<PAGE> 1
As filed with the Securities and Exchange Commission on April 17, 2000
1933 Act File No. 33-11387
1940 Act File No. 811-4984
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ] [ ]
Post-Effective Amendment No. [30] [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. [31]
(Check appropriate box or boxes.)
AMERICAN AADVANTAGE FUNDS
(Exact Name of Registrant as Specified in Charter)
4333 Amon Carter Boulevard
Fort Worth, Texas 76155
(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, including Area Code: (817) 967-3509
WILLIAM F. QUINN, PRESIDENT
4333 Amon Carter Boulevard
Fort Worth, Texas 76155
(Name and Address of Agent for Service)
Copy to:
ROBERT J. ZUTZ, ESQ.
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, NW
Washington, DC 20036
Approximate Date of Proposed Public Offering June 30, 2000
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[X] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485.
Registrant has adopted a master-feeder operating structure for each of its
series. This Post-Effective Amendment includes signature pages for the AMR
Investment Services Trust and the Quantitative Master Series Trust, the master
trusts, and the American AAdvantage Funds, the feeder trust.
<PAGE> 2
AMERICAN AADVANTAGE FUNDS
CONTENTS OF REGISTRATION STATEMENT
This registration statement is comprised of the following:
Cover Sheet
Contents of Registration Statement
Prospectus for the Institutional Class consisting of the
following American AAdvantage Funds: Large Cap Growth Fund,
Emerging Markets Fund, Small Cap Index Fund, and International
Index Fund
Prospectus for the AMR Class consisting of the following American
AAdvantage Funds: Large Cap Growth Fund, Emerging Markets Fund,
Small Cap Index Fund, and International Index Fund
Statement of Additional Information for the AMR Class and
Institutional Class of the following American AAdvantage Funds:
Large Cap Growth Fund, Emerging Markets Fund, Small Cap Index
Fund and International Index Fund
Part C
Signature Pages
Exhibits
<PAGE> 3
INSTITUTIONAL CLASS
[GRAPHIC]
PROSPECTUS
JUNE 30, 2000
[AMERICAN AADVANTAGE FUNDS(R) LOGO]
Large Cap Growth Fund
Emerging Markets Fund
Small Cap Index Fund
International Index Fund
Managed by AMR Investment Services, Inc. The Securities and Exchange
Commission does not guarantee
that the information in this
Prospectus or any other mutual
fund's prospectus is accurate
or complete, nor does it judge
the investment merit of these
Funds. To state otherwise is a
criminal offense.
<PAGE> 4
[AMERICAN AADVANTAGE FUNDS(R) LOGO]
- INSTITUTIONAL CLASS -
TABLE OF CONTENTS
<TABLE>
<S> <C>
About the Funds
Overview...................................................2
Large Cap Growth Fund......................................3
Emerging Markets Fund......................................5
Small Cap Index Fund.......................................7
International Index Fund...................................9
The Manager...............................................11
Index Funds Administrator.................................11
The Investment Advisers...................................11
Valuation of Shares.......................................12
About Your Investment
Purchase and Redemption of Shares.........................12
Distributions and Taxes...................................15
Additional Information
Distribution of Trust Shares..............................15
Master-Feeder Structure...................................15
Additional Information............................Back Cover
</TABLE>
ABOUT THE FUNDS
OVERVIEW
The American AAdvantage Funds (the "Funds") are managed by AMR Investment
Services, Inc. (the "Manager"), a wholly owned subsidiary of AMR Corporation.
The Funds operate under a master-feeder structure. This means that the Large Cap
Growth and Emerging Markets Funds each 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 investment
objective. The Small Cap Index Fund and the International Index Fund (the "Index
Funds") each seeks its investment objective by investing all of its investable
assets in a corresponding portfolio of the Quantitative Master Series Trust
("Index Trust") having an identical investment objective to the Index Fund. The
Index Trust is managed by Fund Asset Management, L.P. ("FAM"), a Delaware
limited partnership wholly owned by Merrill Lynch & Co., Inc. Throughout this
Prospectus, statements regarding investments by a Fund refer to investments made
by its corresponding portfolio. For easier reading, the term "Fund" is used
throughout the Prospectus to refer to either a Fund or its portfolio, unless
stated otherwise. See "Master-Feeder Structure."
2
<PAGE> 5
American AAdvantage
LARGE CAP GROWTH FUND
- --------------------------------------------------------------------------------
Investment Objective
Long-term capital appreciation.
Principal Strategies
Ordinarily at least 65% of the total assets of this Fund are invested in equity
securities of large-capitalization U.S. companies with market capitalizations of
$5 billion or more at the time of investment that the investment advisers
believe have above-average growth potential. The Fund's investments may include
common stocks, preferred stocks, securities convertible into U.S. common stocks,
and U.S. dollar-denominated American Depositary Receipts (collectively referred
to as "stocks").
One of the Fund's investment advisers utilizes quantitative techniques and
fundamental research in seeking to maximize the Fund's expected return, while
maintaining risk, style, capitalization and industry characteristics similar to
the Russell 1000(R) Growth Index. The adviser attempts to structure a portfolio
comprised of companies with above-average capitalizations and earnings growth
expectations and below-average dividend yields.
The Fund's other investment adviser attempts to allocate its portion of the
Fund's assets across industries in weightings similar to those of the Russell
1000 Growth Index. Within each industry, the adviser modestly overweights stocks
that it determines to be undervalued or fairly valued, while modestly
underweighting or not holding stocks that appear overvalued.
Under adverse market conditions, the Fund may, for temporary defensive purposes,
invest up to 100% of its assets in cash or cash equivalents, including
investment grade short-term obligations. To the extent that the Fund invokes
this strategy, its ability to achieve its investment objective may be affected
adversely.
Risk Factors
MARKET RISK
Since this Fund invests most of its assets in stocks, it is subject to stock
market risk. Market risk involves the possibility that the value of the Fund's
investments in stocks will decline due to drops in the stock market. In general,
the value of the Fund will move in the same direction as the overall stock
market, which will vary from day to day in response to the activities of
individual companies and general market and economic conditions. However,
different parts of the stock market and different types of equity securities may
react differently. For example, the growth stocks in which the Fund invests are
typically more volatile than value stocks.
ADDITIONAL RISKS
An investment in the Fund is not a deposit of a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. The value of an investment in the Fund will fluctuate up and down. When
you sell your shares of the Fund, they could be worth less than what you paid
for them.
Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Large Cap Growth Fund.(1)
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)
<TABLE>
<S> <C>
Management Fees x.xx%
Distribution (12b-1) Fees 0.00
Other Expenses x.xx(2)
Total Annual Fund Operating Expenses x.xx%
Fee Waiver and/or Expense Reimbursement x.xx%(3)
Net Expenses x.xx%
</TABLE>
(1) The expense table and the Example below reflect the expenses of both the
Fund and its corresponding portfolio.
(2) Other Expenses are based on estimates for the current fiscal year.
(3) The Manager has contractually agreed to reimburse the Fund for Other
Expenses through October 31, 2001 to the extent that Total Annual Fund
Operating Expenses exceed x.xx%.
Example
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and then redeem all of
your shares at the end of those periods. The Example also assumes that your
investment has a 5% return each year and that the Fund's operating expenses
remain the same. Because the Manager's expense reimbursement is only guaranteed
through October 31, 2001, Net Expenses are used to calculate costs in year one,
and Total Annual Fund Operating Expenses are used to calculate costs in years
two and three. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
<TABLE>
<S> <C>
1 Year..................................................$xx
3 Years................................................$xxx
</TABLE>
Investment Advisers
The Manager allocates the assets of the Fund among the following investment
advisers:
Goldman Sachs Asset Management
J.P. Morgan Investment Management Inc.
3
<PAGE> 6
American AAdvantage
LARGE CAP GROWTH FUND -- (CONTINUED)
- --------------------------------------------------------------------------------
Historical Performance
The Fund began offering its shares on June 30, 2000, and therefore, historical
performance is not available. However, the investment advisers have experience
managing other accounts with investment objectives, policies and strategies
substantially similar to those of the Fund. The performance shown below consists
of the Goldman Sachs CORE Large Cap Growth Composite and the J.P. Morgan
Research Optimized Equity Growth Composite, composites of accounts that have
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 accounts in each composite. Applying the
Fund's expense structure to the composites would have lowered the performance
results shown. Certain restrictions imposed by law on registered investment
companies, such as the Fund, are not applicable to the composites and may have
adversely affected the performance of the composites had they been applicable.
THE PERFORMANCE SHOWN IS NOT THE PERFORMANCE OF THE FUND. PAST PERFORMANCE IS
NOT NECESSARILY INDICATIVE OF HOW THE FUND WILL PERFORM IN THE FUTURE.
GOLDMAN SACHS CORE LARGE CAP GROWTH
TOTAL RETURN FOR THE CALENDAR YEAR ENDED 12/31 OF EACH YEAR
[GRAPH]
<TABLE>
<CAPTION>
95 96 97 98 99
------ ------ ------ ------ ------
<S> <C> <C> <C> <C>
38.40% 32.40% 33.50% 29.20% 38.20%
</TABLE>
<TABLE>
<S> <C>
Highest Quarterly Return: x.xx%
(1/1/95 through 12/31/99) (x Quarter 199x)
Lowest Quarterly Return: x.xx%
(1/1/95 through 12/31/99) (x Quarter 199x)
</TABLE>
J.P. MORGAN RESEARCH OPTIMIZED EQUITY GROWTH
TOTAL RETURN FOR THE CALENDAR YEAR ENDED 12/31 OF EACH YEAR
[GRAPH]
<TABLE>
<CAPTION>
95 96 97 98 99
------ ------ ------ ------ ------
<S> <C> <C> <C> <C>
38.90% 26.40% 32.60% 41.70% 25.80%
</TABLE>
<TABLE>
<S> <C>
Highest Quarterly Return: x.xx%
(1/1/95 through 12/31/99) (x Quarter 199x)
Lowest Quarterly Return: x.xx%
(1/1/95 through 12/31/99) (x Quarter 199x)
</TABLE>
<TABLE>
<CAPTION>
Average Annual Total Return
as of 12/31/99
---------------------------
Since
1 Year 5 Years Inception(2)
------ ------- ------------
<S> <C> <C> <C>
Goldman Sachs CORE Large Cap
Growth Composite
J.P. Morgan Research
Optimized Equity Growth Composite
[Lipper Index name]
Russell 1000(R)Growth Index(1)
</TABLE>
(1) The Russell 1000 Growth Index is an unmanaged index of those stocks in the
Russell 1000 Index with above-average price-to-book ratios and
above-average forecasted growth values.
(2) The inception dates for the Goldman Sachs and J.P. Morgan composites
are xx/xx/xx and xx/xx/xx, respectively.
4
<PAGE> 7
American AAdvantage
EMERGING MARKETS FUND
- --------------------------------------------------------------------------------
Investment Objective
Long-term capital appreciation.
Principal Strategies
Ordinarily at least 65% of the total assets of this Fund are invested in equity
securities of issuers located in or conducting the majority of their business in
emerging markets. Emerging markets are countries that:
o have an emerging stock market as defined by the International Finance
Corporation (IFC);
o have low- to middle-income economies according to the World Bank;
o are included in the IFC Investable Index or the Morgan Stanley Capital
International Emerging Markets "Free" Index; or
o have a per-capita gross national product of $2,000 or less.
The Fund's investments may include common stocks, preferred stocks, securities
convertible into common stocks, and depositary receipts (collectively referred
to as "stocks").
One of the Fund's investment advisers employs a top-down investment strategy by
first allocating assets among emerging market countries that it believes have
improving economic conditions. Then, the investment adviser uses a bottom-up
strategy to select individual securities within those countries, analyzing the
fundamentals of each issuer to determine those with high capital appreciation
potential and minimal risk.
The other investment adviser to the Fund utilizes a bottom-up investment
strategy that is value-oriented and research-driven. This style is both
quantitative and fundamentally based; focusing first on stock selection then
enhanced by broadly diversified country allocation.
Under adverse market conditions, the Fund may, for temporary defensive purposes,
invest up to 100% of its assets in cash or cash equivalents, including
investment grade short-term obligations. To the extent that the Fund invokes
this strategy, its ability to achieve its investment objective may be affected
adversely.
Risk Factors
MARKET RISK
Since this Fund invests most of its assets in stocks, it is subject to stock
market risk. Market risk involves the possibility that the value of the Fund's
investments in stocks of a particular country will decline due to drops in that
country's stock market. In general, the value of the Fund will move in the same
direction as the international stock markets in which it invests, which will
vary from day to day in response to the activities of individual companies and
general market and economic conditions of each country.
FOREIGN INVESTING
Overseas investing carries potential risks not associated with domestic
investments. Such risks include, but are not limited to: (1) currency exchange
rate fluctuations, (2) political and financial instability, (3) less liquidity
and greater volatility of foreign investments, (4) lack of uniform accounting,
auditing and financial reporting standards, (5) less government regulation and
supervision of foreign stock exchanges, brokers and listed companies, (6)
increased price volatility, (7) delays in transaction settlement in some foreign
markets, and (8) adverse impact of the euro conversion on the business or
financial condition of companies in which the Fund is invested.
EMERGING MARKETS
The risks of foreign investing mentioned above are heightened when investing in
emerging markets. In addition, the economies of emerging markets countries tend
to be more unstable than the economies of developed countries resulting in more
volatile rates of return than the developed market and substantially greater
risk to investors.
NON-DIVERSIFICATION RISK
The Fund is non-diversified, which means that it may invest a high percentage of
its assets in a limited number of securities. Since the Fund is non-diversified,
its net asset value and total return may fluctuate more or fall greater in times
of weaker markets than a diversified mutual fund.
ADDITIONAL RISKS
An investment in the Fund is not a deposit of a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. The value of an investment in the Fund will fluctuate up and down. When
you sell your shares of the Fund, they could be worth less than what you paid
for them.
5
<PAGE> 8
American AAdvantage
EMERGING MARKETS FUND -- (CONTINUED)
- --------------------------------------------------------------------------------
Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Emerging Markets Fund.(1)
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)
<TABLE>
<S> <C>
Management Fees x.xx%
Distribution (12b-1) Fees 0.00
Other Expenses x.xx(2)
Total Annual Fund Operating Expenses x.xx%
Fee Waiver and/or Expense Reimbursement x.xx%(3)
NET EXPENSES x.xx%
</TABLE>
(1) The expense table and the Example below reflect the expenses of both the
Fund and its corresponding portfolio.
(2) Other Expenses are based on estimates for the current fiscal year.
(3) The Manager has contractually agreed to reimburse the Fund for Other
Expenses through October 31, 2001 to the extent that Total Annual Fund
Operating Expenses exceed x.xx%.
Example
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and then redeem all of
your shares at the end of those periods. The Example also assumes that your
investment has a 5% return each year and that the Fund's operating expenses
remain the same. Because the Manager's expense reimbursement is only guaranteed
through October 31, 2001, Net Expenses are used to calculate costs in year one,
and Total Annual Fund Operating Expenses are used to calculate costs in years
two and three. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
<TABLE>
<S> <C>
1 YEAR..................................................$xx
3 YEARS................................................$xxx
</TABLE>
Investment Advisers
The Manager allocates the assets of the Fund among the following investment
advisers:
Morgan Stanley Dean Witter Investment Management Inc.
[Adviser name]
Historical Performance
The Fund began offering its shares on June 30, 2000, and therefore, historical
performance is not available. However, one of the investment advisers has
experience managing other accounts with investment objectives, policies and
strategies substantially similar to those of the Fund. The performance shown
below is for a composite of accounts managed by Morgan Stanley Dean Witter
Investment Management ("Morgan Stanley") that have 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 accounts in the composite. Applying the Fund's expense
structure to the composite would have lowered the performance results shown.
Certain restrictions imposed by law on registered investment companies, such as
the Fund, are not applicable to the composite and may have adversely affected
the performance of the composite had they been applicable. THE PERFORMANCE
SHOWN IS NOT THE PERFORMANCE OF THE FUND. PAST PERFORMANCE IS NOT NECESSARILY
INDICATIVE OF HOW THE FUND WILL PERFORM IN THE FUTURE.
[GRAPH]
Morgan Stanley
Total Return for the Calendar Year Ended 12/31 of each Year
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
95 96 97 98 99
(12.70)% 13.00% (3.00)% (22.70)% 105.90%
</TABLE>
<TABLE>
<S> <C>
Highest Quarterly Return: x.xx%
(1/1/95 through 12/31/99) (x Quarter 199x)
Lowest Quarterly Return: x.xx%
(1/1/95 through 12/31/99) (x Quarter 199x)
</TABLE>
<TABLE>
<CAPTION>
Average Annual Total Return
as of 12/31/99
---------------------------
Since
Inception
1 Year 5 Years (10/1/94)
------ ------- ---------
<S> <C> <C> <C>
Morgan Stanley Composite
[Lipper Index name]
MSCI Emerging Markets Free Index(1)
</TABLE>
(1) The MSCI Emerging Markets Free Index is a market capitalization weighted
index composed of companies that are representative of the market structure
of developing countries in Latin America, Asia, Eastern Europe, the Middle
East and Africa.
6
<PAGE> 9
American AAdvantage
SMALL CAP INDEX FUND
- --------------------------------------------------------------------------------
Investment Objective
To match the performance of the Russell 2000(R) Index (the "Russell 2000" or
"Index") as closely as possible before the deduction of Fund expenses.
Principal Strategies
The Fund employs a "passive" management approach, attempting to invest in a
portfolio of assets whose performance is expected to match approximately the
performance of the Russell 2000. The Russell 2000 is composed of the common
stocks of the 1,001st through the 3,000th largest U.S. companies weighted by
market capitalization, as determined by the Frank Russell Company. The Fund will
be substantially invested in securities in the Russell 2000, and will invest at
least 80% of its assets in securities or other financial instruments in, or
correlated with, the Russell 2000. As a result of this strategy, the Fund will
be a non-diversified fund.
The Fund invests in a statistically selected sample of stocks included in the
Russell 2000 and in derivative instruments linked to the Russell 2000. The Fund
may not invest in all of the common stocks in the Russell 2000, or in the same
weightings as in the Russell 2000. The Fund chooses investments so that the
market capitalizations, industry weightings and other fundamental
characteristics of the stocks and derivative instruments chosen are similar to
the Russell 2000 as a whole.
The Fund may invest in derivative instruments, and may invest a substantial
portion of its assets in options and futures contracts linked to the performance
of the Russell 2000. Derivatives allow the Fund to increase or decrease its
exposure to the Russell 2000 quickly and at less cost than buying or selling
stocks. The Fund will invest in options and futures and other derivative
instruments in order to gain market exposure quickly in the event of
subscriptions, to maintain liquidity in the event of redemptions and to keep
trading costs low. In connection with the use of derivative instruments, the
Fund may enter into short sales in order to adjust the weightings of particular
securities represented in a derivative to more accurately reflect the
securities' weightings in the Index.
Risk Factors
MARKET RISK
Since this Fund invests most of its assets in stocks, it is subject to stock
market risk. Market risk involves the possibility that the value of the Fund's
investments in stocks will decline due to drops in the stock market. In general,
the value of the Fund will move in the same direction as the overall stock
market, which will vary from day to day in response to the activities of
individual companies and general market and economic conditions.
TRACKING ERROR RISK
The Fund's return may not match the return of the Index for a number of reasons.
For example, the Fund incurs a number of operating expenses not applicable to
the Index, and incurs costs in buying and selling securities. The Fund may not
be fully invested at times, either as a result of cash flows into the Fund or
reserves of cash held by the Fund to meet redemptions. The return on the sample
of stocks purchased by the Fund, or futures or other derivative positions taken
by the Fund, to replicate the performance of the Index may not correlate
precisely with the return on the Index.
NON-DIVERSIFICATION RISK
The Fund is non-diversified, which means that it may invest a high percentage of
its assets in a limited number of securities. Since the Fund is non-diversified,
its net asset value and total return may fluctuate more or fall greater in times
of weaker markets than a diversified mutual fund.
SMALL CAP RISK
Investing in the securities of small capitalization companies involves greater
risk and the possibility of greater price volatility than investing in larger
capitalization and more established companies, since smaller companies may have
limited operating history, product lines, and financial resources, and the
securities of these companies may lack sufficient market liquidity.
DERIVATIVES RISK
Gains or losses from positions in a derivative instrument may be much greater
than the derivative's original cost. The counterparty to the transaction may be
unable to honor its financial obligation to the Fund. In addition, a derivative
may be difficult or impossible to sell at the time the investment adviser would
like or at the price the investment adviser believes the security is currently
worth.
7
<PAGE> 10
American AAdvantage
SMALL CAP INDEX FUND -- (CONTINUED)
- --------------------------------------------------------------------------------
Additional Risks
An investment in the Fund is not a deposit of a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. The value of an investment in the Fund will fluctuate up and down. When
you sell your shares of the Fund, they could be worth less than what you paid
for them.
Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Small Cap Index Fund.(1)
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)
<TABLE>
<S> <C>
Management Fees x.xx%
Distribution (12b-1) Fees 0.00
Other Expenses x.xx(2)
Total Annual Fund Operating Expenses x.xx%
Fee Waiver and/or Expense Reimbursement x.xx%(3)
NET EXPENSES x.xx%
</TABLE>
(1) The expense table and the Example below reflect the expenses of both the
Fund and its corresponding portfolio.
(2) Other Expenses are based on estimates for the current fiscal year.
(3) The Manager has contractually agreed to reimburse the Fund for Other
Expenses through October 31, 2001 to the extent that Total Annual Fund
Operating Expenses exceed x.xx%.
Example
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and then redeem all of
your shares at the end of those periods. The Example also assumes that your
investment has a 5% return each year and that the Fund's operating expenses
remain the same. Because the Manager's expense reimbursement is only guaranteed
through October 31, 2001, Net Expenses are used to calculate costs in year one,
and Total Annual Fund Operating Expenses are used to calculate costs in years
two and three. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
<TABLE>
<S> <C>
1 YEAR..................................................$xx
3 YEARS................................................$xxx
</TABLE>
Investment Adviser
Fund Asset Management, L.P.
Historical Performance
The Fund began offering its shares on June 30, 2000, and therefore, historical
performance is not available. However, the Merrill Lynch Small Cap Index Fund
(the "Merrill Lynch Fund"), a feeder fund that invests all of its investable
assets in the same master portfolio, has been offering its shares since April 9,
1997. The performance shown below is for the Merrill Lynch Fund. The data shown
below reflects the total return for the periods shown, reduced by the actual
expenses of the Merrill Lynch Fund. Because the Merrill Lynch Fund had higher
expenses, its performance was worse than the Fund would have realized in the
same period. Past performance is not necessarily indicative of how the Fund will
perform in the future.
TOTAL RETURN FOR THE CALENDAR YEAR ENDED 12/31 OF EACH YEAR
<TABLE>
<CAPTION>
<S> <C>
98 99
(3.14)% --
</TABLE>
<TABLE>
<S> <C>
Highest Quarterly Return: x.xx%
(1/1/98 through 12/31/99) (x Quarter 199x)
Lowest Quarterly Return: x.xx%
(1/1/98 through 12/31/99) (x Quarter 199x)
</TABLE>
<TABLE>
Average Annual Total Return
as of 12/31/99
---------------------------
Since
Inception
1 Year (4/9/97)
------ ---------
<S> <C> <C>
Merrill Lynch Fund x.xx% x.xx%
Russell 2000 Index(1) x.xx% x.xx%
</TABLE>
(1) The Russell 2000 Index is an unmanaged index comprised of approximately
2,000 smaller-capitalization stocks from various industrial sectors.
8
<PAGE> 11
American AAdvantage
INTERNATIONAL INDEX FUND
- --------------------------------------------------------------------------------
Investment Objective
To match the performance of the Morgan Stanley Capital International EAFE
Capitalization Weighted Index (the "EAFE Index" or "Index") as closely as
possible before the deduction of Fund expenses.
Principal Strategies
The Fund employs a "passive" management approach, attempting to invest in a
portfolio of assets whose performance is expected to match approximately the
performance of the EAFE Index. The EAFE Index is composed of equity securities
of companies from various industrial sectors whose primary trading markets are
located outside the United States. Companies included in the EAFE Index are
selected from among the larger capitalization companies in these markets. The
countries currently included in the EAFE Index are:
Australia France Japan Singapore
Austria Germany The Netherlands Spain
Belgium Hong Kong New Zealand Sweden
Denmark Ireland Norway Switzerland
Finland Italy Portugal United Kingdom
The weighting of the Index among these countries is based upon each country's
relative market capitalization, and not its gross domestic product, which means
that the Index contains more companies with the largest capital markets (like
Japan and the United Kingdom), and they have the most effect on the Index's
performance.
The Fund will be substantially invested in securities in the Index, and will
invest at least 80% of its assets in securities or other financial instruments
in, or correlated with, the Index. As a result of this strategy, the Fund will
be a non-diversified fund.
The Fund invests in a statistically selected sample of equity securities
included in the EAFE Index and in derivative instruments linked to the EAFE
Index. The Fund may not invest in all of the countries, or all of the companies
within a country, represented in the EAFE Index, or in the same weightings as in
the EAFE Index. The Fund will choose investments so that the market
capitalizations, industry weightings and other fundamental characteristics of
the stocks and derivative instruments chosen are similar to the EAFE Index as a
whole.
The Fund may invest in derivative instruments, and will normally invest a
substantial portion of its assets in options and futures contracts correlated
with countries within the EAFE Index. Derivatives allow the Fund to increase or
decrease its exposure to the EAFE Index quickly and at less cost than buying or
selling stocks. The Fund will invest in options and futures and other derivative
instruments in order to gain market exposure quickly in the event of
subscriptions, to maintain liquidity in the event of redemptions and to keep
trading costs low. In connection with the use of derivative instruments, the
Fund may enter into short sales in order to adjust the weightings of particular
securities represented in a derivative to more accurately reflect the
securities' weightings in the Index.
Risk Factors
MARKET RISK
Since this Fund invests most of its assets in stocks, it is subject to stock
market risk. Market risk involves the possibility that the value of the Fund's
investments in stocks of a particular country will decline due to drops in that
country's stock market. In general, the value of the Fund will move in the same
direction as the international stock markets in which it invests, which will
vary from day to day in response to the activities of individual companies and
general market and economic conditions of each country.
FOREIGN INVESTING
Overseas investing carries potential risks not associated with domestic
investments. Such risks include, but are not limited to: (1) currency exchange
rate fluctuations, (2) political and financial instability, (3) less liquidity
and greater volatility of foreign investments, (4) lack of uniform accounting,
auditing and financial reporting standards, (5) less government regulation and
supervision of foreign stock exchanges, brokers and listed companies, (6)
increased price volatility, (7) delays in transaction settlement in some foreign
markets, and (8) adverse impact of the euro conversion on the business or
financial condition of companies in which the Fund is invested.
TRACKING ERROR RISK
The Fund's return may not match the return of the Index for a number of reasons.
For example, the Fund incurs a number of operating expenses not applicable to
the Index and incurs costs in buying and selling securities. The Fund may not be
fully invested at times, either as a result of cash flows into the Fund or
reserves of cash held by the Fund to meet redemptions. The return on the sample
of stocks purchased by the Fund, or futures or other derivative positions taken
by the Fund, to replicate the performance of the Index may not correlate
precisely with the return on the Index.
NON-DIVERSIFICATION RISK
The Fund is non-diversified, which means that it may invest a high percentage of
its assets in a limited number of securities. Since the Fund is non-diversified,
its net asset value and total return may fluctuate more or fall greater in times
of weaker markets than a diversified mutual fund.
9
<PAGE> 12
American AAdvantage
INTERNATIONAL INDEX FUND -- (CONTINUED)
- -------------------------------------------------------------------------------
DERIVATIVES RISK
Gains or losses from positions in a derivative instrument may be much greater
than the derivative's original cost. The counterparty to the transaction may be
unable to honor its financial obligation to the Fund. In addition, a derivative
may be difficult or impossible to sell at the time the investment adviser would
like or at the price the investment adviser believes the security is currently
worth.
ADDITIONAL RISKS
An investment in the Fund is not a deposit of a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. The value of an investment in the Fund will fluctuate up and down. When
you sell your shares of the Fund, they could be worth less than what you paid
for them.
Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
shares of the International Index Fund.(1)
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)
<TABLE>
<S> <C>
Management Fees x.xx%
Distribution (12b-1) Fees 0.00
Other Expenses x.xx(2)
Total Annual Fund Operating Expenses x.xx%
Fee Waiver and/or Expense Reimbursement x.xx%(3)
NET EXPENSES x.xx%
</TABLE>
(1) The expense table and the Example below reflect the expenses of both the
Fund and its corresponding portfolio.
(2) Other Expenses are based on estimates for the current fiscal year.
(3) The Manager has contractually agreed to reimburse the Fund for Other
Expenses through October 31, 2001 to the extent that Total Annual Fund
Operating Expenses exceed x.xx%.
Example
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and then redeem all of
your shares at the end of those periods. The Example also assumes that your
investment has a 5% return each year and that the Fund's operating expenses
remain the same. Because the Manager's expense reimbursement is only guaranteed
through October 31, 2001, Net Expenses are used to calculate costs in year one,
and Total Annual Fund Operating Expenses are used to calculate costs in years
two and three. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
<TABLE>
<S> <C>
1 YEAR..................................................$xx
3 YEARS................................................$xxx
</TABLE>
Investment Adviser
Fund Asset Management, L.P.
Historical Performance
The Fund began offering its shares on June 30, 2000, and therefore, historical
performance is not available.
10
<PAGE> 13
The Manager
The Funds have retained AMR Investment Services, Inc. to serve as their Manager.
The Manager, located at 4333 Amon Carter Boulevard, Fort Worth, Texas 76155, is
a wholly owned subsidiary of AMR Corporation, the parent company of American
Airlines, Inc. The Manager was organized in 1986 to provide investment
management, advisory, administrative and asset management consulting services.
As of March 31, 2000, the Manager had approximately $xx.x billion of assets
under management, including approximately $x.x billion under active management
and $xx.x billion as named fiduciary of financial adviser. Of the total,
approximately $xx.x billion of assets were related to AMR Corporation.
The Manager provides or oversees the provision of all administrative, investment
advisory and portfolio management services to the Funds. The Manager develops
the investment programs for each Fund and allocates assets among investment
advisers. In addition, for the Large Cap Growth and Emerging Markets Funds, the
Manager
o selects and changes investment advisers (subject to requisite approvals),
o monitors the investment advisers' investment programs and results,
o coordinates the investment activities of the investment advisers to ensure
compliance with regulatory restrictions,
o oversees each Fund's securities lending activities and actions taken by the
securities lending agent, and
o invests the portion of Fund assets that the investment advisers determine
should be allocated to high quality short-term debt obligations.
As compensation for providing management services, the Manager receives an
annualized advisory fee that is calculated and accrued daily, equal to the sum
of x.xx% of the net assets of each Fund.
In addition, the Large Cap Growth and Emerging Markets Funds pay the Manager the
amounts due to their respective investment advisers. The Manager then remits
these amounts to the investment advisers.
The Manager also may receive up to 25% of the net annual interest income or up
to 25% of loan fees in regards to securities lending activities of the Large Cap
Growth and Emerging Markets Funds. Currently, the Manager receives 10% of the
net annual interest income from the investment of cash collateral or 10% of the
loan fees posted by borrowers. The Securities and Exchange Commission ("SEC")
has granted exemptive relief that permits the Funds to invest cash collateral
received from securities lending transactions in shares of one or more private
or registered investment companies managed by the Manager.
William F. Quinn and Nancy A. Eckl have primary responsibility for the
day-to-day operations of the Funds. These responsibilities include oversight of
the investment advisers, regular review of each investment adviser's performance
and asset allocations among multiple investment advisers. Mr. Quinn has served
as President of the Manager since its inception in 1986. Ms. Eckl has served as
Vice President-Trust Investments of the Manager since May 1995.
Index Funds Administrator
FAM serves as the adviser and administrator to the Index Trust. As compensation
for its services as adviser, FAM receives an advisory fee at an annual rate of
0.01% of the average daily net assets of each Index Fund. For its services as
administrator, FAM receives an administrative fee at an annual rate of x.xx% of
the average daily net assets of the Small Cap Index Fund and x.xx% of the
average daily net assets of the International Index Fund.
The Investment Advisers
Set forth below is a brief description of the investment advisers for each Fund.
Each investment adviser has discretion to purchase and sell securities for its
segment of a Fund's assets in accordance with the Fund's objectives, policies,
restrictions and more specific strategies provided by the Manager. Pursuant to
an exemptive order issued by the SEC, the Manager is permitted to enter into new
or modified investment advisory agreements with existing or new investment
advisers of the Large Cap Growth Fund or Emerging Market Funds without approval
of a Fund's shareholders, but subject to approval of the American AAdvantage
Trust (the "Trust") Board of Trustees ("Board") and the AMR Trust Board of
Trustees ("AMR Trust Board"). The Prospectus will be supplemented if additional
investment advisers are retained or the contract with any existing investment
adviser is terminated.
FUND ASSET MANAGEMENT, L.P. ("FAM"), 800 Scudders Mill Road, Plainsboro, New
Jersey 08536, is a wholly owned indirect subsidiary of Merrill Lynch & Co., Inc.
Assets under management as of March 31, 2000 were approximately $xxx billion.
FAM serves as investment adviser and administrator to the Index Trust.
GOLDMAN SACHS ASSET MANAGEMENT ("Goldman Sachs"), 85 Broad Street, New York, New
York 10004, is a unit of the Investment Management Division of Goldman, Sachs &
Co. As of March 31, 2000, assets under management were approximately $xxx.x
billion. Goldman Sachs serves as investment adviser to the Large Cap Growth
Fund.
J.P. MORGAN INVESTMENT MANAGEMENT INC. ("J.P. Morgan"), 522 Fifth Avenue, New
York, New York 10036, is a direct subsidiary of J.P. Morgan & Co. As of March
31, 2000, assets under management were
11
<PAGE> 14
approximately $xxx.x billion. J.P. Morgan serves as investment adviser to the
Large Cap Growth Fund.
MORGAN STANLEY DEAN WITTER INVESTMENT MANAGEMENT INC. ("Morgan Stanley"), 1221
Avenue of the Americas, New York, New York 10020, is a direct subsidiary of
Morgan Stanley Dean Witter & Co. As of March 31, 2000, Morgan Stanley, together
with its affiliated institutional asset management companies, managed assets of
approximately $xxx.x billion, including assets under fiduciary advice. Morgan
Stanley serves as investment adviser to the Emerging Markets Fund.
All other assets of American Airlines, Inc. and its affiliates under management
by each respective investment adviser are considered when calculating the fees
for each investment adviser. Including these assets lowers the investment
advisory fees for each applicable Fund.
Valuation of Shares
The price of each Fund's shares is based on its net asset value ("NAV") per
share. Each Fund's NAV is computed by adding total assets, subtracting all of
the Fund's liabilities, and dividing the result by the total number of shares
outstanding. Equity securities are valued based on market value. Debt securities
(other than short-term securities) usually are valued on the basis of prices
provided by a pricing service. In some cases, the price of debt securities is
determined using quotes obtained from brokers. Securities are valued at fair
value, as determined in good faith and pursuant to procedures approved by the
Board, the AMR Trust Board or the Index Trust Board of Trustees, as applicable,
under certain limited circumstances. For example, fair valuation would be used
if market quotations are not readily available or a material event occurs after
the close of the Exchange which may affect the security's value.
The NAV of Institutional Class shares will be determined based on a pro rata
allocation of the master portfolio's investment income, expenses and total
capital gains and losses. Each Fund's NAV per share is determined as of the
close of the New York Stock Exchange ("Exchange"), generally 4:00 p.m. Eastern
Time, on each day on which it is open for business. The NAV per share of the
Emerging Markets and International Index Funds may change on days when
shareholders will not be able to purchase or redeem the Funds' shares.
About Your Investment
Purchase and Redemption of Shares
Eligibility
Institutional Class shares are offered without a sales charge to investors who
make an initial investment of at least $2 million, including:
o agents or fiduciaries acting on behalf of their clients (such as employee
benefit plans, personal trusts and other accounts for which a trust company
of 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
aggregated purchase order for more than one client.
Purchase Policies
No sales charges are assessed on the purchase or sale of Fund shares. Shares of
the Funds are offered and purchase orders accepted until 4:00 p.m. Eastern Time
or the close of the Exchange (whichever comes first) on each day on which the
Exchange is open for trading.
If a purchase order is received in good order prior to the deadline, the
purchase price will be the NAV per share next determined on that day. If a
purchase order is received in good order after the deadline, the purchase price
will be the NAV of the following day that the Fund is open for business. Checks
to purchase shares are accepted subject to collection at full face value in U.S.
funds and must be drawn in U.S. dollars on a U.S. bank.
Opening an Account
A completed, signed application is required to open an account. You may request
an application form by:
o calling (800) 967-9009, or
o visiting the Funds' website at www.aafunds.com and downloading an account
application.
Complete the application, sign it and
Mail to:
American AAdvantage Funds
P.O. Box 619003, MD 5645
DFW Airport, TX 75261-9003
or Fax to:
(817) 967-0768 or (817) 931-4331
12
<PAGE> 15
Redemption Policies
Shares of any Fund may be redeemed by telephone or mail on any day that the Fund
is open for business. The redemption price will be the NAV next determined after
a redemption order is received in good order. For assistance with completing a
redemption request, please call (800) 659-5811. Wire proceeds from redemption
orders received by 4:00 p.m. Eastern Time generally are transmitted to
shareholders on the next day the Funds are open for business. In any event,
proceeds from a redemption order for a Fund will be transmitted to a shareholder
by no later than seven days after the receipt of a redemption request in good
order. Delivery of proceeds from shares purchased by check may be delayed until
the check has cleared, which may take up to 15 days.
The Funds reserve the right to suspend redemptions or postpone the date of
payment (i) when the Exchange is closed (other than for customary weekends and
holiday closings); (ii) when trading on the Exchange is restricted; (iii) when
the SEC determines that an emergency exists so that disposal of a Fund's
investments or determination of its NAV is not reasonably practicable; or (iv)
by order of the SEC for protection of the Fund's shareholders.
Although the Funds intend to redeem shares in cash, each Fund reserves the right
to pay the redemption price in whole or in part by a distribution of readily
marketable securities held by the applicable Fund's corresponding portfolio.
13
<PAGE> 16
<TABLE>
<S> <C>
HOW TO PURCHASE SHARES
To Make an Initial Purchase To Add to an Existing Account
- ------------------------------------------------------------------------------------------------------------------------------------
By Wire
- ------------------------------------------------------------------------------------------------------------------------------------
If your account has been established, you may call (800) Call (800) 658-5811 to purchase shares by wire. Send a bank
658-5811 to purchase shares by wire. Send a bank wire to State wire to State Street Bank & Trust Co. with these instructions:
Street Bank & Trust Co. with these instructions:
o ABA# 0110-0002-8; AC 9905-342-3 o ABA# 0110-0002-8; AC 9905-342-3
o Attn: American AAdvantage Funds-Institutional Class o Attn: American AAdvantage Funds-Institutional Class
o the Fund name and Fund number o the Fund name and Fund number
o shareholder's account number and registration o shareholder's account number and registration
- ------------------------------------------------------------------------------------------------------------------------------------
By Check
- ------------------------------------------------------------------------------------------------------------------------------------
o Make check payable to American AAdvantage Funds o Include the shareholder's account number, Fund name
and Fund number on the check
o Include the Fund name, Fund number and "Institutional
Class" on the check o Mail the check to:
American AAdvantage Funds
o Mail the check to: P.O. Box 219643
American AAdvantage Funds Kansas City, MO 64121-9643
P.O. Box 219643
Kansas City, MO 64121-9643
- ------------------------------------------------------------------------------------------------------------------------------------
By Exchange
- ------------------------------------------------------------------------------------------------------------------------------------
Shares of a Fund may be purchase by exchange from another American AAdvantage
Fund if the shareholder has owned Institutional Class shares of the other
American AAdvantage Fund for at least 15 days. Send a written request to the
address above or call (800) 658-5811 to exchange shares.
HOW TO REDEEM SHARES
Method Additional Information
- ------------------------------------------------------------------------------------------------------------------------------------
By Telephone
- ------------------------------------------------------------------------------------------------------------------------------------
Call (800) 658-5811 to request a redemption. Proceeds from redemptions placed by telephone will generally
be transmitted by wire only, as instructed on the application
form.
- ------------------------------------------------------------------------------------------------------------------------------------
By Mail
- ------------------------------------------------------------------------------------------------------------------------------------
Write a letter of instruction including: o Other supporting documents may be required for
estates, trusts, guardianships, custodians,
o the Fund name and Fund number corporations, and welfare, pension and profit sharing
plans. Call (800) 658-5811 for instructions.
o shareholder account number
o Proceeds will only be mailed to the account address
of record or transmitted by wire to a commercial bank
o shares or dollar amount to be redeemed account designated on the account application form.
o authorized signature(s) of all persons required to o A signature guarantee is required for redemption
sign for the account orders:
Mail to: o in amounts of $100,000 or more
American AAdvantage Funds
P.O. Box 219643 o with a request to send the proceeds to an
Kansas City, MO 64121-9643 address or commercial bank account other
than the address or commercial bank account
designated on the account application, or
o for an account whose address has changed
within the last 30 days.
- ------------------------------------------------------------------------------------------------------------------------------------
By Exchange
- ------------------------------------------------------------------------------------------------------------------------------------
Shares of a Fund may be redeemed in exchange for another American AAdvantage
Fund-Institutional Class if the shareholder has owned Institutional Class shares
of the Fund for at least 15 days. Send a written request to the address above or
call (800) 658-5811 to exchange shares.
</TABLE>
14
<PAGE> 17
General Policies
If a shareholder's account balance in any Fund falls below $100,000, the
shareholder may be asked to increase the balance. If the account balance remains
below $100,000 after 45 days, the Funds reserve the right to close the account
and send the proceeds to the shareholder.
The following policies apply to instructions you may provide to the Funds by
telephone:
o The Funds, their officers, trustees, directors, employees or agents are not
responsible for the authenticity of instructions provided by telephone, nor
for any loss, liability, cost or expense incurred for acting on them.
o The Funds employ procedures reasonably designed to confirm that instructions
communicated by telephone are genuine.
o Due to the volume of calls or other unusual circumstances, telephone
redemptions may be difficult to implement during certain time periods.
The Funds reserve the right to:
o Reject any order for the purchase of shares and to limit or suspend,
without prior notice, the offering of shares,
o Modify or terminate the exchange privilege at any time,
o Terminate the exchange privilege of any shareholder who makes more than one
exchange in and out of a Fund during any three-month period,
o Seek reimbursement from the shareholder for any related loss incurred if
payment for the purchase of Fund shares by check does not clear the
shareholder's bank.
Third parties who offer Fund shares, such as banks, broker-dealers and 401(k)
plan providers, may charge transaction fees and may set different minimum
investments or limitations on purchasing or redeeming shares.
Distributions and Taxes
The Funds distribute most or all of their net earnings in the form of dividends
from net investment income and distributions of realized net capital gains and
gains from certain foreign currency transactions. Unless the account application
instructs otherwise, distributions will be reinvested in additional Fund shares.
Distributions are paid at least annually for each Fund.
Usually, dividends received from a Fund are taxable as ordinary income,
regardless of whether dividends are reinvested. Distributions by a Fund of
realized net short-term capital gains and gains from certain foreign currency
transactions are similarly taxed. Distributions by the Funds of realized net
long-term capital gains are taxable to their shareholders as long-term capital
gains regardless of how long an investor has been a shareholder.
Some foreign countries may impose taxes on dividends paid to and gains realized
by the Emerging Markets and International Index Funds. These Funds may treat
these taxes as a deduction or, under certain conditions, "flow the tax through"
to shareholders. In the latter event, shareholders may either deduct the taxes
or use them to calculate a credit against their federal income tax.
A portion of the income dividends paid by the Large Cap Growth and Small Cap
Index Funds is eligible for the dividends-received deduction allowed to
corporations. The eligible portion may not exceed the Fund's aggregate dividends
received from U.S. corporations. However, dividends received by a corporate
shareholder and deducted by it pursuant to the dividends-received deduction may
be subject indirectly to the federal alternative minimum tax. The Emerging
Market and International Index Funds' dividends most likely will not qualify for
the dividends-received deduction because none of the dividends received by that
Fund are expected to be paid by U.S. corporations.
Shareholders may realize a taxable gain or loss when selling or exchanging
shares. That gain or loss may be treated as a short-term or long-term gain,
depending on how long the sold or exchanged shares were held.
This is only a summary of some of the important tax considerations that may
affect Fund shareholders. Shareholders should consult their tax adviser
regarding specific questions as to the effect of federal, state or local income
taxes on an investment in the Funds.
ADDITIONAL INFORMATION
Distribution of Trust Shares
The Trust does not incur any direct distribution expenses related to
Institutional Class shares. However, the Trust has adopted a Distribution Plan
in accordance with Rule 12b-1 under the Investment Company Act of 1940 ("1940
Act") which authorizes the use of any fees received by the Manager in accordance
with the Administrative Services and Management Agreements, and any fees
received by the investment advisers pursuant to their Advisory Agreements with
the Manager, to be used for the sale and distribution of Fund shares. In the
event the Trust begins to incur distribution expenses for the Funds,
distribution fees may be paid out of Fund assets, possibly causing the cost of
your investment to increase over time.
Master-Feeder Structure
This means that each Fund is a "feeder" fund that invests all of its investable
assets in a "master" fund with the same investment objective. The "master" fund
purchases securities for investment. The master-feeder structure works as
follows:
15
<PAGE> 18
--------------------------
Investor
--------------------------
purchases shares of
--------------------------
Feeder Fund
--------------------------
Which invests in
--------------------------
Master Fund
--------------------------
Which buys
--------------------------
Investment Securities
--------------------------
Each Fund can withdraw its investment in its corresponding portfolio at any time
if the Board determines that it is in the best interest of the Fund and its
shareholders to do so. If this happens, the Fund's assets will be invested
according to the investment policies and restrictions described in this
Prospectus.
16
<PAGE> 19
ADDITIONAL INFORMATION
Additional information about the Funds is found in the documents listed below.
Request a free copy of these documents by calling (800) 658-5811.
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION ("SAI")
The SAI contains more details about the Funds and their investment policies. The
SAI is incorporated in this Prospectus by reference (it is legally part of this
Prospectus). A current SAI is on file with the Securities and Exchange
Commission (SEC).
- --------------------------------------------------------------------------------
To obtain more information about the Funds or to request a copy of the SAI:
<TABLE>
<S> <C> <C> <C>
BY TELEPHONE: BY MAIL: BY E-MAIL: ON THE INTERNET:
Call (800) 658-5811 American AAdvantage Funds [email protected] Visit our website at www.aafunds.com
P.O. Box 619003, MD 5645 Visit the SEC website at www.sec.gov
DFW Airport, TX 75261-9003
</TABLE>
Copies of the SAI may also be obtained from the SEC Public Reference Room by
mailing a request, including a duplicating fee to: SEC's Public Reference
Section, 450 5th Street NW, Washington, D.C. 20549-6009. The Public Reference
Room can be reached at (202) 942-8090.
FUND SERVICE PROVIDERS:
<TABLE>
<S> <C> <C> <C>
CUSTODIAN TRANSFER AGENT INDEPENDENT AUDITORS DISTRIBUTOR
STATE STREET BANK AND NATIONAL FINANCIAL DATA (LARGE CAP GROWTH AND EMERGING MARKETS FUNDS) SWS FINANCIAL SERVICES
TRUST SERVICES ERNST & YOUNG LLP Dallas, Texas
Boston, Massachusetts Kansas City, Missouri Dallas, Texas
(Index Funds)
DELOITTE & TOUCHE LLP
Princeton, New Jersey
</TABLE>
[AMERICAN AADVANTAGE FUNDS(R) LOGO]
SEC File Number 811-4984
American Airlines is not responsible for investments made in the American
AAdvantage Funds. American AAdvantage Funds is a registered service mark of AMR
Corporation.
<PAGE> 20
[AMERICAN AADVANTAGE FUNDS(R) LOGO]
[GRAPHIC]
PROSPECTUS
JUNE 30, 2000
AMR CLASS
-------------------------------------------------------
Large Cap Growth Fund
Emerging Markets Fund
INSTITUTIONAL CLASS
-------------------------------------------------------
Small Cap Index Fund
International Index Fund
<TABLE>
<S> <C>
Managed by AMR Investment Services, Inc. The Securities and Exchange Commission does not guarantee that
the information in this Prospectus or any other mutual fund's
prospectus is accurate or complete, nor does it judge the
investment merit of these Funds. To state otherwise is a
criminal offense.
</TABLE>
<PAGE> 21
[AMERICAN AADVANTAGE FUNDS(R) LOGO]
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
About the Funds
Overview................................................. 2
Large Cap Growth Fund.................................... 3
Emerging Markets Fund.................................... 5
Small Cap Index Fund..................................... 7
International Index Fund................................. 9
The Manager.............................................. 11
Index Funds Administrator................................ 11
The Investment Advisers.................................. 11
Valuation of Shares...................................... 12
About Your Investment
Purchase and Redemption of Shares........................ 12
Distributions and Taxes.................................. 14
Additional Information
Distribution of Trust Shares............................. 14
Master-Feeder Structure.................................. 14
Additional Information............................Back Cover
</TABLE>
ABOUT THE FUNDS
- --------------------------------------------------------------------------------
OVERVIEW
The American AAdvantage Funds (the "Funds") are managed by AMR Investment
Services, Inc. (the "Manager"), a wholly owned subsidiary of AMR Corporation.
The Funds operate under a master-feeder structure. This means that the Large Cap
Growth and Emerging Markets Funds each 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 investment
objective. The Small Cap Index Fund and the International Index Fund (the "Index
Funds") each seeks its investment objective by investing all of its investable
assets in a corresponding portfolio of the Quantitative Master Series Trust
("Index Trust") having an identical investment objective to the Index Fund. The
Index Trust is managed by Fund Asset Management, L.P. ("FAM"), a Delaware
limited partnership wholly owned by Merrill Lynch & Co., Inc. Throughout this
Prospectus, statements regarding investments by a Fund refer to investments made
by its corresponding portfolio. For easier reading, the term "Fund" is used
throughout the Prospectus to refer to either a Fund or its portfolio, unless
stated otherwise. See "Master-Feeder Structure."
2
<PAGE> 22
American AAdvantage
LARGE CAP GROWTH FUND
- --------------------------------------------------------------------------------
Investment Objective
Long-term capital appreciation.
Principal Strategies
Ordinarily at least 65% of the total assets of this Fund are invested in equity
securities of large-capitalization U.S. companies with market capitalizations of
$5 billion or more at the time of investment that the investment advisers
believe have above-average growth potential. The Fund's investments may include
common stocks, preferred stocks, securities convertible into U.S. common stocks,
and U.S. dollar-denominated American Depositary Receipts (collectively referred
to as "stocks").
One of the Fund's investment advisers utilizes quantitative techniques and
fundamental research in seeking to maximize the Fund's expected return, while
maintaining risk, style, capitalization and industry characteristics similar to
the Russell 1000(R) Growth Index. The adviser attempts to structure a portfolio
comprised of companies with above-average capitalizations and earnings growth
expectations and below-average dividend yields.
The Fund's other investment adviser attempts to allocate its portion of the
Fund's assets across industries in weightings similar to those of the Russell
1000 Growth Index. Within each industry, the adviser modestly overweights stocks
that it determines to be undervalued or fairly valued, while modestly
underweighting or not holding stocks that appear overvalued.
Under adverse market conditions, the Fund may, for temporary defensive purposes,
invest up to 100% of its assets in cash or cash equivalents, including
investment grade short-term obligations. To the extent that the Fund invokes
this strategy, its ability to achieve its investment objective may be affected
adversely.
Risk Factors
MARKET RISK
Since this Fund invests most of its assets in stocks, it is subject to stock
market risk. Market risk involves the possibility that the value of the Fund's
investments in stocks will decline due to drops in the stock market. In general,
the value of the Fund will move in the same direction as the overall stock
market, which will vary from day to day in response to the activities of
individual companies and general market and economic conditions. However,
different parts of the stock market and different types of equity securities may
react differently. For example, the growth stocks in which the Fund invests are
typically more volatile than value stocks.
ADDITIONAL RISKS
An investment in the Fund is not a deposit of a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. The value of an investment in the Fund will fluctuate up and down. When
you sell your shares of the Fund, they could be worth less than what you paid
for them.
Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Large Cap Growth Fund.(1)
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)
<TABLE>
<S> <C>
Management Fees x.xx%
Distribution (12b-1) Fees 0.00
Other Expenses x.xx(2)
Total Annual Fund Operating Expenses x.xx%
Fee Waiver and/or Expense Reimbursement x.xx%(3)
NET EXPENSES x.xx%
</TABLE>
(1) The expense table and the Example below reflect the expenses of both the
Fund and its corresponding portfolio.
(2) Other Expenses are based on estimates for the current fiscal year.
(3) The Manager has contractually agreed to reimburse the Fund for Other
Expenses through October 31, 2001 to the extent that Total Annual Fund
Operating Expenses exceed x.xx%.
Example
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and then redeem all of
your shares at the end of those periods. The Example also assumes that your
investment has a 5% return each year and that the Fund's operating expenses
remain the same. Because the Manager's expense reimbursement is only guaranteed
through October 31, 2001, Net Expenses are used to calculate costs in year one,
and Total Annual Fund Operating Expenses are used to calculate costs in years
two and three. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
<TABLE>
<S> <C>
1 YEAR..................................................$ xx
3 YEARS.................................................$xxx
</TABLE>
Investment Advisers
The Manager allocates the assets of the Fund among the following investment
advisers:
Goldman Sachs Asset Management
J.P. Morgan Investment Management Inc.
3
<PAGE> 23
American AAdvantage
LARGE CAP GROWTH FUND -- (CONTINUED)
- --------------------------------------------------------------------------------
Historical Performance
The Fund began offering its shares on June 30, 2000, and therefore, historical
performance is not available. However, the investment advisers have experience
managing other accounts with investment objectives, policies and strategies
substantially similar to those of the Fund. The performance shown below consists
of the Goldman Sachs CORE Large Cap Growth Composite and the J.P. Morgan
Research Optimized Equity Growth Composite, composites of accounts that have
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 accounts in each composite. Applying the
Fund's expense structure to the composites would have lowered the performance
results shown. Certain restrictions imposed by law on registered investment
companies, such as the Fund, are not applicable to the composites and may have
adversely affected the performance of the composites had they been applicable.
THE PERFORMANCE SHOWN IS NOT THE PERFORMANCE OF THE FUND. PAST PERFORMANCE IS
NOT NECESSARILY INDICATIVE OF HOW THE FUND WILL PERFORM IN THE FUTURE.
GOLDMAN SACHS CORE LARGE CAP GROWTH
TOTAL RETURN FOR THE CALENDAR YEAR ENDED 12/31 OF EACH YEAR
[GRAPH]
<TABLE>
<CAPTION>
95 96 97 98 99
------ ------ ------ ------ ------
<S> <C> <C> <C> <C>
38.40% 32.40% 33.50% 29.20% 38.20%
</TABLE>
<TABLE>
<S> <C>
Highest Quarterly Return: x.xx%
(1/1/95 through 12/31/99) (x Quarter 199x)
Lowest Quarterly Return: x.xx%
(1/1/95 through 12/31/99) (x Quarter 199x)
</TABLE>
J.P. MORGAN RESEARCH OPTIMIZED EQUITY GROWTH
TOTAL RETURN FOR THE CALENDAR YEAR ENDED 12/31 OF EACH YEAR
[GRAPH]
<TABLE>
<CAPTION>
95 96 97 98 99
------ ------ ------ ------ ------
<S> <C> <C> <C> <C>
38.90% 26.40% 32.60% 41.70% 25.80%
</TABLE>
<TABLE>
<S> <C>
Highest Quarterly Return: x.xx%
(1/1/95 through 12/31/99) (x Quarter 199x)
Lowest Quarterly Return: x.xx%
(1/1/95 through 12/31/99) (x Quarter 199x)
</TABLE>
<TABLE>
<CAPTION>
Average Annual Total Return
---------------------------
as of 12/31/99
---------------------------
Since
1 Year 5 Years Inception(2)
------ ------- ------------
<S> <C> <C> <C>
Goldman Sachs CORE Large Cap
Growth Composite
J.P. Morgan Research
Optimized Equity Growth Composite
[Lipper Index name]
Russell 1000(R)Growth Index(1)
</TABLE>
(1) The Russell 1000 Growth Index is an unmanaged index of those stocks in the
Russell 1000 Index with above-average price-to-book ratios and
above-average forecasted growth values.
(2) The inception dates for the Goldman Sachs and J.P. Morgan composites are
xx/xx/xx and xx/xx/xx, respectively.
4
<PAGE> 24
American AAdvantage
EMERGING MARKETS FUND
- --------------------------------------------------------------------------------
Investment Objective
Long-term capital appreciation.
Principal Strategies
Ordinarily at least 65% of the total assets of this Fund are invested in equity
securities of issuers located in or conducting the majority of their business in
emerging markets. Emerging markets are countries that:
o have an emerging stock market as defined by the International Finance
Corporation (IFC);
o have low- to middle-income economies according to the World Bank;
o are included in the IFC Investable Index or the Morgan Stanley Capital
International Emerging Markets "Free" Index; or
o have a per-capita gross national product of $2,000 or less.
The Fund's investments may include common stocks, preferred stocks, securities
convertible into common stocks, and depositary receipts (collectively referred
to as "stocks").
One of the Fund's investment advisers employs a top-down investment strategy by
first allocating assets among emerging market countries that it believes have
improving economic conditions. Then, the investment adviser uses a bottom-up
strategy to select individual securities within those countries, analyzing the
fundamentals of each issuer to determine those with high capital appreciation
potential and minimal risk.
The other investment adviser to the Fund utilizes a bottom-up investment
strategy that is value-oriented and research-driven. This style is both
quantitative and fundamentally based; focusing first on stock selection then
enhanced by broadly diversified country allocation.
Under adverse market conditions, the Fund may, for temporary defensive purposes,
invest up to 100% of its assets in cash or cash equivalents, including
investment grade short-term obligations. To the extent that the Fund invokes
this strategy, its ability to achieve its investment objective may be affected
adversely.
Risk Factors
MARKET RISK
Since this Fund invests most of its assets in stocks, it is subject to stock
market risk. Market risk involves the possibility that the value of the Fund's
investments in stocks of a particular country will decline due to drops in that
country's stock market. In general, the value of the Fund will move in the same
direction as the international stock markets in which it invests, which will
vary from day to day in response to the activities of individual companies and
general market and economic conditions of each country.
FOREIGN INVESTING
Overseas investing carries potential risks not associated with domestic
investments. Such risks include, but are not limited to: (1) currency exchange
rate fluctuations, (2) political and financial instability, (3) less liquidity
and greater volatility of foreign investments, (4) lack of uniform accounting,
auditing and financial reporting standards, (5) less government regulation and
supervision of foreign stock exchanges, brokers and listed companies, (6)
increased price volatility, (7) delays in transaction settlement in some foreign
markets, and (8) adverse impact of the euro conversion on the business or
financial condition of companies in which the Fund is invested.
EMERGING MARKETS
The risks of foreign investing mentioned above are heightened when investing in
emerging markets. In addition, the economies of emerging markets countries tend
to be more unstable than the economies of developed countries resulting in more
volatile rates of return than the developed market and substantially greater
risk to investors.
NON-DIVERSIFICATION RISK
The Fund is non-diversified, which means that it may invest a high percentage of
its assets in a limited number of securities. Since the Fund is non-diversified,
its net asset value and total return may fluctuate more or fall greater in times
of weaker markets than a diversified mutual fund.
ADDITIONAL RISKS
An investment in the Fund is not a deposit of a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. The value of an investment in the Fund will fluctuate up and down. When
you sell your shares of the Fund, they could be worth less than what you paid
for them.
5
<PAGE> 25
American AAdvantage
EMERGING MARKETS FUND -- (CONTINUED)
- --------------------------------------------------------------------------------
Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Emerging Markets Fund.(1)
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)
<TABLE>
<S> <C>
Management Fees x.xx%
Distribution (12b-1) Fees 0.00
Other Expenses x.xx(2)
Total Annual Fund Operating Expenses x.xx%
Fee Waiver and/or Expense Reimbursement x.xx%(3)
NET EXPENSES x.xx%
</TABLE>
(1) The expense table and the Example below reflect the expenses of both the
Fund and its corresponding portfolio.
(2) Other Expenses are based on estimates for the current fiscal year.
(3) The Manager has contractually agreed to reimburse the Fund for Other
Expenses through October 31, 2001 to the extent that Total Annual Fund
Operating Expenses exceed x.xx%.
Example
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and then redeem all of
your shares at the end of those periods. The Example also assumes that your
investment has a 5% return each year and that the Fund's operating expenses
remain the same. Because the Manager's expense reimbursement is only guaranteed
through October 31, 2001, Net Expenses are used to calculate costs in year one,
and Total Annual Fund Operating Expenses are used to calculate costs in years
two and three. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
<TABLE>
<S> <C>
1 YEAR..................................................$ xx
3 YEARS.................................................$xxx
</TABLE>
Investment Adviser
The Manager allocates the assets of the Fund among the following investment
advisers:
Morgan Stanley Dean Witter Investment Management Inc.
[Adviser name]
Historical Performance
The Fund began offering its shares on June 30, 2000, and therefore, historical
performance is not available. However, one of the investment advisers has
experience managing other accounts with investment objectives, policies and
strategies substantially similar to those of the Fund. The performance shown
below is for a composite of accounts managed by Morgan Stanley Dean Witter
Investment Management ("Morgan Stanley") that have 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 accounts in the composite. Applying the Fund's expense
structure to the composite would have lowered the performance results shown.
Certain restrictions imposed by law on registered investment companies, such as
the Fund, are not applicable to the composite and may have adversely affected
the performance of the composite had they been applicable. THE PERFORMANCE SHOWN
IS NOT THE PERFORMANCE OF THE FUND. PAST PERFORMANCE IS NOT NECESSARILY
INDICATIVE OF HOW THE FUND WILL PERFORM IN THE FUTURE.
[GRAPH]
Morgan Stanley
Total Return for the Calendar Year Ended 12/31 of each Year
<TABLE>
<CAPTION>
95 96 97 98 99
------- ----- ------ ------ ------
<S> <C> <C> <C> <C>
(12.70%) 13.00% (3.00%) (22.70%) 105.90%
</TABLE>
<TABLE>
<S> <C>
Highest Quarterly Return: x.xx%
(1/1/95 through 12/31/99) (x Quarter 199x)
Lowest Quarterly Return: x.xx%
(1/1/95 through 12/31/99) (x Quarter 199x)
</TABLE>
<TABLE>
<CAPTION>
Average Annual Total Return
---------------------------
as of 12/31/99
---------------------------
Since
1 Year 5 Years Inception
------ ------- ---------
(10/1/94)
<S> <C> <C> <C>
Morgan Stanley Composite
[Lipper Index name]
MSCI Emerging Markets Free Index(1)
</TABLE>
(1) The MSCI Emerging Markets Free Index is a market capitalization weighted
index composed of companies that are representative of the market structure
of developing countries in Latin America, Asia, Eastern Europe, the Middle
East and Africa.
6
<PAGE> 26
American AAdvantage
SMALL CAP INDEX FUND
- --------------------------------------------------------------------------------
Investment Objective
To match the performance of the Russell 2000(R) Index (the "Russell 2000" or
"Index") as closely as possible before the deduction of Fund expenses.
Principal Strategies
The Fund employs a "passive" management approach, attempting to invest in a
portfolio of assets whose performance is expected to match approximately the
performance of the Russell 2000. The Russell 2000 is composed of the common
stocks of the 1,001st through the 3,000th largest U.S. companies weighted by
market capitalization, as determined by the Frank Russell Company. The Fund will
be substantially invested in securities in the Russell 2000, and will invest at
least 80% of its assets in securities or other financial instruments in, or
correlated with, the Russell 2000. As a result of this strategy, the Fund will
be a non-diversified fund.
The Fund invests in a statistically selected sample of stocks included in the
Russell 2000 and in derivative instruments linked to the Russell 2000. The Fund
may not invest in all of the common stocks in the Russell 2000, or in the same
weightings as in the Russell 2000. The Fund chooses investments so that the
market capitalizations, industry weightings and other fundamental
characteristics of the stocks and derivative instruments chosen are similar to
the Russell 2000 as a whole.
The Fund may invest in derivative instruments, and may invest a substantial
portion of its assets in options and futures contracts linked to the performance
of the Russell 2000. Derivatives allow the Fund to increase or decrease its
exposure to the Russell 2000 quickly and at less cost than buying or selling
stocks. The Fund will invest in options and futures and other derivative
instruments in order to gain market exposure quickly in the event of
subscriptions, to maintain liquidity in the event of redemptions and to keep
trading costs low. In connection with the use of derivative instruments, the
Fund may enter into short sales in order to adjust the weightings of particular
securities represented in a derivative to more accurately reflect the
securities' weightings in the Index.
Risk Factors
MARKET RISK
Since this Fund invests most of its assets in stocks, it is subject to stock
market risk. Market risk involves the possibility that the value of the Fund's
investments in stocks will decline due to drops in the stock market. In general,
the value of the Fund will move in the same direction as the overall stock
market, which will vary from day to day in response to the activities of
individual companies and general market and economic conditions.
TRACKING ERROR RISK
The Fund's return may not match the return of the Index for a number of reasons.
For example, the Fund incurs a number of operating expenses not applicable to
the Index, and incurs costs in buying and selling securities. The Fund may not
be fully invested at times, either as a result of cash flows into the Fund or
reserves of cash held by the Fund to meet redemptions. The return on the sample
of stocks purchased by the Fund, or futures or other derivative positions taken
by the Fund, to replicate the performance of the Index may not correlate
precisely with the return on the Index.
NON-DIVERSIFICATION RISK
The Fund is non-diversified, which means that it may invest a high percentage of
its assets in a limited number of securities. Since the Fund is non-diversified,
its net asset value and total return may fluctuate more or fall greater in times
of weaker markets than a diversified mutual fund.
SMALL CAP RISK
Investing in the securities of small capitalization companies involves greater
risk and the possibility of greater price volatility than investing in larger
capitalization and more established companies, since smaller companies may have
limited operating history, product lines, and financial resources, and the
securities of these companies may lack sufficient market liquidity.
DERIVATIVES RISK
Gains or losses from positions in a derivative instrument may be much greater
than the derivative's original cost. The counterparty to the transaction may be
unable to honor its financial obligation to the Fund. In addition, a derivative
may be difficult or impossible to sell at the time the investment adviser would
like or at the price the investment adviser believes the security is currently
worth.
7
<PAGE> 27
American AAdvantage
SMALL CAP INDEX FUND -- (CONTINUED)
- --------------------------------------------------------------------------------
ADDITIONAL RISKS
An investment in the Fund is not a deposit of a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. The value of an investment in the Fund will fluctuate up and down. When
you sell your shares of the Fund, they could be worth less than what you paid
for them.
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Small Cap Index Fund.(1)
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)
<TABLE>
<S> <C>
Management Fees x.xx%
Distribution (12b-1) Fees 0.00
Other Expenses x.xx(2)
Total Annual Fund Operating Expenses x.xx%
Fee Waiver and/or Expense Reimbursement x.xx%(3)
Net Expenses x.xx%
</TABLE>
(1) The expense table and the Example below reflect the expenses of both the
Fund and its corresponding portfolio.
(2) Other Expenses are based on estimates for the current fiscal year.
(3) The Manager has contractually agreed to reimburse the Fund for Other
Expenses through October 31, 2001 to the extent that Total Annual Fund
Operating Expenses exceed x.xx%.
Example
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and then redeem all of
your shares at the end of those periods. The Example also assumes that your
investment has a 5% return each year and that the Fund's operating expenses
remain the same. Because the Manager's expense reimbursement is only guaranteed
through October 31, 2001, Net Expenses are used to calculate costs in year one,
and Total Annual Fund Operating Expenses are used to calculate costs in years
two and three. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
<TABLE>
<S> <C>
1 YEAR..................................................$ xx
3 YEARS.................................................$xxx
</TABLE>
Investment Adviser
Fund Asset Management, L.P.
Historical Performance
The Fund began offering its shares on June 30, 2000, and therefore, historical
performance is not available. However, the Merrill Lynch Small Cap Index Fund
(the "Merrill Lynch Fund"), a feeder fund that invests all of its investable
assets in the same master portfolio, has been offering its shares since April 9,
1997. The performance shown below is for the Merrill Lynch Fund. The data shown
below reflects the total return for the periods shown, reduced by the actual
expenses of the Merrill Lynch Fund. Because the Merrill Lynch Fund had higher
expenses, its performance was worse than the Fund would have realized in the
same period. Past performance is not necessarily indicative of how the Fund will
perform in the future.
[GRAPH]
Total Return for the Calendar Year Ended 12/31 of each Year
<TABLE>
98 99
-- --
<S> <C>
(3.14%)
</TABLE>
<TABLE>
<S> <C>
Highest Quarterly Return: x.xx%
(1/1/98 through 12/31/99) (x Quarter 199x)
Lowest Quarterly Return: x.xx%
(1/1/98 through 12/31/99) (x Quarter 199x)
</TABLE>
<TABLE>
<CAPTION>
Average Annual Total Return
---------------------------
as of 12/31/99
---------------------------
Since
1 Year Inception
------ ---------
(4/9/97)
<S> <C> <C>
Merrill Lynch Fund x.xx% x.xx%
Russell 2000 Index(1) x.xx% x.xx%
</TABLE>
(1) The Russell 2000 Index is an unmanaged index comprised of approximately
2,000 smaller-capitalization stocks from various industrial sectors.
8
<PAGE> 28
American AAdvantage
INTERNATIONAL INDEX FUND
- --------------------------------------------------------------------------------
Investment Objective
To match the performance of the Morgan Stanley Capital International EAFE GDP
Weighted Index (the "EAFE Index" or "Index") as closely as possible before the
deduction of Fund expenses.
Principal Strategies
The Fund employs a "passive" management approach, attempting to invest in a
portfolio of assets whose performance is expected to match approximately the
performance of the EAFE Index. The EAFE Index is composed of equity securities
of companies from various industrial sectors whose primary trading markets are
located outside the United States. Companies included in the EAFE Index are
selected from among the larger capitalization companies in these markets. The
countries currently included in the EAFE Index are:
<TABLE>
<S> <C> <C> <C>
Australia France Japan Singapore
Austria Germany The Netherlands Spain
Belgium Hong Kong New Zealand Sweden
Denmark Ireland Norway Switzerland
Finland Italy Portugal United Kingdom
</TABLE>
The weighting of the Index among these countries is based upon each country's
relative market capitalization, and not its gross domestic product, which means
that the Index contains more companies with the largest capital markets (like
Japan and the United Kingdom), and they have the most effect on the Index's
performance.
The Fund will be substantially invested in securities in the Index, and will
invest at least 80% of its assets in securities or other financial instruments
in, or correlated with, the Index. As a result of this strategy, the Fund will
be a non-diversified fund.
The Fund invests in a statistically selected sample of equity securities
included in the EAFE Index and in derivative instruments linked to the EAFE
Index. The Fund may not invest in all of the countries, or all of the companies
within a country, represented in the EAFE Index, or in the same weightings as in
the EAFE Index. The Fund will choose investments so that the market
capitalizations, industry weightings and other fundamental characteristics of
the stocks and derivative instruments chosen are similar to the EAFE Index as a
whole.
The Fund may invest in derivative instruments, and will normally invest a
substantial portion of its assets in options and futures contracts correlated
with countries within the EAFE Index. Derivatives allow the Fund to increase or
decrease its exposure to the EAFE Index quickly and at less cost than buying or
selling stocks. The Fund will invest in options and futures and other derivative
instruments in order to gain market exposure quickly in the event of
subscriptions, to maintain liquidity in the event of redemptions and to keep
trading costs low. In connection with the use of derivative instruments, the
Fund may enter into short sales in order to adjust the weightings of particular
securities represented in a derivative to more accurately reflect the
securities' weightings in the Index.
Risk Factors
MARKET RISK
Since this Fund invests most of its assets in stocks, it is subject to stock
market risk. Market risk involves the possibility that the value of the Fund's
investments in stocks of a particular country will decline due to drops in that
country's stock market. In general, the value of the Fund will move in the same
direction as the international stock markets in which it invests, which will
vary from day to day in response to the activities of individual companies and
general market and economic conditions of each country.
FOREIGN INVESTING
Overseas investing carries potential risks not associated with domestic
investments. Such risks include, but are not limited to: (1) currency exchange
rate fluctuations, (2) political and financial instability, (3) less liquidity
and greater volatility of foreign investments, (4) lack of uniform accounting,
auditing and financial reporting standards, (5) less government regulation and
supervision of foreign stock exchanges, brokers and listed companies, (6)
increased price volatility, (7) delays in transaction settlement in some foreign
markets, and (8) adverse impact of the euro conversion on the business or
financial condition of companies in which the Fund is invested.
TRACKING ERROR RISK
The Fund's return may not match the return of the Index for a number of reasons.
For example, the Fund incurs a number of operating expenses not applicable to
the Index and incurs costs in buying and selling securities. The Fund may not be
fully invested at times, either as a result of cash flows into the Fund or
reserves of cash held by the Fund to meet redemptions. The return on the sample
of stocks purchased by the Fund, or futures or other derivative positions taken
by the Fund, to replicate the performance of the Index may not correlate
precisely with the return on the Index.
NON-DIVERSIFICATION RISK
The Fund is non-diversified, which means that it may invest a high percentage of
its assets in a limited number of securities. Since the Fund is non-diversified,
its net asset value and total return may fluctuate more or fall greater in times
of weaker markets than a diversified mutual fund.
9
<PAGE> 29
American AAdvantage
INTERNATIONAL INDEX FUND -- (CONTINUED)
- --------------------------------------------------------------------------------
DERIVATIVES RISK
Gains or losses from positions in a derivative instrument may be much greater
than the derivative's original cost. The counterparty to the transaction may be
unable to honor its financial obligation to the Fund. In addition, a derivative
may be difficult or impossible to sell at the time the investment adviser would
like or at the price the investment adviser believes the security is currently
worth.
ADDITIONAL RISKS
An investment in the Fund is not a deposit of a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. The value of an investment in the Fund will fluctuate up and down. When
you sell your shares of the Fund, they could be worth less than what you paid
for them.
Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold
shares of the International Index Fund.(1)
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)
<TABLE>
<S> <C>
Management Fees x.xx%
Distribution (12b-1) Fees 0.00
Other Expenses x.xx(2)
Total Annual Fund Operating Expenses x.xx%
Fee Waiver and/or Expense Reimbursement x.xx%(3)
NET EXPENSES x.xx%
</TABLE>
(1) The expense table and the Example below reflect the expenses of both the
Fund and its corresponding portfolio.
(2) Other Expenses are based on estimates for the current fiscal year.
(3) The Manager has contractually agreed to reimburse the Fund for Other
Expenses through October 31, 2001 to the extent that Total Annual Fund
Operating Expenses exceed x.xx%.
Example
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and then redeem all of
your shares at the end of those periods. The Example also assumes that your
investment has a 5% return each year and that the Fund's operating expenses
remain the same. Because the Manager's expense reimbursement is only guaranteed
through October 31, 2001, Net Expenses are used to calculate costs in year one,
and Total Annual Fund Operating Expenses are used to calculate costs in years
two and three. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
<TABLE>
<S> <C>
1 YEAR..................................................$ xx
3 YEARS.................................................$xxx
</TABLE>
Investment Adviser
Fund Asset Management, L.P.
Historical Performance
The Fund began offering its shares on June 30, 2000, and therefore, historical
performance is not available.
10
<PAGE> 30
The Manager
The Funds have retained AMR Investment Services, Inc. to serve as their Manager.
The Manager, located at 4333 Amon Carter Boulevard, Fort Worth, Texas 76155, is
a wholly owned subsidiary of AMR Corporation, the parent company of American
Airlines, Inc. The Manager was organized in 1986 to provide investment
management, advisory, administrative and asset management consulting services.
As of March 31, 2000, the Manager had approximately $xx.x billion of assets
under management, including approximately $x.x billion under active management
and $xx.x billion as named fiduciary of financial adviser. Of the total,
approximately $xx.x billion of assets were related to AMR Corporation.
The Manager provides or oversees the provision of all administrative, investment
advisory and portfolio management services to the Funds. The Manager develops
the investment programs for each Fund and allocates assets among investment
advisers. In addition, for the Large Cap Growth and Emerging Markets Funds, the
Manager
o selects and changes investment advisers (subject to requisite approvals),
o monitors the investment advisers' investment programs and results,
o coordinates the investment activities of the investment advisers to ensure
compliance with regulatory restrictions,
o oversees each Fund's securities lending activities and actions taken by the
securities lending agent, and
o invests the portion of Fund assets that the investment advisers determine
should be allocated to high quality short-term debt obligations.
As compensation for providing management services, the Manager receives an
annualized advisory fee that is calculated and accrued daily, equal to the sum
of x.xx% of the net assets of each Fund.
In addition, the Large Cap Growth and Emerging Markets Funds pay the Manager the
amounts due to their respective investment advisers. The Manager then remits
theses amounts to the investment advisers.
The Manager also may receive up to 25% of the net annual interest income or up
to 25% of loan fees in regards to securities lending activities of the Large Cap
Growth and Emerging Markets Funds. Currently, the Manager receives 10% of the
net annual interest income from the investment of cash collateral or 10% of the
loan fees posted by borrowers. The Securities and Exchange Commission ("SEC")
has granted exemptive relief that permits the Funds to invest cash collateral
received from securities lending transactions in shares of one or more private
or registered investment companies managed by the Manager.
William F. Quinn and Nancy A. Eckl have primary responsibility for the
day-to-day operations of the Funds. These responsibilities include oversight of
the investment advisers, regular review of each investment adviser's performance
and asset allocations among multiple investment advisers. Mr. Quinn has served
as President of the Manager since its inception in 1986. Ms. Eckl has served as
Vice President-Trust Investments of the Manager since May 1995.
Index Funds Administrator
FAM serves as the adviser and administrator to the Index Trust. As compensation
for its services as adviser, FAM receives an advisory fee at an annual rate of
0.01% of the average daily net assets of each Index Fund. For its services as
administrator, FAM receives an administrative fee at an annual rate of x.xx% of
the average daily net assets of the Small Cap Index Fund and x.xx% of the
average daily net assets of the International Index Fund.
The Investment Advisers
Set forth below is a brief description of the investment advisers for each Fund.
Each investment adviser has discretion to purchase and sell securities for its
segment of a Fund's assets in accordance with the Fund's objectives, policies,
restrictions and more specific strategies provided by the Manager. Pursuant to
an exemptive order issued by the SEC, the Manager is permitted to enter into new
or modified investment advisory agreements with existing or new investment
advisers of the Large Cap Growth Fund or Emerging Market Funds without approval
of a Fund's shareholders, but subject to approval of the American AAdvantage
Trust (the "Trust") Board of Trustees ("Board") and the AMR Trust Board of
Trustees ("AMR Trust Board"). The Prospectus will be supplemented if additional
investment advisers are retained or the contract with any existing investment
adviser is terminated.
FUND ASSET MANAGEMENT, L.P. ("FAM"), 800 Scudders Mill Road, Plainsboro, New
Jersey 08536, is a wholly owned indirect subsidiary of Merrill Lynch & Co., Inc.
Assets under management as of March 31, 2000 were approximately $xxx billion.
FAM serves as investment adviser and administrator to the Index Trust.
GOLDMAN SACHS ASSET MANAGEMENT ("Goldman Sachs"), 85 Broad Street, New York, New
York 10004, is a unit of the Investment Management Division of Goldman, Sachs &
Co. As of March 31, 2000, assets under management were approximately $xxx.x
billion. Goldman Sachs serves as investment adviser to the Large Cap Growth
Fund.
J.P. MORGAN INVESTMENT MANAGEMENT INC. ("J.P. Morgan"), 522 Fifth Avenue, New
York, New York
11
<PAGE> 31
10036, is a direct subsidiary of J.P. Morgan & Co. As of March 31, 2000, assets
under management were approximately $xxx.x billion. J.P. Morgan serves as
investment adviser to the Large Cap Growth Fund.
MORGAN STANLEY DEAN WITTER INVESTMENT MANAGEMENT INC. ("Morgan Stanley"), 1221
Avenue of the Americas, New York, New York 10020, is a direct subsidiary of
Morgan Stanley Dean Witter & Co. As of March 31, 2000, Morgan Stanley, together
with its affiliated institutional asset management companies, managed assets of
approximately $xxx.x billion, including assets under fiduciary advice. Morgan
Stanley serves as investment adviser to the Emerging Markets Fund.
All other assets of American Airlines, Inc. and its affiliates under management
by each respective investment adviser are considered when calculating the fees
for each investment adviser. Including these assets lowers the investment
advisory fees for each applicable Fund.
Valuation of Shares
The price of each Fund's shares is based on its net asset value ("NAV") per
share. Each Fund's NAV is computed by adding total assets, subtracting all of
the Fund's liabilities, and dividing the result by the total number of shares
outstanding. Equity securities are valued based on market value. Debt securities
(other than short-term securities) usually are valued on the basis of prices
provided by a pricing service. In some cases, the price of debt securities is
determined using quotes obtained from brokers. Securities are valued at fair
value, as determined in good faith and pursuant to procedures approved by the
Board and AMR Trust Board, under certain limited circumstances. For example,
fair valuation would be used if market quotations are not readily available or a
material event occurs after the close of the Exchange which may affect the
security's value.
The NAV of AMR and Institutional Class shares will be determined based on a pro
rata allocation of the master portfolio's investment income, expenses and total
capital gains and losses. Each Fund's NAV per share is determined as of the
close of the New York Stock Exchange ("Exchange"), generally 4:00 p.m. Eastern
Time, on each day on which it is open for business. The NAV per share of the
Emerging Markets and International Index Funds may change on days when
shareholders will not be able to purchase or redeem the Funds' shares.
About Your Investment
Purchase and Redemption of Shares
Eligibility
AMR Class shares are offered only to investors in the tax-exempt retirement and
benefit plans of AMR Corporation and its affiliates.
Purchase Policies
No sales charges are assessed on the purchase or sale of Fund shares. Shares of
the Funds are offered and purchase orders accepted until 4:00 p.m. Eastern Time
or the close of the Exchange (whichever comes first) on each day on which the
Exchange is open for trading. If a purchase order is received in good order
prior to the deadline, the purchase price will be the NAV per share next
determined on that day. If a purchase order is received in good order after the
deadline, the purchase price will be the NAV of the following day that the Fund
is open for business.
Redemption Policies
Shares of any Fund may be redeemed by telephone or mail on any day that the Fund
is open for business. The redemption price will be the NAV next determined after
a redemption order is received in good order. For assistance with completing a
redemption request, please call (800) 492-9063 (for the Index Funds, please call
(800) 658-5811). Proceeds from redemption orders received by 4:00 p.m. Eastern
Time generally are transmitted to shareholders on the next day the Funds are
open for business. In any event, proceeds from a redemption order for a Fund
will be transmitted to a shareholder by no later than seven days after the
receipt of a redemption request in good order.
The Funds reserve the right to suspend redemptions or postpone the date of
payment (i) when the Exchange is closed (other than for customary weekends and
holiday closings); (ii) when trading on the Exchange is restricted; (iii) when
the SEC determines that an emergency exists so that disposal of a Fund's
investments or determination of its NAV is not reasonably practicable; or (iv)
by order of the SEC for protection of the Fund's shareholders.
Although the Funds intend to redeem shares in cash, each Fund reserves the right
to pay the redemption price in whole or in part by a distribution of readily
marketable securities held by the applicable Fund's corresponding portfolio.
12
<PAGE> 32
<TABLE>
<S> <C>
HOW TO PURCHASE SHARES
To Make an Initial Purchase To Add to an Existing Account
- ------------------------------------------------------------------------------------------------------------------------
By Wire
- ------------------------------------------------------------------------------------------------------------------------
Call (800) 492-9063 to purchase shares by wire. Send a Call (800) 492-9063 to purchase shares by wire. Send a
bank wire to State Street Bank & Trust Co. with these bank wire to State Street Bank & Trust Co. with these
instructions: instructions:
o ABA# 0110-0002-8; AC 0002-888-6 o ABA# 0110-0002-8; AC 0002-888-6
o Attn: American AAdvantage Funds-AMR Class o Attn: American AAdvantage Funds-AMR Class
o the Fund name and Fund number o the Fund name and Fund number
o shareholder's account number and registration o shareholder's account number and registration
- ------------------------------------------------------------------------------------------------------------------------
By Exchange
- ------------------------------------------------------------------------------------------------------------------------
Shares of a Fund may be purchase 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.
HOW TO REDEEM SHARES
Method Additional Information
- ------------------------------------------------------------------------------------------------------------------------
By Telephone
- ------------------------------------------------------------------------------------------------------------------------
Call (800) 492-9063 to request a redemption. Proceeds from redemptions placed by telephone will
generally be transmitted by wire only, as instructed on
the application form.
- ------------------------------------------------------------------------------------------------------------------------
By Mail
- ------------------------------------------------------------------------------------------------------------------------
Write a letter of instruction including: Proceeds will only be mailed to the account address of
record or transmitted by wire to a commercial bank
o the Fund name and Fund number account designated on the account application form.
o shareholder account number
o shares or dollar amount to be redeemed
o authorized signature
Mail to:
State Street Bank & Trust Co.
P.O. Box 1978
Boston, MA 02105-1978
Attn: American AAdvantage Funds
- ------------------------------------------------------------------------------------------------------------------------
By Exchange
- ------------------------------------------------------------------------------------------------------------------------
Shares of a Fund may be redeemed in exchange for another American AAdvantage Fund Class if the shareholder has owned AMR
Class shares of the Fund for at least 15 days. Send a written request to the address above or call (800) 492-9063 to
exchange shares.
</TABLE>
13
<PAGE> 33
General Policies
The following policies apply to instructions you may provide to the Funds by
telephone:
o The Funds, their officers, trustees, directors, employees or agents are not
responsible for the authenticity of instructions provided by telephone, nor
for any loss, liability, cost or expense incurred for acting on them.
o The Funds employ procedures reasonably designed to confirm that
instructions communicated by telephone are genuine.
o Due to the volume of calls or other unusual circumstances, telephone
redemptions may be difficult to implement during certain time periods.
The Funds reserve the right to:
o reject any order for the purchase of shares and to limit or suspend,
without prior notice, the offering of shares,
o modify or terminate the exchange privilege at any time,
o limit the number of exchanges between Funds an investor may exercise, and
o seek reimbursement from the shareholder for any related loss incurred if
payment for the purchase of Fund shares by check does not clear the
shareholder's bank.
Third parties who offer Fund shares, such as banks, broker-dealers and 401(k)
plan providers, may charge transaction fees and may set different minimum
investments or limitations on purchasing or redeeming shares.
Distributions and Taxes
The Funds distribute most or all of their net earnings in the form of dividends
from net investment income and distributions of realized net capital gains and
gains from certain foreign currency transactions. Unless the account application
instructs otherwise, distributions will be reinvested in additional Fund shares.
Distributions are paid at least annually for each Fund.
Usually, dividends received from a Fund are taxable as ordinary income,
regardless of whether dividends are reinvested. Distributions by a Fund of
realized net short-term capital gains and gins from certain foreign currency
transactions are similarly taxed. Distributions by the Funds of realized net
long-term capital gains are taxable to their shareholders as long-term capital
gains regardless of how long an investor has been a shareholder.
Some foreign countries may impose taxes on dividends paid to and gains realized
by the Emerging Markets and International Index Funds. These Funds may treat
these taxes as a deduction or, under certain conditions, "flow the tax through"
to shareholders. In the latter event, shareholders may either deduct the taxes
or use them to calculate a credit against their federal income tax.
A portion of the income dividends paid by the Large Cap Growth and Small Cap
Index Funds is eligible for the dividends-received deduction allowed to
corporations. The eligible portion may not exceed the Fund's aggregate dividends
received from U.S. corporations. However, dividends received by a corporate
shareholder and deducted by it pursuant to the dividends-received deduction may
be subject indirectly to the federal alternative minimum tax. The Emerging
Market and International Index Funds' dividends most likely will not qualify for
the dividends-received deduction because none of the dividends received by that
Fund are expected to be paid by U.S. corporations.
The qualified retirement and benefit plans of AMR Corporation and its affiliates
("Plans") pay no federal income tax. Individual participants in the Plans should
consult the Plans' governing documents and their own tax advisers for
information on the tax consequences associated with participating in the Plans.
This is only a summary of some of the important tax considerations that may
affect Fund shareholders. Shareholders should consult their tax adviser
regarding specific questions as to the effect of federal, state or local income
taxes on an investment in the Funds.
ADDITIONAL INFORMATION
Distribution of Trust Shares
The Trust does not incur any direct distribution expenses related to AMR Class
or Institutional Class shares. However, the Trust has adopted a Distribution
Plan in accordance with Rule 12b-1 under the Investment Company Act of 1940
("1940 Act") which authorizes the use of any fees received by the Manager in
accordance with the Administrative Services and Management Agreements, and any
fees received by the investment advisers pursuant to their Advisory Agreements
with the Manager, to be used for the sale and distribution of Fund shares. In
the event the Trust begins to incur distribution expenses for the Funds,
distribution fees may be paid out of Fund assets, possibly causing the cost of
your investment to increase over time.
Master-Feeder Structure
This means that each Fund is a "feeder" fund that invests all of its investable
assets in a "master" fund with the same investment objective. The "master" fund
purchases securities for investment. The master-feeder structure works as
follows:
14
<PAGE> 34
--------------------------
Investor
--------------------------
purchases shares of
--------------------------
Feeder Fund
--------------------------
which invests in
--------------------------
Master Fund
--------------------------
which buys
--------------------------
Investment Securities
--------------------------
Each Fund can withdraw its investment in its corresponding portfolio at any time
if the Board determines that it is in the best interest of the Fund and its
shareholders to do so. If this happens, the Fund's assets will be invested
according to the investment policies and restrictions described in this
Prospectus.
15
<PAGE> 35
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
Additional information about the Funds is found in the documents listed below.
Request a free copy of these documents by calling (800) 433-2434.
STATEMENT OF ADDITIONAL INFORMATION ("SAI")
- --------------------------------------------------------------------------------
The SAI contains more details about the Funds and their investment policies. The
SAI is incorporated in this Prospectus by reference (it is legally part of this
Prospectus). A current SAI is on file with the Securities and Exchange
Commission (SEC).
- --------------------------------------------------------------------------------
To obtain more information about the Funds or to request a copy of the SAI:
<TABLE>
<S> <C> <C> <C>
BY TELEPHONE: BY MAIL: BY E-MAIL: ON THE INTERNET:
Call (800) 433-2434 American AAdvantage Funds [email protected] Visit our website at www.aafunds.com
P.O. Box 619003, MD 5645 Visit the SEC website at www.sec.gov
DFW Airport, TX 75261-9003
</TABLE>
Copies of the SAI may also be obtained from the SEC Public Reference Room by
mailing a request, including a duplicating fee to: SEC's Public Reference
Section, 450 5th Street NW, Washington, D.C. 20549-6009. The Public Reference
Room can be reached at (202) 942-8090.
FUND SERVICE PROVIDERS:
<TABLE>
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
CUSTODIAN TRANSFER AGENT INDEPENDENT AUDITORS DISTRIBUTOR
STATE STREET BANK AND NATIONAL FINANCIAL (LARGE CAP GROWTH AND EMERGING SWS FINANCIAL SERVICES
TRUST DATA SERVICES MARKETS FUNDS) Dallas, Texas
Boston, Massachusetts (INSTITUTIONAL CLASS) ERNST & YOUNG LLP
Kansas City, Missouri Dallas, Texas
STATE STREET BANK AND (INDEX FUNDS)
TRUST (AMR CLASS) DELOITTE & TOUCHE LLP
Boston, Massachusetts Princeton, New Jersey
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
[AMERICAN AADVANTAGE FUNDS(R) LOGO]
SEC File Number 811-4984
American Airlines is not responsible for investments made in the American
AAdvantage Funds. American AAdvantage Funds is a registered service mark of AMR
Corporation.
16
<PAGE> 36
STATEMENT OF ADDITIONAL INFORMATION
AMERICAN AADVANTAGE FUNDS(R)
AMERICAN AADVANTAGE EMERGING MARKETS FUND
AMERICAN AADVANTAGE INTERNATIONAL INDEX FUND
AMERICAN AADVANTAGE LARGE CAP GROWTH FUND
AMERICAN AADVANTAGE SMALL CAP INDEX FUND
-- AMR CLASS(SM) --
-- INSTITUTIONAL CLASS --
JUNE 30, 2000
The American AAdvantage Emerging Markets Fund (the "Emerging Markets
Fund"), American AAdvantage International Index Fund (the "International Index
Fund"), American AAdvantage Large Cap Growth Fund (the "Large Cap Growth Fund"),
and American AAdvantage Small Cap Index Fund (the "Small Cap Index Fund"),
(individually, a "Fund" and collectively, the "Funds") are four separate
investment portfolios of the American AAdvantage Funds (the "Trust"), a no-load,
open-end, diversified management investment company organized as a Massachusetts
business trust on January 16, 1987. Each Fund constitutes a separate investment
portfolio with a distinct investment objective, and distinct purpose and
strategy. The Emerging Markets and Large Cap Growth Funds offer the AMR and
Institutional Classes of shares, which are designed to meet the needs of
different groups of investors. The International Index and Small Cap Index Funds
only offer the Institutional Class of shares. This Statement of Additional
Information ("SAI") relates to the AMR and Institutional Classes of the Trust.
The Emerging Markets and Large Cap Growth Funds each seeks its
investment objective by investing all of its investable assets in a
corresponding portfolio of the AMR Investment Services Trust ("AMR Trust") that
has a similar name and an identical investment objective to the investing Fund.
The AMR Trust is a separate investment company managed by AMR Investment
Services, Inc. (the "Manager"). The International Index Fund and the Small Cap
Index Fund (the "Index Funds") each seeks its investment objective by investing
all of its investable assets in a corresponding portfolio of the Quantitative
Master Series Trust ("Index Trust"), which is managed by Fund Asset Management,
L.P. ("FAM"). The International Index Fund invests all of its investable assets
in the Master International (Capitalization Weighted) Index Series
("International Index Series"). The Small Cap Index Fund invests all of its
investable assets in the Master Small Cap Index Series ("Small Cap Index
Series"). The portfolios of the AMR Trust and Index Trust are referred to herein
individually as a "Portfolio" and, collectively, the "Portfolios." Each
Portfolio has an investment objective identical to the investing Fund.
This SAI should be read in conjunction with an AMR Class or an
Institutional Class prospectus, dated June 30, 2000, (individually, a
"Prospectus"), copies of which may be obtained without charge by calling (800)
967-9009 for an Institutional Class Prospectus or (800) 433-2434 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..................................................................................................3
Temporary Defensive Position.............................................................................................7
Trustees and Officers of the Trust and the AMR Trust.....................................................................7
Trustees and Officers of the Index Trust.................................................................................9
Control Persons and 5% Shareholders.....................................................................................11
Investment Advisory Agreements..........................................................................................11
Management, Administrative Services and Distribution Fees...............................................................12
Other Service Providers.................................................................................................13
Portfolio Securities Transactions.......................................................................................13
Redemptions in Kind.....................................................................................................15
Tax Information.........................................................................................................15
Yield and Total Return Quotations.......................................................................................17
Description of the Trust................................................................................................17
Other Information.......................................................................................................18
</TABLE>
<PAGE> 37
NON-PRINCIPAL INVESTMENT STRATEGIES AND RISKS
In addition to the investment strategies described in the Prospectuses,
each 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 Corporation or Moody's
Investors Service, Inc.). Obligations rated in the fourth highest
rating category are limited to 25% of each of these Funds' debt
allocations. The Funds, at the discretion of the investment advisers,
may retain a debt security that has been downgraded below the initial
investment criteria.
2. Invest in other investment companies (including affiliated
investment companies) to the extent permitted by the Investment Company
Act of 1940 ("1940 Act") or exemptive relief granted by the Securities
and Exchange Commission ("SEC").
3. Loan securities to broker-dealers or other institutional investors.
Securities loans will not be made if, as a result, the aggregate amount
of all outstanding securities loans by a Portfolio exceeds 33 1/3% of
its total assets (including the market value of collateral received).
For purposes of complying with a Portfolio's investment policies and
restrictions, collateral received in connection with securities loans
is deemed an asset of the Portfolio to the extent required by law. The
Manager receives compensation for administrative and oversight
functions with respect to securities lending activities of the Large
Cap Growth and Emerging Markets Portfolios. The amount of such
compensation depends on the income generated by the loan of the
securities. A Portfolio continues to receive interest on the securities
loaned and simultaneously earns either interest on the investment of
the cash collateral or fee income if the loan is otherwise
collateralized.
4. Enter into repurchase agreements. A repurchase agreement is an
agreement under which securities are acquired by a Portfolio from a
securities dealer or bank subject to resale at an agreed upon price on
a later date. The acquiring Portfolio bears a risk of loss in the event
that the other party to a repurchase agreement defaults on its
obligations and the Portfolio is delayed or prevented from exercising
its rights to dispose of the collateral securities. However, the
investment advisers, the Manager or FAM, as applicable, attempt to
minimize this risk by entering into repurchase agreements only with
financial institutions that are deemed to be of good financial
standing.
5. Purchase securities in private placement offerings made in reliance
on the "private placement" exemption from registration afforded by
Section 4(2) of the Securities Act of 1933 ("1933 Act"), and resold to
qualified institutional buyers under Rule 144A under the 1933 Act
("Section 4(2) securities"). The Portfolios will not invest more than
15% of their respective net assets in Section 4(2) securities and
illiquid securities unless the applicable investment adviser, the
Manager or FAM, as applicable, determines, by continuous reference to
the appropriate trading markets and pursuant to guidelines approved by
the AMR Trust's Board of Trustees ("AMR Trust Board") or the Index
Trust Board of Trustees, as applicable, that any Section 4(2)
securities held by such Portfolio in excess of this level are at all
times liquid.
2
<PAGE> 38
In addition to the investment strategies described in the Prospectuses,
the Large Cap Growth Fund and the Emerging Markets Fund may:
1. Engage in dollar rolls or purchase or sell securities on a
when-issued or forward commitment basis. The purchase or sale of
when-issued securities enables an investor to hedge against anticipated
changes in interest rates and prices by locking in an attractive price
or yield. The price of when-issued securities is fixed at the time the
commitment to purchase or sell is made, but delivery and payment for
the when-issued securities take place at a later date, normally one to
two months after the date of purchase. During the period between
purchase and settlement, no payment is made by the purchaser to the
issuer and no interest accrues to the purchaser. Such transactions
therefore involve a risk of loss if the value of the security to be
purchased declines prior to the settlement date or if the value of the
security to be sold increases prior to the settlement date. A sale of a
when-issued security also involves the risk that the other party will
be unable to settle the transaction. Dollar rolls are a type of forward
commitment transaction. Purchases and sales of securities on a forward
commitment basis involve a commitment to purchase or sell securities
with payment and delivery to take place at some future date, normally
one to two months after the date of the transaction. As with
when-issued securities, these transactions involve certain risks, but
they also enable an investor to hedge against anticipated changes in
interest rates and prices. Forward commitment transactions are executed
for existing obligations, whereas in a when-issued transaction, the
obligations have not yet been issued. When purchasing securities on a
when-issued or forward commitment basis, a segregated account of liquid
assets at least equal to the value of purchase commitments for such
securities will be maintained until the settlement date.
INVESTMENT RESTRICTIONS
Each Fund has the following fundamental investment policy that enables
it to invest in its corresponding Portfolio:
Notwithstanding any other limitation, the Fund may invest all of its
investable assets in an open-end management investment company with
substantially the same investment objectives, policies and limitations
as the Fund. For this purpose, "all of the Fund's investable assets"
means that the only investment securities that will be held by the Fund
will be the Fund's interest in the investment company.
All other fundamental investment policies and the non-fundamental
policies of each Fund and its corresponding Portfolio are identical. Therefore,
although the following discusses the investment policies of each Portfolio and
the AMR Trust Board, it applies equally to each Fund and the Trust's Board of
Trustees ("Board"). In addition, the restrictions noted below pertaining to the
Index Portfolios and the Index Trust Board of Trustees apply equally to the
Index Funds and the Board.
PORTFOLIOS OF THE AMR TRUST
In addition to the investment limitations noted in the Prospectuses,
the following nine restrictions have been adopted by each Portfolio of the AMR
Trust, and may be changed with respect to any such Portfolio only by the
majority vote of that Portfolio's outstanding interests. "Majority of the
outstanding voting securities" under the 1940 Act, and as used herein means,
with respect to a Portfolio, the lesser of (a) 67% of the interests of the
Portfolio present at the meeting if the holders of more than 50% of the
interests are present and represented at the interest holders' meeting or (b)
more than 50% of the interests of the Portfolio. Whenever a Fund is requested to
vote on a change in the investment restrictions of its corresponding Portfolio,
that Fund will hold a meeting of its shareholders and will cast its votes as
instructed by its shareholders. The percentage of a Fund's votes representing
that Fund's shareholders not voting will be voted by the Board in the same
proportion as those Fund shareholders who do, in fact, vote.
No Portfolio of the AMR Trust may:
1. Purchase or sell real estate or real estate limited partnership
interests, provided, however, that each Portfolio may invest in
securities secured by real estate or interests therein or issued by
companies which invest in real estate or interests therein when
consistent with the other policies and limitations described in the
Prospectuses.
2. Purchase or sell commodities (including direct interests and/or
leases in oil, gas or minerals) or
3
<PAGE> 39
commodities contracts, except with respect to forward foreign currency
exchange contracts, foreign currency futures contracts and when-issued
securities when consistent with the other policies and limitations
described in the Prospectuses. Each Portfolio may purchase or sell
futures contracts and options on futures contracts as a method for
keeping assets readily convertible to cash if needed to meet
shareholder redemptions or other needs while maintaining exposure to
the stock market.
3. Engage in the business of underwriting securities issued by others,
except to the extent that, in connection with the disposition of
securities, each 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 SAI.
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 each Portfolio may engage in
when-issued securities and forward commitment transactions and may
engage in foreign currency futures and forward foreign currency
contracts.
7. Borrow money, except from banks or through reverse repurchase
agreements for temporary purposes. Each Portfolio may borrow money from
the Manager or any of its affiliates for temporary purposes. The
aggregate amount of borrowing for each Portfolio is not to exceed 10%
of the value of the Portfolio's assets at the time of borrowing.
Although not a fundamental policy, the Portfolios intend to repay any
money borrowed before any additional portfolio securities are
purchased. See "Other Information" for a further description regarding
reverse repurchase agreements.
8. Invest more than 5% of its total assets (taken at market value) in
securities of any one issuer, other than obligations issued by the U.S.
Government, its agencies and instrumentalities, or purchase more than
10% of the voting securities of any one issuer, with respect to 75% of
the Portfolio's total assets; or
9. Invest more than 25% of its total assets in the securities of
companies primarily engaged in any one industry, provided that: (i)
this limitation does not apply to obligations issued or guaranteed by
the U.S. Government, its agencies and instrumentalities; (ii)
municipalities and their agencies and authorities are not deemed to be
industries; and (iii) financial service companies are classified
according to the end users of their services (for example, automobile
finance, bank finance, and diversified finance will be considered
separate industries).
The above percentage limits are based upon asset values at the time of
the applicable transaction; accordingly, a subsequent change in asset values
will not affect a transaction that was in compliance with the investment
restrictions at the time such transaction was effected.
The following non-fundamental investment restrictions may be changed
with respect to each Fund by a vote of a majority of the Board or, with respect
to the Portfolio, by a vote of a majority of the AMR Trust Board. The Portfolios
may not:
1. Invest more than 15% of its net assets in illiquid securities,
including time deposits and repurchase agreements that mature in more
than seven days; or
2. Purchase securities on margin, effect short sales (except that a
Portfolio may obtain such short term credits as may be necessary for
the clearance of purchases or sales of securities) or purchase or sell
call options or engage in the writing of such options.
Both Portfolios of the AMR Trust may invest up to 10% of their total
assets in the securities of other
4
<PAGE> 40
investment companies to the extent permitted by law; however, pursuant to
exemptive relief granted by the SEC, a Portfolio may invest up to 25% of its
total assets in the aggregate of the American AAdvantage Money Market Portfolio,
American AAdvantage Municipal Money Market Portfolio, and American AAdvantage
U.S. Government Money Market Portfolio. A Portfolio of the AMR Trust may incur
duplicate advisory or management fees when investing in another mutual fund.
INDEX PORTFOLIOS
The following investment restrictions are "fundamental policies" of the
Index Portfolios and may be changed with respect to each Portfolio or Fund only
by the majority vote of the Portfolio's or Fund's outstanding interests or
shares, respectively, as defined above. Whenever an Index Fund is requested to
vote on a change in the fundamental policy of its Portfolio, the applicable Fund
will hold a meeting of its shareholders and will cast its votes as instructed by
its shareholders. The percentage of the Fund's votes representing Fund
shareholders not voting will be voted by the Board in the same proportion as the
Fund shareholders who do, in fact, vote. Neither Index Portfolio may:
1. Make any investment inconsistent with the Portfolio's classification
as a non-diversified company under the 1940 Act.
2. Invest more than 25% of its total assets, taken at market value, in
the securities of issuers in any particular industry (excluding the
U.S. Government and its agencies and instrumentalities); provided, that
in replicating the weighting of a particular industry in its target
index, a Portfolio may invest more than 25% of its total assets in
securities of issuers in that industry.
3. Make investments for the purpose of exercising control or
management.
4. Purchase or sell real estate, except that, to the extent permitted
by law, a Portfolio may invest in securities directly or indirectly
secured by real estate or interests therein or issued by companies
which invest in real estate or interests therein.
5. Make loans to other persons, except that the acquisition of bonds,
debentures or other corporate debt securities and investment in
government obligations, commercial paper, pass-through instruments,
certificates of deposit, bankers acceptances, repurchase agreements or
any similar instruments shall not be deemed to be the making of a loan,
and except further that a Portfolio may lend its portfolio securities,
provided that the lending of portfolio securities may be made only in
accordance with applicable law and the guidelines set forth in the
Portfolio's SAI, as they may be amended from time to time.
6. Issue senior securities to the extent such issuance would violate
applicable law.
7. Borrow money, except that (i) a Portfolio may borrow from banks (as
defined in the 1940 Act) in amounts up to 33 1/3% of its total assets
(including the amount borrowed), (ii) a Portfolio may borrow up to an
additional 5% of its total assets for temporary purposes, (iii) a
Portfolio may obtain such short term credit as may be necessary for the
clearance of purchases and sales of portfolio securities and (iv) a
Portfolio may purchase securities on margin to the extent permitted by
applicable law. A Portfolio may not pledge its assets other than to
secure such borrowings or, to the extent permitted by the Portfolio's
investment policies as set forth in its Prospectus and SAI, as they may
be amended from time to time, in connection with hedging transactions,
short sales, when issued and forward commitment transactions and
investment strategies.
8. Underwrite securities of other issuers except insofar as a Portfolio
technically may be deemed an underwriter under the 1933 Act in selling
portfolio securities.
9. Purchase or sell commodities or contracts on commodities, except to
the extent that a Portfolio may do so in accordance with applicable law
and the Portfolio's Prospectus and SAI, as they may be amended from
time to time, and without registering as a commodity pool operator
under the Commodity Exchange Act.
In addition, although each Index Portfolio is classified as a
non-diversified fund under the 1940 Act and is not subject to the
diversification requirements of the 1940 Act, each Portfolio is required to
comply with certain
5
<PAGE> 41
requirements under the Internal Revenue Code of 1986, as amended (the "Code").
To ensure that the Index Portfolios satisfy these requirements, the Index
Trust's Declaration of Trust requires that each Index Portfolio be managed in
compliance with the Code requirements as though such requirements were
applicable to the Portfolios. These requirements include limiting its
investments so that at the close of each quarter of the taxable year (i) not
more than 25% of the market value of a Portfolio's total assets are invested in
the securities of a single issuer, or any two or more issuers which are
controlled by the Portfolio and engaged in the same, similar or related
businesses, and (ii) with respect to 50% of the market value of its total
assets, not more than 5% of the market value of its total assets are invested in
securities of a single issuer, and the Portfolio does not own more than 10% of
the outstanding voting securities of a single issuer. The U.S. Government, its
agencies and instrumentalities are not included within the definition of
"issuer" for purposes of the diversification requirements of the Code. These
requirements will be satisfied at the Portfolio level and not at the level of
the Funds based upon a ruling received from the Internal Revenue Service ("IRS")
which entitles the Fund to "look through" the shares of the Portfolio to the
underlying investments of the Portfolio for purposes of these diversification
requirements.
In addition, the Index Trust has adopted non-fundamental restrictions
that may be changed by the Index Trust Board of Trustees without shareholder
approval. Like the fundamental restrictions, none of the non-fundamental
restrictions, including but not limited to restriction (a) below, shall prevent
an Index Portfolio from investing all of its assets in shares of another
registered investment company with the same investment objective (in a
master-feeder structure). Under the non-fundamental restrictions, an Index
Portfolio may not:
(a) Purchase securities of other investment companies, except to the
extent such purchases are permitted by applicable law. As a matter of
policy, however, a Portfolio will not purchase shares of any registered
open-end investment company or registered unit investment trust, in
reliance on Section 12(d)(1)(F) or (G) (the "fund of funds" provisions)
of the 1940 Act, at any time the Portfolios' shares are owned by
another investment company that is part of the same group of investment
companies as the Portfolios.
(b) Make short sales of securities or maintain a short position, except
to the extent permitted by applicable law and otherwise permitted by
the Portfolios' prospectus or SAI.
(c) Invest in securities that cannot be readily resold because of legal
or contractual restrictions or that cannot otherwise be marketed,
redeemed or put to the issuer or a third party, if at the time of
acquisition more than 15% of its net assets would be invested in such
securities. This restriction shall not apply to securities that mature
within seven days or securities that the Index Trust Board of Trustees
has otherwise determined to be liquid pursuant to applicable law.
Securities purchased in accordance with Rule 144A under the 1933 Act
(which are restricted securities that can be resold to qualified
institutional buyers, but no to the general public) and determined to
be liquid by the Trustees are not subject to the limitations set forth
in this investment restriction.
(d) Make any additional investments if the amount of its borrowings
exceeds 5% of its total assets. Borrowings do not include the use of
investment techniques that may be deemed to create leverage, including,
but not limited to, such techniques as dollar rolls, when-issued
securities, options and futures.
If a percentage restriction on the investment use of assets set forth
above is adhered to at the time a transaction is effected, later changes in
percentages resulting from changing values will not be considered a violation.
The staff of the SEC has taken the position that purchased
over-the-counter ("OTC") options and the assets used as cover for written OTC
options are illiquid securities. Therefore, the Index Trust has adopted an
investment policy pursuant to which neither Portfolio will purchase or sell OTC
options (including OTC options on futures contracts) if, as a result of such
transaction, the sum of: (i) the market value of OTC options currently
outstanding that are held by such Portfolio, (ii) the market value of the
underlying securities covered by OTC call options currently outstanding that
were sold by the Portfolio, (iii) and margin deposits on the Portfolio's
existing OTC options on futures contracts exceeds 15% of the net assets of the
Portfolio taken at market value, together with all other assets of such
Portfolio that are illiquid and not otherwise readily marketable. However, if
the OTC options are sold by a Portfolio to a primary U.S. Government securities
dealer recognized by the Federal Reserve Bank of New York and if a Portfolio has
the unconditional contractual right to repurchase such OTC option from the
dealer at a predetermined price, then the Portfolio will treat as illiquid such
amount of the underlying securities as is equal to the repurchase price less the
amount by which the option is "in-the-money"
6
<PAGE> 42
(i.e., current market value of the underlying securities minus the option's
strike price). The repurchase price with the primary dealer is typically a
formula price that is generally based on a multiple of the premium received for
the option plus the amount by which the option is "in-the-money." This policy as
to OTC options is not a fundamental policy of any Portfolio and may be amended
by the Index Trust Board of Trustees without the approval of the Portfolio's
shareholders. However, the Index Trust Board of Trustees will not change or
modify this policy prior to the change or modification by the SEC staff of its
position.
Index Portfolio securities generally may not be purchased from, sold or
loaned to FAM or its affiliates or any of their directors, officers or
employees, acting as principal, unless pursuant to a rule or exemptive order
under the 1940 Act. Because of the affiliation of Merrill Lynch, Pierce, Fenner
& Smith Incorporated ("Merrill Lynch") with FAM, the Index Portfolios are
prohibited from engaging in certain transactions involving Merrill Lynch or its
affiliates, except for brokerage transactions permitted under the 1940 Act
involving only usual and customary commissions or transactions pursuant to an
exemptive order under the 1940 Act. See "Portfolio Securities Transactions."
TEMPORARY DEFENSIVE POSITION
While assuming a temporary defensive position, a Fund may invest in
cash or cash equivalent short-term investment grade obligations, including:
obligations of the U.S. Government, its agencies and instrumentalities;
corporate debt securities, such as commercial paper, master demand notes, loan
participation interests, medium-term notes and funding agreements; Yankeedollar
and Eurodollar bank certificates of deposit, time deposits, and banker's
acceptances; asset-backed securities; and repurchase agreements involving the
foregoing obligations.
TRUSTEES AND OFFICERS OF THE TRUST AND THE AMR TRUST
The Board provides broad supervision over the Trust's affairs. The
Manager is responsible for the management of Trust assets, and the Trust's
officers are responsible for the Trust's operations. The Trustees and officers
of the Trust and AMR Trust are listed below, together with their principal
occupations during the past five years. Unless otherwise indicated, the address
of each person listed below is 4333 Amon Carter Boulevard, MD 5645, Fort Worth,
Texas 76155.
<TABLE>
<CAPTION>
POSITION WITH
NAME, AGE AND ADDRESS EACH TRUST PRINCIPAL OCCUPATION DURING PAST 5 YEARS
- --------------------- ---------- ----------------------------------------
<S> <C> <C>
William F. Quinn* (52) Trustee and President, AMR Investment Services, Inc.
President (1986-Present); Chairman, American Airlines
Employees Federal Credit Union (1989-Present);
Director, Crescent Real Estate Equities, Inc.
(1994-Present); Vice Chairman, United Way of
Tarrant County, Texas (1988-Present); Director,
Southern Methodist University Cox School of
Business (1999-Present); Member, Southern
Methodist University Endowment Fund Advisory Board
(1996-Present); Trustee, American AAdvantage
Mileage Funds (1995-Present); Trustee, American
Select Funds (1999-Present).
Alan D. Feld (63) Trustee Partner, Akin, Gump, Strauss, Hauer & Feld, LLP
1700 Pacific Avenue (1960-Present)#; Director, Clear Channel
Suite 4100 Communications (1984-Present); Director,
Dallas, Texas 75201 CenterPoint Properties, Inc. (1994-Present);
Trustee, American AAdvantage Mileage Funds
(1996-Present); Trustee, American Select Funds
(1999-Present).
Ben J. Fortson (67) Trustee President and CEO, Fortson Oil Company
301 Commerce Street (1958-Present); Director, Kimbell Art Foundation
Suite 3301 (1964-Present); Director, Burnett Foundation
Fort Worth, Texas 76102 (1987-Present); Honorary Trustee, Texas Christian
University (1986-Present); Trustee, American
AAdvantage Mileage Funds (1996-Present); Trustee,
American Select Funds (1999-Present).
John S. Justin (83) Trustee Chairman (1969-Present), Chief Executive Officer
2821 West Seventh Street (1969-1999), Justin Industries, Inc. (a
Fort Worth, Texas 76107 diversified holding company); Executive Board
Member, Blue Cross/Blue Shield of Texas
(1985-Present); Board Member, Zale Lipshy Hospital
(1993-Present); Trustee, Texas Christian
University (1980-Present); Director and Executive
Board Member, Moncrief Radiation Center
(1985-Present); Trustee, American AAdvantage
Mileage Funds (1995-Present); Trustee, American
Select Funds (1999-Present).
Stephen D. O'Sullivan* (64) Trustee Consultant (1994-Present); Trustee, American
AAdvantage Mileage Funds (1995-Present); Trustee,
American Select Funds (1999-Present).
</TABLE>
7
<PAGE> 43
<TABLE>
<CAPTION>
POSITION WITH
NAME, AGE AND ADDRESS EACH TRUST PRINCIPAL OCCUPATION DURING PAST 5 YEARS
- --------------------- ---------- ----------------------------------------
<S> <C> <C>
Roger T. Staubach (58) Trustee Chairman of the Board and Chief Executive Officer
15601 Dallas Parkway of The Staubach Company (a commercial real estate
Suite 400 company) (1982-Present); Director, Brinker
Dallas, Texas 75001 International (1993-Present); Trustee, Institute
for Aerobics Research; Member, Executive Council,
Daytop/Dallas; Member, National Board of
Governors, United Way of America; Board of
Directors, PowerUP; former quarterback of the
Dallas Cowboys professional football team;
Trustee, American AAdvantage Mileage Funds
(1995-Present); Trustee, American Select Funds
(1999-Present).
Kneeland Youngblood (44) Trustee Managing Partner, Pharos Capital Group, LLC (a
100 Crescent Court private equity firm) (1998-Present); Director, L&B
Suite 1740 Realty Advisors (1998-2000); Trustee, Teachers
Dallas, Texas 75201 Retirement System of Texas (1993-1999); Director,
United States Enrichment Corporation (1993-1998),
Director, Just For the Kids (1995-Present);
Director, Starwood Financial Trust (1998-Present);
Member, Council on Foreign Relations
(1995-Present); Trustee, American AAdvantage
Mileage Funds (1996-Present); Trustee, American
Select Funds (1999-Present).
Nancy A. Eckl (37) Vice Vice President, Trust Investments, AMR Investment
President Services, Inc. (1990-Present).
Michael W. Fields (46) Vice Vice President, Fixed Income Investments, AMR
President Investment Services, Inc. (1988-Present).
Barry Y. Greenberg (37) Vice President Vice President, Legal and Compliance, AMR
and Assistant Investment Services, Inc. (1995-Present);
Secretary Attorney, Securities and Exchange Commission
(1988-1995).
Rebecca L. Harris (33) Treasurer Vice President, Finance (1995-Present), Controller
(1991-1995), AMR Investment Services, Inc.
John B. Roberson (42) Vice Vice President, Sales and Marketing, AMR
President Investment Services, Inc. (1991-Present).
Robert J. Zutz (47) Secretary Partner, Kirkpatrick & Lockhart LLP (law firm).
1800 Massachusetts Ave. NW
2nd Floor
Washington, D.C. 20036
</TABLE>
* Messrs. Quinn and O'Sullivan are deemed to be "interested persons" of the
Trust and AMR Trust as defined by the 1940 Act.
# The law firm of Akin, Gump, Strauss, Hauer & Feld LLP ("Akin, Gump")
provides legal services to American Airlines, Inc., an affiliate of the
Manager. Mr. Feld has advised the Trusts that he has had no material
involvement in the services provided by Akin, Gump to American Airlines,
Inc. and that he has received no material benefit in connection with these
services. Akin, Gump does not provide legal services to the Manager or AMR
Corporation.
All Trustees and officers as a group own less than 1% of the outstanding
shares of each of the Funds.
As compensation for their service to the Trust, the American AAdvantage
Mileage Funds, the American Select Funds and the AMR Trust (collectively, the
"Trusts"), the Independent Trustees and their spouses receive free air travel
from American Airlines, Inc., an affiliate of the Manager. The Trusts pay
American Airlines the flight service charges incurred for these travel
arrangements. The Trusts compensate each Trustee with payments in an amount
equal to the Trustees' income tax on the value of this free airline travel. Mr.
O'Sullivan, as a retiree of American Airlines, Inc., already receives flight
benefits. Prior to March 1, 2000, the Trusts compensated Mr. O'Sullivan up to
$10,000 annually to cover his personal flight service charges and the charges
for his three adult children, as well as any income tax charged on the value of
these flight benefits. Beginning March 1, 2000, Mr. O'Sullivan will receive an
annual retainer of $20,000 plus $1,250 for each Board meeting attended. Trustees
are also reimbursed for any expenses incurred in attending Board meetings. These
amounts (excluding reimbursements) are reflected in the following table, as paid
by the Funds in existence during the fiscal year ended October 31, 1999. The
compensation amounts below include the flight service charges paid by the Trusts
to American Airlines.
8
<PAGE> 44
<TABLE>
<CAPTION>
Pension or
Aggregate Retirement Benefits Total
Compensation Accrued as Part of Estimated Annual Compensation
From the the AAdvantage Benefits Upon From the
Name of Trustee AAdvantage Trust Trust's Expenses Retirement Trusts
- --------------- ---------------- ------------------------- ----------------- ------------------
<S> <C> <C> <C> <C>
William F. Quinn $ 0 $ 0 $ 0 $ 0
Alan D. Feld $27,894 $ 0 $ 0 $85,697
Ben J. Fortson $ 2,532 $ 0 $ 0 $ 7,778
John S. Justin $ 0 $ 0 $ 0 $ 0
Stephen D. O'Sullivan $ 0 $ 0 $ 0 $ 0
Roger T. Staubach $ 9,439 $ 0 $ 0 $28,997
Kneeland Youngblood $21,194 $ 0 $ 0 $65,114
</TABLE>
TRUSTEES AND OFFICERS OF THE INDEX TRUST
The Index Trust Board of Trustees oversees the activities of the
International Index Series and Small Cap Index Series and reviews contractual
arrangements with companies that provide services to the Portfolios. The
Trustees and officers of the Index Trust and their principal occupations during
the past five years are set forth below. Their titles may have varied during
that period. Unless otherwise noted, the address of each Trustee and officer is
P.O. Box 9011, Princeton, New Jersey 08543-9011.
<TABLE>
<CAPTION>
POSITION WITH
NAME, AGE AND ADDRESS INDEX TRUST PRINCIPAL OCCUPATION DURING PAST 5 YEARS
- --------------------- ----------- ----------------------------------------
<S> <C> <C>
Terry K. Glenn (59) President and Executive Vice President, FAM and certain of its
Trustee(1)(2) affiliates (which terms as used herein include
their corporate predecessors) (1983-Present);
Executive Vice President and Director, Princeton
Services, Inc. (1993-Present); President
(1986-Present), Director (1991-Present), Princeton
Funds Distributor, Inc. ("PFD"); President,
Princeton Administrators, L.P. (1988-Present).
Jack B. Sunderland (71) Trustee(2) President and Director, American Independent Oil
P.O. Box 7 Company, Inc. (energy company) (1987-Present);
West Cornwall, Connecticut 06796 Member, Council on Foreign Relations
(1971-Present).
Stephen B. Swensrud (66) Trustee(2) Chairman, Fernwood Advisors (investment adviser)
24 Federal Street, Suite 400 (1996-Present); Principal, Fernwood Associates
Boston, Massachusetts 02110 (financial consultant) (1975-Present).
J. Thomas Touchton (61) Trustee(2) Managing Partner, The Witt-Touchton Company and
Suite 3405, One Tampa City Center its predecessor The Witt Co. (private investment
Tampa, Florida 33602 partnership) (1972-Present); Trustee Emeritus,
Washington and Lee University; Director, TECO
Energy Inc. (electric utility holding company).
Joseph T. Monagle, Jr. (51) Senior Vice Senior Vice President, FAM and certain of its
President(1)(2) affiliates (1990-Present); Department Head-Global
Fixed Income Division, MLAM and FAM
(1997-Present); Senior Vice President, Princeton
Services, Inc. (1993-Present).
Gregory Mark Maunz (47) Senior Vice First Vice President (1997-Present), Vice
President(1)(2) President (1985-1997), Portfolio Manager
(1984-Present), FAM and certain of its affiliates.
Jeffrey B. Hewson (48) Senior Vice Director-Global Fixed Income (1998-Present), Vice
President(1)(2) President (1989-1998), Portfolio Manager
(1985-Present), FAM and certain of its affiliates.
Eric S. Mitofsky (45) Senior Vice First Vice President (1997-Present), Vice
President(1)(2) President (1992-1997), FAM and certain of its
affiliates.
</TABLE>
9
<PAGE> 45
<TABLE>
<CAPTION>
POSITION WITH
NAME, AGE AND ADDRESS INDEX TRUST PRINCIPAL OCCUPATION DURING PAST 5 YEARS
- --------------------- ----------- ----------------------------------------
<S> <C> <C>
Christopher G. Ayoub(44) Senior Vice First Vice President (1998-Present), Vice
President(1)(2) President (1985-1998), FAM and certain of its
affiliates.
Richard Vella(42) Senior Vice First Vice President, FAM and certain of its
President(1)(2) affiliates (1999-Present); Managing
Director-Global Index Funds (1997-1999), Managing
Director-International Index Funds (1995-1999),
Vice President-International Index Funds
(1990-1995), Assistant Vice
President-International Index Funds (1987-1990),
Assistant Treasurer (1985-1986), Bankers Trust.
Frank Salerno(40) Senior Vice First Vice President, FAM and certain of its
President(1)(2) affiliates (1999-Present); Managing Director and
Chief Investment Officer-Structured Investments
(1995-1999), Managing Director and Head-Structured
Investments (1993-1995), Domestic Head-Structured
Investments (1991-1993), Assistant Vice
President-Structured Investments (1985-1991),
Bankers Trust.
Dean D'Onofrio(41) Senior Vice Managing Director and Head, Quantitative Advisors
President(1)(2) (1999-Present); Managing Director, Corporate
Institutional Client Group (1997-1999); Managing
Director (1981-1996), Analyst-Quantitative
Investments (1981-1982), Portfolio
Manager-Quantitative Investments (1983-1984),
Head-Quantitative Investments (1985-1989),
Head-U.S. Equity Derivatives Marketing
(1990-1993), Head-Hedge Funds and Arbitrage
Trading (1994-1996), Bankers Trust.
Donald C. Burke(39) Vice President and Senior Vice President and Treasurer
Treasurer(1)(2) (1999-Present), First Vice President (1997-1999),
FAM and certain of its affiliates (1999-Present);
Senior Vice President and Treasurer, Princeton
Services, Inc. (1999-Present); Vice President, PFD
(1999-Present); Director of Taxation, FAM
(1990-Present); Vice President, Merrill Lynch
Asset Management ("MLAM") and FAM (1990-1997).
Robert C. Doll(45) Senior Vice Senior Vice President, FAM and certain of its
President(1)(2) affiliates (1999-Present); Senior Vice President,
Princeton Services (1999-Present); Chief
Investment Officer (1999), Executive Vice
President (1991-1999), Oppenheimer Funds, Inc.
Ira P. Shapiro(36) Secretary (1) (2) First Vice President (1998-Present),
Director-Legal Advisory (1997-1998), Vice
President (1996-1997), Attorney (1993-1997), FAM
and certain of its affiliates.
[Phil Green (36) Senior Vice Senior Vice President, FAM and certain of its
President(1)(2) affiliates (1999-Present); Managing Director and
Portfolio Manager-Global Institutional Services
(1997-1999), Vice President-Quantitative Equities
(1996), Vice President-Asset Allocation Strategies
(1994-1996), Vice President-Foreign Exchange and
Currency Overlay Strategies (1988-1999), Assistant
Treasurer-Asset Management Group (1985-1988),
Bankers Trust.
Sidney Hoots (39) Senior Vice Senior Vice President, FAM and certain of its
President(1)(2) affiliates (1999-Present); Managing
Director-Global Institutional Services
(1992-1999), Manager-Quantitative U.S. Equities
(1991-1992), Manager-Bond Index Funds (1986-1991),
Quantitative Analyst-Index Funds (1984-1986),
Bankers Trust.
</TABLE>
(1) Interested person, as defined in the 1940 Act, of the Index Funds.
(2) Such Trustee or officer is a director, trustee or officer of other
investment companies for which FAM or its affiliate acts as investment
adviser.
10
<PAGE> 46
The Index Trust pays each individual who serves as a Trustee who is not
affiliated with FAM or with an affiliate of FAM (each a "non-affiliated
Trustee") for service to the Index Trust an annual fee of $5,000 plus $500 per
meeting attended. The Index Trust also compensates members of the Audit and
Nominating Committee (the "Committee"), which consists of all of the
non-affiliated Trustees with a fee of $1,000 per year. The Index Trust
reimburses each non-interested Trustee for his out-of-pocket expenses relating
to attendance at Board and Committee meetings.
The following table reflects fees paid to the Trustees of the Index
Trust for their services to the Index Trust as a whole for the year ended
December 31, 1999.
<TABLE>
<CAPTION>
Aggregate Pension or Retirement Total Compensation from Index
Compensation from the Benefits Accrued as Part of Trust and MLAM/FAM Advised Funds
Name of Trustee Index Trust Index Trust Expenses Paid to Trustees(1)
--------------- ---------------------- ---------------------------- --------------------------------
<S> <C> <C> <C>
Jack B. Sunderland $4,750 $0 $143,975
Stephen B. Swensrud $4,750 $0 $232,250
J. Thomas Touchton $4,750 $0 $142,725
</TABLE>
(1) The Trustees serve on the boards of MLAM/FAM Advised Funds as follows: Mr.
Sunderland (18 registered investment companies consisting of 33
portfolios); Mr. Swensrud (30 registered investment companies consisting of
66 portfolios); Mr. Touchton (18 registered investment companies consisting
of 33 portfolios).
CONTROL PERSONS AND 5% SHAREHOLDERS
The Manager is deemed to control the Funds by virtue of its ownership of
more than 25% of the outstanding shares of the Funds as of June 30, 2000.
INVESTMENT ADVISORY AGREEMENTS
To the extent that the Emerging Markets and Large Cap Growth Funds
invest all of their investable assets in a corresponding portfolio of the AMR
Trust, investment advisers receive a fee on behalf of those Portfolios, and not
the corresponding Funds. The Manager has agreed to pay Goldman Sachs Asset
Management and J.P. Morgan Investment Management an annualized advisory fee
equal to x.xx% on the first $xxx million in Large Cap Growth Portfolio assets
under management, etc. The Manager has agreed to pay Morgan Stanley Dean Witter
Investment Management an annualized advisory fee equal to x.xx% on the first
$xxx million in Emerging Markets Portfolio assets under management, etc. The
Index Funds have agreed to pay FAM an annualized advisory fee equal to 0.01% of
their average daily net assets.
Under the terms of the Index Trust's investment advisory agreement with
FAM, FAM provides the Index Trust with investment advisory and management
services. Subject to the supervision of the Index Trust Board of Trustees, FAM
is responsible for the actual management of each Index Portfolio and constantly
reviews each Portfolio's holdings in light of its own research analysis and that
from other relevant sources. The responsibility for making decisions to buy,
sell or hold a particular security rests with FAM.
The investment advisory agreement obligates FAM to provide investment
advisory services and to pay all compensation of and furnish office space for
officers and employees of the Index Trust connected with investment and economic
research, trading and investment management of the Index Trust, as well as the
fees of all Trustees who are affiliated persons of FAM or any of their
affiliates. The Index Funds and the Index Portfolios each bear certain other
expenses incurred in their operation, including: taxes, interest, brokerage fees
and commissions, if any; fees of Trustees of the Index Portfolios or Trustees of
the Trust who are not officers, directors or employees of FAM, the Manager or
any of their affiliates; SEC fees and state Blue Sky qualification fees; charges
of custodians and transfer and dividend disbursing agents; certain insurance
premiums; outside auditing and legal expenses; costs attributable to investor
services, including telephone and personnel expenses; costs of preparing and
printing prospectuses and statements of additional information for regulatory
purposes and for distribution to existing shareholders; costs of shareholders'
reports and meetings of shareholders, officers and Trustees of the Index
Portfolios or Trustees of the Trust, and any extraordinary expenses.
For the period from April 9 to December 31, 1997, FAM earned $36,425 as
compensation for investment advisory services provided to the Small Cap Index
Series and waived the entire amount. For the years ended December 31, 1998 and
1999, FAM earned $61,476 and $xxx, respectively, as compensation for investment
advisory services provided to the Index Portfolios. During the same periods, FAM
waived $61,476 and $xxx, respectively.
11
<PAGE> 47
Each Investment Advisory Agreement between the Trust and the investment
adviser 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 Board or by a
vote of a majority of the outstanding voting securities of the applicable Fund
on no less than thirty (30) days' nor more than sixty (60) days' written notice
to the investment adviser, or by the investment adviser upon sixty (60) days'
written notice to the Trust. The Investment Advisory Agreements will continue in
effect provided that annually such continuance is specifically approved by a
vote of the Trustees, including the affirmative votes of a majority of the
Trustees who are not parties to the Agreement or "interested persons" (as
defined in the 1940 Act) of any such party, cast in person at a meeting called
for the purpose of considering such approval, or by the vote of shareholders.
SWS Financial Services, Inc. ("SWS"), located at 7001 Preston Road,
Dallas, Texas 75205, is the distributor and principal underwriter of the Funds'
shares, and, as such, receives an annualized fee of $50,000 from the Manager for
distributing the shares of the Trust, the American AAdvantage Mileage Funds and
the American Select Funds.
MANAGEMENT, ADMINISTRATIVE SERVICES AND DISTRIBUTION FEES
The Manager is paid a management fee as compensation for paying
investment advisory fees and for providing the Trust and the AMR Trust with
advisory and asset allocation services. Pursuant to management and
administrative services agreements, the Manager provides the Trust and the AMR
Trust with office space, office equipment and personnel necessary to manage and
administer the Trusts' operations. This includes:
o complying with reporting requirements;
o corresponding with shareholders;
o maintaining internal bookkeeping, accounting and auditing
services and records; and
o supervising the provision of services to the Trusts by third
parties.
In addition to its oversight of the investment advisers, the Manager
invests the portion of Emerging Markets and Large Cap Growth Fund assets that
the investment advisers determine to be allocated to high quality short-term
debt obligations.
Under the Management Agreement, the Manager presently monitors the
services provided by FAM to the Index Trust. The Manager receives no fee for
providing these monitoring services. In the event that the Board determines that
it is in the best interest of either of the Index Fund's shareholders to
withdraw its investment from the respective Index Portfolio, the Manager would
become responsible for directly managing the assets of the Index Fund. In such
event, the Index Fund would pay the Manager an annual fee of up to 0.10% of its
average net assets, accrued daily and paid monthly.
FAM provides administrative services to the Index Trust. The Investment
Advisory Agreement obligates FAM to provide certain administrative services to
the Index Trust and to pay all compensation of and furnish office space for
officers and employees of the Index Trust as well as the fees of all Trustees
who are affiliated persons of FAM or any of their affiliates. Each Index
Portfolio pays all other expenses incurred in its operation, including, among
other things, taxes, expenses for legal and auditing services, costs of printing
proxies, stock certificates, shareholder reports and prospectuses and statements
of additional information, charges of the custodian, any sub-custodian and
transfer agent, expenses of portfolio transactions, expenses of redemption of
shares, SEC fees, expenses of registering the shares under federal, state or
foreign laws, fees and actual out-of-pocket expenses of unaffiliated Trustees,
accounting and pricing costs (including the daily calculation of net asset
value), insurance, interest, brokerage costs, litigation and other extraordinary
or non-recurring expenses, and other expenses properly payable by the Index
Portfolios. Princeton Funds Distributor, will pay certain of the expenses of the
Index Portfolios incurred in connection with the offering of their shares.
For the period from April 9 to December 31, 1997, FAM earned $289,342
as compensation for administrative services provided to the Index Portfolios and
waived $253,479 of that amount. For the years ended December 31, 1998 and 1999,
FAM earned $99,967 and $xxx, respectively, as compensation for administrative
services provided to the Index Portfolios. During the same periods, FAM waived
$99,967 and $xxx, respectively. The International Index Fund and the Small Cap
Index Fund have agreed to pay FAM x.xx% and x.xx%, respectively, of each Fund's
average daily net assets for administrative services.
12
<PAGE> 48
OTHER SERVICE PROVIDERS
The transfer agent for the Trust is State Street Bank & Trust Company
("State Street"), Boston, Massachusetts, who provides transfer agency services
to Fund shareholders directly and through its affiliate National Financial Data
Services, Kansas City, Missouri. State Street also serves as custodian for the
Portfolios of the AMR Trust and the Funds. In addition to its other duties as
custodian, pursuant to instructions given by the Manager, State Street invests
certain excess cash balances of certain funds in various futures contracts. The
Chase Manhattan Bank, Brooklyn, New York, serves as custodian for the assets of
the International Index Series. Merrill Lynch Trust Company, Plainsboro, New
Jersey, serves as the custodian for the assets of the Small Cap Index Series.
Financial Data Services, Inc., Jacksonville, Florida, is the transfer agent for
the Index Trust. The independent auditor for the Funds and the AMR Trust is
Ernst & Young LLP, Dallas, Texas and Boston, Massachusetts. The independent
auditor for the Index Trust is Deloitte & Touche LLP, Princeton, New Jersey.
CODE OF ETHICS
The Trust, FAM and the other investment advisers have each adopted a
Code of Ethics ("Code") under Rule 17j-1 of the 1940 Act. Each Code
significantly restricts the personal trading of all employees. For example, each
Code requires pre-clearance of all personal securities trades (with limited
exceptions) and prohibits employees from purchasing or selling a security that
is being purchased or sold or being considered for purchase or sale by any Fund.
Each Code is on public file with, and may be obtained from, the SEC.
PORTFOLIO SECURITIES TRANSACTIONS
AMR TRUST PORTFOLIOS
Each investment adviser will place its own orders to execute securities
transactions that are designed to implement the applicable AMR Trust Portfolio's
investment objective and policies. In placing such orders, each investment
adviser will seek the best available price and most favorable execution. The
full range and quality of services offered by the executing broker or dealer
will be considered when making these determinations. Pursuant to written
guidelines approved by the AMR Trust Board, as appropriate, an investment
adviser of a Portfolio, or its affiliated broker-dealer, may execute portfolio
transactions and receive usual and customary brokerage commissions (within the
meaning of Rule 17e-1 of the 1940 Act) for doing so. A Portfolio's turnover
rate, or the frequency of portfolio transactions, will vary from year to year
depending on market conditions and the Portfolio's cash flows. High portfolio
activity increases a Portfolio's transaction costs, including brokerage
commissions, and may result in a greater number of taxable transactions.
The Investment Advisory Agreements provide, in substance, that in
executing portfolio transactions and selecting brokers or dealers, the principal
objective of each investment adviser is to seek the best net price and execution
available. It is expected that securities ordinarily will be purchased in the
primary markets, and that in assessing the best net price and execution
available, each investment adviser shall consider all factors it deems relevant,
including the breadth of the market in the security, the price of the security,
the financial condition and execution capability of the broker or dealer and the
reasonableness of the commission, if any, for the specific transaction and on a
continuing basis. Transactions with respect to the securities of small and
emerging growth companies in which the Portfolios may invest may involve
specialized services on the part of the broker or dealer and thereby may entail
higher commissions or spreads than would be the case with transactions involving
more widely trading securities.
The Portfolios of the AMR Trust have established brokerage commission
recapture arrangements with certain brokers or dealers. If a Portfolio
investment adviser chooses to execute a transaction through a participating
broker, the broker rebates a portion of the commission back to the Portfolio.
Any collateral benefit received through participation in the commission
recapture program is directed exclusively to the Portfolios. Neither the Manager
nor any of the investment advisers receive any benefits from the commission
recapture program. A Portfolio investment adviser's participation in the
brokerage commission recapture program is optional. Each investment adviser
retains full discretion in selecting brokerage firms for securities transactions
and is instructed to use the commission recapture program for a transaction only
if it is consistent with the investment adviser's obligation to seek the best
execution available.
INDEX TRUST PORTFOLIOS
FAM places all orders for purchases and sales of the Index Portfolios'
investments. Under the 1940 Act, persons affiliated with the Index Trust and
persons who are affiliated with such persons are prohibited from dealing with
the Index Trust as principal in the purchase and sale of securities unless an
exemptive order allowing such transactions is obtained from the SEC. Since
transactions in the OTC market usually involve
13
<PAGE> 49
transactions with dealers acting as principal for their own accounts, affiliated
persons of the Index Trust, including Merrill Lynch and any of its affiliates,
will not serve as the Index Trust's dealer in such transactions. However,
affiliated persons of the Index Trust may serve as its broker in listed or OTC
transactions conducted on an agency basis provided that, among other things, the
fee or commission received by such affiliated broker is reasonable and fair
compared to the fee or commission received by non-affiliated brokers in
connection with comparable transactions. In addition, the Index Trust may not
purchase securities during the existence of any underwriting syndicate for such
securities of which Merrill Lynch is a member or in a private placement in which
Merrill Lynch serves as placement agent except pursuant to procedures adopted by
the Index Trust Board of Trustees that either comply with rules adopted by the
SEC or with interpretations of the SEC staff.
Section 11(a) of the Securities Exchange Act of 1934 generally
prohibits members of the U.S. national securities exchanges from executing
exchange transactions for their affiliates and institutional accounts that they
manage unless the member (i) has obtained prior express authorization from the
account to effect such transactions, (ii) at least annually furnishes the
account with a statement setting forth the aggregate compensation received by
the member in effecting such transactions, and (iii) complies with any rules the
SEC has prescribed with respect to the requirements of clauses (i) and (ii). To
the extent Section 11(a) would apply to Merrill Lynch acting as a broker for the
Index Trust in any of its portfolio transactions executed on any such securities
exchange of which it is a member, appropriate consents have been obtained from
the Index Trust and annual statements as to aggregate compensation will be
provided to the Index Trust. Securities may be held by, or be appropriate
investments for, the Index Portfolios as well as other funds or investment
advisory clients of FAM.
Because of different objectives or other factors, a particular security
may be bought for one or more clients of FAM or an affiliate when one or more
clients of FAM or an affiliate are selling the same security. If purchases or
sales of securities arise for consideration at or about the same time that would
involve the Index Trust or other clients or funds for which FAM or an affiliate
acts as manager, transactions in such securities will be made, insofar as
feasible, for the respective funds and clients in a manner deemed equitable to
all. To the extent that transactions on behalf of more than one client of FAM or
an affiliate during the same period may increase the demand for securities being
purchased or the supply of securities being sold, there may be an adverse effect
on price.
For the period from April 9 to December 31, 1997, the Small Cap Index
Series paid brokerage commissions of $60,361. The Portfolio paid no commissions
to Merrill Lynch in that period. For the fiscal year ended December 31, 1998,
the Small Cap Index Series paid brokerage commissions of $50,264. The Portfolio
paid no commissions to Merrill Lynch in 1998. For the fiscal year ended December
31, 1999, the Small Cap Index Portfolio paid brokerage commissions of $xxx. For
the period from inception to December 31, 1999, the International Index
Portfolio paid brokerage commissions of $xxx. Shareholders of the Index Funds
bear only their pro-rata portion of the brokerage commissions.
In selecting brokers or dealers to execute particular transactions,
investment advisers are authorized to consider "brokerage and research services"
(as those terms are defined in Section 28(e) of the Securities Exchange Act of
1934), provision of statistical quotations (including the quotations necessary
to determine a Portfolio's net asset value), the sale of Trust shares by such
broker-dealer or the servicing of Trust shareholders by such broker-dealer, and
other information provided to the applicable Portfolio, to the Manager, FAM
and/or to the investment advisers (or their affiliates), provided, however, that
the investment adviser determines that it has received the best net price and
execution available. The investment advisers are also authorized to cause a
Portfolio to pay a commission to a broker or dealer who provides such brokerage
and research services for executing a portfolio transaction which is in excess
of the amount of the commission another broker or dealer would have charged for
effecting that transaction. The Trustees, the Manager or the investment
advisers, as appropriate, must determine in good faith, however, that such
commission was reasonable in relation to the value of the brokerage and research
services provided viewed in terms of that particular transaction or in terms of
all the accounts over which the Manager or the investment adviser exercises
investment discretion. The fees of the investment advisers are not reduced by
reason of receipt of such brokerage and research services. However, with
disclosure to and pursuant to written guidelines approved by the Index Trust
Board of Trustees, FAM or an affiliated broker-dealer may execute portfolio
transactions and receive usual and customary brokerage commissions (within the
meaning of Rule 17e-1 under the 1940 Act) for doing so. Supplemental investment
research obtained from such broker-dealers might be used by FAM in servicing all
of its accounts and all such research might not be used by FAM in connection
with the Index Portfolios. Consistent with the Conduct Rules of the National
Association of Securities Dealers and policies established by Trustees, FAM may
consider sales of shares of the Portfolios as a factor in the selection of
brokers or dealers to execute portfolio transactions.
14
<PAGE> 50
REDEMPTIONS IN KIND
Although each Fund intends to redeem shares in cash, each reserves the
right to pay the redemption price in whole or in part by a distribution of
readily marketable securities held by the applicable Fund's corresponding
Portfolio. However, shareholders always will be entitled to redeem shares for
cash up to the lesser of $250,000 or 1% of the applicable Fund's net asset value
during any 90-day period. Redemption in kind is not as liquid as a cash
redemption. In addition, if redemption is made in kind, shareholders who receive
securities and sell them could receive less than the redemption value of their
securities and could incur certain transaction costs.
TAX INFORMATION
TAXATION OF THE FUNDS
To qualify as a regulated investment company ("RIC") under the Code,
each Fund (each of which is treated as a separate corporation for these
purposes) must, among other requirements:
o Derive at least 90% of its gross income each taxable year from
dividends, interest, payments with respect to securities loans
and gains from the sale or other disposition of securities or (in
the case of the International Equity Fund) foreign currencies, or
certain other income, including gains from options, futures or
forward contracts ("Income Requirement");
o Diversify its investments in securities within certain statutory
limits ("Diversification Requirement"); and
o Distribute annually to its shareholders at least 90% of its
investment company taxable income (generally, taxable net
investment income plus net short-term capital gain and, in the
case of the Emerging Markets and International Index Funds, net
gains from foreign currency transactions).
Each Fund, as an investor in its corresponding Portfolio, is deemed to
own a proportionate share of the Portfolio's assets and to earn the income on
that share for purposes of determining whether the Fund satisfies the Income and
Diversification Requirements. If a Fund failed to qualify as a RIC for any
taxable year, it would be taxed on the full amount of its taxable income for
that year without being able to deduct the distributions it makes to its
shareholders and the shareholders would treat all those distributions as
dividends (that is, ordinary income) to the extent of the Fund's earnings and
profits.
TAXATION OF THE PORTFOLIOS
Each Portfolio should be classified as a separate partnership for
federal income tax purposes and is not a "publicly traded partnership." As a
result, each Portfolio is or should not be subject to federal income tax;
instead, each investor in a Portfolio, such as a Fund, is required to take into
account in determining its federal income tax liability its share of the
Portfolio's income, gains, losses, deductions, credits and tax preference items,
without regard to whether it has received any cash distributions from the
Portfolio.
Because, as noted above, each Fund is deemed to own a proportionate
share of its corresponding Portfolio's assets and to earn a proportionate share
of its corresponding Portfolio's income for purposes of determining whether the
Fund satisfies the requirements to qualify as a RIC, each Portfolio intends to
conduct its operations so that its corresponding Fund will be able to satisfy
all those requirements.
Distributions to a Fund from its corresponding Portfolio (whether
pursuant to a partial or complete withdrawal or otherwise) will not result in
the Fund's recognition of any gain or loss for federal income tax purposes,
except that (1) gain will be recognized to the extent any cash that is
distributed exceeds the Fund's basis for its interest in the Portfolio before
the distribution, (2) income or gain will be recognized if the distribution is
in liquidation of the Fund's entire interest in the Portfolio and includes a
disproportionate share of any unrealized receivables held by the Portfolio and
(3) loss will be recognized if a liquidation distribution consists solely of
cash and/or unrealized receivables. A Fund's basis for its interest in its
corresponding Portfolio generally will equal the amount of cash and the basis of
any property the Fund invests in the Portfolio, increased by the Fund's share of
the Portfolio's net income and gains and decreased by (a) the amount of cash and
the basis of any property the Portfolio distributes to the Fund and (b) the
Fund's share of the Portfolio's losses.
15
<PAGE> 51
A Portfolio may acquire zero coupon or other securities issued with
original issue discount. As an investor in a Portfolio that holds those
securities, a Fund would have to include in its income its share of the original
issue discount that accrues on the securities during the taxable year, even if
the Portfolio (and, hence, the Fund) receives no corresponding payment on the
securities during the year. Because each Fund annually must distribute
substantially all of its investment company taxable income, including any
original issue discount, to satisfy the Distribution Requirement and avoid
imposition of the 4% excise tax described in the Prospectus, a Fund may be
required in a particular year to distribute as a dividend an amount that is
greater than the total amount of cash it actually receives. Those distributions
would be made from the Fund's cash assets, if any, or the proceeds of redemption
of a portion of the Fund's interest in its corresponding Portfolio (which
redemption proceeds would be paid from the Portfolio's cash assets or the
proceeds of sales of portfolio securities, if necessary). The Portfolio might
realize capital gains or losses from any such sales, which would increase or
decrease the Fund's investment company taxable income and/or net capital gain
(the excess of net long-term capital gain over net short-term capital loss).
If one of the Portfolios acquires stock in a foreign corporation that
is a "passive foreign investment company" ("PFIC") and holds the stock beyond
the end of the year of acquisition, its corresponding Fund will be subject to
federal income tax on the Fund's share of a portion of any "excess distribution"
received by the Portfolio on the stock or of any gain realized by the Portfolio
from disposition of the stock (collectively "PFIC income"), plus interest
thereon, even if the Fund distributes the PFIC income as a taxable dividend to
its shareholders. A Fund may avoid this tax and interest if its corresponding
Portfolio elects to treat the PFIC as a "qualified electing fund;" however, the
requirements for that election are difficult to satisfy. These Portfolios
currently do not intend to acquire securities that are considered PFICs.
Hedging strategies, such as entering into forward contracts and selling
and purchasing options and futures contracts, involve complex rules that will
determine for federal income tax purposes the amount, character and timing of
recognition of gains and losses a Portfolio realizes in connection therewith.
The Emerging Markets and International Index Funds' respective share of their
Portfolio's (1) income from foreign currencies (except certain gains that may be
excluded by future regulations) and (2) income from transactions in futures and
forward contracts derived with respect to its business of investing in
securities or foreign currencies will qualify as allowable income for those
Funds under the Income Requirement. The Large Cap Growth and Small Cap Index
Funds' share of their corresponding Portfolios' income from options and futures
contracts will qualify as allowable income under the Income Requirement.
Dividends and interest received by the Emerging Markets Portfolio and
the International Index Series, and gains realized thereby, may be subject to
income, withholding or other taxes imposed by foreign countries and U.S.
possessions that would reduce the yield and/or total return on their securities.
Tax treaties between certain countries and the United States may reduce or
eliminate these foreign taxes, however, and many foreign countries do not impose
taxes on capital gains on investments by foreign investors.
TAXATION OF THE FUNDS' SHAREHOLDERS
A portion of the dividends from a Fund's investment company taxable
income, whether received in cash or paid in additional Fund shares, may be
eligible for the dividends-received deduction allowed to corporations. The
eligible portion may not exceed the Fund's share of the aggregate dividends
received by its corresponding Portfolio from U.S. corporations. However,
dividends received by a corporate shareholder and deducted by it pursuant to the
dividends-received deduction are subject indirectly to the alternative minimum
tax. No dividends paid by the Emerging Markets or International Index Fund are
expected to be eligible for this deduction.
If more than 50% of the value of the Emerging Markets or International
Index Fund's total assets (including its share of its corresponding Portfolio's
total assets) at the close of its taxable year consists of securities of foreign
corporations, that Fund will be eligible to, and may, file an election with the
IRS that will enable the Fund's shareholders, in effect, to receive the benefit
of the foreign tax credit with respect to the Fund's share of any foreign and
U.S. possessions income taxes paid by the Portfolio. If the Fund makes this
election, the Fund will treat those taxes as dividends paid to its shareholders
and each shareholder will be required to (1) include in gross income, and treat
as paid by him, his proportionate share of those taxes, (2) treat his share of
those taxes and of any dividend paid by the Fund that represents income from
foreign or U.S. possessions sources as his own income from those sources and (3)
either deduct the taxes deemed paid by him in computing his taxable income or,
alternatively, use the foregoing information in calculating the foreign tax
credit against his federal income tax. If the election is made, the Fund will
report to its shareholders shortly after each taxable year their respective
share of the Portfolio's income from foreign and U.S. possessions sources and
the taxes paid by the Portfolio to foreign countries and U.S. possessions.
Pursuant to that election, individuals
16
<PAGE> 52
who have no more than $300 ($600 for married persons filing jointly) of
creditable foreign taxes included on Forms 1099 and all of whose foreign source
income is "qualified passive income" may elect each year to be exempt from the
extremely complicated foreign tax credit limitation and will be able to claim a
foreign tax credit without having to file the detailed Form 1116 that otherwise
is required.
The foregoing is only a summary of some of the important federal tax
considerations affecting the Funds and their shareholders and is not intended as
a substitute for careful tax planning. Accordingly, prospective investors are
advised to consult their own tax advisers for more detailed information
regarding the above and for information regarding federal, state, local and
foreign taxes.
YIELD AND TOTAL RETURN QUOTATIONS
The advertised total return for a class of a Fund is calculated by
equating an initial amount invested in a class of a Fund to the ending
redeemable value, according to the following formula:
n
P(1 + T) = ERV
where "P" is a hypothetical initial payment of $1,000; "T" is the average annual
total return for the class; "n" is the number of years involved; and "ERV" is
the ending redeemable value of a hypothetical $1,000 payment made in the class
at the beginning of the investment period covered.
Each class of a Fund also may use "aggregate" total return figures for
various periods that represent the cumulative change in value of an investment
in a class of a Fund for the specific period. Such total returns reflect changes
in share prices of a class of a Fund and assume reinvestment of dividends and
distributions.
Each Fund may give total returns from inception using the date when the
current managers began active management as the inception date. However, returns
using the actual inception date of the Fund also will be provided.
In reports or other communications to shareholders or in advertising
material, each class of a Fund may from time to time compare its performance
with that of other mutual funds in rankings prepared by Lipper Analytical
Services, Inc., Morningstar, Inc., IBC Financial Data, Inc. and other similar
independent services which monitor the performance of mutual funds or
publications such as the "New York Times," "Barrons" and the "Wall Street
Journal." Each class of a Fund may also compare its performance with various
indices prepared by independent services such as Standard & Poor's, Merrill
Lynch, Morgan Stanley or Lehman Brothers or to unmanaged indices that may assume
reinvestment of dividends but generally do not reflect deductions for
administrative and management costs.
Each Fund may advertise the standard deviation of its returns for
various time periods and compare its standard deviation to that of various
indices. Standard deviation of returns over time is a measure of volatility. It
indicates the spread of a Fund's returns about their central tendency or mean.
In theory, a Fund that is more volatile should receive a higher return in
exchange for taking extra risk. Standard deviation is a well-accepted statistic
to gauge the riskiness of an investment strategy and measure its historical
volatility as a predictor of risk, although the measure is subject to time
selection bias.
Advertisements for the Funds may mention that the Funds offer a variety
of investment options. They may also compare the Funds to federally insured
investments such as bank certificates of deposit and credit union deposits,
including the long-term effects of inflation on these types of investments.
Advertisements may also compare the historical rate of return of different types
of investments. Advertisements for the Emerging Markets and International Index
Funds may compare the differences between domestic and foreign investments.
Information concerning broker-dealers who sell the Funds may also appear in
advertisements for the Funds, including their ranking as established by various
publications compared to other broker-dealers.
From time to time, the Manager may use contests as a means of promoting
the American AAdvantage Funds. Prizes may include free air travel and/or hotel
accommodations. Listings for certain of the Funds may be found in newspapers
under the heading "Amer AAdvant."
DESCRIPTION OF THE TRUST
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under
17
<PAGE> 53
Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable for its obligations. However, the
Trust's Declaration of Trust contains an express disclaimer of shareholder
liability for acts or obligations of the Trust and provides for indemnification
and reimbursement of expenses out of Trust property for any shareholder held
personally liable for the obligations of the Trust. The Declaration of Trust
also provides that the Trust may maintain appropriate insurance (for example,
fidelity bonding) for the protection of the Trust, its shareholders, Trustees,
officers, employees and agents to cover possible tort and other liabilities.
Thus, the risk of a shareholder incurring financial loss due to shareholder
liability is limited to circumstances in which both inadequate insurance existed
and the Trust itself was unable to meet its obligations. The Trust has not
engaged in any other business.
The Trust was originally created to manage money for large
institutional investors, including pension and 401(k) plans for American
Airlines, Inc. The AMR Class is offered to tax-exempt retirement and benefit
plans of AMR Corporation and its affiliates. The following individuals are
eligible for purchasing shares of the Institutional Class with an initial
investment of less than $2 million: (i) employees of the Manager, (ii) officers
and directors of AMR and (iii) members of the Trust's Board of Trustees.
The corresponding Portfolios of the Large Cap Growth and the Emerging
Markets Funds utilize a multi-manager approach designed to reduce volatility by
diversifying assets over multiple investment management firms. Each adviser is
carefully chosen by the Manager through a rigorous screening process.
OTHER INFORMATION
American Depositary Receipts (ADRs), European Depositary Receipts
(EDRs)-ADRs are depositary receipts for foreign issuers in registered form
traded in U.S. securities markets, whereas, EDRs are in bearer form and traded
in European securities markets. These securities are not denominated in the same
currency as the securities into which they may be converted. Investing in ADRs
and EDRs involves greater risks than are normally present in domestic
investments. There is generally less publicly available information about
foreign companies and there may be less governmental regulation and supervision
of foreign stock exchanges, brokers and listed companies. In addition, such
companies may use different accounting and financial standards (and certain
currencies may become unavailable for transfer from a foreign currency),
resulting in a Fund's possible inability to convert immediately into U.S.
currency proceeds realized upon the sale of portfolio securities of the affected
foreign companies.
Asset-Backed Securities-Through the use of trusts and special purpose
subsidiaries, various types of assets (primarily home equity loans, automobile
and credit card receivables, other types of receivables/assets as well as
purchase contracts, financing leases and sales agreements entered into by
municipalities) are securitized in pass-through structures similar to
Mortgage-Backed Securities, as described below. The Portfolios are permitted to
invest in asset-backed securities, subject to the Portfolios' rating and quality
requirements.
Bank Deposit Notes-Bank deposit notes are obligations of a bank, rather
than bank holding company corporate debt. The only structural difference between
bank deposit notes and certificates of deposit is that interest on bank deposit
notes is calculated on a 30/360 basis, as are corporate notes/bonds. Similar to
certificates of deposit, deposit notes represent bank level investments and,
therefore, are senior to all holding company corporate debt.
Bankers' Acceptances-Bankers' acceptances are short-term credit
instruments designed to enable businesses to obtain funds to finance commercial
transactions. Generally, an acceptance is a time draft drawn on a bank by an
exporter or an importer to obtain a stated amount of funds to pay for specific
merchandise. The draft is then "accepted" by a bank that, in effect,
unconditionally guarantees to pay the face value of the instrument on its
maturity date. The acceptance may then be held by the accepting bank as an
earning asset or it may be sold in the secondary market at the going rate of
discount for a specific maturity. Although maturities for acceptances can be as
long as 270 days, most acceptances have maturities of six months or less.
Cash Equivalents-Cash equivalents include certificates of deposit,
bearer deposit notes, bankers' acceptances, government obligations, commercial
paper, short-term corporate debt securities and repurchase agreements.
Certificates of Deposit-Certificates of deposit are issued against
funds deposited in an eligible bank (including its domestic and foreign
branches, subsidiaries and agencies), are for a definite period of time, earn a
specified rate of return and are normally negotiable.
18
<PAGE> 54
Cover-Transactions using forward contracts, futures contracts, options
on futures contracts and options on indices ("Financial Instruments"), other
than purchased options, expose a Portfolio to an obligation to another party. A
Portfolio will not enter into any such transactions unless it owns either (1) an
offsetting ("covered") position in securities, currencies, or other forward
contracts, options or futures contracts, or (2) cash, receivables and liquid
assets, with a value, marked-to-market daily, sufficient to cover its potential
obligations to the extent not covered as provided in (1) above. Each Portfolio
will comply with SEC guidelines regarding cover for these instruments and will,
if the guidelines so require, set aside cash, receivables, or liquid assets in a
segregated account with its custodian in the prescribed amount.
Assets used as cover or held in a segregated account cannot be sold
while the position in the corresponding Financial Instrument is open, unless
they are replaced with other appropriate assets. As a result, the commitment of
a large portion of a Portfolio's assets to cover or to segregated accounts could
impede portfolio management or the Portfolio's ability to meet redemption
requests or other current obligations.
Commercial Paper-Commercial paper refers to promissory notes
representing an unsecured debt of a corporation or finance company with a fixed
maturity of no more than 270 days. A variable amount master demand note (which
is a type of commercial paper) represents a direct borrowing arrangement
involving periodically fluctuating rates of interest under a letter agreement
between a commercial paper issuer and an institutional lender pursuant to which
the lender may determine to invest varying amounts.
Derivatives-Generally, a derivative is a financial arrangement, the
value of which is based on, or "derived" from, a traditional security, asset or
market index. Some "derivatives" such as mortgage-related and other asset-backed
securities are in many respects like any other investment, although they may be
more volatile or less liquid than more traditional debt securities. There are,
in fact, many different types of derivatives and many different ways to use
them. There are a range of risks associated with those uses.
Dollar Rolls-A dollar roll is a contract to sell mortgage-backed
securities as collateral against a commitment to repurchase similar, but not
identical, mortgage-backed securities on a specified future date. The other
party to the contract is entitled to all principal, interest, and prepayment
cash flows while it holds the collateral. Each Portfolio maintains with the
Custodian a segregated account containing high-grade liquid securities in an
amount at least equal to the forward purchase obligation.
Emerging Markets-The Emerging Markets Portfolio will invest in the
securities of issuers domiciled in various countries with emerging capital
markets. Investments in the securities of issuers domiciled in countries with
emerging capital markets involve certain additional risks not involved in
investments in securities of issuers in more developed capital markets, such as
(i) low or non-existent trading volume, resulting in a lack of liquidity and
increased volatility in prices for such securities, as compared to securities of
comparable issuers in more developed capital markets, (ii) uncertain national
policies and social, political and economic instability, increasing the
potential for expropriation of assets, confiscatory taxation, high rates of
inflation or unfavorable diplomatic developments, (iii) possible fluctuations in
exchange rates, differing legal systems and the existence or possible imposition
of exchange controls, custodial restrictions or other non-U.S. or U.S.
governmental laws or restrictions applicable to such investments, (iv) national
policies that may limit the Portfolio's investment opportunities such as
restrictions on investment in issuers or industries deemed sensitive to national
interests, and (v) the lack or relatively early development of legal structures
governing private and foreign investments and private property. In addition to
withholding taxes on investment income, some countries with emerging markets may
impose differential capital gain taxes on foreign investors.
Such capital markets are emerging in a dynamic political and economic
environment brought about by events over recent years that have reshaped
political boundaries and traditional ideologies. In such a dynamic environment,
there can be no assurance that these capital markets will continue to present
viable investment opportunities for the Portfolio. In the past, governments of
such nations have expropriated substantial amounts of private property, and most
claims of the property owners have never been fully settled. There is no
assurance that such expropriations will not reoccur. In such event, it is
possible that the Portfolio could lose the entire value of its investments in
the affected markets.
Also, there may be less publicly available information about issuers in
emerging markets than would be available about issuers in more developed capital
markets, and such issuers may not be subject to accounting, auditing and
financial reporting standards and requirements comparable to those to which U.S.
companies are subject. In certain countries with emerging capital markets,
reporting standards vary widely. As a result,
19
<PAGE> 55
traditional investment measurements used in the U.S., such as price/earnings
ratios, may not be applicable. Emerging market securities may be substantially
less liquid and more volatile than those of mature markets, and companies may be
held by a limited number of persons. This may adversely affect the timing and
pricing of the Portfolio's acquisition or disposal of securities.
Practices in relation to settlement of securities transactions in
emerging markets involve higher risks than those in developed markets, in part
because the Portfolio will need to use brokers and counterparties that are less
well capitalized, and custody and registration of assets in some countries may
be unreliable.
Eurodollar and Yankeedollar obligations-Eurodollar obligations are U.S.
dollar obligations issued outside the United States by domestic or foreign
entities, while Yankeedollar obligations are U.S. dollar obligations issued
inside the United States by foreign entities. There is generally less publicly
available information about foreign issuers and there may be less governmental
regulation and supervision of foreign stock exchanges, brokers and listed
companies. Foreign issuers may use different accounting and financial standards,
and the addition of foreign governmental restrictions may affect adversely the
payment of principal and interest on foreign investments. In addition, not all
foreign branches of United States banks are supervised or examined by regulatory
authorities as are United States banks, and such branches may not be subject to
reserve requirements.
Forward Foreign Currency Exchange Contracts-A forward foreign currency
exchange contract ("forward contract") is a contract to purchase or sell a
currency at a future date. The two parties to the contract set the number of
days and the price. Forward contracts are used as a hedge against movements in
future foreign exchange rates. The corresponding Portfolios of the Emerging
Markets and International Index Funds may enter into forward contracts to
purchase or sell foreign currencies for a fixed amount of U.S. dollars or other
foreign currency.
Forward contracts may serve as long hedges -- for example, a Portfolio
may purchase a forward contract to lock in the U.S. dollar price of a security
denominated in a foreign currency that the Portfolio intends to acquire. Forward
contracts may also serve as short hedges -- for example, a Portfolio may sell a
forward contract to lock in the U.S. dollar equivalent of the proceeds from the
anticipated sale of a security denominated in a foreign currency or from the
anticipated dividend or interest payments denominated in a foreign currency. The
investment adviser may seek to hedge against changes in the value of a
particular currency by using forward contracts on another foreign currency or
basket of currencies, the value of which the investment adviser believes will
bear a positive correlation to the value of the currency being hedged.
The cost to a Portfolio of engaging in forward contracts varies with
factors such as the currency involved, the length of the contract period and the
market conditions then prevailing. Because forward contracts are usually entered
into on a principal basis, no fees or commissions are involved. When a Portfolio
enters into a forward contract, it relies on the contra party to make or take
delivery of the underlying currency at the maturity of the contract. Failure by
the contra party to do so would result in the loss of any expected benefit of
the transaction.
Buyers and sellers of forward contracts can enter into offsetting
closing transactions by selling or purchasing, respectively, an instrument
identical to the instrument purchased or sold. Secondary markets generally do
not exist for forward contracts, with the result that closing transactions
generally can be made for forward contracts only by negotiating directly with
the contra party. Thus, there can be no assurance that a Portfolio will in fact
be able to close out a forward contract at a favorable price prior to maturity.
In addition, in the event of insolvency of the contra party, a Portfolio might
be unable to close out a forward contract at any time prior to maturity. In
either event, the Portfolio would continue to be subject to market risk with
respect to the position, and would continue to be required to maintain a
position in the securities or currencies that are the subject of the hedge or to
maintain cash or securities in a segregated account.
The precise matching of forward currency contract amounts and the value
of the securities involved generally will not be possible because the value of
such securities, measured in the foreign currency, will change after the forward
contract has been established. Thus, a Portfolio might need to purchase or sell
foreign currencies in the spot (cash) market to the extent such foreign
currencies are not covered by forward contracts. The projection of short-term
currency market movements is extremely difficult, and the successful execution
of a short-term hedging strategy is highly uncertain.
Full Faith and Credit Obligations of the U.S. Government-Securities
issued or guaranteed by the U.S. Treasury, backed by the full taxing power of
the U.S. Government or the right of the issuer to borrow from the U.S. Treasury.
20
<PAGE> 56
Futures Contracts-Futures contracts obligate a purchaser to take
delivery of a specific amount of an obligation underlying the futures contract
at a specified time in the future for a specified price. Likewise, the seller
incurs an obligation to deliver the specified amount of the underlying
obligation against receipt of the specified price. Futures are traded on both
U.S. and foreign commodities exchanges. Futures contracts will be traded for the
same purposes as entering into forward contracts. The use of futures contracts
by the Index Portfolios is explained further under "Index Futures Contracts and
Options on Index Futures Contracts."
The purchase of futures can serve as a long hedge, and the sale of
futures can serve as a short hedge.
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract a Portfolio is required to deposit "initial
deposit" consisting of cash or U.S. Government Securities in an amount generally
equal to 10% or less of the contract value. Margin must also be deposited when
writing a call or put option on a futures contract, in accordance with
applicable exchange rules. Unlike margin in securities transactions, initial
margin on futures contracts does not represent a borrowing, but rather is in the
nature of a performance bond or good-faith deposit that is returned to the
Portfolio at the termination of the transaction if all contractual obligations
have been satisfied. Under certain circumstances, such as periods of high
volatility, a Portfolio may be required by a futures exchange to increase the
level of its initial margin payment, and initial margin requirements might be
increased generally in the future by regulatory action.
Subsequent "variation margin" payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
"marking-to-market." Variation margin does not involve borrowing, but rather
represents a daily settlement of a Portfolio's obligations to or from a futures
broker. When the Portfolio purchases or sells a futures contract, it is subject
to daily variation margin calls that could be substantial in the event of
adverse price movements. If a Portfolio has insufficient cash to meet daily
variation margin requirements, it might need to sell securities at a time when
such sales are disadvantageous.
Purchasers and sellers of futures contracts can enter into offsetting
closing transactions, by selling or purchasing, respectively, an instrument
identical to the instrument purchased or sold. Positions in futures contracts
may be closed only on a futures exchange or board of trade that provides a
secondary market. The Portfolios intend to enter into futures contracts only on
exchanges or boards of trade where there appears to be a liquid secondary
market. However, there can be no assurance that such a market will exist for a
particular contract at a particular time. In such event, it may not be possible
to close a futures contract.
Although futures contracts by their terms call for the actual delivery
or acquisition of securities or currency, in most cases the contractual
obligation is fulfilled before the date of the contract without having to make
or take delivery of the securities or currency. The offsetting of a contractual
obligation is accomplished by buying (or selling, as appropriate) on a
commodities exchange an identical futures contract calling for delivery in the
same month. Such a transaction, which is effected through a member of an
exchange, cancels the obligation to make or take delivery of the securities or
currency. Since all transactions in the futures market are made, offset or
fulfilled through a clearinghouse associated with the exchange on which the
contracts are traded, a Portfolio will incur brokerage fees when it purchases or
sells futures contracts.
Under certain circumstances, futures exchanges may establish daily
limits on the amount that the price of a futures contract can vary from the
previous day's settlement price; once that limit is reached, no trades may be
made that day at a price beyond the limit. Daily price limits do not limit
potential losses because prices could move to the daily limit for several
consecutive days with little or no trading, thereby preventing liquidation of
unfavorable positions.
If a Portfolio were unable to liquidate a futures contract due to the
absence of a liquid secondary market or the imposition of price limits, it could
incur substantial losses. The Portfolio would continue to be subject to market
risk with respect to the position. In addition, the Portfolio would continue to
be required to make daily variation margin payments and might be required to
maintain the position being hedged by the futures contract or option thereon or
to maintain cash or securities in a segregated account.
To the extent that a Portfolio enters into futures contracts, in each
case other than for bona fide hedging purposes (as defined by the Commodities
Futures Trading Commission ("CFTC")), the aggregate initial margin will not
exceed 5% of the liquidation value of a Portfolio's portfolio, after taking into
account unrealized profits
21
<PAGE> 57
and unrealized losses on any contracts that the Portfolio has entered into. This
policy does not limit to 5% the percentage of the Portfolio's assets that are at
risk in futures contracts.
Futures contracts require the deposit of initial margin valued at a
certain percentage of the contract and possibly adding "variation margin" should
the price of the contract move in an unfavorable direction. As with forward
contracts, the segregated assets must be either cash or high-grade liquid debt
securities.
The ordinary spreads between prices in the cash and futures market, due
to differences in the nature of those markets, are subject to distortions.
First, all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
deposit requirements, investors may close futures contracts through offsetting
transactions that could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may
cause temporary price distortions. Due to the possibility of distortion, a
correct forecast of securities price or currency exchange rate trends by the
investment adviser may still not result in a successful transaction.
In addition, futures contracts entail risks. Although an investment
adviser believes that use of such contracts will benefit a particular Portfolio,
if that investment adviser's investment judgment about the general direction of,
for example, an index is incorrect, a Portfolio's overall performance would be
worse than if it had not entered into any such contract. In addition, there are
differences between the securities and futures markets that could result in an
imperfect correlation between the markets, causing a given transaction not to
achieve its objectives.
Illiquid Securities-Historically, illiquid securities have included
securities subject to contractual or legal restrictions on resale because they
have not been registered under the 1933 Act, securities that are otherwise not
readily marketable and repurchase agreements having a remaining maturity of
longer than seven calendar days. Securities that have not been registered under
the 1933 Act are referred to as private placements or restricted securities and
are purchased directly from the issuer or in the secondary market. Mutual funds
do not typically hold a significant amount of these restricted or other illiquid
securities because of the potential for delays on resale and uncertainty in
valuation. Limitations on resale may have an adverse effect on the marketability
of portfolio securities and a mutual fund might be unable to dispose of
restricted or other illiquid securities promptly or at reasonable prices and
might thereby experience difficulty satisfying redemptions within seven calendar
days. A mutual fund also might have to register such restricted securities in
order to dispose of them resulting in additional expense and delay. Adverse
market conditions could impede such a public offering of securities.
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the 1933 Act, including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. However, the
fact that there are contractual or legal restrictions on resale of such
investments to the general public or to certain institutions may not be
indicative of their liquidity.
Index Futures Contracts and Options on Index Futures Contracts-The
Portfolios may invest in index futures contracts, options on index futures
contracts and options on securities indices.
Index Futures Contracts-U.S. futures contracts have been
designed by exchanges which have been designated "contracts markets" by
the CFTC and must be executed through a futures commission merchant, or
brokerage firm, which is a member of the relevant contract market.
Futures contracts trade on a number of exchange markets, and through
their clearing corporations.
At the same time a futures contract on an index is purchased
or sold, the Portfolio must allocate cash or securities as a deposit
payment ("initial deposit"). It is expected that the initial deposit
would be approximately 1-1/2% to 5% of a contract's face value. Daily
thereafter, the futures contract is valued and the payment of
"variation margin" may be required.
Options on Index Futures Contracts-The purchase of a call
option on an index futures contract is similar in some respects to the
purchase of a call option on such an index.
22
<PAGE> 58
The writing of a call option on a futures contract with
respect to an index constitutes a partial hedge against declining
prices of the underlying securities that are deliverable upon exercise
of the futures contract. If the futures price at expiration of the
option is below the exercise price, a Portfolio will retain the full
amount of the option premium, which provides a partial hedge against
any decline that may have occurred in that Portfolio's holdings. The
writing of a put option on an index futures contract constitutes a
partial hedge against increasing prices of the underlying securities
that are deliverable upon exercise of the futures contract. If the
futures price at expiration of the option is higher than the exercise
price, a Portfolio will retain the full amount of the option premium,
which provides a partial hedge against any increase in the price of
securities that Portfolio intends to purchase. If a put or call option
a Portfolio has written is exercised, that Portfolio will incur a loss
that will be reduced by the amount of the premium it receives.
Depending on the degree of correlation between changes in the value of
its portfolio securities and changes in the value of its futures
positions, a Portfolio's losses from existing options on futures may to
some extent be reduced or increased by changes in the value of
portfolio securities.
The purchase of a put option on a futures contract with
respect to an index is similar in some respects to the purchase of
protective put options on the index. For example, a Portfolio may
purchase a put option on an index futures contract to hedge against the
risk of lowering securities values.
The amount of risk a Portfolio assumes when it purchases an
option on a futures contract with respect to an index is the premium
paid for the option plus related transaction costs. In addition to the
correlation risks discussed above, the purchase of such an option also
entails the risk that changes in the value of the underlying futures
contract will not be fully reflected in the value of the option
purchased.
Stock index futures may be used on a continual basis to
equitize cash so that the Portfolios may maintain maximum equity
exposure. Each Portfolio will not enter into any futures contracts or
options on futures contracts if immediately thereafter the amount of
margin deposits on all the futures contracts of the Portfolio and
premiums paid on outstanding options on futures contracts owned by the
Portfolio would exceed 5% of the market value of the total assets of
the Portfolio.
Futures Contracts on Stock Indices-The Portfolios may enter
into contracts providing for the making and acceptance of a cash
settlement based upon changes in the value of an index of securities
("Futures Contracts"). This investment technique is designed only to
hedge against anticipated future change in general market prices which
otherwise might either adversely affect the value of securities held by
the Portfolios or adversely affect the prices of securities which are
intended to be purchased at a later date for the Portfolios.
In general, each transaction in Futures Contracts involves the
establishment of a position that will move in a direction opposite to
that of the investment being hedged. If these hedging transactions are
successful, the futures positions taken for the Portfolios will rise in
value by an amount that approximately offsets the decline in value of
the portion of the Portfolios' investments that are being hedged.
Should general market prices move in an unexpected manner, the full
anticipated benefits of Futures Contracts may not be achieved or a loss
may be realized.
Although Futures Contracts would be entered into for cash
management purposes only, such transactions do involve certain risks.
These risks could include a lack of correlation between the Futures
Contract and the equity market, a potential lack of liquidity in the
secondary market and incorrect assessments of market trends, which may
result in worse overall performance than if a Futures Contract had not
been entered into.
Brokerage costs will be incurred and "margin" will be required
to be posted and maintained as a good-faith deposit against performance
of obligations under Futures Contracts written into by the Portfolios.
Each Portfolio may not purchase or sell a Futures Contract (or options
thereon) if immediately thereafter its margin deposits on its
outstanding Futures Contracts (and its premium paid on outstanding
options thereon) would exceed 5% of the market value of each
Portfolio's total assets.
Options on Securities Indices-The Portfolios may write (sell)
covered call and put options to a limited extent on an index ("covered
options") in an attempt to increase income. Such options give the
holder the right to receive a cash settlement during the term of the
option based upon the difference between the exercise price and the
value of the index. The Portfolios may forgo the benefits of
23
<PAGE> 59
appreciation on the index or may pay more than the market price or the
index pursuant to call and put options written by the Portfolios.
By writing a covered call option, the Portfolios forgo, in
exchange for the premium less the commission ("net premium"), the
opportunity to profit during the option period from an increase in the
market value of the index above the exercise price. By writing a
covered put option, the Portfolios, in exchange for the net premium
received, accept the risk of a decline in the market value of the index
below the exercise price.
Each Portfolio may terminate its obligation as the writer of a
call or put option by purchasing an option with the same exercise price
and expiration date as the option previously written.
When a Portfolio writes an option, an amount equal to the net
premium received by the Portfolio is included in the liability section
of the Portfolio's Statement of Assets and Liabilities as a deferred
credit. The amount of the deferred credit will be subsequently marked
to market to reflect the current market value of the option written.
The current market value of a traded option is the last sale price or,
in the absence of a sale, the mean between the closing bid and asked
price. If an option expires on its stipulated expiration date or if the
Portfolio enters into a closing purchase transaction, the Portfolio
will realize a gain (or loss if the cost of a closing purchase
transaction exceeds the premium received when the option was sold), and
the deferred credit related to such option will be eliminated.
The Portfolios have adopted certain other non-fundamental
policies concerning index option transactions that are discussed above.
The Portfolios' activities in index options also may be restricted by
the requirements of the Code, for qualification as a RIC.
The hours of trading for options on an Index may not conform
to the hours during which the underlying securities are traded. To the
extent that the option markets close before the markets for the
underlying securities, significant price and rate movements can take
place in the underlying securities markets that cannot be reflected in
the option markets. It is impossible to predict the volume of trading
that may exist in such options, and there can be no assurance that
viable exchange markets will develop or continue.
Because options on securities indices require settlement in
cash, an investment adviser may be forced to liquidate portfolio
securities to meet settlement obligations.
Options on Stock Indices-A Portfolio may purchase and write
put and call options on stock indices listed on stock exchanges. A
stock index fluctuates with changes in the market values of the stocks
included in the index. Options on stock indices generally are similar
to options on stock except that the delivery requirements are
different. Instead of giving the right to take or make delivery of
stock at a specified price, an option on a stock index gives the holder
the right to receive a cash "exercise settlement amount" equal to (a)
the amount, if any, by which the fixed exercise price of the option
exceeds (in the case of a put) or is less than (in the case of a call)
the closing value of the underlying index on the date of exercise,
multiplied by (b) a fixed "index multiplier." The writer of the option
is obligated, in return for the premium received, to make delivery of
this amount. The writer may offset its position in stock index options
prior to expiration by entering into a closing transaction on an
exchange or the option may expire unexercised.
Because the value of an index option depends upon movements in
the level of the index rather than the price of a particular stock,
whether a Portfolio will realize a gain or loss from the purchase or
writing of options on an index depends upon movements in the level of
stock prices in the stock market generally or, in the case of certain
indices, in an industry or market segment, rather than movements in the
price of a particular stock.
Loan Participation Interests-Loan participation interests represent
interests in bank loans made to corporations. The contractual arrangement with
the bank transfers the cash stream of the underlying bank loan to the
participating investor. Because the issuing bank does not guarantee the
participations, they are subject to the credit risks generally associated with
the underlying corporate borrower. In addition, because it may be necessary
under the terms of the loan participation for the investor to assert through the
issuing bank such rights as may exist against the underlying corporate borrower,
in the event the underlying corporate borrower fails to pay principal and
interest when due, the investor may be subject to delays, expenses and risks
that are greater than
24
<PAGE> 60
those that would have been involved if the investor had purchased a direct
obligation (such as commercial paper) of such borrower. Moreover, under the
terms of the loan participation, the investor may be regarded as a creditor of
the issuing bank (rather than of the underlying corporate borrower), so that the
issuer may also be subject to the risk that the issuing bank may become
insolvent. Further, in the event of the bankruptcy or insolvency of the
corporate borrower, the loan participation may be subject to certain defenses
that can be asserted by such borrower as a result of improper conduct by the
issuing bank. The secondary market, if any, for these loan participations is
extremely limited and any such participations purchased by the investor are
regarded as illiquid.
Loan Transactions-Loan transactions involve the lending of securities
to a broker-dealer or institutional investor for its use in connection with
short sales, arbitrages or other security transactions. The purpose of a
qualified loan transaction is to afford a lender the opportunity to continue to
earn income on the securities loaned and at the same time earn fee income or
income on the collateral held by it.
Securities loans will be made in accordance with the following
conditions: (1) the Portfolio must receive at least 100% collateral in the form
of cash or cash equivalents, securities of the U.S. Government and its agencies
and instrumentalities, and approved bank letters of credit; (2) the borrower
must increase the collateral whenever the market value of the loaned securities
(determined on a daily basis) rises above the level of collateral; (3) the
Portfolio must be able to terminate the loan after notice, at any time; (4) the
Portfolio must receive reasonable interest on the loan or a flat fee from the
borrower, as well as amounts equivalent to any dividends, interest or other
distributions on the securities loaned, and any increase in market value of the
loaned securities; (5) the Portfolio may pay only reasonable custodian fees in
connection with the loan; and (6) voting rights on the securities loaned may
pass to the borrower, provided, however, that if a material event affecting the
investment occurs, the AMR Trust Board or the Index Trust Board of Trustees, as
appropriate, must be able to terminate the loan and vote proxies or enter into
an alternative arrangement with the borrower to enable the AMR Trust Board or
the Index Trust Board of Trustees, as appropriate, to vote proxies.
While there may be delays in recovery of loaned securities or even a
loss of rights in collateral supplied should the borrower fail financially,
loans will be made only to firms deemed by the AMR Trust Board to be of good
financial standing and will not be made unless the consideration to be earned
from such loans would justify the risk. If the borrower of the securities fails
financially, there is a risk of delay in recovery of the securities loaned or
loss of rights in the collateral. Such loan transactions are referred to in this
Statement of Additional Information as "qualified" loan transactions.
The cash collateral so acquired through qualified loan transactions may
be invested only in those categories of high quality liquid securities
previously authorized by the AMR Trust Board or the Index Trust Board of
Trustees, as appropriate.
Mortgage-Backed Securities-Mortgage-backed securities consist of both
collateralized mortgage obligations and mortgage pass-through certificates.
Collateralized Mortgage Obligations ("CMOs")-CMOs and
interests in real estate mortgage investment conduits ("REMICs") are
debt securities collateralized by mortgages, or mortgage pass-through
securities. CMOs divide the cash flow generated from the underlying
mortgages or mortgage pass-through securities into different groups
referred to as "tranches," which are then retired sequentially over
time in order of priority. The principal governmental issuers of such
securities are the Federal National Mortgage Association ("FNMA"), a
government sponsored corporation owned entirely by private stockholders
and the Federal Home Loan Mortgage Corporation ("FHLMC"), a corporate
instrumentality of the United States created pursuant to an act of
Congress which is owned entirely by Federal Home Loan Banks. The
issuers of CMOs are structured as trusts or corporations established
for the purpose of issuing such CMOs and often have no assets other
than those underlying the securities and any credit support provided. A
REMIC is a mortgage securities vehicle that holds residential or
commercial mortgages and issues securities representing interests in
those mortgages. A REMIC may be formed as a corporation, partnership,
or segregated pool of assets. The REMIC itself is generally exempt from
federal income tax, but the income from the mortgages is reported by
investors. For investment purposes, interests in REMIC securities are
virtually indistinguishable from CMOs.
Mortgage Pass-Through Certificates-Mortgage pass-through
certificates are issued by governmental, government-related and private
organizations which are backed by pools of mortgage loans.
25
<PAGE> 61
(1) Government National Mortgage Association ("GNMA") Mortgage
Pass-Through Certificates ("Ginnie Maes")-GNMA is a wholly owned U.S.
Government corporation within the Department of Housing and Urban
Development. Ginnie Maes represent an undivided interest in a pool of
mortgages that are insured by the Federal Housing Administration or the
Farmers Home Administration or guaranteed by the Veterans
Administration. Ginnie Maes entitle the holder to receive all payments
(including prepayments) of principal and interest owed by the
individual mortgagors, net of fees paid to GNMA and to the issuer which
assembles the mortgage pool and passes through the monthly mortgage
payments to the certificate holders (typically, a mortgage banking
firm), regardless of whether the individual mortgagor actually makes
the payment. Because payments are made to certificate holders
regardless of whether payments are actually received on the underlying
mortgages, Ginnie Maes are of the "modified pass-through" mortgage
certificate type. The GNMA is authorized to guarantee the timely
payment of principal and interest on the Ginnie Maes. The GNMA
guarantee is backed by the full faith and credit of the United States,
and the GNMA has unlimited authority to borrow funds from the U.S.
Treasury to make payments under the guarantee. The market for Ginnie
Maes is highly liquid because of the size of the market and the active
participation in the secondary market of security dealers and a variety
of investors.
(2) FHLMC Mortgage Participation Certificates ("Freddie
Macs")-Freddie Macs represent interests in groups of specified first
lien residential conventional mortgages underwritten and owned by the
FHLMC. Freddie Macs entitle the holder to timely payment of interest,
which is guaranteed by the FHLMC. The FHLMC guarantees either ultimate
collection or timely payment of all principal payments on the
underlying mortgage loans. In cases where the FHLMC has not guaranteed
timely payment of principal, the FHLMC may remit the amount due because
of its guarantee of ultimate payment of principal at any time after
default on an underlying mortgage, but in no event later than one year
after it becomes payable. Freddie Macs are not guaranteed by the United
States or by any of the Federal Home Loan Banks and do not constitute a
debt or obligation of the United States or of any Federal Home Loan
Bank. The secondary market for Freddie Macs is highly liquid because of
the size of the market and the active participation in the secondary
market of the FHLMC, security dealers and a variety of investors.
(3) FNMA Guaranteed Mortgage Pass-Through Certificates
("Fannie Maes")-Fannie Maes represent an undivided interest in a pool
of conventional mortgage loans secured by first mortgages or deeds of
trust, on one family or two to four family, residential properties. The
FNMA is obligated to distribute scheduled monthly installments of
principal and interest on the mortgages in the pool, whether or not
received, plus full principal of any foreclosed or otherwise liquidated
mortgages. The obligation of the FNMA under its guarantee is solely its
obligation and is not backed by, nor entitled to, the full faith and
credit of the United States.
(4) Mortgage-Related Securities Issued by Private
Organizations-Pools created by non-governmental issuers generally offer
a higher rate of interest than government and government-related pools
because there are no direct or indirect government guarantees of
payments in such pools. However, timely payment of interest and
principal of these pools is often partially supported by various
enhancements such as over-collateralization and senior/subordination
structures and by various forms of insurance or guarantees, including
individual loan, title, pool and hazard insurance. The insurance and
guarantees are issued by government entities, private insurers or the
mortgage poolers. Although the market for such securities is becoming
increasingly liquid, securities issued by certain private organizations
may not be readily marketable.
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 nor poorly
secured. Interest payments and
26
<PAGE> 62
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 differ from the highest rated issues only in a small degree.
Obligations rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions. Obligations rated BBB by Standard &
Poor's are regarded as having adequate capacity to pay interest and repay
principal. Whereas it normally exhibits adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for debt in this category
than in higher rated categories.
Duff & Phelps' four highest ratings for long-term obligations are AAA,
AA, A and BBB. Obligations rated AAA have the highest credit quality with risk
factors being negligible. Obligations rated AA are of high credit quality and
strong protection factors. Risk is modest but may vary slightly from time to
time because of economic conditions. Obligations rated A have average but
adequate protection factors. However, risk factors are more variable and greater
in periods of economic stress. Obligations rated BBB have below average
protection factors with considerable variability in risk during economic cycles,
but are still considered sufficient for prudent investment.
Thomson BankWatch ("BankWatch") long-term debt ratings apply to
specific issues of long-term debt and preferred stock. They specifically assess
the likelihood of an untimely repayment of principal or interest over the term
to maturity of the rated instrument. BankWatch's four highest ratings for
long-term obligations are AAA, AA, A and BBB. Obligations rated AAA indicate
that the ability to repay principal and interest on a timely basis is very high.
Obligations rated AA indicate a superior ability to repay principal and interest
on a timely basis, with limited incremental risk compared to issues rated in the
highest category. Obligations rated A indicate the ability to repay principal
and interest is strong. Issues rated A could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
BBB is the lowest investment grade category and indicates an acceptable capacity
to repay principal and interest. Issues rated BBB are, however, more vulnerable
to adverse developments (both internal and external) than obligations with
higher ratings.
Fitch IBCA, Inc. ("Fitch") investment grade bond ratings provide a
guide to investors in determining the credit risk associated with a particular
security. The ratings represent Fitch's assessment of the issuer's ability to
meet the obligations of a specific debt issue or class of debt in a timely
manner. Obligations rated AAA are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonable
foreseeable events. Bonds rated AA are considered to be investment grade and of
very high credit quality. The obligor's ability to pay interest and repay
principal is very strong, although not quite as strong as bonds rated AAA. Bonds
rated A are considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings. Bonds rated BBB are considered to
be investment grade and of satisfactory credit quality. The obligor's ability to
pay interest and repay principal is considered to be adequate. Adverse changes
in economic conditions and circumstances, however, are more likely to have
adverse impact on these bonds, and therefore impair timely payment. The
likelihood that the ratings of these bonds will fall below investment grade is
higher than for bonds with higher ratings.
Standard & Poor's, Duff & Phelps and Fitch apply indicators, such as
"+","-," or no character, to indicate relative standing within the major rating
categories.
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.
27
<PAGE> 63
Short-term obligations (or issuers thereof) rated A-1 by Standard &
Poor's have the following characteristics. Liquidity ratios are adequate to meet
cash requirements. The issuer has access to at least two additional channels of
borrowing. Basic earnings and cash flow have an upward trend with allowance made
for unusual circumstances. Typically, the issuer's industry is well established
and the issuer has a strong position within the industry. The reliability and
quality of management are unquestioned. Relative strength or weakness of the
above factors determines whether the issuer's short-term obligation is rated
A-1, A-2, or A-3.
The distinguishing feature of Duff & Phelps Credit Ratings' short-term
rating is the refinement of the traditional 1 category. The majority of
short-term debt issuers carry the highest rating, yet quality differences exist
within that tier. Obligations rated D-1+ indicate the highest certainty of
timely payment. Safety is just below risk-free U.S. Treasury obligations.
Obligations rated D-1 have a very high certainty of timely payment. Risk factors
are minor. Obligations rated D-1- have a high certainty of timely payment. Risk
factors are very small. Obligations rated D-2 have good certainty of timely
payment. Liquidity factors and company fundamentals are sound. Although ongoing
funding needs may enlarge total financing requirements, access to capital
markets is good. Risk factors are small.
Thomson BankWatch short-term ratings are intended to assess the
likelihood of an untimely or incomplete payment of principal or interest.
Obligations rated TBW-1 indicate a very high likelihood that principal and
interest will be paid on a timely basis. While the degree of safety regarding
timely payment of principal and interest is strong for an obligation rated
TBW-2, the relative degree of safety is not as high as for issues rated TBW-1.
Fitch's short-term ratings apply to debt obligations that are payable
on demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes. A rating of F-1+ indicates exceptionally strong credit
quality. Issues assigned this rating are regarded as having the strongest degree
of assurance for timely payment. Obligations rated F-1 have very strong credit
quality. Issues assigned this rating reflect an assurance of timely payment only
slightly less in degree than issues rated F-1+. Issues assigned a rating of F-2
indicate good credit quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not as great
as for issues assigned F-1+ and F-1 ratings.
Repurchase Agreements-A repurchase agreement, which provides a means to
earn income on funds for periods as short as overnight, is an arrangement under
which the purchaser (e.g., a Portfolio) purchases securities and the seller
agrees, at the time of sale, to repurchase the securities at a specified time
and price. The repurchase price will be higher than the purchase price, the
difference being income to the purchaser, or the purchase and repurchase prices
may be the same, with interest at a stated rate due to the purchaser together
with the repurchase price on repurchase. In either case, the income to the
purchaser is unrelated to the interest rate on the securities subject to the
repurchase agreement.
Each Portfolio may enter into repurchase agreements with any bank or
registered broker-dealer who, in the opinion of the Manager or the Index Trust
Board of Trustees, as appropriate, presents a minimum risk of bankruptcy during
the term of the agreement based upon guidelines that periodically are reviewed
by the AMR Trust Board and the Index Trust Board of Trustees. Each Portfolio may
enter into repurchase agreements as a short-term investment of its idle cash in
order to earn income. The securities will be held by a custodian (or agent)
approved by the AMR Trust Board or the Index Trust Board of Trustees, as
appropriate, during the term of the agreement. However, if the market value of
the securities subject to the repurchase agreement becomes less than the
repurchase price (including interest), the Portfolio will direct the seller of
the securities to deliver additional securities so that the market value of all
securities subject to the repurchase agreement will equal or exceed the
repurchase price.
In the event of the commencement of bankruptcy or insolvency
proceedings with respect to the seller of the securities before the repurchase
of the securities under a repurchase agreement, a Portfolio may encounter a
delay and incur costs before being able to sell the security being held as
collateral. Delays may involve loss of interest or decline in price of the
securities. Apart from the risk of bankruptcy or insolvency proceedings, there
is also the risk that the seller may fail to repurchase the securities, in which
case a Portfolio may incur a loss if the proceeds to the Portfolio from the sale
of the securities to a third party are less than the repurchase price.
28
<PAGE> 64
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, the Index Trust Board of Trustees 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.
Short Sales- In connection with the use of certain instruments based
upon or consisting of one or more baskets of securities, the investment adviser
may sell a security a Portfolio does not own, or in an amount greater than the
Portfolio owns (i.e., make short sales). With respect to the Index Portfolios,
such transactions will be used only in an effort to adjust the weightings of
particular securities represented in the basket to reflect such securities'
weightings in the target index. Generally, to complete a short sale transaction,
a Portfolio will borrow the security to make delivery to the buyer. The
Portfolio is then obligated to replace the security borrowed. The price at the
time of replacement may be more or less than the price at which the security was
sold by the Portfolio. Until the security is replaced, the Portfolio is required
to pay to the lender any interest which accrues during the period of the loan.
To borrow the security, the Portfolio may be required to pay a premium, which
would increase the cost of the security sold. The proceeds of the short sale
will be retained by the broker to the extent necessary to meet margin
requirements until the short position is closed out. Until the Portfolio
replaces the borrowed security, it will (a) maintain in a segregated account
with its custodian cash or liquid securities at such a level that the amount
deposited in the account plus the amount deposited with the broker as collateral
will equal the current market value of the security sold short or (b) otherwise
cover its short position.
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
29
<PAGE> 65
Administration, Tennessee Valley Authority, District of Columbia Armory Board,
Inter-American Development Bank, Asian-American Development Bank, Agency for
International Development, Student Loan Marketing Association and International
Bank of Reconstruction and Development.
Obligations of U.S. Government agencies and instrumentalities may or
may not be supported by the full faith and credit of the United States. Some are
backed by the right of the issuer to borrow from the Treasury; others are
supported by discretionary authority of the U.S. Government to purchase the
agencies' obligations; while still others, such as the Student Loan Marketing
Association, are supported only by the credit of the instrumentality. In the
case of securities not backed by the full faith and credit of the United States,
the investor must look principally to the agency issuing or guaranteeing the
obligation for ultimate repayment, and may not be able to assert a claim against
the United States itself in the event the agency or instrumentality does not
meet its commitment.
U.S. Treasury Obligations-U.S. Treasury obligations include bills,
notes and bonds issued by the U.S. Treasury and Separately Traded Registered
Interest and Principal component parts of such obligations known as STRIPS.
Variable or Floating Rate Obligations-A variable rate obligation is one
whose terms provide for the adjustment of its interest rate on set dates and
which, upon such adjustment, can reasonably be expected to have a market value
that approximates its par value. A floating rate obligation is one whose terms
provide for the adjustment of its interest rate whenever a specified interest
rate changes and which, at any time, can reasonably be expected to have a market
value that approximates its par value. Variable or floating rate obligations may
be secured by bank letters of credit.
Pursuant to Rule 2a-7 under the 1940 Act, variable or floating rate
obligations with stated maturities of more than 397 days may be deemed to have
shorter maturities as follows:
(1) An obligation that is issued or guaranteed by the United States
Government or any agency thereof which has a variable rate of interest
readjusted no less frequently than every 762 days will be deemed by a Portfolio
to have a maturity equal to the period remaining until the next readjustment of
the interest rate.
(2) A variable rate obligation, the principal amount of which is
scheduled on the face of the instrument to be paid in 397 days or less, will be
deemed by a Portfolio to have a maturity equal to the period remaining until the
next readjustment of the interest rate.
(3) A variable rate obligation that is subject to a demand feature will
be deemed by a Portfolio to have a maturity equal to the longer of the period
remaining until the next readjustment of the interest rate or the period
remaining until the principal amount can be recovered through demand.
(4) A floating rate obligation that is subject to a demand feature will
be deemed by a Portfolio to have a maturity equal to the period remaining until
the principal amount can be recovered through demand.
As used above, an obligation is "subject to a demand feature" when a
Portfolio is entitled to receive the principal amount of the obligation either
at any time on no more than 30 days' notice or at specified intervals not
exceeding one year and upon no more than 30 days' notice.
Variable Rate Auction and Residual Interest Obligations-Variable rate
auction and residual interest obligations are created when an issuer or dealer
separates the principal portion of a long-term, fixed-rate municipal bond into
two long-term, variable-rate instruments. The interest rate on one portion
reflects short-term interest rates, while the interest rate on the other portion
is typically higher than the rate available on the original fixed-rate bond.
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.
30
<PAGE> 66
Each Portfolio maintains with the Custodian a segregated account containing
high-grade liquid securities in an amount at least equal to the when-issued or
forward commitment transaction. Forward commitment transactions are executed for
existing obligations, whereas in a when-issued transaction, the obligations have
not yet been issued. When entering into a when-issued or forward commitment
transaction, a Portfolio will rely on the other party to consummate the
transaction; if the other party fails to do so, the Portfolio may be
disadvantaged.
31
<PAGE> 67
AMERICAN AADVANTAGE FUNDS
PART C. OTHER INFORMATION
Item 23. Exhibits
<TABLE>
<S> <C>
(a) Declaration of Trust - (iv)
(b) Bylaws - (iv)
(c) Voting trust agreement -- none
(d)(i)(A) Fund Management Agreement between American AAdvantage Funds and AMR Investment Services,
Inc. dated April 3, 1987
(i)(B) Supplement to Fund Management Agreement dated August 1, 1994 - (iv)
(i)(C) Supplement to Fund Management Agreement dated August 1, 1995 - (iv)
(i)(D) Supplement to Fund Management Agreement dated November 1, 1995*
(i)(E) Amendment to Schedule A of Fund Management Agreement dated December 1, 1995 - (i)
(i)(F) Supplement to Fund Management Agreement dated December 17, 1996 - (ii)
(i)(G) Supplement to Fund Management Agreement dated July 25, 1997 - (iii)
(i)(H) Supplement to Fund Management Agreement dated September 1, 1998 - (vi)
(i)(I) Supplement to Fund Management Agreement dated January 1, 1999*
(i)(J) Supplement to Fund Management Agreement - to be filed
(ii)(A) Investment Advisory Agreement between AMR Investment Services, Inc. and Barrow, Hanley,
Mewhinney & Strauss, Inc. dated November 1, 1995 - (iv)
(ii)(B) Investment Advisory Agreement between AMR Investment Services, Inc. and Independence
Investment Associates, Inc. dated November 1, 1995 - (iv)
(ii)(C) Investment Advisory Agreement between AMR Investment Services, Inc. and Templeton
Investment Counsel, Inc. dated November 1, 1995 - (iv)
(ii)(D) Investment Advisory Agreement between AMR Investment Services, Inc. and Hotchkis and Wiley,
a division of the Capital Management Group of Merrill Lynch Asset Management, L.P. dated
November 12, 1996 - (ii)
(ii)(E) Investment Advisory Agreement between AMR Investment Services, Inc. and Brandywine Asset
Management, Inc. dated January 16, 1998 - (v)
(ii)(F) Form of Investment Advisory Agreement between AMR Investment Services, Inc. and Lazard
Asset Management*
(ii)(G) Amendment to Schedule A of Advisory Agreement between AMR Investment Services, Inc. and
Brandywine Asset Management, Inc. dated October 15, 1998 - (vi)
</TABLE>
C-1
<PAGE> 68
<TABLE>
<S> <C>
(ii)(H) Amendment to Schedule A to of Advisory Agreement between AMR Investment Services, Inc. and
Hotchkis and Wiley, a division of the Capital Management Group of Merrill Lynch Asset
Management, L.P. dated October 15, 1998 - (vi)
(ii)(I) Form of Amendment to Schedule A of Advisory Agreement between AMR Investment Services, Inc. and
Independence Investment Associates, Inc.*
(ii)(J) Form of Investment Advisory Agreement between AMR Investment Services, Inc. and Goldman Sachs
Asset Management - to be filed
(ii)(K) Form of Investment Advisory Agreement between AMR Investment Services, Inc. and J.P. Morgan
Investment Management Inc. - to be filed
(ii)(L) Form of Investment Advisory Agreement between AMR Investment Services, Inc. and Morgan
Stanley Dean Witter Investment Management Inc. - to be filed
(ii)(M) Investment Advisory Agreement - to be filed
(iii)(A) Administrative Services Agreement between the American AAdvantage Funds and AMR Investment
Services, Inc. dated November 21, 1997 - (iv)
(iii)(B) Supplement to Administrative Services Agreement dated September 1, 1998 - (vi)
(iii)(C) Supplement to Administrative Services Agreement dated January 1, 1999*
(iv) Administrative Services Plan for the Platinum Class - (iv)
(v)(A) Administrative Agreement for S&P 500 Index Fund with Bankers Trust Company- (iv)
(B) Administrative Agreement for S&P 500 Index Fund with State Street Bank & Trust Company*
(C) Sub-Administration Agreement between Fund Asset Management, L.P. and AMR Investment
Services, Inc. with respect to the Small Cap Index Fund and International Index Fund - to
be filed
(e) Distribution Agreement among the American AAdvantage Funds, the American AAdvantage Mileage
Funds and Brokers Transaction Services, Inc. dated September 1, 1995 - (iv)
(f) Bonus, profit sharing or pension plans - none
(g) Custodian Agreement between the American AAdvantage Funds and State Street Bank and Trust
Company dated December 1, 1997 - (v)
(h)(i) Transfer Agency and Service Agreement between the American AAdvantage Funds-and State Street
Bank and Trust Company dated January 1, 1998 - (v)
(ii) Securities Lending Authorization Agreement between American AAdvantage Funds and State Street
Bank and Trust Company dated January 2, 1998 - (v)
(iii) Service Plan Agreement for the American AAdvantage Funds PlanAhead Class dated August 1, 1994
- (iv)
</TABLE>
C-2
<PAGE> 69
<TABLE>
<S> <C>
(iv) Credit Agreement between American AAdvantage Funds and AMR Investment Services, Inc., dated
December 1, 1999*
(v) Administrative Services Agreement among American AAdvantage Funds, American AAdvantage Mileage
Funds, AMR Investment Services Trust, AMR Investment Services, Inc. and State Street Bank and
Trust Company dated November 29, 1999*
(i) Opinion and consent of counsel - to be filed
(j) Consent of Independent Auditors - to be filed
(k) Financial statements omitted from prospectus - none
(l) Letter of investment intent - (iv)
(m)(i) Plan pursuant to Rule 12b-1 for the Institutional, PlanAhead and AMR Classes - (iv)
(ii) Plan pursuant to Rule 12b-1 for the Platinum Class - (iv)
(n) Amended and Restated Plan pursuant to Rule 18f-3 - (iv)
(p) Codes of Ethics - to be filed
Other Exhibits - Powers of Attorney for all Trustees - (ii)
</TABLE>
- -------------------------
Incorporated by reference to PEA No. 4 to the Registration Statement of
the Trust on Form N-1A as filed with the SEC on December 31, 1990.
(i) Incorporated by reference to PEA No. 15 to the Registration Statement
of the Trust on Form N-1A as filed with the SEC on December 22, 1995.
(ii) Incorporated by reference to PEA No. 19 to the Registration Statement
of the Trust on Form N-1A as filed with the SEC on February 13, 1997.
(iii) Incorporated by reference to PEA No. 20 to the Registration Statement
of the Trust on Form N-1A as filed with the SEC on July 1, 1997.
(iv) Incorporated by reference to PEA No. 23 to the Registration Statement
of the Trust on Form N-1A as filed with the SEC on December 18, 1997.
(v) Incorporated by reference to PEA No. 24 to the Registration Statement
of the Trust on Form N-1A as filed with the SEC on February 27, 1998.
(vi) Incorporated by reference to PEA No. 25 to the Registration Statement
of the Trust on Form N-1A as filed with the SEC on October 15, 1998.
* Incorporated by reface to PEA No. 28 to the Registration Statement of
the Trust on Form N-1A as filed with the SEC on December 21, 1999.
C-3
<PAGE> 70
Item 24. Persons Controlled by or under Common Control with Registrant
None.
Item 25. Indemnification
Article XI, Section 2 of the Declaration of Trust of the Trust provides
that:
(a) Subject to the exceptions and limitations contained in paragraph
(b) below:
(i) every person who is, or has been, a Trustee or officer of
the Trust (hereinafter referred to as "Covered Person") shall be indemnified by
the appropriate portfolios to the fullest extent permitted by law against
liability and against all expenses reasonably incurred or paid by him in
connection with any claim, action, suit or proceeding in which he becomes
involved as a party or otherwise by virtue of his being or having been a Trustee
or officer and against amounts paid or incurred by him in the settlement
thereof;
(ii) the words "claim," "action," "suit," or "proceeding"
shall apply to all claims, actions, suits or proceedings (civil, criminal or
other, including appeals), actual or threatened while in office or thereafter,
and the words "liability" and "expenses" shall include, without limitation,
attorneys' fees, costs, judgments, amounts paid in settlement, fines, penalties
and other liabilities.
(b) No indemnification shall be provided hereunder to a Covered Person:
(i) who shall have been adjudicated by a court or body before
which the proceeding was brought (A) to be liable to the Trust or its
Shareholders by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office or (B)
not to have acted in good faith in the reasonable belief that his action was in
the best interest of the Trust; or
(ii) in the event of a settlement, unless there has been a
determination that such Trustee or officer did not engage in willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office (A) by the court or other body approving
the settlement; (B) by at least a majority of those Trustees who are neither
interested persons of the Trust nor are parties to the matter based upon a
review of readily available facts (as opposed to a full trial-type inquiry); or
(C) by written opinion of independent legal counsel based upon a review of
readily available facts (as opposed to a full trial-type inquiry); provided,
however, that any Shareholder may, by appropriate legal proceedings, challenge
any such determination by the Trustees, or by independent counsel.
(c) The rights of indemnification herein provided may be insured
against by policies maintained by the Trust, shall be severable, shall not be
exclusive of or affect any other rights to which any Covered Person may now or
hereafter be entitled, shall continue as to a person who has ceased to be such
Trustee or officer and shall inure to the benefit of the heirs, executors and
administrators of
C-4
<PAGE> 71
such a person. Nothing contained herein shall affect any rights to
indemnification to which Trust personnel, other than Trustees and officers, and
other persons may be entitled by contract or otherwise under law.
(d) Expenses in connection with the preparation and presentation of a
defense to any claim, action, suit, or proceeding of the character described in
paragraph (a) of this Section 2 may be paid by the applicable Portfolio from
time to time prior to final disposition thereof upon receipt of an undertaking
by or on behalf of such Covered Person that such amount will be paid over by him
to the Trust if it is ultimately determined that he is not entitled to
indemnification under this Section 2; provided, however, that:
(i) such Covered Person shall have provided appropriate
security for such undertaking;
(ii) the Trust is insured against losses arising out of any
such advance payments; or
(iii) either a majority of the Trustees who are neither
interested persons of the Trust nor parties to the matter, or independent legal
counsel in a written opinion, shall have determined, based upon a review of
readily available facts (as opposed to a trial-type inquiry or full
investigation), that there is reason to believe that such Covered Person will be
found entitled to indemnification under this Section 2.
According to Article XII, Section 1 of the Declaration of Trust, the
Trust is a trust, not a partnership. Trustees are not liable personally to any
person extending credit to, contracting with or having any claim against the
Trust, a particular Portfolio or the Trustees. A Trustee, however, is not
protected from liability due to willful misfeasance, bad faith, gross negligence
or reckless disregard of the duties involved in the conduct of his office.
Article XII, Section 2 provides that, subject to the provisions of
Section 1 of Article XII and to Article XI, the Trustees are not liable for
errors of judgment or mistakes of fact or law, or for any act or omission in
accordance with advice of counsel or other experts or for failing to follow such
advice.
Item 26. I. Business and Other Connections of Investment Manager
AMR Investment Services, Inc. (the "Manager"), 4333 Amon Carter
Boulevard, MD 5645, Fort Worth, Texas 76155, offers investment management and
administrative services. Information as to the officers and directors of the
Manager is included in its current Form ADV filed with the SEC and is
incorporated by reference herein.
II. Business and Other Connections of Investment Advisers
The investment advisers listed below provide investment advisory
services to the Trust.
Barrow, Hanley, Mewhinney & Strauss, 3232 McKinney Avenue, 15th Floor,
Dallas, Texas 75204.
<PAGE> 72
Brandywine Asset Management, Inc., 201 North Walnut Street, Wilmington,
Delaware 19801.
Goldman Sachs Asset Management, 85 Broad Street, New York, New York
10004.
Hotchkis and Wiley, 800 West Sixth Street, 5th Floor, Los Angeles,
California 90017.
J.P. Morgan Investment Management, Inc., 522 Fifth Avenue, New York,
New York 10036
Independence Investment Associates, Inc., 53 State Street, Boston,
Massachusetts 02109.
Lazard Asset Management, 30 Rockefeller Plaza, New York, New York
10112.
Morgan Stanley Dean Witter Investment Management Inc., 1221 Avenue of
the Americas, New York, New York 10020
Templeton Investment Counsel, Inc. 500 East Broward Blvd., Ft.
Lauderdale, Florida 33394.
Information as to the officers and directors of each of the above
investment advisers is included in that adviser's current Form ADV filed with
the SEC and is incorporated by reference herein.
Item 27. Principal Underwriter
(a) SWS Financial Services, Inc., 7001 Preston Road, Dallas,
TX 75205 is the principal underwriter for the Trust and the American AAdvantage
Mileage Funds.
(b) The directors and officers of the Trust's principal
underwriter are:
<TABLE>
<CAPTION>
Positions & Offices Position
Name with Underwriter with Registrant
- ---- ------------------- ---------------
<S> <C> <C>
Sue H. Peden Chief Executive Officer None
Raymond E. Wooldridge Chairman None
Dianna Boswell President None
Diana Burrell Vice President None
Diane Scott Assistant Vice President None
</TABLE>
The address of the above named directors and officers is 7001 Preston
Road, Dallas, TX 75205.
C-6
<PAGE> 73
Item 28. Location of Accounts and Records
The books and other documents required by Rule 31a-1 under the
Investment Company Act of 1940 are maintained as follows:
31a-1(b)(1) - in the physical possession of the Trust's custodian;
31a-1(b)(2)(i),(ii)&(iii) - in the physical possession of the Trust's custodian
31a-1(b)(2)(iv) - in the physical possession of the Trust's transfer agent
31a-1(b)(4) - in the physical possession of the Trust's Manager
31a-1(b)(5) - in the physical possession of the Trust's investment advisers
31a-1(b)(6) - A record of other purchases or sales etc. - in the physical
possession of the Trust's Manager, investment advisers and custodian
31a-1(b)(7) - in the physical possession of the Trust's custodian
31a-1(b)(8) - in the physical possession of the Trust's custodian
31a-1(b)(9) - in the physical possession of the Trust's investment advisers
31a-1(b)(10) - in the physical possession of the Trust's Manager
31a-1(b)(11) - in the physical possession of the Trust's Manager
31a-1(b)(12) - in the physical possession of the Trust's Manager, investment
advisers and custodian
Item 29. Management Services
All substantive provisions of any management-related service
contract are discussed in Part A or Part B.
Item 30. Undertakings
Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of its latest annual report to Shareholders,
upon request and without charge.
Registrant hereby undertakes to carry out all indemnification
provisions of its Declaration of Trust in accordance with Investment Company Act
Release No. 11330 (September 4, 1980) and successor releases.
Insofar as indemnification for liability arising under the Securities
Act of 1933, as amended ("1933 Act"), may be permitted to trustees, officers and
controlling persons of the Registrant pursuant to the provisions under Item 25
herein, or otherwise, the Registrant has been advised that in the opinion of the
SEC such indemnification is against public policy as expressed in the 1933 Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a trustee, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
trustee, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the 1933 Act and will be governed by the final
adjudication.
C-7
<PAGE> 74
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, the Registrant has duly
caused this Post-Effective Amendment No. 30 to its Registration Statement on
Form N-1A to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Fort Worth and the State of Texas, on April 17, 2000.
AMERICAN AADVANTAGE FUNDS
By: /s/ William F. Quinn
--------------------------------------
William F. Quinn
President
Attest:
/s/ Barry Y. Greenberg
- --------------------------------
Barry Y. Greenberg
Vice President and Assistant Secretary
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Post-Effective Amendment No. 30 to the Registration Statement has been
signed below by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ William F. Quinn President and April 17, 2000
- -------------------------------- Trustee
William F. Quinn
Alan D. Feld* Trustee April 17, 2000
- --------------------------------
Alan D. Feld
Ben J. Fortson* Trustee April 17, 2000
- --------------------------------
Ben J. Fortson
John S. Justin* Trustee April 17, 2000
- --------------------------------
John S. Justin
Stephen D. O'Sullivan* Trustee April 17, 2000
- --------------------------------
Stephen D. O'Sullivan
Roger T. Staubach* Trustee April 17, 2000
- --------------------------------
Roger T. Staubach
Dr. Kneeland Youngblood * Trustee April 17, 2000
- --------------------------------
Dr. Kneeland Youngblood
*By /s/ William F. Quinn
-----------------------------------
William F. Quinn, Attorney-In-Fact
</TABLE>
<PAGE> 75
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, AMR Investment Services
Trust has duly caused this Post-Effective Amendment No. 30 to the Registration
Statement on Form N-1A for the American AAdvantage Funds as it relates to AMR
Investment Services Trust to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Fort Worth and the State of Texas, on
April 17, 2000.
AMR INVESTMENT SERVICES TRUST
By: /s/ William F. Quinn
--------------------------------------
William F. Quinn
President
Attest:
/s/ Barry Y. Greenberg
- ---------------------------
Barry Y. Greenberg
Vice President and Assistant Secretary
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Post-Effective Amendment No. 30 to the Registration Statement for the
American AAdvantage Funds as it relates to the AMR Investment Services Trust has
been signed below by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ William F. Quinn President and April 17, 2000
- ----------------------------------- Trustee
William F. Quinn
Alan D. Feld* Trustee April 17, 2000
- -----------------------------------
Alan D. Feld
Ben J. Fortson* Trustee April 17, 2000
- -----------------------------------
Ben J. Fortson
John S. Justin* Trustee April 17, 2000
- -----------------------------------
John S. Justin
Stephen D. O'Sullivan* Trustee April 17, 2000
- -----------------------------------
Stephen D. O'Sullivan
Roger T. Staubach* Trustee April 17, 2000
- -----------------------------------
Roger T. Staubach
Dr. Kneeland Youngblood * Trustee April 17, 2000
- -----------------------------------
Dr. Kneeland Youngblood
*By /s/ William F. Quinn
----------------------------------
William F. Quinn, Attorney-In-Fact
</TABLE>
<PAGE> 76
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, Quantitative Master Series
Trust has duly caused this Post-Effective Amendment No. 30 to the Registration
Statement on Form N-1A for the American AAdvantage Funds as it relates to the
Quantitative Master Series Trust to be signed on its behalf by the undersigned,
thereunto duly authorized, in the Township of Plainsboro and the State of New
Jersey, on April 17, 2000.
QUANTITATIVE MASTER SERIES TRUST
By: /s/ Terry K. Glenn
--------------------------------
Terry K. Glenn
President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Post-Effective Amendment No. 29 to the Registration Statement on Form N-1A
for the American AAdvantage Funds as it relates to the Quantitative Master
Series Trust has been signed below by the following persons in the capacities
and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Terry K. Glenn Trustee April 17, 2000
- ------------------------------------
Terry K. Glenn
Jack B. Sunderland* Trustee April 17, 2000
- ------------------------------------
Jack B. Sunderland
Stephen B. Swensrud* Trustee April 17, 2000
- ------------------------------------
Stephen B. Swensrud
J. Thomas Touchton* Trustee April 17, 2000
- ------------------------------------
J. Thomas Touchton
*By /s/ Terry K. Glenn
--------------------------------
Terry K. Glenn, Attorney-in-Fact
</TABLE>
<PAGE> 77
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
(a) Declaration of Trust - (iv)
(b) Bylaws - (iv)
(c) Voting trust agreement -- none
(d)(i)(A) Fund Management Agreement between American AAdvantage Funds and AMR Investment Services,
Inc. dated April 3, 1987
(i)(B) Supplement to Fund Management Agreement dated August 1, 1994 - (iv)
(i)(C) Supplement to Fund Management Agreement dated August 1, 1995 - (iv)
(i)(D) Supplement to Fund Management Agreement dated November 1, 1995*
(i)(E) Amendment to Schedule A of Fund Management Agreement dated December 1, 1995 - (i)
(i)(F) Supplement to Fund Management Agreement dated December 17, 1996 - (ii)
(i)(G) Supplement to Fund Management Agreement dated July 25, 1997 - (iii)
(i)(H) Supplement to Fund Management Agreement dated September 1, 1998 - (vi)
(i)(I) Supplement to Fund Management Agreement dated January 1, 1999*
(i)(J) Supplement to Fund Management Agreement - to be filed
(ii)(A) Investment Advisory Agreement between AMR Investment Services, Inc. and Barrow, Hanley,
Mewhinney & Strauss, Inc. dated November 1, 1995 - (iv)
(ii)(B) Investment Advisory Agreement between AMR Investment Services, Inc. and Independence
Investment Associates, Inc. dated November 1, 1995 - (iv)
(ii)(C) Investment Advisory Agreement between AMR Investment Services, Inc. and Templeton
Investment Counsel, Inc. dated November 1, 1995 - (iv)
(ii)(D) Investment Advisory Agreement between AMR Investment Services, Inc. and Hotchkis and Wiley,
a division of the Capital Management Group of Merrill Lynch Asset Management, L.P. dated
November 12, 1996 - (ii)
(ii)(E) Investment Advisory Agreement between AMR Investment Services, Inc. and Brandywine Asset
Management, Inc. dated January 16, 1998 - (v)
(ii)(F) Form of Investment Advisory Agreement between AMR Investment Services, Inc. and Lazard
Asset Management*
(ii)(G) Amendment to Schedule A of Advisory Agreement between AMR Investment Services, Inc. and
Brandywine Asset Management, Inc. dated October 15, 1998 - (vi)
(ii)(H) Amendment to Schedule A to of Advisory Agreement between AMR Investment Services, Inc. and
Hotchkis and Wiley, a division of the Capital Management Group of Merrill Lynch Asset
Management, L.P. dated October 15, 1998 - (vi)
</TABLE>
<PAGE> 78
<TABLE>
<S> <C>
(ii)(I) Form of Amendment to Schedule A of Advisory Agreement between AMR Investment Services, Inc. and
Independence Investment Associates, Inc.*
(ii)(J) Form of Investment Advisory Agreement between AMR Investment Services, Inc. and Goldman Sachs
Asset Management - to be filed
(ii)(K) Form of Investment Advisory Agreement between AMR Investment Services, Inc. and J.P. Morgan
Investment Management Inc. - to be filed
(ii)(L) Form of Investment Advisory Agreement between AMR Investment Services, Inc. and Morgan
Stanley Dean Witter Investment Management Inc. - to be filed
(ii)(M) Investment Advisory Agreement - to be filed
(iii)(A) Administrative Services Agreement between the American AAdvantage Funds and AMR Investment
Services, Inc. dated November 21, 1997 - (iv)
(iii)(B) Supplement to Administrative Services Agreement dated September 1, 1998 - (vi)
(iii)(C) Supplement to Administrative Services Agreement dated January 1, 1999*
(iv) Administrative Services Plan for the Platinum Class - (iv)
(v)(A) Administrative Agreement for S&P 500 Index Fund with Bankers Trust Company- (iv)
(B) Administrative Agreement for S&P 500 Index Fund with State Street Bank & Trust Company*
(C) Sub-Administration Agreement between Fund Asset Management, L.P. and AMR Investment
Services, Inc. with respect to the Small Cap Index Fund and International Index Fund - to
be filed
(e) Distribution Agreement among the American AAdvantage Funds, the American AAdvantage Mileage
Funds and Brokers Transaction Services, Inc. dated September 1, 1995 - (iv)
(f) Bonus, profit sharing or pension plans - none
(g) Custodian Agreement between the American AAdvantage Funds and State Street Bank and Trust
Company dated December 1, 1997 - (v)
(h)(i) Transfer Agency and Service Agreement between the American AAdvantage Funds-and State Street
Bank and Trust Company dated January 1, 1998 - (v)
(ii) Securities Lending Authorization Agreement between American AAdvantage Funds and State Street
Bank and Trust Company dated January 2, 1998 - (v)
(iii) Service Plan Agreement for the American AAdvantage Funds PlanAhead Class dated August 1, 1994
- (iv)
(iv) Credit Agreement between American AAdvantage Funds and AMR Investment Services, Inc., dated
December 1, 1999*
</TABLE>
<PAGE> 79
<TABLE>
<S> <C>
(v) Administrative Services Agreement among American AAdvantage Funds, American AAdvantage Mileage
Funds, AMR Investment Services Trust, AMR Investment Services, Inc. and State Street Bank and
Trust Company dated November 29, 1999*
(i) Opinion and consent of counsel - to be filed
(j) Consent of Independent Auditors - to be filed
(k) Financial statements omitted from prospectus - none
(l) Letter of investment intent - (iv)
(m)(i) Plan pursuant to Rule 12b-1 for the Institutional, PlanAhead and AMR Classes - (iv)
(ii) Plan pursuant to Rule 12b-1 for the Platinum Class - (iv)
(n) Amended and Restated Plan pursuant to Rule 18f-3 - (iv)
(p) Codes of Ethics - to be filed
Other Exhibits - Powers of Attorney for all Trustees - (ii)
</TABLE>
- -------------------------
Incorporated by reference to PEA No. 4 to the Registration Statement of
the Trust on Form N-1A as filed with the SEC on December 31, 1990.
(i) Incorporated by reference to PEA No. 15 to the Registration Statement
of the Trust on Form N-1A as filed with the SEC on December 22, 1995.
(ii) Incorporated by reference to PEA No. 19 to the Registration Statement
of the Trust on Form N-1A as filed with the SEC on February 13, 1997.
(iii) Incorporated by reference to PEA No. 20 to the Registration Statement
of the Trust on Form N-1A as filed with the SEC on July 1, 1997.
(iv) Incorporated by reference to PEA No. 23 to the Registration Statement
of the Trust on Form N-1A as filed with the SEC on December 18, 1997.
(v) Incorporated by reference to PEA No. 24 to the Registration Statement
of the Trust on Form N-1A as filed with the SEC on February 27, 1998.
(vi) Incorporated by reference to PEA No. 25 to the Registration Statement
of the Trust on Form N-1A as filed with the SEC on October 15, 1998.
* Incorporated by reface to PEA No. 28 to the Registration Statement of
the Trust on Form N-1A as filed with the SEC on December 21, 1999.
