<PAGE> 1
STATEMENT OF ADDITIONAL INFORMATION
AMERICAN AADVANTAGE SMALL CAP VALUE FUNDSM
-- AMR CLASS --
-- INSTITUTIONAL CLASS --
JANUARY 1, 1999
The American AAdvantage Small Cap Value Fundsm (the "Fund") is one of
ten separate investment portfolios of the American AAdvantage Funds (the
"Trust") a no-load, open-end, diversified management investment company
organized as a Massachusetts business trust on January 16, 1987. This Statement
of Additional Information ("SAI") relates to the AMR and Institutional Classes
of the Fund.
The 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 Fund (the "Portfolio"). The AMR Trust is a separate investment
company managed by AMR Investment Services, Inc. (the "Manager").
This SAI should be read in conjunction with an AMR Class or an
Institutional Class prospectus for the Fund, dated January 1, 1999
(individually, a "Prospectus"), copies of which may be obtained without charge
by calling (800) 388-3344 for an Institutional Class Prospectus or (817)
967-3509 for an AMR Class Prospectus.
This SAI is not a prospectus and is authorized for distribution to
prospective investors only if preceded or accompanied by a current Prospectus.
TABLE OF CONTENTS
<TABLE>
<S> <C>
Non-Principal Investment Strategies and Risks.................................2
Investment Restrictions.......................................................2
Trustees and Officers of the Trust and the AMR Trust..........................4
Management, Administrative Services and Distribution Fees.....................6
Redemptions in Kind...........................................................6
Investment Advisory Agreements................................................6
Portfolio Securities Transactions.............................................7
Net Asset Value...............................................................8
Tax Information...............................................................8
Yield and Total Return Quotations.............................................9
Description of the Trust.....................................................10
Other Information............................................................11
</TABLE>
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NON-PRINCIPAL INVESTMENT STRATEGIES AND RISKS
In addition to the investment strategies described in the Prospectus,
the Fund may:
1. Invest up to 20% of total assets in debt securities that are
investment grade at the time of purchase, including obligations of the
U.S. Government, its agencies and instrumentalities, corporate debt
securities, mortgage-backed securities, asset-backed securities,
master-demand notes, Yankeedollar and Eurodollar bank certificates of
deposit, time deposits, bankers' acceptances, commercial paper and
other notes, and other debt securities. Investment grade securities
include securities issued or guaranteed by the U.S. Government, its
agencies and instrumentalities, as well as securities rated in one of
the four highest rating categories by all rating organizations rating
that security (such as Standard & Poor's or Moody's Investors Service,
Inc.). Obligations rated in the fourth highest rating category are
limited to 25% of the Fund's debt allocation. The Fund, at the
discretion of the investment advisers, may retain a debt security that
has been downgraded below the initial investment criteria.
2. Purchase or sell securities on a when-issued or forward commitment
basis.
3. Invest in other investment companies to the extent permitted by the
Investment Company Act of 1940 ("1940 Act") or exemptive relief granted
by the Securities and Exchange Commission ("SEC").
4. Loan securities to broker-dealers or other institutional investors.
5. Enter into repurchase agreements, and
6. Purchase securities in private placement offerings made in reliance
on the "private placement" exemption from registration afforded by
Section 4(2) of the Securities Act of 1933 ("1933 Act"), and resold to
qualified institutional buyers under Rule 144A under the 1933 Act
("Section 4(2) securities").
INVESTMENT RESTRICTIONS
The Fund has the following fundamental investment policy that enables
it to invest in the Portfolio:
Notwithstanding any other limitation, the Fund may invest all of
its investable assets in an open-end management investment company
with substantially the same investment objectives, policies and
limitations as the Fund. For this purpose, "all of the Fund's
investable assets" means that the only investment securities that
will be held by the Fund will be the Fund's interest in the
investment company.
All other fundamental investment policies and the non-fundamental
policies of the Fund and its corresponding Portfolio are identical. Therefore,
although the following discusses the investment policies of the Portfolio and
the AMR Trust's Board of Trustees ("AMR Trust Board"), it applies equally to the
Fund and the Trust's Board of Trustees ("Board").
In addition to the investment limitations noted above, the following
nine restrictions have been adopted by the Portfolio, and may be changed 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 the Fund is requested to vote on a change
in the investment restrictions of the Portfolio, the Fund will hold a meeting of
its shareholders and will cast its votes as instructed by its shareholders. The
percentage of the Fund's votes representing the Fund's shareholders not voting
will be voted by the Board in the same proportion as the Fund shareholders who
do, in fact, vote.
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The Portfolio may not:
1. Purchase or sell real estate or real estate limited partnership
interests, provided, however, that the Portfolio may invest in
securities secured by real estate or interests therein or issued by
companies which invest in real estate or interests therein when
consistent with the other policies and limitations described in the
Prospectus.
2. Purchase or sell commodities (including direct interests and/or
leases in oil, gas or minerals) or commodities contracts, except with
respect to forward foreign currency exchange contracts, foreign
currency futures contracts and when-issued securities when consistent
with the other policies and limitations described in the Prospectus.
3. Engage in the business of underwriting securities issued by others,
except to the extent that, in connection with the disposition of
securities, the Portfolio may be deemed an underwriter under federal
securities law.
4. Make loans to any person or firm, provided, however, that the making
of a loan shall not be construed to include (i) the acquisition for
investment of bonds, debentures, notes or other evidences of
indebtedness of any corporation or government which are publicly
distributed or (ii) the entry into repurchase agreements and further
provided, however, that 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.
7. Borrow money, except from banks or through reverse repurchase
agreements for temporary purposes in an aggregate amount not to exceed
10% of the value of its total assets at the time of borrowing. In
addition, although not a fundamental policy, the Portfolio intends to
repay any money borrowed before any additional portfolio securities are
purchased. See "Other Information" for a further description regarding
reverse repurchase agreements.
8. Invest more than 5% of its total assets (taken at market value) in
securities of any one issuer, other than obligations issued by the U.S.
Government, its agencies and instrumentalities, or purchase more than
10% of the voting securities of any one issuer, with respect to 75% of
the Portfolio's total assets; or
9. Invest more than 25% of its total assets in the securities of
companies primarily engaged in any one industry, provided that: (i)
this limitation does not apply to obligations issued or guaranteed by
the U.S. Government, its agencies and instrumentalities (and repurchase
agreements related thereto); (ii) municipalities and their agencies and
authorities are not deemed to be industries; (iii) finance companies as
a group are not considered a single industry for purposes of this
limitation; and (iv) wholly-owned finance companies will be considered
to be in the industries of their parent companies if their activities
are primarily related to financing the activities of their parent
companies.
The above percentage limits are based upon asset values at the time of
the applicable transaction; accordingly, a subsequent change in asset values
will not affect a transaction that was in compliance with the investment
restrictions at the time such transaction was effected.
The following non-fundamental investment restrictions may be changed
with respect to the Fund by a vote of a majority of the Board or with respect to
the Portfolio by a vote of a majority of the AMR Trust Board. The Portfolio may
not:
1. Invest more than 15% of its net assets in illiquid securities,
including time deposits and repurchase agreements that mature in more
than seven days; or
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2. Purchase securities on margin, effect short sales (except that the
Portfolio may obtain such short term credits as may be necessary for
the clearance of purchases or sales of securities) or purchase or sell
call options or engage in the writing of such options.
The Portfolio may invest up to 10% of its total assets in the
securities of other investment companies to the extent permitted by law. The
Portfolio may incur duplicate advisory or management fees when investing in
another mutual fund.
TRUSTEES AND OFFICERS OF THE TRUST AND THE AMR TRUST
The Board provides broad supervision over the Trust's affairs. The
Manager is responsible for the management of Trust assets, and the Trust's
officers are responsible for the Trust's operations. The Trustees and officers
of the Trust and AMR Trust are listed below, together with their principal
occupations during the past five years. Unless otherwise indicated, the address
of each person listed below is 4333 Amon Carter Boulevard, MD 5645, Fort Worth,
Texas 76155.
<TABLE>
<CAPTION>
POSITION WITH
NAME, AGE AND ADDRESS EACH TRUST PRINCIPAL OCCUPATION DURING PAST 5 YEARS
--------------------- ------------- ----------------------------------------
<S> <C> <C>
William F. Quinn* (51) Trustee and President President, AMR Investment Services, Inc. (1986-Present); Chairman,
American Airlines Employees Federal Credit Union (1989-Present);
Trustee, American Performance Funds (1990-1994); Director,
Crescent Real Estate Equities, Inc. (1994-Present); Trustee,
American AAdvantage Mileage Funds (1995-Present).
Alan D. Feld (61) Trustee Partner, Akin, Gump, Strauss, Hauer & Feld, LLP (1960-Present)#;
1700 Pacific Avenue Director, Clear Channel Communications (1984-Present); Director,
Suite 4100 CenterPoint Properties, Inc. (1994-Present); Trustee, American
Dallas, Texas 75201 AAdvantage Mileage Funds (1996-Present).
Ben J. Fortson (66) Trustee President and CEO, Fortson Oil Company (1958-Present); Director,
301 Commerce Street Kimbell Art Foundation (1964-Present); Director, Burnett
Suite 3301 Foundation (1987-Present); Honorary Trustee, Texas Christian
Fort Worth, Texas 76102 University (1986-Present); Trustee, American AAdvantage Mileage
Funds (1996-Present).
John S. Justin (82) Trustee Chairman and Chief Executive Officer, Justin Industries, Inc. (a
2821 West Seventh Street diversified holding company) (1969-Present); Executive Board
Fort Worth, Texas 76107 Member, Blue Cross/Blue Shield of Texas (1985-Present); Board
Member, Zale Lipshy Hospital (1993-Present); Trustee, Texas
Christian University (1980-Present); Director and Executive Board
Member, Moncrief Radiation Center (1985-Present); Director, Texas
New Mexico Enterprises (1984-1993); Director, Texas New Mexico
Power Company (1979-1993); Trustee, American AAdvantage Mileage
Funds (1995-Present).
Stephen D. O'Sullivan (63) Trustee Consultant (1994-Present); Vice President and Controller
(1985-1994), American Airlines, Inc.; Trustee, American AAdvantage
Mileage Funds (1995-Present).
</TABLE>
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<TABLE>
<S> <C> <C>
Roger T. Staubach (56) Trustee Chairman of the Board and Chief Executive Officer of The Staubach
6750 LBJ Freeway Company (a commercial real estate company) (1982-Present);
Dallas, Texas 75240 Director, Halliburton Company (1991-Present); Director, Brinker
International (1993-Present); Director, International Home Foods,
Inc. (1997-Present); National Advisory Board, The Salvation Army;
Trustee, Institute for Aerobics Research; Member, Executive
Council, Daytop/Dallas; Member, National Board of Governors,
United Way of America; former quarterback of the Dallas Cowboys
professional football team; Trustee, American AAdvantage Mileage
Funds (1995-Present).
Kneeland Youngblood (42) Trustee President, Youngblood Enterprises, Inc. (a private business
2305 Cedar Springs Road management firm) (1983-Present); Trustee, Teachers Retirement
Suite 401 System of Texas (1993-Present); Director, United States Enrichment
Dallas, Texas 75201 Corporation (1993-Present), Director, Just For the Kids
(1995-Present); Director, Starwood Financial Trust (1998-Present);
Member, Council on Foreign Relations (1995-Present); Trustee,
American AAdvantage Mileage Funds (1996-Present).
Nancy A. Eckl (36) Vice President Vice President, AMR Investment Services, Inc. (1990-Present).
Michael W. Fields (45) Vice President Vice President, AMR Investment Services, Inc. (1988-Present).
Barry Y. Greenberg (35) Vice President and Director, Legal and Compliance, AMR Investment Services, Inc.
Assistant Secretary (1995-Present); Branch Chief (1992-1995) and Staff Attorney
(1988-1992), Securities and Exchange Commission.
Rebecca L. Harris (32) Treasurer Director of Finance (1995-Present), Controller (1991- 1995), AMR
Investment Services, Inc.
John B. Roberson (40) Vice President Vice President, AMR Investment Services, Inc. (1991-Present).
Robert J. Zutz (46) Secretary Partner, Kirkpatrick & Lockhart LLP (law firm)
1800 Massachusetts Ave. NW
Washington, D.C. 20036
</TABLE>
* Mr. Quinn, by virtue of his current position, is deemed to be an
"interested person" of the Trust and AMR Trust as defined by the 1940
Act.
# The law firm of Akin, Gump, Strauss, Hauer & Feld LLP ("Akin, Gump")
provides legal services to American Airlines, Inc., an affiliate of the
Manager. Mr. Feld has advised the Trusts that he has had no material
involvement in the services provided by Akin, Gump to American Airlines,
Inc. and that he has received no material benefit in connection with
these services. Akin, Gump does not provide legal services to the Manager
or AMR Corporation.
All Trustees and officers as a group own less than 1% of the outstanding
shares of any of the Funds.
As compensation for their service to the Trust and the AMR Trust, the
Independent Trustees and their spouses receive free air travel from American
Airlines, Inc., an affiliate of the Manager. The Trust and the AMR Trust do not
pay for these travel arrangements. However, the Trusts compensate each Trustee
with payments in an amount equal to the Trustees' income tax on the value of
this free airline travel. Mr. O'Sullivan, as a retiree of American
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Airlines, Inc. already receives flight benefits. The Trusts compensate Mr.
O'Sullivan up to $10,000 annually to cover his personal flight service charges
and the cost of airline travel for his three adult children, as well as any
income tax charged on the value of flight benefits received. Trustees are also
reimbursed for any expenses incurred in attending Board meetings. These amounts
(excluding reimbursements) are reflected in the following table for the fiscal
year ended October 31, 1998.
<TABLE>
<CAPTION>
Total Compensation
Aggregate Pension or Retirement From American
Compensation Benefits Accrued as Part Estimated Annual AAdvantage Funds
From the of the Benefits Upon Complex
Name of Trustee Trust Trust's Expenses Retirement (27 Funds)
- --------------- ------------ ------------------------ ---------------- ------------------
<S> <C> <C> <C> <C>
William F. Quinn $ 0 $0 $0 $ 0
Alan D. Feld $ 8,901 $0 $0 $35,605
Ben J. Fortson $ 8,760 $0 $0 $35,038
John S. Justin $ 404 $0 $0 $ 1,618
Stephen D. O'Sullivan $ 1,421 $0 $0 $ 5,686
Roger T. Staubach $ 4,356 $0 $0 $17,423
Kneeland Youngblood $19,891 $0 $0 $79,563
</TABLE>
MANAGEMENT, ADMINISTRATIVE SERVICES AND DISTRIBUTION FEES
The Manager is paid a management fee as compensation for paying
investment advisory fees and for providing the Trust and the AMR Trust with
advisory and asset allocation services. Pursuant to management and
administrative services agreements, the Manager provides the Trust and the AMR
Trust with office space, office equipment and personnel necessary to manage and
administer the Trusts' operations. This includes
o complying with reporting requirements;
o corresponding with shareholders;
o maintaining internal bookkeeping, accounting and auditing services and
records; and
o supervising the provision of services to the Trusts by third parties.
In addition to its oversight of the investment advisers, the Manager
invests the portion of Fund assets which the investment advisers determine to be
allocated to high quality short-term debt obligations.
In addition to the management fee, the Manager is paid an
administrative service fee for providing administrative and management services
(other than investment advisory services) to the Fund. The Manager also receives
compensation for administrative and oversight functions with respect to
securities lending of the Portfolio.
Brokers Transaction Services, Inc. ("BTS"), located at 7001 Preston
Road, Dallas, Texas 75205, is the principal underwriter of the Fund's shares,
and, as such, receives an annualized fee of $50,000 from the Manager for
distributing the shares of the Trust and the American AAdvantage Mileage Funds.
REDEMPTIONS IN KIND
Although the Fund intends to redeem shares in cash, it reserves the
right to pay the redemption price in whole or in part by a distribution of
readily marketable securities held by the Portfolio. However, shareholders
always will be entitled to redeem shares for cash up to the lesser of $250,000
or 1% of the Fund's net asset value during any 90-day period. Redemption in kind
is not as liquid as a cash redemption. In addition, if redemption is made in
kind, shareholders who receive securities and sell them could receive less than
the redemption value of their securities and could incur certain transactions
costs.
INVESTMENT ADVISORY AGREEMENTS
Separate amendments to the existing Investment Advisory Agreements
("Advisory Agreements") with Brandywine Asset Management, Inc. and Hotchkis and
Wiley regarding the Small Cap Fund were approved and will become effective as of
January 1, 1999. The Manager has agreed to pay Brandywine an annualized fee
equal to 0.50% on the first $100 million in Portfolio assets under its
discretionary management, 0.45% for assets ranging from $100 million to $250
million, and 0.40% on assets over $250 million. Hotchkis will be paid an
annualized fee
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equal to 0.5625% of Portfolio assets under its discretionary management. To the
extent that the Fund invests all of its investable assets in the Portfolio,
investment advisers receive a fee on behalf of the Portfolio, and not the Fund.
Each Advisory Agreement will automatically terminate if assigned, and may
be terminated without penalty at any time by the Manager, by a vote of a
majority of the Trustees or by a vote of a majority of the outstanding voting
securities of the Fund on no less than thirty (30) days' nor more than sixty
(60) days' written notice to the investment adviser, or by the investment
adviser upon sixty (60) days' written notice to the Trust. The 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 Advisory Agreement or
"interested persons" (as defined in the 1940 Act) of any such party, cast in
person at a meeting called for the purpose of considering such approval, or by
the vote of shareholders.
The 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.
PORTFOLIO SECURITIES TRANSACTIONS
Each investment adviser will place its own orders to execute securities
transactions which are designed to implement the applicable Portfolio's
investment objective and policies. In placing such orders, each investment
adviser will seek the best available price and most favorable execution. The
full range and quality of services offered by the executing broker or dealer
will be considered when making these determinations. Pursuant to written
guidelines approved by the AMR Trust Board, as appropriate, an investment
adviser of the Portfolio, or its affiliated broker-dealer, may execute portfolio
transactions and receive usual and customary brokerage commissions (within the
meaning of Rule 17e-1 of the 1940 Act) for doing so. The 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 the Portfolio's transaction costs, including brokerage
commissions and may result in a greater number of taxable transactions.
The Advisory Agreements provide, in substance, that in executing
portfolio transactions and selecting brokers or dealers, the principal objective
of each investment adviser is to seek the best net price and execution
available. It is expected that securities ordinarily will be purchased in the
primary markets, and that in assessing the best net price and execution
available, each investment adviser shall consider all factors it deems relevant,
including the breadth of the market in the security, the price of the security,
the financial condition and execution capability of the broker or dealer and the
reasonableness of the commission, if any, for the specific transaction and on a
continuing basis.
In selecting brokers or dealers to execute particular transactions,
investment advisers are authorized to consider "brokerage and research services"
(as those terms are defined in Section 28(e) of the Securities Exchange Act of
1934), provision of statistical quotations (including the quotations necessary
to determine a Portfolio's net asset value), the sale of Trust shares by such
broker-dealer or the servicing of Trust shareholders by such broker-dealer, and
other information provided to the Portfolio, to the Manager 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 the
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.
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NET ASSET VALUE
Equity securities listed on securities exchanges 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. 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.
TAX INFORMATION
TAXATION OF THE FUNDS
The Fund (which is treated as a separate corporation for these purposes)
intends to qualify as a regulated investment company ("RIC") under the Internal
Revenue Code of 1986, as amended. To do so, the Fund 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 foreign currencies, or certain
other income, including gains from options, futures or forward contracts
("Income Requirement");
o Diversify its investments in securities within certain statutory limits
("Diversification Requirement"); and
o Distribute annually to its shareholders at least 90% of its investment
company taxable income (generally, taxable net investment income plus net
short-term capital gain).
The Fund, as an investor in the Portfolio, will be deemed to own a
proportionate share of the Portfolio's assets and to earn the income on that
share for purposes of determining whether the Fund satisfies the Income and
Diversification Requirements. If the Fund failed to qualify as a RIC for any
taxable year, it would be taxed on the full amount of its taxable income for
that year without being able to deduct the distributions it makes to its
shareholders and the shareholders would treat all those distributions as
dividends (that is, ordinary income) to the extent of the Fund's earnings and
profits.
TAXATION OF THE PORTFOLIO
The Portfolio should be classified as a separate partnership for federal
income tax purposes and should not be a "publicly traded partnership." As a
result, the Portfolio should not be subject to federal income tax; instead, each
investor in the Portfolio, such as the Fund, is required to take into account in
determining its federal income tax liability its share of the Portfolio's
income, gains, losses and deductions, without regard to whether it has received
any cash distributions from the Portfolio.
Because, as noted above, the Fund is deemed to own a proportionate share
of the Portfolio's assets and to earn a proportionate share of the Portfolio's
income for purposes of determining whether the Fund satisfies the Income and
Diversification Requirements to qualify as a RIC, the Portfolio intends to
conduct its operations so that the Fund will be able to satisfy those
requirements.
Distributions to the Fund from the Portfolio (whether pursuant to a
partial or complete withdrawal or otherwise) will not result in the Fund's
recognition of any gain or loss for federal income tax purposes, except that (1)
gain will be recognized to the extent any cash that is distributed exceeds the
Fund's basis for its interest in the Portfolio before the distribution, (2)
income or gain will be recognized if the distribution is in liquidation of the
Fund's entire interest in the Portfolio and includes a disproportionate share of
any unrealized receivables held by the Portfolio and (3) loss will be recognized
if a liquidation distribution consists solely of cash and/or unrealized
receivables. The Fund's basis for its interest in the Portfolio generally will
equal the amount of cash 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
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<PAGE> 9
cash and the basis of any property the Portfolio distributes to the Fund and (b)
the Fund's share of the Portfolio's losses.
TAXATION OF THE FUND'S SHAREHOLDERS
A portion of the dividends from the 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 the 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.
The foregoing is only a summary of some of the important federal tax
considerations affecting the Fund and its shareholders and is not intended as a
substitute for careful tax planning. Accordingly, prospective investors are
advised to consult their own tax advisers for more detailed information
regarding the above and for information regarding federal, state and local
taxes.
YIELD AND TOTAL RETURN QUOTATIONS
The advertised yields for each class of the Fund 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 the Fund by the maximum offering price per
share of the class on the last day of the period, according to the following
formula:
6
YIELD = 2{(A-B +1) - 1}
---
CD
where, with respect to a particular class of the Fund, "a" is the dividends and
interest earned during the period; "b" is the sum of the expenses accrued for
the period (net of reimbursement, if any) and the aggregate fees that are
charged to all shareholder accounts in proportion to the 30-day (or one month)
period and the weighted average size of an account in the class; "c" is the
average daily number of class shares outstanding during the period that were
entitled to receive dividends; and "d" is the maximum offering price per class
share on the last day of the period.
The advertised total return for a class of the Fund is calculated by
equating an initial amount invested in a class of the Fund to the ending
redeemable value, according to the following formula:
N
P(1 + T) = ERV
where "P" is a hypothetical initial payment of $1,000; "T" is the average annual
total return for the class; "n" is the number of years involved; and "ERV" is
the ending redeemable value of a hypothetical $1,000 payment made in the class
at the beginning of the investment period covered.
Each class of the Fund also may use "aggregate" total return figures for
various periods which represent the cumulative change in value of an investment
in a class of the Fund for the specific period. Such total returns reflect
changes in share prices of a class of the Fund and assume reinvestment of
dividends and other distributions.
In reports or other communications to shareholders or in advertising
material, each class of the Fund may from time to time compare its performance
with that of other mutual funds in rankings prepared by Lipper Analytical
Services, Inc., Morningstar, Inc., IBC Financial Data, Inc. and other similar
independent services which monitor the performance of mutual funds or
publications such as the "New York Times," "Barrons" and the "Wall Street
Journal." Each class of the Fund may also compare its performance with various
indices prepared by independent services such as Standard & Poor's, Morgan
Stanley or Lehman Brothers or to unmanaged indices that may assume reinvestment
of dividends but generally do not reflect deductions for administrative and
management costs.
The Fund may advertise the standard deviation of its returns for various
time periods and compare its standard deviation to that of various indices.
Standard deviation of returns over time is a measure of volatility. It indicates
the spread of the Fund's returns about its 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
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of an investment strategy and measure its historical volatility as a predictor
of risk, although the measure is subject to time selection bias.
Advertisements for the Fund may compare the Fund to federally insured
investments such as bank certificates of deposit and credit union deposits,
including the long-term effects of inflation on these types of investments.
Advertisements may also compare the historical rate of return of different types
of investments. Information concerning broker-dealers who sell the Fund may also
appear in advertisements for the Fund, 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 the Fund may be found in newspapers under the
heading "Amer AAdvant."
DESCRIPTION OF THE TRUST
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 currently is comprised of ten separate investment portfolios.
The Fund is currently comprised of two classes of shares, which can be issued in
an unlimited number. Each share represents an equal proportionate beneficial
interest in the Fund and is entitled to one vote. Only shares of a particular
class may vote on matters affecting that class. Only shares of the Fund may vote
on matters affecting the Fund. All shares of the Trust vote on matters affecting
the Trust as a whole. Share voting rights are not cumulative, and shares have no
preemptive or conversion rights. Shares of the Trust are nontransferable. Each
series in the Trust will not be involved in any vote involving a Portfolio in
which it does not invest its assets. Shareholders of all of the series of the
Trust, however, will vote together to elect Trustees of the Trust and for
certain other matters. Under certain circumstances, the shareholders of one or
more series could control the outcome of these votes.
On most issues subjected to a vote of the Portfolio's interest holders,
as required by the 1940 Act, the Fund will solicit proxies from its shareholders
and will vote its interest in the Portfolio in proportion to the votes cast by
the Fund's shareholders. Because the Portfolio interest holder's votes are
proportionate to its percentage interests in the Portfolio, one or more other
Portfolio investors could, in certain instances, approve an action against which
a majority of the outstanding voting securities of the Fund had voted. This
could result in the Fund's redemption of its investment in the Portfolio, which
could result in increased expenses for the Fund. Whenever the shareholders of
the Fund are called to vote on matters related to the Portfolio, the Board shall
vote shares for which they receive no voting instructions in the same proportion
as the shares for which they do receive voting instructions. Any information
received from the Portfolio in the Portfolio's report to shareholders will be
provided to the shareholders of the Fund.
As a Massachusetts business trust, the Trust is not obligated to conduct
annual shareholder meetings. However, the Trust will hold special shareholder
meetings whenever required to do so under the federal securities laws or the
Trust's Declaration of Trust or By-Laws. Trustees can be removed by a
shareholder vote at special shareholder meetings.
The Portfolio utilizes 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.
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OTHER INFORMATION
American Depositary Receipts (ADRs)-ADRs are depositary receipts for
foreign issuers in registered form traded in U.S. securities markets. These
securities are not denominated in the same currency as the securities into which
they may be converted. Investing in ADRs 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 the 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.
Commercial Paper-Commercial paper refers to promissory notes representing
an unsecured debt of a corporation or finance company with a fixed maturity of
no more than 270 days. A variable amount master demand note (which is a type of
commercial paper) represents a direct borrowing arrangement involving
periodically fluctuating rates of interest under a letter agreement between a
commercial paper issuer and an institutional lender pursuant to which the lender
may determine to invest varying amounts.
Debentures-Debentures are unsecured debt securities. The holder of a
debenture is protected only by the general creditworthiness of the issuer.
Derivatives-Generally, a derivative is a financial arrangement, the value
of which is based on, or "derived" from, a traditional security, asset or market
index. Some "derivatives" such as mortgage-related and other asset-backed
securities are in many respects like any other investment, although they may be
more volatile or less liquid than more traditional debt securities. There are,
in fact, many different types of derivatives and many different ways to use
them. There are a range of risks associated with those uses.
Full Faith and Credit Obligations of the U.S. Government-Securities
issued or guaranteed by the U.S. Treasury, backed by the full taxing power of
the U.S. Government or the right of the issuer to borrow from the U.S. Treasury.
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
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<PAGE> 12
have to register such restricted securities in order to dispose of them
resulting in additional expense and delay. Adverse market conditions could
impede such a public offering of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the 1933 Act, including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. However, the
fact that there are contractual or legal restrictions on resale of such
investments to the general public or to certain institutions may not be
indicative of their liquidity.
Loan Participation Interests-Loan participation interests represent
interests in bank loans made to corporations. The contractual arrangement with
the bank transfers the cash stream of the underlying bank loan to the
participating investor. Because the issuing bank does not guarantee the
participations, they are subject to the credit risks generally associated with
the underlying corporate borrower. In addition, because it may be necessary
under the terms of the loan participation for the investor to assert through the
issuing bank such rights as may exist against the underlying corporate borrower,
in the event the underlying corporate borrower fails to pay principal and
interest when due, the investor may be subject to delays, expenses and risks
that are greater than those that would have been involved if the investor had
purchased a direct obligation (such as commercial paper) of such borrower.
Moreover, under the terms of the loan participation, the investor may be
regarded as a creditor of the issuing bank (rather than of the underlying
corporate borrower), so that the issuer may also be subject to the risk that the
issuing bank may become insolvent. Further, in the event of the bankruptcy or
insolvency of the corporate borrower, the loan participation may be subject to
certain defenses that can be asserted by such borrower as a result of improper
conduct by the issuing bank. The secondary market, if any, for these loan
participations is extremely limited and any such participations purchased by the
investor are regarded as illiquid.
Loan Transactions-Loan transactions involve the lending of securities to
a broker-dealer or institutional investor for its use in connection with short
sales, arbitrages or other security transactions. The purpose of a qualified
loan transaction is to afford a lender the opportunity to continue to earn
income on the securities loaned and at the same time earn fee income or income
on the collateral held by it.
Securities loans will be made in accordance with the following
conditions: (1) the Portfolio must receive at least 100% collateral in the form
of cash or cash equivalents, securities of the U.S. Government and its agencies
and instrumentalities, and approved bank letters of credit; (2) the borrower
must increase the collateral whenever the market value of the loaned securities
(determined on a daily basis) rises above the level of collateral; (3) the
Portfolio must be able to terminate the loan after notice, at any time; (4) the
Portfolio must receive reasonable interest on the loan or a flat fee from the
borrower, as well as amounts equivalent to any dividends, interest or other
distributions on the securities loaned, and any increase in market value of the
loaned securities; (5) the Portfolio may pay only reasonable custodian fees in
connection with the loan; and (6) voting rights on the securities loaned may
pass to the borrower, provided, however, that if a material event affecting the
investment occurs, the AMR Trust Board must be able to terminate the loan and
vote proxies or enter into an alternative arrangement with the borrower to
enable the AMR Trust Board to vote proxies.
Securities loans will not be made if, as a result, the aggregate amount
of all outstanding securities loans by the Portfolio exceeds 33 1/3% of its
total assets (including the market value of collateral received). For purposes
of complying with the Portfolio's investment policies and restrictions,
collateral received in connection with securities loans is deemed an asset of
the Portfolio to the extent required by law. The Manager receives compensation
for administrative and oversight functions with respect to securities lending.
The amount of such compensation depends on the income generated by the loan of
the securities. The SEC has granted exemptive relief that permits the Portfolio
to invest cash collateral received from securities lending transactions in
shares of one or more private investment companies managed by the Manager.
Subject to receipt of exemptive relief from the SEC, the Portfolio also may
invest cash collateral received from securities lending transactions in shares
of one or more registered investment companies managed by the Manager.
The Portfolio continues to receive interest on the securities loaned and
simultaneously earns either interest on the investment of the cash collateral or
fee income if the loan is otherwise collateralized. While there may be delays in
recovery of loaned securities or even a loss of rights in collateral supplied
should the borrower fail financially, loans will be made only to firms deemed by
the AMR Trust Board to be of good financial standing and will not be made unless
the consideration to be earned from such loans would justify the risk. If the
borrower of the securities fails financially, there is a risk of delay in
recovery of the securities loaned or loss of rights in the collateral. Such loan
transactions are referred to in this Statement of Additional Information as
"qualified" loan transactions.
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Mortgage-Backed Securities-Mortgage-backed securities consist of both
collateralized mortgage obligations and mortgage pass-through certificates.
Collateralized Mortgage Obligations ("CMOs")-CMOs and interests in
real estate mortgage investment conduits ("REMICs") are debt securities
collateralized by mortgages, or mortgage pass-through securities. CMOs divide
the cash flow generated from the underlying mortgages or mortgage pass-through
securities into different groups referred to as "tranches," which are then
retired sequentially over time in order of priority. The principal governmental
issuers of such securities are the Federal National Mortgage Association
("FNMA"), a government sponsored corporation owned entirely by private
stockholders and the Federal Home Loan Mortgage Corporation ("FHLMC"), a
corporate instrumentality of the United States created pursuant to an act of
Congress which is owned entirely by Federal Home Loan Banks. The issuers of CMOs
are structured as trusts or corporations established for the purpose of issuing
such CMOs and often have no assets other than those underlying the securities
and any credit support provided. A REMIC is a mortgage securities vehicle that
holds residential or commercial mortgages and issues securities representing
interests in those mortgages. A REMIC may be formed as a corporation,
partnership, or segregated pool of assets. The REMIC itself is generally exempt
from federal income tax, but the income from the mortgages is reported by
investors. For investment purposes, interests in REMIC securities are virtually
indistinguishable from CMOs.
Mortgage Pass-Through Certificates-Mortgage pass-through certificates
are issued by governmental, government-related and private organizations which
are backed by pools of mortgage loans.
(1) Government National Mortgage Association ("GNMA") Mortgage
Pass-Through Certificates ("Ginnie Maes")-GNMA is a wholly-owned U.S. Government
corporation within the Department of Housing and Urban Development. Ginnie Maes
represent an undivided interest in a pool of mortgages that are insured by the
Federal Housing Administration or the Farmers Home Administration or guaranteed
by the Veterans Administration. Ginnie Maes entitle the holder to receive all
payments (including prepayments) of principal and interest owed by the
individual mortgagors, net of fees paid to GNMA and to the issuer which
assembles the mortgage pool and passes through the monthly mortgage payments to
the certificate holders (typically, a mortgage banking firm), regardless of
whether the individual mortgagor actually makes the payment. Because payments
are made to certificate holders regardless of whether payments are actually
received on the underlying mortgages, Ginnie Maes are of the "modified
pass-through" mortgage certificate type. The GNMA is authorized to guarantee the
timely payment of principal and interest on the Ginnie Maes. The GNMA guarantee
is backed by the full faith and credit of the United States, and the GNMA has
unlimited authority to borrow funds from the U.S. Treasury to make payments
under the guarantee. The market for Ginnie Maes is highly liquid because of the
size of the market and the active participation in the secondary market of
security dealers and a variety of investors.
(2) FHLMC Mortgage Participation Certificates ("Freddie Macs")-Freddie
Macs represent interests in groups of specified first lien residential
conventional mortgages underwritten and owned by the FHLMC. Freddie Macs entitle
the holder to timely payment of interest, which is guaranteed by the FHLMC. The
FHLMC guarantees either ultimate collection or timely payment of all principal
payments on the underlying mortgage loans. In cases where the FHLMC has not
guaranteed timely payment of principal, the FHLMC may remit the amount due
because of its guarantee of ultimate payment of principal at any time after
default on an underlying mortgage, but in no event later than one year after it
becomes payable. Freddie Macs are not guaranteed by the United States or by any
of the Federal Home Loan Banks and do not constitute a debt or obligation of the
United States or of any Federal Home Loan Bank. The secondary market for Freddie
Macs is highly liquid because of the size of the market and the active
participation in the secondary market of the FHLMC, security dealers and a
variety of investors.
(3) FNMA Guaranteed Mortgage Pass-Through Certificates ("Fannie
Maes")-Fannie Maes represent an undivided interest in a pool of conventional
mortgage loans secured by first mortgages or deeds of trust, on one family or
two to four family, residential properties. The FNMA is obligated to distribute
scheduled monthly installments of principal and interest on the mortgages in the
pool, whether or not received, plus full principal of any foreclosed or
otherwise liquidated mortgages. The obligation of the FNMA under its guarantee
is solely its obligation and is not backed by, nor entitled to, the full faith
and credit of the United States.
(4) Mortgage-Related Securities Issued by Private Organizations-Pools
created by non-governmental issuers generally offer a higher rate of interest
than government and government-related pools because there are no direct or
indirect government guarantees of payments in such pools. However, timely
payment of interest and principal of these pools is often partially supported by
various enhancements such as over-collateralization and senior/subordination
structures and by various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance. The insurance and guarantees are issued
by government entities, private insurers or the
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mortgage poolers. Although the market for such securities is becoming
increasingly liquid, securities issued by certain private organizations may not
be readily marketable.
Ratings of Long-Term Obligations-The Portfolio utilizes ratings provided
by the following nationally recognized statistical rating organizations ("Rating
Organizations") in order to determine eligibility of long-term obligations.
The four highest Moody's Investors Service, Inc. ("Moody's") ratings for
long-term obligations (or issuers thereof) are Aaa, Aa, A and Baa. Obligations
rated Aaa are judged by Moody's to be of the best quality. Obligations rated Aa
are judged to be of high quality by all standards. Together with the Aaa group,
such debt comprises what is generally known as high-grade debt. Moody's states
that debt rated Aa is rated lower than Aaa debt because margins of protection or
other elements make long-term risks appear somewhat larger than for Aaa debt.
Obligations which are rated A by Moody's possess many favorable investment
attributes and are considered "upper medium-grade obligations." Obligations
which are rated Baa by Moody's are considered to be medium grade obligations,
i.e., they are neither highly protected or poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Moody's also supplies numerical indicators 1, 2, and 3 to rating
categories. The modifier 1 indicates that the security is in the higher end of
its rating category; the modifier 2 indicates a mid-range ranking; and modifier
3 indicates a ranking toward the lower end of the category.
The four highest Standard & Poor's ratings for long-term obligations are
AAA, AA, A and BBB. Obligations rated AAA have the highest rating assigned by
Standard & Poor's. Capacity to pay interest and repay principal is extremely
strong. Obligations rated AA have a very strong capacity to pay interest and
repay principal and differs from the highest rated issues only in a small
degree. Obligations rated A have a strong capacity to pay principal and
interest, although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions. Obligations rated BBB by
Standard & Poor's are regarded as having adequate capacity to pay interest and
repay principal. Whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
Duff & Phelps' four highest ratings for long-term obligations are AAA,
AA, A and BBB. Obligations rated AAA have the highest credit quality with risk
factors being negligible. Obligations rated AA are of high credit quality and
strong protection factors. Risk is modest but may vary slightly from time to
time because of economic conditions. Obligations rated A have average but
adequate protection factors. However, risk factors are more variable and greater
in periods of economic stress. Obligations rated BBB have below average
protection factors with considerable variability in risk during economic cycles,
but are still considered sufficient for prudent investment.
Thomson BankWatch ("BankWatch") long-term debt ratings apply to specific
issues of long-term debt and preferred stock. They specifically assess the
likelihood of an untimely repayment of principal or interest over the term to
maturity of the rated instrument. BankWatch's four highest ratings for long-term
obligations are AAA, AA, A and BBB. Obligations rated AAA indicate that the
ability to repay principal and interest on a timely basis is very high.
Obligations rated AA indicate a superior ability to repay principal and interest
on a timely basis, with limited incremental risk compared to issues rated in the
highest category. Obligations rated A indicate the ability to repay principal
and interest is strong. Issues rated A could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
BBB is the lowest investment grade category and indicates an acceptable capacity
to repay principal and interest. Issues rated BBB are, however, more vulnerable
to adverse developments (both internal and external) than obligations with
higher ratings.
Fitch 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.
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Standard & Poor's, Duff & Phelps and Fitch apply indicators, such as
"+","-," or no character, to indicate relative standing within the major rating
categories.
Ratings of Short-Term Obligations-The rating P-1 is the highest
short-term rating assigned by Moody's. Among the factors considered by Moody's
in assigning ratings are the following: (1) evaluations of the management of the
issuer; (2) economic evaluation of the issuer's industry or industries and an
appraisal of speculative-type risks which may be inherent in certain areas; (3)
evaluation of the issuer's products in relation to competition and customer
acceptance; (4) liquidity; (5) amount and quality of long-term debt; (6) trend
of earnings over a period of ten years; (7) financial strength of a parent
company and the relationships which exist with the issuer; and (8) recognition
by the management of obligations which may be present or may arise as a result
of public interest questions and preparations to meet such obligations.
Short-term obligations (or issuers thereof) rated A-1 by Standard &
Poor's have the following characteristics. Liquidity ratios are adequate to meet
cash requirements. The issuer has access to at least two additional channels of
borrowing. Basic earnings and cash flow have an upward trend with allowance made
for unusual circumstances. Typically, the issuer's industry is well established
and the issuer has a strong position within the industry. The reliability and
quality of management are unquestioned. Relative strength or weakness of the
above factors determines whether the issuer's short-term obligation is rated
A-1, A-2, or A-3.
The distinguishing feature of Duff & Phelps Credit Ratings' short-term
rating is the refinement of the traditional 1 category. The majority of
short-term debt issuers carry the highest rating, yet quality differences exist
within that tier. Obligations rated D-1+ indicate the highest certainty of
timely payment. Safety is just below risk-free U.S. Treasury obligations.
Obligations rated D-1 have a very high certainty of timely payment. Risk factors
are minor. Obligations rated D-1- have a high certainty of timely payment. Risk
factors are very small. Obligations rated D-2 have good certainty of timely
payment. Liquidity factors and company fundamentals are sound. Although ongoing
funding needs may enlarge total financing requirements, access to capital
markets is good. Risk factors are small.
Thomson BankWatch short-term ratings are intended to assess the
likelihood of an untimely or incomplete payment of principal or interest.
Obligations rated TBW-1 indicate a very high likelihood that principal and
interest will be paid on a timely basis. While the degree of safety regarding
timely payment of principal and interest is strong for an obligation rated
TBW-2, the relative degree of safety is not as high as for issues rated TBW-1.
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes. A rating of F-1+ indicates exceptionally strong credit
quality. Issues assigned this rating are regarded as having the strongest degree
of assurance for timely payment. Obligations rated F-1 have very strong credit
quality. Issues assigned this rating reflect an assurance of timely payment only
slightly less in degree than issues rated F-1+. Issues assigned a rating of F-2
indicate good credit quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not as great
as for issues assigned F-1+ and F-1 ratings.
Repurchase Agreements-A repurchase agreement, which provides a means to
earn income on funds for periods as short as overnight, is an arrangement under
which the purchaser (e.g., a Portfolio) purchases securities and the seller
agrees, at the time of sale, to repurchase the securities at a specified time
and price. The repurchase price will be higher than the purchase price, the
difference being income to the purchaser, or the purchase and repurchase prices
may be the same, with interest at a stated rate due to the purchaser together
with the repurchase price on repurchase. In either case, the income to the
purchaser is unrelated to the interest rate on the securities subject to the
repurchase agreement.
Each Portfolio may enter into repurchase agreements with any bank or
registered broker-dealer who, in the opinion of the AMR Trust Board presents a
minimum risk of bankruptcy during the term of the agreement based upon
guidelines that periodically are reviewed by the AMR Trust Board. Each Portfolio
may enter into repurchase agreements as a short-term investment of its idle cash
in order to earn income. The securities will be held by a custodian (or agent)
approved by the AMR Trust Board during the term of the agreement. However, if
the market value of the securities subject to the repurchase agreement becomes
less than the repurchase price (including interest), the Portfolio will direct
the seller of the securities to deliver additional securities so that the market
value of all securities subject to the repurchase agreement will equal or exceed
the repurchase price.
In the event of the commencement of bankruptcy or insolvency proceedings
with respect to the seller of the securities before the repurchase of the
securities under a repurchase agreement, a Portfolio may encounter a delay
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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.
Rights and Warrants-Rights are short-term warrants issued in conjunction
with new stock issues. Warrants are options to purchase an issuer's securities
at a stated price during a stated term. There is no specific limit on the
percentage of assets a Portfolio may invest in rights and warrants, although the
ability of some of the Portfolios to so invest is limited by their investment
objectives or policies.
Section 4(2) Securities- Section 4(2) securities are restricted as to
disposition under the federal securities laws, and generally are sold to
institutional investors, such as the Portfolio, that agree they are purchasing
the securities for investment and not with an intention to distribute to the
public. Any resale by the purchaser must be pursuant to an exempt transaction
and may be accomplished in accordance with Rule 144A. Section 4(2) securities
normally are resold to other institutional investors through or with the
assistance of the issuer or dealers that make a market in the Section 4(2)
securities, thus providing liquidity.
The AMR Trust Board and the applicable investment adviser will carefully
monitor the Portfolio's investments in Section 4(2) securities offered and sold
under Rule 144A, focusing on such important factors, among others, as valuation,
liquidity, and availability of information. Investments in Section 4(2)
securities could have the effect of reducing the Portfolio's liquidity to the
extent that qualified institutional buyers no longer wish to purchase these
restricted securities.
Separately Traded Registered Interest and Principal Securities and Zero
Coupon Obligations-Separately traded registered interest and principal
securities or "STRIPS" and zero coupon obligations are securities that do not
make regular interest payments. Instead they are sold at a discount from their
face value. Each Portfolio will take into account as income a portion of the
difference between these obligations' purchase prices and their face values.
Because they do not pay coupon income, the prices of STRIPS and zero coupon
obligations can be very volatile when interest rates change. STRIPS are zero
coupon bonds issued by the U.S. Treasury.
U.S. Government Securities-U.S. Government securities are issued or
guaranteed by the U.S. Government and include U.S. Treasury obligations (see
definition below) and securities issued by U.S. agencies and instrumentalities.
U. S. Government agencies or instrumentalities that issue or guarantee
securities include, but are not limited to, the Federal Housing Administration,
Farmers Home Administration, Export-Import Bank of the United States, Small
Business Administration, GNMA, General Services Administration, Central Bank for
Cooperatives, Federal Home Loan Banks, FHLMC, Federal Intermediate Credit Banks,
Federal Land Banks, Maritime Administration, Tennessee Valley Authority,
District of Columbia Armory Board, Inter-American Development Bank,
Asian-American Development Bank, Agency for International Development, Student
Loan Marketing Association and International Bank of Reconstruction and
Development.
Obligations of U.S. Government agencies and instrumentalities may or may
not be supported by the full faith and credit of the United States. Some are
backed by the right of the issuer to borrow from the Treasury; others are
supported by discretionary authority of the U.S. Government to purchase the
agencies' obligations; while still others, such as the Student Loan Marketing
Association, are supported only by the credit of the instrumentality. In the
case of securities not backed by the full faith and credit of the United States,
the investor must look principally to the agency issuing or guaranteeing the
obligation for ultimate repayment, and may not be able to assert a claim against
the United States itself in the event the agency or instrumentality does not
meet its commitment.
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U.S. Treasury Obligations-U.S. Treasury obligations include bills, notes
and bonds issued by the U.S. Treasury and Separately Traded Registered Interest
and Principal component parts of such obligations known as STRIPS.
When-Issued and Forward Commitment Transactions- For purchases on a
when-issued basis, the price of the security is fixed at the date of purchase,
but delivery of and payment for the securities is not set until after the
securities are issued (generally one to two months later). The value of
when-issued securities is subject to market fluctuation during the interim
period and no income accrues to a Portfolio until settlement takes place.
Forward commitment transactions involve a commitment to purchase or sell
securities with payment and delivery to take place at some future date, normally
one to two months after the date of the transaction. The payment obligation and
interest rate are fixed at the time the buyer enters into the forward
commitment. Forward commitment transactions are typically used as a hedge
against anticipated changes in interest rates and prices. The Portfolio
maintains with the Custodian a segregated account containing high grade liquid
securities in an amount at least equal to the when-issued or forward commitment
transaction. Forward commitment transactions are executed for existing
obligations, whereas in a when-issued transaction, the obligations have not yet
been issued. When entering into a when-issued or forward commitment transaction,
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.
