Ronald M. Petnuch* ---------------------------- Ronald M. Petnuch President This Post-Effective Amendment No. 24 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 the Equity 500 Index Portfolio and on February 26, 1998.
Signature Title - --------- ----- Charles P Biggar* Trustee - ----------------------------- Charles P. Biggar Leland Dill* Trustee - ----------------------------- S. Leland Dill Philip Saunders, Jr.* Trustee - ----------------------------- Philip Saunders, Jr. Ronald M. Petnuch* President and Treasurer (Chief Executive Officer, Principal - ----------------------------- Financial and Accounting Officer) Ronald M. Petnuch
/s/ Jay S. Neuman - ------------------------------------------ Jay S. Neuman, Secretary of the Equity 500 Index Portfolio, as Attorney-in-Fact pursuant to a Power of Attorney 229 INDEX TO EXHIBITS
Exhibit Number Description Page - ------- ----------- ---- (1) Declaration of Trust - (iv) (2) Bylaws - (iv) (3) Voting trust agreement -- none (4) Specimen security -- none (a)(i) Fund Management Agreement between American AAdvantage Funds and AMR Investment Services, Inc. dated April 3, 1987 - (iv) (a)(ii) Supplement to Fund Management Agreement dated October 1, 1990 - (iv) (a)(iii) Supplement to Fund Management Agreement dated August 1, 1994 - (iv) (a)(iv) Supplement to Fund Management Agreement dated August 1, 1995 - (iv) (a)(v) Amendment to Schedule A of Fund Management Agreement dated December 1, 1995 (i) (a)(vi) Supplement to Fund Management Agreement dated December 16, 1996 (ii) (a)(vii) Supplement to the Fund Management Agreement dated July 15, 1997 (iii) (b)(i) Investment Advisory Agreement between AMR Investment Services, Inc. and Independence Investment Associates, Inc. dated November 1, 1995 - (iv) (b)(ii) Investment Advisory Agreement between AMR Investment Services, Inc. and Morgan Stanley Asset Management Inc. dated November 1, 1995 - (iv) (b)(iii) Investment Advisory Agreement between AMR Investment Services, Inc. and Templeton Investment Counsel, Inc. dated November 1, 1995 - (iv) (b)(iv) Investment Advisory Agreement between AMR Investment Services, Inc. and Barrow, Hanley, Mewhinney & Strause, Inc. dated November 1, 1995 - (iv) (b)(v) Investment Advisory Agreement between AMR Investment Services, Inc. and GSB Investment Management, Inc. dated November 1, 1995 - (iv) (b)(vi) Investment Advisory Agreement between AMR Investment Services, Inc. and Brandywine Asset Management, Inc. dated January 16, 1998 - filed herewith (b)(vii) Investment Advisory Agreement between AMR Investment Services, Inc. and Hotchkis and Wiley, a division of the Capital Management Group of Merrill Lynch Asset Management, L.P. dated November 12, 1996 -- (ii) (c) Administrative Services Agreement between the American AAdvantage Funds and AMR Investment Services, Inc. dated November 21, 1997 - (iv) (d) Administrative Services Plan for the Platinum Class - (iv) (e) Administrative Agreement with S&P 500 Index Fund - (iv)
230 (6) Distribution Agreement among the American AAdvantage Funds, the American AAdvantage Mileage Funds and Brokers Transaction Services, Inc. dated September 1, 1995 - (iv) (7) Bonus, profit sharing or pension plans -- none (8) Custodian Agreement between the American AAdvantage Funds and State Street Bank and Trust Company dated December 1, 1997 - filed herewith (9) (a) Transfer Agency and Service Agreement between the American AAdvantage Funds-and State Street Bank and Trust Company dated January 1, 1998 - filed herewith (b) Securities Lending Authorization Agreement between American AAdvantage Funds and State Street Bank and Trust Company dated January 2, 1998 - filed herewith (c) Service Plan Agreement for the American AAdvantage Funds PlanAhead Class dated August 1, 1994 - (iv) (10) Opinion and consent of counsel - (iv) (11) Consent of Independent Auditors - filed herewith (12) Financial statements omitted from prospectus - none (13) Letter of investment intent - (iv) (14) Prototype retirement plan -- none (15) (a) Plan pursuant to Rule 12b-1 for the Institutional, PlanAhead and AMR Classes - (iv) (b) Plan pursuant to Rule 12b-1 for the Platinum Class - (iv) (16) Schedule for Computation of Performance Quotations - (iv) (17) Financial Data Schedules - filed herewith (18) Amended and Restated Plan pursuant to Rule 18f-3 - (iv)
Other Exhibits - Powers of Attorney for all Trustees - (ii) - ------------------------- (i) Incorporated by reference to PEA No. 15 to the Registration Statement of the Trust on Form N-1A as filed with the SEC on December 22, 1995. (ii) Incorporated by reference to PEA No. 19 to the Registration Statement of the Trust on Form N-1A as filed with the SEC on February 13, 1997. (iii) Incorporated by reference to PEA No. 20 to the Registration Statement of the Trust on Form N-1A as filed with the SEC on July 1, 1997. (iv) Incorporated by reference to PEA No. 23 to the Registration Statement of the Trust on Form N-1A as filed with the SEC on December 18, 1997. EX-99.B.4.BVI 2 INVESTMENT ADVISORY AGMT - BRANDYWINE ASSET MGMT 1 Exhibit 99.b.4.b.vi AMERICAN AADVANTAGE FUNDS INVESTMENT ADVISORY AGREEMENT AGREEMENT made this 16th day of January, 1998 by and between AMR Investment Services, Inc., a Delaware Corporation (the "Manager"), and Brandywine Asset Management, Inc., a wholly owned subsidiary of Legg Mason, Inc. (the "Adviser"); WHEREAS, American AAdvantage Funds (the "Trust"), a Massachusetts Business Trust, is an open-end, diversified management investment company registered under the Investment Company Act of 1940, as amended ("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, 2 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 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). 3 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 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 4 thereof) is or may be interested in the Trust as a shareholder or otherwise; provided that all such interests shall be fully disclosed between the parties on an ongoing basis and in the Trust's registration statement as required by law. 10. DURATION AND TERMINATION. This Agreement, unless sooner terminated as provided herein, shall continue for two years after its initial approval as to each Portfolio and thereafter for periods of one year for so long as such continuance thereafter is specifically approved at least annually (a) by the vote of a majority of those Trustees of the Trust who are not parties to this Agreement or interested persons of any such party, cast in person at a meeting called for the purpose of voting on such approval, and (b) by the Trustees of the Trust or by vote of a majority of the outstanding voting securities of each Portfolio; provided, however, that if the shareholders of any Portfolio fail to approve the Agreement as provided herein, the Adviser may continue to serve hereunder in the manner and to the extent permitted by the 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 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. 5 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first written above. Brandywine Asset Management, Inc. AMR Investment Services, Inc. By /s/ CARL M. LINDBERG By /s/ WILLIAM F. QUINN ---------------------------------- ---------------------------------- Title Managing Director and Secretary Title President ------------------------------- ---------------------------- 6 Schedule A to the American AAdvantage Funds Investment Advisory Agreement between AMR Investment Services, Inc. and Brandywine Asset Management, Inc. AMR Investment Services, Inc. shall pay compensation to Brandywine Asset Management Inc. pursuant to section 3 of the Investment Advisory Agreement between said for rendering investment management services with respect to the Growth and Income and Balanced Funds in accordance with the following annual percentage rates: 1. For assets up to $500 million: Growth and Income Fund: 0.25% Balanced Fund: 0.225% 2. For assets $500 - 600 million: 0.225% 3. For assets over $600 million: 0.20% 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. For purposes of calculating the fee for assets between $500 million and $600 million, the reduced fee rate will be applied pro rata based on assets for each equity portfolio. For purposes of calculating the fee for assets over $600 million, the reduced fee rate will be applied pro rata based on assets for each portfolio. 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: January 16, 1998 EX-99.B.8 3 CUSTODIAN AGREEMENT - STATE STREET BANK & TRUST CO 1 EXHIBIT 99.b.8 CUSTODIAN AGREEMENT This Agreement between AMERICAN AADVANTAGE FUNDS, a business trust organized and existing under the laws of Massachusetts with its principal place of business at 4333 Amon Carter Boulevard, Fort Worth, Texas 76155 (the "TRUST"), and STATE STREET BANK and TRUST COMPANY, a Massachusetts trust company with its principal place of business at 225 Franklin Street, Boston, Massachusetts 02110 (the "CUSTODIAN"), WITNESSETH: WHEREAS, the Trust intends to offer shares in the series set forth on Schedule D hereto (such series, together with all other series subsequently established by the Trust and made subject to this Agreement in accordance with Section 20 and as of the effective date set forth on Schedule D, shall be referred to herein as the "PORTFOLIO(S)"); and WHEREAS, each Portfolio, with the exceptions of (a) the S&P 500 INDEX FUND (which intends to invest all of its investable assets in the EQUITY 500 INDEX PORTFOLIO) and (b) the SHORT-TERM INCOME FUND, intends to invest all of its investable assets in the portfolio of AMR INVESTMENT SERVICES TRUST, an open-end, diversified management investment company, with which it shares its investment objectives, NOW THEREFORE, in consideration of the mutual covenants and agreements hereinafter contained, the parties hereto agree as follows: SECTION 1. EMPLOYMENT OF CUSTODIAN AND PROPERTY TO BE HELD BY IT The Trust hereby employs the Custodian as the custodian of the assets of the Portfolios of the Trust, including securities which the Trust, on behalf of the applicable Portfolio desires to be held in places within the United States ("DOMESTIC SECURITIES") and securities it desires to be held outside the United States ("FOREIGN SECURITIES") pursuant to the provisions of the Trust's Declaration of Trust. The Trust on behalf of the Portfolio(s) agrees to deliver to the Custodian all securities and cash of the Portfolios, and all payments of income, payments of principal or capital distributions received by it with respect to all securities owned by the Portfolio(s) from time to time, and the cash consideration received by it for such new or treasury shares of each class of beneficial interest of the Trust representing interests in the Portfolios ("SHARES") as may be issued or sold from time to time. The Custodian shall not be responsible for any property of a Portfolio held or received by the Portfolio and not delivered to the Custodian. Upon receipt of "PROPER INSTRUCTIONS" (as such term is defined in Section 6 hereof), the Custodian shall on behalf of the applicable Portfolio(s) from time to time employ one or more sub-custodians, located in the United States but only in accordance with an applicable vote by the Board of Trustees of the Trust (the "BOARD OF TRUSTEES") on behalf of the applicable Portfolio(s), and provided that the Custodian shall have no more or less responsibility or liability to the Trust on account of any actions or omissions of any sub-custodian so employed than any such sub-custodian has to the Custodian. The Custodian may employ as sub-custodian for the Trust's 2 foreign securities on behalf of the applicable Portfolio(s) the foreign banking institutions and foreign securities depositories designated in Schedules A and B hereto but only in accordance with the applicable provisions of Sections 3 and 4. SECTION 2. DUTIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY OF THE TRUST HELD BY THE CUSTODIAN IN THE UNITED STATES SECTION 2.1 HOLDING SECURITIES. The Custodian shall hold and physically segregate for the account of each Portfolio all non-cash property, to be held by it in the United States including all domestic securities owned by such Portfolio, other than (a) securities which are maintained pursuant to Section 2.9 in a clearing agency which acts as a securities depository or in a book-entry system authorized by the U.S. Department of the Treasury (each, a "U.S. SECURITIES SYSTEM") and (b) commercial paper of an issuer for which State Street Bank and Trust Company acts as issuing and paying agent ("DIRECT PAPER") which is deposited and/or maintained in the Direct Paper System of the Custodian (the "DIRECT PAPER SYSTEM") pursuant to Section 2.10. SECTION 2.2 DELIVERY OF SECURITIES. The Custodian shall release and deliver domestic securities owned by a Portfolio held by the Custodian or in a U.S. Securities System account of the Custodian or in the Custodian's Direct Paper book entry system account ("DIRECT PAPER SYSTEM ACCOUNT") only upon receipt of Proper Instructions from the Trust on behalf of the applicable Portfolio, which may be continuing instructions when deemed appropriate by the parties, and only in the following cases: 1) Upon sale of such securities for the account of the Portfolio and receipt of payment therefor; 2) Upon the receipt of payment in connection with any repurchase agreement related to such securities entered into by the Portfolio; 3) In the case of a sale effected through a U.S. Securities System, in accordance with the provisions of Section 2.9 hereof; 4) To the depository agent in connection with tender or other similar offers for securities of the Portfolio; 5) To the issuer thereof or its agent when such securities are called, redeemed, retired or otherwise become payable; provided that, in any such case, the cash or other consideration is to be delivered to the Custodian; 6) To the issuer thereof, or its agent, for transfer into the name of the Portfolio or into the name of any nominee or nominees of the Custodian or into the name or nominee name of any agent appointed pursuant to Section 2.8 or into the name or nominee name of any sub-custodian appointed pursuant to Section 1; or for exchange for a different number of bonds, certificates or other evidence representing the same aggregate face amount or number of units; provided that, in any such case, the new securities are to be delivered to the Custodian; 3 7) Upon the sale of such securities for the account of the Portfolio, to the broker or its clearing agent, against a receipt, for examination in accordance with "street delivery" custom; provided that in any such case, the Custodian shall have no responsibility or liability for any loss arising from the delivery of such securities prior to receiving payment for such securities except as may arise from the Custodian's own negligence or willful misconduct; 8) For exchange or conversion pursuant to any plan of merger, consolidation, recapitalization, reorganization or readjustment of the securities of the issuer of such securities, or pursuant to provisions for conversion contained in such securities, or pursuant to any deposit agreement; provided that, in any such case, the new securities and cash, if any, are to be delivered to the Custodian; 9) In the case of warrants, rights or similar securities, the surrender thereof in the exercise of such warrants, rights or similar securities or the surrender of interim receipts or temporary securities for definitive securities; provided that, in any such case, the new securities and cash, if any, are to be delivered to the Custodian; 10) For delivery in connection with any loans of securities made by the Portfolio, but only against receipt of adequate collateral as agreed upon from time to time by the Custodian and the Trust on behalf of the Portfolio, which may be in the form of cash or obligations issued by the United States government, its agencies or instrumentalities, except that in connection with any loans for which collateral is to be credited to the Custodian's account in the book-entry system authorized by the U.S. Department of the Treasury, the Custodian will not be held liable or responsible for the delivery of securities owned by the Portfolio prior to the receipt of such collateral; 11) For delivery as security in connection with any borrowing by the Trust on behalf of the Portfolio requiring a pledge of assets by the Trust on behalf of the Portfolio, but only against receipt of amounts borrowed; 12) For delivery in accordance with the provisions of any agreement among the Trust on behalf of the Portfolio, the Custodian and a broker-dealer registered under the Securities Exchange Act of 1934 (the "EXCHANGE ACT") and a member of The National Association of Securities Dealers, Inc. ("NASD"), relating to compliance with the rules of The Options Clearing Corporation and of any registered national securities exchange, or of any similar organization or organizations, regarding escrow or other arrangements in connection with transactions by the Portfolio of the Trust; 13) For delivery in accordance with the provisions of any agreement among the Trust on behalf of the Portfolio, the Custodian, and a Futures Commission Merchant registered under the Commodity Exchange Act, relating to compliance with the rules of the Commodity Futures Trading Commission and/or any Contract Market, or any similar organization or organizations, regarding account deposits in connection with transactions by the Portfolio of the Trust; 4 14) Upon receipt of instructions from the transfer agent for the Trust (the "TRANSFER AGENT") for delivery to such Transfer Agent or to the holders of Shares in connection with distributions in kind, as may be described from time to time in the currently effective prospectus and statement of additional information of the Trust related to the Portfolio (the "PROSPECTUS"), in satisfaction of requests by holders of Shares for repurchase or redemption; and 15) For any other proper trust purpose, but only upon receipt of written Proper Instructions specifying the securities of the Portfolio to be delivered, setting forth the purpose for which such delivery is to be made, declaring such purpose to be a proper trust purpose, and naming the person or persons to whom delivery of such securities shall be made. SECTION 2.3 REGISTRATION OF SECURITIES. Domestic securities held by the Custodian (other than bearer securities) shall be registered in the name of the Portfolio or in the name of any nominee of the Trust on behalf of the Portfolio or of any nominee of the Custodian which nominee shall be assigned exclusively to the Portfolio, unless the Trust has authorized in writing the appointment of a nominee to be used in common with other registered investment companies having the same investment adviser as the Portfolio, or in the name or nominee name of any agent appointed pursuant to Section 2.8 or in the name or nominee name of any sub-custodian appointed pursuant to Section 1. All securities accepted by the Custodian on behalf of the Portfolio under the terms of this Agreement shall be in "street name" or other good delivery form. If, however, the Trust directs the Custodian to maintain securities in "street name", the Custodian shall utilize its best efforts only to timely collect income due the Trust on such securities and to notify the Trust on a best efforts basis only of relevant corporate actions including, without limitation, pendency of calls, maturities, tender or exchange offers. SECTION 2.4 BANK ACCOUNTS. The Custodian shall open and maintain a separate bank account or accounts in the United States in the name of each Portfolio of the Trust, subject only to draft or order by the Custodian acting pursuant to the terms of this Agreement, and shall hold in such account or accounts, subject to the provisions hereof, all cash received by it from or for the account of the Portfolio, other than cash maintained by the Portfolio in a bank account established and used in accordance with Rule 17f-3 under the Investment Company Act of 1940, as amended (the "1940 Act"). Trusts held by the Custodian for a Portfolio may be deposited by it to its credit as Custodian in the Banking Department of the Custodian or in such other banks or trust companies as it may in its discretion deem necessary or desirable; provided, however, that every such bank or trust company shall be qualified to act as a custodian under the 1940 Act and that each such bank or trust company and the funds to be deposited with each such bank or trust company shall on behalf of each applicable Portfolio be approved by vote of a majority of the Board of Trustees. Such funds shall be deposited by the Custodian in its capacity as Custodian and shall be withdrawable by the Custodian only in that capacity. SECTION 2.5 AVAILABILITY OF FEDERAL FUNDS. Upon mutual agreement between the Trust, on behalf of each applicable Portfolio, and the Custodian, the Custodian shall, upon the receipt of Proper Instructions from the Trust, make federal funds available to such Portfolio as of specified times agreed upon from time to time by the Trust and the Custodian in the amount of checks received in payment for Shares of such Portfolio which are deposited into the Portfolio's account. 5 SECTION 2.6 COLLECTION OF INCOME. Subject to the provisions of Section 2.3, the Custodian shall collect on a timely basis all income and other payments with respect to registered domestic securities held hereunder to which each Portfolio shall be entitled either by law or pursuant to custom in the securities business, and shall collect on a timely basis all income and other payments with respect to bearer domestic securities if, on the date of payment by the issuer, such securities are held by the Custodian or its agent thereof and shall credit such income, as collected, to such Portfolio's custodian account. Without limiting the generality of the foregoing, the Custodian shall detach and present for payment all coupons and other income items requiring presentation as and when they become due and shall collect interest when due on securities held hereunder. Income due each Portfolio on securities loaned pursuant to the provisions of Section 2.2 (10) shall be the responsibility of the Trust. The Custodian will have no duty or responsibility in connection therewith, other than to provide the Trust with such information or data as may be necessary to assist the Trust in arranging for the timely delivery to the Custodian of the income to which the Portfolio is properly entitled. SECTION 2.7 PAYMENT OF TRUST MONIES. Upon receipt of Proper Instructions from the Trust on behalf of the applicable Portfolio, which may be continuing instructions when deemed appropriate by the parties, the Custodian shall pay out monies of a Portfolio in the following cases only: 1) Upon the purchase of domestic securities, options, futures contracts or options on futures contracts for the account of the Portfolio but only (a) against the delivery of such securities or evidence of title to such options, futures contracts or options on futures contracts to the Custodian (or any bank, banking firm or trust company doing business in the United States or abroad which is qualified under the 1940 Act to act as a custodian and has been designated by the Custodian as its agent for this purpose) registered in the name of the Portfolio or in the name of a nominee of the Custodian referred to in Section 2.3 hereof or in proper form for transfer; (b) in the case of a purchase effected through a U.S. Securities System, in accordance with the conditions set forth in Section 2.9 hereof; (c) in the case of a purchase involving the Direct Paper System, in accordance with the conditions set forth in Section 2.10; (d) in the case of repurchase agreements entered into between the Trust on behalf of the Portfolio and the Custodian, or another bank, or a broker-dealer which is a member of NASD, (i) against delivery of the securities either in certificate form or through an entry crediting the Custodian's account at the Federal Reserve Bank with such securities or (ii) against delivery of the receipt evidencing purchase by the Portfolio of securities owned by the Custodian along with written evidence of the agreement by the Custodian to repurchase such securities from the Portfolio or (e) for transfer to a time deposit account of the Trust in any bank, whether domestic or foreign; such transfer may be effected prior to receipt of a confirmation from a broker and/or the applicable bank pursuant to Proper Instructions from the Trust as defined herein; 2) In connection with conversion, exchange or surrender of securities owned by the Portfolio as set forth in Section 2.2 hereof; 3) For the redemption or repurchase of Shares issued as set forth in Section 5 hereof; 6 4) For the payment of any expense or liability incurred by the Portfolio, including but not limited to the following payments for the account of the Portfolio: interest, taxes, management, accounting, transfer agent and legal fees, and operating expenses of the Trust whether or not such expenses are to be in whole or part capitalized or treated as deferred expenses; 5) For the payment of any dividends on Shares declared pursuant to the governing documents of the Trust; 6) For payment of the amount of dividends received in respect of securities sold short; 7) For any other proper trust purpose, but only upon receipt of written Proper Instructions specifying the amount of such payment, setting forth the purpose for which such payment is to be made, declaring such purpose to be a proper trust purpose, and naming the person or persons to whom such payment is to be made. SECTION 2.8 APPOINTMENT OF AGENTS. The Custodian may at any time or times in its discretion appoint (and may at any time remove) any other bank or trust company which is itself qualified under the 1940 Act to act as a custodian, as its agent to carry out such of the provisions of this Section 2 as the Custodian may from time to time direct; provided, however, that the appointment of any agent shall not relieve the Custodian of its responsibilities or liabilities hereunder. SECTION 2.9 DEPOSIT OF TRUST ASSETS IN U.S. SECURITIES SYSTEMS. The Custodian may deposit and/or maintain securities owned by a Portfolio in a clearing agency registered with the United States Securities and Exchange Commission (the "SEC") under Section 17A of the Exchange Act, which acts as a securities depository, or in the book-entry system authorized by the U.S. Department of the Treasury and certain federal agencies, collectively referred to herein as "U.S. SECURITIES SYSTEM" in accordance with applicable Federal Reserve Board and SEC rules and regulations, if any, and subject to the following provisions: 1) The Custodian may keep securities of the Portfolio in a U.S. Securities System provided that such securities are represented in an account of the Custodian in the U.S. Securities System (the "U.S. SECURITIES SYSTEM ACCOUNT") which account shall not include any assets of the Custodian other than assets held as a fiduciary, custodian or otherwise for customers; 2) The records of the Custodian with respect to securities of the Portfolio which are maintained in a U.S. Securities System shall identify by book-entry those securities belonging to the Portfolio; 3) The Custodian shall pay for securities purchased for the account of the Portfolio upon (i) receipt of advice from the U.S. Securities System that such securities have been transferred to the U.S. Securities System Account, and (ii) the making of an entry on the records of the Custodian to reflect such payment and transfer for the account of the Portfolio. The Custodian shall transfer securities sold for the account of the Portfolio upon (i) receipt of advice from the U.S. Securities System that payment for such securities has been transferred to the U.S. Securities System 7 Account, and (ii) the making of an entry on the records of the Custodian to reflect such transfer and payment for the account of the Portfolio. Copies of all advices from the U.S. Securities System of transfers of securities for the account of the Portfolio shall identify the Portfolio, be maintained for the Portfolio by the Custodian and be provided to the Trust at its request. Upon request, the Custodian shall furnish the Trust on behalf of the Portfolio confirmation of each transfer to or from the account of the Portfolio in the form of a written advice or notice and shall furnish to the Trust on behalf of the Portfolio copies of daily transaction sheets reflecting each day's transactions in the U.S. Securities System for the account of the Portfolio; 4) The Custodian shall provide the Trust for the Portfolio with any report obtained by the Custodian on the U.S. Securities System's accounting system, internal accounting control and procedures for safeguarding securities deposited in the U.S. Securities System; 5) The Custodian shall have received from the Trust on behalf of the Portfolio the initial or annual certificate, as the case may be, required by Section 15 hereof; 6) Anything to the contrary in this Agreement notwithstanding, the Custodian shall be liable to the Trust for the benefit of the Portfolio for any loss or damage to the Portfolio resulting from use of the U.S. Securities System by reason of any negligence, misfeasance or misconduct of the Custodian or any of its agents or of any of its or their employees or from failure of the Custodian or any such agent to enforce effectively such rights as it may have against the U.S. Securities System; at the election of the Trust, it shall be entitled to be subrogated to the rights of the Custodian with respect to any claim against the U.S. Securities System or any other person which the Custodian may have as a consequence of any such loss or damage if and to the extent that the Portfolio has not been made whole for any such loss or damage; the Custodian agrees to provide reasonable cooperation in connection with such subrogation. SECTION 2.10 TRUST ASSETS HELD IN THE CUSTODIAN'S DIRECT PAPER SYSTEM. The Custodian may deposit and/or maintain securities owned by a Portfolio in the Direct Paper System of the Custodian subject to the following provisions: 1) No transaction relating to securities in the Direct Paper System will be effected in the absence of Proper Instructions from the Trust on behalf of the Portfolio; 2) The Custodian may keep securities of the Portfolio in the Direct Paper System only if such securities are represented in the Direct Paper System Account, which account shall not include any assets of the Custodian other than assets held as a fiduciary, custodian or otherwise for customers; 3) The records of the Custodian with respect to securities of the Portfolio which are maintained in the Direct Paper System shall identify by book-entry those securities belonging to the Portfolio; 8 4) The Custodian shall pay for securities purchased for the account of the Portfolio upon the making of an entry on the records of the Custodian to reflect such payment and transfer of securities to the account of the Portfolio. The Custodian shall transfer securities sold for the account of the Portfolio upon the making of an entry on the records of the Custodian to reflect such transfer and receipt of payment for the account of the Portfolio; 5) The Custodian shall furnish the Trust on behalf of the Portfolio confirmation of each transfer to or from the account of the Portfolio, in the form of a written advice or notice, of Direct Paper on the next business day following such transfer and shall furnish to the Trust on behalf of the Portfolio copies of daily transaction sheets reflecting each day's transaction in the Direct Paper System for the account of the Portfolio; 6) The Custodian shall provide the Trust on behalf of the Portfolio with any report on its system of internal accounting control as the Trust may reasonably request from time to time. SECTION 2.11 SEGREGATED ACCOUNT. The Custodian shall upon receipt of Proper Instructions from the Trust on behalf of each applicable Portfolio establish and maintain a segregated account or accounts for and on behalf of each such Portfolio, into which account or accounts may be transferred cash and/or securities, including securities maintained in an account by the Custodian pursuant to Section 2.9 hereof, (i) in accordance with the provisions of any agreement among the Trust on behalf of the Portfolio, the Custodian and a broker-dealer registered under the Exchange Act and a member of the NASD (or any futures commission merchant registered under the Commodity Exchange Act), relating to compliance with the rules of The Options Clearing Corporation and of any registered national securities exchange (or the Commodity Futures Trading Commission or any registered contract market), or of any similar organization or organizations, regarding escrow or other arrangements in connection with transactions by the Portfolio, (ii) for purposes of segregating cash or government securities in connection with options purchased, sold or written by the Portfolio or commodity futures contracts or options thereon purchased or sold by the Portfolio, (iii) for the purposes of compliance by the Portfolio with the procedures required by Investment Company Act Release No. 10666, or any subsequent release or releases of the SEC relating to the maintenance of segregated accounts by registered investment companies and (iv) for other proper trust purposes, but only, in the case of clause (iv), upon receipt of written Proper Instructions from the Trust on behalf of the applicable Portfolio setting forth the purpose or purposes of such segregated account and declaring such purpose(s) to be a proper trust purpose. SECTION 2.12 OWNERSHIP CERTIFICATES FOR TAX PURPOSES. The Custodian shall execute ownership and other certificates and affidavits for all federal and state tax purposes in connection with receipt of income or other payments with respect to domestic securities of each Portfolio held by it and in connection with transfers of securities. SECTION 2.13 PROXIES. The Custodian shall, with respect to the domestic securities held hereunder, cause to be promptly executed by the registered holder of such securities, if the securities are registered otherwise than in the name of the Portfolio or a nominee of the Portfolio, all proxies, without indication of the manner in which such proxies are to be voted, and shall 9 promptly deliver to the Portfolio such proxies, all proxy soliciting materials and all notices relating to such securities. SECTION 2.14 COMMUNICATIONS RELATING TO PORTFOLIO SECURITIES. Subject to the provisions of Section 2.3, the Custodian shall transmit promptly to the Trust for each Portfolio all written information (including, without limitation, pendency of calls and maturities of domestic securities and expirations of rights in connection therewith and notices of exercise of call and put options written by the Trust on behalf of the Portfolio and the maturity of futures contracts purchased or sold by the Portfolio) received by the Custodian from issuers of the securities being held for the Portfolio. With respect to tender or exchange offers, the Custodian shall transmit promptly to the Portfolio all written information received by the Custodian from issuers of the securities whose tender or exchange is sought and from the party (or his agents) making the tender or exchange offer. If the Portfolio desires to take action with respect to any tender offer, exchange offer or any other similar transaction, the Portfolio shall notify the Custodian at least three business days prior to the date on which the Custodian is to take such action. SECTION 3. THE CUSTODIAN AS FOREIGN CUSTODY MANAGER OF THE PORTFOLIOS SECTION 3.1 DEFINITIONS. The following capitalized terms shall have the indicated meanings: "COUNTRY RISK" means all factors reasonably related to the systemic risk of holding Foreign Assets in a particular country including, but not limited to, such country's political environment; economic and financial infrastructure (including any Mandatory Securities Depositories operating in the country); prevailing or developing custody and settlement practices; and laws and regulations applicable to the safekeeping and recovery of Foreign Assets held in custody in that country. "ELIGIBLE FOREIGN CUSTODIAN" has the meaning set forth in section (a)(1) of Rule 17f-5, including a majority-owned or indirect subsidiary of a U.S. Bank (as defined in Rule 17f-5), a bank holding company meeting the requirements of an Eligible Foreign Custodian (as set forth in Rule 17f-5 or by other appropriate action of the SEC, or a foreign branch of a Bank (as defined in Section 2(a)(5) of the 1940 Act) meeting the requirements of a custodian under Section 17(f) of the 1940 Act, except that the term does not include Mandatory Securities Depositories. "FOREIGN ASSETS" means any of the Portfolios' investments (including foreign currencies) for which the primary market is outside the United States and such cash and cash equivalents as are reasonably necessary to effect the Portfolios' transactions in such investments. "FOREIGN CUSTODY MANAGER" has the meaning set forth in section (a)(2) of Rule 17f-5. "MANDATORY SECURITIES DEPOSITORY" means a foreign securities depository or clearing agency that, either as a legal or practical matter, must be used if the Trust, on the Portfolios' behalf, determines to place Foreign Assets in a country outside the United States (i) because required by law or regulation; (ii) because securities cannot be withdrawn from such foreign securities depository or clearing agency; or (iii) because maintaining or effecting trades in securities outside 10 the foreign securities depository or clearing agency is not consistent with prevailing or developing custodial or market practices. SECTION 3.2 DELEGATION TO THE CUSTODIAN AS FOREIGN CUSTODY MANAGER. The Trust, by resolution adopted by the Board of Trustees, hereby delegates to the Custodian with respect to the Portfolios, subject to Section (b) of Rule 17f-5, the responsibilities as Foreign Custody Manager set forth in this Section 3 with respect to Foreign Assets of the Portfolios held outside the United States, and the Custodian hereby accepts such delegation, as the Portfolios' Foreign Custody Manager. SECTION 3.3 COUNTRIES COVERED. The Foreign Custody Manager shall be responsible for performing the delegated responsibilities defined below only with respect to the countries and custody arrangements for each such country listed on Schedule A of this Contract, which list of countries may be amended from time to time by the Trust with the agreement of the Custodian. The Foreign Custody Manager shall list on Schedule A the Eligible Foreign Custodians selected by the Foreign Custody Manager to maintain the assets of the Portfolios, which list of Eligible Foreign Custodians may be amended from time to time in the sole discretion of the Foreign Custody Manager. Mandatory Securities Depositories are listed on Schedule B to this Agreement, which may be amended from time to time by the Foreign Custody Manager. The Foreign Custody Manager will provide amended versions of Schedules A and B in accordance with Section 3.7 hereof. Upon the receipt by the Foreign Custody Manager of Proper Instructions to open an account or to place or maintain Foreign Assets in a country listed on Schedule A, and the fulfillment by the Trust on behalf of the Portfolios of the applicable account opening requirements for the country, the Foreign Custody Manager shall be deemed to have been delegated by the Board of Trustees on behalf of the Portfolios responsibility as Foreign Custody Manager with respect to that country and to have accepted such delegation. Following the receipt of Proper Instructions directing the Foreign Custody Manager to close the account of a Portfolio with the Eligible Foreign Custodian selected by the Foreign Custody Manager in a designated country, the delegation by the Board of Trustees on behalf of the Portfolios to the Custodian as Foreign Custody Manager for that country shall be deemed to have been withdrawn and the Custodian shall immediately cease to be the Foreign Custody Manager of the Portfolios with respect to that country. The Foreign Custody Manager may withdraw its acceptance of delegated responsibilities with respect to a designated country upon written notice to the Trust. Thirty days (or such longer period as to which the parties agree in writing) after receipt of any such notice by the Trust, the Custodian shall have no further responsibility as Foreign Custody Manager to the Trust with respect to the country as to which the Custodian's acceptance of delegation is withdrawn. SECTION 3.4 SCOPE OF DELEGATED RESPONSIBILITIES. 3.4.1 Selection of Eligible Foreign Custodians. Subject to the provisions of this Section 3, the Portfolios' Foreign Custody Manager may place and maintain the Foreign Assets in the care of the Eligible Foreign Custodian selected by the Foreign Custody Manager in each country listed on Schedule A, as amended from time to time. 11 In performing its delegated responsibilities as Foreign Custody Manager to place or maintain Foreign Assets with an Eligible Foreign Custodian, the Foreign Custody Manager shall determine that the Foreign Assets will be subject to reasonable care, based on the standards applicable to custodians in the country in which the Foreign Assets will be held by that Eligible Foreign Custodian, after considering all factors relevant to the safekeeping of such assets, including, without limitation, the factors specified in Rule 17f-5(c)(1). 3.4.2 Contracts With Eligible Foreign Custodians. The Foreign Custody Manager shall determine that the contract (or the rules or established practices or procedures in the case of an Eligible Foreign Custodian that is a foreign securities depository or clearing agency) governing the foreign custody arrangements with each Eligible Foreign Custodian selected by the Foreign Custody Manager will satisfy the requirements of Rule 17f-5(c)(2). 3.4.3 Monitoring. In each case in which the Foreign Custody Manager maintains Foreign Assets with an Eligible Foreign Custodian selected by the Foreign Custody Manager, the Foreign Custody Manager shall establish a system to monitor (i) the appropriateness of maintaining the Foreign Assets with such Eligible Foreign Custodian and (ii) the contract governing the custody arrangements established by the Foreign Custody Manager with the Eligible Foreign Custodian (or the rules or established practices and procedures in the case of an Eligible Foreign Custodian selected by the Foreign Custody Manager which is a foreign securities depository or clearing agency that is not a Mandatory Securities Depository). In the event the Foreign Custody Manager determines that the custody arrangements with an Eligible Foreign Custodian it has selected are no longer appropriate, the Foreign Custody Manager shall notify the Board of Trustees in accordance with Section 3.7 hereunder. SECTION 3.5 GUIDELINES FOR THE EXERCISE OF DELEGATED AUTHORITY. For purposes of this Section 3, the Board of Trustees shall be deemed to have considered and determined to accept such Country Risk as is incurred by placing and maintaining the Foreign Assets in each country for which the Custodian is serving as Foreign Custody Manager of the Portfolios. The Trust, on behalf of the Portfolios, and the Custodian each expressly acknowledge that the Foreign Custody Manager shall not be delegated any responsibilities under this Section 3 with respect to Mandatory Securities Depositories. SECTION 3.6 STANDARD OF CARE AS FOREIGN CUSTODY MANAGER OF THE PORTFOLIOS. In performing the responsibilities delegated to it, the Foreign Custody Manager agrees to exercise reasonable care, prudence and diligence such as a person having responsibility for the safekeeping of assets of management investment companies registered under the 1940 Act would exercise. SECTION 3.7 REPORTING REQUIREMENTS. The Foreign Custody Manager shall report the withdrawal of the Foreign Assets from an Eligible Foreign Custodian and the placement of such Foreign Assets with another Eligible Foreign Custodian by providing to the Board of Trustees amended Schedules A or B at the end of the calendar quarter in which an amendment to either Schedule has occurred. The Foreign Custody Manager shall make written reports notifying the Board of Trustees of any other material change in the foreign custody arrangements of the Portfolios described in this Article 3 after the occurrence of the material change. SECTION 3.8 REPRESENTATIONS WITH RESPECT TO RULE 17f-5. The Foreign Custody Manager represents to the Trust that it is a U.S. Bank as defined in section (a)(7) of Rule 17f-5. 12 The Trust represents to the Custodian that the Board of Trustees has determined that it is reasonable for the Board of Trustees to rely on the Custodian to perform the responsibilities delegated pursuant to this Agreement to the Custodian as the Foreign Custody Manager of the Portfolios. SECTION 3.9 EFFECTIVE DATE AND TERMINATION OF THE CUSTODIAN AS FOREIGN CUSTODY MANAGER. The Board of Trustees' delegation to the Custodian as Foreign Custody Manager of the Portfolios shall be effective as of the date of execution of this Agreement and shall remain in effect until terminated at any time, without penalty, by written notice from the terminating party to the non-terminating party. Termination will become effective thirty (30) days after receipt by the non-terminating party of such notice. The provisions of Section 3.3 hereof shall govern the delegation to and termination of the Custodian as Foreign Custody Manager of the Portfolios with respect to designated countries. SECTION 4. DUTIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY OF THE PORTFOLIOS HELD OUTSIDE OF THE UNITED STATES SECTION 4.1 DEFINITIONS. Capitalized terms in this Section 4 shall have the following meanings: "FOREIGN SECURITIES SYSTEM" means either a clearing agency or a securities depository listed on Schedule A hereto or a Mandatory Securities Depository listed on Schedule B hereto. "FOREIGN SUB-CUSTODIAN" means a foreign banking institution serving as an Eligible Foreign Custodian. SECTION 4.2 HOLDING SECURITIES. The Custodian shall identify on its books as belonging to the Portfolios the foreign securities held by each Foreign Sub-Custodian or Foreign Securities System. The Custodian may hold foreign securities for all of its customers, including the Portfolios, with any Foreign Sub-Custodian in an account that is identified as belonging to the Custodian for the benefit of its customers, provided however, that (i) the records of the Custodian with respect to foreign securities of the Portfolios which are maintained in such account shall identify those securities as belonging to the Portfolios and (ii) the Custodian shall require that securities so held by the Foreign Sub-Custodian be held separately from any assets of such Foreign Sub-Custodian or of other customers of such Foreign Sub-Custodian. SECTION 4.3 FOREIGN SECURITIES SYSTEMS. Foreign securities shall be maintained in a Foreign Securities System in a designated country only through arrangements implemented by the Foreign Sub-Custodian in such country pursuant to the terms of this Agreement. SECTION 4.4 TRANSACTIONS IN FOREIGN CUSTODY ACCOUNT. 4.4.1 Delivery of Foreign Securities. The Custodian or a Foreign Sub-Custodian shall release and deliver foreign securities of the Portfolios held by such Foreign Sub-Custodian, or in a Foreign Securities System account, only upon receipt of Proper Instructions, which may be continuing instructions when deemed appropriate by the parties, and only in the following cases: 13 (i) upon the sale of such foreign securities for the Portfolios in accordance with market practice generally accepted by institutional investors in the country where such foreign securities are held or traded, including, without limitation: (A) delivery against expectation of receiving later payment; or (B) in the case of a sale effected through a Foreign Securities System in accordance with the rules governing the operation of the Foreign Securities System; (ii) in connection with any repurchase agreement related to foreign securities; (iii) to the depository agent in connection with tender or other similar offers for foreign securities of the Portfolios; (iv) to the issuer thereof or its agent when such foreign securities are called, redeemed, retired or otherwise become payable; (v) to the issuer thereof, or its agent, for transfer into the name of the Custodian (or the name of the respective Foreign Sub-Custodian or of any nominee of the Custodian or such Foreign Sub-Custodian) or for exchange for a different number of bonds, certificates or other evidence representing the same aggregate face amount or number of units; (vi) to brokers, clearing banks or other clearing agents for examination or trade execution in accordance with market custom; provided that in any such case the Foreign Sub-Custodian shall have no responsibility or liability for any loss arising from the delivery of such securities prior to receiving payment for such securities except as may arise from the Foreign Sub-Custodian's own negligence or willful misconduct; (vii) for exchange or conversion pursuant to any plan of merger, consolidation, recapitalization, reorganization or readjustment of the securities of the issuer of such securities, or pursuant to provisions for conversion contained in such securities, or pursuant to any deposit agreement; (viii) in the case of warrants, rights or similar foreign securities, the surrender thereof in the exercise of such warrants, rights or similar securities or the surrender of interim receipts or temporary securities for definitive securities; (ix) or delivery as security in connection with any borrowing by the Portfolios requiring a pledge of assets by the Portfolios; (x) in connection with trading in options and futures contracts, including delivery as original margin and variation margin; (xi) in connection with the lending of foreign securities; and (xii) for any other proper trust purpose, but only upon receipt of written Proper Instructions specifying the foreign securities to be delivered, setting forth the purpose for which such delivery is to be made, declaring such purpose to be a proper trust purpose, and naming the person or persons to whom delivery of such securities shall be made. 14 4.4.2 Payment of Portfolio Monies. Upon receipt of Proper Instructions, which may be continuing instructions when deemed appropriate by the parties, the Custodian shall pay out, or direct the respective Foreign Sub-Custodian or the respective Foreign Securities System to pay out, monies of Portfolio in the following cases only: (i) upon the purchase of foreign securities for the Portfolio, unless otherwise directed by Proper Instructions, by (A) delivering money to the seller thereof or to a dealer therefor (or an agent for such seller or dealer) against expectation of receiving later delivery of such foreign securities; or (B) in the case of a purchase effected through a Foreign Securities System, in accordance with the rules governing the operation of such Foreign Securities System; (ii) in connection with the conversion, exchange or surrender of foreign securities of the Portfolio; (iii) for the payment of any expense or liability of the Portfolio, including but not limited to the following payments: interest, taxes, investment advisory fees, transfer agency fees, fees under this Agreement, legal fees, accounting fees, and other operating expenses; (iv) for the purchase or sale of foreign exchange or foreign exchange contracts for the Portfolio, including transactions executed with or through the Custodian or its Foreign Sub-Custodians; (v) in connection with trading in options and futures contracts, including delivery as original margin and variation margin; (vii) in connection with the borrowing or lending of foreign securities; and (viii) for any other proper trust purpose, but only upon receipt of written Proper Instructions specifying the amount of such payment, setting forth the purpose for which such payment is to be made, declaring such purpose to be a proper trust purpose, and naming the person or persons to whom such payment is to be made. 4.4.3 Market Conditions; Market Information. Notwithstanding any provision of this Agreement to the contrary, settlement and payment for Foreign Assets received for the account of the Portfolios and delivery of Foreign Assets maintained for the account of the Portfolios may be effected in accordance with the customary established securities trading or processing practices and procedures generally accepted by institutional investors in the country or market in which the transaction occurs, including, without limitation, delivering Foreign Assets to the purchaser thereof or to a dealer therefor (or an agent for such purchaser or dealer) with the expectation of receiving later payment for such Foreign Assets from such purchaser or dealer. The Custodian will provide the Trust the information with respect to custody and settlement practices in countries in which the Custodian employs a Foreign Sub-Custodian, 15 including without limitation information relating to Foreign Securities Systems, described on Schedule E hereto at the time or times set forth on such Schedule. The Custodian may revise Schedule E from time to time, provided that no such revision shall result in the Trust being provided with substantively less information than had been previously provided hereunder. SECTION 4.5 REGISTRATION OF FOREIGN SECURITIES. The foreign securities maintained in the custody of a Foreign Custodian (other than bearer securities) shall be registered in the name of the applicable Portfolio or in the name of the Custodian or in the name of any Foreign Sub-Custodian or in the name of any nominee of the foregoing, and the Trust on behalf of such Portfolio agrees to hold any such nominee harmless from any liability as a holder of record of such foreign securities. The Custodian or a Foreign Sub-Custodian shall not be obligated to accept securities on behalf of a Portfolio under the terms of this Agreement unless the form of such securities and the manner in which they are delivered are in accordance with reasonable market practice. SECTION 4.6 BANK ACCOUNTS. The Custodian shall identify on its books as belonging to a Portfolio cash (including cash denominated in foreign currencies) deposited with the Custodian. Where the Custodian is unable to maintain, or market practice does not facilitate the maintenance of, cash on the books of the Custodian, a bank account or bank accounts opened and maintained outside the United States on behalf of a Portfolio with a Foreign Sub-Custodian shall be subject only to draft or order by the Custodian or such Foreign Sub-Custodian, acting pursuant to the terms of this Agreement to hold cash received by or from or for the account of the Portfolio. SECTION 4.7 COLLECTION OF INCOME. The Custodian shall use reasonable commercial efforts to collect all income and other payments with respect to the Foreign Assets held hereunder to which the Portfolios shall be entitled and shall credit such income, as collected, to the applicable Portfolio. In the event that extraordinary measures are required to collect such income, the Trust and the Custodian shall consult as to such measures and as to the compensation and expenses of the Custodian relating to such measures. SECTION 4.8 SHAREHOLDER RIGHTS. With respect to the foreign securities held pursuant to this Agreement, the Custodian will use its reasonable commercial efforts to facilitate the exercise of voting and other shareholder proxy rights, subject always to the laws, regulations and practical constraints that may exist in the country where such securities are issued. The Trust acknowledges that local conditions, including lack of regulation, onerous procedural obligations, lack of notice and other factors may have the effect of severely limiting the ability of the Trust to exercise shareholder rights. SECTION 4.9 COMMUNICATIONS RELATING TO FOREIGN SECURITIES. The Custodian shall transmit promptly to the Trust written information (including, without limitation, pendency of calls and maturities of foreign securities and expirations of rights in connection therewith) received by the Custodian via the Foreign Sub-Custodians from issuers of the foreign securities being held for the account of the Portfolios. With respect to tender or exchange offers, the Custodian shall transmit promptly to the Trust written information so received by the Custodian from issuers of the foreign securities whose tender or exchange is sought or from the party (or its agents) making the tender or exchange offer. The Custodian shall not be liable for any untimely exercise of any tender, exchange or other right or power in connection with foreign securities or other property of the Portfolios at any time held by it unless (i) the Custodian or the respective Foreign Sub-Custodian is in actual possession of such foreign securities or property and (ii) the 16 Custodian receives Proper Instructions with regard to the exercise of any such right or power, and both (i) and (ii) occur at least three (3) business days prior to the date on which the Custodian is to take such action to exercise such right or power. SECTION 4.10 LIABILITY OF FOREIGN SUB-CUSTODIANS AND FOREIGN SECURITIES SYSTEMS. Each agreement pursuant to which the Custodian employs as a Foreign Sub-Custodian shall, to the extent possible, require the Foreign Sub-Custodian to exercise reasonable care in the performance of its duties and, to the extent possible, to indemnify, and hold harmless, the Custodian from and against any loss, damage, cost, expense, liability or claim arising out of or in connection with the institution's performance of such obligations. At the election of the Trust, the Portfolios shall be entitled to be subrogated to the rights of the Custodian with respect to any claims against a Foreign Sub-Custodian as a consequence of any such loss, damage, cost, expense, liability or claim if and to the extent that the Portfolios have not been made whole for any such loss, damage, cost, expense, liability or claim. SECTION 4.11 TAX LAW. The Custodian shall have no responsibility or liability for any obligations now or hereafter imposed on the Trust, the Portfolios or the Custodian as custodian of the Portfolios by the tax law of the United States or of any state or political subdivision thereof. It shall be the responsibility of the Trust to notify the Custodian of the obligations imposed on the Trust with respect to the Portfolios or the Custodian as custodian of the Portfolios by the tax law of countries other than those mentioned in the above sentence, including responsibility for withholding and other taxes, assessments or other governmental charges, certifications and governmental reporting. The sole responsibility of the Custodian with regard to such tax law shall be to use reasonable efforts to assist the Trust with respect to any claim for exemption or refund under the tax law of countries for which the Trust has provided such information. SECTION 4.12 CONFLICT. If the Custodian is delegated the responsibilities of Foreign Custody Manager pursuant to the terms of Section 3 hereof, in the event of any conflict between the provisions of Sections 3 and 4 hereof, the provisions of Section 3 shall prevail. SECTION 4(A). CONTRACTUAL SETTLEMENT SECTION 4(A).1 SCHEME OF CONTRACTUAL SERVICES. (a) Subject to paragraphs (b) and (c) below and Sections 4.4.1, 4.4.2 and 4.4.3 hereof, the Custodian shall credit or debit the appropriate account of each Portfolio in connection with (i) the purchases of, (ii) income or dividends associated with, or (iii) proceeds of the sale, maturity, redemption, or other disposition of, securities and other assets held for the time being on behalf of a Portfolio on a contractual settlement basis. (b) The Custodian may make available provisional credit of settlement, maturity, redemption proceeds on a contractual settlement basis in the markets set forth on Schedule C hereto when the Custodian has a reasonable expectation that the transaction will settle in due course. The Custodian reserves the right to reverse any such crediting at any time before actual receipt of the item associated with the credit when the Custodian determines that such transaction will not settle in 17 accordance with its terms or that amounts due pursuant thereto will not be collectable, or the Custodian has not been provided with Proper Instructions with respect thereto. In such instances, the Custodian may charge the appropriate account of the applicable Portfolio for the expense of providing funds associated with such advance in an amount not to exceed a commercially reasonable rate. (c) With respect to the markets set forth on Schedule C hereto, the consideration payable in connection with a purchase transaction shall be debited from the appropriate account of the applicable Portfolio upon the contractual settlement date for the relevant purchase transaction. The Custodian shall promptly recredit such amount at the time that the Portfolio notifies the Custodian by Proper Instruction that such transaction has been canceled. SECTION 4(A).2 MARKETS ELIGIBLE FOR CONTRACTUAL SERVICES. The services described in Section 4(A).1 hereof (for the purposes of this Section 4(A), the "Services") shall be provided with respect to the applicable securities transactions in the countries set forth on Schedule C attached hereto. SECTION 4(A).3 OBLIGATIONS. All payments made under this Section 4(A) are made subject to actual collection; the Custodian shall not be liable to the Trust or the Portfolios for any amount that is not actually collected in accordance with the terms hereof. The provision of the Services is intended to facilitate settlement in ordinary course. The Custodian may terminate provision of Services under Section 4(A)1(b) immediately upon notice to Trust, particularly with respect to the occurrence of force majeure events affecting settlement, any disorder in markets, or other changed external business circumstances. SECTION 5. PAYMENTS FOR SALES OR REPURCHASES OR REDEMPTIONS OF SHARES The Custodian shall receive from the distributor for the Shares or from the Transfer Agent and deposit into the account of the appropriate Portfolio such payments as are received for Shares thereof issued or sold from time to time by the Trust. The Custodian will provide timely notification to the Trust on behalf of each such Portfolio and the Transfer Agent of any receipt by it of payments for Shares of such Portfolio. From such funds as may be available for the purpose but subject to the limitations of the Trust's Declaration of Trust and any applicable votes of the Board of Trustees pursuant thereto, the Custodian shall, upon receipt of instructions from the Transfer Agent, make funds available for payment to holders of Shares who have delivered to the Transfer Agent a request for redemption or repurchase of their Shares. In connection with the redemption or repurchase of Shares, the Custodian is authorized upon receipt of instructions from the Transfer Agent to wire funds to or through a commercial bank designated by the redeeming shareholders. In connection with the redemption or repurchase of Shares, the Custodian shall honor checks drawn on the Custodian by a holder of Shares, which checks have been furnished by the Trust to the holder of Shares, when presented to the Custodian in accordance with such procedures and controls as are mutually agreed upon from time to time between the Trust and the Custodian. 18 SECTION 6. PROPER INSTRUCTIONS Proper Instructions as used throughout this Agreement means a writing signed or initialed by one or more person or persons as the Board of Trustees shall have from time to time authorized. Each such writing shall set forth the specific transaction or type of transaction involved, including a specific statement of the purpose for which such action is requested. Oral instructions will be considered Proper Instructions if the Custodian reasonably believes them to have been given by a person authorized to give such instructions with respect to the transaction involved. The Trust shall cause all oral instructions to be confirmed in writing. Upon receipt of a certificate of the Secretary or an Assistant Secretary as to the authorization by the Board of Trustees accompanied by a detailed description of procedures approved by the Board of Trustees, Proper Instructions may include communications effected directly between electro-mechanical or electronic devices provided that the Board of Trustees and the Custodian are satisfied that such procedures afford adequate safeguards for the Portfolios' assets. For purposes of this Section, Proper Instructions shall include instructions received by the Custodian pursuant to any three-party agreement which requires a segregated asset account in accordance with Section 2.11. SECTION 7. ACTIONS PERMITTED WITHOUT EXPRESS AUTHORITY The Custodian may in its discretion, without express authority from the Trust on behalf of each applicable Portfolio: 1) make payments to itself or others for minor expenses of handling securities or other similar items relating to its duties under this Agreement, provided that all such payments shall be accounted for to the Trust on behalf of the Portfolio; 2) surrender securities in temporary form for securities in definitive form; 3) endorse for collection, in the name of the Portfolio, checks, drafts and other negotiable instruments; and 4) in general, attend to all non-discretionary details in connection with the sale, exchange, substitution, purchase, transfer and other dealings with the securities and property of the Portfolio except as otherwise directed by the Board of Trustees. SECTION 8. EVIDENCE OF AUTHORITY The Custodian shall be protected in acting upon any instructions, notice, request, consent, certificate or other instrument or paper reasonably believed by it to be genuine and to have been properly executed by or on behalf of the Trust. The Custodian may receive and accept a Certified Resolution as conclusive evidence (a) of the authority of any person to act in accordance with such resolution or (b) of any determination or of any action by the Board of Trustees pursuant to the Trust's Declaration of Trust as described in such resolution, and such resolution may be considered as in full force and effect until receipt by the Custodian of written notice to the contrary. 19 SECTION 9. DUTIES OF CUSTODIAN WITH RESPECT TO THE BOOKS OF ACCOUNT AND CALCULATION OF NET ASSET VALUE AND NET INCOME The Custodian shall cooperate with and supply necessary information to the entity or entities appointed by the Board of Trustees to keep the books of account of each Portfolio and/or compute the net asset value per Share of the outstanding Shares or, if directed in writing to do so by the Trust on behalf of the Portfolio, shall itself keep such books of account and/or compute such net asset value per Share. If so directed, the Custodian shall also calculate daily the net income of the Portfolio as described in the Prospectus related to such Portfolio and shall advise the Trust and the Transfer Agent daily of the total amounts of such net income and, if instructed in writing by an officer of the Trust to do so, shall advise the Transfer Agent periodically of the division of such net income among its various components. The calculations of the net asset value per Share and the daily income of each Portfolio shall be made at the time or times described from time to time in the Prospectus related to such Portfolio. SECTION 10. RECORDS The Custodian shall with respect to each Portfolio create and maintain all records relating to its activities and obligations under this Agreement in such manner as will meet the obligations of the Trust under the 1940 Act, with particular attention to Section 31 thereof and Rules 31a-1 and 31a-2 thereunder. All such records shall be the property of the Trust and shall at all times during the regular business hours of the Custodian be open for inspection by duly authorized officers, employees or agents of the Trust and employees and agents of the SEC. The Custodian shall, at the Trust's request, supply the Trust with a tabulation of securities owned by each Portfolio and held by the Custodian and shall, when requested to do so by the Trust and for such compensation as shall be agreed upon between the Trust and the Custodian, include certificate numbers in such tabulations. SECTION 11. OPINION OF TRUST'S INDEPENDENT ACCOUNTANT The Custodian shall take all reasonable action, as the Trust on behalf of each applicable Portfolio may from time to time request, to obtain from year to year favorable opinions from the Trust's independent accountants with respect to its activities hereunder in connection with the preparation of the Trust's Form N-1A, and Form N-SAR or other annual reports to the SEC and with respect to any other requirements thereof. SECTION 12. REPORTS TO TRUST BY INDEPENDENT PUBLIC ACCOUNTANTS The Custodian shall provide the Trust, on behalf of each of the Portfolios at such times as the Trust may reasonably require, with reports by independent public accountants on the accounting system, internal accounting control and procedures for safeguarding securities, futures contracts and options on futures contracts, including securities deposited and/or maintained in a U.S. Securities System or a Foreign Securities System (collectively referred to herein as the "SECURITIES SYSTEMS"), relating to the services provided by the Custodian under this Agreement; such reports, shall be of sufficient scope and in sufficient detail, as may reasonably be required by 20 the Trust to provide reasonable assurance that any material inadequacies would be disclosed by such examination, and, if there are no such inadequacies, the reports shall so state. SECTION 13. COMPENSATION OF CUSTODIAN The Custodian shall be entitled to reasonable compensation for its services and expenses as Custodian, as agreed upon from time to time between the Trust on behalf of each applicable Portfolio and the Custodian. SECTION 14. RESPONSIBILITY OF CUSTODIAN So long as and to the extent that it is in the exercise of reasonable care, the Custodian shall not be responsible for the title, validity or genuineness of any property or evidence of title thereto received by it or delivered by it pursuant to this Agreement and shall be held harmless in acting upon any notice, request, consent, certificate or other instrument reasonably believed by it to be genuine and to be signed by the proper party or parties, including any futures commission merchant acting pursuant to the terms of a three-party futures or options agreement. The Custodian shall be held to the exercise of reasonable care in carrying out the provisions of this Agreement, but shall be kept indemnified by and shall be without liability to the Trust for any action taken or omitted by it in good faith without negligence. It shall be entitled to rely on and may act upon advice of counsel (who may be counsel for the Trust) on all matters, and shall be without liability for any action reasonably taken or omitted pursuant to such advice. The Custodian shall be without liability to the Trust and the Portfolios for any loss, liability, claim or expense resulting from or caused by anything which is (A) part of Country Risk (as defined in Section 3 hereof), including without limitation nationalization, expropriation, currency restrictions, or acts of war, revolution, riots or terrorism, or (B) part of the "prevailing country risk" of the Portfolios, as such term is used in SEC Release Nos. IC-22658; IS-1080 (May 12, 1997) or as such term or other similar terms are now or in the future interpreted by the SEC or by the staff of the Division of Investment Management thereof. Except as may arise from the Custodian's own negligence or willful misconduct or the negligence or willful misconduct of a sub-custodian or agent, the Custodian shall be without liability to the Trust for any loss, liability, claim or expense resulting from or caused by; (i) events or circumstances beyond the reasonable control of the Custodian or any sub-custodian or Securities System or any agent or nominee of any of the foregoing, including, without limitation, the interruption, suspension or restriction of trading on or the closure of any securities market, power or other mechanical or technological failures or interruptions, computer viruses or communications disruptions, work stoppages, natural disasters, or other similar events or acts; (ii) errors by the Trust or the Investment Advisor in their instructions to the Custodian provided such instructions have been in accordance with this Agreement; (iii) the insolvency of or acts or omissions by a Securities System; (iv) any delay or failure of any broker, agent or intermediary, central bank or other commercially prevalent payment or clearing system to deliver to the Custodian's sub-custodian or agent securities purchased or in the remittance or payment made in connection with securities sold; (v) any delay or failure of any company, corporation, or other body in charge of registering or transferring securities in the name of the Custodian, the Trust, the Custodian's sub-custodians, nominees or agents or any consequential losses arising out of such 21 delay or failure to transfer such securities including non-receipt of bonus, dividends and rights and other accretions or benefits; (vi) delays or inability to perform its duties due to any disorder in market infrastructure with respect to any particular security or Securities System; and (vii) any provision of any present or future law or regulation or order of the United States of America, or any state thereof, or any other country, or political subdivision thereof or of any court of competent jurisdiction. The Custodian shall be liable for the acts or omissions of a Foreign Sub-Custodian (as defined in Section 4 hereof) to the same extent as set forth with respect to sub-custodians generally in this Agreement. If the Trust on behalf of a Portfolio requires the Custodian to take any action with respect to securities, which action involves the payment of money or which action may, in the opinion of the Custodian, result in the Custodian or its nominee assigned to the Trust or the Portfolio being liable for the payment of money or incurring liability of some other form, the Trust on behalf of the Portfolio, as a prerequisite to requiring the Custodian to take such action, shall provide indemnity to the Custodian in an amount and form satisfactory to it. If the Trust requires the Custodian, its affiliates, subsidiaries or agents, to advance cash or securities for any purpose (including but not limited to securities settlements, foreign exchange contracts and assumed settlement) or in the event that the Custodian or its nominee shall incur or be assessed any taxes, charges, expenses, assessments, claims or liabilities in connection with the performance of this Agreement, except such as may arise from its or its nominee's own negligent action, negligent failure to act or willful misconduct, any property at any time held for the account of the applicable Portfolio shall be security therefor and should the Trust fail to repay the Custodian promptly, the Custodian shall be entitled to utilize available cash and to dispose of such Portfolio's assets to the extent necessary to obtain reimbursement. In no event shall the Custodian be liable for indirect, special or consequential damages. SECTION 15. MITIGATION BY CUSTODIAN Upon the occurrence of any event connected with the Custodian under this Agreement which causes or may cause any loss, damage or expense to the Trust or any Portfolio, the Custodian shall, and shall exercise reasonable efforts to cause any Foreign Sub-Custodian to, use reasonable efforts under the circumstances to mitigate the effect of such event and to avoid continuing harm to the Trust and the Portfolios. SECTION 16. NOTIFICATION OF LITIGATION; RIGHT TO PROCEED In any case in which the Trust may be asked to indemnify or hold the Custodian harmless, the Trust shall be fully and promptly advised of all pertinent facts concerning the situation in question, and it is further understood that the Custodian will use all reasonable care to identify and notify the Trust promptly concerning any situation which presents or appears likely to present the probability of such claim for indemnification against the Trust; provided, however, that the failure to so advise, identify or notify the Trust shall not in any way limit the Trust's liability for 22 indemnification under this Agreement with respect to any such claim to the extent that the defense thereof is not materially prejudiced by such failure. If the Trust acknowledges in writing that the Custodian is entitled to indemnification, the Trust shall have the option to defend the Custodian against any claim which may be the subject of this indemnification, and in the event that the Trust so elects, it will so notify the Custodian, and thereupon the Trust shall take over complete defense of the claim. In the event the Trust elects to assume the control of the defense of the claim, the Custodian may participate in such proceeding and retain additional counsel but shall bear all fees and expenses of such retention of such counsel, unless (i) the Trust shall have specifically authorized the retention of such counsel, or (ii) if the Trust and the Custodian agree that the retention of such counsel is required as a result of a conflict of interest. In the event the Trust assumes control of any proceeding, the Trust shall keep the Custodian notified of the progress of such proceeding and, upon request, consult with the Custodian and counsel. The Trust will, upon request by the Custodian, either pay in the first instance or reimburse the Custodian for any expenses subject to indemnity hereunder. The Trust shall not settle or compromise any proceeding without the prior written consent of the Custodian unless (i) such settlement or compromise involves no admission of guilt, wrongdoing, or misconduct by the Custodian, (ii) such settlement or compromise does not impose any obligations or restrictions on the Custodian other than obligations to pay money that are subject to indemnity under this Agreement, and (iii) the Trust shall have paid, or made arrangements satisfactory to the Custodian for payment of amounts payable by the Custodian in connection with such settlement. The Custodian shall in no case confess any claim or make any compromise in any case in which the Trust will be asked to indemnify the Custodian except with the Trust's prior written consent. SECTION 17. EFFECTIVE PERIOD, TERMINATION AND AMENDMENT This Agreement shall become effective as of its execution, shall continue in full force and effect until terminated as hereinafter provided, may be amended at any time by mutual agreement of the parties hereto and may be terminated by either party by an instrument in writing delivered or mailed, postage prepaid to the other party, such termination to take effect not sooner than sixty (60) days after the date of such delivery or mailing; provided, however that the Custodian shall not with respect to a Portfolio act under Section 2.9 hereof in the absence of receipt of an initial certificate of the Secretary or an Assistant Secretary that the Board of Trustees has approved the initial use of a particular Securities System by such Portfolio, as required by Rule 17f-4 under the 1940 Act and that the Custodian shall not with respect to a Portfolio act under Section 2.10 hereof in the absence of receipt of an initial certificate of the Secretary or an Assistant Secretary that the Board of Trustees has approved the initial use of the Direct Paper System by such Portfolio; provided further, however, that the Trust shall not amend or terminate this Agreement in contravention of any applicable federal or state regulations, or any provision of the Trust's Declaration of Trust, and further provided, that the Trust on behalf of one or more of the Portfolios may at any time by action of its Board of Trustees (i) substitute another bank or trust company for the Custodian by giving notice as described above to the Custodian, or (ii) immediately terminate this Agreement in the event of the appointment of a conservator or receiver for the Custodian by the Comptroller of the Currency or upon the happening of a like event at the direction of an appropriate regulatory agency or court of competent jurisdiction. 23 Upon termination of the Agreement, the Trust on behalf of each applicable Portfolio shall pay to the Custodian such compensation as may be due as of the date of such termination and shall likewise reimburse the Custodian for its reasonable costs, expenses and disbursements. SECTION 18. SUCCESSOR CUSTODIAN If a successor custodian for the Trust, of one or more of the Portfolios shall be appointed by the Board of Trustees, the Custodian shall, upon termination, deliver to such successor custodian at the office of the Custodian, duly endorsed and in the form for transfer, all securities of each applicable Portfolio then held by it hereunder and shall transfer to an account of the successor custodian all of the securities of each such Portfolio held in a Securities System. If no such successor custodian shall be appointed, the Custodian shall, in like manner, upon receipt of a Certified Resolution, deliver at the office of the Custodian and transfer such securities, funds and other properties in accordance with such resolution. In the event that no written order designating a successor custodian or Certified Resolution shall have been delivered to the Custodian on or before the date when such termination shall become effective, then the Custodian shall have the right to deliver to a bank or trust company, which is a "bank" as defined in the 1940 Act doing business in Boston, Massachusetts, of its own selection, having an aggregate capital, surplus, and undivided profits, as shown by its last published report, of not less than $25,000,000, all securities, funds and other properties held by the Custodian on behalf of each applicable Portfolio and all instruments held by the Custodian relative thereto and all other property held by it under this Agreement on behalf of each applicable Portfolio and to transfer to an account of such successor custodian all of the securities of each such Portfolio held in any Securities System. Thereafter, such bank or trust company shall be the successor of the Custodian under this Agreement. In the event that securities, funds and other properties remain in the possession of the Custodian after the date of termination hereof owing to failure of the Trust to procure the Certified Resolution to appoint a successor custodian, the Custodian shall be entitled to fair compensation for its services during such period as the Custodian retains possession of such securities, funds and other properties and the provisions of this Agreement relating to the duties and obligations of the Custodian shall remain in full force and effect. SECTION 19. INTERPRETIVE AND ADDITIONAL PROVISIONS In connection with the operation of this Agreement, the Custodian and the Trust on behalf of each of the Portfolios, may from time to time agree on such provisions interpretive of or in addition to the provisions of this Agreement as may in their joint opinion be consistent with the general tenor of this Agreement. Any such interpretive or additional provisions shall be in a writing signed by both parties and shall be annexed hereto, provided that no such interpretive or additional provisions shall contravene any applicable federal or state regulations or any provision of the Trust's Declaration of Trust. No interpretive or additional provisions made as provided in the preceding sentence shall be deemed to be an amendment of this Agreement. 24 SECTION 20. ADDITIONAL PORTFOLIOS In the event that the Trust establishes one or more series of Shares with respect to which it desires to have the Custodian render services as custodian pursuant to the terms hereof, it shall so notify the Custodian in writing, and if the Custodian agrees in writing to provide such services, such series of Shares shall become a Portfolio hereunder and Schedule D hereto shall be revised to so reflect. SECTION 21. MASSACHUSETTS LAW TO APPLY This Agreement shall be construed and the provisions thereof interpreted under and in accordance with laws of The Commonwealth of Massachusetts. SECTION 22. RECOURSE AGAINST SHAREHOLDERS, OFFICERS AND TRUSTEES This Agreement is executed by the officers of the Trust in their capacity as such and not individually. Any responsibility or liability of the Trust (or a particular Portfolio) under any provision of this Contract shall be satisfied solely from the assets of the Trust or the particular Portfolio, tangible or intangible, realized or unrealized, and in no event shall the Custodian, a sub-custodian or agent have any recourse against the shareholders, officers or Trustees of the Trust under this Contract or against any one Portfolio for the obligations of any other Portfolio. The execution and delivery of this Agreement have been authorized by the Board of Trustees, and this Agreement has been executed and delivered by an authorized officer of the Trust acting as such; neither such authorization by the Trustees nor execution and delivery by such officer shall be deemed to have been made by any of them individually or to impose any liability on them personally, but shall only bind the assets and property of the Trust. SECTION 23. CONFIDENTIALITY. None of the parties hereto shall, unless compelled to do so by any court of competent jurisdiction either before or after the termination of this Agreement, disclose to any person not authorized by the relevant party to receive the same any information relating to such party and to the affairs of such party of which the party disclosing the same shall have become possessed during the period of this Agreement and each party shall use its best endeavors to prevent any such disclosure as aforesaid. SECTION 24. ASSIGNMENT. This Agreement may not be assigned by either party without the written consent of the other. 25 SECTION 25. SEVERABILITY. In the event any provision of this Agreement is held illegal, void or unenforceable, the balance shall remain in effect. SECTION 26. PRIOR AGREEMENTS This Agreement supersedes and terminates, as of the date hereof, all prior Agreements between the Trust on behalf of each of the Portfolios and the Custodian relating to the custody of the Trust's assets. SECTION 27. NOTICES. Any notice, instruction or other instrument required to be given hereunder may be delivered in person to the offices of the parties as set forth herein during normal business hours or delivered prepaid registered mail or by telex, cable or telecopy to the parties at the following addresses or such other addresses as may be notified by any party from time to time: To the Trust: AMERICAN AADVANTAGE FUNDS 4333 Amon Carter Boulevard, Maildrop 5645 Fort Worth, Texas 76155 Attention: William F. Quinn, President Telephone: 817-967-3509 Telecopy: 817-967-0768 To the Custodian: STATE STREET BANK AND TRUST COMPANY Allan Forbes Building 150 Newport Avenue North Quincy, Massachusetts 02171 Attention: Frank J. Sidoti, Jr. Telephone: 617-985-5262 Telecopy: 617-985-6130 Such notice, instruction or other instrument shall be deemed to have been served in the case of a registered letter at the expiration of five business days after posting, in the case of cable twenty-four hours after dispatch and, in the case of telex, immediately on dispatch and if delivered outside normal business hours it shall be deemed to have been received at the next time after delivery when normal business hours commence and in the case of cable, telex or telecopy on the business day after the receipt thereof. Evidence that the notice was properly addressed, stamped and put into the post shall be conclusive evidence of posting. SECTION 28. REPRODUCTION OF DOCUMENTS This Agreement and all schedules, exhibits, attachments and amendments hereto may be reproduced by any photographic, photostatic, microfilm, micro-card, miniature photographic or other similar process. The parties hereto all/each agree that any such reproduction shall be 26 admissible in evidence as the original itself in any judicial or administrative proceeding, whether or not the original is in existence and whether or not such reproduction was made by a party in the regular course of business, and that any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence. SECTION 29. SHAREHOLDER COMMUNICATIONS ELECTION SEC Rule 14b-2 requires banks which hold securities for the account of customers to respond to requests by issuers of securities for the names, addresses and holdings of beneficial owners of securities of that issuer held by the bank unless the beneficial owner has expressly objected to disclosure of this information. In order to comply with the rule, the Custodian needs the Trust to indicate whether it authorizes the Custodian to provide the Trust's name, address, and share position to requesting companies whose securities the Trust owns. If the Trust tells the Custodian "no", the Custodian will not provide this information to requesting companies. If the Trust tells the Custodian "yes" or does not check either "yes" or "no" below, the Custodian is required by the rule to treat the Trust as consenting to disclosure of this information for all securities owned by the Trust or any funds or accounts established by the Trust. For the Trust's protection, the Rule prohibits the requesting company from using the Trust's name and address for any purpose other than corporate communications. Please indicate below whether the Trust consents or objects by checking one of the alternatives below. YES [ ] The Custodian is authorized to release the Trust's name, address, and share positions. NO [ ] The Custodian is not authorized to release the Trust's name, address, and share positions. 27 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 December 1, 1997. AMERICAN AADVANTAGE FUNDS By: /s/ WILLIAM F. QUINN ------------------------------------ Its: President STATE STREET BANK AND TRUST COMPANY By: /s/ RONALD E. LOGUE ----------------------------------- Its: Executive Vice President 28 SCHEDULE C COUNTRIES/SETTLEMENT SYSTEMS WITH RESPECT TO WHICH CONTRACTUAL SETTLEMENT MAY BE PROVIDED Australia Austria Belgium Canada Denmark Euroclear Finland France Germany Hong Kong Italy Japan Netherlands New Zealand Norway Portugal Singapore Spain Sweden Switzerland United Kingdom 29 SCHEDULE D PORTFOLIOS
Name of Portfolio Effective Date ---------------------------------------------------------------------------------- BALANCED FUND JANUARY 1, 1998 GROWTH AND INCOME FUND JANUARY 1, 1998 INTERMEDIATE BOND FUND DECEMBER 1, 1997 INTERNATIONAL EQUITY FUND JANUARY 1, 1998 LIMITED-TERM INCOME FUND DECEMBER 1, 1997 MONEY MARKET FUND DECEMBER 1, 1997 MUNICIPAL MONEY MARKET FUND DECEMBER 1, 1997 S&P 500 INDEX FUND JANUARY 1, 1998 SHORT-TERM INCOME FUND TO BE DETERMINED U.S. GOVERNMENT MONEY MARKET FUND DECEMBER 1, 1997
30 STATE STREET SCHEDULE A GLOBAL CUSTODY NETWORK SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES Argentina Citibank, N.A. -- Australia Westpac Banking Corporation -- Austria Erste Bank der oesterreichischen -- Sparkasen AG Bahrain The British Bank of the Middle East -- (as delegate of the Hongkong and Shanghai Banking Corporation Limited) Bangladesh Standard Chartered Bank -- Belgium Generale Bank -- Bermuda The Bank of Bermuda Limited -- Bolivia Banco Boliviano Americano -- Botswana Barclays Bank of Botswana Limited -- Brazil Citibank, N.A. -- Bulgaria ING Bank N.V. -- Canada Canada Trustco Mortgage Company -- Chile Citibank, N.A. -- People's Republic The Hongkong and Shanghai -- of China Banking Corporation Limited, Shanghai and Shenzhen branches Colombia Cititrust Colombia S.A. -- Sociedad Fiduciaria
31 STATE STREET SCHEDULE A GLOBAL CUSTODY NETWORK SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES Croatia Privredana banka Zagreb d.d -- Cyprus Barclays Bank PLC -- Cyprus Offshore Banking Unit Czech Republic Ceskoslovenska Obchodni -- Banka A.S. Denmark Den Danske Bank -- Ecuador Citibank, N.A. -- Egypt National Bank of Egypt -- Estonia Hansabank -- Finland Merita Bank Ltd. -- France Banque Paribas -- Germany Dresdner Bank AG -- Ghana Barclays Bank of Ghana Limited -- Greece National Bank of Greece S.A Bank of Greece Hong Kong Standard Chartered Bank -- Hungary Citibank Budapest Rt. -- India Deutsche Bank AG; -- The Hongkong and Shanghai Banking Corporation Limited Indonesia Standard Chartered Bank --
32 STATE STREET SCHEDULE A GLOBAL CUSTODY NETWORK SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES Ireland Bank of Ireland -- Israel Bank Hapoalim B.M. -- Italy Banque Paribas -- Ivory Coast Societe Generale de Banques -- en Cote d'Ivoire Jamaica Scotiabank Trust and Merchant Bank -- Japan The Daiwa Bank, Limited; Japan Securities The Fuji Bank, Limited Depository Center; Jordan The British Bank of the Middle East -- (as delegate of the Hongkong and Shanghai Banking Corporation Limited) Kenya Barclays Bank of Kenya Limited -- Republic of Korea The Hongkong and Shanghai Banking -- Corporation Limited Latvia Hansabank -- Lebanon The British Bank of the Middle East Custodian and Clearing Center of Financial (as delegate of the Hongkong and Instruments for Lebanon (MIDCLEAR) S.A.L.; Shanghai Banking Corporation Limited) Lithuania Vilniaus Bankas AB -- Malaysia Standard Chartered Bank -- Malaysia Berhad Mauritius The Hongkong and Shanghai -- Banking Corporation Limited
33 STATE STREET SCHEDULE A GLOBAL CUSTODY NETWORK SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES Mexico Citibank Mexico, S.A. -- Morocco Banque Commerciale du Maroc -- Namibia (via) Standard Bank of South Africa - The Netherlands MeesPierson N.V. -- New Zealand ANZ Banking Group -- (New Zealand) Limited Norway Christiania Bank og -- Kreditkasse Oman The British Bank of the Middle East -- (as delegate of the Hongkong and Shanghai Banking Corporation Limited) Pakistan Deutsche Bank AG -- Peru Citibank, N.A. -- Philippines Standard Chartered Bank -- Poland Citibank Poland S.A. -- Portugal Banco Comercial Portugues -- Romania ING Bank, N.V. -- Russia Credit Suisse First Boston, Zurich -- via Credit Suisse First Boston Limited, Moscow Singapore The Development Bank -- of Singapore Ltd.
34 STATE STREET SCHEDULE A GLOBAL CUSTODY NETWORK SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES Slovak Republic Ceskoslovenska Obchodna -- Banka A.S. Slovenia Banka Creditanstalt d.d. -- South Africa Standard Bank of South Africa Limited -- Spain Banco Santander, S.A. -- Sri Lanka The Hongkong and Shanghai -- Banking Corporation Limited Swaziland Barclays Bank of Swaziland Limited -- Sweden Skandinaviska Enskilda Banken -- Switzerland Union Bank of Switzerland -- Taiwan - R.O.C. Central Trust of China -- Thailand Standard Chartered Bank -- Trinidad & Tobago Republic Bank Ltd. -- Tunisia Banque Internationale Arabe de Tunisie -- Turkey Citibank, N.A. -- United Kingdom State Street Bank and Trust -- Uruguay Citibank, N.A. -- Venezuela Citibank, N.A. --
35 STATE STREET SCHEDULE A GLOBAL CUSTODY NETWORK SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES Zambia Barclays Bank of Zambia Limited -- Zimbabwe Barclays Bank of Zimbabwe Limited -- Euroclear (The Euroclear System) Cedel (Cedel Bank, societe anonyme) INTERSETTLE (for EASDAQ Securities)
36 SCHEDULE B STATE STREET GLOBAL CUSTODY NETWORK MANDATORY* DEPOSITORIES
COUNTRY MANDATORY DEPOSITORIES Argentina -Caja de Valores S.A.; -CRYL Australia -Austraclear Limited; -Reserve Bank Information and Transfer System Austria -Oesterreichische Kontrollbank AG (Wertpapiersammelbank Division) Belgium -Caisse Interprofessionnelle de Depots et de Virements de Titres S.A.; -Banque Nationale de Belgique Brazil - Camara de Liquidacao de Sao Paulo, (Calispa); -Bolsa de Valores de Rio de Janeiro - All SSB clients presently use Calispa -Central de Custodia e de Liquidacao Financeira de Titulos -Banco Central do Brasil, Systema Especial de Liquidacao e Custodia Bulgaria - Central Depository AD Canada -The Canadian Depository for Securities Limited; West Canada Depository Trust Company [depositories linked]
* Mandatory depositories include entities for which use is mandatory as a matter of law or effectively mandatory as a matter of market practice. 37 SCHEDULE B STATE STREET GLOBAL CUSTODY NETWORK MANDATORY* DEPOSITORIES
COUNTRY MANDATORY DEPOSITORIES People's Republic -Shanghai Securities Central Clearing and of China Registration Corporation; -Shenzhen Securities Central Clearing Co., Ltd. Croatia Ministry of Finance Czech Republic -Stredisko cennych papiru(degree); -Czech National Bank Denmark -Vaerdipapircentralen - The Danish Securities Center Egypt -Misr Company for Clearing, Settlement, and Central Depository Estonia - Eesti Vaartpaberite Keskdepositooruim Finland -The Finnish Central Securities Depository France -Societe Interprofessionnelle pour la Compensation des Valeurs Mobilieres; -Banque de France, Saturne System Germany -The Deutscher Kassenverein AG Greece -The Central Securities Depository (Apothetirion Titlon A.E.); Hong Kong -The Central Clearing and Settlement System; -The Central Money Markets Unit
* Mandatory depositories include entities for which use is mandatory as a matter of law or effectively mandatory as a matter of market practice. 38 SCHEDULE B STATE STREET GLOBAL CUSTODY NETWORK MANDATORY* DEPOSITORIES
COUNTRY MANDATORY DEPOSITORIES Hungary -The Central Depository and Clearing House (Budapest) Ltd. [Mandatory for Gov't Bonds only; SSB does not use for other securities] India The National Securities Depository Limited Indonesia -Bank of Indonesia Ireland -The Central Bank of Ireland, The Gilt Settlement Office Israel -The Clearing House of the Tel Aviv Stock Exchange; -Bank of Israel Italy -Monte Titoli S.p.A.; -Banca d'Italia Japan -Bank of Japan Net System Republic of Korea -Korea Securities Depository Corporation Latvia - The Latvian Central Depository Lebanon -The Central Bank of Lebanon Lithuania - The Central Securities Depository of Lithuania Malaysia -Malaysian Central Depository Sdn. Bhd.; -Bank Negara Malaysia, Scripless Securities Trading and Safekeeping Systems
* Mandatory depositories include entities for which use is mandatory as a matter of law or effectively mandatory as a matter of market practice. 39 SCHEDULE B STATE STREET GLOBAL CUSTODY NETWORK MANDATORY* DEPOSITORIES
COUNTRY MANDATORY DEPOSITORIES Mauritius -The Central Depository & Settlement Co. Ltd. Mexico -S.D. INDEVAL, S.A. de C.V. (Instituto para el Deposito de Valores); The Netherlands -Nederlands Centraal Instituut voor Giraal Effectenverkeer B.V. ("NECIGEF"); New Zealand -New Zealand Central Securities Depository Limited Norway -Verdipapirsentralen - The Norwegian Registry of Securities Oman -Muscat Securities Market Peru -Caja de Valores y Liquidaciones (CAVALI, S.A.) Philippines -The Philippines Central Depository Inc. -The Book-Entry-System of Bangko Sentral ng Pilipinas; -The Registry of Scripless Securities of the Bureau of the Treasury Poland -The National Depository of Securities (Krajowy Depozyt Papierow Wartosciowych); -National Bank of Poland Portugal -Central de Valores Mobiliarios
* Mandatory depositories include entities for which use is mandatory as a matter of law or effectively mandatory as a matter of market practice. 40 SCHEDULE B STATE STREET GLOBAL CUSTODY NETWORK MANDATORY* DEPOSITORIES
COUNTRY MANDATORY DEPOSITORIES Romania -National Securities Clearing, Settlement and Depository Co.; -Bucharest Stock Exchange; -National Bank of Romania Singapore -The Central Depository (Pvt.) Limited; -Monetary Authority of Singapore Slovak Republic -Stredisko Cennych Papierov; -National Bank of Slovakia Slovenia - Klirinsko Depotna Bruzba South Africa -The Central Depository Limited Spain -Servicio de Compensacion y Liquidacion de Valores, S.A.; -Banco de Espana, Anotaciones en Cuenta Sri Lanka -Central Depository System (Pvt) Limited Sweden -Vardepapperscentralen VPC AB - The Swedish Central Securities Depository Switzerland -Schweizerische Effekten - Giro AG; Taiwan - R.O.C. -The Taiwan Securities Central Depository Company, Ltd.
* Mandatory depositories include entities for which use is mandatory as a matter of law or effectively mandatory as a matter of market practice. 41 SCHEDULE B STATE STREET GLOBAL CUSTODY NETWORK MANDATORY* DEPOSITORIES
COUNTRY MANDATORY DEPOSITORIES Thailand -Thailand Securities Depository Company Limited Tunisia -STICODEVAM; -Central Bank of Tunisia; -Tunisian Treasury Turkey -Takas ve Saklama Bankasi A.S.; -Central Bank of Turkey United Kingdom -The Bank of England, The Central Gilts Office; The Central Moneymarkets Office Uruguay -Central Bank of Uruguay Zambia -Lusaka Central Depository
* Mandatory depositories include entities for which use is mandatory as a matter of law or effectively mandatory as a matter of market practice. 42 SCHEDULE C MARKET INFORMATION
PUBLICATION/TYPE OF INFORMATION BRIEF DESCRIPTION - ------------------------------- ----------------- (FREQUENCY) The Guide to Custody in World Markets (annually): An overview of safekeeping and settlement practices and procedures in each market in which State Street Bank and Trust Company offers custodial services. The Depository Review (annually): Information relating to the operating history and structure of depositories located in the markets in which State Street Bank and Trust Company offers custodial services, including transnational depositories. legal opinions (annually): With respect to each market in which State Street Bank and Trust Company offers custodial services, opinions relating to whether local law restricts (i) access of a fund's independent public accountants to books and records of a Foreign Sub-Custodian or Foreign Securities System, (ii) the Fund's ability to recover in the event of bankruptcy or insolvency of a Foreign Sub-Custodian or Foreign Securities System, (iii) the Fund's ability to recover in the event of a loss by a Foreign Sub-Custodian or Foreign Securities System, and (iv) the ability of a foreign investor to convert cash and cash equivalents to U.S. dollars. Network Bulletins (weekly): Developments of interest to investors in the markets in which State Street Bank and Trust Company offers custodial services. Foreign Custody Advisories (as necessary): With respect to markets in which State Street Bank and Trust Company offers custodial services which exhibit special custody risks, developments which may impact State Street's ability to deliver expected levels of service.
43 DATA ACCESS SERVICES ADDENDUM TO CUSTODIAN AGREEMENT ---------------------------------------------------- AGREEMENT between American AAdvantage Funds (the "Customer") and State Street Bank and Trust Company ("State Street"). PREAMBLE WHEREAS, State Street has been appointed as custodian of certain assets of the Customer pursuant to a certain Custodian Agreement (the "Custodian Agreement") dated as December 1, 1997; WHEREAS, State Street has developed and utilizes proprietary accounting and other systems, including State Street's proprietary Multicurrency HORIZON(R) Accounting System, in its role as custodian of the Customer, and maintains certain Customer-related data ("Customer Data") in databases under the control and ownership of State Street (the "Data Access Services"); and WHEREAS, State Street makes available to the Customer certain Data Access Services solely for the benefit of the Customer, and intends to provide additional services, consistent with the terms and conditions of this Agreement. NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, and for other good and valuable consideration, the parties agree as follows: 1. SYSTEM AND DATA ACCESS SERVICES a. System. Subject to the terms and conditions of this Agreement, State Street hereby agrees to provide the Customer with access to State Street's Multicurrency HORIZON(R) Accounting System and the other information systems (collectively, the "System") as described in Attachment A, on a remote basis for the purpose of obtaining reports, solely on computer hardware, system software and telecommunication links, as listed in Attachment B (the "Designated Configuration") of the Customer, or certain third parties approved by State Street that serve as investment advisors or investment managers (the "Investment Advisor") or independent auditors (the "Independent Auditors") of the Customer and solely with respect to the Customer or on any designated substitute or back-up equipment configuration with State Street's written consent, such consent not to be unreasonably withheld. b. Data Access Services. State Street agrees to make available to the Customer the Data Access Services subject to the terms and conditions of this Agreement and data access operating standards and procedures as may be issued by State Street from time to time. The ability of the Customer to originate electronic instructions to State Street on behalf of the Customer in order to (i) effect the transfer or movement of cash or securities held under custody by State Street or (ii) transmit accounting or other information (such transactions are referred to herein as "Client Originated Electronic Financial Instructions"), and (iii) access data for the 44 purpose of reporting and analysis, shall be deemed to be Data Access Services for purposes of this Agreement. c. Additional Services. State Street may from time to time agree to make available to the Customer additional Systems that are not described in the attachments to this Agreement. In the absence of any other written agreement concerning such additional systems, the term "System" shall include, and this Agreement shall govern, the Customer's access to and use of any additional System made available by State Street and/or accessed by the Customer. 2. NO USE OF THIRD PARTY SYSTEMS-LEVEL SOFTWARE State Street and the Customer acknowledge that in connection with the Data Access Services provided under this Agreement, the Customer will have access, through the Data Access Services, to Customer Data and to functions of State Street's proprietary systems; provided, however that in no event will the Customer have direct access to any third party systems-level software that retrieves data for, stores data from, or otherwise supports the System. 3. LIMITATION ON SCOPE OF USE a. Designated Equipment; Designated Location. The System and the Data Access Services shall be used and accessed solely on and through the Designated Configuration at the offices of the Customer or the Investment Advisor or Independent Auditor located in Fort Worth, Texas ("Designated Location"). b. Designated Configuration; Trained Personnel. State Street shall be responsible for supplying, installing and maintaining the Designated Configuration at the Designated Location. State Street and the Customer agree that each will engage or retain the services of trained personnel to enable both parties to perform their respective obligations under this Agreement. State Street agrees to use commercially reasonable efforts to maintain the System so that it remains serviceable, provided, however, that State Street does not guarantee or assure uninterrupted remote access use of the System. c. Scope of Use. The Customer will use the System and the Data Access Services only for the processing of securities transactions, the keeping of books of account for the Customer and accessing data for purposes of reporting and analysis. The Customer shall not, and shall cause its employees and agents not to (i) permit any third party to use the System or the Data Access Services, (ii) sell, rent, license or otherwise use the System or the Data Access Services in the operation of a service bureau or for any purpose other than as expressly authorized under this Agreement, (iii) use the System or the Data Access Services for any fund, trust or other investment vehicle without the prior written consent of State Street, (iv) allow access to the System or the Data Access Services through terminals or any other computer or telecommunications facilities located outside the Designated Locations, (v) allow or cause any information (other than portfolio holdings, valuations of portfolio holdings, and other information reasonably necessary for the management or distribution of the assets of the Customer) transmitted from State Street's databases, including data from third party sources, 2 45 available through use of the System or the Data Access Services to be redistributed or retransmitted to another computer, terminal or other device for other than use for or on behalf of the Customer or (vi) modify the System in any way, including without limitation, developing any software for or attaching any devices or computer programs to any equipment, system, software or database which forms a part of or is resident on the Designated Configuration. d. Other Locations. Except in the event of an emergency or of a planned System shutdown, the Customer's access to services performed by the System or to Data Access Services at the Designated Location may be transferred to a different location only upon the prior written consent of State Street. In the event of an emergency or System shutdown, the Customer may use any back-up site included in the Designated Configuration or any other back-up site agreed to by State Street, which agreement will not be unreasonably withheld. The Customer may secure from State Street the right to access the System or the Data Access Services through computer and telecommunications facilities or devices complying with the Designated Configuration at additional locations only upon the prior written consent of State Street and on terms to be mutually agreed upon by the parties. e. Title. Title and all ownership and proprietary rights to the System, including any enhancements or modifications thereto, whether or not made by State Street, are and shall remain with State Street. f. No Modification. Without the prior written consent of State Street, the Customer shall not modify, enhance or otherwise create derivative works based upon the System, nor shall the Customer reverse engineer, decompile or otherwise attempt to secure the source code for all or any part of the System. g. Security Procedures. The Customer shall comply with data access operating standards and procedures and with user identification or other password control requirements and other security procedures as may be issued from time to time by State Street for use of the System on a remote basis and to access the Data Access Services. The Customer shall have access only to the Customer Data and authorized transactions agreed upon from time to time by State Street and, upon notice from State Street, the Customer shall discontinue remote use of the System and access to Data Access Services for any security reasons cited by State Street; provided, that, in such event, State Street shall, for a period not less than 180 days (or such other shorter period specified by the Customer) after such discontinuance, assume responsibility to provide accounting services under the terms of the Custodian Agreement. h. Inspections. State Street shall have the right to inspect the use of the System and the Data Access Services by the Customer and the Investment Advisor to ensure compliance with this Agreement. The on-site inspections shall be upon prior written notice to Customer and the Investment Advisor and at reasonably convenient times and frequencies so as not to result in an unreasonable disruption of the Customer's or the Investment Advisor's business. 3 46 4. PROPRIETARY INFORMATION a. Proprietary Information. The Customer acknowledges and State Street represents that the System and the databases, computer programs, screen formats, report formats, interactive design techniques, documentation and other information made available to the Customer by State Street as part of the Data Access Services and through the use of the System constitute copyrighted, trade secret, or other proprietary information of substantial value to State Street. Any and all such information provided by State Street to the Customer shall be deemed proprietary and confidential information of State Street (hereinafter "Proprietary Information"). The Customer agrees that it will hold such Proprietary Information in the strictest confidence and secure and protect it in a manner consistent with its own procedures for the protection of its own confidential information and to take appropriate action by instruction or agreement with its employees who are permitted access to the Proprietary Information to satisfy its obligations hereunder. The Customer further acknowledges that State Street shall not be required to provide the Investment Advisor or the Investment Auditor with access to the System unless it has first received from the Investment Advisor and the Investment Auditor an undertaking with respect to State Street's Proprietary Information in the form of Attachment C and/or Attachment C-1 to this Agreement. The Customer shall use all commercially reasonable efforts to assist State Street in identifying and preventing any unauthorized use, copying or disclosure of the Proprietary Information or any portions thereof or any of the logic, formats or designs contained therein. b. Cooperation. Without limitation of the foregoing, the Customer shall advise State Street promptly in the event the Customer learns or has reason to believe that any person to whom the Customer has given access to the Proprietary Information, or any portion thereof, has violated or intends to violate the terms of this Agreement, and the Customer will, at its expense, co-operate with State Street in seeking injunctive or other equitable relief in the name of the Customer or State Street against any such person. c. Injunctive Relief. The Customer acknowledges that the disclosure of any Proprietary Information, or of any information which at law or equity ought to remain confidential, will immediately give rise to continuing irreparable injury to State Street inadequately compensable in damages at law. In addition, State Street shall be entitled to obtain immediate injunctive relief against the breach or threatened breach of any of the foregoing undertakings, in addition to any other legal remedies which may be available. d. Survival. The provisions of this Section 4 shall survive the termination of this Agreement. 5. LIMITATION ON LIABILITY a. Limitation on Amount and Time for Bringing Action. The Customer agrees any liability of State Street to the Customer or any third party arising out of State Street's provision of Data Access Services or the System under this Agreement shall be limited to the amount paid by the Customer for the preceding 24 months for such services. In no event shall State Street be liable to the Customer or any other party for any special, indirect, punitive or consequential 4 47 damages even if advised of the possibility of such damages. No action, regardless of form, arising out of this Agreement may be brought by the Customer more than two years after the Customer has knowledge that the cause of action has arisen. b. Year 2000. State Street will take all steps necessary to ensure that its products (and those of its third-party suppliers) reflect the available state of the art technology to offer products that are Year 2000 compliant, including, but not limited to, century recognition of dates, calculations that correctly compute same century and multi century formulas and date values, and interface values that reflect the date issues arising between now and the next one-hundred years. If any changes are required, State Street will make the changes to its products at no cost to Customer and in a commercially reasonable time frame and will require third-party suppliers to do likewise. c. Limited Warranties. NO OTHER WARRANTIES, WHETHER EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION, THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, ARE MADE BY STATE STREET. IN NO EVENT WILL STATE STREET BE LIABLE TO THE CUSTOMER OR ANY OTHER PARTY FOR ANY CONSEQUENTIAL OR INCIDENTAL DAMAGES WHICH MAY ARISE FROM THE CUSTOMER'S ACCESS TO THE SYSTEM OR USE OF INFORMATION OBTAINED THEREBY. d. Third-Party Data. Organizations from which State Street may obtain certain data included in the System or the Data Access Services are solely responsible for the contents of such data, and State Street shall have no liability for claims arising out of the contents of such third-party data, including, but not limited to, the accuracy thereof. e. Regulatory Requirements. As between State Street and the Customer, the Customer shall be solely responsible for the accuracy of any accounting statements or reports produced using the Data Access Services and the System and the conformity thereof with any requirements of law. f. Force Majeure. Neither party shall be liable for any costs or damages due to delay or nonperformance under this Agreement arising out of any cause or event beyond such party's reasonable control, including without limitation, cessation of services hereunder or any damages resulting therefrom to the other party, or the Customer as a result of work stoppage, power or other mechanical failure, computer virus, natural disaster, governmental action, or communication disruption. 6. INDEMNIFICATION The Customer agrees to indemnify and hold State Street harmless from any loss, damage or expense including reasonable attorney's fees, (a "loss") suffered by State Street arising from (i) the negligence or willful misconduct in the use by the Customer of the Data Access Services or the System, including any loss incurred by State Street resulting from a security breach at the Designated Location or committed by the Customer's employees or agents or the Investment 5 48 Advisor or the Independent Auditor and (ii) any loss resulting from incorrect Client Originated Electronic Financial Instructions. State Street shall be entitled to rely on the validity and authenticity of Client Originated Electronic Financial Instructions without undertaking any further inquiry as long as such instruction is undertaken in conformity with security procedures established by State Street from time to time. 7. FEES Fees and charges for the use of the System and the Data Access Services and related payment terms shall be as set forth in the Custody Fee Schedule in effect from time to time between the parties (the "Fee Schedule"). Any tariffs, duties or taxes imposed or levied by any government or governmental agency by reason of the transactions contemplated by this Agreement, including, without limitation, federal, state and local taxes, use, value added and personal property taxes (other than income, franchise or similar taxes which may be imposed or assessed against State Street) shall be borne by the Customer. Any claimed exemption from such tariffs, duties or taxes shall be supported by proper documentary evidence delivered to State Street. 8. TRAINING, IMPLEMENTATION AND CONVERSION a. Training. State Street agrees to provide training, at a designated State Street training facility or at the Designated Location, to the Customer's personnel in connection with the use of the System on the Designated Configuration. The Customer agrees that it will set aside, during regular business hours or at other times agreed upon by both parties, sufficient time to enable all operators of the System and the Data Access Services, designated by the Customer, to receive the training offered by State Street pursuant to this Agreement. b. Installation and Conversion. State Street shall be responsible for the technical installation and conversion ("Installation and Conversion") of the Designated Configuration. The Customer shall have the following responsibilities in connection with Installation and Conversion of the System: (i) The Customer shall be solely responsible for the timely acquisition and maintenance of the hardware and software that attach to the Designated Configuration in order to use the Data Access Services at the Designated Location. (ii) State Street and the Customer each agree that they will assign qualified personnel to actively participate during the Installation and Conversion phase of the System implementation to enable both parties to perform their respective obligations under this Agreement. 6 49 9. SUPPORT During the term of this Agreement, State Street agrees to provide the support services set out in Attachment D to this Agreement. 10. TERM OF AGREEMENT a. Term of Agreement. This Agreement shall become effective on the date of its execution by State Street and shall remain in full force and effect until terminated as herein provided. b. Termination of Agreement. Either party may terminate this Agreement (i) for any reason by giving the other party at least one-hundred and eighty days' prior written notice in the case of notice of termination by State Street to the Customer or thirty days' notice in the case of notice from the Customer to State Street of termination; or (ii) immediately for failure of the other party to comply with any material term and condition of the Agreement by giving the other party written notice of termination. In the event the Customer shall cease doing business, shall become subject to proceedings under the bankruptcy laws (other than a petition for reorganization or similar proceeding) or shall be adjudicated bankrupt, this Agreement and the rights granted hereunder shall, at the option of State Street, immediately terminate with notice to the Customer. This Agreement shall in any event terminate as to any Customer within 90 days after the termination of the Custodian Agreement applicable to such Customer. c. Termination of the Right to Use. Upon termination of this Agreement for any reason, any right to use the System and access to the Data Access Services shall terminate and the Customer shall immediately cease use of the System and the Data Access Services. Immediately upon termination of this Agreement for any reason, the Customer shall return to State Street all copies of documentation and other Proprietary Information in its possession; provided, however, that in the event that either party terminates this Agreement or the Custodian Agreement for any reason other than the Customer's breach, State Street shall provide the Data Access Services for a period of time and at a price to be agreed upon by the parties. 11. MISCELLANEOUS a. Assignment; Successors. This Agreement and the rights and obligations of the Customer and State Street hereunder shall not be assigned by either party without the prior written consent of the other party, except that State Street may assign this Agreement to a successor of all or a substantial portion of its business, or to a party controlling, controlled by, or under common control with State Street. b. Survival. All provisions regarding indemnification, warranty, liability and limits thereon, and confidentiality and/or protection of proprietary rights and trade secrets shall survive the termination of this Agreement. 7 50 c. Entire Agreement. This Agreement and the attachments hereto constitute the entire understanding of the parties hereto with respect to the Data Access Services and the use of the System and supersedes any and all prior or contemporaneous representations or agreements, whether oral or written, between the parties as such may relate to the Data Access Services or the System, and cannot be modified or altered except in a writing duly executed by the parties. This Agreement is not intended to supersede or modify the duties and liabilities of the parties hereto under the Custodian Agreement or any other agreement between the parties hereto except to the extent that any such agreement specifically refers to the Data Access Services or the System. No single waiver or any right hereunder shall be deemed to be a continuing waiver. d. Severability. If any provision or provisions of this Agreement shall be held to be invalid, unlawful, or unenforceable, the validity, legality, and enforceability of the remaining provisions shall not in any way be affected or impaired. e. Governing Law. This Agreement shall be interpreted and construed in accordance with the internal laws of The Commonwealth of Massachusetts without regard to the conflict of laws provisions thereof. 8 51 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement effective as of December 1, 1997. STATE STREET BANK AND TRUST COMPANY By: /s/ RONALD E. LOGUE -------------------------------- Title: Ronald E. Logue -------------------------------- Date: December 1, 1997 -------------------------------- AMERICAN AADVANTAGE FUNDS By: /s/ WILLIAM F. QUINN -------------------------------- Title: President -------------------------------- Date: December 1, 1997 -------------------------------- 52 ATTACHMENT A Multicurrency HORIZON(R) Accounting System System Product Description I. The Multicurrency HORIZON(R) Accounting System is designed to provide lot level portfolio and general ledger accounting for SEC and ERISA type requirements and includes the following services: 1) recording of general ledger entries; 2) calculation of daily income and expense; 3) reconciliation of daily activity with the trial balance, and 4) appropriate automated feeding mechanisms to (i) domestic and international settlement systems, (ii) daily, weekly and monthly evaluation services, (iii) portfolio performance and analytic services, (iv) customer's internal computing systems and (v) various State Street provided information services products. II. GlobalQuest(R) GlobalQuest(R) is designed to provide customer access to the following information maintained on The Multicurrency HORIZON(R) Accounting System: 1) cash transactions and balances; 2) purchases and sales; 3) income receivables; 4) tax refund receivables; 5) daily priced positions; 6) open trades; 7) settlement status; 8) foreign exchange transactions; 9) trade history; and 10) daily, weekly and monthly evaluation services. III. InSight is designed to provide customer access to the following information maintained on The Multicurrency HORIZON Accounting System: 1) cash transactions and balances; 2) purchases and sales; 3) income receivables; 4) tax refund receivables; 5) daily priced positions; 6) open trades; 7) settlement status; 8) foreign exchange transactions; 9) trade history, and 10) daily, weekly and monthly evaluation services. 53 ATTACHMENT B Designated Configuration 54 ATTACHMENT C Undertaking The undersigned understands that in the course of its employment as Investment Advisor to American AAdvantage Funds (the "Customer") it will have access to State Street Bank and Trust Company's ("State Street") Multicurrency HORIZON Accounting System and other information systems (collectively, the "System"). The undersigned acknowledges that the System and the databases, computer programs, screen formats, report formats, interactive design techniques, documentation, and other information made available to the Undersigned by State Street as part of the Data Access Services provided to the Customer and through the use of the System constitute copyrighted, trade secret, or other proprietary information of substantial value to State Street. Any and all such information provided by State Street to the Undersigned shall be deemed proprietary and confidential information of State Street (hereinafter "Proprietary Information"). The Undersigned agrees that it will hold such Proprietary Information in confidence and secure and protect it in a manner consistent with its own procedures for the protection of its own confidential information and to take appropriate action by instruction or agreement with its employees who are permitted access to the Proprietary Information to satisfy its obligations hereunder. The Undersigned will not attempt to intercept data, gain access to data in transmission, or attempt entry into any system or files for which it is not authorized. It will not intentionally adversely affect the integrity of the System through the introduction of unauthorized code or data, or through unauthorized deletion. Upon notice by State Street for any reason, any right to use the System and access to the Data Access Services shall terminate and the Undersigned shall immediately cease use of the System and the Data Access Services. Immediately upon notice by State Street for any reason, the Undersigned shall return to State Street all copies of documentation and other Proprietary Information in its possession. AMR Investment Services, Inc. By: ----------------------------------- Title: -------------------------------- Date: --------------------------------- 55 ATTACHMENT C-1 Undertaking The undersigned understands that in the course of its employment as Independent Auditor to American AAdvantage Funds (the "Customer") it will have access to State Street Bank and Trust Company's ("State Street") Multicurrency HORIZON Accounting System and other information systems (collectively, the "System"). The undersigned acknowledges that the System and the databases, computer programs, screen formats, report formats, interactive design techniques, documentation, and other information made available to the Undersigned by State Street as part of the Data Access Services provided to the Customer and through the use of the System constitute copyrighted, trade secret, or other proprietary information of substantial value to State Street. Any and all such information provided by State Street to the Undersigned shall be deemed proprietary and confidential information of State Street (hereinafter "Proprietary Information"). The Undersigned agrees that it will hold such Proprietary Information in confidence and secure and protect it in a manner consistent with its own procedures for the protection of its own confidential information and to take appropriate action by instruction or agreement with its employees who are permitted access to the Proprietary Information to satisfy its obligations hereunder. The Undersigned will not attempt to intercept data, gain access to data in transmission, or attempt entry into any system or files for which it is not authorized. It will not intentionally adversely affect the integrity of the System through the introduction of unauthorized code or data, or through unauthorized deletion. Upon notice by State Street for any reason, any right to use the System and access to the Data Access Services shall terminate and the Undersigned shall immediately cease use of the System and the Data Access Services. Immediately upon notice by State Street for any reason, the Undersigned shall return to State Street all copies of documentation and other Proprietary Information in its possession. Independent Auditor By: ------------------------------------ Title: --------------------------------- Date: ---------------------------------- 56 ATTACHMENT D Support During the term of this Agreement, State Street agrees to provide the following on-going support services: a. Telephone Support. The Customer Designated Persons may contact State Street's HORIZON(R) Help Desk and Customer Assistance Center between the hours of 8 a.m. and 6 p.m. (Eastern time) on all business days for the purpose of obtaining answers to questions about the use of the System, or to report apparent problems with the System. From time to time, the Customer shall provide to State Street a list of persons, not to exceed five in number, who shall be permitted to contact State Street for assistance (such persons being referred to as "the Customer Designated Persons"). b. Technical Support. State Street will provide technical support to assist the Customer in using the System and the Data Access Services. The total amount of technical support provided by State Street shall not exceed 10 resource days per year. State Street shall provide such additional technical support as is expressly set forth in the fee schedule in effect from time to time between the parties (the "Fee Schedule"). Technical support, including during installation and testing, is subject to the fees and other terms set forth in the Fee Schedule. c. Maintenance Support. State Street shall use commercially reasonable efforts to correct system functions that do not work according to the System Product Description as set forth on Attachment A in priority order in the next scheduled delivery release or otherwise as soon as is practicable. d. System Enhancements. State Street will provide to the Customer any enhancements to the System developed by State Street and made a part of the System; provided that, sixty (60) days prior to installing any such enhancement, State Street shall notify the Customer and shall offer the Customer reasonable training on the enhancement. Charges for system enhancements shall be as provided in the Fee Schedule. State Street retains the right to charge for related systems or products that may be developed and separately made available for use other than through the System. e. Custom Modifications. In the event the Customer desires custom modifications in connection with its use of the System, the Customer shall make a written request to State Street providing specifications for the desired modification. Any custom modifications may be undertaken by State Street in its sole discretion in accordance with the Fee Schedule. f. Limitation on Support. State Street shall have no obligation to support the Customer's use of the System: (1) for use on any computer equipment or telecommunication facilities which does not conform to the Designated Configuration or (ii) in the event the Customer has modified the System in breach of this Agreement. EX-99.B.9A 4 AADVANTAGE TRANSFER AGENCY & SERVICE AGREEMENT 1 Exhibit 99.b.9.a TRANSFER AGENCY AND SERVICE AGREEMENT between AMERICAN AADVANTAGE FUNDS and STATE STREET BANK AND TRUST COMPANY 1C-Domestic Trust/Series 2 TABLE OF CONTENTS
Page ---- 1. Terms of Appointment; Duties of the Bank . . . . . . . . . . . . . . . . . . . . . . . . . 1 2. Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 3. Representations and Warranties of the Bank . . . . . . . . . . . . . . . . . . . . . . . . 4 4. Representations and Warranties of the Fund . . . . . . . . . . . . . . . . . . . . . . . . 4 5. Wire Transfer Operating Guidelines . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 6. Data Access and Proprietary Information . . . . . . . . . . . . . . . . . . . . . . . . . 6 7. Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 8. Registration as a Transfer Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 9. Year 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 10. Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 11. Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 12. Standard of Care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 13. Covenants of the Fund and the Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 14. Termination of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 15. Additional Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 16. Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 17. Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 18. Massachusetts Law to Apply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 19. Force Majeure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 20. Consequential Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 21. Merger of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
3 22. Limitations of Liability of the Trustees or Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 23. Separate Liability of Portfolios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 24. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 25. Reproduction of Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 26. Notices 13
4 TRANSFER AGENCY AND SERVICE AGREEMENT AGREEMENT made as of the 1st day of January, 1998, by and between AMERICAN AADVANTAGE FUNDS, a Massachusetts business trust, having its principal office and place of business at 4333 Amon Carter Boulevard, MD5675, Fort Worth, Texas 76155 (the "Fund"), and STATE STREET BANK AND TRUST COMPANY, a Massachusetts trust company having its principal office and place of business at 225 Franklin Street, Boston, Massachusetts 02110 (the "Bank"). WHEREAS, the Fund is authorized to issue shares in separate series, with each such series representing interests in a separate portfolio of securities and other assets; and WHEREAS, the Fund currently offers shares in nine (9) series, such series shall be named in the attached Schedule A which may be amended by the parties from time to time (each such series, together with all other series subsequently established by the Fund and made subject to this Agreement in accordance with Article 11, being herein referred to as a "Portfolio", and collectively as the "Portfolios"); WHEREAS, the Fund on behalf of the Portfolios desires to appoint the Bank as its transfer agent, dividend disbursing agent, custodian of certain retirement plans (as may be applicable) and agent in connection with certain other activities, and the Bank desires to accept such appointment; NOW, THEREFORE, in consideration of the mutual covenants herein contained, the parties hereto agree as follows: l. Terms of Appointment; Duties of the Bank 1.1 APPOINTMENT. Subject to the terms and conditions set forth in this Agreement, the Fund, on behalf of the Portfolios, hereby employs and appoints the Bank to act as, and the Bank agrees to act as its transfer agent for the Fund's authorized and issued shares of its beneficial interest, ("Shares"), dividend disbursing agent, custodian of certain retirement plans and agent in connection with any accumulation, open-account or similar plans provided to the shareholders of each of the respective Portfolios of the Fund ("Shareholders") and set out in the currently effective prospectus and statement of additional information ("prospectus") of the Fund on behalf of the applicable Portfolio, including without limitation any periodic investment plan or periodic withdrawal program. 1.2 TRANSFER AGENT SERVICES. The Bank agrees that it will perform the following services: (a) In accordance with procedures established from time to 5 time by agreement between the Fund on behalf of each of the Portfolios, as applicable and the Bank, the Bank shall: (i) receive for acceptance, orders for the purchase of Shares, and promptly deliver payment and appropriate documentation thereof to the Custodian of the Fund authorized pursuant to the Declaration of Trust of the Fund (the "Custodian"); (ii) pursuant to purchase orders, record the appropriate number of Shares and hold such Shares in the appropriate Shareholder account; (iii) receive for acceptance redemption requests and redemption directions and deliver the appropriate documentation thereof to the Custodian; (iv) in respect to the transactions in items (i), (ii) and (iii) above, the Bank shall execute transactions directly with broker-dealers authorized by the Fund; (v) at the appropriate time as and when it receives monies paid to it by the Custodian with respect to any redemption, pay over or cause to be paid over in the appropriate manner such monies as instructed by the redeeming Shareholders; (vi) effect transfers of Shares by the registered owners thereof upon receipt of appropriate instructions; (vii) prepare and transmit payments for dividends and distributions declared by the Fund on behalf of the applicable Portfolio; (viii) maintain records of account for and advise the Fund and its Shareholders as to the foregoing; and (ix) record the issuance of shares of the Fund and maintain pursuant to SEC Rule 17Ad-10(e) a record of the total number of shares of the Fund and each Portfolio which are authorized, based upon data provided to it by the Fund on behalf of each Portfolio, and issued and outstanding. The Bank shall also provide the Fund and each Portfolio on a regular basis with the total number of shares which are authorized and issued and outstanding and shall have no obligation, when recording the 6 issuance of shares, to monitor the issuance of such shares or to take cognizance of any laws relating to the issue or sale of such Shares, which functions shall be the sole responsibility of the Fund. (b) In addition to and neither in lieu nor in contravention of the services set forth in the above paragraph (a), the Bank shall: (i) perform the customary services of a transfer agent, dividend disbursing agent, custodian of certain retirement plans (as may be applicable) and, as relevant, agent in connection with accumulation, open-account or similar plans (including without limitation any periodic investment plan or periodic withdrawal program), including but not limited to: maintaining all Shareholder accounts, preparing Shareholder meeting lists, mailing Shareholder proxies, Shareholder reports and prospectuses to current Shareholders, withholding taxes on U.S. resident and non-resident alien accounts, preparing and filing U.S. Treasury Department Forms 1099 and other appropriate forms required with respect to dividends and distributions by federal authorities for all Shareholders, preparing and mailing confirmation forms and statements of account to Shareholders for all purchases and redemptions of Shares and other confirmable transactions in Shareholder accounts, preparing and mailing activity statements for Shareholders, and providing Shareholder account information and (ii) provide a system which will enable the Fund to monitor the total number of Shares sold in each State and report such data to the Fund or its designee. (c) In addition, the Fund shall (i) identify to the Bank in writing those Shareholder transactions and assets to be treated as exempt from blue sky reporting for each State and (ii) verify the establishment of transactions for each State on the system prior to activation and thereafter monitor the daily activity for each State. The responsibility of the Bank for the Fund's blue sky State registration status is solely limited to the initial establishment of transactions subject to blue sky compliance by the Fund and the reporting of such transactions to the Fund as provided in Section 1.2 (b) above. (d) Procedures as to who shall provide certain of these services in Section 1 may be established from time to time by agreement between the Fund on behalf of each Portfolio and the Bank per the attached service responsibility schedule. The Bank may at times perform only a portion of these services and the Fund or its agent may perform these services on the Fund's behalf. 7 (e) The Bank shall provide additional services on behalf of the Fund (e.g., escheatment services) which may be agreed upon in writing between the Fund and the Bank. 2. Fees and Expenses 2.1 For the performance by the Bank pursuant to this Agreement, the Fund agrees on behalf of each of the Portfolios to pay the Bank the fees as set out in the initial fee schedule attached hereto. 2.2 In addition to the fee paid under Section 2.1 above, the Fund agrees on behalf of each of the Portfolios to reimburse the Bank for out-of-pocket expenses, including but not limited to confirmation production, postage, forms, telephone, microfilm, microfiche, mailing and tabulating proxies, records storage, or advances incurred by the Bank for the items set out in the fee schedule attached hereto. Such fees and out-of-pocket expenses and advances identified may be changed from time to time subject to mutual written agreement between the Fund and the Bank. In addition, any other expenses incurred by the Bank at the request or with the consent of the Fund, will be reimbursed by the Fund on behalf of the applicable Portfolio. 2.3 The Fund agrees on behalf of each of the Portfolios to pay all fees and reimbursable expenses within twenty days following the receipt of the respective billing notice. Postage for mailing of dividends, proxies, Fund reports and other mailings to all shareholder accounts shall be advanced to the Bank by the Fund at least two (2) days prior to the mailing date of such materials. 3. Representations and Warranties of the Bank The Bank represents and warrants to the Fund that: 3.1 It is a trust company duly organized and existing and in good standing under the laws of The Commonwealth of Massachusetts. 3.2 It is duly qualified to carry on its business in The Commonwealth of Massachusetts. 3.3 It is empowered under applicable laws and by its Charter and By-Laws to enter into and perform this Agreement. 3.4 All requisite corporate proceedings have been taken to authorize it to enter into and perform this Agreement. 8 3.5 It has and will continue to have access to the necessary facilities, equipment and personnel to perform its duties and obligations under this Agreement. 3.6 It will comply with all applicable laws and regulations in performing its duties required hereunder. 4. Representations and Warranties of the Fund The Fund represents and warrants to the Bank that: 4.1 It is a business trust duly organized and existing and in good standing under the laws of The Commonwealth of Massachusetts. 4.2 It is empowered under applicable laws and by its Declaration of Trust and By-Laws to enter into and perform this Agreement. 4.3 All corporate proceedings required by said Declaration of Trust and By-Laws have been taken to authorize it to enter into and perform this Agreement. 4.4 It is an open-end and diversified management investment company registered under the Investment Company Act of 1940, as amended. 4.5 A registration statement under the Securities Act of 1933, as amended on behalf of each of the Portfolios is currently effective and will remain effective, and appropriate state securities law filings have been made and will continue to be made, with respect to all Shares of the Fund being offered for sale. 5. Wire Transfer Operating Guidelines/Articles 4A of the Uniform Commercial Code 5.1 The Bank is authorized to promptly debit the appropriate Fund account(s) upon the receipt of a payment order in compliance with the selected security procedure (the "Security Procedure") chosen for funds transfer and in the amount of money that the Bank has been instructed to transfer. The Bank shall execute payment orders in compliance with the Security Procedure and with the Fund instructions on the execution date provided that such payment order is received by the close of the funds-transfer business day of the Bank, unless the payment order specifies a later time. All payment orders and communications received after the customary deadline will be deemed to have been received the next business day. 5.2 The Fund acknowledges that the Security Procedure it has designated on the Fund Selection Form was selected by the Fund from security procedures offered by the Bank. The Fund shall restrict access to confidential information relating 9 to the Security Procedure to authorized persons as communicated to the Bank in writing. Each party must notify the other party immediately if it has reason to believe unauthorized persons may have obtained access to such information or of any change in that party's authorized personnel. The Bank shall verify the authenticity of all Fund instructions according to the Security Procedure. 5.3 The Bank shall process all payment orders on the basis of the account number contained in the payment order. In the event of a discrepancy between any name indicated on the payment order and the account number, the account number shall take precedence and govern. 5.4 The Bank reserves the right to decline to process or delay the processing of a payment order which (a) is in excess of the collected balance in the account to be charged at the time of the Bank's receipt of such payment order; (b) would cause the Bank, in the Bank's reasonable judgement, to exceed any volume, aggregate dollar, network, time, credit or similar limits which are applicable to the Bank; or (c) the Bank, upon reasonable belief after verifying the authenticity of the payment order according to the Security Procedures is unable to satisfy itself that the transaction has been properly authorized. 5.5 The Bank shall use reasonable efforts to act on all authorized requests to cancel or amend payment orders received in compliance with the Security Procedure provided that such requests are received in a timely manner affording the Bank reasonable opportunity to act. However, the Bank assumes no liability if after using reasonable efforts the request for amendment or cancellation cannot be satisfied. 5.6 The Bank shall assume no responsibility for failure to detect any erroneous payment order provided that the Bank complies with the payment order instructions as received and the Bank complies with the Security Procedure. The Security Procedure is established for the purpose of authenticating payment orders only and not for the detection of errors in payment orders. 5.7 The Bank shall assume no responsibility for lost interest with respect to the refundable amount of any unauthorized payment order, unless the Bank is notified of the unauthorized payment order within thirty (30) days of notification by the Bank of the acceptance of such payment order. In no event (including failure to execute a payment order) shall the Bank be liable for special, indirect or consequential damages, even if advised of the possibility of such damages. 10 5.8 When the Fund initiates or receives Automated Clearing House credit and debit entries pursuant to these guidelines and the rules of the National Automated Clearing House Association and the New England Clearing House Association, the Bank will act as an Originating Depository Financial Institution and/or receiving depository Financial Institution, as the case may be, with respect to such entries. Credits given by the Bank with respect to an ACH credit entry are provisional until the Bank receives final settlement for such entry from the Federal Reserve Bank. If the Bank does not receive such final settlement, the Fund agrees that the Bank shall receive a refund of the amount credited to the Fund in connection with such entry, and the party making payment to the Fund via such entry shall not be deemed to have paid the amount of the entry. 5.9 Confirmation of Bank's execution of payment orders shall ordinarily be provided within twenty-four (24) hours notice of which may be delivered through the Bank's proprietary information systems, or by facsimile or call-back. Fund must report any objections to the execution of an order within thirty (30) days. 6. Data Access and Proprietary Information 6.1 The Fund acknowledges that the data bases, computer programs, screen formats, report formats, interactive design techniques, and documentation manuals furnished to the Fund by the Bank as part of the Fund's ability to access certain Fund-related data ("Customer Data") maintained by the Bank on data bases under the control and ownership of the Bank or other third party ("Data Access Services") constitute copyrighted, trade secret, or other proprietary information (collectively, "Proprietary Information") of substantial value to the Bank or other third party. In no event shall Proprietary Information be deemed Customer Data. The Fund agrees to treat all Proprietary Information as proprietary to the Bank and further agrees that it shall not divulge any Proprietary Information to any person or organization except as may be provided hereunder. Without limiting the foregoing, the Fund agrees for itself and its employees and agents: (a) to access Customer Data solely from locations as may be designated in writing by the Bank and solely in accordance with the Bank's applicable user documentation; (b) to refrain from copying or duplicating in any way the Proprietary Information; (c) to refrain from obtaining unauthorized access to any portion of the Proprietary Information, and if such access is inadvertently obtained, to inform in a timely 11 manner of such fact and dispose of such information in accordance with the Bank's instructions; (d) excluding the Fund's principal office in Fort Worth, Texas, to refrain from causing or allowing the data acquired hereunder from being retransmitted to any other computer facility or other location, except with the prior written consent of the Bank; (e) that the Fund shall have access only to those authorized transactions agreed upon by the parties; (f) to honor all reasonable written requests made by the Bank to protect at the Bank's expense the rights of the Bank in Proprietary Information at common law, under federal copyright law and under other federal or state law. Each party shall take reasonable efforts to advise its employees of their obligations pursuant to this Section 6. The obligations of this Section shall survive any earlier termination of this Agreement. 6.2 If the Fund notifies the Bank that any of the Data Access Services do not operate in material compliance with the most recently issued user documentation for such services, the Bank shall endeavor in a timely manner to correct such failure. Organizations from which the Bank may obtain certain data included in the Data Access Services are solely responsible for the contents of such data and the Fund agrees to make no claim against the Bank arising out of the contents of such third-party data, including, but not limited to, the accuracy thereof. DATA ACCESS SERVICES AND ALL COMPUTER PROGRAMS AND SOFTWARE SPECIFICATIONS USED IN CONNECTION THEREWITH ARE PROVIDED ON AN AS IS, AS AVAILABLE BASIS. THE BANK EXPRESSLY DISCLAIMS ALL WARRANTIES EXCEPT THOSE EXPRESSLY STATED HEREIN INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. 6.3 If the transactions available to the Fund include the ability to originate electronic instructions to the Bank in order to (i) effect the transfer or movement of cash or Shares or (ii) transmit Shareholder information or other information, then in such event the Bank shall be entitled to rely on the validity and authenticity of such instruction without undertaking any further inquiry as long as such instruction is undertaken in conformity with security procedures established by the Bank from time to time. 12 7. Indemnification 7.1 The Bank shall not be responsible for, and the Fund shall on behalf of the applicable Portfolio indemnify and hold the Bank harmless from and against, any and all losses, damages, costs, charges, reasonable counsel fees, payments, expenses and liability arising out of or attributable to: (a) All actions of the Bank or its agents or subcontractors required to be taken pursuant to this Agreement, provided that such actions are taken in good faith and without negligence or willful misconduct; (b) The Fund's lack of good faith, negligence or willful misconduct which arise out of the material breach of any representation or warranty of the Fund hereunder; (c) The reliance on or use by the Bank or its agents or subcontractors of information, records, documents or services which (i) are received by the Bank or its agents or subcontractors, and (ii) have been prepared, maintained or performed by the Fund or any other person or firm on behalf of the Fund including but not limited to any previous transfer agent or registrar; (d) The reliance on, or the carrying out by the Bank or its agents or subcontractors of any instructions or requests of the Fund on behalf of the applicable Portfolio; (e) The offer or sale of Shares in violation of federal or state securities laws or regulations requiring that such Shares be registered or in violation of any stop order or other determination or ruling by any federal or any state agency with respect to the offer or sale of such Shares; (f) upon the Fund's request entering into any agreements required by the National Securities Clearing Corporation (the "NSCC") required by the NSCC for the transmission of Fund or Shareholder data through the NSCC clearing systems. 7.2 At any time the Bank may apply to any officer of the Fund for instructions, and may consult with Fund counsel with respect to any matter arising in connection with the services to be performed by the Bank under this Agreement, and the Bank and its agents or subcontractors shall not be liable and shall be indemnified by the Fund on behalf of the applicable Portfolio for any action taken or omitted by it in reliance upon such instructions or upon the opinion of such counsel. The Bank, its agents and subcontractors shall be protected and indemnified in acting upon any paper or document, reasonably believed to be genuine and to have been 13 signed by the proper person or persons, or upon any instruction, information, data, records or documents provided the Bank or its agents or subcontractors by machine readable input, telex, CRT data entry or other similar means authorized by the Fund, and shall not be held to have notice of any change of authority of any person, until receipt of written notice thereof from the Fund. 7.3 The Bank shall indemnify and hold the Fund harmless from and against any and all losses, damages, costs, charges, counsel fees, payments, expenses and liability arising out of or attributable to any action or failure or omission to act by the Bank as a result of the Bank's lack of good faith, gross negligence or willful misconduct. 7.4 In order that the indemnification provisions contained in this Section 7 shall apply, upon the assertion of a claim for which the one party (the "Indemnitor") may be required to indemnify the other party (the "Indemnitee"), the Indemnitee shall promptly notify the Indemnitor of such assertion, and shall keep the Indemnitor advised with respect to all developments concerning such claim. The Indemnitor shall have the option to participate with the Indemnitee in the defense of such claim or to defend against said claim in its own name or in the name of the Indemnitee. The Indemnitee shall in no case confess any claim or make any compromise in any case in which the Indemnitor may be required to indemnify the Indemnitee except with the Indemnitor's prior written consent. 8. Registration as a Transfer Agent Bank and its record keeping Transfer Agent NFDS are currently registered with the appropriate federal agency for the registration of transfer agents, or is otherwise permitted to lawfully conduct its activities without such registration and that it will remain so registered for the duration of this Agreement. Bank agrees that it will promptly notify the Fund in the event of any material change in its status as a registered transfer agent. Should Bank fail to be registered with the appropriate federal agency as a transfer agent at any time during this Agreement, and such failure to register does not permit Bank to lawfully conduct its activities, the Fund may terminate this Agreement upon five days written notice to Bank. 9. Year 2000 Notwithstanding anything in this Agreement to the contrary, the Bank's only warranty with respect to year 2000 compliance is that the Bank's processing systems and software (the "TA2000 System") will be year 2000 compliant during the term set forth in Section 14 of this Agreement. 14 As used in this Agreement "year 2000 complaint" shall mean that the software will perform in accordance with the terms of this Agreement regardless of the century with respect to which date data is encountered by the software; provided, that (i) all date data received by the Bank for use by the software is accurate and in formats specified by the Bank from time to time, (ii) all date data generated by the software is accepted by the Fund in formats provided by the Bank from time to time, and (iii) the Bank shall not be obligated to provide date data for interface functions such as screens, reports or data transmission files in any format other than that specified by the Bank from time to time. Notwithstanding the foregoing, the Bank makes no representation or warranty as to the ability of any hardware, firmware, software, products or services provided to the Bank software, including the TA2000 System, in circumstances where data received from any fund system or any other system is invalid, incorrect or otherwise corrupt. 10. Insurance Bank shall maintain insurance of the types and in the amounts deemed by it to be appropriate. To the extent that policies of insurance may provide for coverage of claims for liability by the parties set forth in this Agreement, the contracts of insurance shall take precedence, and no provision of this Agreement shall be construed to relieve an insurer of any obligation to pay claims to the Fund, Bank or other insured party which would otherwise be a covered claim in the absence of any provision of this Agreement provided however, that this Section 10 does not void, reduce or jeopardize the insurance coverage of the insured party. 11. Security Bank represents and warrants that, to the best of its knowledge, the various procedures and systems which Bank has implemented with regard to the safeguarding from loss or damage attributable to fire, theft or any other cause (including provision for twenty-four hours a day restricted access) of the Fund's blank checks, certificates, records and other data hereunder are adequate, and that it will make such changes therein from time to time as in its judgment are required for the secure performance of its obligations hereunder. Bank shall review such systems and procedures on a periodic basis and the fund shall have access to review these systems and procedures. 12. Standard of Care The Bank shall at all times act in good faith and agrees to use its best efforts within reasonable limits to insure the accuracy of all services performed under this Agreement, but assumes no responsibility and shall not be liable for loss 15 or damage due to errors unless said errors are caused by its negligence, bad faith, or willful misconduct or that of its employees. 13. Covenants of the Fund and the Bank 13.1 The Fund shall on behalf of each of the Portfolios promptly furnish to the Bank the following: (a) A copy of the resolution of the Board of Trustees of the Fund authorizing the appointment of the Bank and the execution and delivery of this Agreement. (b) A copy of the Declaration of Trust and By-Laws of the Fund and all amendments thereto. 13.2 The Bank hereby agrees to establish and maintain facilities and procedures reasonably acceptable to the Fund for safekeeping of check forms and facsimile signature imprinting devices, if any; and for the preparation or use, and for keeping account of, such forms and devices. 13.3 The Bank shall keep records relating to the services to be performed hereunder, in the form and manner as it may deem advisable. To the extent required by Section 31 of the Investment Company Act of 1940, as amended, and the Rules thereunder, the Bank agrees that all such records prepared or maintained by the Bank relating to the services to be performed by the Bank hereunder are the property of the Fund and will be preserved, maintained and made available in accordance with such Section and Rules, and will be surrendered promptly to the Fund on and in accordance with its request. 13.4 The Bank and the Fund agree that all books, records, information and data pertaining to the business of the other party which are exchanged or received pursuant to the negotiation or the carrying out of this Agreement shall remain confidential, and shall not be voluntarily disclosed to any other person, except as may be required by law. 13.5 In case of any requests or demands for the inspection of the Shareholder records of the Fund, the Bank will endeavor to notify the Fund and to secure instructions from an authorized officer of the Fund as to such inspection. The Bank reserves the right, however, to exhibit the Shareholder records to any person whenever it is advised by its counsel that it may be held liable for the failure to exhibit the Shareholder records to such person. 14. Termination of Agreement 14.1 Unless otherwise provided in this Agreement, this Agreement may be terminated by either party upon ninety (90) days written notice to the other. 16 14.2 Should the Fund exercise its right to terminate, reasonable out-of-pocket expenses associated with the movement of records and material will be borne by the Fund on behalf of the applicable Portfolio(s). Additionally, the Bank reserves the right to charge for any other reasonable expenses associated with such termination. 15. Additional Funds In the event that the Fund establishes one or more series of Shares in addition to the series named in the attached Schedule A with respect to which it desires to have the Bank render services as transfer agent under the terms hereof, it shall so notify the Bank in writing, and if the Bank agrees in writing to provide such services, such series of Shares shall become a Portfolio hereunder. 16. Assignment 16.1 Except as provided in Section 16.3 below, neither this Agreement nor any rights or obligations hereunder may be assigned by either party without the written consent of the other party. 16.2 This Agreement shall inure to the benefit of and be binding upon the parties and their respective permitted successors and assigns. 16.3 The Bank may, without further consent on the part of the Fund, subcontract for the performance hereof with (i) Boston Financial Data Services, Inc., a Massachusetts corporation ("BFDS") which is duly registered as a transfer agent pursuant to Section 17A(c)(2) of the Securities Exchange Act of 1934, as amended ("Section 17A(c)(2)"), (ii) a BFDS subsidiary duly registered as a transfer agent pursuant to Section 17A(c)(2) or (iii) a BFDS affiliate; provided, however, that the Bank shall be as fully responsible to the Fund for the acts and omissions of any subcontractor as it is for its own acts and omissions. 17. Amendment This Agreement may be amended or modified by a written agreement executed by both parties and authorized or approved by a resolution of the Board of Trustees of the Fund. 18. Massachusetts Law to Apply This Agreement shall be construed and the provisions thereof interpreted under and in accordance with the laws of The Commonwealth of Massachusetts. 17 19. Force Majeure In the event either party is unable to perform its obligations under the terms of this Agreement because of acts of God, strikes, equipment or transmission failure or damage reasonably beyond its control, or other causes reasonably beyond its control, such party shall not be liable for damages to the other for any damages resulting from such failure to perform or otherwise from such causes. 20. Consequential Damages Neither party to this Agreement shall be liable to the other party for consequential damages under any provision of this Agreement or for any consequential damages arising out of any act or failure to act hereunder. 18 21. Merger of Agreement This Agreement constitutes the entire agreement between the parties hereto and supersedes any prior agreement with respect to the subject matter hereof whether oral or written. 22. Limitations of Liability of the Trustees and Shareholders 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 executed on behalf of the Trustees of the Trust as Trustees and not individually and that the obligations of this instrument are not binding upon any of the Trustees or Shareholders individually but are binding only upon the assets and property of the Fund. 23. Separate Liability of Portfolios Notwithstanding any other provision of this Agreement, the parties agree that the assets and liabilities of each Portfolio of the Fund are separate and distinct from the assets and liabilities of each other Portfolio and that no Portfolio shall be liable or shall be charged for any debt, obligation or liability of any other Portfolio, whether arising under the Agreement or otherwise. 24. Counterparts This Agreement may be executed by the parties hereto on any number of counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. 25. Reproduction of Documents This Agreement and all schedules, exhibits, attachments and amendments hereto may be reproduced by any photographic, photostatic, microfilm, micro-card, miniature photographic or other similar process. The parties hereto each agree that any such reproduction shall be admissible in evidence as the original itself in any judicial or administrative proceeding, whether or not the original is in existence and whether or not such reproduction was made by a party in the regular course of business, and that any enlargement, facsimile or further reproduction shall likewise be admissible in evidence. 19 26. Notices All notices under this Agreement shall be made orally, in writing, or by any other means mutually acceptable to the parties. If in writing, a notice shall be sufficient if personally delivered, mailed, first class postage prepaid, or sent via facsimile with return confirmation to the party entitled to receive such notices at the following addresses: (a) if to the Fund, to: AMERICAN AADVANTAGE FUNDS 4333 Amon Carter Blvd. MD 5645 Fort Worth, TX 76155 Attention: President Telephone: (817) 967-3509 Facsimile: (817) 967-0768 (b) if to the Bank, to: State Street Bank and Trust Company C/O Boston Financial Data Services, Inc. Attention: President 2 Heritage Drive North Quincy, MA 02171 Telephone: (617) 774-3292 Facsimile: (617) 774-2388 or such other address as either party shall have furnished to the other in writing. 20 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in their names and on their behalf by and through their duly authorized officers, as of the day and year first above written. AMERICAN AADVANTAGE FUNDS BY: /s/ WILLIAM F. QUINN ----------------------------------------- President ATTEST: /s/ BARRY Y. GREENBERG - ------------------------------ STATE STREET BANK AND TRUST COMPANY BY: /s/ RONALD E. LOGUE ----------------------------------------- Executive Vice President ATTEST: /s/ S. CESSI - ------------------------------ 21 STATE STREET BANK & TRUST COMPANY FUND SERVICE RESPONSIBILITIES*
Service Performed Responsibility - ----------------- -------------- Bank Fund ---- ---- 1. Receives orders for the purchase X of Shares. 2. Issue Shares and hold Shares in X Shareholders accounts. 3. Receive redemption requests. X 4. Effect transactions 1-3 above X directly with broker-dealers. 5. Pay over monies to redeeming X Shareholders. 6. Effect transfers of Shares. X 7. Prepare and transmit dividends X and distributions. 8. Issue Replacement Certificates. N/A 9. Reporting of abandoned property. X 10. Maintain records of account. X 11. Maintain and keep a current and X accurate control book for each issue of securities. 12. Mail proxies. X 13. Mail Shareholder reports. X 14. Mail prospectuses to current X Shareholders. 15. Withhold taxes on U.S. resident X and non-resident alien accounts.
22
Service Performed Responsibility - ----------------- -------------- Bank Fund ---- ---- 16. Prepare and file U.S. Treasury X Department forms. 17. Prepare and mail account and X confirmation statements for Shareholders. 18. Provide Shareholder account X information. 19. Blue sky reporting. X ]
* Such services are more fully described in Section 1.2 (a), (b) and (c) of the Agreement. AMERICAN AADVANTAGE FUNDS BY:/s/WILLIAM F. QUINN ------------------- William F. Quinn ATTEST: /s/ BARRY Y. GREENBERG - ---------------------- STATE STREET BANK AND TRUST COMPANY BY:/s/ RONALD E. LOGUE ------------------------ Executive Vice President ATTEST: /s/ S. CESSO ---------------------- 23 SCHEDULE A Balanced Fund Growth and Income Fund Intermediate Bond Fund International Equity Fund Limited-Term Income Fund Money Market Fund Municipal Money Market Fund U.S. Government Money Market Fund S&P 500 Index Fund EX-99.B.9B 5 AADVANTAGE SECURITIES LENDING AUTHORIZATION 1 Exhibit 99.b.9.b SECURITIES LENDING AUTHORIZATION AGREEMENT Between AMERICAN AADVANTAGE FUND and STATE STREET BANK AND TRUST COMPANY 2 TABLE OF CONTENTS
PAGE 1. DEFINITIONS....................................................... 1 2. APPOINTMENT OF STATE STREET....................................... 2 3. SECURITIES TO BE LOANED........................................... 2 4. BORROWERS......................................................... 2 5. SECURITIES LOAN AGREEMENTS........................................ 4 6. LOANS OF AVAILABLE SECURITIES..................................... 4 7. DISTRIBUTIONS ON AND VOTING RIGHTS WITH RESPECT TO LOANED SECURITIES........................................ 5 8. COLLATERAL........................................................ 6 9. INVESTMENT OF CASH COLLATERAL AND COMPENSATION ................... 8 10. FEE DISCLOSURE.................................................... 9 11. RECORDKEEPING AND REPORTS......................................... 9 12. STANDARD OF CARE.................................................. 9 13. REPRESENTATIONS AND WARRANTIES....................................10 14. INDEMNIFICATION...................................................11 15. CONTINUING AGREEMENT AND TERMINATION..............................13 16. NOTICES...........................................................13 17. MISCELLANEOUS.....................................................13 18. SECURITIES INVESTORS PROTECTION ACT...............................14 19. COUNTERPARTS......................................................15 20. MODIFICATION......................................................15
3 EXHIBITS AND SCHEDULES EXHIBIT 4.1 EXHIBIT 4.2 EXHIBIT 5.1 EXHIBIT 5.2 EXHIBIT 5.3 SCHEDULE A SCHEDULE B SCHEDULE 8.1 4 SECURITIES LENDING AUTHORIZATION AGREEMENT Agreement dated the ____ day of ______________, 19__ between AMERICAN AADVANTAGE FUNDS, a registered management investment company organized and existing under the laws of Massachusetts (the "Client"), and STATE STREET BANK AND TRUST COMPANY, a Massachusetts trust company ("State Street"), setting forth the terms and conditions under which State Street is authorized to act on behalf of the Client with respect to the lending of certain securities of the Client held by State Street as trustee, agent or custodian. This Agreement shall constitute a separate and discrete agreement between State Street and each of the series of shares of the Client listed on Schedule B to this Agreement, as it may be amended by the parties, and no series of shares of the Client shall be responsible or liable for any of the obligations of any other series of shares of the Client under this Agreement or otherwise. NOW, THEREFORE, in consideration of the mutual promises and of the mutual covenants contained herein, each of the parties does hereby covenant and agree as follows: 1. Definitions. For the purposes hereof: (a) "Available Securities" means the securities of the Client that are available for Loans pursuant to Section 3. (b) "Borrower" means any of the entities to which Available Securities may be loaned under a Securities Loan Agreement, as described in Section 4. (c) "Collateral" means collateral delivered by a Borrower to secure its obligations under a Securities Loan Agreement. (d) "Investment Manager" when used in any provision, means the person or entity who has discretionary authority over the investment of the Available Securities to which the provision applies. (e) "Loan" means a loan of Available Securities to a Borrower. (f) "Loaned Security" shall mean any "security" which is delivered as a Loan under a Securities Loan Agreement; provided that, if any new or different security shall be exchanged for any Loaned Security by recapitalization, merger, consolidation, or other corporate action, such new or different security shall, effective upon such exchange, be 1 5 deemed to become a Loaned Security in substitution for the former Loaned Security for which such exchange was made. (g) "Market Value" of a security means the market value of such security (including, in the case of a Loaned Security that is a debt security, the accrued interest on such security) as determined by the independent pricing service designated by State Street, or such other independent sources as may be selected by State Street on a reasonable basis. (h) "Securities Loan Agreement" means the agreement between a Borrower and State Street (on behalf of the Client) that governs Loans, as described in Section 5. (i) "Replacement Securities" means securities of the same issuer, class and denomination as Loaned Securities. 2. Appointment of State Street. The Client hereby appoints and authorizes State Street, as its agent, to lend Available Securities to Borrowers in accordance with the terms of this Agreement. State Street shall have the responsibility and authority to do or cause to be done all acts State Street shall determine to be desirable, necessary, or appropriate to implement and administer this securities lending program. The Client agrees that State Street is acting as a fully disclosed agent and not as principal in connection with the securities lending program. State Street may take action as agent of the Client on an undisclosed or a disclosed basis. 3. Securities to be Loaned. State Street acts or will act as agent, trustee or custodian of certain securities owned by the Client. All of the Client's securities held by State Street as agent, trustee or custodian for each portfolio as set forth on Schedule B hereto, shall be subject to this securities lending program and constitute Available Securities hereunder, except those securities which the Client or the Investment Manager specifically identifies in notices to State Street as not being Available Securities. Notwithstanding the foregoing, State Street shall loan no more than thirty three and one third percent (33 1/3%) of the market value of each portfolio's total assets, including the aggregate value of all Loans hereunder to Borrowers with respect to each portfolio. In the absence of any such notice identifying specific securities, State Street shall have no authority or responsibility for determining whether any of the Client's securities should be excluded from the lending program. 4. Borrowers. The Available Securities may be loaned to any Borrower identified on the Schedule of Borrowers, as such Schedule may be modified from time to time by State Street and Client, including without limitation, the Financial Markets Group of State Street; provided, however, if Available Securities are loaned to the Financial Markets Group, in addition to being consistent with the terms hereof, said Loan shall be made in accordance with the terms of the Securities Loan Agreement attached hereto as Exhibit 4.1, as modified form time to time in accordance with the provisions hereof (hereinafter, the "State Street Securities Loan Agreement"). The form of the State Street Securities Loan Agreement may 2 6 be modified by State Street from time to time, without the consent of the Client, in order to comply with the requirements of law or any regulatory authority having jurisdiction over State Street, the Client or the securities lending program or in any other manner that is not material and adverse to the interests of the Client. The Client acknowledges that it is aware that State Street, acting as "Lender's Agent" hereunder and thereunder, is or may be deemed to be the same legal entity as State Street acting as "Borrower" under the State Street Securities Loan Agreement, notwithstanding the different designations used herein and therein or the dual roles assumed by State Street hereunder and thereunder. Client represents that the power granted herein to State Street, as agent, to lend U.S. Securities owned by Client (including, in legal effect, the power granted to State Street to make Loans to itself) and the other powers granted to State Street, as agent herein, are given expressly for the purpose of averting and waiving any prohibitions upon such lending or other exercise of such powers which might exist in the absence of such powers, and that transactions effected pursuant to and in compliance with this Agreement and the State Street Securities Loan Agreement will not constitute a breach of trust or other fiduciary duty by State Street. The Client further acknowledges that it has granted State Street the power to effect securities lending transactions with the Financial Markets Group of State Street and other powers assigned to State Street hereunder and under the Securities Loan Agreements and the State Street Securities Loan Agreement as a result of the Client's desire to increase the opportunity for it to lend securities held in its account on fair and reasonable terms to qualified Borrowers without such loans being considered a breach of State Street's fiduciary duty. In connection therewith, each party hereby agrees that it shall furnish to the other party, upon request (i) the most recent available audited statement of its financial condition, and (ii) the most recent available unaudited statement of its financial condition, if more recent than the audited statement. As long as any Loan is outstanding under this Agreement, each party shall also promptly deliver to the other party all such financial information that is subsequently available, and any other financial information or statements that such other party may reasonably request. In the event any such Loan is made to the Financial Markets Group, State Street hereby covenants and agrees for the benefit of the Client that it has adopted and implemented procedural safeguards to ensure that all actions taken by it hereunder will be effected by individuals other than, and not under the supervision of, individuals who are acting in a capacity as Borrower thereunder, and that all trades effected hereunder will take place at the same fully negotiated "arms length" prices offered to similarly situated third parties by State Street when it acts as lending agent, notwithstanding the inherent conflict of interest with respect to Loans to be effected by State Street to the Financial Markets Group. 3 7 In the event the Client approves lending to borrowers resident in the United Kingdom, the Client shall complete Part 1 of the document known as a "MOD-2 form," which is attached hereto as Exhibit 4.2. In the event that securities lending activity is undertaken through its London office, State Street becomes subject to additional regulation in the UK, and State Street is obliged to notify the you of the following matters: i. State Street shall make available to you established procedures in accordance with the requirements of the Securities and Futures Authority for the effective consideration of complaints concerning State Street's activities carried on in the UK. ii. Where a liability in one currency is to be matched by an asset in a different currency, or where an investment transaction relates to an investment denominated in a currency other than sterling, a movement of exchange rates may have a separate effect, favorable or unfavorable, on the gain or loss which would otherwise be experienced on the investment. iii. State Street or an affiliate may have an interest that is material to the investment or transaction concerned and neither State Street nor any such affiliate shall be obliged to disclose such interest or account to you for any profits or benefits made or derived by it or any of its associates from any such transaction. iv. Any assets which State Street holds in the form of money shall not be treated by State Street as the Clients' Money as defined by The Financial Services (Client Money) Regulations 1991 of the United Kingdom as amended (the "Clients' Money Regulations") and will not be held in accordance with the Clients' Money Regulations or such other regulations as shall amend or replace the Clients' Money Regulations from time to time. 5. Securities Loan Agreements. The Client acknowledges receipt of State Street's standard forms of Securities Loan Agreements, attached hereto as Exhibits 5.1, 5.2 and 5.3, and authorizes State Street to enter into loans with such Borrowers as may be selected by State Street pursuant to agreements substantially in the form thereof. Each Securities Loan Agreement shall have such terms and conditions as State Street may negotiate with the Borrower, however certain terms of individual loans, including rebate fees to be paid to the Borrower for the use of cash Collateral, shall be negotiated at the time a loan is made. 6. Loans of Available Securities. State Street shall have authority to make Loans of Available Securities to Borrowers, and to deliver such securities to Borrowers. State Street shall be responsible for determining whether any such Loan shall be made, and provided that the terms and conditions are consistent with the terms and conditions hereof, for negotiating 4 8 and establishing the terms of each such Loan. State Street shall have the authority to terminate any Loan in its discretion, at any time and without prior notice to the Client. The Client acknowledges that State Street administers securities lending programs for other clients of State Street. State Street will allocate securities lending opportunities among its clients, using reasonable and equitable methods established by State Street from time to time. State Street does not represent or warrant that any amount or percentage of the Client's Available Securities will in fact be loaned to Borrowers. The Client agrees that it shall have no claim against State Street and State Street shall have no liability arising from, based on, or relating to, loans made for other clients, or loan opportunities refused hereunder, whether or not State Street has made fewer or more loans for any other client, and whether or not any loan for another client, or the opportunity refused, could have resulted in loans made under this Agreement. The Client also acknowledges that, under the applicable Securities Loan Agreements, the Borrowers will not be required to return Loaned Securities immediately upon receipt of notice from State Street terminating the applicable Loan, but instead will be required to return such Loaned Securities within such period of time following such notice as is specified in the applicable Securities Loan Agreement. Upon receiving a notice from the Client or the Investment Manager that Available Securities which have been loaned to a Borrower should no longer be considered Available Securities (whether because of the sale of such securities or otherwise), State Street shall use its best efforts to notify promptly thereafter the Borrower which has borrowed such securities that the Loan of such securities is terminated and that such securities are to be returned within the time specified by the applicable Securities Loan Agreement. 7. Distributions on and Voting Rights with Respect to Loaned Securities. The Client represents and warrants that it is the beneficial owner of (or exercises complete investment discretion over) all Available Securities free and clear of all liens, claims, security interests and encumbrances and no such security has been sold, and that it is entitled to receive all distributions made by the issuer with respect to Loaned Securities. Except as provided in the next sentence, all interest, dividends, and other distributions paid with respect to Loaned Securities shall be credited to the Client's custodial account with State Street on the date such amounts are delivered by the Borrower to State Street. Any non-cash distribution on Loaned Securities which is in the nature of a stock split or a stock dividend shall be added to the Loan (and shall be considered to constitute Loaned Securities) as of the date such non-cash distribution is received by the Borrower; provided that the Client (or Investment Manager) may, by giving State Street ten (l0) business days' notice prior to the date of such non-cash distribution, direct State Street to request that the Borrower deliver such non-cash distribution to State Street, pursuant to the applicable Securities Loan Agreement, in which case State Street shall credit such non-cash distribution to the Client's custodial account on the date it is delivered to State Street. 5 9 The Client acknowledges that it will not be entitled to participate in any dividend reinvestment program or to vote with respect to securities that are on loan on the applicable record date for such securities. The Client also acknowledges that any payments of distributions from Borrower to the Client are in substitution for the interest or dividend accrued or paid in respect of Loaned Securities and that the tax treatment of such payment may differ from the tax treatment of such interest or dividend. If an installment, call or rights issue becomes payable on or in respect of any Loaned Securities, State Street shall use all reasonable endeavors to ensure that any timely instructions from the Client are complied with, but State Street shall not be required to make any payment unless the Client has first delivered funds to State Street with which to make such payment. 8. Collateral. (a) Receipt of Collateral. The Client authorizes State Street to receive and to hold in Client's custodial account with State Street, on the Client's behalf, Collateral from Borrowers to secure the obligations of Borrowers with respect to any loan of securities made on behalf of the Client pursuant to the Securities Loan Agreements. Except as provided in Section 8(c) hereof, all investments of cash Collateral shall be made in accordance with Section 9 hereof and shall be for the account and at the risk of the Client. Concurrently with the delivery of the Loaned Securities to the Borrower under any Loan, State Street shall receive from the Borrower and shall credit to Client's custodial account, Collateral in any of the forms listed on Schedule 8.1. Said Schedule may be amended from time to time by State Street with the prior written approval of the Client. With respect to foreign cash Collateral, State Street will provide the Client with a multicurrency investment vehicle through which the foreign cash will be converted to U.S. dollars and invested pursuant to Section 9 hereof ("MCIV"). The Collateral received shall (i) in the case of Loaned Securities denominated in United States Dollars or whose primary trading market is located in the United States or sovereign debt issued by foreign governments, have a value of 102% of the Market Value of the Loaned Securities, or (ii) in the case of Loaned Securities which are not denominated in United States Dollars or whose primary trading market is not located in the United States, have a value of 105% of the Market Value of the Loaned Securities or (iii) have such other value as may be applicable in the jurisdiction in which such Loaned Securities are customarily traded; provided, however, that in the event of the application of part (iii) above, State Street shall consult with the Client and obtain the Client's written approval. Thereafter, State Street shall take all such action as is appropriate in order to protect Client's secured position and interests with respect to the Collateral under the applicable Securities Lending 6 10 Agreement, including without limitation, taking all action to require the Borrower to deliver additional Collateral. State Street shall value all Loaned Securities in accordance with its customary practice as follows. Pursuant to the terms of the applicable Securities Loan Agreement, State Street shall, in accordance with State Street's reasonable and customary practices and prevailing industry practices, mark each Loaned Security and its Collateral to their Market Value each business day based upon the Market Value of the Collateral and the Loaned Security at the close of business on the preceding business day employing the most recently available pricing information, and ensure that each applicable Securities Loan Agreement shall require each Borrower to deliver additional Collateral (for a letter of credit Collateral, an additional or replacement letter of credit) to State Street in accordance with the above percentages in the event that at the close of business on any business day the Market Value of the Collateral delivered by such Borrower with respect to a Loaned Security shall be less than (i) in the case of Loaned Securities denominated in United States Dollars or whose primary trading market is located in the United States or sovereign debt issued by foreign governments, 101.5% of the Market Value of the Loaned Securities or (ii) in the case of Loaned Securities whose primary trading market is not located in the United States (other than sovereign debt issued by foreign governments) 104.5% of the Market Value of the Loaned Securities or (iii) such other mark to market level as may be applicable in the jurisdiction in which such securities are customarily traded; provided, however, that in the event of the application of part (iii) above, State Street shall consult with the Client and obtain its prior written approval. Thereafter, State Street shall take such action as is appropriate with respect to the Collateral under the applicable Securities Loan Agreement. (b) Return of Collateral. The Collateral shall be returned to Borrower at the termination of the Loan upon the return of the Loaned Securities by Borrower to State Street in accordance with the applicable Securities Loan Agreement. (c) Limitations. State Street shall invest cash Collateral in accordance with the directions of the Client, including any limitations established by the Client in a writing identified to this Agreement and acknowledged in writing by State Street and shall exercise reasonable care, skill, diligence and prudence in the investment of Collateral. Subject to the foregoing limits and standard of care, State Street does not assume any market or investment risk of loss with respect to the currency conversions associated with the use of MCIV or the investment of cash Collateral. If the value of the cash Collateral so invested is insufficient to return the rebate fee (i.e., the return to the Borrower for use of cash Collateral), the full amount of the Collateral (U.S. dollar or otherwise), or any and all other amounts due to such Borrower pursuant to the Securities Loan Agreement, the Client shall be solely responsible for such shortfall and State Street may debit the Client's account. State Street shall be entitled to charge the Client's accounts for such shortfall in accordance with Section 9. 7 11 9. Investment of Cash Collateral and Compensation. To the extent that a Loan is secured by cash Collateral, such cash Collateral, including money received with respect to the investment of the same, or upon the maturity, sale, or liquidation of any such investments, shall be invested by State Street, subject to the directions of the Client or its Investment Manager, in short-term instruments, short term investment funds maintained by State Street and other money market mutual funds. The Client acknowledges that State Street, in providing MCIV, may receive additional compensation by managing its interest rate exposure. The Client acknowledges that interests in such mutual funds, securities lending trusts and other collective investment funds, to which State Street and/or one or more of its affiliates provide services are not guaranteed or insured by State Street or any of its affiliates or by the Federal Deposit Insurance Corporation or any government agency. The income generated by any investment made pursuant to the preceding paragraphs of this Section 9 shall be allocated among the Borrower, State Street, the Client and others, as follows: (a) a portion of such income shall be paid to the Borrower in accordance with the applicable Securities Loan Agreement; (b) the balance, if any, shall be split between State Street [as compensation for its services in connection with this securities lending program], the Client [as such income shall be credited to the Client's custodial account], and others. State Street shall be compensated in accordance with the fee schedule attached hereto as Schedule A. In the event the income generated by any investment made pursuant to the first paragraph of this Section 9 does not equal or exceed the amount due the Borrower (the "rebate fee") in accordance with the agreement between Borrower and State Street, State Street shall debit the Client's custodial account by an amount equal to the difference between the net income generated and the amounts to be paid to the Borrower pursuant to the Securities Loan Agreement. In the event debits to the Client's custodial account produce a deficit therein, State Street shall sell or otherwise liquidate investments made with cash Collateral and credit the net proceeds of such sale or liquidation to satisfy the deficit. In the event of a Loan to a Borrower resident in Canada, which is made over record date for a dividend reinvestment program ("DRP") and is secured by cash Collateral, the Borrower shall pay the Client a substitute payment equal to the full amount of the cash dividend declared, and may pay a loan premium, the amount of which shall be negotiated by State Street, above the amount of the cash dividend. Such loan premium shall be allocated between State Street and the Client as follows: (a) a portion of such loan premium shall be paid to State Street as compensation for its services in connection with this securities lending program, in accordance with Schedule A and (b) the remainder of such loan premium shall be credited to the Client's account. 8 12 To the extent that a Loan is secured by non-cash Collateral, the Borrower shall be required to pay a loan premium, the amount of which shall be negotiated by State Street. Such loan premium shall be allocated between State Street and the Client as follows: (a) a portion of such loan premium shall be paid to State Street as compensation for its services in connection with this securities lending program, in accordance with Schedule A hereto; and (b) the remainder of such loan premium shall be credited promptly to the Client's custodial account. The Client acknowledges that in the event that the Client's participation in securities lending generates income for the Client, State Street may be required to withhold tax or may claim such tax from the Client as is appropriate in accordance with applicable law. 10. Fee Disclosure. The fees associated with the investment of cash Collateral in funds maintained or advised by State Street are disclosed on Schedule A hereto. Said Schedule may be replaced from time to time by State Street only with the prior written consent of to the Client. An annual report with respect to such funds is available to the Client, at no expense, upon request. 11. Recordkeeping and Reports. State Street will establish and maintain such records as are reasonably necessary to account for Loans that are made and the income derived therefrom. On a monthly basis, State Street will provide the Client with a statement describing the Loans made, and the income derived from the Loans, for each day during the period covered by such statement. Each party to this Agreement shall comply with the reasonable requests of the other for information necessary to the requester's performance of its duties in connection with this securities lending program. 12. Standard of Care. Subject to the requirements of applicable law, State Street shall not be liable for any loss or damage, including reasonable counsel fees and court costs, whether or not resulting from their acts or omissions to act hereunder or otherwise, unless the loss or damage arises out of State Street's own negligence. Except for any liability, loss, or expense arising from or connected with State Street's own negligence or State Street's obligations under Section 14 hereof, the Client agrees to reimburse and hold State Street harmless from and against any liability, loss and expense, including reasonable counsel fees and expenses and court costs, arising in connection with this Agreement or any Loan or arising from or connected with claims of any third parties, including any Borrower, from and against all taxes and other governmental charges, and from and against any out-of-pocket or incidental expenses. State Street may charge any amounts to which it is entitled hereunder against the Client's custodial account provided the Client has given its consent. Without limiting the generality of the foregoing, the Client agrees: (i) that State Street shall not be responsible for any statements, representations or warranties which any Borrower makes in connection with any securities loans hereunder, or for the performance by any Borrower of 9 13 the terms of a Loan, or any agreement related thereto; (ii) that State Street shall be fully protected in acting in accordance with the oral or written instructions of any person reasonable believed by State Street to be authorized to execute this Agreement on behalf of the Client (an "Authorized Person"); (iii) that in the event of a default by a Borrower under a Loan, State Street shall be fully protected in acting in its sole discretion in a manner it deems appropriate; and (iv) that State Street shall not be under any duty or obligation to take action to effect payment by a Borrower of any amounts owed by the Borrower pursuant to the Loan Agreement, provided State Street timely advises the Client of the non-payment by the Borrower of any such amount. The Client acknowledges that, when lending Gilt securities, there is intraday settlement exposure from the Borrower's settlement bank. In particular, Client has daily exposure that the Gilt collateral position backed by the assured payment from the Borrower's settlement bank is unsecured. State Street, in determining the Market Value of Securities, including without limitation, Collateral, may rely upon any recognized pricing service and shall not be liable for any errors made by such service. 13. 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 transactions contemplated hereby, and to perform its obligations hereunder; (b) it 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. The Client represents and warrants that (a) it has made its own determination as to the tax treatment of any dividends, remuneration or other funds received hereunder; and (b) the financial statements delivered to State Street pursuant to Section 4 fairly present its financial condition and there has been no material adverse change in its financial condition or the financial condition of any parent company since the date of the balance sheet included within such financial statements. Each Loan shall constitute a present representation by the Client that there has been no material adverse change in its financial condition or the financial condition of any parent company that has not been disclosed in writing to State Street since the date of the most recent financial statements furnished to State Street pursuant to Section 4. The person executing this Agreement on behalf of the Client represents that he or she has the authority to execute this Agreement on behalf of the Client. 10 14 The Client hereby represents to State Street that prior to instructing State Street to purchase shares of the Navigator Securities Lending Quality Trust with cash Collateral: (i) its policies generally permit it to engage in securities lending transactions; (ii) its policies permit it to purchase shares of the Navigator Securities Lending Quality Trust with cash Collateral; (iii) its participation in the securities lending program, including the investment of cash collateral in the Navigator Securities Lending Trust, and the existing series' thereof, has been approved by a majority of the directors or trustees that are not "interested persons" within the meaning of section 2(a)(19) of the Investment Company Act of 1940, and such directors or trustees will evaluate the securities lending program no less frequently than annually to determine that the investment of cash collateral in the Navigator Securities Lending Trust, including any series thereof, is in the Client's best interest; and (iv) its prospectus provides appropriate disclosure concerning its securities lending activity. The Client acknowledges that on an annualized basis, the management/trust/custody fee for investing cash Collateral in the Navigator Securities Lending Prime Portfolio is not more than 10.00 basis points netted out of yield. The trustee may pay out of the assets of the Portfolio all reasonable expenses and fees of the Portfolio, including professional fees or disbursements incurred in connection with the operation of the Portfolio. The Client acknowledges that on an annualized basis, the management/trust/custody fee for investing cash Collateral in the Navigator Securities Lending Prime Portfolio is not more than 10.00 basis points netted out of yield. The trustee may pay out of the assets of the Portfolio all reasonable expenses and fees of the Portfolio, including professional fees or disbursements incurred in connection with the operation of the Portfolio. The Client hereby further represents that it is not subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA") with respect to this Agreement and the Securities; that it qualifies as an "accredited investor" within the meaning of Rule 501 of Regulation D under the Securities Act of 1933, as amended. 14. Indemnification. (a) If at the time of a default by a Borrower with respect to a Loan (within the meaning of the applicable Securities Loan Agreement) some or all of the Loaned Securities under such Loan have not been returned by the Borrower, and subject to the terms of this Agreement, State Street shall indemnify the Client against the failure of the Borrower as follows. State Street shall purchase a number of Replacement Securities equal to the number of such unreturned Loaned Securities, to the extent that such Replacement Securities are available on the open market. Such Replacement Securities shall be purchased by applying the proceeds of the Collateral with respect to such Loan to the purchase of such Replacement Securities. Subject to the Client's obligations pursuant to Section 8 hereof, if and to the extent that such proceeds are insufficient or the Collateral is unavailable, the purchase of such Replacement Securities shall be made at State Street's expense. 11 15 (b) If after the expiration of the customary settlement period State Street is unable to purchase Replacement Securities pursuant to Paragraph (a) hereof, State Street shall: (1) credit to the Client's custodial account an amount equal to the Market Value of the unreturned Loaned Securities for which replacement securities are not so purchased, determined as of (i) the last day the Collateral continues to be successfully marked to market against the unreturned Loaned Securities; or (ii) the next business day following the day referred to in (i) above, if higher; or (2) notwithstanding the Borrower marking-to-market and State Street continuing to search for Replacement Securities, State Street shall apprise the Client of same and at the direction of the Client, credit the Client's account with an amount equal to the Market Value of the unreturned Loaned Securities determined as of the close of business on the date of the Client's direction. (c) In addition to making the purchases or credits required by Paragraphs (a) and (b) hereof, State Street shall credit to the Client's custodial account the value of all distributions on the Loaned Securities (not otherwise credited to the Client's custodial accounts with State Street), the record dates for which occur before the date that State Street purchases Replacement Securities pursuant to Paragraph (a) or credits the Client's custodial account pursuant to Paragraph (b). (d) Any credits required under Paragraphs (b) and (c) hereof shall be made by application of the proceeds of the Collateral (if any) that remains after the purchase of Replacement Securities pursuant to Paragraph (a). If and to the extent that the Collateral is unavailable or the value of the proceeds of the remaining Collateral is less than the value of the sum of the credits required to be made under Paragraphs (b) and (c), such credits shall be made at State Street's expense. (e) If after application of Paragraphs (a) through (d) hereof, additional Collateral remains or any previously unavailable Collateral becomes available or any additional amounts owed by the Borrower with respect to such Loan are received from the Borrower, State Street shall apply the proceeds of such Collateral or such additional amounts first to reimburse itself for any amounts expended by State Street pursuant to Paragraphs (a) through (d) above, and then to credit to the Client's custodial account all other amounts owed by the Borrower to the Client with respect to such Loan under the applicable Securities Loan Agreement. (f) In the event that State Street is required to make any payment and/or incur any loss or expense under this Section, State Street shall, to the extent of such payment, loss, or expense, be subrogated to, and succeed to, all of the rights of the Client against the Borrower under the applicable Securities Loan Agreement. 12 16 (g) The provisions of this Section 14 shall not apply to losses attributable to war, riot, revolution, acts of government or other similar causes which could inhibit State Street's ability to transact business. 15. Continuing Agreement and Termination. It is the intention of the parties hereto that this Agreement shall constitute a continuing agreement in every respect and shall apply to each and every Loan, whether now existing or hereafter made. The Client and State Street may each at any time terminate this Agreement upon five (5) business days' written notice to the other to that effect. The only effects of any such termination of this Agreement will be that (a) following such termination, no further Loans shall be made hereunder by State Street on behalf of the Client, and (b) State Street shall, within a reasonable time after termination of this Agreement, terminate any and all outstanding Loans. The provisions hereof shall continue in full force and effect in all other respects until all Loans have been terminated and all obligations satisfied as herein provided. 16. Notices. Except as otherwise specifically provided herein, notices under this Agreement may be made orally, in writing, or by any other means mutually acceptable to the parties. If in writing, a notice shall be sufficient if delivered to the party entitled to receive such notices at the following addresses: If to Client: AMR Investment Services, Inc. 4333 Amon Carter Blvd. Bldg. MD 5645 Fort Worth, Texas 76155 Attention: President Telephone: (817) 967-3509 If to State Street: State Street Bank and Trust Company Global Securities Lending Division Two International Place, Floor 31 Boston, Massachusetts 02110 Attention: Client Services Telephone: (617) 664-2500 or to such other addresses as either party may furnish the other party by written notice under this section. 13 17 Whenever this Agreement permits or requires the Client to give notice to, direct, provide information to State Street, such notice, direction, or information shall be provided to State Street on the Client's behalf by any individual designated for such purpose by the Client in a written notice to State Street. (This Agreement shall be considered such a designation of the person executing the Agreement on the Client's behalf.) After its receipt of such a notice of designation, and until its receipt of a notice revoking such designation, State Street shall be fully protected in relying upon the notices, directions, and information given by such designee. 17. Miscellaneous. This Agreement supersedes any other agreement between the parties or any representations made by one party to the other, whether oral or in writing, concerning loans of securities by State Street on behalf of the Client. Subject to the foregoing, this Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, representatives, successors, and assigns. This Agreement shall be governed and construed in accordance with the laws of the Commonwealth of Massachusetts. The Client hereby irrevocably submits to the jurisdiction of any Massachusetts state or Federal court sitting in The Commonwealth of Massachusetts in any action or proceeding arising out of or related to this Agreement and hereby irrevocably agrees that all claims in respect of such action or proceeding may be heard and determined in such Massachusetts state or Federal court except that this provision shall not preclude any party from removing any action to Federal court. The Client irrevocably consents to the service of any and all process in any such action or proceeding by the mailing of copies of such process to the Client at its address specified in Section 16 hereof. The Client agrees that a final judgment in any such action or proceeding, all appeals having been taken or the time period for such appeals having expired, shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. The provisions of this Agreement are severable and the invalidity or unenforceability of any provision hereof shall not affect any other provision of this Agreement. If in the construction of this Agreement any court should deem any provision to be invalid because of scope or duration, then such court shall forthwith reduce such scope or duration to that which is appropriate and enforce this Agreement in its modified scope or duration. 18. Securities Investors Protection Act of 1970 Notice. CLIENT IS HEREBY ADVISED AND ACKNOWLEDGES THAT THE PROVISIONS OF THE SECURITIES INVESTOR PROTECTION ACT OF 1970 MAY NOT PROTECT THE CLIENT WITH RESPECT TO THE LOAN OF SECURITIES HEREUNDER AND THAT, THEREFORE, THE COLLATERAL DELIVERED TO THE CLIENT MAY CONSTITUTE THE ONLY SOURCE OF SATISFACTION OF THE BROKER'S OR DEALER'S OBLIGATION IN THE EVENT THE BROKER OR DEALER FAILS TO RETURN THE SECURITIES. 14 18 19. Counterparts. The Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but such counterparts shall, together, constitute only one (1) instrument. 20. Modification. This Agreement shall not be modified, except by an instrument in writing signed by the party against whom enforcement is sought. AMERICAN AADVANTAGE FUNDS Name:____________________________ By:______________________________ Its: ____________________________ STATE STREET BANK AND TRUST COMPANY Name:____________________________ By:______________________________ Its:_____________________________ 15 19 SCHEDULE A This Schedule is attached to and made part of the Securities Lending Authorization Agreement, dated the ____ day of _______, 199_ between AMERICAN AADVANTAGE FUNDS ("Client") and STATE STREET BANK AND TRUST COMPANY ("State Street"). SCHEDULE OF FEES 1. Subject to Paragraph 2 below, all proceeds collected by State Street on investment of cash Collateral or any fee income, including all interest, dividends and other distributions shall be allocated as follows: - Twenty five percent (25 %) payable to State Street. 2. All payments to be allocated under Paragraph 1 above shall be made after deduction of such other amounts payable to State Street or to the Borrower under the terms of the attached Securities Lending Authorization Agreement. On an annualized basis, the management/trust/custody fee for investing cash Collateral in the Navigator Securities Lending Prime Portfolio is not more than 10.00 basis points netted out of yield. The trustee may pay out of the assets of the Portfolio all reasonable expenses and fees of the Portfolio, including professional fees or disbursements incurred in connection with the operation of the Portfolio. 20 SCHEDULE B This Schedule is attached to and made part of the Securities Lending Authorization Agreement, dated the ____ day of _______, 199_ between AAMERICAN AADVANTAGE FUNDS ("Client") and STATE STREET BANK AND TRUST COMPANY ("State Street").
FUND NAMES TAXPAYER IDENTIFICATION NUMBER TAX YEAR END Balanced Fund 75-2161800 October 31 Growth and Income Fund 75-2161801 October 31 International Equity Fund 75-2401150 October 31 Intermediate Bond Fund 75-2715788 October 31 Limited-Term Income Fund 75-2161799 October 31
21 SCHEDULE 8.1 This Schedule is attached to and made part of the Securities Lending Authorization Agreement, dated the ____ day of _______, 199_ between AMR INVESTMENT SERVICES TRUST ("Client") and STATE STREET BANK AND TRUST COMPANY ("State Street"). ACCEPTABLE FORMS OF COLLATERAL - Cash (U.S. and foreign currency); - Securities issued or guaranteed by the United States government or its agencies; - Irrevocable bank letters of credit issued by a person other than the Borrower or an affiliate of the Borrower may be accepted as Collateral; and - Such other Collateral as the parties may agree to in writing from time to time. EX-99.B.11 6 CONSENT OF INDEPENDENT AUDITORS 1 EXHIBIT 99.b.11 Consent of Independent Auditors We consent to the reference to our firm under the captions "Financial Highlights," "Management and Administration of the Trust-Independent Auditor" and "Shareholder Communications" and to the use of our reports dated December 19, 1997 in the Registration Statement (Form N-1A) and its incorporation by reference in the related Prospectus of American AAdvantage Funds, filed with the Securities and Exchange Commission in this Post-Effective Amendment No. 24 to the Registration Statement under the Securities Act of 1933 (File No. 33-11387) and in this Amendment No. 25 to the Registration Statement under the Investment Company Act of 1940. /s/ ERNST & YOUNG LLP ------------------------ ERNST & YOUNG LLP Dallas, Texas February 24, 1998 2 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in Post-Effective Amendment No. 24 to the Registration Statement under the Securities Act of 1933 (File No. 33-11387) and in Post-Effective Amendment No. 25 to the Registration Statement under the Investment Company Act of 1940 of the American AAdvantage S&P 500 Index Fund (one of the Funds comprising American AAdvantage Funds) on Form N-1A of our reports dated February 13, 1998 on our audits of the financial statements and financial highlights of the American AAdvantage S&P 500 Index Fund and the Equity 500 Index Portfolio, which reports are included in the Annual Report to Shareholders for the year ended December 31, 1997 which is incorporated by reference in the Post-Effective Amendment to each Registration Statement. /s/ COOPERS & LYBRAND L.L.P. Kansas City, Missouri February 26, 1998 -----END PRIVACY-ENHANCED MESSAGE-----