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[AMERICAN AADVANTAGE FUNDS LOGO]
SMALL CAP VALUE FUND
-INSTITUTIONAL CLASS-
PROSPECTUS
January 1, 1999
[GRAPHIC]
Managed by AMR INVESTMENTS
The Securities and Exchange Commission does not guarantee that the information
in this Prospectus or any other mutual fund's prospectus is accurate or
complete, nor does it judge the investment merit of this Fund. To state
otherwise is a criminal offense.
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TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ABOUT THE FUND
Investment Objectives, Strategies and Risks..........................3
The Manager..........................................................5
The Investment Advisers..............................................6
Valuation of Shares..................................................7
Distribution of Fund Shares .........................................7
ABOUT YOUR INVESTMENT
Purchase and Redemption of Shares....................................7
Distributions and Taxes.............................................10
ADDITIONAL INFORMATION
Master-Feeder Structure.............................................10
Year 2000...........................................................10
Additional Information..............................................11
</TABLE>
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ABOUT THE FUND
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS
INVESTMENT OBJECTIVES
Long-term capital appreciation and current income.
PRINCIPAL STRATEGIES
Ordinarily at least 80% of the total assets of the American AAdvantage Small Cap
Value Fund (the "Fund") will be invested in equity securities of U.S. companies
with market capitalizations of $1 billion or less at the time of investment. The
Fund's investments may include common stocks, preferred stocks, securities
convertible into common stocks, and U.S. dollar-denominated American Depositary
Receipts (collectively, "stocks").
The investment advisers will select stocks which, in their opinion, have most or
all of the following characteristics:
o above-average earnings growth potential,
o selling at prices below their perceived economic value,
o low price to earnings ratio,
o low price to book value ratio, and
o generate above-average dividend yields.
Each of the investment advisers determines the growth prospects of companies
based upon a combination of internal and external research using fundamental
analysis and considering changing economic trends. The decision to sell a stock
is typically based on the belief that the company is no longer considered
undervalued or shows deteriorating fundamentals, or that better investment
opportunities exist in other stocks. AMR Investment Services, Inc. (the
"Manager") believes that this strategy will help the Fund outperform other
investment styles over the longer term while minimizing volatility and downside
risk.
Under adverse market conditions, the Fund may, for temporary defensive purposes,
invest up to 100% of its assets in cash or cash equivalents, including
investment grade short-term obligations. To the extent that the Fund invokes
this strategy, its ability to achieve its investment objective may be affected
adversely.
The Fund seeks its investment objective by investing all of its investable
assets in the Small Cap Value Portfolio ("Portfolio") of the AMR Investment
Services Trust ("AMR Trust"). The Portfolio's investment objective is identical
to that of the Fund. Throughout this Prospectus, statements regarding
investments by the Fund refer to investments made by the Portfolio. For easier
reading, the term "Fund" is used throughout the Prospectus to refer to either
the Fund or the Portfolio, unless stated otherwise. See "Master-Feeder
Structure".
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RISK FACTORS
o Market Risk
Since this Fund invests most of its assets in equity securities, it is
subject to stock market risk. Market risk involves the possibility that
the value of the Fund's investments in stocks will decline due to drops
in the stock market. In general, the value of the Fund will move in the
same direction as the overall stock market, which will vary from day to
day in response to the activities of individual companies and general
market and economic conditions.
o Small Capitalization Companies
Investing in the securities of small capitalization companies involves
greater risk and the possibility of greater price volatility since
smaller companies may have limited operating history, product lines,
and financial resources, and the securities of these companies may lack
sufficient market liquidity.
o Additional Risk
An investment in the Fund is not a deposit of a bank and is not insured
or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency. The value of an investment in the Fund will
fluctuate up and down, which means an investor could lose money.
PERFORMANCE OF SIMILAR SMALL CAP VALUE ACCOUNT
The Fund's investment advisers are Brandywine Asset Management, Inc.
("Brandywine") and Hotchkis and Wiley ("Hotchkis"). Brandywine and Hotchkis each
have experience managing other accounts with investment objectives, policies and
strategies similar to those of the Fund. Unlike the Fund, all of the accounts
managed by Brandywine include an allocation to micro-cap companies, which are
defined as companies with total market capitalization of less than $250 million.
Thus, the performance below consists of the Hotchkis and Wiley Small Cap Fund
("Hotchkis Fund"), the only investment company managed by Brandywine or Hotchkis
with investment objectives, policies and strategies substantially similar to
those of the Fund. The data shown below reflects the total return for the
periods shown, reduced by the actual expenses of the Hotchkis Fund. Applying the
Fund's expense structure to the Hotchkis Fund would have lowered the performance
results shown. THIS PERFORMANCE OF THE HOTCHKIS FUND IS HISTORICAL AND DOES NOT
REPRESENT PROJECTED FUTURE INVESTMENT PERFORMANCE OF THE FUND. PAST PERFORMANCE
IS NOT NECESSARILY INDICATIVE OF HOW THE FUND WILL PERFORM IN THE FUTURE.
TOTAL RETURN FOR THE CALENDAR YEAR ENDED 12/31 OF EACH YEAR
[GRAPH]
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<CAPTION>
88 89 90 91 92 93 94 95 96 97
---- ----- ---- ----- ----- ----- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
8.90% 20.50% -9.02% 48.29% 13.72% 12.57% 1.11% 18.44% 14.27% 39.52%
</TABLE>
<TABLE>
<S> <C>
Highest Quarterly Return from 1/1/88 through 12/31/97 (1st Qtr. 1991) 29.45%
Lowest Quarterly Return from 1/1/88 through 12/31/97 (3rd Qtr. 1998) -32.94%
Year-to-Date Return through 9/30/98...................................... -22.39%
</TABLE>
<TABLE>
<CAPTION>
Average Annual Total Return
===================================
as of 12/31/97
-----------------------------------
1 Year 5 Years 10 Years
------ ------- --------
<S> <C> <C> <C>
Hotchkis Fund 39.52% 16.53% 15.77%
Russell 2000 Index 22.37% 16.41% 15.76%
</TABLE>
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FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
Fund shares(1).
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
<TABLE>
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Management Fees......................................0.68%
Other Expenses.......................................0.65%(2)
-----
Total Annual Operating Expenses......................1.33%
=====
Fee Waiver and/or Expense Reimbursement..............0.34%(3)
Net Expenses.........................................0.99%
</TABLE>
(1) The expense table and the Example below reflect the expenses of both the
Fund and the Portfolio.
(2) "Other Expenses" are based on estimates for the current fiscal year.
(3) The Manager has contractually agreed to waive a portion of its fee and
to reimburse the Fund for other expenses through October 31, 1999 to the
extent that Total Operating Expenses exceed 0.99%.
EXAMPLE
This example shows the expenses you would pay over time if you invested $10,000
in the Fund. It assumes that you earn 5% total return each year that the Fund's
operating expenses remain the same and that you sell your shares at the end of
each period. The actual expenses and total return of the Fund will vary over
time and, therefore, this example is for comparison purposes only.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
------ -------
<S> <C>
$101 $388
</TABLE>
THE MANAGER
The American AAdvantage Funds ("Trust") has retained AMR Investment Services,
Inc. to serve as its Manager. The Manager, located at 4333 Amon Carter
Boulevard, Fort Worth, Texas 76155, is a wholly owned subsidiary of AMR
Corporation, the parent company of American Airlines, Inc. The Manager was
organized in 1986 to provide investment management, advisory, administrative and
asset management consulting services. As of October 31, 1998, the Manager had
approximately $20.5 billion of assets under management, including approximately
$7.6 billion under active management and $12.9 billion as named fiduciary or
financial adviser. Of the total, approximately $14.5 billion of the assets are
related to AMR Corporation.
The Manager provides or oversees all administrative, investment advisory and
portfolio management services to the Fund. The Manager
o develops the investment programs for the Fund,
o selects and changes investment advisers (subject to requisite approvals),
o allocates assets among investment advisers,
o monitors the investment advisers' investment programs and results,
o coordinates the investment activities of the investment advisers
to ensure compliance with regulatory restrictions, and
o oversees the Fund's securities lending activities and any actions taken
by the securities lending agent.
As compensation for providing management services, the Fund pays the Manager an
annualized advisory fee that is calculated and accrued daily, equal to the sum
of 0.10% of the net assets of the Fund, plus all fees paid to the investment
advisers. The Manager also may receive up to 25% of the net annual interest
income and up to 25% of loan fees in regards to security lending activities.
Currently the Manager
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receives 10% of the net annual interest income from the investment of cash
collateral and 10% of the loan fees posted by borrowers. In addition to
management fees, the Fund pays fees to the Manager for administrative and
management services (other than investment advisory services). As compensation
for these services, the Institutional Class of the Fund pays a quarterly fee at
the annual rate of 0.25% of net assets.
William F. Quinn and Nancy A. Eckl have primary responsibility for the
day-to-day operations of the Fund. These responsibilities include oversight of
the investment advisers, regular review of their performance and asset
allocations among them. Mr. Quinn has served as President of the Manager since
its inception in 1986. Ms. Eckl has served as Vice President-Trust Investments
since May 1995. Prior to her current position, Ms. Eckl held the position of
Vice President-Finance and Compliance of the Manager from December 1990 through
April 1995.
THE INVESTMENT ADVISERS
Set forth below is a brief description of the investment advisers for the Fund.
The Fund's assets are allocated among the investment advisers by the Manager.
Each investment adviser has discretion to purchase and sell securities for its
segment of the Fund's assets in accordance with the Fund's objectives, policies,
restrictions and more specific strategies provided by the Manager. Each
investment adviser has entered into a separate investment advisory agreement
with the Manager to provide investment advisory services to the Fund and the
Portfolio. Pursuant to an exemptive order issued by the Securities and Exchange
Commission ("SEC"), the Manager is permitted to enter into new or modified
investment advisory agreements with existing or new investment advisers without
approval of Fund shareholders, but subject to approval of the Trust's Board of
Trustees ("Board") and the AMR Investment Services Trust Board ("AMR Trust
Board"). The Prospectus will be supplemented if additional investment advisers
are retained or the contract with any existing investment adviser is terminated.
BRANDYWINE ASSET MANAGEMENT, INC., 201 North Walnut Street, Wilmington, Delaware
19801, is a professional investment counseling firm founded in 1986. Brandywine
is a wholly owned subsidiary of Legg Mason, Inc. Brandywine's investment process
involves both fundamental screening to identify stocks that are undervalued and
fundamental analysis to identify undervalued stocks which have the ability to
return to normal value. As of November 30, 1998, Brandywine had assets under
management totaling approximately $7.2 billion, including approximately $1.1
billion of assets of AMR and its subsidiaries and affiliated entities. 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 AND WILEY, 725 South Figueroa, # 4000, Los Angeles, California 90017,
is a professional investment counseling firm which was founded in 1980 by John
F. Hotchkis and George Wiley. Hotchkis is a division of Merrill Lynch Asset
Management, L.P., a wholly owned indirect subsidiary of Merrill Lynch & Co.,
Inc. Hotchkis focuses on time proven investment disciplines and extensive
fundamental research to identify significantly undervalued companies where, in
its opinion, actual value exceeds current market price. As of November 30, 1998,
Hotchkis had assets under management totaling approximately $14.3 billion, which
included approximately $1.9 billion of assets of AMR and its subsidiaries and
affiliated entities. Hotchkis will be paid an annualized fee equal to 0.5625% of
Portfolio assets under its discretionary management.
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VALUATION OF SHARES
The price of Fund shares is based on the Fund's net asset value ("NAV"). The NAV
per share of the Fund is computed by adding total assets, subtracting all of the
Fund's liabilities, and dividing the result by the total number of shares
outstanding. The Fund's investments are valued based on market value. 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. The NAV of Institutional Class shares will be determined based on a pro
rata allocation of investment income, expenses and total capital gains and
losses. The Fund's NAV is determined as of the close of the New York Stock
Exchange ("Exchange"), generally 4:00 p.m. Eastern time, on each day it is open
for business.
DISTRIBUTION OF FUND SHARES
The Trust does not incur any direct distribution expenses related to
Institutional Class shares. However, the Trust has adopted a Distribution Plan
in accordance with Rule 12b-1 under the Investment Company Act of 1940 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.
ABOUT YOUR INVESTMENT
PURCHASE AND REDEMPTION OF SHARES
ELIGIBILITY
Institutional Class shares are offered without a sales charge to investors who
make an initial investment of at least $2 million, including :
o agents or fiduciaries acting on behalf of their clients (such as
employee benefit plans, personal trusts and other accounts for which a
trust company or financial advisor acts as agent or fiduciary);
o endowment funds and charitable foundations;
o employee welfare plans which are tax-exempt under Section 501(c)(9) of
the Internal Revenue Code of 1986, as amended ("Code");
o qualified pension and profit sharing plans,
o cash and deferred arrangements under Section 401(k) of the Code;
o corporations; and
o other investors who make an initial investment of at least $2 million.
The Manager may allow a reasonable period of time after opening an account for
an investor to meet the initial investment requirement. In addition, for
investors such as trust companies and financial advisors who make investments
for a group of clients, the minimum initial investment can be met through an
aggregated purchase order for more than one client.
PURCHASE POLICIES
Shares of the Fund are offered and purchase 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. If a purchase order is received in good order
prior to the deadline, the purchase price will be the NAV per share next
determined on that day. If a purchase order is received in good order after the
applicable deadline, the purchase price will be the NAV of the following day
that the Fund is open for business. Checks to
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purchase shares are accepted subject to collection at full face value in U.S.
funds and must be drawn in U.S. dollars on a U.S. bank. The Fund reserves the
right to reject any order for the purchase of shares and to limit or suspend,
without prior notice, the offering of shares. Shares purchased through financial
intermediaries may be subject to transaction fees. No sales charges are assessed
on the purchase or sale of Fund shares.
OPENING AN ACCOUNT
A completed, signed application is required to open an account. You may request
an application form by:
o calling (800) 967-9009, or
o visiting the Funds' website at www.aafunds.com and downloading an
account application.
Complete the application, sign it and:
Mail to: or Fax to:
American AAdvantage Funds (817) 967-0768 or (817) 931-4331
P.O. Box 619003, MD 5645
DFW Airport, TX 75261-9003
HOW TO PURCHASE SHARES
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<CAPTION>
TO MAKE AN INITIAL PURCHASE TO ADD TO AN EXISTING ACCOUNT
BY CHECK-----------------------------------------------------------------------------------------------------------
<S> <C>
o Make the check payable to the American o Make the check payable to the American AAdvantage
AAdvantage Funds Funds
o Include "Fund No. 370" on the check o Include shareholder's account number and "Fund
o Mail check to: No. 370" on the check
o Mail check to:
American AAdvantage Funds American AAdvantage Funds
P.O. Box 419643 P.O. Box 419643
Kansas City, MO 64141-6643 Kansas City, MO 64141-6643
BY WIRE------------------------------------------------------------------------------------------------------------
Send a bank wire to State Street Bank & Trust Co. Send a bank wire to State Street Bank & Trust Co. with
with these instructions: these instructions:
ABA# 0110-0002-8; AC-9905-342-3 ABA# 0110-0002-8; AC-9905-342-3
Attn: American AAdvantage Small Cap Value Fund Attn: American AAdvantage Small Cap Value
Fund-Institutional Class (Fund 370) Fund-Institutional Class (Fund 370)
Call (800) 658-5811 to announce an incoming wire Call (800) 658-5811 to announce an incoming wire
BY EXCHANGE--------------------------------------------------------------------------------------------------------
Fund shares may be purchased by exchange from another
American AAdvantage Fund if the shareholder has owned
Institutional Class shares of the other American
AAdvantage Fund for at least 15 days. Send a written
request to the address above or call (800) 658-5811 to
request an exchange of shares.
</TABLE>
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REDEMPTION POLICIES
Fund shares may be redeemed by telephone or mail on any day that the Fund is
open for business. The redemption price will be the NAV next determined after a
redemption order is received in good order. Proceeds from redemption orders
received by 4:00 p.m. Eastern time generally will be transmitted to shareholders
on the next day that the Fund is open for business and by no later than seven
days after the receipt of a redemption request in good order.
The Fund, its officers, trustees, directors, employees, or agents are not
responsible for the authenticity of instructions provided by telephone, nor for
any loss, liability, cost or expense incurred for acting on them. The Fund
employs procedures reasonably designed to confirm that instructions communicated
by telephone are genuine.
The Fund reserves the right to suspend redemptions or postpone the date of
payment:
o when the Exchange is closed (other than for customary weekend and
holiday closings)
o when trading on the Exchange is restricted
o when the SEC determines that an emergency exists so that disposal of the
Fund's investments or determination of its NAV is not reasonably
practicable
o by order of the SEC for protection of the Fund's shareholders.
Proceeds from the sale of shares purchased by check may be withheld until the
check has cleared, which may take up to 15 days. Shares redeemed through
financial intermediaries may be subject to transaction fees. 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.
If a shareholder's account balance falls below $500, the Fund may ask the
shareholder to increase the balance. If the account balance remains below $500
after 45 days, the Fund may close the account and send the shareholder the
proceeds.
HOW TO REDEEM SHARES
<TABLE>
<CAPTION>
METHOD ADDITIONAL INFORMATION
BY MAIL------------------------------------------------------------------------------------------------------------
<S> <C>
Write a letter of instruction including Other supporting documents may be required for
o the Fund name (American AAdvantage Small estates, trusts, guardianships, custodians,
Cap Fund-Institutional Class) corporations, IRAs and welfare, pension and
o shareholder account number profit-sharing plans. Call (800) 658-5811 for
o shares or dollar amount to be sold instructions.
o authorized signature
o how and where to send the proceeds
Mail to:
American AAdvantage Funds
P.O. Box 419643
Kansas City, MO 64141-6643
BY TELEPHONE-------------------------------------------------------------------------------------------------------
Call (800) 658-5811 to request a redemption. Proceeds from redemptions placed by telephone
generally will be transmitted by wire only, as
instructed on the Fund application.
BY EXCHANGE--------------------------------------------------------------------------------------------------------
Shares of the Fund may be redeemed in exchange for another American AAdvantage Fund if the shareholder has owned
Institutional Class shares of the Fund for at least 15 days. Send a written request to the address above or call
(800) 658-5811 to exchange shares.
</TABLE>
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DISTRIBUTIONS AND TAXES
The Fund expects that its distributions, as a result of its investment
objectives and strategies, will consist primarily of net capital gains and
dividends from its net investment income. Usually, distributions received from
the Fund will be taxable as ordinary income. Distributions in the form of
realized net short-term capital gains are similarly taxed. Distributions in the
form of realized net long-term capital gains are taxable to shareholders as
long-term capital gains regardless of how long an investor has been a
shareholder.
Each of the Fund's distributions is paid annually. Unless the account
application instructs otherwise, distributions will be reinvested in additional
Fund shares. An exchange of the Fund's shares for shares of another American
AAdvantage Fund will be treated as a sale of the Fund's shares, and any gain on
the transaction will be subject to federal income tax.
This is only a summary of some of the important tax considerations that may
affect Fund shareholders. Shareholders should consult their tax adviser
regarding specific questions as to the effect of federal, state or local income
taxes on an investment in the Fund.
ADDITIONAL INFORMATION
MASTER-FEEDER STRUCTURE
The Fund operates under a master-feeder structure. This means that the Fund is a
"feeder" fund that invests all of its investable assets in a "master" fund with
the same investment objective. The "master" fund purchases securities for
investment. The master-feeder structure works as follows:
-----------------------------------
Investor
-----------------------------------
purchases shares of
-----------------------------------
Feeder Fund
-----------------------------------
which invests in
-----------------------------------
Master Fund
-----------------------------------
which buys
-----------------------------------
Investment Securities
-----------------------------------
The Fund invests all of its investable assets in the Small Cap Value Portfolio
of the AMR Trust. The Fund can withdraw its investment in the Portfolio at any
time if the Board determines that it is in the best interest of the Fund and its
shareholders to do so. If this happens, the Fund's assets will be invested
according to the investment policies and restrictions described in this
Prospectus.
YEAR 2000
The Funds could be affected adversely if the computer systems used by the
Manager, the Funds' other service providers, or companies in which the Funds
invest do not properly process and calculate information that relates to dates
beginning on January 1, 2000 and beyond. Due to the Funds' reliance on various
service providers to perform essential functions, each of the Funds could have
difficulty calculating its NAV, processing orders for share redemptions and
delivering account statements and other information to shareholders. The Manager
has taken steps that it believes are reasonably designed
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to address the potential failure of computer systems used by the Manager and the
Funds' service providers to address the Year 2000 issue. There can be no
assurance that the steps taken by the Manager will be sufficient to avoid any
adverse impact.
In evaluating current and potential portfolio positions, Year 2000 is one of the
factors that each Fund's investment advisers take into consideration. The Funds'
investment advisers will rely upon public filings and other statements made by
companies regarding their Year 2000 readiness. Issuers in countries outside of
the U.S. may not be required to make the level of disclosure regarding Year 2000
readiness that is required in the U.S. If the value of a Fund's investment is
adversely affected by a Year 2000 problem, the NAV of the Fund may be affected
as well.
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ADDITIONAL INFORMATION
The Statement of Additional Information ("SAI") contains more details about the
Fund and its investment policies. The SAI is incorporated in this Prospectus by
reference (it is legally part of this Prospectus). A current SAI is on file with
the SEC.
To obtain more information about the Funds or to request a free copy of the SAI:
BY TELEPHONE:
Call (817) 967-3509
BY MAIL:
American AAdvantage Funds
P.O. Box 619003, MD5645
DFW Airport, TX 75261-9003
BY E-MAIL:
[email protected]
ON THE INTERNET:
Visit our website at www.aafunds.com
Visit the SEC's website at www.sec.gov
Copies of these documents also may be obtained from the SEC Public Reference
Room in Washington, D.C. The Public Reference Room can be reached at (800)
732-0330 or by mailing a request, including a duplicating fee to the SEC's
Public Reference Section, 450 5th. Street NW, Washington, D.C. 20549-6009.
FUND SERVICE PROVIDERS
CUSTODIAN TRANSFER AGENT
--------- --------------
State Street Bank and Trust Company National Financial Data Services
Boston, Massachusetts Kansas City, Missouri
INDEPENDENT AUDITORS DISTRIBUTOR
-------------------- -----------
Ernst & Young LLP Brokers Transaction Services, Inc.
Dallas, Texas Dallas, Texas
[AMERICAN AADVANTAGE FUNDS LOGO]
SEC File Number 811-4984
American AAdvantage Funds is a registered service mark of AMR Corporation.
American AAdvantage Small Cap Value Fund is a service mark of AMR Investment
Services. American Airlines is not responsible for investments made in the
American AAdvantage Funds.
12
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[AMERICAN AADVANTAGE FUNDS(R) LOGO]
SMALL CAP VALUE FUND
-AMR CLASS-
PROSPECTUS
January 1, 1999
[EAGLE GRAPHIC]
Managed by AMR INVESTMENTS
THE SECURITIES AND EXCHANGE COMMISSION DOES NOT GUARANTEE THAT THE INFORMATION
IN THIS PROSPECTUS OR ANY OTHER MUTUAL FUND'S PROSPECTUS IS ACCURATE OR
COMPLETE, NOR DOES IT JUDGE THE INVESTMENT MERIT OF THIS FUND. TO STATE
OTHERWISE IS A CRIMINAL OFFENSE.
<PAGE> 14
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ABOUT THE FUND
<S> <C> <C>
Investment Objectives, Strategies and Risks..........................3
The Manager..........................................................5
The Investment Advisers..............................................6
Valuation of Shares..................................................7
Distribution of Fund Shares .........................................7
ABOUT YOUR INVESTMENT
Purchase and Redemption of Shares....................................7
Distributions and Taxes..............................................9
ADDITIONAL INFORMATION
Master-Feeder Structure.............................................10
Year 2000...........................................................10
Additional Information..............................................11
</TABLE>
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ABOUT THE FUND
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS
INVESTMENT OBJECTIVES
Long-term capital appreciation and current income.
PRINCIPAL STRATEGIES
Ordinarily at least 80% of the total assets of the American AAdvantage Small
Cap Value Fund (the "Fund") will be invested in equity securities of U.S.
companies with market capitalizations of $1 billion or less at the time of
investment. The Fund's investments may include common stocks, preferred stocks,
securities convertible into common stocks, and U.S. dollar-denominated American
Depositary Receipts (collectively, "stocks").
The investment advisers will select stocks which, in their opinion, have most
or all of the following characteristics:
o above-average earnings growth potential,
o selling at prices below their perceived economic value,
o low price to earnings ratio,
o low price to book value ratio, and
o generate above-average dividend yields.
Each of the investment advisers determines the growth prospects of companies
based upon a combination of internal and external research using fundamental
analysis and considering changing economic trends. The decision to sell a stock
is typically based on the belief that the company is no longer considered
undervalued or shows deteriorating fundamentals, or that better investment
opportunities exist in other stocks. AMR Investment Services, Inc. (the
"Manager") believes that this strategy will help the Fund outperform other
investment styles over the longer term while minimizing volatility and downside
risk.
Under adverse market conditions, the Fund may, for temporary defensive
purposes, invest up to 100% of its assets in cash or cash equivalents,
including investment grade short-term obligations. To the extent that the Fund
invokes this strategy, its ability to achieve its investment objective may be
affected adversely.
The Fund seeks its investment objective by investing all of its investable
assets in the Small Cap Value Portfolio ("Portfolio") of the AMR Investment
Services Trust ("AMR Trust"). The Portfolio's investment objective is identical
to that of the Fund. Throughout this Prospectus, statements regarding
investments by the Fund refer to investments made by the Portfolio. For easier
reading, the term "Fund" is used throughout the Prospectus to refer to either
the Fund or the Portfolio, unless stated otherwise. See "Master-Feeder
Structure".
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RISK FACTORS
o Market Risk
Since this Fund invests most of its assets in equity securities, it is
subject to stock market risk. Market risk involves the possibility
that the value of the Fund's investments in stocks will decline due to
drops in the stock market. In general, the value of the Fund will move
in the same direction as the overall stock market, which will vary
from day to day in response to the activities of individual companies
and general market and economic conditions.
o Small Capitalization Companies
Investing in the securities of small capitalization companies involves
greater risk and the possibility of greater price volatility since
smaller companies may have limited operating history, product lines,
and financial resources, and the securities of these companies may
lack sufficient market liquidity.
o Additional Risk
An investment in the Fund is not a deposit of a bank and is not
insured or guaranteed by the Federal Deposit Insurance Corporation or
any other government agency. The value of an investment in the Fund
will fluctuate up and down, which means an investor could lose money.
PERFORMANCE OF SIMILAR SMALL CAP VALUE ACCOUNT
The Fund's investment advisers are Brandywine Asset Management, Inc.
("Brandywine") and Hotchkis and Wiley ("Hotchkis"). Brandywine and Hotchkis
each have experience managing other accounts with investment objectives,
policies and strategies similar to those of the Fund. Unlike the Fund, all of
the accounts managed by Brandywine include an allocation to micro-cap
companies, which are defined as companies with total market capitalization of
less than $250 million. Thus, the performance below consists of the Hotchkis
and Wiley Small Cap Fund ("Hotchkis Fund"), the only investment company managed
by Brandywine or Hotchkis with investment objectives, policies and strategies
substantially similar to those of the Fund. The data shown below reflects the
total return for the periods shown, reduced by the actual expenses of the
Hotchkis Fund. Applying the Fund's expense structure to the Hotchkis Fund would
have lowered the performance results shown. THIS PERFORMANCE OF THE HOTCHKIS
FUND IS HISTORICAL AND DOES NOT REPRESENT PROJECTED FUTURE INVESTMENT
PERFORMANCE OF THE FUND. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF HOW
THE FUND WILL PERFORM IN THE FUTURE.
TOTAL RETURN FOR THE CALENDAR YEAR ENDED 12/31 OF EACH YEAR
[GRAPH]
<TABLE>
<CAPTION>
88 89 90 91 92 93 94 95 96 97
---- ----- ----- ----- ----- ----- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
8.90% 20.50% (9.02)% 48.29% 13.72% 12.57% 1.11% 18.44% 14.27% 39.52%
</TABLE>
<TABLE>
<S> <C> <C>
Highest Quarterly Return from 1/1/88 through 12/31/97 (1st Qtr. 1991) 29.45%
Lowest Quarterly Return from 1/1/88 through 12/31/97 (3rd Qtr. 1998) (32.94)%
Year-to-Date Return through 9/30/98...................................... (22.39)%
</TABLE>
<TABLE>
<CAPTION>
Average Annual Total Return
=====================================================
as of 12/31/97
-----------------------------------------------------
1 Year 5 Years 10 Years
------ ------- --------
<S> <C> <C> <C>
Hotchkis Fund 39.52% 16.53% 15.77%
Russell 2000 Index 22.37% 16.41% 15.76%
</TABLE>
4
<PAGE> 17
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
Fund shares1.
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
<TABLE>
<CAPTION>
<S> <C>
Management Fees......................................0.68%
Other Expenses.......................................0.41%2
Total Annual Operating Expenses......................1.09%
Fee Waiver and/or Expense Reimbursement..............0.34%3
Net Expenses.........................................0.75%
</TABLE>
(1) The expense table and the Example below reflect the expenses of both the
Fund and the Portfolio.
(2) "Other Expenses" are based on estimates for the current fiscal year.
(3) The Manager has contractually agreed to waive a portion of its fee and to
reimburse the Fund for other expenses through October 31, 1999 to the
extent that Total Operating Expenses exceed 0.75%.
EXAMPLE
This example shows the expenses you would pay over time if you invested $10,000
in the Fund. It assumes that you earn 5% total return each year that the Fund's
operating expenses remain the same and that you sell your shares at the end of
each period. The actual expenses and total return of the Fund will vary over
time and, therefore, this example is for comparison purposes only.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
------ -------
<S> <C> <C>
$77 $313
</TABLE>
THE MANAGER
The American AAdvantage Funds ("Trust") has retained AMR Investment Services,
Inc. to serve as its Manager. The Manager, located at 4333 Amon Carter
Boulevard, Fort Worth, Texas 76155, is a wholly owned subsidiary of AMR
Corporation, the parent company of American Airlines, Inc. The Manager was
organized in 1986 to provide investment management, advisory, administrative
and asset management consulting services. As of October 31, 1998, the Manager
had approximately $20.5 billion of assets under management, including
approximately $7.6 billion under active management and $12.9 billion as named
fiduciary or financial adviser. Of the total, approximately $14.5 billion of
the assets are related to AMR Corporation.
The Manager provides or oversees all administrative, investment advisory and
portfolio management services to the Fund. The Manager
o develops the investment programs for the Fund,
o selects and changes investment advisers (subject to requisite
approvals),
o allocates assets among investment advisers,
o monitors the investment advisers' investment programs and results,
o coordinates the investment activities of the investment advisers to
ensure compliance with regulatory restrictions, and
o oversees the Fund's securities lending activities and any actions taken
by the securities lending agent.
As compensation for providing management services, the Fund pays the Manager an
annualized advisory fee that is calculated and accrued daily, equal to the sum
of 0.10% of the net assets of the Fund, plus all fees paid to the investment
advisers. The Manager also may receive up to 25% of the net annual interest
income and up to 25% of loan fees in regards to security lending activities.
Currently the Manager receives 10% of the net annual interest income from the
investment of cash collateral and 10% of the loan
5
<PAGE> 18
fees posted by borrowers. In addition to management fees, the Fund pays fees to
the Manager for administrative and management services (other than investment
advisory services). As compensation for these services, the Institutional Class
of the Fund pays a quarterly fee at the annual rate of 0.25% of net assets.
William F. Quinn and Nancy A. Eckl have primary responsibility for the
day-to-day operations of the Fund. These responsibilities include oversight of
the investment advisers, regular review of their performance and asset
allocations among them. Mr. Quinn has served as President of the Manager since
its inception in 1986. Ms. Eckl has served as Vice President-Trust Investments
since May 1995. Prior to her current position, Ms. Eckl held the position of
Vice President-Finance and Compliance of the Manager from December 1990 through
April 1995.
THE INVESTMENT ADVISERS
Set forth below is a brief description of the investment advisers for the Fund.
The Fund's assets are allocated among the investment advisers by the Manager.
Each investment adviser has discretion to purchase and sell securities for its
segment of the Fund's assets in accordance with the Fund's objectives,
policies, restrictions and more specific strategies provided by the Manager.
Each investment adviser has entered into a separate investment advisory
agreement with the Manager to provide investment advisory services to the Fund
and the Portfolio. Pursuant to an exemptive order issued by the Securities and
Exchange Commission ("SEC"), the Manager is permitted to enter into new or
modified investment advisory agreements with existing or new investment
advisers without approval of Fund shareholders, but subject to approval of the
Trust's Board of Trustees ("Board") and the AMR Investment Services Trust Board
("AMR Trust Board"). The Prospectus will be supplemented if additional
investment advisers are retained or the contract with any existing investment
adviser is terminated.
BRANDYWINE ASSET MANAGEMENT, INC., 201 North Walnut Street, Wilmington,
Delaware 19801, is a professional investment counseling firm founded in 1986.
Brandywine is a wholly owned subsidiary of Legg Mason, Inc. Brandywine's
investment process involves both fundamental screening to identify stocks that
are undervalued and fundamental analysis to identify undervalued stocks which
have the ability to return to normal value. As of November 30, 1998, Brandywine
had assets under management totaling approximately $7.2 billion, including
approximately $1.1 billion of assets of AMR and its subsidiaries and affiliated
entities. 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 AND WILEY, 725 South Figueroa, # 4000, Los Angeles, California 90017,
is a professional investment counseling firm which was founded in 1980 by John
F. Hotchkis and George Wiley. Hotchkis is a division of Merrill Lynch Asset
Management, L.P., a wholly owned indirect subsidiary of Merrill Lynch & Co.,
Inc. Hotchkis focuses on time proven investment disciplines and extensive
fundamental research to identify significantly undervalued companies where, in
its opinion, actual value exceeds current market price. As of November 30,
1998, Hotchkis had assets under management totaling approximately $14.3
billion, which included approximately $1.9 billion of assets of AMR and its
subsidiaries and affiliated entities. Hotchkis will be paid an annualized fee
equal to 0.5625% of Portfolio assets under its discretionary management.
VALUATION OF SHARES
The price of Fund shares is based on the Fund's net asset value ("NAV"). The
NAV per share of the Fund is computed by adding total assets, subtracting all
of the Fund's liabilities, and dividing the result by the total number of
shares outstanding. The Fund's investments are valued based on market value.
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. The NAV of Institutional Class shares
6
<PAGE> 19
will be determined based on a pro rata allocation of investment income,
expenses and total capital gains and losses. The Fund's NAV is determined as of
the close of the New York Stock Exchange ("Exchange"), generally 4:00 p.m.
Eastern time, on each day it is open for business.
DISTRIBUTION OF FUND SHARES
The Trust does not incur any direct distribution expenses related to
Institutional Class shares. However, the Trust has adopted a Distribution Plan
in accordance with Rule 12b-1 under the Investment Company Act of 1940 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.
ABOUT YOUR INVESTMENT
PURCHASE AND REDEMPTION OF SHARES
ELIGIBILITY
AMR Class shares are offered without a sales charge to tax exempt retirement
and benefit plans of AMR Corporation and its affiliates.
PURCHASE POLICIES
Shares of the Fund are offered and purchase 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. If a purchase order is accepted and payment is
received prior to the deadline, the purchase price will be the NAV per share
next determined on that day. If a purchase order is accepted or payment is
received after the applicable deadline, the purchase price will be the NAV of
the following day that the Fund is open for business. Checks to purchase shares
are accepted subject to collection at full face value in U.S. funds and must be
drawn in U.S. dollars on a U.S. bank. The Fund reserves the right to reject any
order for the purchase of shares and to limit or suspend, without prior notice,
the offering of shares. Shares purchased through financial intermediaries may
be subject to transaction fees. No sales charges are assessed on the purchase
or sale of Fund shares.
OPENING AN ACCOUNT
A completed, signed application is required to open an account. Prospective
investors may request an application form by calling (800) 492-9063.
Complete the application, sign it and:
Mail to: or Fax to:
State Street Bank & Trust Co. (817) 967-0768
P.O. Box 1978
Boston, MA 02105-1978
Attn: American AAdvantage Funds
7
<PAGE> 20
HOW TO PURCHASE SHARES
<TABLE>
<CAPTION>
To Make an Initial Purchase To Add to an Existing Account
BY CHECK
--------------------------------------------------------------------------------------------------------
<S> <C>
Mail check to: Include shareholder's account number and name of the
Fund on the check. Mail check to:
State Street Bank & Trust Co. State Street Bank & Trust Co.
P.O. Box 1978 P.O. Box 1978
Boston, MA 02105-1978 Boston, MA 02105-1978
Attn: American AAdvantage Funds Attn: American AAdvantage Funds
BY WIRE
--------------------------------------------------------------------------------------------------------
Send a bank wire to State Street Bank & Trust Co. Send a bank wire to State Street Bank & Trust Co. with
with these instructions: these instructions:
ABA# 0110-0002-8; AC-0002-888-6 ABA# 0110-0002-8; AC-0002-888-6
Attn: AAdvantage Funds-AMR Class Attn: AAdvantage Funds-AMR Class
Small Cap Value Fund Small Cap Value Fund
Call (800) 492-9063 to announce an incoming wire Call (800) 492-9063 to announce an incoming wire
BY EXCHANGE
-----------------------------------------------------------------------------------------------------
Fund shares may be purchased by exchange from
another American AAdvantage Fund if the
shareholder has owned AMR Class shares of the
other American AAdvantage Fund for at least 15
days. Send a written request to the address above
or call (800) 492-9063 to exchange shares.
</TABLE>
REDEMPTION POLICIES
Fund shares may be redeemed by telephone or mail on any day that the Fund is
open for business. The redemption price will be the NAV next determined after a
redemption order is received in good order. Proceeds from redemption orders
received by 4:00 p.m. Eastern time generally will be transmitted to
shareholders on the next day that the Fund is open for business and by no later
than seven days after the receipt of a redemption request in good order.
The Fund, its officers, trustees, directors, employees, or agents are not
responsible for the authenticity of instructions provided by telephone, nor for
any loss, liability, cost or expense incurred for acting on them. The Fund
employs procedures reasonably designed to confirm that instructions
communicated by telephone are genuine.
The Fund reserves the right to suspend redemptions or postpone the date of
payment:
o when the Exchange is closed (other than for customary weekend and
holiday closings)
o when trading on the Exchange is restricted
o when the SEC determines that an emergency exists so that disposal of
the Fund's investments or determination of its NAV is not reasonably
practicable
o by order of the SEC for protection of the Fund's shareholders.
Shares purchased by check may not be redeemed until the check has cleared,
which may take up to 15 days. Shares redeemed through financial intermediaries
may be subject to transaction fees. 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.
If a shareholder's account balance falls below $500, the Fund may ask the
shareholder to increase the balance. If the account balance remains below $500
after 45 days, the Fund may close the account and send the shareholder the
proceeds.
8
<PAGE> 21
HOW TO SELL SHARES
<TABLE>
<CAPTION>
BY MAIL
-----------------------------------------------------------------------
<S> <C>
Write a letter of instruction including
o the Fund name (American AAdvantage Small Cap Fund-AMR Class)
o shareholder account number
o shares or dollar amount to be sold
o authorized signature
o how and where to send the proceeds
Mail to:
State Street Bank & Trust Co.
P.O. Box 1978
Boston, MA 02105-1978
Attn: American AAdvantage Funds
BY TELEPHONE
----------------------------------------------------------------------------------------------------
Call (800) 492-9063 to request a redemption. Proceeds from redemptions placed by telephone
generally will be transmitted by wire only, as
instructed on the Fund application.
BY EXCHANGE
-----------------------------------------------------------------------------------------------------
Shares of the Fund may be redeemed in exchange for another American AAdvantage Fund if the shareholder has owned
shares of the Fund for at least 15 days. Send a written request to the address above or call (800) 492-9063 to
exchange shares.
</TABLE>
DISTRIBUTIONS AND TAXES
The Fund expects that its distributions, as a result of its investment
objectives and strategies, will consist primarily of net capital gains and
dividends from its net investment income. Usually, distributions received from
the Fund will be taxable, regardless of how long an investor has been a
shareholder or whether distributions are reinvested. Distributions in the form
of net capital gains may be taxable at different rates, depending on the length
of time the Fund holds its assets.
Each of the Fund's distributions is paid annually. Unless the account
application instructs otherwise, distributions will be reinvested in additional
Fund shares. An exchange of the Fund's shares for shares of another American
AAdvantage Fund will be treated as a sale of the Fund's shares, and any gain on
the transaction will be 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.
This is only a summary of some of the important tax considerations that may
affect Fund shareholders. Shareholders should consult their tax adviser
regarding specific questions as to the effect of federal, state or local income
taxes on an investment in the Fund.
9
<PAGE> 22
ADDITIONAL INFORMATION
MASTER-FEEDER STRUCTURE
The Fund operates under a master-feeder structure. This means that the Fund is
a "feeder" fund that invests all of its investable assets in a "master" fund
with the same investment objective. The "master" fund purchases securities for
investment. The master-feeder structure works as follows:
---------------------------
Investor
---------------------------
purchases shares of
---------------------------
Feeder Fund
---------------------------
which invests in
---------------------------
Master Fund
---------------------------
which buys
---------------------------
Investment Securities
---------------------------
The Fund invests all of its investable assets in the Small Cap Value Portfolio
of the AMR Trust. The Fund can withdraw its investment in the Portfolio at any
time if the Board determines that it is in the best interest of the Fund and
its shareholders to do so. If this happens, the Fund's assets will be invested
according to the investment policies and restrictions described in this
Prospectus.
YEAR 2000
The Fund could be affected adversely if the computer systems used by the
Manager, the Fund's other service providers, or companies in which the Fund
invests do not properly process and calculate information that relates to dates
beginning on January 1, 2000 and beyond. The Manager has taken steps that it
believes are reasonably designed to address the potential failure of computer
systems used by the Manager and the Fund's service providers to address the
Year 2000 issue. However, due to the Fund's reliance on various service
providers to perform essential functions, the Fund could have difficulty
calculating the NAV, processing orders for share redemptions and delivering
account statements and other information to shareholders. There can be no
assurance that these steps will be sufficient to avoid any adverse impact.
10
<PAGE> 23
ADDITIONAL INFORMATION
The Statement of Additional Information ("SAI") contains more details about the
Fund and its investment policies. The SAI is incorporated in this Prospectus by
reference (it is legally part of this Prospectus). A current SAI is on file
with the SEC.
To obtain more information about the Funds or to request a free copy of the
SAI:
BY TELEPHONE:
Call (817) 967-3509
BY MAIL:
American AAdvantage Funds
P.O. Box 619003, MD5645
DFW Airport, TX 75261-9003
BY E-MAIL:
[email protected]
ON THE INTERNET:
Visit our website at www.aafunds.com
Visit the SEC's website at www.sec.gov
Copies of these documents also may be obtained from the SEC Public Reference
Room in Washington, D.C. The Public Reference Room can be reached at (800)
732-0330 or by mailing a request, including a duplicating fee to the SEC's
Public Reference Section, 450 5th. Street NW, Washington, D.C. 20549-6009.
FUND SERVICE PROVIDERS
<TABLE>
<CAPTION>
<S> <C>
CUSTODIAN TRANSFER AGENT
State Street Bank and Trust Company State Street Bank and Trust Company
Boston, Massachusetts Boston, Massachusetts
INDEPENDENT AUDITORS DISTRIBUTOR
Ernst & Young LLP Brokers Transaction Services, Inc.
Dallas, Texas Dallas, Texas
</TABLE>
[AMERICAN AADVANTAGE FUNDS(R) LOGO]
SEC File Number 811-4984
American AAdvantage Funds is a registered service mark of AMR Corporation.
American AAdvantage Small Cap Value Fund is a service mark of AMR Investment
Services. American Airlines is not responsible for investments made in the
American AAdvantage Funds.
11
