STATEMENT OF ADDITIONAL INFORMATION
AMERICAN AADVANTAGE FUNDS(R)
AMERICAN AADVANTAGE MILEAGE FUNDS(sm)
-- Platinum Class(sm) --
March 1, 1997
The American AAdvantage Money Market Fund(sm) (the "Money Market
Fund"), the American AAdvantage Municipal Money Market Fund(sm) (the
"Municipal Money Market Fund"), and the American AAdvantage U.S.
Government Money Market Fund(sm) (the "U.S. Government Money Market
Fund"), formerly the American AAdvantage U.S. Treasury Money Market
Fund, are three separate investment portfolios of the American
AAdvantage Funds (the "AAdvantage Trust"). The American AAdvantage
Money Market Mileage Fund (the "Mileage Fund") is a separate
investment portfolio of the American AAdvantage Mileage Funds (the
"Mileage Trust") (individually, a "Fund" and, collectively, the
"Funds"). The AAdvantage Trust and the Mileage Trust (collectively
the "Trusts") are open-end, diversified management investment
companies. Each Fund consists of multiple classes of shares designed
to meet the needs of different groups of investors. This Statement
of Additional Information ("SAI") relates only to the Platinum Class
of the Funds.
Each Fund seeks its investment objective by investing all of its
investable assets in a corresponding portfolio (individually, a
"Portfolio" and, collectively, the "Portfolios") of the AMR
Investment Services Trust ("AMR Trust") that has a similar name and
an identical investment objective to the investing Fund.
This SAI should be read in conjunction with the Platinum Class
prospectus dated March 1, 1997 ("Prospectus"), a copy of which may be
obtained without charge by calling (800) 388-3344.
This SAI is not a prospectus and is authorized for distribution to
prospective investors only if preceded or accompanied by a current
Prospectus.
INVESTMENT RESTRICTIONS
Each Fund has the following fundamental investment policy that
enables it to invest in a corresponding Portfolio of the AMR Trust:
Notwithstanding any other limitation, the Fund may invest all
of its investable assets in an open-end management investment
company with substantially the same investment objectives,
policies and limitations as the Fund. For this purpose, "all
of the Fund's investable assets" means that the only investment
securities that will be held by the Fund will be the Fund's
interest in the investment company.
All other fundamental investment policies and the non-fundamental
policies of each Fund and its corresponding Portfolio are identical.
Therefore, although the following discusses the investment policies
of each Portfolio and the AMR Trust's Board of Trustees ("AMR Trust
Board"), it applies equally to each Fund and the AAdvantage Trust's
Board of Trustees ("AAdvantage Board") and the Mileage Trust's Board
of Trustees ("Mileage Trust Board"), as applicable.
In addition to the investment limitations noted in the Prospectus,
the following seven restrictions have been adopted by each Portfolio
and may be changed with respect to any Portfolio only by the majority
vote of that Portfolio's outstanding interests. "Majority of the
outstanding voting securities" under the Investment Company Act of
1940, as amended (the "1940 Act"), and as used herein means, with
respect to the Portfolio, the lesser of (a) 67% of the interests of
the Portfolio present at the meeting if the holders of more than 50%
of the interests are present and represented at the interest holders'
meeting or (b) more than 50% of the interests of the Portfolio.
Whenever a Fund is requested to vote on a change in the investment
restrictions of its corresponding Portfolio, that Fund will hold a
meeting of its shareholders and will cast its votes as instructed by
its shareholders. The percentage of a Fund's votes representing that
Fund's shareholders not voting will be voted by the AAdvantage Board
and the Mileage Trust Board in the same proportion as those Fund
shareholders who do, in fact, vote.
No Portfolio may:
1. Purchase or sell real estate or real estate limited partnership
interests, provided, however, that the Portfolio may invest in
securities secured by real estate or interests therein or issued
by companies which invest in real estate or interests therein when
consistent with the other policies and limitations described in
the Prospectus.
2. Purchase or sell commodities (including direct interests and/or
leases in oil, gas or minerals) or commodities contracts, except
with respect to forward foreign currency exchange contracts,
foreign currency futures contracts and "when-issued" securities
when consistent with the other policies and limitations described
in the Prospectus.
3. Engage in the business of underwriting securities issued by
others except to the extent that, in connection with the
disposition of securities, the Portfolio may be deemed an
underwriter under federal securities law.
4. Make loans to any person or firm, provided, however, that the
making of a loan shall not be construed to include (i) the
acquisition for investment of bonds, debentures, notes or other
evidences of indebtedness of any corporation or government which
are publicly distributed or (ii) the entry into repurchase
agreements and further provided, however, that each Portfolio may
lend its investment securities to broker-dealers or other
institutional investors in accordance with the guidelines stated
in the Prospectus.
5. Purchase from or sell portfolio securities to its officers,
Trustees or other "interested persons" of the AMR Trust, as
defined in the Investment Company Act of 1940 ("1940 Act"),
including its investment advisers and their affiliates, except as
permitted by the 1940 Act and exemptive rules or orders
thereunder.
6. Issue senior securities except that the Portfolio may engage in
when-issued and forward commitment transactions.
7. Borrow money, except from banks or through reverse repurchase
agreements for temporary purposes in an aggregate amount not to
exceed 10% of the value of its total assets at the time of
borrowing. In addition, although not a fundamental policy, the
Portfolios intend to repay any money borrowed before any
additional portfolio securities are purchased. See "Other
Information" for a further description regarding reverse
repurchase agreements.
The following non-fundamental investment restriction applies to
each Portfolio and may be changed with respect to a Portfolio by a
majority vote of the AMR Trust Board: no Portfolio may purchase
securities on margin, effect short sales (except that the Portfolio
may obtain such short-term credits as may be necessary for the
clearance of purchases or sales of securities) or purchase or sell
call options or engage in the writing of such options.
All Portfolios may invest up to 10% of their total assets in the
securities of other investment companies to the extent permitted by
law. A Portfolio may incur duplicate advisory or management fees
when investing in another mutual fund.
TRUSTEES AND OFFICERS OF THE TRUSTS AND THE AMR TRUST
The AAdvantage Board, the Mileage Trust Board and the AMR Trust
Board provide broad supervision over each Trust's affairs. AMR
Investment Services, Inc. (the "Manager") is responsible for the
management and the administration of each Trust's assets, and each
Trust's officers are responsible for the respective Trust's
operations. The Trustees and officers of the Trusts and the AMR
Trust are listed below, together with their principal occupations
during the past five years. Unless otherwise indicated, the address
of each person listed below is 4333 Amon Carter Boulevard, MD 5645,
Fort Worth, Texas 76155.
<TABLE>
<CAPTION>
Position
Name, Age and with each Principal Occupation During
Address Trust Past 5 Years
<S> <C> <C>
William F. Quinn* Trustee President, AMR Investment
(49) and Services, Inc. (1986-
President Present); Chairman, American
Airlines Employees Federal
Credit Union (October 1989-
Present); Trustee, American
Performance Funds (1990-
1994); Director, Crescent
Real Estate Equities, Inc.
(1994 - Present); Trustee,
American AAdvantage Funds
(1987-Present); Trustee,
American AAdvantage Mileage
Funds (1995-Present).
Alan D. Feld (59) Trustee Partner, Akin, Gump,
1700 Pacific Avenue Strauss, Hauer & Feld, LLP
Suite 4100 (1960-Present)#; Director,
Dallas, Texas 75201 Clear Channel Communications
(1984-Present); Director,
CenterPoint Properties, Inc.
(1994-Present); Trustee,
American AAdvantage Funds
(1993-Present); Trustee,
American AAdvantage
Funds(1996- Present);
Trustee American AAdvantage
Mileage Funds (1996-
Present).
Ben J. Fortson (64) Trustee President and CEO, Fortson
301 Commerce Street Oil Company (1958-Present);
Suite 3301 Director, Kimbell Art
Fort Worth, Texas Foundation (1964-Present);
76102 Director, Burnett Foundation
(1987-Present); Honorary
Trustee, Texas Christian
University (1986-Present);
Trustee, American AAdvantage
Funds (1996-Present);
Trustee, American AAdvantage
Mileage Funds (1996-
Present).
John S. Justin (80) Trustee Chairman and Chief Executive
2821 West Seventh Officer, Justin Industries,
Street Inc. (a diversified holding
Fort Worth, Texas company) (1969-Present);
76107 Executive Board Member, Blue
Cross/Blue Shield of Texas
(1985-Present); Board
Member, Zale Lipshy Hospital
(June 1993-Present);
Trustee, Texas Christian
University (1980-Present);
Director and Executive Board
Member, Moncrief Radiation
Center (1985-Present);
Director, Texas New Mexico
Enterprises (1984-1993);
Director, Texas New Mexico
Power Company (1979-1993);
Trustee, American AAdvantage
Funds (1989-Present);
Trustee, American AAdvantage
Mileage Funds (1995-
Present).
Stephen D. Trustee Consultant (1994-Present);
O'Sullivan* (61) Vice President and
Controller (1985-1994),
American Airlines, Inc.;
Trustee, American AAdvantage
Funds (1987-Present);
Trustee, American AAdvantage
Mileage Funds (1995-
Present).
Roger T. Staubach Trustee Chairman of the Board and
(55) Chief Executive Officer of
6750 LBJ Freeway The Staubach Company (a
Dallas, TX 75240 commercial real estate
company) (1982-present);
Director, Halliburton
Company (1991-present);
Director, First USA, Inc.
(1993-present); Director,
Brinker International (1993-
present); Director, Columbus
Realty Trust (1994-present);
Member of the Advisory
Board, The Salvation Army;
Trustee, Institute for
Aerobics Research; Member of
Executive Council,
Daytop/Dallas; former
quarterback of the Dallas
Cowboys professional
football team; Trustee,
American AAdvantage Funds
(1995-Present); Trustee,
American AAdvantage Mileage
Funds (1995-Present).
Kneeland Youngblood, Trustee Physician (1982-Present);
M.D. (40) 2305 Cedar President, Youngblood
Springs Road Enterprises, Inc. (a health
Suite 401 care investment and
Dallas, Texas 75201 management firm) (1983-
Present); Trustee, Teachers
Retirement System of Texas
(1993-Present); Director,
United States Enrichment
Corporation (1993-Present),
Director, Just For the Kids
(1995-Present); Member,
Council on Foreign Relations
(1995-Present; Trustee,
American AAdvantage Funds
(1996-Present); Trustee,
American AAdvantage Mileage
Funds (1996-Present).
Nancy A. Eckl (34) Vice Vice President, AMR
President Investment Services, Inc.
(December 1990-Present).
Michael W. Fields Vice Vice President, AMR
(43) President Investment Services, Inc.
(August 1988-Present).
Barry Y. Greenberg Vice Director, Legal and
(33) President Compliance, AMR Investment
and Services, Inc. (1995-
Assistant Present); Branch Chief (1992-
Secretary 1995) and Staff Attorney
(1988-1992), Securities and
Exchange Commission.
Rebecca L. Harris Treasurer Director of Finance (1995-
(30) Present), Controller (1991-
1995), AMR Investment
Services, Inc.
John B. Roberson Vice Vice President, AMR
(38) President Investments Services, Inc.
(1991-Present).
Thomas E. Jenkins, Assistant Senior Compliance Analyst,
Jr. (30) Secretary AMR Investment Services,
Inc. (1996-Present); Staff
Accountant (1994-1996) and
Compliance Examiner (1991-
1994), Securities and
Exchange Commission.
Adriana R. Posada Assistant Senior Compliance Analyst
(42) Secretary (1996-Present) and
Compliance Analyst (1993-
Present), AMR Investment
Services, Inc.; Special
Sales Representative,
American Airlines, Inc.
(1991-1993).
Janice B. Schwarz Assistant Senior Business Systems
(37) Secretary Coordinator, (1996-Present),
Senior Compliance Analyst
(1990-1996), AMR Investment
Services, Inc.
Clifford J. Secretary Partner, Kirkpatrick &
Alexander (53) Lockhart LLP (law firm)
Robert J. Zutz (44) Assistant Partner, Kirkpatrick &
Secretary Lockhart LLP (law firm)
</TABLE>
#The law firm of Akin, Gump, Strauss, Hauer & Feld LLP ("Akin, Gump")
provides legal services to American Airlines, Inc., an affiliate of
the Manager. Mr. Feld has advised the Trusts that he has had no
material involvement in the services provided by Akin, Gump to
American Airlines, Inc. and that he has received no material benefit
in connection with these services. Akin, Gump does not provide
legal services to the Manager or AMR Corporation.
*Messrs. Quinn and O'Sullivan, by virtue of their current or former
positions, are deemed to be "interested persons" of each Trust and
the AMR Trust as defined by the 1940 Act.
All Trustees and officers as a group own less than 1% of the
outstanding shares of any of the Funds.
As compensation for their service to the Trusts and the AMR
Trust, the Independent Trustees and their spouses receive free air
travel from American Airlines, Inc., an affiliate of the Manager.
The Trusts and the AMR Trust do not pay for these travel
arrangements. However, the Trusts and the AMR Trust compensate each
Trustee with payments in an amount equal to the Trustees' income tax
on the value of this free airline travel. Mr. O'Sullivan, whom as a
retiree of American Airlines, Inc. already receives free airline
travel, receives compensation annually of up to three round trip
airline tickets for each of his three adult children. Trustees are
also reimbursed for any expenses incurred in attending Board
meetings. These amounts are reflected in the following table for the
fiscal year ended October 31, 1996.(1)
<TABLE>
<CAPTION>
Pension
or
Retire- Estima
Aggregat ment ted
e Aggregate Benefits Annual Total
Compensa Compensa- Accrued Benefi Compensat
tion tion From as Part ts ion From
From the the of the Upon AAdvantag
Name of AAdvanta Mileage Trusts' Retire e Funds
Trustee ge Trust Trust Expenses ment Complex
<S> <C> <C> <C> <C> <C>
William F. $0 $0 $0 $0 $0
Quinn
John S. $373 $373 $0 $0 $1,492
Justin
Stephen D. $458 $458 $0 $0 $1,832
O'Sullivan
Roger T. $2,832 $2,832 $0 $0 $11,330
Staubach
</TABLE>
_______________
(1) Messrs. Feld and Fortson and Dr. Youngblood did not serve as
Trustees during the period.
MANAGEMENT, ADMINISTRATIVE SERVICES AND DISTRIBUTION FEES
As described more fully in the Prospectus, the Manager is paid a
management fee as compensation for its administrative services, for
paying investment advisory fees and for providing the Portfolios with
advisory and asset allocation services. Management fees for the
AAdvantage Trust for the fiscal years ended October 31 were
approximately as follows: 1994, $6,950,000 of which approximately
$2,965,000 was paid by the Manager to the other investment advisers;
1995, $7,603,000 of which approximately $3,985,000 was paid by the
Manager to the other investment advisers; and 1996, $10,853,000 of
which approximately $5,403,000 was paid by the Manager to the other
investment advisers. Management fees in the amount of approximately
$214,000, $29,000 and $44,000 were waived by the Manager during the
fiscal years ended October 31, 1994, 1995 and 1996, respectively.
These amounts include payments by Portfolios in the AAdvantage Trust
other than the Funds.
In addition to the management fee, the Manager is paid an
administrative services fee for providing administrative and
management services (other than investment advisory services) to the
Funds. Administrative services fees for the AAdvantage Trust for the
fiscal years ended October 31 were approximately as follows: 1994,
$1,473,000; 1995, $2,731,000; and 1996, $2,893,400. Administrative
service fees in the amount of approximately $14,000 and $9,000 were
waived by the Manager during the fiscal years ended October 31, 1994
and 1995, respectively. These amounts include payments by Portfolios
in the AAdvantage Trust other than the Funds.
Brokers Transaction Services, Inc. ("BTS"), is the distributor
of the Funds' shares. BTS receives an annualized fee of $50,000 from
the Manager for distributing the shares of the Trusts. Prior to
September 1, 1995, the AAdvantage Trust was self-distributed.
REDEMPTIONS IN KIND
Although each Fund intends to redeem shares in cash, each
reserves the right to pay the redemption price in whole or in part by
a distribution of readily marketable securities held by the
applicable Fund's corresponding Portfolio. However, shareholders
always will be entitled to redeem shares for cash up to the lesser of
$250,000 or 1% of the applicable Fund's net asset value during any 90
day period. Redemption in kind is not as liquid as a cash
redemption. In addition, if redemption is made in kind, shareholders
who receive securities and sell them could receive less than the
redemption value of their securities and could incur certain
transactions costs.
NET ASSET VALUE
It is the policy of the Funds to attempt to maintain a constant
price per share of $1.00. There can be no assurance that a $1.00 net
asset value per share will be maintained. The portfolio instruments
held by each Fund's corresponding Portfolio are valued based on the
amortized cost valuation technique pursuant to Rule 2a-7 under the
1940 Act. This involves valuing an instrument at its cost and
thereafter assuming a constant amortization to maturity of any
discount or premium, even though the portfolio security may increase
or decrease in market value. Such market fluctuations are generally
in response to changes in interest rates. Use of the amortized cost
valuation method requires the Funds' corresponding Portfolios to
purchase instruments having remaining maturities of 397 days or less,
to maintain a dollar-weighted average portfolio maturity of 90 days
or less, and to invest only in securities determined by the AMR Trust
Board to be of high quality with minimal credit risks. The
corresponding portfolios of the Money Market Funds may invest in
issuers or instruments that at the time of purchase have received the
highest short-term rating by two Rating Organizations, such as "D-1"
by Duff & Phelps and "F-1" by Fitch Investors Service, Inc., and have
received the next highest short-term rating by other Rating
Organizations, such as "A-2" by Standard & Poors and "P-2" by Moody's
Investors Service, Inc. See "Ratings of Municipal Obligations" and
"Ratings of Short-Term Obligations" for further information
concerning ratings.
TAX INFORMATION
Taxation of the Funds
To qualify for treatment as a regulated investment company
("RIC") under the Internal Revenue Code of 1986, as amended ("Code"),
each Fund (each of which is treated as a separate corporation for
these purposes) must, among other requirements:
Derive at least 90% of its gross income each taxable year from
dividends, interest, payments with respect to securities loans
and gains from the sale or other disposition of securities or
certain other income;
Derive less than 30% of its gross income each taxable year from
the sale or other disposition of securities that are not
directly related to the Fund's principal business of investing
in securities, that are held for less than three months ("Short-
Short Limitation");
Diversify its investments in securities within certain
statutory limits; and
Distribute annually to its shareholders at least 90% of its
investment company taxable income (generally, taxable net
investment income plus net short-term capital gain) plus, in
the case of the Municipal Money Market Fund, net interest
income excludable from gross income under Section 103(a) of the
Code ("Distribution Requirement").
Each Fund has received either a ruling from the Internal Revenue
Service ("IRS") or an opinion of counsel that the Fund, as an
investor in its corresponding Portfolio, is deemed to own a
proportionate share of the Portfolio's assets and to earn the income
on that share for purposes of determining whether the Fund satisfies
all the requirements described above to qualify as a RIC.
See the next section for a discussion of the tax consequences to
the Funds of certain investments by the Portfolios.
Taxation of the Portfolios
The Portfolios have received a ruling from the IRS to the effect
that, among other things, each Portfolio is treated as a separate
partnership for federal income tax purposes and is not a "publicly
traded partnership." As a result, no Portfolio is 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
income for purposes of determining whether the Fund satisfies the
requirements to qualify as a RIC, each Portfolio intends to conduct
its operations so that its corresponding Fund will be able to satisfy
all those requirements.
Distributions to a Fund from its corresponding Portfolio
(whether pursuant to a partial or complete withdrawal or otherwise)
will not result in the Fund's recognition of any gain or loss for
federal income tax purposes, except that (1) gain will be recognized
to the extent any cash that is distributed exceeds the Fund's basis
for its interest in the Portfolio before the distribution, (2) income
or gain will be recognized if the distribution is in liquidation of
the Fund's entire interest in the Portfolio and includes a
disproportionate share of any unrealized receivables held by the
Portfolio and (3) loss will be recognized if a liquidation
distribution consists solely of cash and/or unrealized receivables.
A Fund's basis for its interest in its corresponding Portfolio
generally will equal the amount of cash and the basis of any property
the Fund invests in the Portfolio, increased by the Fund's share of
the Portfolio's net income and gains and decreased by (a) the amount
of cash and the basis of any property the Portfolio distributes to
the Fund and (b) the Fund's share of the Portfolio's losses.
The Municipal Money Market Fund's corresponding Portfolio may
acquire zero coupon or other securities issued with original issue
discount. As an investor in the Portfolio that holds those
securities, the Municipal Money Market Fund would have to include in
its income its share of the original issue discount that accrues on
the securities during the taxable year, even if the Portfolio (and,
hence, the Fund) receives no corresponding payment on the securities
during the year. Because each Fund annually must distribute
substantially all of its investment company taxable income, including
any original issue discount, to satisfy the Distribution Requirement
and avoid imposition of the 4% excise tax described in the
Prospectus, the Municipal Money Market Fund may be required in a
particular year to distribute as a dividend an amount that is greater
than the total amount of cash it actually receives. Those
distributions would be made from the Fund's cash assets, if any, or
the proceeds of redemption of a portion of the Municipal Money Market
Fund's interest in its corresponding Portfolio (which redemption
proceeds would be paid from the Portfolio's cash assets or the
proceeds of sales of portfolio securities, if necessary). The
Portfolio might realize capital gains or losses from any such sales,
which would increase or decrease the Municipal Money Market Fund's
investment company taxable income and/or net capital gain (the excess
of net long-term capital gain over net short-term capital loss). In
addition, any such gains might be realized on the disposition of
securities held for less than three months. Because of the Short-
Short Limitation applicable to the Fund, any such gains would reduce
the Portfolio's ability to sell other securities held for less than
three months that it might wish to sell in the ordinary course of its
portfolio management.
Taxation of the Funds' Shareholders
Distributions by the Municipal Money Market Fund of the amount
by which income on tax-exempt securities exceeds certain amounts
disallowed as deductions, designated by it as "exempt-interest
dividends," generally may be excluded from gross income by its
shareholders. Dividends paid by the Municipal Money Market Fund will
qualify as exempt-interest dividends if, at the close of each quarter
of its taxable year, at least 50% of the value of its total assets
(including its share of the Municipal Money Market Portfolio's
assets) consists of securities the interest on which is excludable
from gross income under Section 103(a) of the Code. The Municipal
Money Market Fund intends to continue to satisfy this requirement.
The aggregate dividends excludable from shareholders' gross income
may not exceed the Municipal Money Market Fund's net tax-exempt
income. The shareholders' treatment of dividends from the Municipal
Money Market Fund under local and state income tax laws may differ
from the treatment thereof under the Code.
Exempt-interest dividends received by a corporate shareholder
may be indirectly subject to the alternative minimum tax. In
addition, entities or persons who are "substantial users" (or persons
related to "substantial users") of facilities financed by private
activity bonds ("PABs") or industrial development bonds ("IDBs")
should consult their tax advisers before purchasing shares of the
Municipal Money Market Fund because, for users of certain of these
facilities, the interest on those bonds is not exempt from federal
income tax. For these purposes, the term "substantial user" is
defined generally to include a "non-exempt person" who regularly uses
in trade or business a part of a facility financed from the proceeds
of PABs or IDBs.
Up to 85% of social security and railroad retirement benefits
may be included in taxable income for recipients whose adjusted gross
income (including income from tax-exempt sources such as the
Municipal Money Market Fund) plus 50% of their benefits exceeds
certain base amounts. Exempt-interest dividends from the Municipal
Money Market Fund still are tax-exempt to the extent described above;
they are only included in the calculation of whether a recipient's
income exceeds the established amounts.
The foregoing is only a summary of some of the important federal
tax considerations affecting the Funds and their shareholders and is
not intended as a substitute for careful tax planning. Accordingly,
prospective investors are advised to consult their own tax advisers
for more detailed information regarding the above and for information
regarding federal, state, local and foreign taxes.
YIELD AND TOTAL RETURN QUOTATIONS
The Platinum Class of the AAdvantage Trust commenced operations
on November 7, 1995 and the Platinum Class of the Mileage Trust
commenced operations on January 29, 1996. For purposes of
advertising performance, and in accordance with Securities and
Exchange Commission staff interpretations, the Funds in the
AAdvantage Trust have adopted the performance of the Institutional
Class of the Funds in the AAdvantage Trust for periods prior to the
inception date. The Mileage Fund has adopted the performance of the
American AAdvantage Money Market Mileage Fund - Mileage Class for
periods prior to its inception date. The performance results for the
Platinum Class will be lower, because the figures for the other
classes (except for the Mileage Fund) do not reflect the 12b-1 fees,
Administrative Services Plan fees or other class expenses that will
be borne by the Platinum Class.
A quotation of yield on shares of the Funds may appear from time
to time in advertisements and in communications to shareholders and
others. Quotations of yields are indicative of yields for the
limited historical period used but not for the future. Yield will
vary as interest rates and other conditions change. Yield also
depends on the quality, length of maturity and type of instruments
invested in by the Funds, and the applicable Fund's operating
expenses. A comparison of the quoted yields offered for various
investments is valid only if yields are calculated in the same
manner. In addition, other similar investment companies may have
more or less risk due to differences in the quality or maturity of
securities held.
The yields of the Funds may be calculated in one of two ways:
(1) Current Yield--the net average annualized return without
compounding accrued interest income. For a 7-day current yield,
this is computed by dividing the net change in value over a 7
calendar-day period of a hypothetical account having one share
at the beginning of a 7 calendar-day period by the value of the
account at the beginning of this period to determine the "base
period return". The quotient is multiplied by 365 divided by 7
and stated to two decimal places. A daily current yield is
calculated by multiplying the net change in value over one day
by 365 and stating it to two decimal places. Capital changes,
such as realized gains and losses from the sale of securities
and unrealized appreciation and depreciation, are excluded in
calculating the net change in value of an account, but this
calculation includes the aggregate fees and other expenses that
are charged to all shareholder accounts in a Fund. In
determining the net change in value of a hypothetical account,
this value is adjusted to reflect the value of any additional
shares purchased with dividends from the original share and
dividends declared on both the original share and any such
additional shares.
(2) Effective Yield--the net average annualized return as
computed by compounding accrued interest income. In determining
the 7-day effective yield, a Fund will compute the "base period
return" in the same manner used to compute the "current yield"
over a 7 calendar-day period as described above. One is then
added to the base period return and the sum is raised to the
365/7 power. One is subtracted from the result, according to
the following formula:
(365/7)
effective yield = [ (base period return + 1) ] - 1
The current and effective yields for the Funds are as follows:
<TABLE>
<CAPTION>
Current Current Effective
daily yield for yield for the
yield as the seven- seven-day
of October day period period ended
31, 1996 ended October 31,
October 31, 1996
1996
<S> <C> <C> <C>
Platinum Class
Money Market Fund 4.73% 4.73% 4.84%
Municipal Money Market 2.75% 2.75% 2.79%
Fund
U.S. Government Money 4.63% 4.33% 4.42%
Market Fund
Mileage Fund 4.59% 4.58% 4.68%
</TABLE>
The Municipal Money Market Fund also may advertise a tax-
equivalent current and effective yield. The tax-equivalent yields
are calculated as follows:
current yield/(1 - applicable tax rate) = current tax-equivalent
yield
effective yield/(1 - applicable tax rate) = effective tax-equivalent
yield
Based on these formulas, the current and effective tax-
equivalent yields for the Municipal Money Market Fund for the seven
day period ending October 31, 1996 were 4.55% and 4.62%, respectively
(based upon a 39.6% personal tax rate).
The advertised total return for a class of a Fund would be
calculated by equating an initial amount invested in a class of a
Fund to the ending redeemable value, according to the following
formula:
n
P(1 + T) = ERV
where "P" is a hypothetical initial payment of $1,000; "T" is the
average annual total return for the Fund; "n" is the number of years
involved; and "ERV" is the ending redeemable value of a hypothetical
$1,000 payment made in the Fund at the beginning of the investment
period covered.
Based on this formula, annualized total returns were as follows
for the periods indicated:
<TABLE>
<CAPTION>
For the one- For the For the
year period five-year period from
ended period commencement
October 31, ended of operations
1996(1) October 31, through
1996(1)(2) October 31,
1996(1)
<S> <C> <C> <C>
Platinum Class
Money Market Fund 4.85% 4.47% 6.11%
Municipal Money Market 2.88% N/A 3.03%
Fund
U. S. Government Money 4.58% N/A 4.16%
Mkt. Fund (3)
Mileage Fund 4.78% 4.23% 5.97%
</TABLE>
(1) Performance of the Funds of the AAdvantage Trust represents total
returns achieved by the Institutional Class from the inception date
of each Fund up to the inception date of the Platinum Class on
11/7/95. Performance of the Mileage Fund represents total return of
the Money Market Fund-Institutional Class (9/1/87-10/31/91); the
Money Market Fund-Mileage Class (11/1/91-10/31/95); the Money Market
Mileage Fund-Mileage Class (11/1/95-1/28/96) and the Money Market
Mileage Fund-Platinum Class since its 1/29/96 inception. Total
returns have not been adjusted for any difference between the fees
and expenses of each Fund and the historical fees and expenses of the
predecessor Funds. Inception dates are: Money Market Fund-
Institutional Class, 9/1/87; Municipal Money Market Fund-
Institutional Class, 11/10/93; U.S. Government Money Market Fund-
Institutional Class, 3/1/92.
(2) The Municipal Money Market Fund and the U.S. Government Money
Market Fund had not commenced active operations as of 11/1/91.
(3) Prior to March 1, 1997, the U.S. Government Money Market Fund was
known as the U.S. Treasury Money Market Fund and operated under
different investment policies.
Each Fund also may use "aggregate" total return figures for
various periods which represent the cumulative change in value of an
investment in a Fund for the specific period. Such total returns
reflect changes in share prices of a Fund and assume reinvestment of
dividends and distributions.
In reports or other communications to shareholders or in
advertising material, each class of a Fund may from time to time
compare its performance with that of other mutual funds in rankings
prepared by Lipper Analytical Services, Inc., Morningstar, Inc., IBC
Financial Data, Inc. and other similar independent services which
monitor the performance of mutual funds or publications such as the
"New York Times," "Barrons" and the "Wall Street Journal." Each Fund
may also compare its performance with various indices prepared by
independent services such as Standard & Poor's, Morgan Stanley or
Lehman Brothers or to unmanaged indices that may assume reinvestment
of dividends but generally do not reflect deductions for
administrative and management costs.
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.
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 and the American AAdvantage
Mileage Funds. Prizes may include free air travel and/or hotel
accommodations. Listings for certain of the Funds may be found in
newspapers under the heading Amer AAdvant.
Each Fund may advertise the standard deviation of its returns for
various time periods and compare its standard deviation to that of
various indices. Standard deviation of returns over time is a measure
of volatility. It indicates the spread of returns about their central
tendency or mean. In theory, a Fund that is more volatile should
receive a higher return in exchange for taking extra risk. Standard
deviation is a well-accepted statistic to gauge the riskiness of an
investment strategy and measure its historical volatility as a
predictor of risk, although the measure is subject to time selection
bias.
DESCRIPTION OF THE TRUST
The AAdvantage Trust organized on January 16, 1987 and the
Mileage Trust, organized on February 22, 1995, (originally named
American AAdvantage Funds II) are entities of the type commonly known
as a "Massachusetts business trust." Under Massachusetts law,
shareholders of such a trust may, under certain circumstances, be held
personally liable for its obligations. However, each Trust's
Declaration of Trust contains an express disclaimer of shareholder
liability for acts or obligations of the Trust and provides for
indemnification and reimbursement of expenses out of Trust property
for any shareholder held personally liable for the obligations of the
Trust. The Declaration of Trust also provides that the Trusts may
maintain appropriate insurance (for example, fidelity bonding) for the
protection of the Trust, its shareholders, Trustees, officers,
employees and agents to cover possible tort and other liabilities.
Thus, the risk of a shareholder incurring financial loss due to
shareholder liability is limited to circumstances in which both
inadequate insurance existed and the Trust itself was unable to meet
its obligations. The Trust has not engaged in any other business.
The Platinum Class was created as an investment vehicle for cash
balances of customers of certain broker-dealers.
CONTROL PERSONS AND 5% SHAREHOLDERS
There are no persons deemed to control any Funds by virtue of
their ownership of more than 25% of the outstanding shares of a Fund
as of January 31, 1997:
OTHER INFORMATION
Bank Deposit Notes-Bank deposit notes are obligations of a bank,
rather than bank holding company corporate debt. The only structural
difference between bank deposit notes and certificates of deposit is
that interest on bank deposit notes is calculated on a 30/360 basis
as are corporate notes/bonds. Similar to certificates of deposit,
deposit notes represent bank level investments and, therefore, are
senior to all holding company corporate debt.
Bankers' Acceptances-Bankers' acceptances are short-term credit
instruments designed to enable businesses to obtain funds to finance
commercial transactions. Generally, an acceptance is a time draft
drawn on a bank by an exporter or an importer to obtain a stated
amount of funds to pay for specific merchandise. The draft is then
"accepted" by a bank that, in effect, unconditionally guarantees to
pay the face value of the instrument on its maturity date. The
acceptance may then be held by the accepting bank as an earning asset
or it may be sold in the secondary market at the going rate of
discount for a specific maturity. Although maturities for
acceptances can be as long as 270 days, most acceptances have
maturities of six months or less.
Cash Equivalents-Cash equivalents include certificates of
deposit, bearer deposit notes, bankers' acceptances, government
obligations, commercial paper, short-term corporate debt securities
and repurchase agreements.
Certificates of Deposit-Certificates of deposit are issued
against funds deposited in an eligible bank (including its domestic
and foreign branches, subsidiaries and agencies), are for a definite
period of time, earn a specified rate of return and are normally
negotiable.
Commercial Paper-Commercial paper refers to promissory notes
representing an unsecured debt of a corporation or finance company
with a fixed maturity of no more than 270 days. A variable amount
master demand note (which is a type of commercial paper) represents a
direct borrowing arrangement involving periodically fluctuating rates
of interest under a letter agreement between a commercial paper
issuer and an institutional lender pursuant to which the lender may
determine to invest varying amounts.
Derivatives-Generally, a derivative is a financial arrangement,
the value of which is based on, or "derived" from, a traditional
security, asset or market index. Some "derivatives" such as mortgage-
related and other asset-backed securities are in many respects like
any other investment, although they may be more volatile or less
liquid than more traditional debt securities. There are, in fact,
many different types of derivatives and many different ways to use
them. There are a range of risks associated with those uses.
Full Faith and Credit Obligations of the U.S. Government-
Securities issued or guaranteed by the U.S. Treasury, backed by the
full taxing power of the U.S. Government or the right of the issuer
to borrow from the U.S. Treasury.
Illiquid Securities. Historically, illiquid securities have
included securities subject to contractual or legal restrictions on
resale because they have not been registered under the 1933 Act,
securities that are otherwise not readily marketable and repurchase
agreements having a remaining maturity of longer than seven calendar
days. Securities that have not been registered under the 1933 Act
are referred to as private placements or restricted securities and
are purchased directly from the issuer or in the secondary market.
Mutual funds do not typically hold a significant amount of these
restricted or other illiquid securities because of the potential for
delays on resale and uncertainty in valuation. Limitations on resale
may have an adverse effect on the marketability of portfolio
securities and a mutual fund might be unable to dispose of restricted
or other illiquid securities promptly or at reasonable prices and
might thereby experience difficulty satisfying redemptions within
seven calendar days. A mutual fund also might have to register such
restricted securities in order to dispose of them resulting in
additional expense and delay. Adverse market conditions could impede
such a public offering of securities.
In recent years, however, a large institutional market has
developed for certain securities that are not registered under the
1933 Act, including repurchase agreements, commercial paper, foreign
securities, municipal securities and corporate bonds and notes.
Institutional investors depend on an efficient institutional market
in which the unregistered security can be readily resold or on an
issuer's ability to honor a demand for repayment. However, the fact
that there are contractual or legal restrictions on resale of such
investments to the general public or to certain institutions may not
be indicative of their liquidity.
Loan Participation Interests-Loan participation interests
represent interests in bank loans made to corporations. The
contractual arrangement with the bank transfers the cash stream of
the underlying bank loan to the participating investor. Because the
issuing bank does not guarantee the participations, they are subject
to the credit risks generally associated with the underlying
corporate borrower. In addition, because it may be necessary under
the terms of the loan participation for the investor to assert
through the issuing bank such rights as may exist against the
underlying corporate borrower, in the event the underlying corporate
borrower fails to pay principal and interest when due, the investor
may be subject to delays, expenses and risks that are greater than
those that would have been involved if the investor had purchased a
direct obligation (such as commercial paper) of such borrower.
Moreover, under the terms of the loan participation, the investor may
be regarded as a creditor of the issuing bank (rather than of the
underlying corporate borrower), so that the issuer may also be
subject to the risk that the issuing bank may become insolvent.
Further, in the event of the bankruptcy or insolvency of the
corporate borrower, the loan participation may be subject to certain
defenses that can be asserted by such borrower as a result of
improper conduct by the issuing bank. The secondary market, if any,
for these loan participations is extremely limited and any such
participations purchased by the investor are regarded as illiquid.
Loan Transactions-Loan transactions involve the lending of
securities to a broker-dealer or institutional investor for its use
in connection with short sales, arbitrages or other security
transactions. The purpose of a qualified loan transaction is to
afford a lender the opportunity to continue to earn income on the
securities loaned and at the same time earn fee income or income on
the collateral held by it.
Securities loans will be made in accordance with the following
conditions: (1) the Portfolio must receive at least 100% collateral
in the form of cash or cash equivalents, securities of the U.S.
Government and its agencies and instrumentalities, and approved bank
letters of credit; (2) the borrower must increase the collateral
whenever the market value of the loaned securities (determined on a
daily basis) rises above the level of collateral; (3) the Portfolio
must be able to terminate the loan after notice, at any time; (4) the
Portfolio must receive reasonable interest on the loan or a flat fee
from the borrower, as well as amounts equivalent to any dividends,
interest or other distributions on the securities loaned, and any
increase in market value of the loaned securities; (5) the Portfolio
may pay only reasonable custodian fees in connection with the loan;
and (6) voting rights on the securities loaned may pass to the
borrower, provided, however, that if a material event affecting the
investment occurs, the AMR Trust Board must be able to terminate the
loan and vote proxies or enter into an alternative arrangement with
the borrower to enable the AMR Trust Board to vote proxies.
While there may be delays in recovery of loaned securities or
even a loss of rights in collateral supplied should the borrower fail
financially, loans will be made only to firms deemed by the AMR Trust
Board to be of good financial standing and will not be made unless
the consideration to be earned from such loans would justify the
risk. Such loan transactions are referred to in this Statement of
Additional Information as "qualified" loan transactions.
The cash collateral so acquired through qualified loan
transactions may be invested only in those categories of high quality
liquid securities previously authorized by the AMR Trust Board.
Mortgage-Backed Securities-Mortgage-backed securities consist of
both collateralized mortgage obligations and mortgage pass-through
certificates.
Collateralized Mortgage Obligations ("CMOs")-CMOs and interests
in real estate mortgage investment conduits ("REMICs") are debt
securities collateralized by mortgages, or mortgage pass-through
securities. CMOs divide the cash flow generated from the underlying
mortgages or mortgage pass-through securities into different groups
referred to as "tranches," which are then retired sequentially over
time in order of priority. The principal governmental issuers of
such securities are the Federal National Mortgage Association
("FNMA"), a government sponsored corporation owned entirely by
private stockholders and the Federal Home Loan Mortgage Corporation
("FHLMC"), a corporate instrumentality of the United States created
pursuant to an act of Congress which is owned entirely by Federal
Home Loan Banks. The issuers of CMOs are structured as trusts or
corporations established for the purpose of issuing such CMOs and
often have no assets other than those underlying the securities and
any credit support provided. A REMIC is a mortgage securities vehicle
that holds residential or commercial mortgages and issues securities
representing interests in those mortgages. A REMIC may be formed as
a corporation, partnership, or segregated pool of assets. The REMIC
itself is generally exempt from federal income tax, but the income
from the mortgages is reported by investors. For investment
purposes, interests in REMIC securities are virtually
indistinguishable from CMOs.
Mortgage Pass-Through Certificates-Mortgage pass-through
certificates are issued by governmental, government-related and
private organizations which are backed by pools of mortgage loans.
(1) Government National Mortgage Association ("GNMA") Mortgage
Pass-Through Certificates ("Ginnie Maes")-GNMA is a wholly-owned U.S.
Government corporation within the Department of Housing and Urban
Development. Ginnie Maes represent an undivided interest in a pool
of mortgages that are insured by the Federal Housing Administration
or the Farmers Home Administration or guaranteed by the Veterans
Administration. Ginnie Maes entitle the holder to receive all
payments (including prepayments) of principal and interest owed by
the individual mortgagors, net of fees paid to GNMA and to the issuer
which assembles the mortgage pool and passes through the monthly
mortgage payments to the certificate holders (typically, a mortgage
banking firm), regardless of whether the individual mortgagor
actually makes the payment. Because payments are made to certificate
holders regardless of whether payments are actually received on the
underlying mortgages, Ginnie Maes are of the "modified pass-through"
mortgage certificate type. The GNMA is authorized to guarantee the
timely payment of principal and interest on the Ginnie Maes. The
GNMA guarantee is backed by the full faith and credit of the United
States, and the GNMA has unlimited authority to borrow funds from the
U.S. Treasury to make payments under the guarantee. The market for
Ginnie Maes is highly liquid because of the size of the market and
the active participation in the secondary market of security dealers
and a variety of investors.
(2) FHLMC Mortgage Participation Certificates ("Freddie Macs")-
Freddie Macs represent interests in groups of specified first lien
residential conventional mortgages underwritten and owned by the
FHLMC. Freddie Macs entitle the holder to timely payment of
interest, which is guaranteed by the FHLMC. The FHLMC guarantees
either ultimate collection or timely payment of all principal
payments on the underlying mortgage loans. In cases where the FHLMC
has not guaranteed timely payment of principal, the FHLMC may remit
the amount due because of its guarantee of ultimate payment of
principal at any time after default on an underlying mortgage, but in
no event later than one year after it becomes payable. Freddie Macs
are not guaranteed by the United States or by any of the Federal Home
Loan Banks and do not constitute a debt or obligation of the United
States or of any Federal Home Loan Bank. The secondary market for
Freddie Macs is highly liquid because of the size of the market and
the active participation in the secondary market of the FHLMC,
security dealers and a variety of investors.
(3) FNMA Guaranteed Mortgage Pass-Through Certificates ("Fannie
Maes")-Fannie Maes represent an undivided interest in a pool of
conventional mortgage loans secured by first mortgages or deeds of
trust, on one family or two to four family, residential properties.
The FNMA is obligated to distribute scheduled monthly installments of
principal and interest on the mortgages in the pool, whether or not
received, plus full principal of any foreclosed or otherwise
liquidated mortgages. The obligation of the FNMA under its guarantee
is solely its obligation and is not backed by, nor entitled to, the
full faith and credit of the United States.
(4) Mortgage-Related Securities Issued by Private Organizations-
Pools created by non-governmental issuers generally offer a higher
rate of interest than government and government-related pools because
there are no direct or indirect government guarantees of payments in
such pools. However, timely payment of interest and principal of
these pools is often partially supported by various enhancements such
as over-collateralization and senior/subordination structures and by
various forms of insurance or guarantees, including individual loan,
title, pool and hazard insurance. The insurance and guarantees are
issued by government entities, private insurers or the mortgage
poolers. Although the market for such securities is becoming
increasingly liquid, securities issued by certain private
organizations may not be readily marketable.
Municipal Lease Obligations ("MLOs")-MLOs are issued by state
and local governments and authorities to acquire land and a wide
variety of equipment and facilities. These obligations typically are
not fully backed by the municipality's credit and thus interest may
become taxable if the lease is assigned. If funds are not
appropriated for the following year's lease payments, a lease may
terminate with the possibility of default on the lease obligation.
With respect to MLOs purchased by the corresponding Portfolio of the
Municipal Money Market Fund, the AMR Trust Board has established the
following guidelines for determining the liquidity of the MLOs in its
portfolio, and, subject to review by the AMR Trust Board, has
delegated that responsibility to the investment adviser: (1) the
frequency of trades and quotes for the security; (2) the number of
dealers willing to purchase or sell the security and the number of
other potential buyers; (3) the willingness of dealers to undertake
to make a market in the security; (4) the nature of the marketplace
trades; (5) the likelihood that the marketability of the obligation
will be maintained through the time the security is held by the
Portfolio; (6) the credit quality of the issuer and the lessee; (7)
the essentiality to the lessee of the property covered by the lease
and (8) for unrated MLOs, the MLOs' credit status analyzed according
to the factors reviewed by rating agencies.
Private Activity Obligations-Private activity obligations are
issued to finance, among other things, privately operated housing
facilities, pollution control facilities, convention or trade show
facilities, mass transit, airport, port or parking facilities and
certain facilities for water supply, gas, electricity, sewage or
solid waste disposal. Private activity obligations are also issued
to privately held or publicly owned corporations in the financing of
commercial or industrial facilities. The principal and interest on
these obligations may be payable from the general revenues of the
users of such facilities. Shareholders, depending on their
individual tax status, may be subject to the federal alternative
minimum tax on the portion of a distribution attributable to these
obligations. Interest on private activity obligations will be
considered exempt from federal income taxes; however, shareholders
should consult their own tax advisers to determine whether they may
be subject to the federal alternative minimum tax.
Ratings of Long-Term Obligations-The Portfolio utilizes ratings
provided by the following nationally recognized statistical rating
organizations ("Rating Organizations") in order to determine
eligibility of long-term obligations.
The two highest Moody's Investors Service, Inc. ("Moody's")
ratings for long-term obligations (or issuers thereof) are Aaa and
Aa. Obligations rated Aaa are judged by Moody's to be of the best
quality. Obligations rated Aa are judged to be of high quality by
all standards. Together with the Aaa group, such debt comprises what
is generally known as high-grade debt. Moody's states that debt
rated Aa is rated lower than Aaa debt because margins of protection
or other elements make long-term risks appear somewhat larger than
for Aaa debt. Moody's also supplies numerical indicators 1, 2, and 3
to rating categories. The modifier 1 indicates that the security is
in the higher end of its rating category; the modifier 2 indicates a
mid-range ranking; and modifier 3 indicates a ranking toward the
lower end of the category.
The two highest Standard & Poor's ratings for long-term
obligations are AAA and AA. Obligations rated AAA have the highest
rating assigned by Standard & Poor's. Capacity to pay interest and
repay principal is extremely strong. Obligations rated AA have a
very strong capacity to pay interest and repay principal and differs
from the highest rated issues only in a small degree.
Duff & Phelps' two highest ratings for long-term obligations are
AAA and AA. Obligations rated AAA have the highest credit quality
with risk factors being negligible. Obligations rated AA are of high
credit quality and strong protection factors. Risk is modest but may
vary slightly from time to time because of economic conditions.
Thomson BankWatch ("BankWatch") long-term debt ratings apply to
specific issues of long-term debt and preferred stock. They
specifically assess the likelihood of an untimely repayment of
principal or interest over the term to maturity of the rated
instrument. BankWatch's two highest ratings for long-term
obligations are AAA and AA. Obligations rated AAA indicate that the
ability to repay principal and interest on a timely basis is very
high. Obligations rated AA indicate a superior ability to repay
principal and interest on a timely basis, with limited incremental
risk compared to issues rated in the highest category.
Fitch Investors Service, 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.
IBCA's two highest long term obligation ratings are AAA and AA.
Obligations rated AAA are those for which there is the lowest
expectation of investment risk. Capacity for timely repayment of
principal and interest is substantial such that adverse changes in
business, economic or financial conditions are unlikely to increase
investment risk substantially. AA obligations have a very low
expectation of investment risk. Capacity for timely repayment of
principal and interest is substantial. Adverse changes in business,
economic, or financial conditions may increase investment risk albeit
not very significantly.
Standard & Poor's, Duff & Phelps and Fitch apply indicators,
such as "+","-," or no character, to indicate relative standing
within the major rating categories.
Ratings of Municipal Obligations-Moody's ratings for state and
municipal short-term obligations are designated Moody's Investment
Grade or "MIG" with variable rate demand obligations being designated
as "VMIG." A VMIG rating may also be assigned to commercial paper
programs which are characterized as having variable short-term
maturities but having neither a variable rate nor demand feature.
Factors used in determination of ratings include liquidity of the
borrower and short-term cyclical elements.
Standard & Poor's uses SP-1, SP-2, and SP-3 to rate short-term
municipal obligations. A rating of SP-1 denotes a very strong or
strong capacity to pay principal and interest.
Ratings of Short-term Obligations-The rating P-1 is the highest
short-term rating assigned by Moody's. Among the factors considered
by Moody's in assigning ratings are the following: (1) evaluations
of the management of the issuer; (2) economic evaluation of the
issuer's industry or industries and an appraisal of speculative-type
risks which may be inherent in certain areas; (3) evaluation of the
issuer's products in relation to competition and customer acceptance;
(4) liquidity; (5) amount and quality of long-term debt; (6) trend of
earnings over a period of ten years; (7) financial strength of a
parent company and the relationships which exist with the issuer; and
(8) recognition by the management of obligations which may be present
or may arise as a result of public interest questions and
preparations to meet such obligations.
Short-term obligations (or issuers thereof) rated A-1 by
Standard & Poor's have the following characteristics. Liquidity
ratios are adequate to meet cash requirements. The issuer has access
to at least two additional channels of borrowing. Basic earnings and
cash flow have an upward trend with allowance made for unusual
circumstances. Typically, the issuer's industry is well established
and the issuer has a strong position within the industry. The
reliability and quality of management are unquestioned. Relative
strength or weakness of the above factors determines whether the
issuer's short-term obligation is rated A-1, A-2, or A-3.
IBCA's short-term rating of A-1 indicates obligations supported
by the highest capacity for timely repayment. Where issues possess
particularly strong credit features, a rating of A-1+ is assigned.
Obligations rated A-2 are supported by a good capacity for timely
repayment.
The distinguishing feature of Duff & Phelps Credit Ratings'
short-term rating is the refinement of the traditional 1 category.
The majority of short-term debt issuers carry the highest rating, yet
quality differences exist within that tier. Obligations rated D-1+
indicate the highest certainty of timely payment. Safety is just
below risk-free U.S. Treasury obligations. Obligations rated D-1
have a very high certainty of timely payment. Risk factors are
minor. Obligations rated D-1- have a high certainty of timely
payment. Risk factors are very small. Obligations rated D-2 have
good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge
total financing requirements, access to capital markets is good.
Risk factors are small.
Thomson BankWatch short-term ratings are intended to assess the
likelihood of an untimely or incomplete payment of principal or
interest. Obligations rated TBW-1 indicate a very high likelihood
that principal and interest will be paid on a timely basis. While
the degree of safety regarding timely payment of principal and
interest is strong for an obligation rated TBW-2, the relative degree
of safety is not as high as for issues rated TBW-1.
Fitch's short-term ratings apply to debt obligations that are
payable on demand or have original maturities of generally up to
three years, including commercial paper, certificates of deposit,
medium-term notes, and municipal and investment notes. A rating of F-
1+ indicates exceptionally strong credit quality. Issues assigned
this rating are regarded as having the strongest degree of assurance
for timely payment. Obligations rated F-1 have very strong credit
quality. Issues assigned this rating reflect an assurance of timely
payment only slightly less in degree than issues rated F-1+. Issues
assigned a rating of F-2 indicate good credit quality. Issues
assigned this rating have a satisfactory degree of assurance for
timely payment, but the margin of safety is not as great as for
issues assigned F-1+ and F-1 ratings.
Repurchase Agreements-A repurchase agreement, which provides a
means to earn income on funds for periods as short as overnight, is
an arrangement under which the purchaser (e.g., a Portfolio)
purchases securities and the seller agrees, at the time of sale, to
repurchase the securities at a specified time and price. The
repurchase price will be higher than the purchase price, the
difference being income to the purchaser, or the purchase and
repurchase prices may be the same, with interest at a stated rate due
to the purchaser together with the repurchase price on repurchase.
In either case, the income to the purchaser is unrelated to the
interest rate on the securities subject to the repurchase agreement.
Each Portfolio may enter into repurchase agreements with any
bank or registered broker-dealer who, in the opinion of the AMR Trust
Board presents a minimum risk of bankruptcy during the term of the
agreement based upon guidelines that periodically are reviewed by the
AMR Trust Board. Each Portfolio may enter into repurchase agreements
as a short-term investment of its idle cash in order to earn income.
The securities will be held by a custodian (or agent) approved by the
AMR Trust Board during the term of the agreement. However, if the
market value of the securities subject to the repurchase agreement
becomes less than the repurchase price (including interest), the
Portfolio will direct the seller of the securities to deliver
additional securities so that the market value of all securities
subject to the repurchase agreement will equal or exceed the
repurchase price.
In the event of the commencement of bankruptcy or insolvency
proceedings with respect to the seller of the securities before the
repurchase of the securities under a repurchase agreement, a
Portfolio may encounter a delay and incur costs before being able to
sell the security being held as collateral. Delays may involve loss
of interest or decline in price of the securities. Apart from the
risk of bankruptcy or insolvency proceedings, there is also the risk
that the seller may fail to repurchase the securities, in which case
a Portfolio may incur a loss if the proceeds to the Portfolio from
the sale of the securities to a third party are less than the
repurchase price.
Reverse Repurchase Agreements-The Portfolios may borrow funds
for temporary purposes by entering into reverse repurchase
agreements. Pursuant to such agreements, a Portfolio would sell
portfolio securities to financial institutions such as banks and
broker/dealers and agree to repurchase them at a mutually agreed-upon
date and price. The Portfolios intend to enter into reverse
repurchase agreements only to avoid selling securities to meet
redemptions during market conditions deemed unfavorable by the
investment adviser possessing investment authority. At the time a
Portfolio enters into a reverse repurchase agreement, it will place
in a segregated custodial account assets such as liquid high quality
debt securities having a value not less than 100% of the repurchase
price (including accrued interest), and will subsequently monitor the
account to ensure that such required value is maintained. Reverse
repurchase agreements involve the risk that the market value of the
securities sold by a Portfolio may decline below the price at which
such Portfolio is obligated to repurchase the securities. Reverse
repurchase agreements are considered to be borrowings by an
investment company under the 1940 Act.
Resource Recovery Obligations-Resource recovery obligations are
a type of municipal revenue obligation issued to build facilities
such as solid waste incinerators or waste-to-energy plants. Usually,
a private corporation will be involved and the revenue cash flow will
be supported by fees or units paid by municipalities for use of the
facilities. The viability of a resource recovery project,
environmental protection regulations and project operator tax
incentives may affect the value and credit quality of these
obligations.
Revenue Obligations-Revenue obligations are backed by the
revenue cash flow of a project or facility.
Separately Traded Registered Interest and Principal Securities
and Zero Coupon Obligations-Separately traded registered interest and
principal securities or "STRIPS" and zero coupon obligations are
securities that do not make regular interest payments. Instead they
are sold at a discount from their face value. Each Portfolio will
take into account as income a portion of the difference between these
obligations' purchase prices and their face values. Because they do
not pay coupon income, the prices of STRIPS and zero coupon
obligations can be very volatile when interest rates change. STRIPS
are zero coupon bonds issued by the U.S. Treasury.
Tax, Revenue or Bond Anticipation Notes-Tax, revenue or bond
anticipation notes are issued by municipalities in expectation of
future tax or other revenues which are payable from these specific
taxes or revenues. Bond anticipation notes usually provide interim
financing in advance of an issue of bonds or notes, the proceeds of
which are used to repay the anticipation notes. Tax-exempt
commercial paper is issued by municipalities to help finance short-
term capital or operating needs in anticipation of future tax or
other revenue.
U.S. Government Securities-U.S. Government securities are issued
or guaranteed by the U.S. Government and include U.S. Treasury
obligations (see definition below) and securities issued by U.S.
agencies and instrumentalities.
U. S. Government agencies or instrumentalities that issue or
guarantee securities include, but are not limited to, the Federal
Housing Administration, Farmers Home Administration, Export-Import
Bank of the United States, Small Business Administration, GNMA,
General Services Administration, Central Bank for Cooperatives,
Federal Home Loan Banks, FHLMC, Federal Intermediate Credit Banks,
Federal Land Banks, Maritime Administration, Tennessee Valley
Authority, District of Columbia Armory Board, Inter-American
Development Bank, Asian-American Development Bank, Agency for
International Development, Student Loan Marketing Association and
International Bank of Reconstruction and Development.
Obligations of U.S. Government agencies and instrumentalities
may or may not be supported by the full faith and credit of the
United States. Some are backed by the right of the issuer to borrow
from the Treasury; others are supported by discretionary authority of
the U.S. Government to purchase the agencies' obligations; while
still others, such as the Student Loan Marketing Association, are
supported only by the credit of the instrumentality. In the case of
securities not backed by the full faith and credit of the United
States, the investor must look principally to the agency issuing or
guaranteeing the obligation for ultimate repayment, and may not be
able to assert a claim against the United States itself in the event
the agency or instrumentality does not meet its commitment.
U.S. Treasury Obligations-U.S. Treasury obligations include
bills, notes and bonds issued by the U.S. Treasury and Separately
Traded Registered Interest and Principal component parts of such
obligations known as STRIPS.
Variable or Floating Rate Obligations-A variable rate obligation
is one whose terms provide for the adjustment of its interest rate on
set dates and which, upon such adjustment, can reasonably be expected
to have a market value that approximates its par value. A floating
rate obligation is one whose terms provide for the adjustment of its
interest rate whenever a specified interest rate changes and which,
at any time, can reasonably be expected to have a market value that
approximates its par value. Variable or floating rate obligations
may be secured by bank letters of credit.
Pursuant to Rule 2a-7 under the 1940 Act, variable or floating
rate obligations with stated maturities of more than 397 days may be
deemed to have shorter maturities as follows:
(1) An obligation that is issued or guaranteed by the United
States Government or any agency thereof which has a variable rate of
interest readjusted no less frequently than every 762 days will be
deemed by a Portfolio to have a maturity equal to the period
remaining until the next readjustment of the interest rate.
(2) A variable rate obligation, the principal amount of which
is scheduled on the face of the instrument to be paid in 397 days or
less, will be deemed by a Portfolio to have a maturity equal to the
period remaining until the next readjustment of the interest rate.
(3) A variable rate obligation that is subject to a demand
feature will be deemed by a Portfolio to have a maturity equal to the
longer of the period remaining until the next readjustment of the
interest rate or the period remaining until the principal amount can
be recovered through demand.
(4) A floating rate obligation that is subject to a demand
feature will be deemed by a Portfolio to have a maturity equal to the
period remaining until the principal amount can be recovered through
demand.
As used above, an obligation is "subject to a demand feature"
when a Portfolio is entitled to receive the principal amount of the
obligation either at any time on no more than 30 days' notice or at
specified intervals not exceeding one year and upon no more than 30
days' notice.
Variable Rate Auction and Residual Interest Obligations-Variable
rate auction and residual interest obligations are created when an
issuer or dealer separates the principal portion of a long-term,
fixed-rate municipal bond into two long-term, variable-rate
instruments. The interest rate on one portion reflects short-term
interest rates, while the interest rate on the other portion is
typically higher than the rate available on the original fixed-rate
bond.
FINANCIAL STATEMENTS
The American AAdvantage Money Market Funds' and the American
AAdvantage Mileage Funds' Annual Reports to Shareholders for the
fiscal year ended October 31, 1996, as audited by Ernst & Young, LLP,
are supplied with the SAI, and the financial statements and
accompanying notes appearing therein are incorporated by reference in
this SAI.
TABLE OF CONTENTS
Investment Restrictions 1
Trustees and Officers of the Trust and the AMR Trust 2
Management, Administrative Services and Distribution Fees 5
Redemptions in Kind 6
Net Asset Value 6
Tax Information 6
Yield and Total Return Quotations 8
Description of the Trust 11
Control Persons and 5% Shareholders 11
Other Information 11
Financial Statements 18
