<PAGE> 1
As filed with the Securities and Exchange Commission on February 26, 1998
1933 Act File No. 33-91058
1940 Act File No. 811-9018
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. 6 [ X ]
--------
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940 [ X ]
Amendment No. 7
--------
(Check appropriate box or boxes.)
AMERICAN AADVANTAGE MILEAGE FUNDS
(Exact name of Registrant as Specified in Charter)
4333 Amon Carter Boulevard
Fort Worth, Texas 76155
(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, including Area Code: (817) 967-3509
WILLIAM F. QUINN, PRESIDENT
4333 Amon Carter Boulevard
Fort Worth, Texas 76155
(Name and Address of Agent for Service)
Copy to:
ROBERT J. ZUTZ, ESQ.
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, NW
Washington, DC 20036
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[ X ] on March 2, 1998 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485.
Title of Securities Being Registered ...........Shares of Beneficial Interest
Registrant has adopted a master-feeder operating structure for each of its
series. This Post-Effective Amendment includes signature pages for the AMR
Investment Services Trust and the Equity 500 Index Portfolios, the master
trusts.
<PAGE> 2
AMERICAN AADVANTAGE MILEAGE FUNDS
CONTENTS OF REGISTRATION STATEMENT
This registration statement is comprised of the following:
Cover Sheet
Contents of Registration Statement
Cross Reference Sheets
Prospectus for the following American AAdvantage Mileage
Funds: Balanced Fund, Growth and Income Fund, International
Equity Fund, S&P 500 Index Fund, Intermediate Bond Fund,
Short-Term Bond Fund, Money Market Fund, Municipal Money
Market Fund and U.S. Government Money Market Fund.
Statement of Additional Information for the following American
AAdvantage Mileage Funds: Balanced Fund, Growth and Income
Fund, International Equity Fund, S&P 500 Index Fund,
Intermediate Bond Fund, Short-Term Bond Fund, Money Market
Fund, Municipal Money Market Fund, and U.S. Government Money
Market Fund.
Prospectus for the Platinum Class of the American AAdvantage
Money Market Mileage Fund, American AAdvantage Money Market
Fund, American AAdvantage Municipal Money Market Fund and
American AAdvantage U.S. Government Money Market Fund.
Statement of Additional Information for the Platinum Class of
the American AAdvantage Money Market Mileage Fund, American
AAdvantage Money Market Fund, American AAdvantage Municipal
Money Market Fund, American AAdvantage U.S. Government Money
Market Fund.
Part C
Signature Pages
Exhibits
<PAGE> 3
AMERICAN AADVANTAGE MILEAGE FUNDS
American AAdvantage Mileage Funds -- Balanced, Growth and Income,
International Equity, Short-Term Bond, Money Market (Mileage
Class), Municipal Money Market and U.S. Government Money Market
Funds.
FORM N-1A CROSS-REFERENCE SHEET
Part A
<TABLE>
<CAPTION>
Form N-1A
- ---------
Item No. PROSPECTUS CAPTION
- -------- ------------------
<S> <C>
1 Cover Page
2 Table of Fees and Expenses
3 Financial Highlights; Yields and Total Returns
4 Cover Page; Introduction; Investment Objectives, Policies and Risks; Investment Restrictions
5 Management and Administration of the Trusts; Investment Advisers
5A Not Applicable
6 Dividends, Other Distributions and Tax Matters; General Information; Shareholder Communications
7 Management and Administration of the Trusts; AAdvantage Miles(R); How to Purchase Shares;
Valuation of Shares
8 How to Redeem Shares; Exchange Privilege
9 Inapplicable
</TABLE>
Part B
<TABLE>
<CAPTION>
FORM N-1A STATEMENT OF ADDITIONAL
ITEM NO. INFORMATION CAPTION
- -------- ---------------------
<S> <C>
10 Cover Page
11 Table of Contents
12 Cover Page
13 Investment Restrictions; Approach to Stock Selection; Other Information
14 Trustees and Officers of the Mileage Trust and the AMR Trust; Trustees and Officers of the
Equity 500 Index Portfolio
</TABLE>
<PAGE> 4
<TABLE>
<S> <C>
15 Control Persons and 5% Shareholders
16 Management, Administrative Services and Distribution Fees; Investment Advisory Agreements
17 Portfolio Securities Transactions
18 Description of the Mileage Trust; Other Information
19 Net Asset Value; Redemptions in Kind
20 Tax Information
21 Inapplicable
22 Yield and Total Return Quotations
23 Financial Statements
</TABLE>
<PAGE> 5
AMERICAN AADVANTAGE MONEY MARKET MILEAGE FUNDS
PLATINUM CLASS
FORM N-1A CROSS-REFERENCE SHEET
Part A
<TABLE>
<CAPTION>
FORM N-1A
- ---------
ITEM NO. PROSPECTUS CAPTION
- -------- ------------------
<S> <C>
1 Cover Page
2 Table of Fees and Expenses
3 Financial Highlights; Yields and Total Returns
4 Cover Page; Introduction; Investment Objectives, Policies and Risks; Investment Restrictions
5 Management and Administration of the Trusts
5A Not Applicable
6 Dividends and Tax Matters; General Information; Shareholder Communications
7 Management and Administration of the Trusts; AAdvantage(R) Miles; How to Purchase Shares;
Valuation of Shares
8 How to Redeem Shares
9 Inapplicable
</TABLE>
Part B
<TABLE>
<CAPTION>
FORM N-1A STATEMENT OF ADDITIONAL
ITEM NO. INFORMATION CAPTION
- -------- ---------------------
<S> <C>
10 Cover Page
11 Table of Contents
12 Cover Page
13 Investment Restrictions; Other Information
14 Trustees and Officers of the Trusts and the AMR Trust
15 Control Persons and 5% Shareholders
16 Management, Administrative Services and Distribution Fees
17 Portfolio Securities Transactions
18 Description of the Trust; Other Information
</TABLE>
<PAGE> 6
<TABLE>
<S> <C>
19 Net Asset Value; Redemptions in Kind
20 Tax Information
21 Inapplicable
22 Yield and Total Return Quotations
23 Financial Statements
</TABLE>
PART C. OTHER INFORMATION
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C of this Registration Statement.
<PAGE> 7
THIS PROSPECTUS contains important information about the AMERICAN AADVANTAGE
MILEAGE FUNDS ("Mileage Trust"), an open-end investment company which consists
of the separate investment portfolios listed on this cover page (individually
referred to as a "Fund" and, collectively, the "Funds"). EACH FUND, EXCEPT THE
S&P 500 INDEX MILEAGE FUND, SEEKS ITS INVESTMENT OBJECTIVE BY INVESTING ALL OF
ITS INVESTABLE ASSETS IN A CORRESPONDING PORTFOLIO OF THE AMR INVESTMENT
SERVICES TRUST ("AMR TRUST"). THE S&P 500 INDEX MILEAGE FUND INVESTS ALL OF ITS
INVESTABLE ASSETS IN THE EQUITY 500 INDEX PORTFOLIO. (THE EQUITY 500 INDEX
PORTFOLIO AND THE PORTFOLIOS OF THE AMR TRUST ARE REFERRED TO HEREIN AS A
"PORTFOLIO" AND, COLLECTIVELY, THE "PORTFOLIOS.") EACH PORTFOLIO HAS AN
INVESTMENT OBJECTIVE IDENTICAL TO THE INVESTING FUND. The investment experience
of each Fund will correspond directly with the investment experience of each
Portfolio. Fund shares are offered to individuals and certain grantor trusts.
Prospective investors should read this Prospectus carefully before making an
investment decision and retain it for future reference.
IN ADDITION TO THIS PROSPECTUS, a Statement of Additional Information ("SAI")
dated March 1, 1998 has been filed with the Securities and Exchange Commission
and is incorporated herein by reference. The SAI contains more detailed
information about the Funds. For a free copy of the SAI, call (800) 388-3344.
The Securities and Exchange Commission maintains a Web Site
(http://www.sec.gov) that contains the SAI, material incorporated by reference
and other information regarding the Funds and the Portfolios.
AN INVESTMENT IN ANY OF THE MONEY MARKET FUNDS IS NEITHER INSURED NOR
GUARANTEED BY THE U.S. GOVERNMENT AND THERE CAN BE NO ASSURANCE THAT THEY WILL
BE ABLE TO MAINTAIN A STABLE PRICE OF $1.00 PER SHARE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY SUCH STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
PROSPECTUS
March 1, 1998
[AMERICAN AADVANTAGE MILEAGE FUNDS(R) LOGO]
BALANCED MILEAGE FUND
GROWTH AND INCOME MILEAGE FUND
INTERNATIONAL EQUITY MILEAGE FUND
S&P 500 INDEX MILEAGE FUND
INTERMEDIATE BOND MILEAGE FUND
SHORT-TERM BOND MILEAGE FUND
MONEY MARKET MILEAGE FUND
MUNICIPAL MONEY MARKET MILEAGE FUND
U.S. GOVERNMENT MONEY MARKET MILEAGE FUND
MANAGED BY
AMR INVESTMENT SERVICES, INC.
<PAGE> 8
The AMERICAN AADVANTAGE BALANCED MILEAGE FUND(SM) ("Balanced Fund") seeks income
and capital appreciation by investing all of its investable assets in the
Balanced Portfolio of the AMR Trust ("Balanced Portfolio") which in turn
primarily invests in equity and debt securities (such as stocks and bonds).
The AMERICAN AADVANTAGE GROWTH AND INCOME MILEAGE FUND(SM) ("Growth and Income
Fund") seeks long-term capital appreciation and current income by investing all
of its investable assets in the Growth and Income Portfolio of the AMR Trust
("Growth and Income Portfolio") which in turn primarily invests in equity
securities (such as stocks).
The AMERICAN AADVANTAGE INTERNATIONAL EQUITY MILEAGE FUND(SM) ("International
Equity Fund") seeks long-term capital appreciation by investing all of its
investable assets in the International Equity Portfolio of the AMR Trust
("International Equity Portfolio") which in turn primarily invests in equity
securities of issuers based outside the United States (such as foreign stocks).
The AMERICAN AADVANTAGE S&P 500 INDEX MILEAGE FUND(1) ("S&P 500 Index Fund")
seeks to provide investment results that, before expenses, correspond to the
total return of common stocks publicly traded in the United States, as
represented by the Standard & Poor's 500 Composite Stock Price Index (the "S&P
500" or "Index"), by investing all of its investable assets in the Equity 500
Index Portfolio which in turn invests in common stocks of companies that compose
the S&P 500.
The AMERICAN AADVANTAGE INTERMEDIATE BOND MILEAGE FUND(SM) ("Intermediate Bond
Fund") and the AMERICAN AADVANTAGE SHORT-TERM BOND MILEAGE FUND(SM) ("Short-Term
Bond Fund," formerly the American AAdvantage Limited-Term Income Mileage Fund)
each seeks income and capital appreciation by investing all of its investable
assets in the Intermediate Bond Portfolio of the AMR Trust ("Intermediate Bond
Portfolio") and the Short-Term Bond Portfolio of the AMR Trust ("Short-Term Bond
Portfolio," formerly the Limited-Term Income Portfolio), respectively, which in
turn primarily invest in debt obligations. The Intermediate Bond Fund seeks to
maintain a dollar weighted average duration of three to seven years and the
Short-Term Bond Fund seeks to maintain a dollar weighted average duration of one
to three years.
The AMERICAN AADVANTAGE MONEY MARKET MILEAGE FUND(SM) ("Money Market Fund"),
AMERICAN AADVANTAGE MUNICIPAL MONEY MARKET MILEAGE FUND(SM) ("Municipal Money
Market Fund") and AMERICAN AADVANTAGE U.S. GOVERNMENT MONEY MARKET MILEAGE
FUND(SM) ("U.S. Government Money Market Fund") (collectively, the "Money Market
Funds") each seeks current income, liquidity, and the maintenance of a stable
price per share of $1.00 by investing all of their investable assets in the
Money Market Portfolio of the AMR Trust ("Money Market Portfolio"), the
Municipal Money Market Portfolio of the AMR Trust ("Municipal Money Market
Portfolio") and the U.S. Government Money Market Portfolio of the AMR Trust
("U.S. Government Money Market Portfolio"), respectively (collectively the
"Money Market Portfolios"), which in turn invest in high quality, short-term
obligations. The Municipal Money Market Portfolio invests primarily in municipal
obligations and the U.S. Government Money Market Portfolio invests exclusively
in obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities and in repurchase agreements that are collateralized by such
obligations.
- ---------------
(1) S&P is a trademark of The McGraw-Hill Companies, Inc. and has been licensed
for use. "Standard and Poor's(R)," "S&P(R)," "Standard & Poor's 500," "S&P
500(R)" and "500" are all trademarks of the McGraw-Hill Companies, Inc. and
have been licensed for use by Bankers Trust Company. The S&P 500 Index Fund
is not sponsored, sold or promoted by Standard & Poor's, and Standard &
Poor's makes no representation regarding the advisability of investing in
that Fund.
<TABLE>
<S> <C>
TABLE OF FEES AND EXPENSES.............. 3
FINANCIAL HIGHLIGHTS.................... 4
INTRODUCTION............................ 7
INVESTMENT OBJECTIVES, POLICIES AND
RISKS................................. 8
INVESTMENT RESTRICTIONS................. 20
YIELDS AND TOTAL RETURNS................ 20
MANAGEMENT AND ADMINISTRATION OF THE
TRUSTS................................ 21
INVESTMENT ADVISERS..................... 24
AADVANTAGE(R) MILES..................... 26
HOW TO PURCHASE SHARES.................. 27
HOW TO REDEEM SHARES.................... 28
EXCHANGE PRIVILEGE...................... 30
VALUATION OF SHARES..................... 30
DIVIDENDS, OTHER DISTRIBUTIONS AND TAX
MATTERS............................... 31
GENERAL INFORMATION..................... 33
SHAREHOLDER COMMUNICATIONS.............. 34
</TABLE>
PROSPECTUS
2
<PAGE> 9
Under a master-feeder operating structure, each Fund seeks its investment
objective by investing all of its investable assets in a corresponding Portfolio
as described above. Each Portfolio's investment objective is identical to that
of its corresponding Fund. Whenever the phrase "all of the Fund's investable
assets" is used, it means that the only investment securities that will be held
by a Fund will be that Fund's interest in its corresponding Portfolio. AMR
Investment Services, Inc. ("Manager") provides investment management and
administrative services to the Portfolios, except for the Equity 500 Index
Portfolio, and administrative services to the Funds. Bankers Trust Company
("BT") provides investment advisory, administrative and other services to the
Equity 500 Index Portfolio. This master-feeder operating structure is different
from that of many other investment companies which directly acquire and manage
their own portfolios of securities. Accordingly, investors should carefully
consider this investment approach. See "Investment Objectives, Policies and
Risks -- Additional Information About the Portfolios." A Fund may withdraw its
investment in a corresponding Portfolio at any time if the Mileage Trust's Board
of Trustees ("Mileage Trust Board") determines that it would be in the best
interest of that Fund and its shareholders to do so. Upon any such withdrawal,
that Fund's assets would be invested in accordance with the investment policies
and restrictions described in this Prospectus and the SAI.
TABLE OF FEES AND EXPENSES
Annual Operating Expenses (as a percentage of average net assets):
<TABLE>
<CAPTION>
MONEY
GROWTH SHORT- MARKET MUNICIPAL
AND INT'L S&P 500 INTERMEDIATE TERM FUND - MONEY
BALANCED INCOME EQUITY INDEX BOND BOND MILEAGE MARKET
FUND FUND FUND FUND(1) FUND(1) FUND CLASS FUND
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MANAGEMENT FEES 0.33% 0.33% 0.48% 0.05%(2) 0.25% 0.25% 0.15% 0.15%
12B-1 FEES (AFTER WAIVERS) 0.00(3) 0.00(3) 0.05(3) 0.00(3) 0.00(3) 0.00(3) 0.25 0.25
OTHER EXPENSES (AFTER FEE
WAIVERS AND REIMBURSEMENTS)(4) 0.66 0.66 0.95 0.50 0.64 0.60 0.27 0.25
----- ---- ---- ----- ------- ---- ----- ------
TOTAL OPERATING EXPENSES
(AFTER FEE WAIVERS AND
REIMBURSEMENTS)(5) 0.99% 0.99% 1.47% 0.55% 0.89% 0.85% 0.67% 0.65%
===== ==== ==== ===== ======= ==== ===== ======
<CAPTION>
U.S.
GOVERNMENT
MONEY
MARKET
FUND
<S> <C>
MANAGEMENT FEES 0.15%
12B-1 FEES (AFTER WAIVERS) 0.09(3)
OTHER EXPENSES (AFTER FEE
WAIVERS AND REIMBURSEMENTS)(4) 0.38
------
TOTAL OPERATING EXPENSES
(AFTER FEE WAIVERS AND
REIMBURSEMENTS)(5) 0.62%
======
</TABLE>
(1) Because the S&P 500 Index Fund and the Intermediate Bond Fund shares were
not offered for sale prior to March 1, 1998, their Annual Operating Expenses
are based on estimates.
(2) The investment adviser has voluntarily agreed to waive a portion of the
investment advisory fee of the S&P 500 Index Fund. Without such waiver, the
"Management Fee" would be equal to 0.10%.
(3) Absent fee waivers, "12b-1 Fees" for the Balanced Fund, the Growth and
Income Fund, the International Equity Fund, the S&P 500 Index Fund, the
Intermediate Bond Fund, the Short-Term Bond Fund and the U.S. Government
Money Market Fund would be .25%. The Mileage Trust anticipates that the
12b-1 fee charged for the current fiscal year will be used to pay for
advertising and AAdvantage miles. See "AAdvantage Miles."
(4) "Other Expenses" before fee waivers and reimbursements are estimated to be
1.25% for the Balanced Fund, 0.73% for the Growth and Income Fund, 1.12% for
the S&P 500 Index Fund, 1.12% for the Intermediate Bond Fund, 2.51% for the
Short-Term Bond Fund, 0.34% for the Money Market Fund -- Mileage Class and
0.38% for the Municipal Money Market Fund.
(5) "Total Operating Expenses" before fee waivers and reimbursements are
estimated to be 1.83% for the Balanced Fund, 1.31% for the Growth and Income
Fund, 1.68% for the International Equity Fund, 1.47% for the S&P 500 Index
Fund, 1.62% for the Intermediate Bond Fund, 3.01% for the Short-Term Bond
Fund, 0.74% for the Money Market Fund -- Mileage Class, 0.78% for the
Municipal Money Market Fund and 0.78% for the U.S. Government Money Market
Fund.
The above expenses reflect the expenses of each Fund and the Portfolio in
which it invests. The Mileage Trust Board believes that the aggregate per share
expenses of each Fund and its corresponding Portfolio will be approximately
equal to the expenses that the Fund would incur if its assets were invested
directly in the type of securities held by the Portfolio.
PROSPECTUS
3
<PAGE> 10
EXAMPLES
An investor in each Fund would directly or indirectly pay on a cumulative basis
the following expenses on a $1,000 investment assuming a 5% annual return:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
BALANCED FUND $10 $32 $55 $121
GROWTH AND INCOME FUND 10 32 55 121
INTERNATIONAL EQUITY FUND 15 46 80 176
S&P 500 INDEX FUND 6 18 31 69
INTERMEDIATE BOND FUND 9 28 49 110
SHORT-TERM BOND FUND 9 27 47 105
MONEY MARKET FUND 7 21 37 83
MUNICIPAL MONEY MARKET FUND 7 21 36 81
U.S. GOVERNMENT MONEY MARKET FUND 6 20 35 77
</TABLE>
The purpose of the table above is to assist a potential investor in
understanding the various costs and expenses expected to be incurred directly or
indirectly as a shareholder in a Fund. Additional information may be found under
"Management and Administration of the Mileage Trust" and "Investment Advisers."
THE FOREGOING EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN AND PERFORMANCE MAY BE BETTER OR WORSE THAN THE 5% ANNUAL RETURN
ASSUMED IN THE EXAMPLES.
FINANCIAL HIGHLIGHTS
The financial highlights in the following tables have been derived from
financial statements of the Mileage Trust. The information has been audited by
Ernst & Young LLP, independent auditors. Such information should be read in
conjunction with the financial statements and the report of the independent
auditors appearing in the Annual Report incorporated in the SAI, which contains
further information about performance of the Funds and can be obtained by
investors without charge. Financial highlights are not available for the S&P 500
Index Fund and the Intermediate Bond Fund because they had not commenced
operations as of October 31, 1997.
PROSPECTUS
4
<PAGE> 11
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-----------------------------------------------------------------------------------
GROWTH AND
BALANCED INCOME INT'L EQUITY SHORT-TERM
FUND FUND FUND BOND FUND
-------------------- -------------------- ----------------- -----------------
1997 1996(1)(2) 1997 1996(1)(2) 1997 1996(1) 1997 1996(1)
------- ---------- ------- ---------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD(3)..... $ 16.01 $ 13.97 $ 19.35 $ 15.94 $ 15.31 $ 13.15 $ 9.65 $ 9.83
------- ------- ------- ------- ------- ------- ------- ------
INCOME FROM INVESTMENT OPERATIONS:
NET INVESTMENT INCOME(4).................. 0.58 0.49 0.31 0.34 0.25 0.20 0.61 0.59
NET GAINS (LOSSES) ON SECURITIES (BOTH
REALIZED AND UNREALIZED)(4)............. 2.44 1.65 4.87 3.16 2.52 2.03 (0.05) (0.18)
------- ------- ------- ------- ------- ------- ------- ------
TOTAL FROM INVESTMENT OPERATIONS............ 3.02 2.14 5.18 3.50 2.77 2.23 0.56 0.41
------- ------- ------- ------- ------- ------- ------- ------
LESS DISTRIBUTIONS:
DIVIDENDS FROM NET INVESTMENT INCOME...... (0.49) (0.10) (0.34) (0.09) (0.18) (0.07) (0.61) (0.59)
DISTRIBUTIONS FROM NET REALIZED GAINS ON
SECURITIES.............................. (0.22) -- (0.47) -- (0.23) -- -- --
------- ------- ------- ------- ------- ------- ------- ------
TOTAL DISTRIBUTIONS......................... (0.71) (0.10) (0.81) (0.09) (0.41) (0.07) (0.61) (0.59)
------- ------- ------- ------- ------- ------- ------- ------
NET ASSET VALUE, END OF PERIOD.............. $ 18.32 $ 16.01 $ 23.72 $ 19.35 $ 17.67 $ 15.31 $ 9.60 $ 9.65
======= ======= ======= ======= ======= ======= ======= ======
TOTAL RETURN (ANNUALIZED)................... 19.52% 15.97% 27.60% 22.77% 18.44% 16.58% 5.90% 4.55%
======= ======= ======= ======= ======= ======= ======= ======
RATIOS/SUPPLEMENTAL DATA:
NET ASSETS, END OF PERIOD (IN
THOUSANDS).............................. $ 3,437 $ 2,495 $12,513 $ 6,234 $ 5,219 $ 3,387 $ 1,226 $1,168
RATIOS TO AVERAGE NET ASSETS
(ANNUALIZED)(4):
EXPENSES(5)............................. 0.99% 1.01% 0.99% 1.00% 1.47% 1.48% 0.85% 0.86%
NET INVESTMENT INCOME(6)................ 3.45% 3.58% 1.78% 2.13% 1.61% 1.63% 6.37% 6.08%
PORTFOLIO TURNOVER RATE(7).............. 105% 76% 35% 40% 15% 19% 282% 304%
AVERAGE COMMISSION RATE PAID(7)......... $0.0385 $0.0409 $0.0395 $0.0412 $0.0164 $0.0192 -- --
</TABLE>
(1) The Funds commenced active operations on November 1, 1995. Prior to March 1,
1998, the Short-Term Bond Fund was known as the American AAdvantage
Limited-Term Income Mileage Fund.
(2) Capital Guardian Trust Company was replaced by Brandywine Asset Management,
Inc. as an investment adviser to the Balanced Fund and the Growth and Income
Fund on April 1, 1996.
(3) The net asset value per share for the Balanced, Growth and Income,
International Equity and Short-Term Bond Funds was adjusted for a stock
split which occurred on November 1, 1995 in the ratio of 1.43169, 1.254705,
1.502913 and 2.034588, respectively.
(4) Per share amounts and ratios reflect income and expenses assuming inclusion
of each Fund's proportionate share of the income and expenses of its
corresponding Portfolio.
(5) Operating results exclude expenses reimbursed by the Manager. Including
these expenses, the ratios of expenses to average net assets for the years
ending October 31, 1996 and October 31, 1997 are 2.93% and 1.83%,
respectively, for the Balanced Fund; 1.88% and 1.31%, respectively, for the
Growth and Income Fund; 2.71% and 1.68%, respectively, for the International
Equity Fund; and 3.19% and 3.01%, respectively, for the Short-Term Bond
Fund.
(6) Operating results exclude expenses reimbursed by the Manager. Including
these expenses, the ratios of net investment income to average net assets
for the years ending October 31, 1996 and October 31, 1997 are 1.66% and
2.61%, respectively, for the Balanced Fund; 1.25% and 1.46%, respectively,
for the Growth and Income Fund; 0.40% and 1.40%, respectively, for the
International Equity Fund; and 3.75% and 4.21%, respectively, for the Short-
Term Bond Fund.
(7) On November 1, 1995 each Fund invested all of its investable assets in its
corresponding Portfolio. Portfolio turnover rate and average commission rate
paid are those of the corresponding Portfolio.
PROSPECTUS
5
<PAGE> 12
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
---------------------------------------------------------------
MONEY U.S.
MARKET MUNICIPAL GOVERNMENT
FUND- MONEY MONEY
MILEAGE MARKET MARKET
CLASS FUND FUND
--------------------- ------------------- -----------------
1997 1996(1)(2) 1997 1996(1) 1997 1996(1)
-------- ---------- ------- --------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- ------- --------- ------- -------
NET INVESTMENT INCOME(3).................................... 0.05 0.05 0.03 0.03 0.05 0.05
LESS DIVIDENDS FROM NET INVESTMENT INCOME................... (0.05) (0.05) (0.03) (0.03) (0.05) (0.05)
-------- -------- ------- --------- ------- -------
NET ASSET VALUE, END OF PERIOD.............................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======= ========= ======= =======
TOTAL RETURN (ANNUALIZED)................................... 5.14% 5.12% 3.18% 3.19% 5.00% 4.98%
======== ======== ======= ========= ======= =======
RATIOS/SUPPLEMENTAL DATA:
NET ASSETS, END OF PERIOD (IN THOUSANDS).................. $104,947 $106,709 $26,564 $ 28,726 $28,791 $10,638
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)(3):
EXPENSES(4)............................................. 0.67% 0.67% 0.65% 0.66% 0.62% 0.62%
NET INVESTMENT INCOME(5)................................ 5.02% 5.02% 3.13% 3.14% 4.91% 4.82%
</TABLE>
(1) The Funds commenced active operations on November 1, 1995.
(2) The Platinum Class of the Money Market Mileage Fund commenced active
operations on January 29, 1996 and at that time the existing shares of the
Fund were designated as Mileage Class shares.
(3) Per share amounts and ratios reflect income and expenses assuming inclusion
of each Fund's proportionate share of the income and expenses of its
corresponding Portfolio.
(4) Operating results exclude expenses reimbursed by the Manager. Including
these expenses, the ratios of expenses to average net assets for the years
ending October 31, 1996 and October 31, 1997 are 0.78% and 0.74%,
respectively, for the Money Market Fund -- Mileage Class; 0.80% and 0.78%,
respectively, for the Municipal Money Market Fund; and 1.11% and 0.78%
respectively, for the U.S. Government Money Market Fund.
(5) Operating results exclude expenses reimbursed by the Manager. Including
these expenses, the ratios of net investment income to average net assets
for the years ending October 31, 1996 and October 31, 1997 are 4.91% and
4.95%, respectively, for the Money Market Fund -- Mileage Class; 3.00% and
3.00%, respectively, for the Municipal Money Market Fund; and 4.33% and
4.75%, respectively, for the U.S. Government Money Market Fund.
PROSPECTUS
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<PAGE> 13
INTRODUCTION
The Mileage Trust is an open-end, diversified management investment company
organized as a Massachusetts business trust on February 22, 1995. The Funds are
separate investment portfolios of the Mileage Trust. Each Fund has a distinctive
investment objective and investment policies. Each Fund, except the S&P 500
Index Fund, invests all of its investable assets in a corresponding Portfolio of
the AMR Trust which has an identical investment objective. The S&P 500 Index
Fund invests all of its investable assets in the Equity 500 Index Portfolio,
which is a separate investment company advised by BT with an identical
investment objective. The Manager provides the Portfolios, except the Equity 500
Index Portfolio, with business and asset management services, including the
evaluation and monitoring of the investment advisers, and it provides the Funds
with administrative services. BT provides the Equity 500 Index Portfolio with
investment advisory, administrative and other services.
Each Fund, except for the Money Market Fund, currently consists of one
class of shares. The Money Market Fund currently consists of two classes of
shares, including the Mileage Class, described in this Prospectus. The Funds are
available to individuals and certain grantor trusts ("Trust Accounts"). For
further information about the Money Market Fund's other class, call (800)
967-9009.
Although each class of shares of the Money Market Fund is designed to meet
the needs of different investors, each class of the Fund shares the same
portfolio of investments and a common investment objective. See "Investment
Objectives, Policies and Risks." Based on its value, a share of the Money Market
Fund, regardless of class, will receive a proportionate share of the investment
income and the gains (or losses) earned (or incurred) by the Fund. It also will
bear its proportionate share of expenses that are allocated to the Money Market
Fund as a whole. However, certain expenses are allocated separately to each
class of shares.
The assets of the Balanced Portfolio, the Growth and Income Portfolio and
the International Equity Portfolio are allocated by the Manager among investment
advisers designated for each of those Portfolios. BT serves as the investment
adviser to the Equity 500 Index Portfolio. The assets of the Intermediate Bond
Portfolio are allocated by the Manager between the Manager and another
investment adviser. Investment decisions for the Short-Term Bond Portfolio and
the Money Market Portfolios are made directly by the Manager. With the exception
of the S&P 500 Index Fund, each investment adviser has discretion to purchase
and sell portfolio securities in accordance with the investment objectives,
policies and restrictions described in this Prospectus and in the SAI and by
specific investment strategies developed by the Manager. There is no guarantee
that a Fund will achieve its investment objective. See "Investment Advisers."
Shares are offered without a sales charge at the net asset value next
determined after an investment is received and accepted. Shares will be redeemed
at the next share price calculated after receipt of a redemption order. See "How
to Purchase Shares" and "How to Redeem Shares."
Each shareholder will receive American Airlines(R) AAdvantage(R) travel
awards program ("AAdvantage") miles.(2) AAdvantage miles will be posted monthly
to each shareholder's AAdvantage account at an annual rate of one mile for every
$10 invested in any Fund. See "AAdvantage Miles."
- ---------------
2 American Airlines and AAdvantage are registered trademarks of American
Airlines, Inc.
PROSPECTUS
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<PAGE> 14
INVESTMENT OBJECTIVES, POLICIES AND RISKS
The investment objective and policies of each Fund and its corresponding
Portfolio are described below. Except as otherwise indicated, the investment
policies of any Fund may be changed at any time by the Mileage Trust Board to
the extent that such changes are consistent with the investment objective of the
applicable Fund. However, each Fund's investment objective may not be changed
without a majority vote of that Fund's outstanding shares, which is defined as
the lesser of (a) 67% of the shares of the applicable Fund present or
represented if the holders of more than 50% of the shares are present or
represented at the shareholders' meeting, or (b) more than 50% of the shares of
the applicable Fund (hereinafter, "majority vote"). Except for the Equity 500
Index Portfolio a Portfolio's investment objective may not be changed without a
majority vote of that Portfolio's interest holders. The investment objective of
the Equity 500 Index Portfolio is not a fundamental policy. Shareholders of the
S&P 500 Index Fund will receive thirty days' prior written notice with respect
to any change in the investment objective of the Equity 500 Index Portfolio.
Each Fund has a fundamental investment policy which allows it to invest all
of its investable assets in its corresponding Portfolio. All other fundamental
investment policies and the non-fundamental investment policies of each Fund and
its corresponding Portfolio are identical. Therefore, although the following
discusses the investment policies of each Portfolio, the AMR Trust's Board of
Trustees ("AMR Trust Board") and the Equity 500 Index Portfolio's Board of
Trustees ("Equity 500 Index Portfolio Board"), it applies equally to each Fund
and each Board.
AMERICAN AADVANTAGE BALANCED MILEAGE FUND -- This Fund's investment objective is
to realize both income and capital appreciation. This Fund seeks its investment
objective by investing all of its investable assets in the Balanced Portfolio,
which invests primarily in equity and debt securities. Although equity
securities (such as stocks) will be purchased primarily for capital appreciation
and debt securities (such as bonds) will be purchased primarily for income
purposes, income and capital appreciation potential will be considered in
connection with all such investments. Excluding collateral for securities
loaned, ordinarily the Portfolio will have a minimum of 30% and a maximum of 70%
of its assets invested in equity securities and a minimum of 30% and a maximum
of 70% of its assets invested in debt securities which, at the time of purchase,
are rated in one of the four highest rating categories by all nationally
recognized statistical rating organizations ("Rating Organizations") rating that
security such as Standard & Poor's ("S&P") or Moody's Investor Services, Inc.
("Moody's") or, if unrated, are deemed to be of comparable quality by the
applicable investment adviser. Obligations rated in the fourth highest rating
category are limited to 25% of the Portfolio's debt allocation. Obligations
rated BBB or Baa by any Rating Organization may have speculative characteristics
and thus changes in economic conditions or other circumstances are more likely
to lead to a weakened capacity to make principal and interest payments than is
the case with higher grade bonds. See the SAI for a description of debt ratings.
The Portfolio, at the discretion of the investment advisers, may retain a
security that has been downgraded below the initial investment criteria. The
Portfolio usually invests between 50% and 65% of its assets in equity securities
and between 35% and 50% of its assets in debt securities. The remainder of the
Portfolio's assets may be invested in cash or cash equivalents, including
obligations that are permitted investments for the Money Market Portfolio, and
in other investment companies. However, when its investment advisers deem that
market conditions warrant, the Portfolio may, for temporary defensive purposes,
invest up to 100% of its assets in cash, cash equivalents and investment grade
short-term obligations.
The Portfolio's investments in debt securities may include investments in
obligations of the U.S. Government or its agencies or instrumentalities,
including separately traded registered interest and principal securities
("STRIPS") and other zero coupon obligations; corporate bonds, notes and
debentures; non-convertible preferred stocks; mortgage-backed securities;
asset-backed securities; and domestic, Yankeedollar and Eurodollar bank deposit
notes, certificates of deposit, bonds and notes. Such obligations may have a
fixed, variable or floating rate of interest. See the SAI for a further
description of the foregoing securities. The value of the Portfolio's debt
investments will vary in response to interest rate changes as described in
"American AAdvantage Intermediate Bond Mileage Fund and American AAdvantage
Short-Term Bond Mileage Fund."
PROSPECTUS
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<PAGE> 15
The Portfolio also may engage in dollar rolls or purchase or sell
securities on a "when-issued" or "forward commitment" basis. The purchase or
sale of when-issued securities enables an investor to hedge against anticipated
changes in interest rates and prices by locking in an attractive price or yield.
The price of when-issued securities is fixed at the time the commitment to
purchase or sell is made, but delivery and payment for the when-issued
securities take place at a later date, normally one to two months after the date
of purchase. During the period between purchase and settlement, no payment is
made by the purchaser to the issuer and no interest accrues to the purchaser.
Such transactions therefore involve a risk of loss if the value of the security
to be purchased declines prior to the settlement date or if the value of the
security to be sold increases prior to the settlement date. A sale of a
when-issued security also involves the risk that the other party will be unable
to settle the transaction. Dollar rolls are a type of forward commitment
transaction. Purchases and sales of securities on a forward commitment basis
involve a commitment to purchase or sell securities with payment and delivery to
take place at some future date, normally one to two months after the date of the
transaction. As with when-issued securities, these transactions involve certain
risks, but they also enable an investor to hedge against anticipated changes in
interest rates and prices. Forward commitment transactions are executed for
existing obligations, whereas in a when-issued transaction, the obligations have
not yet been issued. When purchasing securities on a when-issued or forward
commitment basis, a segregated account of liquid assets at least equal to the
value of purchase commitments for such securities will be maintained until the
settlement date.
The Portfolio's equity investments may consist of common stocks, preferred
stocks and convertible securities, including foreign securities that are
represented by U.S. dollar-denominated American Depositary Receipts traded in
the United States on exchanges and in the over-the-counter market. When
purchasing equity securities, primary emphasis will be placed on undervalued
securities with above average growth expectations. The Manager believes that
purchasing securities which the investment advisers believe are undervalued in
the market and that have above average growth potential will outperform other
investment styles over the longer term while minimizing volatility and downside
risk. The Manager will recommend that, with respect to portfolio management of
equity assets, the Mileage Trust retain only those investment advisers who, in
the Manager's opinion, utilize such an approach.
BARROW, HANLEY, MEWHINNEY & STRAUSS, INC.; BRANDYWINE ASSET MANAGEMENT,
INC.; GSB INVESTMENT MANAGEMENT, INC.; HOTCHKIS AND WILEY; and INDEPENDENCE
INVESTMENT ASSOCIATES, INC. currently manage the assets of the Balanced
Portfolio. See "Investment Advisers."
AMERICAN AADVANTAGE GROWTH AND INCOME MILEAGE FUND -- This Fund's investment
objective is to realize long-term capital appreciation and current income. This
Fund seeks its investment objective by investing all of its investable assets in
the Growth and Income Portfolio, which invests primarily in equity securities.
Excluding collateral for securities loaned, ordinarily at least 80% of the
Portfolio's assets will be invested in equity securities consisting of common
stocks, preferred stocks, securities convertible into common stocks, and
securities having common stock characteristics, such as rights and warrants, and
foreign equity securities that are represented by U.S. dollar-denominated
American Depositary Receipts traded in the United States on exchanges and in the
over-the-counter market. When purchasing equity securities, primary emphasis
will be placed on undervalued securities with above average growth expectations.
In order to seek either above average current income or capital appreciation
when interest rates are expected to decline, the Portfolio may invest in debt
securities which, at the time of purchase, are rated in one of the four highest
rating categories by all Rating Organizations rating that security or, if
unrated, are deemed to be of comparable quality by the applicable investment
adviser. Obligations rated in the fourth highest rating category are limited to
25% of the Portfolio's debt allocation. See "American AAdvantage Balanced
Mileage Fund" for a description of the risks involved with these obligations.
See the SAI for definitions of the foregoing securities and for a description of
debt ratings. The Portfolio also may invest in other investment companies or in
cash and cash equivalents, including obligations that are permitted investments
for the Money Market Portfolio. However, when its investment advisers deem that
market conditions warrant, the Portfolio may, for temporary defensive purposes,
invest up to 100% of its assets in cash, cash equivalents and investment grade
short-term obligations. In addition, the Portfolio may purchase or sell
securities on a when-issued or forward commitment basis. See "American
AAdvantage Balanced Mileage Fund" for a description of these transactions.
PROSPECTUS
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<PAGE> 16
BARROW, HANLEY, MEWHINNEY & STRAUSS, INC.; BRANDYWINE ASSET MANAGEMENT,
INC.; GSB INVESTMENT MANAGEMENT, INC.; HOTCHKIS AND WILEY; and INDEPENDENCE
INVESTMENT ASSOCIATES, INC. currently manage the assets of the Growth and Income
Portfolio. See "Investment Advisers."
AMERICAN AADVANTAGE INTERNATIONAL EQUITY MILEAGE FUND -- This Fund's investment
objective is to realize long-term capital appreciation. This Fund seeks its
investment objective by investing all of its investable assets in the
International Equity Portfolio, which invests primarily in equity securities of
issuers based outside the United States. Ordinarily the Portfolio will invest at
least 65% of its assets in common stocks and securities convertible into common
stocks of issuers in at least three different countries other than the United
States. However, excluding collateral for securities loaned, the Portfolio
generally invests in excess of 80% of its assets in such securities. The
remainder of the Portfolio's assets will be invested in non-U.S. debt securities
which, at the time of purchase, are rated in one of the three highest rating
categories by any Rating Organization or, if unrated, are deemed to be of
comparable quality by the applicable investment adviser and traded publicly on a
world market, or in cash or cash equivalents, including obligations that are
permitted investments for the Money Market Portfolio, or in other investment
companies. However, when its investment advisers deem that market conditions
warrant, the Portfolio may, for temporary defensive purposes, invest up to 100%
of its assets in cash, cash equivalents, other investment companies and
investment grade short-term obligations.
The investment advisers select securities based upon a country's economic
outlook, market valuation and potential changes in currency exchange rates. When
purchasing equity securities, primary emphasis will be placed on undervalued
securities with above average growth expectations.
Overseas investing carries potential risks not associated with domestic
investments. Such risks include, but are not limited to: (1) political and
financial instability abroad, including risk of nationalization or expropriation
of assets and the risk of war; (2) less liquidity and greater volatility of
foreign investments; (3) less public information regarding foreign companies;
(4) less government regulation and supervision of foreign stock exchanges,
brokers and listed companies; (5) lack of uniform accounting, auditing and
financial reporting standards; (6) delays in transaction settlement in some
foreign markets; (7) possible imposition of confiscatory foreign taxes; (8)
possible limitation on the removal of securities or other assets of the
Portfolio; (9) restrictions on foreign investments and repatriation of capital;
(10) currency fluctuations; (11) cost and possible restrictions of currency
conversion; (12) withholding taxes on dividends in foreign countries; and (13)
possible higher commissions, custodial fees and management costs than in the
U.S. market. These risks are often greater for investments in emerging or
developing countries.
The Portfolio will limit its investments to those in countries which have
been recommended by the Manager and which have been approved by the AMR Trust
Board. Countries may be added or deleted with AMR Trust Board approval. In
determining which countries will be approved, the AMR Trust Board will evaluate
the risk factors set forth above and will particularly focus on the ability to
repatriate funds, the size and liquidity of a particular country's market and
the investment climate for foreign investors. The current foreign countries in
which the Portfolio may invest are Australia, Austria, Belgium, Canada, Denmark,
Finland, France, Germany, Hong Kong, Ireland, Italy, Japan, Malaysia, Mexico,
Netherlands, New Zealand, Norway, Portugal, Singapore, South Korea, Spain,
Sweden, Switzerland, and the United Kingdom.
The Portfolio may trade forward foreign currency contracts ("forward
contracts"), which are "derivatives," to hedge currency fluctuations of
underlying stock or bond positions or in other circumstances permitted by the
Commodity Futures Trading Commission ("CFTC"). Forward contracts to sell foreign
currency may be used when the management of the Portfolio believes that the
currency of a particular foreign country may suffer a decline against the U.S.
dollar. Forward contracts are also used to set the exchange rate for a future
transaction. In this manner, the Portfolio may protect itself against a possible
loss resulting from an adverse change in the relationship between the U.S.
dollar or other currency which is being used for the security purchase and the
foreign currency in which the security is denominated during the period between
the date on which the security is purchased or sold and the date on which
payment is made or received. Forward contracts involve certain risks
PROSPECTUS
10
<PAGE> 17
which include, but are not limited to: (1) imperfect correlation between the
securities hedged and the contracts themselves; and (2) possible decrease in the
total return of the Portfolio. Forward contracts are discussed in greater detail
in the SAI.
The Portfolio also may trade currency futures, which are derivatives, for
the same reasons as for entering into forward contracts as set forth above.
Currency futures are traded on U.S. and foreign currency exchanges. The use of
currency futures also entails certain risks which include, but are not limited
to: (1) less liquidity due to daily limits on price fluctuation; (2) imperfect
correlation between the securities hedged and the contracts themselves; (3)
possible decrease in the total return of the Portfolio due to hedging; (4)
possible reduction in value for both the contracts and the securities being
hedged; and (5) potential losses in excess of the amounts invested in the
currency futures contracts themselves. The Portfolio may not enter into currency
futures contracts if the purchase or sale of such contract would cause the sum
of the Portfolio's initial and any variation margin deposits to exceed 5% of its
total assets. Currency futures contracts are discussed in greater detail in the
SAI.
HOTCHKIS AND WILEY, MORGAN STANLEY ASSET MANAGEMENT INC. and TEMPLETON
INVESTMENT COUNSEL, INC. currently serve as investment advisers to the
International Equity Portfolio.
AMERICAN AADVANTAGE S&P 500 INDEX MILEAGE FUND -- This Fund's investment
objective is to provide investment results that, before expenses, correspond to
the total return (the combination of capital changes and income) of common
stocks publicly traded in the United States, as represented by the S&P 500. This
Fund seeks its investment objective by investing all of its investable assets in
the Equity 500 Index Portfolio which invests in common stocks of companies that
compose the S&P 500. The Fund offers investors a convenient means of
diversifying their holdings of common stocks while relieving those investors of
the administrative burdens typically associated with purchasing and holding
these instruments.
The Portfolio is not managed according to traditional methods of "active"
investment management, which involve the buying and selling of securities based
upon economic, financial and market analyses and investment judgment. Instead,
the Portfolio, utilizing a "passive" or "indexing" investment approach, attempts
to replicate, before expenses, the performance of the S&P 500.
Under normal conditions, the Portfolio will invest at least 80% of its
assets in common stocks of companies that compose the S&P 500. In seeking to
replicate the performance of the S&P 500, BT, the Portfolio's investment
adviser, will attempt over time to allocate the Portfolio's investments among
common stocks in approximately the same weightings as the S&P 500, beginning
with the heaviest-weighted stocks that make up a larger portion of the Index's
value. Over the long term, BT normally seeks a correlation between the
performance of the Portfolio, before expenses, and that of the S&P 500 of 0.98
or better. A figure of 1.00 would indicate perfect correlation. In the unlikely
event that the correlation is not achieved, the Equity 500 Index Portfolio Board
will consider alternative structures.
BT utilizes a two-stage sampling approach in seeking to obtain the
objective. Stage one, which encompasses large capitalization stocks, maintains
the stock holdings at or near their benchmark weights. Large capitalization
stocks are defined as those securities that represent 0.10% or more of the
Index. In stage two, smaller stocks are analyzed and selected using risk
characteristics and industry weights in order to match the sector and risk
characteristics of the smaller companies in the S&P 500. This approach helps to
maximize portfolio liquidity while minimizing costs.
BT generally will seek to match the composition of the S&P 500, but usually
will not invest the Portfolio's stock portfolio to mirror the Index exactly.
Because of the difficulty and expense of executing relatively small stock
transactions, the Portfolio may not always be invested in the less heavily
weighted S&P 500 stocks and may at times have its portfolio weighted differently
from the S&P 500. When the Portfolio's size is greater, BT expects to purchase
more of the stocks in the S&P 500 and to match the relative weighting of the S&P
500 more closely and anticipates that the Portfolio will be able to mirror,
before expenses, the performance of the S&P 500 with
PROSPECTUS
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<PAGE> 18
little variance. In addition, the Portfolio may omit or remove any S&P 500 stock
from the Portfolio if, following objective criteria, BT judges the stock to be
insufficiently liquid or believes the merit of the investment has been
substantially impaired by extraordinary events or financial conditions. BT will
not purchase the stock of Bankers Trust New York Corporation, which is included
in the Index, and instead will overweight its holdings of companies engaged in
similar businesses.
Under normal conditions, BT will attempt to invest as much of the
Portfolio's assets as is practical in common stocks included in the S&P 500.
However, the Portfolio may maintain up to 20% of its assets in short-term debt
securities and money market instruments hedged with stock index futures and
options to meet redemption requests or to facilitate the investment in common
stocks.
When the Portfolio has cash from new investments in the Portfolio or holds a
portion of its assets in money market instruments, it may enter into stock index
futures or options to attempt to increase its exposure to the stock market.
Strategies the Portfolio could use to accomplish this include purchasing futures
contracts, writing put options, and purchasing call options. When the Portfolio
wishes to sell securities, because of shareholder redemptions or otherwise, it
may use stock index futures or options thereon to hedge against market risk
until the sale can be completed. These strategies could include selling futures
contracts, writing call options, and purchasing put options.
BT will choose among futures and options strategies based on its judgment of
how best to meet the Portfolio's goals. In selecting futures and options, BT
will assess such factors as current and anticipated stock prices, relative
liquidity and price levels in the options and futures markets compared to the
securities markets, and the Portfolio's cash flow and cash management needs. If
BT judges these factors incorrectly, or if price changes in the Portfolio's
futures and options positions are not well correlated with those of its other
investments, the Portfolio could be hindered in the pursuit of the objective and
could suffer losses. The Portfolio could also be exposed to risks if it could
not close out its futures or options positions because of an illiquid secondary
market. BT will only use these strategies for cash management purposes. Futures
and options will not be used to increase portfolio risk above the level that
could be achieved using only traditional investment securities or to acquire
exposure to changes in the value of assets or indices that by themselves would
not be purchased for the Portfolio. Futures and options are discussed in greater
detail in the SAI.
The Portfolio intends to stay invested in the securities described above to
the extent practical in light of the objective and long-term investment
perspective. However, the Portfolio's assets may be invested in short-term
instruments with remaining maturities of 397 days or less to meet anticipated
redemptions and expenses or for day-to-day operating purposes. Short-term
instruments consist of (1) short-term obligations of the U.S. Government, its
agencies, instrumentalities, authorities or political subdivisions; (2) other
short-term debt securities rated Aa or higher by Moody's or AA or higher by S&P
or, if unrated, of comparable quality in the opinion of BT; (3) commercial
paper; (4) bank obligations, including negotiable certificates of deposit, time
deposits and bankers' acceptances; and (5) repurchase agreements. At the time
the Portfolio invests in commercial paper, bank obligations or repurchase
agreements, the issuer or the issuer's parent must have outstanding debt rated
Aa or higher by Moody's or AA or higher by S&P or outstanding commercial paper
or bank obligations rated Prime-1 by Moody's or A-1 by S&P; or, if no such
ratings are available, the instrument must be of comparable quality in the
opinion of BT.
The S&P 500 is a well-known stock market index that includes common stocks
of 500 companies from several industrial sectors representing a significant
portion of the market value of all common stocks publicly traded in the United
States, most of which are listed on the New York Stock Exchange (the
"Exchange"). Stocks in the S&P 500 are weighted according to their market
capitalization (the number of shares outstanding multiplied by the stock's
current price). BT believes that the performance of the S&P 500 is
representative of the performance of publicly traded common stocks in general.
The composition of the S&P 500 is determined by Standard & Poor's Corporation
and is based on such factors as the market capitalization and trading activity
of
PROSPECTUS
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<PAGE> 19
each stock and its adequacy as a representation of stocks in a particular
industry group, and may be changed from time to time.
The Fund and the Portfolio are not sponsored, endorsed, sold or promoted by
Standard & Poor's Corporation. Standard & Poor's Corporation makes no
representation or warranty, express or implied, to the owners of the Fund or the
Portfolio or any member of the public regarding the advisability of investing in
securities generally or in the Fund and the Portfolio particularly or the
ability of the S&P 500 to track general stock market performance. Standard &
Poor's Corporation does not guarantee the accuracy and/or the completeness of
the S&P 500 or any data included therein.
STANDARD & POOR'S CORPORATION MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO
THE RESULTS TO BE OBTAINED BY THE FUND OR THE PORTFOLIO, OWNERS OF THE FUND OR
THE PORTFOLIO, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500 OR ANY
DATA INCLUDED THEREIN. STANDARD & POOR'S CORPORATION MAKES NO EXPRESS OR IMPLIED
WARRANTIES AND HEREBY EXPRESSLY DISCLAIMS ALL SUCH WARRANTIES OF MERCHANTABILITY
OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE S&P 500 OR ANY
DATA INCLUDED THEREIN.
The ability of the Fund and the Portfolio to meet their investment objective
depends to some extent on the cash flow experienced by the Fund and by the other
investors in the Portfolio, since investments and redemptions by shareholders of
the Fund generally will require the Portfolio to purchase or sell securities. BT
will make investment changes to accommodate cash flow in an attempt to maintain
the similarity of the Portfolio to the S&P 500. An investor should also be aware
that the performance of the S&P 500 is a hypothetical number that does not take
into account brokerage commissions and other costs of investing, unlike the
Portfolio which must bear these costs. Finally, since the Portfolio seeks to
track the S&P 500, BT generally will not attempt to judge the merits of any
particular stock as an investment.
AMERICAN AADVANTAGE INTERMEDIATE BOND MILEAGE FUND and AMERICAN AADVANTAGE
SHORT-TERM BOND MILEAGE FUND -- The investment objective of each of these Funds
is to realize income and capital appreciation. As an investment policy, each
Fund primarily seeks income and secondarily seeks capital appreciation. The
Intermediate Bond Fund and the Short-Term Bond Fund seek their investment
objective by investing all of their investable assets in the Intermediate Bond
Portfolio and the Short-Term Bond Portfolio, respectively, which invest
primarily in debt obligations. Permissible investments include securities of the
U.S. Government and its agencies and instrumentalities, including STRIPS and
other zero coupon obligations; corporate bonds, notes and debentures;
non-convertible preferred stocks; mortgage-backed securities; asset-backed
securities; domestic, Yankeedollar and Eurodollar certificates of deposit, bank
deposit notes, and bank notes; other investment companies; and cash or cash
equivalents including obligations that are permitted investments for the Money
Market Portfolio. Such obligations may have a fixed, variable or floating rate
of interest. At the time of purchase, all such securities will be rated in one
of the four highest rating categories by all Rating Organizations rating such
obligation or, if unrated, will be deemed to be of comparable quality by the
Manager or the investment adviser. Obligations rated in the fourth highest
rating category are limited to 25% of each Portfolio's total assets. See
"American AAdvantage Balanced Mileage Fund" for a description of the risks
involved with these obligations. The Portfolios, at the discretion of the
Manager and the investment adviser, may retain a security which has been
downgraded below the initial investment criteria. See the SAI for definitions of
the foregoing securities and for a description of debt ratings. Principal and/or
interest payments for obligations of the U.S. Government's agencies or
instrumentalities may or may not be backed by the full faith and credit of the
U.S. Government.
Although investments will not be restricted by the maturity of the
securities purchased, under normal circumstances, the Intermediate Bond
Portfolio will seek to maintain a dollar-weighted average duration of three to
seven years and the Short-Term Bond Portfolio will seek to maintain a weighted
average duration of one to three years. Because the timing on return of
principal for both asset-backed and mortgage-backed securities is uncertain, in
calculating the average weighted maturity of the Portfolio, the maturity of
these securities may be based on certain industry conventions.
PROSPECTUS
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<PAGE> 20
Mortgage-backed securities are securities representing interests in "pools"
of mortgages in which payments of both interest and principal on the securities
are made monthly, in effect, "passing through" monthly payments made by the
individual borrowers on the mortgage loans which underlie the securities (net of
fees paid to the issuer or guarantor of the securities). Early repayment of
principal on mortgage pass-through securities (arising from prepayments of
principal due to sale of the underlying property, refinancing, or foreclosure,
net of fees and costs which may be incurred) may expose the Portfolios to a
lower rate of return upon reinvestment of principal. Also, if a security subject
to prepayment has been purchased at a premium, in the event of prepayment, the
value of the premium would be lost. Like other debt securities, when interest
rates rise, the value of mortgage-related securities generally will decline;
however, when interest rates decline, the value of mortgage-related securities
with prepayment features may not increase as much as other debt securities.
Payment of principal and interest on some mortgage pass-through securities
(but not the market value of the securities themselves) may be guaranteed by the
full faith and credit of the U.S. Government (such as in the case of securities
guaranteed by the Government National Mortgage Association ("GNMA")) or
guaranteed by agencies or instrumentalities of the U.S. Government (such as in
the case of securities guaranteed by the Federal National Mortgage Association
("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC"), which are
supported only by the discretionary authority of the U.S. Government to purchase
the agency's obligations). Mortgage pass-through securities created by
non-governmental issuers (such as commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers and other
secondary market issuers) may be supported with various credit enhancements such
as pool insurance, guarantees issued by governmental entities, a letter of
credit from a bank or senior/subordinated structures.
Collateralized mortgage obligations ("CMOs") are hybrid instruments with
characteristics of both mortgage-backed bonds and mortgage pass-through
securities. Similar to a mortgage pass-through, interest and prepaid principal
on a CMO are paid, in most cases, monthly. CMOs may be collateralized by whole
mortgage loans but are more typically collateralized by portfolios of mortgage
pass-through securities guaranteed by GNMA, FHLMC or FNMA. CMOs are structured
in multiple classes, with each class bearing a different stated maturity or
interest rate.
The Portfolios are permitted to invest in asset-backed securities, subject
to the Portfolios' rating and quality requirements. Through the use of trusts
and special purpose subsidiaries, various types of assets, primarily home equity
loans, automobile and credit card receivables, and other types of receivables or
other assets as well as purchase contracts, financing leases and sales
agreements entered into by municipalities, are securitized in pass-through
structures similar to the mortgage pass-through structures described above.
Consistent with the Funds' and the Portfolios' investment objective, policies
and quality standards, the Portfolios may invest in these and other types of
asset-backed securities which may be developed in the future.
Asset-backed securities involve certain risks that do not exist with
mortgage-related securities, resulting mainly from the fact that asset-backed
securities do not usually contain the benefit of a complete security interest in
the related collateral. For example, credit card receivables generally are
unsecured and the debtors are entitled to the protection of a number of state
and federal consumer credit laws, some of which may reduce the ability to obtain
full payment. In the case of automobile receivables, due to various legal and
economic factors, proceeds from repossessed collateral may not always be
sufficient to support payments on the securities. The risks associated with
asset-backed securities are often reduced by the addition of credit
enhancements, such as a letter of credit from a bank, excess collateral or a
third-party guarantee.
Investments in Yankeedollar and Eurodollar bonds, notes and certificates of
deposit involve risks that differ from investments in securities of domestic
issuers. See "American AAdvantage Money Market Mileage Fund" for a description
of these risks. The Portfolio also may engage in dollar rolls, or purchase or
sell securities on a when-issued or forward commitment basis as described under
"American AAdvantage Balanced Mileage Fund."
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The market value of fixed rate securities, and thus the net asset value of
this Portfolio's shares, is expected to vary inversely with movements in
interest rates. The market value of variable and floating rate instruments
should not vary as much due to the periodic adjustments in their interest rates.
An adjustment which increases the interest rate of such securities should reduce
or eliminate declines in market value resulting from a prior upward movement in
interest rates, and an adjustment which decreases the interest rate of such
securities should reduce or eliminate increases in market value resulting from a
prior downward movement in interest rates.
The MANAGER serves as the sole active investment adviser to the Short-Term
Bond Portfolio. The MANAGER and BARROW, HANLEY, MEWHINNEY & STRAUSS, INC.
currently manage the assets of the Intermediate Bond Portfolio. See "Investment
Advisers."
MONEY MARKET FUNDS -- The investment objectives of the Money Market Funds are
current income, liquidity and the maintenance of a stable $1.00 price per share.
The Money Market Funds seek to achieve these objectives by investing all of
their investable assets in the Money Market Portfolios, which invest in high
quality, U.S. dollar-denominated short-term obligations that have been
determined by the Manager or the AMR Trust Board to present minimal credit
risks. Portfolio investments are valued based on the amortized cost valuation
technique pursuant to Rule 2a-7 under the Investment Company Act of 1940 ("1940
Act"). See the SAI for an explanation of the amortized cost valuation method.
Obligations in which the Money Market Portfolios invest generally have remaining
maturities of 397 days or less, although instruments subject to repurchase
agreements and certain variable and floating rate obligations may bear longer
final maturities. The average dollar-weighted portfolio maturity of each Money
Market Portfolio will not exceed 90 days. The Manager serves as the sole
investment adviser to the Money Market Funds. See "Management and Administration
of the Mileage Trust."
AMERICAN AADVANTAGE MONEY MARKET MILEAGE FUND -- The Fund's corresponding
Portfolio may invest in obligations permitted to be purchased under Rule 2a-7 of
the 1940 Act including, but not limited to, (1) obligations of the U.S.
Government or its agencies or instrumentalities; (2) loan participation
interests, medium-term notes, funding agreements and asset-backed securities;
(3) domestic, Yankeedollar and Eurodollar certificates of deposit, time
deposits, bankers' acceptances, commercial paper, bank deposit notes and other
promissory notes including floating or variable rate obligations issued by U.S.
or foreign bank holding companies and their bank subsidiaries, branches and
agencies; and (4) repurchase agreements involving the obligations listed above.
The Money Market Portfolio will invest only in issuers or instruments that at
the time of purchase (1) have received the highest short-term rating by two
Rating Organizations such as "A-1" by S&P and "P-1" by Moody's; (2) are single
rated and have received the highest short-term rating by a Rating Organization;
or (3) are unrated, but are determined to be of comparable quality by the
Manager pursuant to guidelines approved by the AMR Trust Board and subject to
ratification by the AMR Trust Board. See the SAI for definitions of the
foregoing instruments and rating systems. The Portfolio may invest in other
investment companies. The Portfolio also may purchase or sell securities on a
when-issued or forward commitment basis as described under "American AAdvantage
Balanced Mileage Fund."
The Portfolio will invest more than 25% of its assets in obligations issued
by the banking industry. However, for temporary defensive purposes during
periods when the Manager believes that maintaining this concentration may be
inconsistent with the best interest of shareholders, the Portfolio may not
maintain this concentration.
Investments in Eurodollar (U.S. dollar obligations issued outside the United
States by domestic or foreign entities) and Yankeedollar (U.S. dollar
obligations issued inside the United States by foreign entities) obligations
involve additional risks. Most notably, there generally is less publicly
available information about foreign issuers; there may be less governmental
regulation and supervision; foreign issuers may use different accounting and
financial standards; and the adoption of foreign governmental restrictions may
affect adversely the payment of principal and interest on foreign investments.
In addition, not all foreign branches of United States banks are supervised or
examined by regulatory authorities as are United States banks, and such branches
may not be subject to reserve requirements.
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Variable amount master demand notes in which the Portfolio may invest are
unsecured demand notes that permit the indebtedness thereunder to vary, and
provide for periodic adjustments in the interest rate. Because master demand
notes are direct lending arrangements between the Portfolio and the issuer, they
are not normally publicly traded. There is no secondary market for the notes;
however, the period of time remaining until payment of principal and accrued
interest can be recovered under a variable amount master demand note generally
will not exceed seven days. To the extent this period is exceeded, the note in
question would be considered illiquid. Issuers of variable amount master demand
notes must satisfy the same criteria as set forth for other promissory notes
(e.g. commercial paper). The Portfolio will invest in variable amount master
demand notes only when such notes are determined by the Manager, pursuant to
guidelines established by the AMR Trust Board, to be of comparable quality to
rated issuers or instruments eligible for investment by the Portfolio. In
determining average dollar-weighted portfolio maturity, a variable amount master
demand note will be deemed to have a maturity equal to the longer of the period
of time remaining until the next readjustment of the interest rate or the period
of time remaining until the principal amount can be recovered from the issuer on
demand.
AMERICAN AADVANTAGE MUNICIPAL MONEY MARKET MILEAGE FUND -- The Fund's
corresponding Portfolio may invest in municipal obligations issued by or on
behalf of the governments of states, territories, or possessions of the United
States; the District of Columbia; and their political subdivisions, agencies and
instrumentalities if the interest these obligations provide is generally exempt
from federal income tax. The Municipal Money Market Portfolio will invest only
in issuers or instruments that at the time of purchase (1) are guaranteed by the
U.S. Government, its agencies, or instrumentalities; (2) are secured by letters
of credit that are irrevocable and issued by banks which qualify as authorized
issuers for the Money Market Portfolio (see "American AAdvantage Money Market
Mileage Fund"); (3) are guaranteed by one or more municipal bond insurance
policies that are noncancelable and are issued by third-party guarantors
possessing the highest claims-paying rating from a Rating Organization; (4) have
received one of the two highest short-term ratings from at least two Rating
Organizations; (5) are single rated and have received one of the two highest
short-term ratings from that Rating Organization; (6) have no short-term rating
but the instrument is comparable to the issuer's rated short-term debt; (7) have
no short-term rating (or comparable rating) but have received one of the top two
long-term ratings from all Rating Organizations rating the issuer or instrument;
or (8) are unrated, but are determined to be of comparable quality by the
Manager pursuant to guidelines approved by, and subject to the oversight of, the
AMR Trust Board. The Portfolio also may invest in other investment companies.
Ordinarily at least 80% of the Portfolio's net assets will be invested in
municipal obligations the interest from which is exempt from regular federal
income tax. However, should market conditions warrant, the Portfolio may invest
up to 20% (or for temporary defensive purposes, up to 100%) of its assets in
eligible investments for the Money Market Portfolio which are subject to federal
income tax.
The Portfolio may invest in certain municipal obligations which have rates
of interest that are adjusted periodically according to formulas intended to
minimize fluctuations in the values of these instruments. These instruments,
commonly known as variable rate demand obligations, are long-term instruments
which allow the purchaser, at its discretion, to redeem securities before their
final maturity at par plus accrued interest upon notice (typically 7 to 30
days).
Municipal obligations may be backed by the full taxing power of a
municipality ("general obligations"), or by the revenues from a specific project
or the credit of a private organization ("revenue obligations"). Some municipal
obligations are collateralized as to payment of principal and interest by an
escrow of U.S. Government or federal agency obligations, while others are
insured by private insurance companies, while still others may be supported by
letters of credit furnished by domestic or foreign banks. The Portfolio's
investments in municipal obligations may include fixed, variable, or floating
rate general obligations and revenue obligations (including municipal lease
obligations and resource recovery obligations); zero coupon obligations and
asset-backed obligations; variable rate auction and residual interest
obligations; tax, revenue, or bond anticipation notes; tax-exempt commercial
paper; and purchase obligations that are subject to restrictions on resale. See
the SAI for a further discussion of the foregoing obligations. The Portfolio may
purchase or sell obligations on a when-issued or forward commitment basis as
described under "American AAdvantage Balanced Mileage Fund."
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The Portfolio may invest more than 25% of the value of its total assets in
municipal obligations which are related in such a way that an economic, business
or political development or change affecting one such security would also affect
the other securities; for example, securities the interest of which is paid from
revenues of similar types of projects, or securities whose issuers are located
in the same state. As a result, the Portfolio may be subject to greater risk
compared to a fund that does not follow this practice. However, the Manager
believes this risk is mitigated because it is anticipated that most of the
Portfolio's assets will be insured or backed by bank letters of credit.
Additionally, the Portfolio may invest more than 25% of the value of its total
assets in industrial development bonds which, although issued by industrial
development authorities, may be backed only by the assets and revenues of the
non-governmental users.
The Portfolio also may invest in municipal obligations that constitute
"private activity obligations." These include obligations that finance student
loans, residential rental projects, and solid waste disposal facilities. To the
extent the Portfolio earns interest income on private activity obligations,
shareholders will be required to treat the portion of the Fund's distributions
attributable to its share of such interest as a "tax preference item" for
purposes of determining their liability for the federal alternative minimum tax
("AMT") and, as a result, may become subject to (or increase their liability
for) the AMT. Shareholders should consult their own tax advisers to determine
whether they may be subject to the AMT. The Portfolio may invest in private
activity obligations without limitation and it is anticipated that a substantial
portion of the Portfolio's assets will be invested in these obligations. As a
result, a substantial portion of the Fund's distributions may be a tax
preference item, which will reduce the net return from the Fund for taxpayers
subject to the AMT. Interest on "qualified" private activity obligations is
exempt from federal income tax.
AMERICAN AADVANTAGE U.S. GOVERNMENT MONEY MARKET MILEAGE FUND -- The Fund's
corresponding Portfolio will invest exclusively in obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities and
repurchase agreements which are collateralized by such obligations. U.S.
Government securities include direct obligations of the U.S. Treasury (such as
Treasury bills, Treasury notes and Treasury bonds). The Fund may invest in
securities issued by the Agency for International Development, Farmers Home
Administration, Farm Credit Banks, Federal Home Loan Bank, Federal Intermediate
Credit Bank, Federal Financing Bank, Federal Land Bank, FNMA, GNMA, General
Services Administration, Rural Electrification Administration, Small Business
Administration, Tennessee Valley Authority, and others. Some of these
obligations, such as those issued by the Federal Home Loan Bank and FHLMC, are
supported only by the credit of the agency or instrumentality issuing the
obligation and the discretionary authority of the U.S. Government to purchase
the agency's obligations. Counterparties for repurchase agreements must be
approved by the AMR Trust Board. See the SAI for a further discussion of the
foregoing obligations. The Portfolio may purchase or sell securities on a
when-issued or forward commitment basis, as described under "American AAdvantage
Balanced Mileage Fund."
OTHER INVESTMENT POLICIES -- In addition to the investment policies described
previously, each Portfolio also may lend its securities, enter into fully
collateralized repurchase agreements, and invest in private placement offerings.
SECURITIES LENDING. Each Portfolio may lend securities to broker-dealers or
other institutional investors pursuant to agreements requiring that the loans be
continuously secured by any combination of cash, securities of the U.S.
Government and its agencies and instrumentalities and approved bank letters of
credit that at all times equal at least 100% of the market value of the loaned
securities. Although the Equity 500 Index Portfolio may lend its securities, it
has agreed that it will abstain from doing so. Securities loans will not be made
if, as a result, the aggregate amount of all outstanding securities loans for
any Portfolio of the AMR Trust exceeds 33 1/3% of its total assets (including
the market value of collateral received). A Portfolio continues to receive
interest on the securities loaned and simultaneously earns either interest on
the investment of the cash collateral or fee income if the loan is otherwise
collateralized. Should the borrower of the securities fail financially, there is
a risk of delay in recovery of the securities or loss of rights in the
collateral. However, the Portfolios seek to minimize this risk by making loans
only to borrowers which are deemed to be of good financial standing and which
have been approved by the AMR Trust Board. For purposes of complying with each
Portfolio's investment policies and restrictions, collateral received in
connection with securities loans will be deemed an asset of a Portfolio to the
extent required
PROSPECTUS
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by law. Except for the Equity 500 Index Portfolio, the Manager will receive
compensation for administrative and oversight functions with respect to
securities lending. The amount of such compensation will depend on the income
generated by the loan of each Portfolio's securities. The SEC has granted
exemptive relief that permits the Portfolios to invest cash collateral received
from securities lending transactions in shares of one or more private investment
companies managed by the Manager. Subject to receipt of exemptive relief from
the SEC, the Portfolios also may invest cash collateral received from securities
lending transactions in shares of one or more registered investment companies
managed by the Manager. See the SAI for further information regarding loan
transactions.
REPURCHASE AGREEMENTS. A repurchase agreement is an agreement under which
securities are acquired by a Portfolio from a securities dealer or bank subject
to resale at an agreed upon price on a later date. The acquiring Portfolio bears
a risk of loss in the event that the other party to a repurchase agreement
defaults on its obligations and the Portfolio is delayed or prevented from
exercising its rights to dispose of the collateral securities. However, the
investment advisers or the Manager attempt to minimize this risk by entering
into repurchase agreements only with financial institutions which are deemed to
be of good financial standing and which have been approved by the AMR Trust
Board or the Equity 500 Index Portfolio Board, as appropriate. See the SAI for
more information regarding repurchase agreements.
PRIVATE PLACEMENT OFFERINGS. Investments in private placement offerings are
made in reliance on the "private placement" exemption from registration afforded
by Section 4(2) of the Securities Act of 1933 (the "1933 Act"), and resold to
qualified institutional buyers under Rule 144A under the 1993 Act ("Section 4(2)
securities"). Section 4(2) securities are restricted as to disposition under the
federal securities laws, and generally are sold to institutional investors, such
as the Portfolios, that agree they are purchasing the securities for investment
and not with an intention to distribute to the public. Any resale by the
purchaser must be in an exempt transaction and may be accomplished in accordance
with Rule 144A. Section 4(2) securities normally are resold to other
institutional investors like the Portfolios through or with the assistance of
the issuer or investment dealers who make a market in the Section 4(2)
securities, thus providing liquidity. The Money Market Portfolios will not
invest more than 10% (and the other Portfolios, no more than 15%) of their
respective assets in Section 4(2) securities and other illiquid securities
unless the applicable investment adviser determines, by continuous reference to
the appropriate trading markets and pursuant to guidelines approved by the AMR
Trust Board or the Equity 500 Index Portfolio Board, that any Section 4(2)
securities held by such Portfolio in excess of this level are at all times
liquid.
The AMR Trust Board, the Equity 500 Index Portfolio Board and the applicable
investment adviser, pursuant to the guidelines approved by the respective
Boards, will carefully monitor the Portfolios' investments in Section 4(2)
securities sold and offered under Rule 144A, focusing on such important factors,
among others, as: valuation, liquidity, and availability of information.
Investments in Section 4(2) securities could have the effect of reducing a
Portfolio's liquidity to the extent that qualified institutional buyers no
longer wish to purchase these restricted securities.
BROKERAGE PRACTICES AND PORTFOLIO TURNOVER -- Each investment adviser will place
its own orders to execute securities transactions which are designed to
implement the applicable Portfolio's investment objective and policies. In
placing such orders, each investment adviser will seek the best available price
and most favorable execution. The full range and quality of services offered by
the executing broker or dealer will be considered when making these
determinations. Pursuant to written guidelines approved by the AMR Trust Board
or the Equity 500 Index Portfolio Board, as appropriate, an investment adviser
of a Portfolio, or its affiliated broker-dealer, may execute portfolio
transactions and receive usual and customary brokerage commissions (within the
meaning of Rule 17e-1 of the 1940 Act) for doing so.
The Money Market Portfolios, the Intermediate Bond Portfolio and the
Short-Term Bond Portfolio normally will not incur any brokerage commissions on
their transactions because money market and debt instruments are generally
traded on a "net" basis with dealers acting as principal for their own accounts
and
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without a stated commission. The price of the obligation, however, usually
includes a profit to the dealer. Obligations purchased in underwritten offerings
include a fixed amount of compensation to the underwriter, generally referred to
as the underwriter's concession or discount. No commissions or discounts are
paid when securities are purchased directly from an issuer.
No Portfolio, other than the Short-Term Bond Portfolio, currently expects
its portfolio turnover rate to exceed 100%. The portfolio turnover rate for the
Short-Term Bond Portfolio for the year ended October 31, 1997 was 282%. The
portfolio turnover rate for the Balanced Portfolio for the fiscal year ended
October 31, 1997 was 105%. This was due to an unusually large redemption from
the Portfolio, which is not expected to reoccur. A Portfolio's turnover rate, or
the frequency of portfolio transactions, will vary from year to year depending
on market conditions and the Portfolio's cash flows. High portfolio activity
increases a Portfolio's transaction costs, including brokerage commissions, and
may result in a greater number of taxable transactions.
ADDITIONAL INFORMATION ABOUT THE PORTFOLIOS -- As previously described,
investors should be aware that each Fund, unlike mutual funds which directly
acquire and manage their own portfolios of securities, seeks to achieve its
investment objective by investing all of its investable assets in a
corresponding Portfolio of the AMR Trust, which is a separate investment
company, or in the Equity 500 Index Portfolio, which is a separate investment
company advised by BT. Since a Fund will invest only in its corresponding
Portfolio, that Fund's shareholders will acquire only an indirect interest in
the investments of the Portfolio.
The Manager expects, although it cannot guarantee, that the Mileage Trust
will achieve economies of scale by investing in the AMR Trust and the Equity 500
Index Portfolio. In addition to selling their interests to the Funds, the
Portfolios sell their interests to other non-affiliated investment companies
and/or other institutional investors. All institutional investors in a Portfolio
pay a proportionate share of the Portfolio's expenses and invest in that
Portfolio on the same terms and conditions. However, other investment companies
investing all of their assets in a Portfolio, are not required to sell their
shares at the same public offering price as a Fund and may charge different
sales commissions. Therefore, investors in a Fund may experience different
returns from investors in another investment company which invests exclusively
in that Fund's corresponding Portfolio.
The Fund's investment in a Portfolio may be affected materially by the
actions of large investors in that Portfolio, if any. For example, as with all
open-end investment companies, if a large investor were to redeem its interest
in a Portfolio, that Portfolio's remaining investors could experience higher pro
rata operating expenses, thereby producing lower returns. As a result, that
Portfolio's security holdings may become less diverse, resulting in increased
risk. Institutional investors in a Portfolio that have a greater pro rata
ownership interest in the Portfolio than the Fund could have effective voting
control over the operation of that Portfolio. A change in a Portfolio's
fundamental objective, policies and restrictions, which is not approved by the
shareholders of its corresponding Fund could require that Fund to redeem its
interest in the Portfolio. Any such redemption could result in a distribution in
kind of portfolio securities (as opposed to a cash distribution) by the
Portfolio. Should such a distribution occur, that Fund could incur brokerage
fees or other transaction costs in converting such securities to cash. In
addition, a distribution in kind could result in a less diversified portfolio of
investments for that Fund and could affect its liquidity adversely.
The Portfolios' and their corresponding Funds' investment objectives and
policies are described above. See "Investment Restrictions" for a description of
their investment restrictions. The investment objective of a Fund can be changed
only with shareholder approval. The approval of a Fund and of other investors in
its corresponding Portfolio, if any, is not required to change the investment
objective, policies or limitations of that Portfolio, unless otherwise
specified. Written notice will be provided to shareholders of a Fund within
thirty days prior to any changes in its corresponding Portfolio's investment
objective. If the investment objective of a Portfolio changes and the
shareholders of its corresponding Fund do not approve a parallel change in that
Fund's investment objective, the Fund would seek an alternative investment
vehicle or the Manager and the investment advisers would actively manage the
Fund.
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See "Management and Administration of the Trusts" for a complete description
of the investment management fee and other expenses associated with a Fund's
investment in its corresponding Portfolio. This Prospectus and the SAI contain
more detailed information about each Fund and its corresponding Portfolio,
including information related to (1) the investment objective, policies and
restrictions of each Fund and its corresponding Portfolio, (2) the Board of
Trustees and officers of the Mileage Trust, the AMR Trust and the Equity 500
Index Portfolio Board, (3) brokerage practices, (4) the Funds' shares, including
the rights and liabilities of its shareholders, (5) additional performance
information, including the method used to calculate yield and total return and
(6) the determination of the value of each Fund's shares.
INVESTMENT RESTRICTIONS
The following fundamental investment restrictions and the non-fundamental
investment restriction are identical for each Fund and its corresponding
Portfolio. Therefore, although the following discusses the investment
restrictions of each Portfolio, it applies equally to each Fund. The following
fundamental investment restrictions may be changed with respect to a particular
Fund by the majority vote of that Fund's outstanding shares or with respect to a
Portfolio by the majority vote of that Portfolio's interest holders. No
Portfolio may:
- Invest more than 5% of its total assets (taken at market value) in
securities of any one issuer, other than obligations issued by the U.S.
Government, its agencies and instrumentalities, or purchase more than 10%
of the voting securities of any one issuer, with respect to 75% of a
Portfolio's total assets. In addition, although not a fundamental
investment restriction and therefore subject to change without shareholder
vote, the Money Market Portfolio and the U.S. Government Money Market
Portfolio apply this restriction with respect to 100% of their assets.
- Invest more than 25% of its total assets in the securities of companies
primarily engaged in any one industry, provided that: (i) this limitation
does not apply to obligations issued or guaranteed by the U.S. Government,
its agencies and instrumentalities; (ii) municipalities and their agencies
and authorities are not deemed to be industries; and (iii) financial
service companies are classified according to the end users of their
services (for example, automobile finance, bank finance, and diversified
finance will be considered separate industries). With respect to the Money
Market Portfolio, this restriction does not apply to the banking industry.
The following non-fundamental investment restriction may be changed with
respect to a particular Fund by a vote of a majority of the Mileage Trust Board
or with respect to a Portfolio by a vote of a majority of the AMR Trust Board or
the Equity 500 Index Portfolio Board, as appropriate: no Portfolio may invest
more than 15% (or, with respect to any Money Market Portfolio, 10%) of its net
assets in illiquid securities, including time deposits and repurchase agreements
which mature in more than seven days.
The above percentage limits are based upon asset values at the time of the
applicable transaction; accordingly, a subsequent change in asset values will
not affect a transaction which was in compliance with the investment
restrictions at the time such transaction was effected. See the SAI for other
investment limitations.
YIELDS AND TOTAL RETURNS
From time to time the Money Market Funds may advertise their "current yield"
and "effective yield." Both yield figures are based on historical earnings and
are not intended to indicate future performance. The current yield refers to the
investment income generated over a seven calendar-day period (which period will
be stated in the advertisement). This yield is then annualized by assuming the
amount of investment income generated during that week is earned each week over
a one-year period and is shown as a percentage of the investment. The effective
yield is calculated similarly but, when annualized, the investment income earned
is assumed to be reinvested. The effective yield will be slightly higher than
the current yield because of the compounding effect of this assumed
reinvestment. The Municipal Money Market Fund also may quote "tax equivalent
yields," which show the taxable
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yields a shareholder would have to earn before federal income taxes to equal
this Fund's tax-exempt yields. The tax equivalent yield is calculated by
dividing the Fund's tax-exempt yield by the result of one minus a stated federal
income tax rate. If only a portion of the Fund's income was tax-exempt, only
that portion is adjusted in the calculation. As stated earlier, the Fund
considers interest on private activity obligations to be exempt from federal
income tax. Each class of the Money Market Fund has different expenses which
will impact the performance of the class.
Advertised yields for the Balanced Fund, the Growth and Income Fund, the
International Equity Fund, the S&P 500 Index Fund, the Intermediate Bond Fund
and the Short-Term Bond Fund (collectively, the "Variable NAV Funds") may be
computed by dividing the net investment income per share earned by a Fund during
the relevant time period by the maximum offering price per share for that Fund
on the last day of the period. Additionally, the Intermediate Bond Fund and the
Short-Term Bond Fund may advertise a "monthly distribution rate." This rate is
based on an annualized monthly dividend accrual rate per share compared with the
month-end share price of this Fund.
Total return quotations advertised by the Funds may reflect the average
annual compounded (or aggregate compounded) rate of return during the designated
time period based on a hypothetical initial investment and the redeemable value
of that investment at the end of the period. The Funds will at times compare
their performance to applicable published indices, and also may disclose their
performance as ranked by certain ranking entities. See the SAI for more
information about the calculation of yields and total returns.
MANAGEMENT AND ADMINISTRATION OF THE TRUSTS
The Mileage Trust Board has general supervisory responsibility over the
Mileage Trust's affairs, while the business affairs of the AMR Trust and the
Equity 500 Index Portfolio are subject to the supervision of their respective
Board of Trustees. The Manager serves as investment manager and administrator to
the AMR Trust pursuant to a Management Agreement dated October 1, 1995, as
amended on July 25, 1997, which obligates the Manager to provide or oversee all
administrative, investment advisory and portfolio management services for the
AMR Trust. Similarly, the Manager entered into a Management Agreement dated
October 1, 1995, as amended on November 21, 1997, which obligates the Manager to
provide or oversee all administrative, investment advisory and portfolio
management services for the Funds. The Manager, located at 4333 Amon Carter
Boulevard, MD5645, Fort Worth, Texas 76155, is a wholly owned subsidiary of AMR
Corporation ("AMR"), the parent company of American Airlines, Inc., organized in
1986 to provide investment management, advisory, administrative and asset
management consulting services. The assets of the Balanced Portfolio, the Growth
and Income Portfolio and the International Equity Portfolio are allocated by the
Manager among multiple investment advisers designated for that Portfolio. The
assets of the Intermediate Bond Portfolio are allocated by the Manager between
the Manager and another investment adviser. BT serves as investment adviser and
administrator of, and provides custody and transfer agency services to, the
Equity 500 Index Portfolio. See "Investment Advisers." The Manager serves as the
sole investment adviser to the Money Market Portfolios and the Short-Term Bond
Portfolio. In addition, with the exception of the International Equity Portfolio
and the Equity 500 Index Portfolio, if so requested by any investment adviser,
the Manager will make the investment decisions with respect to assets allocated
to that investment adviser which the investment adviser determines should be
invested in short-term obligations of the type permitted for investment by the
Money Market Portfolio. As of December 31, 1997, the Manager had assets under
management (including assets under fiduciary advisory control) totaling
approximately $18.4 billion including approximately $6.1 billion under active
management and $12.3 billion as named fiduciary or fiduciary adviser. Of the
total, approximately $14.2 billion of assets are related to AMR. American
Airlines, Inc. is not responsible for investments made in the Mileage Trust.
The Manager provides the Mileage Trust and the AMR Trust with office space,
office equipment and personnel necessary to manage and administer the Trusts'
operations. This includes complying with reporting requirements; corresponding
with shareholders; maintaining internal bookkeeping, accounting and auditing
services and records; and supervising the provision of services to the Trusts by
third parties. The Manager oversees
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each Portfolio's participation in securities lending activities and any actions
taken by the securities lending agent in connection with those activities to
ensure compliance with all applicable regulatory and investment guidelines. The
Manager also develops the investment programs for each Portfolio of the AMR
Trust, selects and changes investment advisers (subject to approval by the AMR
Trust Board and appropriate interest holders), allocates assets among investment
advisers, monitors the investment advisers' investment programs and results, and
coordinates the investment activities of the investment advisers to ensure
compliance with regulatory restrictions.
Except as otherwise provided below, the Manager bears the expense of
providing the above services and pays the fees of the investment advisers of the
Funds and the Portfolios of the AMR Trust. As compensation for paying the
investment advisory fees and for providing the Portfolios with advisory and
asset allocation services, the Manager receives from the AMR Trust an annualized
fee which is calculated and accrued daily, equal to the sum of (1) 0.15% of the
net assets of the Money Market Portfolios, (2) 0.25% of the net assets of the
Intermediate Bond Portfolio and the Short-Term Bond Portfolio, (3) 0.10% of the
net assets of the other Portfolios of the AMR Trust, plus (4) all fees payable
by the Manager to the investment advisers of the Balanced, the Growth and Income
and the International Equity Portfolios as described in "Investment Advisers."
To the extent that a Fund invests all of its investable assets in its
corresponding Portfolio, the Manager will need to provide only administrative
services to the Funds. As compensation for these services, the Manager receives
from the Mileage Trust an annualized fee equal to 0.25% of the net assets of
each Variable NAV Fund and 0.05% of the net assets of the Money Market Funds.
The Manager receives compensation in connection with securities lending
activities. If a Portfolio lends its portfolio securities and receives cash
collateral from the borrower, the Manager may receive up to 25% of the net
annual interest income (the gross interest earned by the investment less the
amount paid to the borrower as well as related expenses) received from the
investment of such cash. If a borrower posts collateral other than cash, the
borrower will pay to the lender a loan fee. In addition, the Manager may receive
up to 25% of the loan fees posted by borrowers. Currently, the Manager receives
10% of the net annual interest income from the investment of cash collateral or
10% of the loan fees posted by borrowers. The fees received by the Manager from
the Mileage Trust and the AMR Trust are payable quarterly in arrears.
Each Management Agreement will continue in effect provided that annually
such continuance is specifically approved by a vote of the Mileage Trust Board
and the AMR Trust Board, including the affirmative votes of a majority of the
Trustees of each Board who are not parties to the Management Agreement or
"interested persons" as defined in the 1940 Act of any such party ("Independent
Trustees"), cast in person at a meeting called for the purpose of considering
such approval, or by the vote of a Fund's shareholders or a Portfolio's interest
holders. A Management Agreement may be terminated with respect to a Fund or a
Portfolio at any time, without penalty, by a majority vote of outstanding Fund
shares or Portfolio interests on sixty (60) days' written notice to the Manager,
or by the Manager, on sixty (60) days' written notice to the Mileage Trust or
the AMR Trust. A Management Agreement will automatically terminate in the event
of its "assignment" as defined in the 1940 Act.
The Mileage Trust is responsible for expenses not otherwise assumed by the
Manager, including the following: audits by independent auditors; transfer
agency, custodian, dividend disbursing agent and shareholder recordkeeping
services; taxes, if any, and the preparation of each Fund's tax returns;
interest; costs of Trustee and shareholder meetings; printing and mailing
prospectuses and reports to existing shareholders; fees for filing reports with
regulatory bodies and the maintenance of the Funds' existence; legal fees; fees
to federal and state authorities for the registration of shares; fees and
expenses of Independent Trustees; insurance and fidelity bond premiums; fees
paid to consultants providing reports regarding adherence by the investment
advisers to the investment style of a Portfolio; and any extraordinary expenses
of a nonrecurring nature.
A majority of the Independent Trustees have adopted written procedures
reasonably appropriate to deal with potential conflicts of interest between the
Mileage Trust and the AMR Trust.
FUND ADVISORY AGREEMENTS -- Each investment adviser, except BT, has entered into
a separate investment advisory agreement with the Manager to provide investment
advisory services to the Funds and the Portfolios of the AMR Trust, each dated
October 1, 1995. To the extent that a Fund invests all of its investable assets
in a corresponding
PROSPECTUS
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Portfolio, however, an investment adviser will receive an advisory fee only on
behalf of the Portfolio and not on behalf of its corresponding Fund. As
described below, the assets of the Balanced, the Growth and Income and the
International Equity Portfolios are allocated among the investment advisers
designated for that Portfolio and the assets of the Intermediate Bond Portfolio
are allocated between the Manager and another investment adviser. The Manager is
permitted to enter into new or modified advisory agreements with existing or new
investment advisers without approval of Fund shareholders or Portfolio interest
holders, but subject to approval of the Mileage Trust Board and the AMR Trust
Board. The Securities and Exchange Commission issued an exemptive order which
eliminates the need for shareholder/interest holder approval, subject to
compliance with certain conditions. These conditions include the requirement
that within 90 days of hiring a new adviser or implementing a material change
with respect to an advisory contract, the applicable Fund send a notice to
shareholders containing information about the change that would be included in a
proxy statement. The Manager recommends investment advisers to the AMR Trust
Board based upon its continuing quantitative and qualitative evaluation of the
investment advisers' skill in managing assets using specific investment styles
and strategies. The allocation of assets among investment advisers may be
changed at any time by the Manager. Allocations among investment advisers will
vary based upon a variety of factors, including the overall investment
performance of each investment adviser, the Portfolio's cash flow needs and
market conditions. The Manager need not allocate assets to each investment
adviser designated for a Portfolio. The investment advisers can be terminated
without penalty to the AMR Trust by the Manager, the AMR Trust Board or the
interest holders of the applicable Portfolio. Short-term investment performance,
by itself, is not a significant factor in selecting or terminating an investment
adviser, and the Manager does not expect to recommend frequent changes of
investment advisers. The Prospectus will be supplemented if additional
investment advisers are retained or the contract with any existing investment
adviser is terminated.
Each investment adviser has discretion to purchase and sell securities for
its segment of a Portfolio's assets in accordance with that Portfolio's
objectives, policies and restrictions and the more specific strategies provided
by the Manager. Although the investment advisers are subject to general
supervision by the AMR Trust Board, the Equity 500 Index Portfolio Board and the
Manager, as appropriate, these parties do not evaluate the investment merits of
specific securities transactions. As compensation for its services, each
investment adviser, except BT, is paid a fee by the Manager out of the proceeds
of the management fee received by the Manager from the AMR Trust.
ADMINISTRATION AND SERVICES AGREEMENT -- BT serves as the administrator to the
Equity 500 Index Portfolio. Under an Administration and Services Agreement with
the Portfolio, BT calculates the value of the assets of the Portfolio and
generally assists the Equity 500 Index Portfolio Board in all aspects of the
administration and operation of the Portfolio. The Administration and Services
Agreement provides for the Portfolio to pay BT a fee, computed daily and paid
monthly, at the rate of 0.05% of the average daily net assets of the Portfolio.
Under the Administration and Services Agreement, BT may delegate one or more of
its responsibilities to others, including Federated Services Company, at BT's
expense.
DISTRIBUTION PLAN -- The distribution plan for the Funds (the "Plan") was
adopted pursuant to Rule 12b-1 under the 1940 Act and provides that it will
continue in effect so long as its continuance is approved at least annually by a
majority of the Trustees, including the affirmative votes of a majority of the
Independent Trustees of the Mileage Trust Board, cast in person at a meeting
called for the purpose of considering such approval, or by the vote of
shareholders. The Plan may be terminated with respect to a particular Fund at
any time, without the payment of any penalty, by a vote of a majority of the
Independent Trustees of the Mileage Trust Board or by a vote of a majority of
the outstanding voting securities of the applicable Fund. Shares are distributed
through the Funds' principal underwriter, Brokers Transaction Services ("BTS").
BTS is compensated by the Manager, and not the Trust.
The Plan provides that each Fund will pay 0.25% per annum of its average
daily net assets to the Manager (or another entity approved by the Mileage Trust
Board) for distribution-related services. The fee will be payable monthly in
arrears without regard to whether the amount of the fee is more or less than the
actual expenses
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incurred in a particular month by the entity for the services provided pursuant
to the Plan. The primary expenses expected to be incurred under the Plan are
advertising and participation in the AAdvantage program.
ALLOCATION OF FUND EXPENSES -- Expenses of the Money Market Fund's Platinum and
Mileage Classes generally are allocated equally among the shares of the Fund,
regardless of class. However, certain expenses approved by the Mileage Trust
Board will be allocated solely to the class to which they relate.
PRINCIPAL UNDERWRITER -- BROKERS TRANSACTION SERVICES, INC., 7001 Preston Road,
Dallas, Texas 75205, serves as the principal underwriter of the Funds.
CUSTODIAN -- STATE STREET BANK & TRUST COMPANY ("State Street"), Boston,
Massachusetts, serves as custodian for the Portfolios of the AMR Trust and the
Funds. BANKERS TRUST COMPANY, New York, New York, serves as custodian and
transfer agent for the assets of the Equity 500 Index Portfolio.
TRANSFER AGENT -- State Street serves as transfer agent and provides transfer
agency services for Fund shareholders through its affiliate NATIONAL FINANCIAL
DATA SERVICES, ("NFDS"), Kansas City, Missouri.
INDEPENDENT AUDITOR -- The independent auditor for the Funds, except the S&P 500
Index Fund and the AMR Trust is ERNST & YOUNG LLP, Dallas, Texas. The
independent auditor for the S&P 500 Index Fund and the Equity 500 Index
Portfolio is COOPERS & LYBRAND L.L.P., Kansas City, Missouri.
INVESTMENT ADVISERS
Set forth below is a brief description of the investment advisers for each
Fund and its corresponding Portfolio, except for the Money Market Funds and
their corresponding Portfolios, whose sole investment adviser is the Manager.
References to the investment advisers retained by a Portfolio also apply to the
corresponding Fund. Except for the Manager and BT, none of the investment
advisers provides any services to the Funds or the Portfolios except for
portfolio investment management and related recordkeeping services, or has any
affiliation with the Mileage Trust, the AMR Trust, the Equity 500 Index
Portfolio or the Manager. BT provides investment advisory, administrative and
other services to the Equity 500 Index Portfolio. See "Bankers Trust Company"
below for a discussion of those services.
William F. Quinn has served as President of the Manager since it was founded
in 1986, and Nancy A. Eckl serves as Vice President - Trust Investments of the
Manager. Ms. Eckl previously served as Vice President - Finance and Compliance
of the Manager from December 1990 to May 1995. In these capacities, Mr. Quinn
and Ms. Eckl have primary responsibility for the day-to-day operations of the
Balanced Fund, the Growth and Income Fund, the International Equity Fund, the
Intermediate Bond Fund and their corresponding Portfolios. These
responsibilities include oversight of the investment advisers, regular review of
their performance and asset allocations among them.
Michael W. Fields is responsible for the portfolio management oversight of
the Short-Term Bond Fund and its corresponding Portfolio as well as the portion
of the Intermediate Bond Fund and its corresponding Portfolio allocated to the
Manager. Mr. Fields has been with the Manager since it was founded in 1986 and
serves as Vice President-Fixed Income Investments. Benjamin L. Mayer is
responsible for the day-to-day portfolio management of these Funds and
Portfolios. Mr. Mayer has served as Senior Portfolio Manager of the Manager
since May 1995. Prior to that time, he was a Vice President of Institutional
Fixed Income Sales at Merrill Lynch, Pierce, Fenner & Smith from January 1994 to
April 1995 and Vice President, Regional Senior Strategist from April 1989 to
January 1994.
Frank Salerno, Managing Director of BT, is responsible for the day-to-day
management of the Equity 500 Index Portfolio. Mr. Salerno has been employed by
BT since prior to 1989 and has managed the Equity 500 Index Portfolio's assets
since the Portfolio commenced operations December 31, 1992.
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BANKERS TRUST COMPANY, 130 Liberty Street (One Bankers Trust Plaza), New
York, New York, 10006, is a New York banking corporation and is a wholly owned
subsidiary of Bankers Trust New York Corporation. BT conducts a variety of
general banking and trust activities and is a major wholesale supplier of
financial services to the international and domestic institutional market, with
a global network of over 90 offices in more than 50 countries. As of September
30, 1997, Bankers Trust New York Corporation was the seventh largest bank
holding company in the United States with total assets of approximately $100
billion and approximately $300 billion in assets under management globally. Of
that total, approximately $143 billion are in U.S. equity index assets alone. BT
serves as investment adviser and administrator to the Equity 500 Index
Portfolio. For its services, BT receives a fee from the Equity 500 Index
Portfolio, computed daily and paid monthly, at the annual rate of 0.10% of the
average daily net assets of the Portfolio, of which BT is currently waiving
0.05%.
BARROW, HANLEY, MEWHINNEY & STRAUSS, INC. ("Barrow"), 3232 McKinney Avenue,
15th Floor, Dallas, Texas 75204, is a professional investment counseling firm
which has been providing investment advisory services since 1979. The firm is
wholly owned by United Asset Management Corporation, a Delaware corporation. As
of December 31, 1997, Barrow had discretionary investment management authority
with respect to approximately $28.8 billion of assets, including approximately
$1.9 billion of assets of AMR and its subsidiaries and affiliated entities.
Barrow serves as an investment adviser to the Balanced Portfolio, the Growth and
Income Portfolio, the Intermediate Bond Portfolio and the Short-Term Bond
Portfolio, although the Manager does not presently intend to allocate any of the
assets in the Short-Term Bond Portfolio to Barrow. The Manager pays Barrow an
annualized fee equal to .30% on the first $200 million in AMR Trust assets under
its discretionary management, .20% on the next $300 million, .15% on the next
$500 million, and .125% on assets over $1 billion.
BRANDYWINE ASSET MANAGEMENT, INC. ("Brandywine"), 201 North Walnut Street,
Wilmington, Delaware 19801, is a professional investment counseling firm founded
in 1986. Brandywine is a wholly owned subsidiary of Legg Mason, Inc. As of
December 31, 1997, Brandywine had assets under management totaling approximately
$7.5 billion, including approximately $894 million of assets of AMR and its
subsidiaries and affiliated entities. Brandywine serves as an investment adviser
to the Balanced Portfolio and the Growth and Income Portfolio. The Manager pays
Brandywine, an annualized fee equal to .25% of assets in the Growth and Income
Portfolio and .225% of assets in the Balanced Portfolio of the first $500
million of AMR Trust assets under its discretionary management, .225% of the
next $100 million on all assets, and .20% on all excess assets.
GSB INVESTMENT MANAGEMENT, INC. ("GSB"), 301 Commerce Street, Fort Worth,
Texas 76102, is a professional investment management firm which was founded in
1987 by Frank P. Ganucheau, Mark J. Stupfel, and Lyle E. Brumley. GSB is wholly
owned by United Asset Management Corporation, a Delaware corporation. As of
December 31, 1997, GSB managed approximately $3.5 billion of assets, including
approximately $905 million of assets of AMR and its subsidiaries and affiliated
entities. GSB serves as an investment adviser to the Balanced Portfolio and the
Growth and Income Portfolio. The Manager pays GSB an annualized fee equal to
.30% of the first $100 million in AMR Trust assets under its discretionary
management, .25% of the next $100 million, .20% of the next $100 million, and
.15% on all excess assets.
HOTCHKIS AND WILEY, 800 West Sixth Street, 5th Floor, Los Angeles,
California 90017, is a professional investment counseling firm which was founded
in 1980 by John F. Hotchkis and George Wiley. Hotchkis and Wiley is a division
of the Capital Management Group of Merrill Lynch Asset Management, L.P., a
wholly owned indirect subsidiary of Merrill Lynch & Co., Inc. Assets under
management as of December 31, 1997 were approximately $12.3 billion, which
included approximately $1.1 billion of assets of AMR and its subsidiaries and
affiliated entities. Hotchkis and Wiley serves as an investment adviser to the
Balanced Portfolio, the Growth and Income Portfolio and the International Equity
Portfolio. The Manager pays Hotchkis and Wiley an annualized fee equal to .60%
of the first $10 million of AMR Trust assets under its discretionary management,
.50% of the next $140 million of assets, .30% on the next $50 million of assets,
.20% of the next $800 million of assets and .15% of all excess assets.
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INDEPENDENCE INVESTMENT ASSOCIATES, INC. ("IIA"), 53 State Street, Boston,
Massachusetts 02109, is a professional investment counseling firm which was
founded in 1982. The firm is a wholly owned subsidiary of John Hancock Mutual
Life Insurance Company. Assets under management as of December 31, 1997,
including funds managed for its parent company, were approximately $26.7
billion, which included approximately $1.1 billion of assets of AMR and its
subsidiaries and affiliated entities. IIA serves as an investment adviser to the
Balanced Portfolio and the Growth and Income Portfolio. The Manager pays IIA an
annualized fee equal to .50% of the first $30 million of AMR Trust assets under
its discretionary management, .25% of the next $70 million of assets, and .20%
of all excess assets.
MORGAN STANLEY ASSET MANAGEMENT INC. ("MSAM"), 25 Cabot Square, London,
United Kingdom, E14 4QA, is a wholly owned subsidiary of Morgan Stanley, Dean
Witter, Discover & Co. MSAM provides portfolio management and named fiduciary
services to taxable and nontaxable institutions, international organizations and
individuals investing in United States and international equity and debt
securities. As of December 31, 1997, MSAM, together with its other asset
management affiliates, had assets under management (including assets under
fiduciary advisory control) totaling approximately $142.5 billion, including
approximately $112.3 billion under active management and $20.2 billion as named
fiduciary or fiduciary adviser. As of September 30, 1997, MSAM had investment
authority over approximately $561.9 million of assets of AMR and its
subsidiaries and affiliated entities. MSAM serves as an investment adviser to
the International Equity Portfolio. The Manager pays MSAM an annual fee equal to
.80% of the first $25 million of AMR Trust assets under its discretionary
management, .60% of the next $25 million in assets, .50% of the next $25 million
in assets and .40% on all excess assets.
TEMPLETON INVESTMENT COUNSEL, INC. ("Templeton"), 500 East Broward Blvd.,
Suite 2100, Fort Lauderdale, Florida 33394-3091, is a professional investment
counseling firm which has been providing investment services since 1979.
Templeton is indirectly owned by Franklin Resources, Inc. As of December 31,
1997, Templeton had discretionary investment management authority with respect
to approximately $21.7 billion of assets, including approximately $511.6 million
of assets of AMR and its subsidiaries and affiliated entities. Templeton serves
as an investment adviser to the International Equity Portfolio. The Manager pays
Templeton an annualized fee equal to .50% of the first $100 million in AMR Trust
assets under its discretionary management, .35% of the next $50 million in
assets, .30% of the next $250 million in assets and .25% on assets over $400
million.
Solely for the purpose of determining the applicable percentage rates when
calculating the fees for each investment adviser other than MSAM and BT, there
shall be included all other assets or trust assets of American Airlines, Inc.
also under management by each respective investment adviser (except assets
managed by Barrow under the HALO Bond Program). For the purpose of determining
the applicable percentage rates when calculating MSAM's fees, all equity account
assets managed by MSAM on behalf of American Airlines, Inc. shall be included.
The inclusion of any such assets will result in lower overall fee rates being
applied to the applicable Portfolio.
AADVANTAGE MILES
The AAdvantage program offers the opportunity to obtain free upgrades and
travel awards on American Airlines and AAdvantage airline participants, as well
as upgrades and discounts on car rentals and hotel accommodations. For more
information about the AAdvantage program, call American Airlines at (800)
433-7300.
AAdvantage miles will be posted monthly in arrears to each shareholder's
AAdvantage account based on the shareholder's average daily account balance
during the previous month. Miles are posted at an annual rate of one mile per
$10 maintained in a Fund. Mileage is calculated on the average daily balance and
posted monthly. The average daily balance is calculated by adding each day's
balance and dividing by the number of days in the month. For example, the
average daily balance on a $50,000 account funded on the 16th day of a month
having 30 days (and maintained at that balance through the end of the month)
would be $25,000. Mileage received for that
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month would be 208 miles. If the same balance were maintained through the next
month, the average daily balance would be $50,000, and the mileage would be 417
miles that month and every month the $50,000 investment was maintained in the
Funds. These miles appear on the monthly account statement as well as on
subsequent AAdvantage program statements.
In the case of Trust Accounts, AAdvantage miles will be posted only in a
trustee's individual name, and not in the name of the Trust Account. Before
investing in a Fund, trustees of Trust Accounts should consult their own legal
and tax advisers as to the tax effect of this arrangement and whether this
arrangement is consistent with their legal duties as trustees. American Airlines
has informed the Funds that in administering an AAdvantage member's AAdvantage
account, it shall not be required to distinguish between AAdvantage miles
accumulated by the individual in his/her capacity as trustee to a Trust Account
from AAdvantage miles accumulated in an individual capacity or from other
sources.
The Manager reserves the right to discontinue the posting of AAdvantage
miles or to change the mileage calculation at any time upon notice to
shareholders. See also "Dividends, Other Distributions and Tax Matters."
American Airlines may find it necessary to change AAdvantage program rules,
regulations, travel awards and special offers at any time. This means that
American Airlines may initiate changes impacting, for example, participant
affiliations, rules for earning mileage credit, mileage levels and rules for the
use of travel awards, continued availability of travel awards, blackout dates
and limited seating for travel awards, and the features of special offers.
American Airlines reserves the right to end the AAdvantage program with six
months' notice. AAdvantage travel awards, mileage accrual and special offers are
subject to government regulations.
HOW TO PURCHASE SHARES
Shares are sold on a continuous basis. Purchase orders should be directed to
NFDS either by mail, by pre-authorized investment or by wire as described below.
The minimum initial purchase for each Fund is $2,500. The Funds have no
obligation to accept purchase requests or maintain accounts which do not meet
minimum purchase requirements. Accounts opened through financial intermediaries
may be subject to lower or higher minimums. The minimum for subsequent purchases
is $50, except for wire purchases for which a $500 minimum applies. The Manager
reserves the right to waive or change the minimum investment requirements. The
Manager also reserves the right to charge an annual account fee of $12 (to
offset the costs of servicing accounts with low balances) if an account balance
falls below certain asset levels.
An order to purchase shares of a Variable NAV Fund will be executed at the
next share price calculated Monday through Friday on each day on which the
Exchange is open for trading, which excludes the following business holidays:
New Year's Day, Martin Luther King's Birthday, President's Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day
("Business Day"). Shares of the Variable NAV Funds are offered and purchase
orders are accepted until the close of the Exchange, generally 4:00 p.m. Eastern
time, on each Business Day. An order to purchase shares of the Money Market
Funds will be executed at the Fund's next determined net asset value per share
on any day on which the Exchange is open for business except for Columbus Day
and Veteran's Day ("Money Market Business Day") and during which federal funds
become available to the Fund. Shares are offered and orders are accepted for the
Municipal Money Market Fund until 11:45 a.m. Eastern time, or the close of the
Exchange (whichever comes first), for the U.S. Government Money Market Fund
until 2:00 p.m. Eastern time, or the close of the Exchange (whichever comes
first), and for the Money Market Fund until 3:00 p.m. Eastern time, or the close
of the Exchange (whichever comes first), on each Money Market Business Day. The
Mileage Trust reserves the right to reject any order for the purchase of shares
and to limit or suspend, without prior notice, the offering of shares. "Federal
funds" are funds deposited by a commercial bank in an account at a federal
reserve bank that can be transferred to a similar account of another bank in one
day and thus may be made immediately available to a Money Market Fund through
its custodian.
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OPENING AN ACCOUNT -- A completed and signed application is required for each
new account opened, regardless of the method chosen for making an initial
investment. If an individual opening an account is not yet a member of the
AAdvantage program, he or she will be enrolled and assigned an AAdvantage
account number automatically. If assistance is required in filling out the
application, or if extra applications are required, call (800) 388-3344.
PURCHASING BY MAIL -- To open an account by mail, complete the application form,
include a check payable to the American AAdvantage Funds ($2,500 minimum) and
mail both to:
American AAdvantage Funds
c/o NFDS
P.O. Box 419643
Kansas City, MO 64141-6643
Purchase checks are accepted subject to collection at full face value in
U.S. funds and must be drawn in U.S. dollars on a U.S. bank. The Funds will not
accept "starter" checks or third party checks. If your order to purchase shares
of a Fund is canceled because your check does not clear, you will be responsible
for any resulting loss incurred by the Fund. For subsequent purchases by mail
make your check payable to the American AAdvantage Funds ($50 minimum) and
include your account number on your check. Mail to the address printed above.
Include either the detachable form from your account statement, the deposit
slips from your checkbook (if you have a Money Market account and opted for
checking) or a letter with the account name and number.
SUBSEQUENT PURCHASES BY PRE-AUTHORIZED AUTOMATIC INVESTMENT -- Pre-Authorized
Automatic Investment allows you to make monthly or quarterly, automatic
transfers ($50 minimum) from your bank account to purchase shares in the Fund of
your choice after an account has been open. To establish this option, provide
the appropriate information on the application form and attach a voided check or
a deposit slip from your bank account. Funds will be transferred automatically
from your bank account via Automated Clearing House ("ACH") on the 5th day of
each month or quarter.
PURCHASES BY WIRE -- A completed application form must precede an initial
purchase by wire. Call (800) 388-3344 to wire funds. Federal funds ($2,500 for
initial purchases and $500 for subsequent purchases) should be wired to:
State Street Bank & Trust Co.
ABA Routing #0110-0002-8, AC-9905-342-3
Attention: American AAdvantage Mileage Funds, and specify the Fund to be
purchased.
You will be responsible for any charges assessed by your bank to handle wire
transfers.
HOW TO REDEEM SHARES
Shares of the Variable NAV Funds may be redeemed by telephone, by
pre-authorized automatic redemption or by mail on any Business Day. Shares of
the Money Market Funds may be redeemed by telephone, by writing a check, by
pre-authorized automatic redemption or by mail on any Money Market Business Day.
Shares will be redeemed at the net asset value next calculated after the
applicable Fund has received and accepted the redemption request. Proceeds from
a redemption of shares purchased by check or pre-authorized automatic purchase
may be withheld until the funds have cleared, which may take up to 15 days.
Although the Funds intend to redeem shares in cash, each Fund reserves the right
to pay the redemption price in whole or in part by a distribution of readily
marketable securities held by the Fund's corresponding Portfolio. See the SAI
for further information concerning redemptions in kind.
Redemption proceeds generally will be sent within one Business Day or Money
Market Business Day, as applicable. However, if making immediate payment could
affect a Fund adversely, it may take up to seven days to send payment.
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<PAGE> 35
A minimum of $2,500 is required in order to maintain an account in a Fund.
Otherwise, a Fund may give a shareholder 60 days' notice to increase the account
balance to this level in order to avoid the imposition of an account fee or
account closure. If a shareholder does not increase the account balance to
$2,500 within the 60 day period, the Fund is entitled to close the account and
mail the proceeds to the address of record.
To ensure acceptance of a redemption request, please adhere to the following
procedures.
REDEEMING BY TELEPHONE -- Shares may be redeemed by telephone if your account
application reflects that option. Telephone redemptions in any 30 day period
shall not exceed $25,000 without the express written consent of the Mileage
Trust. In order to redeem by telephone, you should call NFDS at (800) 388-3344.
Redemption proceeds will be mailed only to the address of record or mailed or
wired to a commercial bank account designated on the account application.
By establishing the telephone redemption service, you authorize the Funds or
their agent to act upon verbal instructions to redeem shares for any account for
which such service has been authorized. In an effort to prevent unauthorized or
fraudulent redemption requests by telephone, NFDS will employ reasonable
procedures specified by the Funds to confirm that such instructions are genuine.
For instance, all telephone redemption requests will be recorded and proceeds of
telephone redemption requests will be sent only to the address or account
designated in the application. Neither the Funds, the Trusts, the Equity 500
Index Portfolio, the Manager, State Street, NFDS or their trustees, directors or
officers will be liable for any unauthorized or fraudulent redemption
instructions received by telephone. Due to the volume of calls or other unusual
circumstances, telephone redemptions may be difficult to implement during
certain time periods. This service may be amended or terminated at any time by
the transfer agent or the Mileage Trust without prior notice.
REDEEMING BY CHECK -- If you elect so on the application, shares of the Money
Market Funds may be redeemed through the check writing feature. There is no
limit on the number of checks written per month and no check redemption fees.
Checks must be written in amounts of $100 or more. Check drafts however, are not
returned to you. If copies of drafts are required, a service charge of $2 per
check will be assessed to you.
PRE-AUTHORIZED AUTOMATIC REDEMPTIONS -- You can arrange to have a preauthorized
amount ($100 or more) redeemed from your account and automatically deposited
into a bank account, via ACH, on the 15th day of each month. For more
information regarding preauthorized automatic redemptions, contact NFDS at (800)
388-3344.
REDEEMING BY MAIL -- A letter of instruction may be mailed to the American
AAdvantage Funds, c/o NFDS, P.O. Box 419643, Kansas City, MO 64141-6643. It
should specify the Fund (Balanced, Growth and Income, International Equity, S&P
500 Index, Intermediate Bond, Short-Term Bond, Money Market, Municipal Money
Market or U.S. Government Money Market Fund), the number of shares or dollar
amount to be redeemed, your name and account number. The letter must be signed
by all persons required to sign for the account, exactly as it is registered.
Redemption requests (i) over $25,000, (ii) for redemption proceeds to be sent to
an address other than the address of record or to a commercial bank account
other than the account designated on the application, or (iii) for an account
whose address of record has been changed within thirty days, must be accompanied
by a signature guarantee by a financial institution satisfying the standards
established by NFDS.
REDEEMING BY WIRE -- Shares may be redeemed by wire if your account application
reflects that option. Redemption proceeds will be transmitted directly to your
predesignated account at a domestic bank upon request, for amounts of at least
$500. In order to redeem by wire, call (800) 388-3344. Your account will be
charged $10 for wire redemptions to cover transaction costs.
FULL REDEMPTIONS -- Unpaid dividends credited to an account up to the date of
redemption of all shares of a Money Market Fund generally will be paid at the
time of redemption.
PROSPECTUS
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<PAGE> 36
EXCHANGE PRIVILEGE
Shares of a Fund which have been registered in a shareholder's name for at
least 15 days may be exchanged into shares of another Fund. A minimum exchange
of $50 is required into existing accounts. If a shareholder wishes to establish
a new account by making an exchange, a $2,500 minimum is required.
Shareholders may exchange shares by sending the Funds a written request or
by calling NFDS at (800) 388-3344. The exchange will be processed at the next
share price calculated after the request is received in good order by the Funds.
In establishing a telephone exchange service, shareholders authorize the Funds
or their agent to act upon verbal instructions to exchange shares from any
account for which such service is authorized to any identically registered
account(s). NFDS will use reasonable procedures specified by the Funds to
confirm that such instructions are genuine such as the recording of all
telephone exchange requests. If reasonable procedures as described above are
implemented, neither the Funds, the Trusts, the Equity 500 Index Portfolio, the
Manager, State Street, NFDS or their trustees, directors or officers will be
liable for any unauthorized or fraudulent instructions.
The general redemption policies apply to redemptions by telephone exchange.
The exchange privilege may be modified or terminated at any time by the Funds.
The Funds reserve the right to limit the number of exchanges an investor may
exercise.
VALUATION OF SHARES
The net asset value of each share (share price) of the Variable NAV Funds is
determined as of the close of the Exchange, generally 4:00 p.m. Eastern time, on
each Business Day and the net asset value of each share of the Money Market
Funds is determined as of the close of the Exchange, generally 4:00 p.m. Eastern
time, on each Money Market Business Day. Except for the Mileage Class of the
Money Market Fund, the net asset value of all outstanding shares of a Fund will
be determined by computing that Fund's total assets (which is the value of the
Fund's investment in its corresponding Portfolio), subtracting all of the Fund's
liabilities, and dividing the result by the total number of Fund shares
outstanding at such time. The net asset value of Mileage Class shares of the
Money Market Fund will be based on a pro rata allocation of the value of the
Fund's corresponding Portfolio's investment income, expenses and total capital
gains and losses. The allocation will be based on the comparative net asset
value at the beginning of the day, except for expenses related solely to one
class of shares ("Class Expenses"), which will be borne only by the appropriate
class of shares. Because of Class Expenses, the net income attributable to and
the dividends payable may be different for each class of shares.
Equity securities listed on securities exchanges, including all but United
Kingdom securities of the International Equity Portfolio, are valued at the last
quoted sales price on a designated exchange prior to the close of trading on the
Exchange or, lacking any sales, on the basis of the last current bid price prior
to the close of trading on the Exchange. Securities of the United Kingdom held
in the International Equity Portfolio are priced at the last jobber price (mid
of the bid and offer prices quoted by the leading stock jobber in the security)
prior to close of trading on the Exchange. Trading in foreign markets is usually
completed each day prior to the close of the Exchange. However, events may occur
which affect the values of such securities and the exchange rates between the
time of valuation and the close of the Exchange. Should events affect the value
of such securities materially during this period, the securities are priced at
fair value, as determined in good faith and pursuant to procedures approved by
the AMR Trust Board. Over-the-counter equity securities are valued on the basis
of the last bid price on that date prior to the close of trading. Debt
securities (other than short-term securities) will normally be valued on the
basis of prices provided by a pricing service and may take into account
appropriate factors such as institution-size trading in similar groups of
securities, yield, quality, coupon rate, maturity, type of issue, trading
characteristics and other market data. In some cases, the prices of debt
securities may be determined using quotes obtained from brokers. Securities for
which market quotations are not readily available are valued at fair value, as
determined in good faith and pursuant to procedures approved by the AMR Trust
Board for the AMR Trust Portfolios. Assets and liabilities denominated in
foreign currencies and forward currency contracts are translated
PROSPECTUS
30
<PAGE> 37
into U.S. dollar equivalents based on prevailing market rates. Portfolio
obligations held by the Money Market Portfolios are valued in accordance with
the amortized cost method, which is designed to enable those Portfolios and
their corresponding Funds to maintain a consistent $1.00 per share net asset
value. Investment grade short-term obligations with 60 days or less to maturity
held by all other Portfolios also are valued using the amortized cost method as
described in the SAI.
DIVIDENDS, OTHER DISTRIBUTIONS AND TAX MATTERS
DIVIDEND AND OTHER DISTRIBUTIONS -- Dividends from the net investment income of
the Balanced Fund, the Growth and Income Fund and the International Equity Fund
will be declared annually. Dividends consisting of substantially all of the net
investment income of the Intermediate Bond Fund and the Short-Term Bond Fund,
which are paid monthly, normally are declared on each Business Day immediately
prior to the determination of the net asset value and are payable to
shareholders of record as of the close of business on the day on which declared.
The S&P 500 Index Fund distributes income dividends on the first Business Day in
April, July and October. In December, the S&P 500 Index Fund will distribute
another income dividend, plus any capital gains. Each Fund may make an
additional dividend or other distribution, if necessary, to avoid a 4% excise
tax on certain undistributed income and gain. A Fund's net investment income
consists of its share of its corresponding Portfolio's dividends and interest
(including discount) accrued on its securities, less applicable expenses.
Distributions of a Fund's share of its corresponding Portfolio's realized net
short-term capital gain, net capital gain (the excess of net long-term capital
gain over net short-term capital loss), and net gains from foreign currency
transactions, if any, normally will be made annually.
All of each Money Market Fund's net investment income and net short-term
capital gain, if any, generally will be declared as dividends on each Money
Market Business Day immediately prior to the determination of the net asset
value. Dividends generally will be paid monthly, in cash or in Fund shares, on
the first day of the following month. The Money Market Fund's net investment
income attributable to the Mileage Class consists of (1) that class' pro rata
share of the Fund's share of interest accrued and discount earned on the Money
Market Portfolio's securities less amortization of premium and expenses of both
the Portfolio and (2) the Fund's expenses attributable to the Mileage Class. The
Money Market Portfolios do not expect to realize net capital gain, and,
therefore, the Money Market Funds do not foresee paying any capital gain
distributions. If any Money Market Fund (either directly or indirectly through
its corresponding Portfolio) incurs or anticipates any unusual expenses, loss or
depreciation that would adversely affect its net asset value or income for a
particular period, the Board would at that time consider whether to adhere to
the dividend policy described above or to revise it in the light of the then
prevailing circumstances.
Unless a shareholder elects otherwise on the account application, all
dividends and other distributions on a Fund's shares will be automatically paid
in additional shares of that Fund. However, a shareholder may choose to have
distributions of net capital gain (and, if applicable, net foreign currency
gains) paid in shares and dividends paid in cash, or have all such distributions
and dividends paid in cash. An election may be changed at any time by delivering
written notice that is received by the transfer agent at least ten days prior to
the payment date for a dividend or other distribution.
TAX INFORMATION -- Each Fund is treated as a separate corporation for federal
income tax purposes and intends to qualify or to continue to qualify for
treatment as a regulated investment company under the Internal Revenue Code of
1986, as amended. In each taxable year that a Fund so qualifies, the Fund (but
not its shareholders) will be relieved of federal income tax on that part of its
investment company taxable income (generally, net investment income plus any net
short-term capital gain and gains from certain foreign currency transactions)
and net capital gain that it distributes to its shareholders. However, a Fund
will be subject to a nondeductible 4% excise tax to the extent that it fails to
distribute by the end of any calendar year substantially all of its ordinary
income for that calendar year and its net capital gain for the one-year period
ending on October 31 of that year, plus certain other amounts. For these and
other purposes, dividends and other distributions declared by a Fund in October,
November or December of any year and payable to shareholders of record on a date
in one of those months will
PROSPECTUS
31
<PAGE> 38
be deemed to have been paid by the Fund and received by the shareholders on
December 31 of that year if they are paid by the Fund during the following
January. Each Portfolio has received a ruling from the Internal Revenue Service
or an opinion of counsel that it is or should be classified for federal income
tax purposes as a partnership; accordingly, no Portfolio is subject to federal
income tax.
Dividends from a Fund's investment company taxable income are taxable to its
shareholders as ordinary income to the extent of the Fund's earnings and
profits, whether received in cash or paid in additional Fund shares.
Distributions of a Fund's net capital gain (whether received in cash or paid in
additional Fund shares), when designated as such, generally are taxable to those
shareholders as long-term capital gain, regardless of how long they have held
their Fund shares. A capital gain distribution from a Fund also may be offset by
capital losses from other sources. Under the Taxpayer Relief Act of 1997,
different maximum tax rates apply to a noncorporate taxpayer's net capital gain
depending on the taxpayer's holding period and marginal rate of federal income
tax -- generally, 28% for gain recognized on securities held for more than one
year but not more than 18 months and 20% (10% for taxpayers in the 15% marginal
tax bracket) for gain recognized on securities held for more than 18 months.
Pursuant to an Internal Revenue Service notice, the Fund may divide each net
capital gain distribution into a 28% rate gain distribution and a 20% rate gain
distribution (in accordance with the Fund's holding periods for the securities
it sold that generated the distributed gain) and its shareholders must treat
those portions accordingly.
Some foreign countries may impose income or withholding taxes on certain
dividends payable to the International Equity Portfolio. The International
Equity Fund's share of any such withheld taxes may be treated by that Fund as a
deduction or, if it satisfies certain requirements, it may elect to flow the tax
through to its shareholders, who in turn may either deduct the taxes or use them
in calculating credits against their federal income tax.
Distributions by the Municipal Money Market Fund that it designates as
"exempt-interest dividends" generally may be excluded from gross income by its
shareholders. If the Municipal Money Market Portfolio earns taxable income from
any of its investments, the Municipal Money Market Fund's share of that income
will be distributed as a taxable dividend. To the extent that Portfolio invests
in certain private activity obligations, that Fund's shareholders will be
required to treat a portion of its dividends as a "tax preference item" in
determining their liability for the AMT. Exempt-interest dividends also may be
subject to state or local income tax laws. Because some states exempt from
income tax the interest on their own obligations and obligations of governmental
agencies of and municipalities in the state, shareholders will receive tax
information each year regarding the Municipal Money Market Fund's
exempt-interest income by state. Interest on indebtedness incurred or continued
by a shareholder to purchase or carry shares of that Fund is not deductible.
Redemption of Fund shares (other than shares of the Money Market Funds) may
result in taxable gain or loss to the redeeming shareholder, depending upon
whether the redemption proceeds exceed or are less than the shareholder's
adjusted basis for the redeemed shares. An exchange of shares of a Fund for
shares of any other Fund (see "Exchange Privileges") generally will have similar
tax consequences. If shares of a Fund are sold at a loss after being held for
six months or less, the loss will be treated as long-term, instead of
short-term, capital loss to the extent of any capital gain distributions
received on those shares.
If shares are purchased shortly before the record date for a dividend (other
than an exempt-interest dividend) or other distribution, the investor will pay
full price for the shares and receive some portion of the price back as a
taxable distribution.
Each Fund notifies its shareholders following the end of each calendar year
of the amounts of dividends and capital gain distributions paid (or deemed paid)
(and for the International Equity Fund, if it satisfies the requirements and
makes the election referred to above, their share of the Fund's share of any
foreign taxes paid by the International Equity Portfolio) that year and of any
portion of those dividends that qualifies for the corporate dividends-received
deduction. The information regarding capital gain distributions designates the
portions thereof
PROSPECTUS
32
<PAGE> 39
subject to the different maximum rates of tax applicable to noncorporate
taxpayers' net capital gain indicated above. The notice sent by the Municipal
Money Market Fund specifies the amounts of exempt-interest dividends (and the
portion thereof, if any, that is a tax preference item for purposes of the AMT)
and any taxable dividends.
Each Fund is required to withhold 31% of all taxable dividends, capital gain
distributions and, for all Funds other than the Money Market Funds, redemption
proceeds payable to any individuals and certain other non-corporate shareholders
who do not provide the Fund with a correct taxpayer identification number or
(except with respect to redemption proceeds) who otherwise are subject to
back-up withholding.
The foregoing is only a summary of some of the important tax considerations
generally affecting the Funds and their shareholders. Prospective investors are
urged to consult their own tax advisers regarding specific questions as to the
effect of federal, state or local income taxes on any investment in the Mileage
Trust, as well as any tax consequences relating to the receipt of AAdvantage
Miles. For further tax information, see the SAI.
GENERAL INFORMATION
The Mileage Trust currently is comprised of nine separate investment
portfolios. Each Fund's shares can be issued in an unlimited number. The Money
Market Fund consists of two classes of shares and all other Funds consist of one
class of shares. Each share represents an equal proportionate beneficial
interest in that Fund and is entitled to one vote. Only shares of a particular
class may vote on matters affecting that class. Only shares of a particular Fund
may vote on matters affecting that Fund. All shares of the Mileage Trust vote on
matters affecting it as a whole. Share voting rights are not cumulative, and
shares have no preemptive or conversion rights. Shares of the Mileage Trust are
nontransferable. Each series in the Mileage Trust will not be involved in any
vote involving a Portfolio in which it does not invest its assets. Shareholders
of all of the series of the Mileage Trust, however, will vote together to elect
Trustees of the Mileage Trust and for certain other matters. Under certain
circumstances, the shareholders of one or more series could control the outcome
of these votes.
On most issues subjected to a vote of a Portfolio's interest holders, as
required by the 1940 Act, its corresponding Fund will solicit proxies from its
shareholders and will vote its interest in the Portfolio in proportion to the
votes cast by that Fund's shareholders. Because a Portfolio interest holder's
votes are proportionate to its percentage interests in that Portfolio, one or
more other Portfolio investors could, in certain instances, approve an action
against which a majority of the outstanding voting securities of its
corresponding Fund had voted. This could result in that Fund's redeeming its
investment in its corresponding Portfolio, which could result in increased
expenses for that Fund. Whenever the shareholders of a Fund are called to vote
on matters related to its corresponding Portfolio, the Mileage Trust Board shall
vote shares for which they receive no voting instructions in the same proportion
as the shares for which they do receive voting instructions. Any information
received from a Portfolio in the Portfolio's report to shareholders will be
provided to the shareholders of its corresponding Fund.
As a Massachusetts business trust, the Mileage Trust is not obligated to
conduct annual shareholder meetings. However, the Mileage Trust will hold
special shareholder meetings whenever required to do so under the federal
securities laws or the Mileage Trust's Declaration of Trust or By-Laws. Trustees
can be removed by a shareholder vote at special shareholder meetings.
As more fully described in the SAI, the following person may be deemed to
control this Fund by virtue of their ownership of more than 25% of the
outstanding shares of the Fund as of January 31, 1998:
<TABLE>
<S> <C>
AMERICAN AADVANTAGE SHORT-TERM BOND MILEAGE FUND
Bonnie Stern 45%
AMERICAN AADVANTAGE U.S. GOVERNMENT MONEY MARKET MILEAGE
FUND
Wells Fargo Bank, NA, Custodian FBO William H. Regnery
II, Trustee 27%
</TABLE>
PROSPECTUS
33
<PAGE> 40
The Manager has taken steps that it believes are reasonably designed to
address the potential failure of computer programs used by the Manager and the
Funds' service providers to address the Year 2000 issue. There can be no
assurance that these steps will be sufficient to avoid any adverse impact.
SHAREHOLDER COMMUNICATIONS
Shareholders will receive periodic reports, including annual and semi-annual
reports which will include financial statements showing the results of the
Funds' operations and other information. The financial statements of the Mileage
Trust and the AMR Trust will be audited by the independent auditors at least
annually. Shareholder inquiries and requests for information regarding the other
investment companies which also invest in the AMR Trust should be made in
writing to the Funds at P.O. Box 619003, MD5645, Dallas/Fort Worth Airport,
Texas 75261-9003 or by calling (800) 388-3344. Shareholder inquiries and
requests for information regarding the other investment companies which also
invest in the Equity 500 Index Portfolio should be made by calling (800)
730-1313
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND IN SALES
LITERATURE SPECIFICALLY APPROVED BY OFFICERS OF THE MILEAGE TRUST FOR USE IN
CONNECTION WITH THE OFFER OF ANY FUND'S SHARES, AND, IF GIVEN OR MADE, SUCH
OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE FUNDS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN ANY
JURISDICTION IN WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFERING MAY NOT LAWFULLY
BE MADE.
American AAdvantage Mileage Funds is a registered service mark of AMR
Corporation. Mileage Class is a registered service mark and Platinum Class,
American AAdvantage Balanced Mileage Fund, American AAdvantage Growth and Income
Mileage Fund, American AAdvantage International Equity Mileage Fund, American
AAdvantage Intermediate Bond Mileage Fund, American AAdvantage Short-Term Bond
Mileage Fund, American AAdvantage Money Market Mileage Fund, American AAdvantage
Municipal Money Market Mileage Fund and American AAdvantage U.S. Government
Money Market Mileage Fund are service marks of AMR Investment Services, Inc.
PROSPECTUS
34
<PAGE> 41
-- NOTES --
<PAGE> 42
[AMERICAN ADVANTAGE MILEAGE FUNDS(R) LOGO]
P.O. BOX 419643
KANSAS CITY, MISSOURI 64141-6643
(800) 388-3344
Access our website at www.aafunds.com
MILE-PRO-0398
<PAGE> 43
THIS PROSPECTUS contains important information about the Platinum Class of the
AMERICAN AADVANTAGE FUNDS ("AAdvantage Trust") and the AMERICAN AADVANTAGE
MILEAGE FUNDS ("Mileage Trust"), each an open-end management investment company
which consists of multiple investment portfolios. This prospectus pertains only
to the four funds listed on this cover page (individually referred to as a
"Fund" and, collectively, the "Funds"). EACH FUND SEEKS ITS INVESTMENT OBJECTIVE
BY INVESTING ALL OF ITS INVESTABLE ASSETS IN A CORRESPONDING PORTFOLIO
(INDIVIDUALLY REFERRED TO AS A "PORTFOLIO" AND, COLLECTIVELY, "PORTFOLIOS") OF
THE AMR INVESTMENT SERVICES TRUST ("AMR TRUST") WHICH HAS AN INVESTMENT
OBJECTIVE IDENTICAL TO THE INVESTING FUND. The investment experience of each
Fund will correspond directly with the investment experience of each Portfolio.
Each Fund consists of multiple classes of shares designed to meet the needs of
different groups of investors. Platinum Class shares are offered exclusively to
customers of certain broker-dealers. Prospective Platinum Class investors should
read this Prospectus carefully before making an investment decision and retain
it for future reference.
IN ADDITION TO THIS PROSPECTUS, a Statement of Additional Information ("SAI")
for the Platinum Class dated March 1, 1998 has been filed with the Securities
and Exchange Commission and is incorporated herein by reference. The SAI
contains more detailed information about the Funds. For a free copy of the SAI,
call (800) 967-9009.
AN INVESTMENT IN THE FUNDS IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT AND THERE CAN BE NO ASSURANCE THAT THEY WILL BE ABLE TO MAINTAIN A
STABLE PRICE OF $1.00 PER SHARE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
PROSPECTUS
MARCH 1, 1998
[AMERICAN AADVANTAGE LOGO]
- PLATINUM CLASS(sm) -
AMERICAN AADVANTAGE FUNDS(R)
AMERICAN AADVANTAGE MILEAGE FUNDS(R)
MONEY MARKET FUND
MONEY MARKET MILEAGE FUND
MUNICIPAL MONEY MARKET FUND
U.S. GOVERNMENT MONEY MARKET FUND
<PAGE> 44
The AMERICAN AADVANTAGE MONEY MARKET FUND(sm) ("Money Market Fund"), AMERICAN
AADVANTAGE MUNICIPAL MONEY MARKET FUND(sm) ("Municipal Money Market Fund") and
AMERICAN AADVANTAGE U.S. GOVERNMENT MONEY MARKET FUND(sm)("U.S. Government Money
Market Fund") (collectively, "AAdvantage Funds") and the AMERICAN AADVANTAGE
MONEY MARKET MILEAGE FUND(sm) ("Mileage Fund") each seeks current income,
liquidity, and the maintenance of a stable price per share of $1.00. The Money
Market Fund and the Mileage Fund seek their investment objective by investing
all of their investable assets in the Money Market Portfolio of the AMR Trust
("Money Market Portfolio"), the Municipal Money Market Fund seeks its investment
objective by investing all of its investable assets in the Municipal Money
Market Portfolio of the AMR Trust ("Municipal Money Market Portfolio") and the
U.S. Government Money Market Fund seeks its investment objective by investing
all of its investable assets in the U.S. Government Money Market Portfolio of
the AMR Trust ("U.S. Government Money Market Portfolio"), (collectively, the
"Portfolios"), which in turn invest in high quality, short-term obligations. The
Municipal Money Market Portfolio invests primarily in municipal obligations and
the U.S. Government Money Market Portfolio invests exclusively in obligations
issued or guaranteed by the U.S. Government, its agencies or instrumentalities
and in repurchase agreements that are collateralized by such obligations.
Under a master-feeder operating structure, each Fund seeks its investment
objective by investing all of its investable assets in a corresponding Portfolio
as described above. Each Portfolio's investment objective is identical to that
of its corresponding Fund. Whenever the phrase "all of the Fund's investable
assets" is used, it means that the only investment securities that will be held
by a Fund will be that Fund's interest in its corresponding Portfolio. AMR
Investment Services, Inc. ("Manager") provides investment management and
administrative services to the Portfolios and administrative services to the
Funds. This master-feeder operating structure is different from that of many
other investment companies which directly acquire and manage their own
portfolios of securities. Accordingly, investors should carefully consider this
investment approach. See "Investment Objectives, Policies and
Risks -- Additional Information About the Portfolios." An AAdvantage Fund or the
Mileage Fund may withdraw its investment in a corresponding Portfolio at any
time if the applicable Trust's Board of Trustees ("Board") determines that it
would be in the best interest of that Fund and its shareholders to do so. Upon
any such withdrawal, that Fund's assets would be invested in accordance with the
investment policies and restrictions described in this Prospectus and the SAI.
<TABLE>
<S> <C>
TABLE OF FEES AND EXPENSES.....................3
FINANCIAL HIGHLIGHTS...........................4
INTRODUCTION...................................8
INVESTMENT OBJECTIVES,
POLICIES AND RISKS...........................9
INVESTMENT RESTRICTIONS........................16
YIELDS AND TOTAL RETURNS.......................17
MANAGEMENT AND ADMINISTRATION OF THE TRUSTS....18
AADVANTAGE(R) MILES............................21
HOW TO PURCHASE SHARES.........................22
HOW TO REDEEM SHARES...........................23
VALUATION OF SHARES............................25
DIVIDENDS AND TAX MATTERS......................25
GENERAL INFORMATION............................27
SHAREHOLDER COMMUNICATIONS.....................28
</TABLE>
PROSPECTUS
2
<PAGE> 45
TABLE OF FEES AND EXPENSES
Annual Operating Expenses (as a percentage of average net assets):
<TABLE>
<CAPTION>
MUNICIPAL U.S. GOVERNMENT MONEY
MONEY MONEY MONEY MARKET
MARKET MARKET MARKET MILEAGE
FUND FUND FUND FUND
<S> <C> <C> <C> <C>
Management Fees 0.15% 0.15% 0.15% 0.15%
12b-1 Fees 0.25% 0.25% 0.25% 0.20%(1)
Other Expenses 0.53% 0.63%(2) 0.59% 0.74%
---- ---- ---- ----
Total Operating Expenses 0.93% 1.03%(3) 0.99% 1.09%(3)
==== ==== ==== =====
</TABLE>
(1) Absent fee waivers, "12b-1 Fees" for the Money Market Mileage Fund would be
0.25%. The Mileage Trust anticipates that a portion of the "12b-1 Fees"
charged for the current fiscal year will be used to pay for AAdvantage
miles. See "AAdvantage Miles."
(2) "Other Expenses" before fee waivers are estimated to be 0.64% for the
Municipal Money Market Fund.
(3) "Total Operating Expenses" before fee waivers are estimated to be 1.04% for
the Municipal Money Market Fund and 1.14% for the Money Market Mileage Fund.
The above expenses reflect the expenses of each Fund and the Portfolio in
which it invests. The Board believes that the aggregate per share expenses of
each Fund and its corresponding Portfolio will be approximately equal to the
expenses that the Fund would incur if its assets were invested directly in the
type of securities held by the Portfolio.
EXAMPLES
A Platinum Class investor in each Fund would directly or indirectly pay on a
cumulative basis the following expenses on a $1,000 investment assuming a 5%
annual return:
<TABLE>
<CAPTION>
1 3 5 10
YEAR YEARS YEARS YEARS
<S> <C> <C> <C> <C>
Money Market Fund 9 30 51 114
Municipal Money Market Fund 11 33 57 126
U.S. Government Money Market Fund 10 32 55 121
Money Market Mileage Fund 11 35 60 133
</TABLE>
The purpose of the table above is to assist a potential investor in
understanding the various costs and expenses expected to be incurred directly or
indirectly as a Platinum Class shareholder in a Fund. Additional information may
be found under "Management and Administration of the Trusts."
THE FOREGOING EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN AND PERFORMANCE MAY BE BETTER OR WORSE THAN THE 5% ANNUAL RETURN
ASSUMED IN THE EXAMPLES.
PROSPECTUS
3
<PAGE> 46
FINANCIAL HIGHLIGHTS
The financial highlights in the following tables for the AAdvantage Funds and
the Mileage Fund have been derived from financial statements of the AAdvantage
Trust and the Mileage Trust, respectively. The information has been audited by
Ernst & Young LLP, independent auditor. Such information should be read in
conjunction with the financial statements and the report of the independent
auditor appearing in the Annual Report of the AAdvantage Trust and the Mileage
Trust incorporated by reference in the SAI, which contains further information
about performance of the Funds and can be obtained by investors without charge.
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
MONEY MARKET FUND
-----------------------------------------------------------------------------------------------
PLATINUM CLASS
------------------------ INSTITUTIONAL CLASS(1)
YEAR PERIOD ------------------------------------------------------------------
ENDED ENDED YEAR ENDED OCTOBER 31,
OCT. 31, OCT. 31, ------------------------------------------------------------------
1997 1996(1) 1996 1995 1994 1993 1992
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- ---------- ---------- ---------- ---------- ----------
Net investment income 0.05(2) 0.05(2) 0.05(2) 0.06 0.04 0.03 0.04
Less dividends from net
investment income (0.05) (0.05) (0.05) (0.06) (0.04) (0.03) (0.04)
-------- -------- ---------- ---------- ---------- ---------- ----------
Net asset value, end of
period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ========== ========== ========== ========== ==========
Total return
(annualized) 4.87% 4.85%(3) 5.57% 5.96% 3.85% 3.31% 4.41%
====== ==== ===== ===== ===== ===== =====
Ratios/supplemental
data:
Net assets, end of
period (in thousands) $494,413 $119,981 $1,406,939 $1,206,041 $1,893,144 $2,882,947 $2,223,829
Ratios to average net
assets
(annualized)(4)(5):
Expenses 0.93%(2) 0.94%(2) 0.24%(2) 0.23% 0.21% 0.23% 0.26%
Net investment income 4.80%(2) 4.63%(2) 5.41%(2) 5.79% 3.63% 3.23% 4.06%
<CAPTION>
MONEY MARKET FUND
-----------------------------------------
INSTITUTIONAL CLASS(1)
-----------------------------------------
YEAR ENDED OCTOBER 31,
-----------------------------------------
1991 1990 1989 1988
-----------------------------------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00
---- ---- ---- ----
Net investment income 0.07 0.08 0.09 0.08
Less dividends from net
investment income (0.07) (0.08) (0.09) (0.08)
---- ---- ---- ----
Net asset value, end of
period $ 1.00 $ 1.00 $ 1.00 $ 1.00
==== ==== ==== ====
Total return
(annualized) 7.18% 8.50% 9.45% 7.54%
==== ==== ==== ====
Ratios/supplemental
data:
Net assets, end of
period (in thousands) $715,280 $745,405 $385,916 $330,230
Ratios to average net
assets
(annualized)(4)(5):
Expenses 0.24% 0.20% 0.22% 0.28%
Net investment income 6.93% 8.19% 9.11% 7.54%
</TABLE>
(1) The Money Market Fund commenced active operations on September 1, 1987. The
Platinum Class commenced active operations on November 7, 1995.
(2) The per share amounts and ratios reflect income and expenses assuming
inclusion of the Fund's proportionate share of the income and expenses of
the Money Market Portfolio.
(3) Total return for the Platinum Class for the period ended October 31, 1996,
reflects Institutional Class returns from November 1, 1995 through November
6, 1995 and returns of the Platinum Class through October 31, 1996. Due to
the different expense structures between the classes, total return would
vary from the results shown had the Platinum Class been in operation for the
entire year.
(4) The method of determining average net assets was changed from a monthly
average to a daily average starting with the year ended October 31, 1992.
(5) Effective October 1, 1990, expenses include administrative services fees
paid by the Fund to the Manager. Prior to that date, expenses exclude
shareholder services fees paid directly by shareholders to the Manager,
which amounted to less than $.01 per share in each period on an annualized
basis.
PROSPECTUS
4
<PAGE> 47
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
MUNICIPAL MONEY MARKET FUND
----------------------------------------------------------------------------
PLATINUM CLASS INSTITUTIONAL CLASS
------------------------------ --------------------------------------
YEAR ENDED PERIOD ENDED YEAR ENDED OCT. 31, PERIOD ENDED
OCT. 31, OCT. 31, -------------------- OCT. 31,
1997 1996(1) 1996 1995 1994(1)
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------ ------ ------
Net investment income 0.03(2) 0.03(2) 0.04(2) 0.04 0.02
Less dividends from net investment income (0.03) (0.03) (0.04) (0.04) (0.02)
------- ------- ------ ------ ------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ====== ====== =======
Total return (annualized) 2.79% 2.88%(3) 3.59% 3.75% 2.44%
======= ======== ====== ====== ======
Ratios/supplemental data:
Net assets, end of period (in thousands) $63,883 $49,862 $ 6 $ 7 $9,736
Ratios to average net assets (annualized)(4)(5):
Expenses 1.03%(2) 0.97%(2) 0.27%(2) 0.35% 0.30%
Net investment income 2.75%(2) 2.72%(2) 3.49%(2) 3.70% 2.38%
</TABLE>
(1) The Municipal Money Market Fund commenced active operations on November 10,
1993. The Platinum Class commenced active operations on November 7, 1995.
(2) The per share amounts and ratios reflect income and expenses assuming
inclusion of the Fund's proportionate share of the income and expenses of
its corresponding Portfolio.
(3) Total return for the Platinum Class for the period ended October 31, 1996,
reflects Institutional Class returns from November 1, 1995 through November
6, 1995 and returns of the Platinum Class through October 31, 1996. Due to
the different expense structures between the classes, total return would
vary from the results shown had the Platinum Class been in operation for the
entire year.
(4) Operating results of the Municipal Money Market Fund exclude management and
administrative services fees waived by the Manager. Had the Fund paid such
fees, the ratio of expenses and net investment income to average net assets
of the Institutional Class would have been 0.50% and 2.18%, respectively for
the period ended October 31, 1994; 0.55% and 3.50%, respectively, for the
year ended October 31, 1995; 0.33% and 3.43%, respectively for the year
ended October 31, 1996, and 0.32% and 3.48%, respectively for the year ended
October 31, 1997. The ratio of expenses and net investment income to average
net assets of the Platinum Class would have been 1.02% and 2.67%,
respectively for the period ended October 31, 1996 and 1.04% and 2.74%,
respectively, for the year ending October 31, 1997.
(5) The method of determining average net assets was changed from a monthly
average to a daily average starting with the period ended October 31, 1994.
PROSPECTUS
5
<PAGE> 48
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
U.S. GOVERNMENT MONEY MARKET FUND
------------------------------------------------------------------------------------------------
PLATINUM CLASS INSTITUTIONAL CLASS
---------------------------- ---------------------------------------------
YEAR ENDED PERIOD ENDED YEAR ENDED OCTOBER 31, PERIOD ENDED
OCT. 31, OCT. 31, --------------------------------------------- OCT. 31,
1997 1996(1) 1996 1995 1994(2) 1993 1992(1)
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- ------- -------- --------
Net investment income 0.05(3) 0.04(3) 0.05(3) 0.06 0.04 0.03 0.02
Less dividends from net
investment income (0.05) (0.04) (0.05) (0.06) (0.04) (0.03) (0.02)
------- ------- ------- ------- ------- -------- --------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======== ======= ======= ======= ======== ========
Total return (annualized) 4.61% 4.58%(4) 5.29% 5.67% 3.70% 3.07% 3.61%
======= ======== ======= ======= ======= ======== ========
Ratios/supplemental data:
Net assets, end of period (in
thousands) $68,439 $52,153 $25,595 $47,184 $67,607 $136,813 $91,453
Ratios to average net assets
(annualized)(5):
Expenses 0.99%(3) 1.00%(3) 0.32%(3) 0.32% 0.25% 0.23% 0.27%(6)
Net investment income 4.53%(3) 4.35%(3) 5.16%(3) 5.49% 3.44% 2.96% 3.46%(6)
</TABLE>
(1) The American AAdvantage U.S. Government Money Market Fund commenced active
operations on March 2, 1992. The Platinum Class commenced active operations
on November 7, 1995.
(2) Average shares outstanding for the period rather than end of period shares
were used to compute net investment income per share.
(3) The per share amounts and ratios reflect income and expenses assuming
inclusion of the Fund's proportionate share of the income and expenses of
its corresponding Portfolio.
(4) Total return for the Platinum Class for the period ended October 31, 1996,
reflects Institutional Class returns from November 1, 1995 through November
6, 1995 and returns of the Platinum Class through October 31, 1996. Due to
the different expense structures between the classes, total return would
vary from the results shown had the Platinum Class been in operation for the
entire year.
(5) The method of determining average net assets was changed from a monthly
average to a daily average starting with the period ended October 31, 1994.
(6) Estimated based on expected annual expenses and actual average net assets.
PROSPECTUS
6
<PAGE> 49
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
MONEY MARKET MILEAGE FUND
-------------------------------------------------------------
PLATINUM CLASS MILEAGE CLASS
---------------------------------------- -----------------
YEAR ENDED PERIOD ENDED
----------------- ------------------- YEAR ENDED
OCTOBER 31, 1997 OCTOBER 31, 1996(1) OCTOBER 31, 1996
----------------- ------------------- -----------------
<S> <C> <C> <C>
Net asset value, beginning
of period $ 1.00 $ 1.00 $ 1.00
------- ------- --------
Net investment income 0.05 0.03 0.05
Less dividends from net
investment income (0.05) (0.03) (0.05)
------- ------- --------
Net asset value, end of
period $ 1.00 $ 1.00 $ 1.00
======= ======= ========
Total return (annualized) 4.71% 4.78%(2) 5.12%
======= ======= ========
Ratios/supplemental data:
Net assets, end of period
(in thousands) $49,184 $15,429 $106,709
Ratios to average net
assets
(annualized)(3)(4):
Expenses 1.09% 1.09% 0.67%
Net investment income 4.64% 4.48% 5.02%
</TABLE>
(1) The Platinum Class of the Money Market Mileage Fund commenced active
operations on January 29, 1996, and at that time the existing shares of the
Fund were designated as Mileage Class shares.
(2) Total return for the Platinum Class for the period ended October 31, 1996,
reflects Mileage Class returns from November 1, 1995 through January 27,
1996 and returns of the Platinum Class through October 31, 1996. Due to the
different expense structures between the classes, total return would vary
from the results shown had the Platinum Class been in operation for the
entire year.
(3) The per share amounts reflect income and expenses assuming inclusion of the
Fund's proportionate share of the income and expenses of the Money Market
Portfolio.
(4) Operating results exclude expenses reimbursed by the Manager. Had the Fund
paid such fees, the ratio of expenses and net investment income to average
net assets would have been 1.24% and 4.33%, respectively, for the period
ended October 31, 1996 and 1.14% and 4.59%, respectively, for the year ended
October 31, 1997 for the Platinum Class and 0.78% and 4.91%, respectively
for the year ended October 31, 1996 and 0.74% and 4.95%, respectively, for
the year ended October 31, 1997 for the Mileage Class.
PROSPECTUS
7
<PAGE> 50
INTRODUCTION
The AAdvantage Trust and the Mileage Trust are open-end, diversified management
investment companies, organized as Massachusetts business trusts on January 16,
1987 and February 22, 1995, respectively. The AAdvantage Funds are three of the
several investment portfolios of the AAdvantage Trust and the Mileage Fund is a
separate investment portfolio of the Mileage Trust. Each Fund has the same
investment objective but may have different investment policies. Each Fund
invests all of its investable assets in a corresponding Portfolio of the AMR
Trust with an identical investment objective. Each AAdvantage Fund currently
consists of three classes of shares, including the "Platinum Class," which is
available to customers of certain broker-dealers. The Money Market Mileage Fund
currently consists of two classes of shares including the "Platinum Class," as
described above. The Money Market Mileage Fund is available only to individuals
and certain grantor trusts. Qualified retirement plans (i.e., IRAs, Keogh,
profit sharing plans) and institutional investors are not eligible to invest in
the Money Market Mileage Fund. This Prospectus relates only to the Platinum
Class. For further information about the other classes, or to obtain a
prospectus free of charge, call (800) 967-9009 or write to P.O. Box 619003, MD
5645, Dallas/Ft. Worth Airport, Texas 75261.
Although each class of shares is designed to meet the needs of different
categories of investors, all classes of each Fund share the same portfolio of
investments and a common investment objective. See "Investment Objectives,
Policies and Risks." There is no guarantee that a Fund will achieve its
investment objective. Based on its value, a share of a Fund, regardless of
class, will receive a proportionate share of the investment income and the gains
(or losses) earned (or incurred) by the Fund. It also will bear its
proportionate share of expenses that are allocated to the Fund as a whole.
However, certain expenses are allocated separately to each class of shares.
The Manager provides the Funds and their corresponding Portfolios with
investment advisory and administrative services. Investment decisions for the
Portfolios are made by the Manager in accordance with the investment objectives,
policies and restrictions described in this Prospectus and in the SAI.
Shares are sold without a sales charge at the next share price calculated
after an investment is received and accepted. Shares will be redeemed at the
next share price calculated after receipt of a redemption order. See "How to
Purchase Shares" and "How to Redeem Shares."
Each shareholder in the Mileage Fund will receive American Airlines(R)
AAdvantage(R) travel awards program ("AAdvantage") miles.((1)) AAdvantage miles
will
- ---------------
(1) American Airlines and AAdvantage are registered trademarks of American
Airlines, Inc.
PROSPECTUS
8
<PAGE> 51
be posted monthly to each shareholder's AAdvantage account at an annual rate of
one mile for every $10 invested in the Fund. See "AAdvantage Miles."
INVESTMENT OBJECTIVES, POLICIES AND RISKS
The investment objective and policies of each Fund and its corresponding
Portfolio are described below. Except as otherwise indicated, the investment
policies of any Fund may be changed at any time by the applicable Board to the
extent that such changes are consistent with the investment objective of the
applicable Fund. However, each Fund's investment objective may not be changed
without a majority vote of that Fund's outstanding shares, which is defined as
the lesser of (a) 67% of the shares of the applicable Fund present or
represented if the holders of more than 50% of the shares are present or
represented at the shareholders' meeting, or (b) more than 50% of the shares of
the applicable Fund (hereinafter, "majority vote"). A Portfolio's investment
objective may not be changed without a majority vote of that Portfolio's
interest holders.
Each Fund has a fundamental investment policy which allows it to invest all
of its investable assets in its corresponding Portfolio. All other fundamental
investment policies and the non-fundamental investment policies of each Fund and
its corresponding Portfolio are identical. Therefore, although the following
discusses the investment policies of each Portfolio and the AMR Trust's Board of
Trustees ("AMR Trust Board"), it applies equally to each Fund and the applicable
Board.
INVESTMENT OBJECTIVE OF THE FUNDS -- The investment objective of each of the
Funds is to seek current income, liquidity and the maintenance of a stable $1.00
price per share. The Funds seek to achieve this objective by investing all of
their investable assets in their corresponding Portfolios, which invest in high
quality, U.S. dollar-denominated short-term obligations that have been
determined by the Manager or the AMR Trust Board to present minimal credit
risks. Portfolio investments are valued based on the amortized cost valuation
technique pursuant to Rule 2a-7 under the Investment Company Act of 1940 ("1940
Act"). See the SAI for an explanation of amortized cost. Obligations in which
the Portfolios invest generally have remaining maturities of 397 days or less,
although instruments subject to repurchase agreements and certain variable and
floating rate obligations may bear longer final maturities. The average
dollar-weighted portfolio maturity of each Portfolio will not exceed 90 days.
AMERICAN AADVANTAGE MONEY MARKET FUND AND AMERICAN AADVANTAGE MONEY MARKET
MILEAGE FUND -- The Funds' corresponding Portfolio may invest in obligations
permitted to be purchased under Rule 2a-7 of the 1940 Act including, but not
limited to, (1) obligations of the U.S. Government or its agencies or
instrumentalities; (2) loan participation interests, medium-term notes, funding
agreements and asset-backed
PROSPECTUS
9
<PAGE> 52
securities; (3) domestic, Yankeedollar and Eurodollar certificates of deposit,
time deposits, bankers' acceptances, commercial paper, bank deposit notes and
other promissory notes including floating or variable rate obligations issued by
U.S. or foreign bank holding companies and their bank subsidiaries, branches and
agencies; and (4) repurchase agreements involving the obligations listed above.
The Money Market Portfolio will invest only in issuers or instruments that at
the time of purchase (1) have received the highest short-term rating by two
nationally recognized statistical rating organizations ("Rating Organizations")
such as "A-1" by Standard & Poor's and "P-1" by Moody's Investor Services, Inc.;
(2) are single rated and have received the highest short-term rating by a Rating
Organization; or (3) are unrated, but are determined to be of comparable quality
by the Manager pursuant to guidelines approved by the AMR Trust Board and
subject to ratification by the AMR Trust Board. See the SAI for definitions of
the foregoing instruments and rating systems. The Portfolio may invest in other
investment companies.
The Portfolio will invest more than 25% of its assets in obligations issued
by the banking industry. However, for temporary defensive purposes during
periods when the Manager believes that maintaining this concentration may be
inconsistent with the best interests of shareholders, the Portfolio may not
maintain this concentration.
Investments in Eurodollar (U.S. dollar obligations issued outside the United
States by domestic or foreign entities) and Yankeedollar (U.S. dollar
obligations issued inside the United States by foreign entities) obligations
involve additional risks. Most notably, there generally is less publicly
available information about foreign issuers; there may be less governmental
regulation and supervision; foreign issuers may use different accounting and
financial standards; and the adoption of foreign governmental restrictions may
affect adversely the payment of principal and interest on foreign investments.
In addition, not all foreign branches of United States banks are supervised or
examined by regulatory authorities as are United States banks, and such branches
may not be subject to reserve requirements.
Variable amount master demand notes in which the Portfolio may invest are
unsecured demand notes that permit the indebtedness thereunder to vary, and
provide for periodic adjustments in the interest rate. Because master demand
notes are direct lending arrangements between the Portfolio and the issuer, they
are not normally traded. There is no secondary market for the notes; however,
the period of time remaining until payment of principal and accrued interest can
be recovered under a variable amount master demand note generally will not
exceed seven days. To the extent this period is exceeded, the note in question
would be considered illiquid. Issuers of variable amount master demand notes
must satisfy the same criteria as set forth for other promissory notes (e.g.
commercial paper). The Portfolio will invest in variable amount master demand
notes only when such notes are determined by the Manager, pursuant to guidelines
established by the AMR Trust Board, to be of comparable quality to rated issuers
or instruments eligible for investment by the Portfolio. In
PROSPECTUS
10
<PAGE> 53
determining average dollar-weighted portfolio maturity, a variable amount master
demand note will be deemed to have a maturity equal to the longer of the period
of time remaining until the next readjustment of the interest rate or the period
of time remaining until the principal amount can be recovered from the issuer on
demand.
The Portfolio also may engage in dollar rolls or purchase or sell securities
on a "when-issued" or "forward commitment" basis. The purchase or sale of
when-issued securities enables an investor to hedge against anticipated changes
in interest rates and prices by locking in an attractive price or yield. The
price of when-issued securities is fixed at the time the commitment to purchase
or sell is made, but delivery and payment for the when-issued securities take
place at a later date, normally one to two months after the date of purchase.
During the period between purchase and settlement, no payment is made by the
purchaser to the issuer and no interest accrues to the purchaser. Such
transactions therefore involve a risk of loss if the value of the security to be
purchased declines prior to the settlement date or if the value of the security
to be sold increases prior to the settlement date. A sale of a when-issued
security also involves the risk that the other party will be unable to settle
the transaction. Dollar rolls are a type of forward commitment transaction.
Purchases and sales of securities on a forward commitment basis involve a
commitment to purchase or sell securities with payment and delivery to take
place at some future date, normally one to two months after the date of the
transaction. As with when-issued securities, these transactions involve certain
risks, but they also enable an investor to hedge against anticipated changes in
interest rates and prices. Forward commitment transactions are executed for
existing obligations, whereas in a when-issued transaction, the obligations have
not yet been issued. When purchasing securities on a when-issued or forward
commitment basis, a segregated account of liquid assets at least equal to the
value of purchase commitments for such securities will be maintained until the
settlement date.
AMERICAN AADVANTAGE MUNICIPAL MONEY MARKET FUND -- The Fund's corresponding
Portfolio may invest in municipal obligations issued by or on behalf of the
governments of states, territories, or possessions of the United States; the
District of Columbia; and their political subdivisions, agencies and
instrumentalities if the interest these obligations provide is generally exempt
from federal income tax. The Municipal Money Market Portfolio will invest only
in issuers or instruments that at the time of purchase (1) are guaranteed by the
U.S. Government, its agencies, or instrumentalities; (2) are secured by letters
of credit that are irrevocable and issued by banks which qualify as authorized
issuers for the Money Market Portfolio (see "American AAdvantage Money Market
Fund"); (3) are guaranteed by one or more municipal bond insurance policies that
cannot be canceled and are issued by third-party guarantors possessing the
highest claims-paying rating from a Rating Organization; (4) have received one
of the two highest short-term ratings from at least two Rating Organizations;
(5) are single rated and have received one of the two highest short-term ratings
from that Rating Organization; (6) have no short-term rating but the instrument
is comparable to the issuer's rated short-term debt; (7) have no short-term
rating (or comparable rating)
PROSPECTUS
11
<PAGE> 54
but have received one of the top two long-term ratings from all Rating
Organizations rating the issuer or instrument; or (8) are unrated, but are
determined to be of comparable quality by the Manager pursuant to guidelines
approved by, and subject to the oversight of, the AMR Trust Board. The Portfolio
also may invest in other investment companies. Ordinarily at least 80% of the
Portfolio's net assets will be invested in municipal obligations the interest
from which is exempt from federal income tax. However, should market conditions
warrant, the Portfolio may invest up to 20% (or for temporary defensive
purposes, up to 100%) of its assets in eligible investments for the Money Market
Portfolio which are subject to federal income tax.
The Portfolio may invest in certain municipal obligations which have rates
of interest that are adjusted periodically according to formulas intended to
minimize fluctuations in the values of these instruments. These instruments,
commonly known as variable rate demand obligations, are long-term instruments
which allow the purchaser, at its discretion, to redeem securities before their
final maturity at par plus accrued interest upon notice (typically 7 to 30
days).
Municipal obligations may be backed by the full taxing power of a
municipality ("general obligations"), or by the revenues from a specific project
or the credit of a private organization ("revenue obligations"). Some municipal
obligations are collateralized as to payment of principal and interest by an
escrow of U.S. Government or federal agency obligations, while others are
insured by private insurance companies, while still others may be supported by
letters of credit furnished by domestic or foreign banks. The Portfolio's
investments in municipal obligations may include fixed, variable, or floating
rate general obligations and revenue obligations (including municipal lease
obligations and resource recovery obligations); zero coupon and asset-backed
obligations; variable rate auction and residual interest obligations; tax,
revenue, or bond anticipation notes; and tax-exempt commercial paper. See the
SAI for a further discussion of the foregoing obligations. The Portfolio may
purchase or sell securities on a when-issued or a forward commitment basis as
described under "American AAdvantage Money Market Fund and American AAdvantage
Money Market Mileage Fund."
The Portfolio may invest more than 25% of the value of its total assets in
municipal obligations which are related in such a way that an economic, business
or political development or change affecting one such security would also affect
the other securities; for example, securities the interest of which is paid from
revenues of similar types of projects, or securities whose issuers are located
in the same state. As a result, the Portfolio may be subject to greater risk
compared to a fund that does not follow this practice. However, this risk is
mitigated because it is anticipated that most of the Portfolio's assets will be
insured or backed by bank letters of credit. Additionally, the Portfolio may
invest more than 25% of the value of its total assets in industrial development
bonds which, although issued by industrial development authorities, may be
backed only by the assets and revenues of the non-governmental users.
PROSPECTUS
12
<PAGE> 55
The Portfolio also may invest in municipal obligations that constitute
"private activity obligations." These include obligations that finance student
loans, residential rental projects, and solid waste disposal facilities. To the
extent the Portfolio earns interest income on private activity obligations,
shareholders will be required to treat the portion of the Fund's distributions
attributable to its share of such interest as a "tax preference item" for
purposes of determining their liability for the federal alternative minimum tax
("AMT") and, as a result, may become subject to (or increase their liability
for) the AMT. Shareholders should consult their own tax advisers to determine
whether they may be subject to the AMT. The Portfolio may invest in private
activity obligations without limitation and it is anticipated that a substantial
portion of the Portfolio's assets will be invested in these obligations. As a
result, a substantial portion of the Fund's distributions may be a tax
preference item, which will reduce the net return from the Fund for taxpayers
subject to the AMT. Interest on "qualified" private activity obligations is
exempt from federal income tax.
AMERICAN AADVANTAGE U.S. GOVERNMENT MONEY MARKET FUND -- The Fund's
corresponding Portfolio will invest exclusively in obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities and
repurchase agreements which are collateralized by such obligations. U.S.
Government securities include direct obligations of the U.S. Treasury (such as
Treasury bills, Treasury notes and Treasury bonds). The Fund may invest in
securities issued by the Agency for International Development, Farmers Home
Administration, Farm Credit Banks, Federal Home Loan Bank, Federal Intermediate
Credit Bank, Federal Financing Bank, Federal Land Bank, FNMA, GNMA, General
Services Administration, Rural Electrification Administration, Small Business
Administration, Tennessee Valley Authority and others. Some of these
obligations, such as those issued by the Federal Home Loan Bank and FHLMC, are
supported only by the credit of the agency or instrumentality issuing the
obligation and the discretionary authority of the U.S. Government to purchase
the agency's obligations. See the SAI for a further discussion of the foregoing
obligations. Counterparties for repurchase agreements must be approved by the
AMR Trust Board. The Portfolio may purchase or sell securities on a when-issued
or a forward commitment basis as described under "American AAdvantage Money
Market Fund and American AAdvantage Money Market Mileage Fund."
OTHER INVESTMENT POLICIES -- In addition to the investment policies described
previously, each Portfolio also may lend its securities, enter into fully
collateralized repurchase agreements, and invest in private placement offerings.
SECURITIES LENDING. Each Portfolio may lend securities to broker-dealers or
other institutional investors pursuant to agreements requiring that the loans be
continuously secured by any combination of cash, securities of the U.S.
Government and its agencies and instrumentalities and approved bank letters of
credit that at all times equal at least 100% of the market value of the loaned
securities. Such loans will not be made if, as a result, the aggregate amount of
all outstanding securities loans by any Portfolio would
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exceed 33 1/3% of its total assets (including the market value of collateral
received). A Portfolio continues to receive interest on the securities loaned
and simultaneously earns either interest on the investment of the cash
collateral or fee income if the loan is otherwise collateralized. Should the
borrower of the securities fail financially, there is a risk of delay in
recovery of the securities loaned or loss of rights in the collateral. However,
the Portfolios seek to minimize this risk by making loans only to borrowers
which are deemed to be of good financial standing and which have been approved
by the AMR Trust Board. For purposes of complying with each Portfolio's
investment policies and restrictions, collateral received in connection with
securities loans will be deemed an asset of a Portfolio to the extent required
by law. The Manager will receive compensation for administrative and oversight
functions with respect to securities lending. The amount of such compensation
will depend on the income generated by the loan of each Portfolio's securities.
The SEC has granted exemptive relief that permits the Portfolios to invest cash
collateral received from securities lending transactions in shares of one or
more private investment companies managed by the Manager. Subject to receipt of
exemptive relief from the SEC, the Portfolios also may invest cash collateral
received from securities lending transactions in shares of one or more
registered investment companies managed by the Manager. See the SAI for further
information regarding loan transactions.
REPURCHASE AGREEMENTS. A repurchase agreement is an agreement under which
securities are acquired by a Portfolio from a securities dealer or bank subject
to resale at an agreed upon price on a later date. The acquiring Portfolio bears
a risk of loss in the event that the other party to a repurchase agreement
defaults on its obligations and the Portfolio is delayed or prevented from
exercising its rights to dispose of the collateral securities. However, the
Manager attempts to minimize this risk by entering into repurchase agreements
only with financial institutions which are deemed to be of good financial
standing and which have been approved by the AMR Trust Board. See the SAI for
more information regarding repurchase agreements.
PRIVATE PLACEMENT OFFERINGS. Investments in private placement offerings are made
in reliance on the "private placement" exemption from registration afforded by
Section 4(2) of the Securities Act of 1933 (the "1933 Act"), and resold to
qualified institutional buyers under Rule 144A under the 1933 Act ("Section 4(2)
securities"). Section 4(2) securities are restricted as to disposition under the
federal securities laws, and generally are sold to institutional investors such
as the Portfolios, that agree they are purchasing the securities for investment
and not with an intention to distribute to the public. Any resale by the
purchaser must be pursuant to an exempt transaction and may be accomplished in
accordance with Rule 144A. Section 4(2) securities normally are resold to other
institutional investors such as the Portfolios through or with the assistance of
the issuer or dealers that make a market in the Section 4(2) securities, thus
providing liquidity. The Portfolios will not invest more than 10% of their
respective net assets in Section 4(2) securities and other illiquid securities
unless the Manager determines, by continuous reference to the appropriate
trading markets and
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pursuant to guidelines approved by the AMR Trust Board, that any Section 4(2)
securities held by such Portfolio in excess of this level are at all times
liquid.
The AMR Trust Board and the Manager, pursuant to the guidelines approved by
the AMR Trust Board, will carefully monitor the Portfolios' investments in
Section 4(2) securities offered and sold under Rule 144A, focusing on such
important factors, among others, as: valuation, liquidity, and availability of
information. Investments in Section 4(2) securities could have the effect of
reducing a Portfolio's liquidity to the extent that qualified institutional
buyers no longer wish to purchase these restricted securities.
BROKERAGE PRACTICES -- The Portfolios normally will not incur any brokerage
commissions on their transactions because money market instruments are generally
traded on a "net" basis with dealers acting as principal for their own accounts
without a stated commission. The price of the obligation, however, usually
includes a profit to the dealer. Obligations purchased in underwritten offerings
include a fixed amount of compensation to the underwriter, generally referred to
as the underwriter's concession or discount. No commissions or discounts are
paid when securities are purchased directly from an issuer.
ADDITIONAL INFORMATION ABOUT THE PORTFOLIOS -- As previously described,
investors should be aware that each Fund, unlike mutual funds that directly
acquire and manage their own portfolios of securities, seeks to achieve its
investment objective by investing all of its investable assets in a
corresponding Portfolio of the AMR Trust, which is a separate investment
company. Since a Fund will invest only in its corresponding Portfolio, that
Fund's shareholders will acquire only an indirect interest in the investments of
the Portfolio.
The Manager expects, although it cannot guarantee, that the AAdvantage Trust
and the Mileage Trust will achieve economies of scale by investing in the AMR
Trust. In addition to selling their interests to the Funds, the Portfolios sell
their interests to other non-affiliated investment companies and/or other
institutional investors. All institutional investors in a Portfolio pay a
proportionate share of the Portfolio's expenses and invest in that Portfolio on
the same terms and conditions. However, other investment companies investing all
of their assets in a Portfolio, are not required to sell their shares at the
same public offering price as a Fund and are allowed to charge different sales
commissions. Therefore, investors in a Fund may experience different returns
from investors in another investment company that invests exclusively in that
Fund's corresponding Portfolio.
The Fund's investment in a Portfolio may be affected materially by the
actions of large investors in that Portfolio, if any. For example, as with all
open-end investment companies, if a large investor were to redeem its interest
in a Portfolio, that Portfolio's remaining investors could experience higher pro
rata operating expenses, thereby
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producing lower returns. As a result, that Portfolio's security holdings may
become less diverse, resulting in increased risk. Institutional investors in a
Portfolio that have a greater pro rata ownership interest in the Portfolio than
the Fund could have effective voting control over the operation of that
Portfolio. A material change in a Portfolio's fundamental objective, policies
and restrictions, that is not approved by the shareholders of its corresponding
Fund could require that Fund to redeem its interest in the Portfolio. Any such
redemption could result in a distribution in kind of portfolio securities (as
opposed to a cash distribution) by the Portfolio. Should such a distribution
occur, that Fund could incur brokerage fees or other transaction costs in
converting such securities to cash. In addition, a distribution in kind could
result in a less diversified portfolio of investments for that Fund and could
affect its liquidity adversely.
The Portfolios' and their corresponding Funds' investment objectives and
policies are described above. See "Investment Restrictions" for a description of
their investment restrictions. The investment objective of a Fund can be changed
only with shareholder approval. The approval of a Fund and of other investors in
its corresponding Portfolio, if any, is not required to change the investment
objective, policies or limitations of that Portfolio, unless otherwise
specified. Written notice will be provided to shareholders of a Fund within
thirty days prior to any changes in its corresponding Portfolio's investment
objective. If the investment objective of a Portfolio changes and the
shareholders of its corresponding Fund do not approve a parallel change in that
Fund's investment objective, the Fund would seek an alternative investment
vehicle or the Manager would actively manage the Fund.
See "Management and Administration of the Trusts" for a complete description
of the investment management fee and other expenses associated with a Fund's
investment in its corresponding Portfolio. This Prospectus and the SAI contain
more detailed information about each Fund and its corresponding Portfolio,
including information related to (1) the investment objective, policies and
restrictions of each Fund and its corresponding Portfolio, (2) the Board of
Trustees and officers of the AAdvantage Trust, the MileageTrust and the AMR
Trust, (3) brokerage practices, (4) the Funds' shares, including the rights and
liabilities of its shareholders, (5) additional performance information,
including the method used to calculate yield and total return, and (6) the
determination of the value of each Fund's shares.
INVESTMENT RESTRICTIONS
The following fundamental investment restrictions and the non-fundamental
investment restriction are identical for each Fund and its corresponding
Portfolio. Therefore, although the following discusses the investment
restrictions of each Portfolio and the AMR Trust Board, it applies equally to
each Fund and its respective
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Board. The following fundamental investment restrictions may be changed with
respect to a particular Fund by the majority vote of that Fund's outstanding
shares or with respect to a Portfolio by the majority vote of that Portfolio's
interest holders. No Portfolio may:
o Invest more than 5% of its total assets (taken at market value) in
securities of any one issuer, other than obligations issued by the U.S.
Government, its agencies and instrumentalities, or purchase more than 10%
of the voting securities of any one issuer, with respect to 75% of a
Portfolio's total assets. In addition, although not a fundamental
investment restriction and therefore subject to change without shareholder
vote, the Money Market Portfolio and the U.S. Government Money Market
Portfolio apply this restriction with respect to 100% of their assets.
o Invest more than 25% of its total assets in the securities of companies
primarily engaged in any one industry, provided that: (i) this limitation
does not apply to obligations issued or guaranteed by the U.S. Government,
its agencies and instrumentalities; (ii) municipalities and their agencies
and authorities are not deemed to be industries; and (iii) financial
service companies are classified according to the end users of their
services (for example, automobile finance, bank finance, and diversified
finance will be considered separate industries). With respect to the Money
Market Portfolio, this restriction does not apply to the banking industry.
The following non-fundamental investment restriction may be changed with respect
to a particular Fund by a vote of a majority of its respective Board or with
respect to a Portfolio by a vote of a majority of the AMR Trust Board: no
Portfolio may invest more than 10% of its net assets in illiquid securities,
including time deposits and repurchase agreements that mature in more than seven
days.
The above percentage limits are based upon asset values at the time of the
applicable transaction; accordingly, a subsequent change in asset values will
not affect a transaction that was in compliance with the investment restrictions
at the time such transaction was effected. See the SAI for other investment
limitations.
YIELDS AND TOTAL RETURNS
From time to time the Platinum Class of the Funds may advertise its "current
yield" and "effective yield." Both yield figures are based on historical
earnings and are not intended to indicate future performance. The current yield
refers to the investment income generated over a seven calendar-day period
(which period will be stated in the advertisement). This yield is then
annualized by assuming the amount of investment
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income generated during that week is earned each week over a one-year period,
and is shown as a percentage of the investment. The effective yield is
calculated similarly but, when annualized, the investment income earned is
assumed to be reinvested. The effective yield will be slightly higher than the
current yield because of the compounding effect of this assumed reinvestment.
The Municipal Money Market Fund also may quote "tax equivalent yields," which
show the taxable yields a shareholder would have to earn before federal income
taxes to equal this Fund's tax-exempt yields. The tax equivalent yield is
calculated by dividing the Fund's tax-exempt yield by the result of one minus a
stated federal income tax rate. If only a portion of the Fund's income was
tax-exempt, only that portion is adjusted in the calculation. As stated earlier,
the Fund considers interest on private activity obligations to be exempt from
federal income tax. Total return quotations advertised by the Funds may reflect
the average annual compounded (or aggregate compounded) rate of return during
the designated time period based on a hypothetical initial investment and the
redeemable value of that investment at the end of the period. The Funds will at
times compare their performance to applicable published indices, and also may
disclose their performance as ranked by certain ranking entities. Each class of
a Fund has different expenses which will impact its performance. See the SAI for
more information about the calculation of yields and total returns.
MANAGEMENT AND ADMINISTRATION OF THE TRUSTS
FUND MANAGEMENT AGREEMENT -- The AAdvantage Trust's Board and the Mileage
Trust's Board have general supervisory responsibility over their respective
Trust's affairs. The Manager provides or oversees all administrative, investment
advisory and portfolio management services for the AAdvantage Trust pursuant to
a Management Agreement, dated April 3, 1987, as amended on July 25, 1997,
together with the Administrative Services Agreement described below. The Manager
provides or oversees all administrative, investment advisory and portfolio
management services for the Mileage Trust pursuant to a Management Agreement,
dated October 1, 1995 as amended November 21, 1997. The AMR Trust and the
Manager also entered into a Management Agreement dated, October 1, 1995, as
amended July 25, 1997, which obligates the Manager to provide or oversee all
administrative, investment advisory and portfolio management services for the
AMR Trust. The Manager, located at 4333 Amon Carter Boulevard, MD 5645, Fort
Worth, Texas 76155, is a wholly owned subsidiary of AMR Corporation ("AMR"), the
parent company of American Airlines, Inc., and was organized in 1986 to provide
investment management, advisory, administrative and asset management consulting
services. The Manager serves as the sole investment adviser to the Portfolios.
As of December 31, 1997, the Manager had assets under management totaling
approximately $18.4 billion, including approximately $6.1 billion under active
management and $12.3 billion as named fiduciary or fiduciary adviser. Of the
total, approximately $14.2 billion of assets are
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related to AMR. American Airlines, Inc. is not responsible for investments made
in the American AAdvantage Funds or the American AAdvantage Mileage Funds.
The Manager provides the Trust and the AMR Trust with office space, office
equipment and personnel necessary to manage and administer the Trusts'
operations. This includes complying with reporting requirements; corresponding
with shareholders; maintaining internal bookkeeping, accounting and auditing
services and records; and supervising the provision of services to the Trusts by
third parties. The Manager also oversees each Portfolio's participation in
securities lending activities and any actions taken by the securities lending
agent in connection with those activities to ensure compliance with all
applicable regulatory and investment guidelines. The Manager also develops the
investment programs for each Portfolio.
Except as otherwise provided below, the Manager bears the expense of
providing the above services. As compensation for providing the Portfolios with
advisory services, the Manager receives from the AMR Trust an annualized
advisory fee that is calculated and accrued daily, equal to 0.15% of the net
assets of the Portfolios. To the extent that a Fund invests all of its
investable assets in its corresponding Portfolio, the Manager receives no
advisory fee from the AAdvantage Trust or the Mileage Trust. The Manager is
entitled to receive compensation in connection with securities lending
activities. If a Portfolio lends its portfolio securities and receives cash
collateral from the borrower, the Manager may receive up to 25% of the net
annual interest income (the gross interest earned by the investment less the
amount paid to the borrower as well as related expenses) received from the
investment of such cash. If a borrower posts collateral other than cash, the
borrower will pay to the lender a loan fee. The Manager may receive up to 25% of
the loan fees posted by borrowers. The fees received by the Manager from the AMR
Trust are payable quarterly in arrears. In addition, the Manager is compensated
through the Administrative Services Agreement as described below for other
services provided.
Each Management Agreement will continue in effect provided that annually
such continuance is specifically approved by a vote of the applicable Board
including the affirmative votes of a majority of the Trustees of each Board who
are not parties to the Management Agreement or "interested persons" as defined
in the 1940 Act of any such party ("Independent Trustees"), cast in person at a
meeting called for the purpose of considering such approval, or by the vote of a
Fund's shareholders or a Portfolio's interest holders. A Management Agreement
may be terminated with respect to a Fund or a Portfolio at any time, without
penalty, by a majority vote of outstanding Fund shares or Portfolio interests on
sixty (60) days' written notice to the Manager, or by the Manager, on sixty (60)
days' written notice to the AAdvantage Trust, the Mileage Trust or the AMR
Trust. A Management Agreement will automatically terminate in the event of its
"assignment" as defined in the 1940 Act.
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The AAdvantage Trust and the Mileage Trust are each responsible for expenses
not otherwise assumed by the Manager, including: audits by independent auditors;
transfer agency, custodian, dividend disbursing agent and shareholder
recordkeeping services; taxes, if any, and the preparation of each Fund's tax
returns; interest; costs of Trustee and shareholder meetings; printing and
mailing prospectuses and reports to existing shareholders; fees for filing
reports with regulatory bodies and the maintenance of the Funds' existence;
legal fees; fees to federal and state authorities for the registration of
shares; fees and expenses of Independent Trustees; insurance and fidelity bond
premiums; fees paid to consultants providing reports regarding the adherence by
investment advisers to the investment style of a Portfolio and any extraordinary
expenses of a nonrecurring nature.
A majority of the Independent Trustees of each Board has adopted written
procedures reasonably appropriate to deal with potential conflicts of interest
between the AAdvantage Trust or the Mileage Trust and the AMR Trust.
ADMINISTRATIVE SERVICES PLAN -- The Manager has entered into separate
Administrative Services Plans with the AAdvantage Trust and the Mileage Trust
which obligate the Manager to provide the Platinum Class with administrative
services either directly or through the various broker-dealers that offer
Platinum Class shares. These services include, but are not limited to, the
payment of fees for record maintenance, forwarding shareholder communications to
the shareholders and aggregating and processing orders for the purchase and
redemption of Platinum Class shares. As compensation for these services, the
Manager receives an annualized fee of up to 0.50% and 0.55% of the net assets of
the Platinum Class of the AAdvantage Funds and the Mileage Fund, respectively.
The fee is payable quarterly in arrears.
DISTRIBUTION PLAN -- The AAdvantage Trust and the Mileage Trust have each
adopted a Platinum Class distribution plan (the "Plans") pursuant to Rule 12b-1
under the 1940 Act which will continue in effect so long as approved at least
annually by a majority of the applicable Board's Trustees, including the
affirmative votes of a majority of the Independent Trustees of the applicable
Board, cast in person at a meeting called for the purpose of considering such
approval, or by the vote of shareholders of the Platinum Class. The Plans may be
terminated with respect to a particular Platinum Class at any time, without
payment of any penalty, by a vote of a majority of the Independent Trustees of
the applicable Board or by a vote of a majority of the outstanding voting
securities of that class.
The Plans provide that each Platinum Class will pay 0.25% per annum of its
average daily net assets to the Manager (or another entity approved by the
applicable Board) for distribution-related services. The fee will be payable
quarterly in arrears without regard to whether the amount of the fee is more or
less than the actual expenses incurred in a particular quarter by the entity for
the services provided pursuant to the Plans. The Plans authorize the Manager, or
any other entity approved
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by the applicable Board, to spend Rule 12b-1 fees on any activities or expenses
intended to result in the sale or servicing of Platinum Class shares including
but not limited to, advertising, expenses of various broker-dealers relating to
selling efforts, transfer agency fees and the preparation and distribution of
advertising material and sales literature. In addition, the Mileage Fund's Plan
authorizes expenses incurred in connection with participation in the AAdvantage
program.
ALLOCATION OF FUND EXPENSES -- Expenses of each Fund generally are allocated
equally among the shares of that Fund, regardless of class. However, certain
expenses approved by the applicable Board will be allocated solely to the class
to which they relate.
PRINCIPAL UNDERWRITER -- BROKERS TRANSACTION SERVICES, INC. ("BTS"), 7001
Preston Road, Dallas, Texas, 75205 serves as the principal underwriter of the
AAdvantage Trust and the Mileage Trust.
CUSTODIAN AND TRANSFER AGENT -- STATE STREET BANK & TRUST COMPANY, BOSTON,
MASSACHUSETTS, serves as custodian for the Portfolios and the Funds and as
transfer agent for the Platinum Class.
INDEPENDENT AUDITOR -- The independent auditor for the Funds and the AMR Trust
is ERNST & YOUNG LLP, Dallas, Texas.
AADVANTAGE(R) MILES
The AAdvantage program offers the opportunity to obtain free upgrades and travel
awards on American Airlines and AAdvantage airline participants, as well as
upgrades and discounts on car rentals and hotel accommodations. For more
information about the AAdvantage program, call American Airlines at (800)
433-7300.
AAdvantage miles will be posted monthly in arrears to each shareholder's
AAdvantage account based on the shareholder's average daily account balance
during the previous month. Miles are posted at an annual rate of one mile per
$10 maintained in the Mileage Fund. Mileage is calculated on the average daily
balance and posted monthly. The average daily balance is calculated by adding
each day's balance and dividing by the number of days in the month. For example,
the average daily balance on a $50,000 account funded on the 16th day of a month
having 30 days (and maintained at that balance through the end of the month)
would be $25,000. Mileage received for that month would be 208 miles. If the
same balance were maintained through the next month, the average daily balance
would be $50,000, and the mileage would be 417 miles that month and every month
the $50,000 investment was maintained in the Mileage Fund. These miles appear on
subsequent AAdvantage program statements.
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In the case of Trust Accounts, AAdvantage miles will be posted only in a
trustee's individual name, and not in the name of the Trust Account. Before
investing in a Fund, trustees of the Trust Accounts should consult their own
legal and tax advisers as to the tax effect of this arrangement and whether this
arrangement is consistent with their legal duties as trustees. American Airlines
has informed the Funds that in administering an AAdvantage member's AAdvantage
account, it shall not be required to distinguish between AAdvantage miles
accumulated by the individual in his/her capacity as trustee to a Trust Account
from AAdvantage miles accumulated in an individual capacity or from other
sources.
The Manager reserves the right to discontinue the posting of AAdvantage
miles or to change the mileage calculation at any time upon notice to
shareholders. See also "Dividends and Tax Matters."
American Airlines may find it necessary to change AAdvantage program rules,
regulations, travel awards and special offers at any time. This means that
American Airlines may initiate changes impacting, for example, participant
affiliations, rules for earning mileage credit, mileage levels and rules for the
use of travel awards, continued availability of travel awards, blackout dates
and limited seating for travel awards, and the features of special offers.
American Airlines reserves the right to end the AAdvantage program with six
months' notice. AAdvantage travel awards, mileage accrual and special offers are
subject to governmental regulations.
HOW TO PURCHASE SHARES
Platinum Class shares are offered on a continuous basis at net asset value
through selected financial services firms. The Platinum Class has established a
minimum initial investment of $1,000 and $100 minimum for subsequent
investments, but these minimums may be changed at any time at the AAdvantage
Trust's or the Mileage Trust's discretion.
An order to purchase Platinum Class shares received by wire transfer in the
form of federal funds will be effected at the next determined net asset value.
Shares are offered and orders are accepted for the Money Market Fund, and
the Mileage Fund until 3:00 p.m. Eastern time, or the close of the Exchange
(whichever comes first) Monday through Friday, excluding the following business
holidays: New Year's Day, Martin Luther King's Birthday, President's Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans Day,
Thanksgiving Day and Christmas Day ("Business Day"). Shares are offered and
orders are accepted for the U.S. Government Money Market Fund until 2:00 p.m.
Eastern time, or the close of the Exchange (whichever comes first) on each
Business Day and for the Municipal Money Market Fund until 11:45 a.m. Eastern
time, or the close of the Exchange
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(whichever comes first) on each Business Day. These purchases will receive that
day's dividend.
Orders for purchase accompanied by a check or other negotiable bank draft
will be accepted and effected as of 3:00 p.m. Eastern time on the next Business
Day following receipt and such shares will receive the dividend for the Business
Day following the day the purchase is effected. If an order is accompanied by a
check drawn on a foreign bank, funds must normally be collected from such check
before shares will be purchased. The AAdvantage Trust and the Mileage Trust
reserve the right to reject any order for the purchase of shares and to limit or
suspend, without prior notice, the offering of shares.
Firms provide varying arrangements for their clients with respect to the
purchase and redemption of Platinum Class shares and the confirmation thereof
and may arrange with their clients for other investment or administrative
services. Such firms are responsible for the prompt transmission of purchase and
redemption orders. Some firms may establish higher or lower minimum investment
requirements than set forth above. Such firms may independently establish and
charge additional amounts to their clients for their services, which charges
would reduce their clients' yield or return. Firms also may hold Platinum Class
shares in nominee or street name as agent for and on behalf of their clients. In
such instances, the transfer agent will have no information with respect to or
control over the accounts of specific shareholders. Such shareholders may obtain
access to their accounts and information about their accounts only from their
firm. Certain of these firms may receive compensation from the Manager for
recordkeeping and other expenses relating to these nominee accounts. In
addition, certain privileges with respect to the purchase and redemption of
shares (such as check writing or a debit card) may not be available through such
firms or may only be available subject to certain conditions or limitations.
Some firms may participate in a program allowing them access to their clients'
accounts for servicing, including, without limitation, transfers of registration
and dividend payee changes, and may perform functions such as generation of
confirmation statements and disbursements of cash dividends.
HOW TO REDEEM SHARES
Shareholders should contact the firm through which their shares were purchased
for redemption instructions. Shares of a Fund may be redeemed by telephone, by
writing a check, by pre-authorized automatic redemption or by mail on any
Business Day. Shares will be redeemed at the net asset value next calculated
after the applicable Fund has received and accepted the redemption request.
Proceeds from a redemption of shares purchased by check or pre-authorized
automatic purchase may be withheld until the funds have cleared, which may take
up to 15 days. Although the Funds intend to redeem shares in cash, each Fund
reserves the right to pay the redemption price in
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whole or in part by a distribution of readily marketable securities held by the
applicable Fund's corresponding Portfolio. See the SAI for further information
concerning redemptions in kind.
Firms may charge a fee for wire redemptions to cover transaction costs.
Redemption proceeds generally will be sent within one Business Day. However, if
making immediate payment could affect a Fund adversely, it may take up to seven
days to send payment.
To ensure acceptance of a redemption request, be sure to adhere to the
following procedures.
REDEEMING BY CHECK -- Upon request, shareholders will be provided with drafts to
be drawn on the shareholder's Fund account ("Redemption Checks"). Redemption
Checks may be made payable to the order of any person for an amount not less
than $250 and not more than $5 million. When a Redemption Check is presented for
payment, a sufficient number of full and fractional shares in the shareholder's
account will be redeemed at the next determined net asset value to cover the
amount of the Redemption Check. This will enable the shareholder to continue
earning dividends until the Fund receives the Redemption Check. A shareholder
wishing to use this method of redemption must complete and file an account
application which is available from the Funds or firm through which shares were
purchased. Redemption Checks should not be used to close an account since the
account normally includes accrued but unpaid dividends. The Funds reserve the
right to terminate or modify this privilege at any time. This privilege may not
be available through some firms that distribute shares of the Funds. In
addition, firms may impose minimum balance requirements in order to obtain this
feature. Firms also may impose fees on investors for this privilege or, if
approved by the Funds, establish variations on minimum check amounts.
Unless only one signature is authorized on the account application,
Redemption Checks must be signed by all shareholders. Any change in the
signature authorization must be made by written notice to the firm. Shares
purchased by check or through an Automated Clearing House ("ACH") transaction
may not be redeemed by Redemption Check until the shares have been on the Fund's
books for at least 15 days. The Funds reserve the right to terminate or modify
this privilege at any time.
The Funds may refuse to honor Redemption Checks whenever the right of
redemption has been suspended or postponed, or whenever the account is otherwise
impaired. A $15 service fee will be charged when a Redemption Check is presented
to redeem Fund shares in excess of the value of that Fund account or for an
amount less than $250 or when a Redemption Check is presented that would require
redemption of shares that were purchased by check or ACH transaction within 15
days. A fee of $12 will be charged when "stop payment" of a Redemption Check is
requested. Firms may charge different service fees in place of or in addition to
these fees.
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PRE-AUTHORIZED AUTOMATIC REDEMPTIONS -- Shareholders purchasing through some
firms can arrange to have a pre-authorized amount ($100 or more) redeemed from
their shareholder account and automatically deposited into a bank account on one
or more specified day(s) of each month. For more information regarding
pre-authorized automatic redemptions, contact your firm.
FULL REDEMPTIONS -- Unpaid dividends credited to an account up to the date of
redemption of all shares of a Fund generally will be paid at the time of
redemption.
VALUATION OF SHARES
The net asset value of each share (share price) of the Funds is determined as of
the close of the Exchange, generally 4:00 p.m. Eastern time on each Business
Day. The net asset value of Platinum Class Shares of the Funds will be
determined based on a pro rata allocation of the Fund's corresponding
Portfolio's investment income, expenses and total capital gains and losses. The
allocation will be based on comparative net asset value at the beginning of the
day except for expenses related solely to one class of shares ("Class Expenses")
which will be borne only by the appropriate class of shares. Because of Class
Expenses, the net income attributable to and the dividends payable may be
different for each class of shares.
Obligations held by the Portfolios are valued in accordance with the
amortized cost method, which is designed to enable those Portfolios and their
corresponding Funds to maintain a consistent $1.00 per share net asset value.
The amortized cost method is described in the SAI.
DIVIDENDS AND TAX MATTERS
Dividends paid on each class of a Fund's shares are calculated at the same time
and in the same manner. All of each Fund's net investment income and net
short-term capital gain, if any, generally will be declared as dividends on each
Business Day immediately prior to the determination of the net asset value.
Dividends generally are paid on the first day of the following month. A Fund's
net investment income attributable to the Platinum Class consists of that class'
pro rata share of the Fund's share of interest accrued and discount earned on
its corresponding Portfolio's securities, less amortization of premium, and the
estimated expenses of both the Portfolio and the Fund attributable to the
Platinum Class. The Portfolios do not expect to realize net capital gain,
therefore the Funds do not foresee paying any capital gain distributions. If any
Fund (either directly or indirectly through its corresponding Portfolio)
incurred or anticipated any unusual expenses, loss or depreciation that would
adversely affect its net asset value or income for a particular period, the
Board would at that time consider
PROSPECTUS
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<PAGE> 68
whether to adhere to the dividend policy described above or to revise it in the
light of the then prevailing circumstances.
Unless a shareholder elects otherwise on the account application, all
dividends on a Fund's Platinum Class shares will be automatically paid in
additional Platinum Class shares of that Fund. However, a shareholder may choose
to have dividends paid in cash. An election may be changed at any time by
delivering written notice to your firm at least ten days prior to the payment
date for a dividend.
Each Fund is treated as a separate corporation for federal income tax
purposes and intends to continue to qualify for treatment as a regulated
investment company under the Internal Revenue Code of 1986, as amended. In each
taxable year that a Fund so qualifies, the Fund (but not its shareholders) will
be relieved of federal income tax on that part of its investment company taxable
income (generally, taxable net investment income plus any net short-term capital
gain) that it distributed to its shareholders. However, a Fund will be subject
to a nondeductible 4% excise tax to the extent that it fails to distribute by
the end of any calendar year substantially all of its ordinary income for that
calendar year and its net capital gain for the one-year period ending on October
31 of that year, plus certain other amounts. For these and other purposes,
dividends declared by a Fund in December of any year and payable to shareholders
of record on a date in that month will be deemed to have been paid by the Fund
and received by the shareholders on December 31 of that year if they are paid by
the Fund during the following January. Each Portfolio has received a ruling from
the Internal Revenue Service that it is classified for federal income tax
purposes as a partnership; accordingly, no Portfolio is subject to federal
income tax.
Dividends from a Fund's investment company taxable income are taxable to its
shareholders as ordinary income to the extent of the Fund's earnings and
profits, whether received in cash or paid in additional Platinum Class shares.
Distributions by the Municipal Money Market Fund that it designates as
"exempt-interest dividends" generally may be excluded from gross income by its
shareholders. If the Municipal Money Market Portfolio earns taxable income from
any of its investments, the Municipal Money Market Fund's share of that income
will be distributed to its shareholders as a taxable dividend. To the extent
that Portfolio invests in certain private activity obligations, that Fund's
shareholders will be required to treat a portion of its dividends as a "tax
preference item" in determining their liability for the AMT. Exempt-interest
dividends also may be subject to tax under state and local income tax laws.
Because some states exempt from income tax the interest on their own obligations
and obligations of governmental agencies and municipalities in the state,
shareholders will receive tax information each year regarding the Municipal
Money Market Fund's exempt-interest income by state. Interest on indebtedness
incurred or continued by a shareholder to purchase or carry shares of that Fund
is not deductible.
PROSPECTUS
26
<PAGE> 69
Each Fund notifies its shareholders following the end of each calendar year
of the amounts of dividends paid (or deemed paid) that year. The notice sent by
the Municipal Money Market Fund specifies the amounts of exempt-interest
dividends (and the portion thereof, if any, that is a tax preference item for
purposes of the AMT) and any taxable dividends. The Mileage Fund's notice also
might include in taxable dividends a nominal amount reflecting the value of
AAdvantage Miles credited to the shareholders' accounts, which are deemed by the
Internal Revenue Service to constitute taxable distributions by the Fund. Each
Fund is required to withhold 31% of all taxable dividends payable to any
individuals and certain other non-corporate shareholders who do not provide the
Fund with a correct taxpayer identification number or who otherwise are subject
to back-up withholding.
The foregoing is only a summary of some of the important tax considerations
generally affecting the Funds and their shareholders. Prospective investors are
urged to consult their own tax advisers regarding specific questions as to the
effect of federal, state or local income taxes on any investment in the
AAdvantage Trust or the Mileage Trust or any tax consequences as a result of the
receipt of AAdvantage miles. For further tax information, see the SAI.
GENERAL INFORMATION
The AAdvantage Trust currently is comprised of ten separate investment
portfolios and the Mileage Trust currently is comprised of nine separate
investment portfolios. Each AAdvantage Fund included in this Prospectus is
comprised of three classes of shares. The Mileage Fund is comprised of two
classes of shares. Shares of each AAdvantage Fund and each Mileage Fund can be
issued in an unlimited number. Each AAdvantage Fund and Mileage Fund share
represents an equal proportionate beneficial interest in that Fund and is
entitled to one vote. Only shares of a particular class may vote on matters
affecting that class. Only shares of a particular Fund may vote on matters
affecting that Fund. All shares of a Trust vote on matters affecting that Trust
as a whole. Share voting rights are not cumulative, and shares have no
preemptive or conversion rights. Shares of the AAdvantage Trust and the Mileage
Trust are nontransferable.
On most issues subjected to a vote of a Portfolio's interest holders, as
required by the 1940 Act, its corresponding Fund will solicit proxies from its
shareholders and will vote its interest in the Portfolio in proportion to the
votes cast by the Fund's shareholders. Because a Portfolio interest holder's
votes are proportionate to its percentage interests in that Portfolio, one or
more other Portfolio investors could, in certain instances, approve an action
against which a majority of the outstanding voting securities of its
corresponding Fund had voted. This could result in that Fund's redeeming its
investment in its corresponding Portfolio, which could result in increased
PROSPECTUS
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<PAGE> 70
expenses for that Fund. Whenever the shareholders of a Fund are called to vote
on matters related to its corresponding Portfolio, the Board shall vote shares
for which they receive no voting instructions in the same proportion as the
shares for which they do receive voting instructions. Any information received
from a Portfolio in the Portfolio's report to shareholders will be provided to
the shareholders of its corresponding Fund.
As Massachusetts business trusts, the AAdvantage Trust and the Mileage Trust
are not obligated to conduct annual shareholder meetings. However, the Trusts
will hold special shareholder meetings whenever required to do so under the
federal securities laws or their Declarations of Trust or By-Laws. Trustees of
either Trust can be removed by a shareholder vote at special shareholder
meetings.
The Manager has taken steps that it believes are reasonably designed to
address the potential failure of computer programs used by the Manager and the
Funds' service providers to address the Year 2000 issue. There can be no
assurance that these steps will be sufficient to avoid any adverse impact.
SHAREHOLDER COMMUNICATIONS
Shareholders will receive periodic reports, including annual and semi-annual
reports, which will include financial statements showing the results of the
Funds' operations and other information. The financial statements of the Funds
and the AMR Trust will be audited by Ernst & Young LLP, independent auditor, at
least annually. Shareholder inquiries and requests for information regarding the
other investment companies which also invest in the AMR Trust should be made by
contacting your firm or by calling (800) 388-3344 or by writing to the Funds at
P.O. Box 619003, MD 5645, Dallas/Fort Worth Airport, Texas 75261-9003.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND IN SALES
LITERATURE SPECIFICALLY APPROVED BY OFFICERS OF THE AADVANTAGE TRUST AND THE
MILEAGE TRUST FOR USE IN CONNECTION WITH THE OFFER OF ANY FUND'S SHARES, AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE FUNDS. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER IN ANY JURISDICTION IN WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFERING MAY
NOT LAWFULLY BE MADE.
American AAdvantage Funds and American AAdvantage Mileage Funds are
registered service marks of AMR Corporation. Mileage Class, American AAdvantage
Money Market Fund is a registered service mark and Platinum Class, American
AAdvantage Money Market Mileage Fund, American AAdvantage Municipal Money Market
Fund and American AAdvantage U.S. Government Money Market Fund are service marks
of AMR Investment Services, Inc.
PROSPECTUS
28
<PAGE> 71
-- NOTES --
<PAGE> 72
-- NOTES --
<PAGE> 73
-- NOTES --
<PAGE> 74
AMERICAN
AADVANTAGE FUNDS(R)
- PLATINUM CLASS(sm)
AMERICAN AADVANTAGE
MILEAGE FUNDS(R)
- PLATINUM CLASS(sm)
P.O. BOX 619003
DALLAS/FORT WORTH AIRPORT, TEXAS
75261-9003
(800) 967-9009
PLAT-PRO-0398
<PAGE> 75
STATEMENT OF ADDITIONAL INFORMATION
AMERICAN AADVANTAGE MILEAGE FUNDS(SM)
MARCH 1, 1998
American AAdvantage Mileage Funds (the "Mileage Trust") is an open-end,
diversified management investment company composed of the American AAdvantage
Balanced Mileage Fund(sm) (the "Balanced Fund"), American AAdvantage Growth and
Income Mileage Fund(sm) (the "Growth and Income Fund"), American AAdvantage
International Equity Mileage Fund(sm) (the "International Equity Fund"),
American AAdvantage S&P 500 Index Mileage Fund (the "S&P 500 Index Funds"),
American AAdvantage Intermediate Bond Mileage Fund(sm) (the "Intermediate Bond
Fund"), American AAdvantage Short-Term Bond Mileage Fund(sm) (the "Short-Term
Bond Fund"), formerly the American AAdvantage Limited-Term Income Mileage Fund,
American AAdvantage Money Market Mileage Fund(sm) (the "Money Market Fund"),
American AAdvantage Municipal Money Market Mileage Fund(sm) (the "Municipal
Money Market Fund"), and American AAdvantage U.S. Government Money Market
Mileage Fund(sm), formerly the American AAdvantage U.S. Treasury Money Market
Mileage Fund (the "U.S. Government Money Market Fund"), (individually, a "Fund"
and, collectively, the "Funds"). All Funds consist of one class of shares,
except for the Money Market Fund, which consists of two classes of shares. With
respect to the Money Market Fund, this Statement of Additional Information
("SAI") relates only to the Mileage Class.
Each Fund, except the S&P 500 Index Fund, seeks its investment objective
by investing all of its investable assets in a corresponding portfolio of the
AMR Investment Services Trust ("AMR Trust") that has a similar name and an
identical investment objective to the investing Fund. The S&P 500 Index Fund
invests all of its investable assets in the Equity 500 Index Portfolio, which
has an identical investment objective. The Equity 500 Index Portfolio and the
portfolios of the AMR Trust are referred to herein individually as a
"Portfolio" and, collectively, the "Portfolios." Each Portfolio has an
investment objective identical to the investing Fund. The AMR Trust is a
separate investment company managed by AMR Investment Services, Inc. (the
"Manager"). The Equity 500 Index Portfolio is a separate investment company
managed by Bankers Trust Company ("BT").
This SAI should be read in conjunction with the Prospectus for the
Mileage Trust dated March 1, 1998 ("Prospectus"), a copy of which may be
obtained without charge by calling (800) 388-3344.
This SAI is not a prospectus and is authorized for distribution to
prospective investors only if preceded or accompanied by a current Prospectus.
INVESTMENT RESTRICTIONS
Each Fund has the following fundamental investment policy that enables it
to invest in its corresponding Portfolio:
Notwithstanding any other limitation, the Fund may invest all of
its investable assets in an open-end management investment company
with substantially the same investment objectives, policies and
limitations as the Fund. For this purpose, "all of the Fund's
investable assets" means that the only investment securities that
will be held by the Fund will be the Fund's interest in the
investment company.
All other fundamental investment policies and the non-fundamental
policies of each Fund and its corresponding Portfolio are identical.
Therefore, although the following discusses the investment policies of each
Portfolio, the AMR Trust's Board of Trustees ("AMR Trust Board") and the Equity
500 Index Portfolio's Board of Trustees ("Equity 500 Index Portfolio Board"),
it applies equally to each Fund and the Mileage Trust's Board of Trustees
("Board").
PORTFOLIOS OF THE AMR TRUST
In addition to the investment limitations noted in the Prospectus, the
following seven restrictions have been adopted by each Portfolio 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)
<PAGE> 76
67% of the interests of the Portfolio present at the meeting if the holders of
more than 50% of the interests are present and represented at the interest
holders' meeting or (b) more than 50% of the interests of the Portfolio.
Whenever a Fund is requested to vote on a change in the investment restrictions
of its corresponding Portfolio, that Fund will hold a meeting of its
shareholders and will cast its votes as instructed by its shareholders. The
percentage of a Fund's votes representing that Fund's shareholders not voting
will be voted by the Board in the same proportion as those Fund shareholders
who do, in fact, vote.
No Portfolio of the AMR Trust may:
1. Purchase or sell real estate or real estate limited partnership
interests, provided, however, that the Portfolio may invest in securities
secured by real estate or interests therein or issued by companies which
invest in real estate or interests therein when consistent with the other
policies and limitations described in the Prospectus.
2. Purchase or sell commodities (including direct interests and/or
leases in oil, gas or minerals) or commodities contracts, except with
respect to forward foreign currency exchange contracts, foreign currency
futures contracts and when-issued securities when consistent with the
other policies and limitations described in the Prospectus.
3. Engage in the business of underwriting securities issued by others,
except to the extent that, in connection with the disposition of
securities, the Portfolio may be deemed an underwriter under federal
securities law.
4. Make loans to any person or firm, provided, however, that the
making of a loan shall not be construed to include (i) the acquisition
for investment of bonds, debentures, notes or other evidences of
indebtedness of any corporation or government which are publicly
distributed or (ii) the entry into repurchase agreements and further
provided, however, that each Portfolio may lend its investment securities
to broker-dealers or other institutional investors in accordance with the
guidelines stated in the Prospectus.
5. Purchase from or sell portfolio securities to its officers,
Trustees or other "interested persons" of the AMR Trust, as defined in
the 1940 Act, including its investment advisers and their affiliates,
except as permitted by the 1940 Act and exemptive rules or orders
thereunder.
6. Issue senior securities, except that the Portfolio may engage in
when-issued and forward commitment transactions and the International
Equity Portfolio may engage in currency futures and forward currency
contracts.
7. Borrow money, except from banks or through reverse repurchase
agreements for temporary purposes in an aggregate amount not to exceed
10% of the value of its total assets at the time of borrowing. In
addition, although not a fundamental policy, the Portfolios intend to
repay any money borrowed before any additional portfolio securities are
purchased. See "Other Information" for a further description regarding
reverse repurchase agreements.
The following non-fundamental investment restriction applies to each
Portfolio of the AMR Trust and may be changed with respect to a Portfolio by a
majority vote of the AMR Trust Board: no Portfolio of the AMR Trust may
purchase securities on margin, effect short sales (except that the Portfolio
may obtain such short-term credits as may be necessary for the clearance of
purchases or sales of securities) or purchase or sell call options or engage in
the writing of such options.
All Portfolios of the AMR Trust may invest up to 10% of their total
assets in the securities of other investment companies to the extent permitted
by law. A Portfolio of the AMR Trust may incur duplicate advisory or
management fees when investing in another mutual fund.
EQUITY 500 INDEX PORTFOLIO
The following investment restrictions are "fundamental policies" of the
Equity 500 Index Portfolio and may be changed with respect to the Portfolio
only by the majority vote of the Portfolio's outstanding interests, as defined
2
<PAGE> 77
above. Whenever the S&P 500 Index Fund is requested to vote on a change in the
fundamental policy of the Portfolio, the Fund will hold a meeting of its
shareholders and will cast its votes as instructed by its shareholders. The
percentage of the Fund's votes representing Fund shareholders not voting will
be voted by the Board in the same proportion as the Fund shareholders who do,
in fact, vote.
The Equity 500 Index Portfolio may not:
1. Borrow money or mortgage or hypothecate assets of the Portfolio,
except that in an amount not to exceed 1/3 of the current value of the
Portfolio's net assets, it may borrow money as a temporary measure for
extraordinary or emergency purposes and enter into reverse repurchase
agreements or dollar roll transactions, and except that it may pledge,
mortgage or hypothecate not more than 1/3 of such assets to secure such
borrowings (it is intended that money would be borrowed only from banks
and only either to accommodate requests for the withdrawal of beneficial
interests (redemption of shares) while effecting an orderly liquidation
of portfolio securities or to maintain liquidity in the event of an
unanticipated failure to complete a portfolio security transaction or
other similar situations) or reverse repurchase agreements, provided that
collateral arrangements with respect to options and futures, including
deposits of initial deposit and variation margin, are not considered a
pledge of assets for purposes of this restriction and except that assets
may be pledged to secure letters of credit solely for the purpose of
participating in a captive insurance company sponsored by the Investment
Company Institute; for additional related restrictions, see clause (1)
below. (As an operating policy, the Portfolio may not engage in dollar
roll transactions).
2. Underwrite securities issued by other persons except insofar as the
Portfolio may technically be deemed an underwriter under the Securities
Act of 1933 (the "1933 Act") in selling a portfolio security.
3. Make loans to other persons except: (a) through the use of
repurchase agreements or the purchase of short-term obligations; or (b)
by purchasing a portion of an issue of debt securities of types
distributed publicly or privately.
4. Purchase or sell real estate (including limited partnership
interests but excluding securities secured by real estate or interests
therein), interests in oil, gas or mineral leases, commodities or
commodity contracts (except futures and option contracts) in the ordinary
course of business (except that the Portfolio may hold and sell, for the
Portfolio's portfolio, real estate acquired as a result of the
Portfolio's ownership of securities).
5. Concentrate its investments in any particular industry (excluding
U.S. Government securities), but if it is deemed appropriate for the
achievement of the Portfolio's investment objective, up to 25% of its
total assets may be invested in any one industry.
6. Issue any senior security (as that term is defined in the 1940 Act)
if such issuance is specifically prohibited by the 1940 Act or the rules
and regulations promulgated thereunder, provided that collateral
arrangements with respect to options and futures, including deposits of
initial deposit and variation margin, are not considered to be the
issuance of a senior security for purposes of this restriction.
In order to comply with certain statutes and policies the Equity 500
Index Portfolio will not as a matter of operating policy:
1. Borrow money (including through dollar roll transactions) for any
purpose in excess of 10% of the Portfolio's total assets (taken at cost)
except that the Portfolio may borrow for temporary or emergency purposes
up to 1/3 of its total assets.
2. Pledge, mortgage or hypothecate for any purpose in excess of 10% of
the Portfolio's total assets (taken at market value), provided that
collateral arrangements with respect to options and futures, including
deposits of initial deposit and variation margin, are not considered a
pledge of assets for purposes of this restriction.
3. Purchase any security or evidence of interest therein on margin,
except that such short-term credit as may be necessary for the clearance
of purchases and sales of securities may be obtained and except that
deposits of initial deposit and variation margin may be made in
connection with the purchase, ownership, holding or sale of futures.
3
<PAGE> 78
4. Sell any security that it does not own unless by virtue of its
ownership of other securities it has at the time of sale a right to
obtain securities, without payment of further consideration, equivalent
in kind and amount to the securities sold and provided that if such right
is conditional the sale is made upon the same conditions.
5. Invest for the purpose of exercising control or management.
6. Purchase securities issued by any investment company except by
purchase in the open market where no commission or profit to a sponsor or
dealer results from such purchase other than the customary broker's
commission, or except when such purchase, though not made in the open
market, is part of a plan of merger or consolidation; provided, however,
that securities of any investment company will not be purchased for the
Portfolio if such purchase at the time thereof would cause: (a) more than
10% of the Portfolio's total assets (taken at the greater of cost or
market value) to be invested in the securities of such issuers; (b) more
than 5% of the Portfolio's total assets (taken at the greater of cost or
market value) to be invested in any one investment company; or (c) more
than 3% of the outstanding voting securities of any such issuer to be
held for the Portfolio; and, provided further that, except in the case of
merger or consolidation, the Portfolio shall not invest in any other
open-end investment company unless the Portfolio (1) waives the
investment advisory fee with respect to assets invested in other open-end
investment companies and (2) incurs no sales charge in connection with
the investment (as an operating policy, the Portfolio will not invest in
another open-end registered investment company).
7. Invest more than 15% of the Portfolio's net assets (taken at the
greater of cost or market value) in securities that are illiquid or not
readily marketable not including (a) Rule 144A securities that have been
determined to be liquid by the Equity 500 Index Portfolio Board; and (b)
commercial paper that is sold under section 4(2) of the 1933 Act which:
(i) is not traded flat or in default as to interest or principal; and
(ii) is rated in one of the two highest categories by at least two
nationally recognized statistical rating organizations and the Equity 500
Index Portfolio Board has determined the commercial paper to be liquid;
or (iii) is rated in one of the two highest categories by one nationally
recognized statistical rating agency and the Equity 500 Index Portfolio
Board has determined that the commercial paper is equivalent quality and
is liquid.
8. Invest more than 10% of the Portfolio's total assets (taken at the
greater of cost or market value) in securities that are restricted as to
resale under the 1933 Act (other than Rule 144A securities deemed liquid
by the Equity 500 Index Portfolio Board).
9. No more than 5% of the Portfolio's total assets are invested in
securities issued by issuers which (including predecessors) have been in
operation less than three years.
10. With respect to 75% of the Portfolio's total assets, purchase
securities of any issuer if such purchase at the time thereof would cause
the Portfolio to hold more than 10% of any class of securities of such
issuer, for which purposes all indebtedness of an issuer shall be deemed
a single class and all preferred stock of an issuer shall be deemed a
single class, except that futures or option contracts shall not be
subject to this restriction.
11. If the Portfolio is a "diversified" fund with respect to 75% of its
assets, invest more than 5% of its total assets in the securities
(excluding U.S. Government securities) of any one issuer.
12. Purchase or retain in the Portfolio's portfolio any securities
issued by an issuer any of whose officers, directors, trustees or
security holders is an officer or Trustee of the Equity 500 Index
Portfolio, or is an officer or partner of BT, if after the purchase of
the securities of such issuer for the Portfolio one or more of such
persons owns beneficially more than 1/2 of 1% of the shares or
securities, or both, all taken at market value, of such issuer, and such
persons owning more than 1/2 of 1% of such shares or securities together
own beneficially more than 5% of such shares or securities, or both, all
taken at market value.
13. Invest more than 5% of the Portfolio's net assets in warrants
(valued at the lower of cost or market) (other than warrants acquired by
the Portfolio as part of a unit or attached to securities at the time of
purchase), but not more than 2% of the Portfolio's net assets may be
invested in warrants not listed on the NYSE or the AMEX.
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<PAGE> 79
14. Make short sales of securities or maintain a short position, unless
at all times when a short position is open it owns an equal amount of
such securities or securities convertible into or exchangeable, without
payment of any further consideration, for securities of the same issue
and equal in amount to, the securities sold short, and unless not more
than 10% of the Portfolio's net assets (taken at market value) is
represented by such securities, or securities convertible into or
exchangeable for such securities, at any one time (the Portfolio has no
current intention to engage in short selling).
15. Write puts and calls on securities unless each of the following
conditions are met: (a) the security underlying the put or call is within
the investment policies of the Portfolio and the option is issued by the
Options Clearing Corporation, except for put and call options issued by
non-U.S. entities or listed on non-U.S. securities or commodities
exchanges; (b) the aggregate value of the obligations underlying the puts
determined as of the date the options are sold shall not exceed 5% of the
Portfolio's net assets; (c) the securities subject to the exercise of the
call written by the Portfolio must be owned by the Portfolio at the time
the call is sold and must continue to be owned by the Portfolio until the
call has been exercised, has lapsed, or the Portfolio has purchased a
closing call, and such purchase has been confirmed, thereby extinguishing
the Portfolio's obligation to deliver securities pursuant to the call it
has sold; and (d) at the time a put is written, the Portfolio establishes
a segregated account with its custodian consisting of cash or short-term
U.S. Government securities equal in value to the amount the Portfolio
will be obligated to pay upon exercise of the put (this account must be
maintained until the put is exercised, has expired, or the Portfolio has
purchased a closing put, which is a put of the same series as the one
previously written).
16. Buy and sell puts and calls on securities, stock index futures or
options on stock index futures, or, financial futures or options on
financial futures unless such options are written by other persons and:
(a) the options or futures are offered through the facilities of a
national securities association or are listed on a national securities or
commodities exchange, except for put and call options issued by non-U.S.
entities or listed on non-U.S. securities or commodities exchanges; (b)
the aggregate premiums paid on all such options which are held at any
time do not exceed 20% of the Portfolio's total net assets; and (c) the
aggregate margin deposits required on all such futures or options thereon
held at any time do not exceed 5% of the Portfolio's total assets.
TRUSTEES AND OFFICERS OF THE MILEAGE TRUST AND THE AMR TRUST
The Board provides broad supervision over the Mileage Trust's affairs.
The Manager is responsible for the management of Mileage Trust's assets, and
the Mileage Trust's officers are responsible for the Mileage Trust's
operations. The Trustees and officers of the Mileage 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* (50) Trustee and President President, AMR Investment Services, Inc. (1986-Present);
Chairman, American Airlines Employees Federal Credit
Union (1989-Present); Trustee, American Performance
Funds (1990-July 1994); Director, Crescent Real Estate
Equities, Inc. (1994 - Present); Trustee, American
AAdvantage Funds (1987 - Present).
Alan D. Feld(60) Trustee Partner, Akin, Gump, Strauss, Hauer & Feld, LLP (1960-
1700 Pacific Avenue Suite 4100 Present)#; Director, Clear Channel Communications (1984-
Dallas, Texas 75201 Present); Director, CenterPoint Properties, Inc. (1994-
Present); Trustee, American AAdvantage Funds (1996-
Present).
</TABLE>
5
<PAGE> 80
<TABLE>
<CAPTION>
POSITION WITH
NAME, AGE AND ADDRESS EACH TRUST PRINCIPAL OCCUPATION DURING PAST 5 YEARS
- --------------------- ------------- ----------------------------------------
<S> <C> <C>
Ben J. Fortson (65) Trustee President and CEO, Fortson Oil Company (1958-Present);
301 Commerce Street Director, Kimbell Art Foundation (1964-Present);
Suite 3301 Director, Burnett Foundation (1987-Present); Honorary
Forth Worth, Texas 76012 Trustee, Texas Christian University (1986-Present);
Trustee, American AAdvantage Funds (1996-Present).
John S. Justin (80) Trustee Chairman and Chief Executive Officer, Justin Industries,
2821 West Seventh Street Inc. (a diversified holding company) (1969-Present);
Fort Worth, Texas 76107 Executive Board Member, Blue Cross/Blue Shield of Texas
(1985-Present); Board Member, Zale Lipshy Hospital
(1993-Present); Trustee, Texas Christian University
(1980-Present); Director and Executive Board Member,
Moncrief Radiation Center (1985-Present); Director,
Texas New Mexico Enterprises (1984-1993); Director,
Texas New Mexico Power Company (1979-1993); Trustee,
American AAdvantage Funds (1989-Present).
Stephen D. O'Sullivan* (62) Trustee Consultant (1994-Present); Vice President and Controller
(1985- 1994), American Airlines, Inc.; Trustee, American
AAdvantage Funds (1987-Present).
Roger T. Staubach (56) Trustee Chairman of the Board and Chief Executive Officer of The
6750 LBJ Freeway Staubach Company (a commercial real estate company)
Dallas, Texas 75240 (1982-Present); Director, Halliburton Company (1991-
Present); Director, Brinker International (1993-
Present); Director, International Home Foods, Inc.
(1997-Present); National Advisory Board, The Salvation
Army; Trustee, Institute for Aerobics Research; Member,
Executive Council, Daytop/Dallas; Member, National Board
of Governors, United Way of America, former quarterback
of the Dallas Cowboys professional football team;
Trustee, American AAdvantage Funds (1995-Present).
Kneeland Youngblood (41) Trustee President, Youngblood Enterprises, Inc. (a private
2305 Cedar Springs Road investment management firm) (1983-Present); Trustee,
Suite 401 Teachers Retirement System of Texas (1993-Present);
Dallas, Texas 75201 Director, United States Enrichment Corporation (1993-
Present), Director, Just For the Kids (1995-Present);
Director, Starwood Financial Trust (1998-Present);
Member, Council on Foreign Relations (1995-Present);
Trustee, American AAdvantage Mileage Funds (1996-
Present).
Nancy A. Eckl (35) Vice President Vice President, AMR Investment Services, Inc. (1990-
Present).
</TABLE>
6
<PAGE> 81
<TABLE>
<CAPTION>
POSITION WITH
NAME, AGE AND ADDRESS EACH TRUST PRINCIPAL OCCUPATION DURING PAST 5 YEARS
- --------------------- ------------- ----------------------------------------
<S> <C>
Michael W. Fields (44) Vice President Vice President, AMR Investment Services, Inc. (1988-
Present).
Barry Y. Greenberg (34) Vice President and Director, Legal and Compliance, AMR Investment Services,
Assistant Secretary Inc. (1995-Present); Branch Chief (1992-June 1995), and
Staff Attorney (1988-1992), Securities and Exchange
Commission.
Rebecca L. Harris (31) Treasurer Director of Finance (1995-Present), Controller (1991-
1995), AMR Investment Services, Inc.
John B. Roberson (39) Vice President Vice President, AMR Investment Services, Inc. (1991-
Present).
Thomas E. Jenkins, Jr. (31) Assistant Secretary Senior Compliance Analyst, AMR Investment Services,
Inc. (1996-Present); Staff Accountant (1994-1996) and
Compliance Examiner (1991-1994), Securities and
Exchange Commission.
Adriana R. Posada (43) Assistant Secretary Senior Compliance Analyst (1996-Present) and
Compliance Analyst (1993-1996), AMR Investment
Services, Inc.; Special Sales Representative, American
Airlines, Inc. (1991-1993).
Robert J. Zutz (45) Assistant Secretary Partner, Kirkpatrick & Lockhart LLP (law firm)
1800 Massachusetts Ave., NW
Washington, D.C. 20036
</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 of AMR Corporation.
* Messrs. Quinn and O'Sullivan, by virtue of their current or former
positions, are deemed to be "interested persons" of the Mileage 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 Mileage Trust and the AMR
Trust, the Independent Trustees and their spouses receive free air travel from
American Airlines, Inc., an affiliate of the Manager. The Mileage Trust and
the AMR Trust do not pay for these travel arrangements. However, the Trusts
compensate each Trustee with payments in an amount equal to the Trustees'
income tax on the value of this free airline travel. Mr. O'Sullivan, who as a
retiree of American Airlines, Inc. already receives free airline travel,
receives compensation annually of up to three round trip airline tickets for
each of his three adult children. Trustees are also reimbursed for any
expenses incurred in attending Board meetings. These amounts (excluding
reimbursements) are reflected in the following table for the fiscal year ended
October 31, 1997
7
<PAGE> 82
<TABLE>
<CAPTION>
Pension or Retirement Total
Benefits Accrued as Compensation
Aggregate Part of the Estimated From American
Compensation Trust's Expenses Annual Benefits AAdvantage Funds
From The ---------------- Upon Complex
Name Of Trustee Trust Retirement (27 Funds)
--------------- ------ ---------- ----------
<S> <C> <C> <C> <C>
William F. Quinn $ 0 $0 $0 $ 0
John S. Justin $ 225 $0 $0 $ 901
Alan D. Feld $15,962 $0 $0 $63,850
Ben J. Fortson $ 6,802 $0 $0 $27,709
Stephen D. O'Sullivan $ 493 $0 $0 $ 1,973
Roger T. Staubach $ 8,269 $0 $0 $33,076
Kneeland Youngblood, M.D. $ 9,525 $0 $0 $38,099
</TABLE>
TRUSTEES AND OFFICERS OF THE EQUITY 500 INDEX PORTFOLIO
The Equity 500 Index Portfolio Board oversees the activities of the
Equity 500 Index Portfolio and reviews contractual arrangements with companies
that provide services to the Portfolio. The Trustees and officers of the Equity
500 Index Portfolio and their principal occupations during the past five years
are set forth below. Their titles may have varied during that period. Unless
otherwise indicated, the address of each Trustee and officer is c/o Edgewood
Services, Inc., Clearing Operations, P.O. Box 897, Pittsburgh, PA 15230-0897.
<TABLE>
<CAPTION>
POSITION WITH
EQUITY 500 INDEX
NAME, AGE AND ADDRESS PORTFOLIO PRINCIPAL OCCUPATION DURING PAST 5 YEARS
- --------------------- ------------------- ----------------------------------------
<S> <C> <C>
Charles P. Biggar (67) Trustee Retired; Director of Chase/NBW Bank Advisory Board;
12 Hitching Post Lane Director, Batemen, Eichler, Hill Richards Inc.; formerly
Chappaqua, NY 10514 Vice President of International Business Machines and
President of the National Services and the Field
Engineering Divisions of IBM.
S. Leland Dill (67) Trustee Retired; Director, Coutts Group, Coutts (U.S.A.)
5070 North Ocean Drive International, and Coutts Trust Holdings Ltd.; Director,
Singer Island, FL 33404 Zweig Series Trust; formerly Partner of KPMG Peat
Marwick; Director, Vinters International Company Inc.;
General Partner of Pemco (an investment company
registered under the 1940 Act).
Philip Saunders, Jr. (62) Trustee Principal, Philip Saunders Associates (Consulting);
445 Glen Road former Director of Financial Industry Consulting, Wolf &
Weston, MA 02193 Company; President, John Hancock Home Mortgage
Corporation; and Senior Vice President of Treasury and
Financial Services, John Hancock Mutual Life Insurance
Company, Inc.
Ronald M. Petnuch (38) President and Senior Vice President, Federated Services Company
Treasurer ("FSC"); formerly Director of Proprietary Client
Services, Federated Administrative Services ("FAS") and
formerly Associate Corporate Counsel, Federated
Investors ("FI").
Charles L. Davis, Jr. (37) Vice President and Vice President, FAS.
Assistant Treasurer
Jay S. Neuman (47) Secretary Corporate Counsel, FI.
</TABLE>
8
<PAGE> 83
No person who is an officer or director of BT is an officer or Trustee
of the Equity 500 Index Portfolio. No director, officer or employee of Edgewood
Services, Inc. ("Edgewood") or any of its affiliates will receive any
compensation from the Equity 500 Index Portfolio for serving as an officer or
Trustee of the Equity 500 Index Portfolio. The Portfolio and certain other
investment companies advised by BT (the "BT Funds Complex") collectively pay
each Trustee who is not a director, officer or employee of BT, Edgewood, or any
of their affiliates an annual fee of $10,000, respectively, per annum plus
$1,250, respectively, per meeting attended and reimburses them for travel and
out-of-pocket expenses. For the years ended December 31, 1996 and 1997, the
Equity 500 Index Portfolio incurred Trustees fees equal to $9,865 and $2,723,
respectively.
The following table reflects fees paid to the Trustees of the Equity
500 Index Portfolio for their services to that Portfolio and to certain other
investment companies advised by BT (the "BT Fund Complex") for the year ended
December 31, 1997.
<TABLE>
<CAPTION>
TOTAL COMPENSATION FROM
AGGREGATE COMPENSATION BT FUNDS COMPLEX
FROM THE EQUITY PAID TO TRUSTEES
NAME OF TRUSTEE 500 INDEX PORTFOLIO (24 FUNDS)
--------------- ------------------- ----------
<S> <C> <C>
Charles P. Biggar $640.56 $27,500
S. Leland Dill $640.56 $27,500
Philip Saunders, Jr. $640.56 $27,500
</TABLE>
MANAGEMENT, ADMINISTRATIVE SERVICES AND DISTRIBUTION FEES
As described more fully in the Prospectus, the Manager is paid a
management fee as compensation for paying investment advisory fees and for
providing the Portfolios with advisory and asset allocation services.
Management fees incurred by the Portfolios for the fiscal years ended October
31 were approximately as follows: 1996, $10,853,000 of which approximately
$5,403,000 was paid by the Manager to the other investment advisers; 1997,
$13,730,443 of which approximately $7,061,014 was paid by the Manager to the
other investment advisers Management fees in the amount of approximately
$44,000 and $7,309 were waived by the Manager during the fiscal years ended
October 31, 1996 and 1997, respectively.
In addition, pursuant to a Management Agreement, the Manager is paid a
fee for providing administrative and management services (other than investment
advisory services) to the Funds. Such fees for the fiscal years ended October
31, 1996 and 1997 were approximately $95,944 and $275,120, respectively.
Also as described more fully in the Prospectus, the Manager (or
another entity approved by the Board) under a distribution plan adopted
pursuant to Rule 12b-1 under the 1940 Act, is paid by each Fund 0.25% per annum
of the average daily net assets of each Fund for distribution-related services.
Distribution fees pursuant to Rule 12b-1 under the 1940 Act for the fiscal
years ended October 31, 1996 and 1997 were approximately $188,590 and $470,306,
respectively.
BT provides administrative services to the Equity 500 Index Portfolio.
Under the administration and services agreement between the Equity 500 Index
Portfolio and BT, BT is obligated on a continuous basis to provide such
administrative services as the Equity 500 Index Portfolio Board reasonably
deems necessary for the proper administration of the Portfolio. BT generally
will assist in all aspects of the Portfolio's operations; supply and maintain
office facilities (which may be in BT's own offices), statistical and research
data, data processing services, clerical, accounting, bookkeeping and
recordkeeping services (including without limitation the maintenance of such
books and
9
<PAGE> 84
records as are required under the 1940 Act and the rules thereunder, except as
maintained by other agents), internal auditing, executive and administrative
services, and stationary and office supplies; prepare reports to investors;
prepare and file tax returns; supply financial information and supporting data
for reports to and filing with the SEC and various state Blue Sky authorities;
supply supporting documentation for meetings of the Equity 500 Index Portfolio
Board; provide monitoring reports and assistance regarding compliance with its
Declaration of Trust, By-Laws, investment objectives and policies and with
Federal and state securities laws; arrange for appropriate insurance coverage;
calculate net asset values, net income and realized capital gains or losses;
and negotiate arrangements with, and supervise and coordinate the activities
of, agents and others to supply services.
Pursuant to a sub-administration agreement between BT and Federated
Services Company ("Federated") (the "Sub- Administration Contract"), Federated
performs such sub-administration duties for the Equity 500 Index Portfolio as
from time to time may be agreed upon by BT and Federated. The
Sub-Administration Contract provides that Federated will receive such
compensation as from time to time may be agreed upon by Federated and BT. All
such compensation will be paid by BT.
For the years ended December 31, 1995, 1996 and 1997, BT earned,
$385,265, $752,981 and $1,215,073, respectively, as compensation for
administrative and other services provided to the Equity 500 Index Portfolio.
Brokers Transaction Services, Inc. ("BTS") is the distributor of the
Funds' shares, and, as such, receives an annualized fee of $50,000 from the
Manager for distributing the shares of the Mileage Trust and the American
AAdvantage Funds.
APPROACH TO STOCK SELECTION
Investment advisers to the corresponding Portfolios of the Balanced,
the Growth and Income and the International Equity Funds will select equity
securities which, in their opinion, have above average growth potential and are
also selling at a discount to the market. This approach focuses on the
purchase of a diverse group of stocks below their perceived economic value.
Each of the investment advisers determines the growth prospects of firms based
upon a combination of internal and external research using fundamental economic
cycle analysis and changing economic trends. The determination of value is
based upon the analysis of several characteristics of the issuer and its equity
securities including price to earnings ratio, price to book value ratio, assets
carried below market value, financial strength and dividend yield.
REDEMPTIONS IN KIND
Although each Fund intends to redeem shares in cash, each reserves the
right to pay the redemption price in whole or in part by a distribution of
readily marketable securities held by the applicable Fund's corresponding
Portfolio. However, shareholders always will be entitled to redeem shares for
cash up to the lesser of $250,000 or 1% of the applicable Fund's net asset
value during any 90 day period. Redemption in kind is not as liquid as a cash
redemption. In addition, if redemption is made in kind, shareholders who
receive securities and sell them could receive less than the redemption value
of their securities and could incur certain transactions costs.
INVESTMENT ADVISORY AGREEMENTS
Separate Investment Advisory Agreements between the investment
advisers (except Brandywine Asset Management, Inc.) the Balanced, the Growth
and Income, the International Equity, the Intermediate Bond and the Short-Term
Bond Funds and their corresponding Portfolios, as described in the Prospectus,
were initially approved by the Board, the AMR Trust Board and the initial
shareholders of the Mileage Trust and the AMR Trust effective as of October 1,
1995. An Investment Advisory Agreement with Brandywine Asset Management, Inc.
was approved by the shareholders of the Mileage Trust and interest holders of
the AMR Trust effective May 1, 1996. Each Fund Investment Advisory Agreement
provides that to the extent a Fund invests all of its investable assets in its
corresponding Portfolio, the adviser will not receive an advisory fee under
that Agreement. Following the acquisition of Hotchkis and Wiley ("Hotchkis")
by Merrill Lynch, Pierce, Fenner & Smith, Inc., a new Advisory Agreement with
Hotchkis was approved by the Board, effective as of November 12, 1996.
Following the merger of
10
<PAGE> 85
Morgan Stanley Group Inc. and Dean, Witter, Discover & Co., a new Advisory
Agreement with Morgan Stanley Asset Management Inc. was approved, effective May
31, 1997. Following the acquisition of Brandywine by Legg Mason, Inc., a new
Advisory Agreement with Brandywine was approved, effective January 16, 1998.
To the extent that the Funds invest all of their investable assets in
a corresponding portfolio of the AMR Trust, investment advisers receive a fee
on behalf of the Portfolio, and not the corresponding Fund. The following
table reflects the fees paid to the investment advisers from the AMR Trust for
the fiscal years ending October 31, 1995, 1996 and 1997:
<TABLE>
<CAPTION>
Investment Advisory Investment Advisory Investment Advisory
Adviser Fees for 1995 Fees for 1996 Fees for 1997
------- ------------- ------------- -------------
<S> <C> <C> <C>
Barrow, Hanley Mewhinney & Strauss, Inc. $660,836 $ 862,335 $1,052,749
Brandywine Asset Management, Inc. N/A* $ 297,073 $ 857,875
GSB Investment Management, Inc. $339,126 $ 575,720 $ 804,221
Hotchkis and Wiley $985,695 $1,327,731 $1,607,851
Independence Investment Associates, Inc. $660,824 $ 893,078 $1,110,438
Morgan Stanley Asset Management $356,643 $ 504,731 $ 885,253
Templeton Investment Counsel, Inc. $319,881 $ 410,013 $ 669,848
</TABLE>
*Brandywine was not an investment adviser of the Funds during this period.
Under the terms of the Equity 500 Index Portfolio's Investment
Advisory Agreement with BT, BT manages the Equity 500 Index Portfolio subject
to the supervision and direction of the Equity 500 Index Portfolio Board. BT
has agreed to: (1) act in strict conformity with the Equity 500 Index
Portfolio's Declaration of Trust and the 1940 Act, as the same may from time to
time be amended; (2) manage the Equity 500 Index Portfolio in accordance with
the Portfolio's investment objective, restrictions and policies; (3) make
investment decisions for the Equity 500 Index Portfolio; and (4) place purchase
and sale orders for securities and other financial institutions on behalf of
the Equity 500 Index Portfolio.
BT bears all expenses in connection with the performance of services
under the Agreement. The S&P 500 Index Fund and the Equity 500 Index Portfolio
each bear certain other expenses incurred in their operation, including: taxes,
interest, brokerage fees and commissions, if any; fees of Trustees of the
Portfolio or Trustees of the Trust who are not officers, directors or employees
of BT, Edgewood, the Manager or any of their affiliates; SEC fees and state
Blue Sky qualification fees; charges of custodians and transfer and dividend
disbursing agents; certain insurance premiums; outside auditing and legal
expenses; costs attributable to investor services, including telephone and
personnel expenses; costs of preparing and printing prospectuses and statements
of additional information for regulatory purposes and for distribution to
existing shareholders; costs of shareholders' reports and meetings of
shareholders, officers and Trustees of the Equity 500 Index Portfolio or
Trustees of the Trust, and any extraordinary expenses.
For the years ended December 31, 1995, 1996 and 1997, BT earned
$770,530, $1,505,963 and $2,430,147, respectively, as compensation for
investment advisory services provided to the Equity 500 Index Portfolio.
During the same periods, BT reimbursed $418,814, $870,024 and $1,739,490,
respectively, to the Equity 500 Index Portfolio to cover expenses.
BT may have deposit, loan and other commercial banking relationships
with the issuers of obligations that may be purchased on behalf of the Equity
500 Index Portfolio, including outstanding loans to such issuers that could be
repaid in whole or in part with the proceeds of securities so purchased. Such
affiliates deal, trade and invest for their own accounts in such obligations
and are among the leading dealers of various types of such obligations. BT has
informed the Equity 500 Index Portfolio that, in making its investment
decisions, it does not obtain or use material inside information in its
possession or in the possession of any of its affiliates. In making investment
recommendations for the Equity 500 Index Portfolio, BT will not inquire or take
into consideration whether an issuer of securities proposed for purchase or
sale by the Equity 500 Index Portfolio is a customer of BT, its parent or its
subsidiaries or affiliates and, in dealing with its customers, BT, its parent,
subsidiaries and affiliates will not inquire or take into consideration whether
securities of such customers are held by any fund managed by BT or any such
affiliate.
11
<PAGE> 86
Each Investment Advisory Agreement will automatically terminate if
assigned, and may be terminated without penalty at any time by the Manager, by
a vote of a majority of the Trustees or by a vote of a majority of the
outstanding voting securities of the applicable Fund on no less than thirty
(30) days' nor more than sixty (60) days' written notice to the investment
adviser, or by the investment adviser upon sixty (60) days' written notice to
the Trust. The Investment Advisory Agreements will continue in effect
provided that annually such continuance is specifically approved by a vote of
the Trustees, including the affirmative votes of a majority of the Trustees who
are not parties to the Agreement or "interested persons" (as defined in the
1940 Act) of any such party, cast in person at a meeting called for the purpose
of considering such approval, or by the vote of shareholders.
PORTFOLIO SECURITIES TRANSACTIONS
The Investment Advisory Agreements provide, in substance, that in
executing portfolio transactions and selecting brokers or dealers, the
principal objective of each investment adviser is to seek the best net price
and execution available. It is expected that securities ordinarily will be
purchased in the primary markets, and that in assessing the best net price and
execution available, each investment adviser shall consider all factors it
deems relevant, including the breadth of the market in the security, the price
of the security, the financial condition and execution capability of the broker
or dealer and the reasonableness of the commission, if any, for the specific
transaction and on a continuing basis.
BT may utilize the expertise of any of its worldwide subsidiaries and
affiliates to assist in its role as investment adviser. All orders for
investment transactions on behalf of the Equity 500 Index Portfolio are placed
by BT with broker-dealers and other financial intermediaries that it selects,
including those affiliated with BT. A BT affiliate will be used in connection
with a purchase or sale of an investment for the Equity 500 Index Portfolio
only if BT believes that the affiliate's charge for the transaction does not
exceed usual and customary levels. The Equity 500 Index Portfolio will not
invest in obligations for which BT or any of its affiliates is the ultimate
obligor or accepting bank. The Portfolio may, however, invest in the
obligations of correspondents and customers of BT.
In selecting brokers or dealers to execute particular transactions,
investment advisers are authorized to consider the "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
Mileage Trust (or American AAdvantage Funds') shares by such broker or the
servicing of Mileage Trust (or American AAdvantage Funds') shareholders by such
broker, and other information provided to the applicable Portfolio, to the
Manager and/or to the investment advisers (or their affiliates), provided,
however, that the investment adviser determines that it has received the best
net price and execution available. The investment advisers are also authorized
to cause a Portfolio to pay a commission to a broker or dealer who provides
such brokerage and research services for executing a portfolio transaction that
exceeds the amount of the commission another broker or dealer would have
charged for effecting that transaction. The Trustees, the Manager or the
investment advisers, as appropriate, must determine in good faith, however,
that such commission was reasonable in relation to the value of the brokerage
and research services provided viewed in terms of that particular transaction
or in terms of all the accounts over which the Manager or the investment
adviser exercises investment discretion.
For the fiscal years ended October 31, 1996 and 1997, the following
brokerage commissions were paid by the corresponding Portfolios.
<TABLE>
<CAPTION>
Portfolio 1996 1997
---------- ---- ----
<S> <C> <C>
Balanced $503,947 $562,493
Growth and Income $956,767 $1,192,792
International Equity $544,844 $956,160
Intermediate Bond* $0 $0
Short-Term Bond $0 $0
Money Market Funds $0 $0
</TABLE>
*The Intermediate Bond Portfolio commenced operations on September 15,
1997.
The commissions listed above were paid by the corresponding Portfolios
of the AMR Trust. Shareholders of the Funds bear only their pro-rata portion.
12
<PAGE> 87
For the fiscal years ended December 31, 1995, 1996 and 1997 the
Equity 500 Index Portfolio paid the following brokerage commissions: $172,924,
$289,791 and $341,058. The S&P 500 Index Fund was not operational prior to
March 1, 1998. Shareholders of the S&P 500 Index Fund bear only their pro-rata
portion of brokerage commissions.
Following is the portfolio turnover rate for the corresponding
Portfolios of the Funds for the fiscal years ended October 31, 1996 and 1997.
The portfolio turnover rate for the Intermediate Bond Portfolio is for the
period from September 15, 1997 through October 31, 1997. The portfolio
turnover rate for the Equity 500 Index Portfolio is for its fiscal years ended
December 31, 1996 and 1997.
<TABLE>
<CAPTION>
Portfolio 1996 1997
--------- ---- ----
<S> <C> <C>
Balanced 76% 105%
Growth and Income 40% 35%
International Equity 19% 15%
Intermediate Bond N/A* 47%
Short-Term Bond 304% 282%
Equity 500 Index Portfolio 15% 19%
---
</TABLE>
*The Intermediate Bond Portfolio commenced operations on September 15,
1997.
High portfolio turnover can increase a Fund's transaction costs and
generate additional capital gains or losses. The high portfolio turnover rate
for the Balanced Portfolio for 1997 was due to an unusually large redemption in
the Balanced Fund, which is not expected to reoccur. The portfolio turnover
rate for the Short-Term Bond Fund is expected to exceed 100% due to the active
style in which the portfolio is managed in response to changes in market
conditions.
The fees of the investment advisers are not reduced by reason of
receipt of such brokerage and research services. However, with disclosure to
and pursuant to written guidelines approved by the AMR Trust Board, or the
Equity 500 Index Portfolio Board, an investment adviser of a Portfolio or its
affiliated broker-dealer may execute portfolio transactions and receive usual
and customary brokerage commissions (within the meaning of Rule 17e-1 under the
1940 Act) for doing so.
During the fiscal year ended October 31, 1995, the following
commissions were paid to affiliated brokers:
<TABLE>
<CAPTION>
Portfolio Broker Affiliated With Commission
- --------- ------- --------------- ----------
<S> <C> <C> <C>
Balanced Sutro & Company Independence Investment Associates $18
International Equity Morgan Stanley, Inc. Morgan Stanley Asset Management Inc. $18,937
</TABLE>
The percentage of total commission of the International Equity Fund
paid to Morgan Stanley in 1995 was 4%, representing 8% of the International
Equity Fund's total dollar value of transactions. The percentage of total
commission of the Balanced Fund paid to Sutro & Company in 1995 was 0.005%,
representing 0.03% of the Balanced Fund's total dollar value of transactions.
During the fiscal year ended October 31, 1996, the following
commissions were paid to affiliated brokers:
<TABLE>
<CAPTION>
Portfolio Broker Affiliated With Commission
- --------- ------- --------------- ----------
<S> <C> <C> <C>
Balanced Sutro & Company Independence Investment Associates $125
Growth and Income Sutro & Company Independence Investment Associates $2,750
International Equity Fleming Martin Rowe-Price Fleming International, Inc. $2,142
International Equity Jardine Fleming Rowe-Price Fleming International, Inc. $1,002
International Equity Ord Minnett Rowe-Price Fleming International, Inc. $2,051
International Equity Robert Fleming & Co. Rowe-Price Fleming International, Inc. $20,129
International Equity Morgan Stanley Intl. Morgan Stanley Asset Management Inc. $3,892
</TABLE>
The percentages of total commissions of the Balanced Portfolio, the
Growth and Income Portfolio and the International Equity Portfolio paid to
affiliated brokers in 1996 were 0.02%, 0.29% and 2.68%, respectively. The
13
<PAGE> 88
transactions represented 0.03% of the Balanced Portfolio, 0.25% of the Growth
and Income Portfolio and 2.2% of the International Equity Portfolio's total
dollar value of portfolio transactions for the fiscal year ended October 31,
1996.
During the fiscal year ended October 31, 1997, the following
commissions were paid to affiliated brokers:
<TABLE>
<CAPTION>
Portfolio Broker Affiliated With Commission
- --------- ------- --------------- ----------
<S> <C> <C> <C>
Balanced Merrill Lynch & Co. Hotchkis and Wiley $105,166
Growth and Income Merrill Lynch & Co. Hotchkis and Wiley $43,886
International Equity Jardine Fleming Rowe-Price Fleming International, Inc. $3,260
International Equity Ord Minnett Rowe-Price Fleming International, Inc. $13,141
International Equity Robert Fleming & Co. Rowe-Price Fleming International, Inc. $81,109
</TABLE>
14
<PAGE> 89
<TABLE>
<CAPTION>
Portfolio Broker Affiliated With Commission
- --------- ------- --------------- ----------
<S> <C> <C> <C>
International Equity Morgan Stanley Intl. Morgan Stanley Asset Management Inc. $5,413
International Equity Merrill Lynch & Co. Hotchkis and Wiley $13,141
</TABLE>
The percentages of total commissions of the Balanced Portfolio, the
Growth and Income Portfolio and the International Equity Portfolio paid to
affiliated brokers in 1997 were 8.82%, 7.80% and 16.04%, respectively. The
transactions represented 5.75% of the Balanced Portfolio, 6.20% of the Growth
and Income Portfolio and 9.2% of the International Equity Portfolio's total
dollar value of portfolio transactions for the fiscal year ended October 31,
1997.
In certain instances there may be securities that are suitable for the
Equity 500 Index Portfolio as well as for one or more of BT's other clients.
Investment decisions for the Equity 500 Index Portfolio and for BT's other
clients are made with a view to achieving their respective investment
objectives. It may develop that a particular security is bought or sold for
only one client even though it might be held by, or bought or sold for, other
clients. Likewise, a particular security may be bought for one or more clients
when one or more clients are selling that same security. Some simultaneous
transactions are inevitable when several clients receive investment advice from
the same investment adviser, particularly when the same security is suitable
for the investment objectives of more than one client. When two or more clients
are simultaneously engaged in the purchase or sale of the same security, the
securities are allocated among clients in a manner believed to be equitable to
each. It is recognized that in some cases this system could have a detrimental
effect on the price or volume of the security as far as the Equity 500 Index
Portfolio is concerned. However, it is believed that the ability of the Equity
500 Index Portfolio to participate in volume transactions will produce better
executions for the Portfolio.
NET ASSET VALUE
It is the policy of the Money Market Fund, the Municipal Money Market
Fund and the U.S. Government Money Market Fund (collectively the "Money Market
Funds") to attempt to maintain a constant price per share of $1.00. There can
be no assurance that a $1.00 net asset value per share will be maintained. The
portfolio instruments held by the Money Market Funds' corresponding Portfolios
are valued based on the amortized cost valuation technique pursuant to Rule
2a-7 under the 1940 Act. This involves valuing an instrument at its cost and
thereafter assuming a constant amortization to maturity of any discount or
premium, even though the portfolio security may increase or decrease in market
value. Such market fluctuations are generally in response to changes in
interest rates. Use of the amortized cost valuation method requires the Money
Market 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
Trustees to be of high quality with minimal credit risks. The corresponding
portfolios of the Money Market Funds may invest in issuers or instruments that
at the time of purchase have received the highest short-term rating by two
Rating Organizations, such as "D-1" by Duff & Phelps and "F-1" by Fitch IBCA,,
Inc., and have received the next highest short-term rating by other Rating
Organizations, such as "A-2" by Standard & Poors and "P-2" by Moody's Investors
Service, Inc. See "Ratings of Municipal Obligations" and "Ratings of
Short-Term Obligations" for further information concerning ratings.
TAX INFORMATION
TAXATION OF THE FUNDS
To qualify as a regulated investment company ("RIC") under the
Internal Revenue Code of 1986, as amended ("Code"), each Fund (each of which is
treated as a separate corporation for these purposes) must, among other
requirements:
o Derive at least 90% of its gross income each taxable year from
dividends, interest, payments with respect to securities loans
and gains from the sale or other disposition of securities or
(in the case of the International Equity Fund) foreign
currencies, or certain other income, including (in the case of
the International Equity Fund) gains from futures or forward
contracts ("Income Requirement");
15
<PAGE> 90
o Diversify its investments in securities within certain
statutory limits; 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 International Equity Fund, net gains from foreign
currency transactions) plus, in the case of the Municipal
Money Market Fund, net interest income excludable from gross
income under section 103(a) of the Code ("Distribution
Requirement").
Each Fund has received either a ruling from the Internal Revenue
Service ("IRS"), or an opinion of counsel, that each Fund, as an investor in
its corresponding Portfolio, is or should be deemed to own a proportionate
share of the Portfolio's assets and to earn the income on that share for
purposes of determining whether the Fund satisfies all the Income and
Diversification Requirements described above to qualify as a RIC.
See the next section for a discussion of the tax consequences to the
Funds of certain investments by the Portfolios.
TAXATION OF THE PORTFOLIOS
Each Portfolio has received a ruling from the IRS or an opinion of
counsel to the effect that, among other things, each Portfolio is or should be
classified as a separate partnership for federal income tax purposes and is
not a "publicly traded partnership." As a result, each Portfolio is not or
should not be subject to federal income tax; instead, each investor in a
Portfolio, such as a Fund, is required to take into account in determining its
federal income tax liability its share of the Portfolio's income, gains,
losses, deductions, credits and tax preference items, without regard to whether
it has received any cash distributions from the Portfolio.
Because, as noted above, each Fund is deemed to own a proportionate
share of its corresponding Portfolio's assets and to earn a proportionate share
of its corresponding Portfolio's income for purposes of determining whether the
Fund satisfies the requirements to qualify as a RIC, each Portfolio intends to
conduct its operations so that its corresponding Fund will be able to satisfy
all those requirements.
Distributions to a Fund from its corresponding Portfolio (whether
pursuant to a partial or complete withdrawal or otherwise) will not result in
the Fund's recognition of any gain or loss for federal income tax purposes,
except that (1)gain will be recognized to the extent any cash that is
distributed exceeds the Fund's basis for its interest in the Portfolio before
the distribution, (2) income or gain will be recognized if the distribution is
in liquidation of the Fund's entire interest in the Portfolio and includes a
disproportionate share of any unrealized receivables held by the Portfolio, and
(3) loss will be recognized if a liquidation distribution consists solely of
cash and/or unrealized receivables. A Fund's basis for its interest in its
corresponding Portfolio generally will equal the amount of cash and the basis
of any property the Fund invests in the Portfolio, increased by the Fund's
share of the Portfolio's net income and gains and decreased by (a) the amount
of cash and the basis of any property the Portfolio distributes to the Fund and
(b) the Fund's share of the Portfolio's losses.
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 a Fund's cash assets, if any, or the proceeds
of redemption of a portion of a 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). A Portfolio
might realize capital gains or losses from any such sales, which would increase
or decrease its corresponding 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
16
<PAGE> 91
If the Balanced, the Growth and Income or the International Equity
Portfolio acquires stock in a foreign corporation that is a "passive foreign
investment company" ("PFIC") and holds the stock beyond the end of the year of
acquisition, its corresponding Fund will be subject to federal income tax on
the Fund's share of a portion of any "excess distribution" received by the
Portfolio on the stock or of any gain realized by the Portfolio from
disposition of the stock (collectively, "PFIC income"), plus interest thereon,
even if the Fund distributes the PFIC income as a taxable dividend to its
shareholders. A Fund may avoid this tax and interest if its corresponding
Portfolio elects to 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 futures contracts, involve complex rules that will
determine for federal income tax purposes the amount, character and timing of
recognition of gains and losses the International Equity Portfolio and the
Equity 500 Index Portfolio realize in connection therewith. The International
Equity Fund's share of its Portfolio's (1) income from foreign currencies
(except certain gains that may be excluded by future regulations) and (2)
income from transactions in futures and forward contracts derived with respect
to its business of investing in securities or foreign currencies will qualify
as allowable income for that Fund under the Income Requirement. Similarly, the
S&P 500 Index Fund's share of the Equity 500 Index Portfolio's income from
options and futures derived with respect to its business of investing
securities will so qualify for that Fund.
Dividends and interest received by the International Equity Portfolio
,and gains realized thereby, may be subject to income, withholding or other
taxes imposed by foreign countries and U.S. possessions that would reduce the
yield and/or total return on its securities. Tax treaties between certain
countries and the United States may reduce or eliminate these foreign taxes,
however, and many foreign countries do not impose taxes on capital gains on
investments by foreign investors.
TAXATION OF THE FUNDS' SHAREHOLDERS
Distributions by the Municipal Money Market Fund of the amount by
which the Fund's share of its corresponding Portfolio's income on tax-exempt
securities exceeds certain amounts disallowed as deductions, designated by the
Fund as "exempt-interest dividends," generally may be excluded from gross
income by its shareholders. Dividends paid by the Municipal Money Market Fund
will qualify as exempt-interest dividends if, at the close of each quarter of
its taxable year, at least 50% of the value of its total assets (including its
share of the Municipal Money Market Portfolio's assets) consists of securities
the interest on which is excludable from gross income under section 103(a) of
the Code. The Fund intends to continue to satisfy this requirement. The
aggregate dividends excludable from shareholders' gross income may not exceed
the Fund's net tax-exempt income. The shareholders' treatment of dividends
from the Fund under state and local income tax laws may differ from the
treatment thereof under the Code.
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.
If more than 50% of the value of the International Equity Fund's total
assets (including its share of the International Equity Portfolio's total
assets) at the close of its taxable year consists of securities of foreign
corporations, the Fund will be eligible to, and may, file an election with the
IRS that will enable the Fund's shareholders, in effect, to receive the benefit
of the foreign tax credit with respect to the Fund's share of any foreign and
U.S. possessions income taxes paid by the Portfolio. If the Fund makes this
election, the Fund will treat those taxes as dividends paid to its shareholders
and each shareholder will be required to (1) include in gross
17
<PAGE> 92
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 International
Equity Fund that represents income from foreign or U.S. possessions sources as
his own income from those sources and (3) either deduct the taxes deemed paid
by him in computing his taxable income or, alternatively, use the foregoing
information in calculating the foreign tax credit against his federal income
tax. If the election is made, the Fund will report to its shareholders shortly
after each taxable year their respective share of the Portfolio's income from
foreign and U.S. possessions sources and the taxes paid by the Portfolio to
foreign countries and U.S. possessions. Pursuant to that election, individuals
who have no more than $300 ($600 for married persons filing jointly) of
creditable foreign taxes included on Forms 1099 and all of whose foreign source
income is "qualified passive income" may elect each year to be exempt from the
extremely complicated foreign tax credit limitation and will be able to claim a
foreign tax credit without having to file the detailed Form 1116 that otherwise
is required.
The foregoing is only a summary of some of the important federal tax
considerations affecting the Funds and their shareholders and is not intended
as a substitute for careful tax planning. Accordingly, prospective investors
are advised to consult their own tax advisers for more detailed information
regarding the above and for information regarding federal, state, local and
foreign taxes.
YIELD AND TOTAL RETURN QUOTATIONS
The Funds commenced operations on November 1, 1995, and thus have
limited past performance. For purposes of advertising performance, and in
accordance with Securities and Exchange Commission staff interpretations, for
periods prior to November 1, 1995, the Funds have adopted the performance of
the Mileage Class of the American AAdvantage Funds, an open-end management
investment company with ten series, nine of which each have an identical
investment objective to one of the Funds and its corresponding Portfolio. The
Manager and the investment advisers described in the Prospectus also provide
investment management services to the American AAdvantage Funds. Like the
Funds, each series of the American AAdvantage Funds invests all of its
investable assets in a corresponding Portfolio of the AMR Trust. Performance
of the Funds will be different than that of the American AAdvantage Funds due
to the different expense structures between the Funds and the American
AAdvantage Funds.
A quotation of yield on shares of the Money Market Funds may appear
from time to time in advertisements and in communications to shareholders and
others. Quotations of yields are indicative of yields for the limited
historical period used but not for the future. Yield will vary as interest
rates and other conditions change. Yield also depends on the quality, length
of maturity and type of instruments invested in by the Money Market 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 Money Market Funds may be calculated in one of two
ways:
(1) Current Yield--the net average annualized return without
compounding accrued interest income. For a 7-day current yield, this
is computed by dividing the net change in value over a 7 calendar-day
period of a hypothetical account having one share at the beginning of
a 7 calendar-day period by the value of the account at the beginning
of this period to determine the "base period return." The quotient is
multiplied by 365 divided by 7 and stated to two decimal places. A
daily current yield is calculated by multiplying the net change in
value over one day by 365 and stating it to two decimal places.
Income other than investment income and capital changes, such as
realized gains and losses from the sale of securities and unrealized
appreciation and depreciation, are excluded in calculating the net
change in value of an account. However, this calculation includes the
aggregate fees and other expenses that are charged to all shareholder
accounts in a Fund (or to a particular class of the Money Market
Fund). In determining the net change in value of a hypothetical
account, this value is adjusted to reflect the value of any additional
shares purchased with dividends from the original share and dividends
declared on both the original share and any such additional shares.
(2) Effective Yield--the net average annualized return as computed by
compounding accrued interest income. In determining the 7-day
effective yield, a class of a Fund will compute the "base period
return" in
18
<PAGE> 93
the same manner used to compute the "current yield" over a 7
calendar-day period as described above. One is then added to the base
period return and the sum is raised to the 365/7 power. One is
subtracted from the result, according to the following formula:
EFFECTIVE YIELD = [ (BASE PERIOD RETURN + 1)365/7 ] - 1
The current and effective yields for the Funds are as follows:
<TABLE>
<CAPTION>
Current yield for the Effective yield for
seven-day period the seven-day period
American AAdvantage Current daily yield as ended ended
Mileage Funds: of October 31, 1997 October 31, 1997 October 31, 1997
-------------- ------------------- ---------------- ----------------
<S> <C> <C> <C>
Money Market Fund (1) 5.11% 5.10% 5.23%
Municipal Money Market Fund (2) 3.19% 3.19% 3.24%
U.S. Government Money Market Fund (3) 5.11% 5.03% 5.16%
</TABLE>
(1) Prior to fee waivers, the current daily yield, current seven day
yield, and effective yield for the Money Market Fund would have been 5.18%,
5.17% and 5.30%.
(2) Prior to fee waivers, the current daily yield, current seven day
yield, and effective yield for the Municipal Money Market Fund would have been
3.32%, 3.32% and 3.37%.
(3) Prior to fee waivers, the current daily yield, current seven day
yield, and effective yield for the U.S. Government Money Market Fund would
have been 5.27%, 5.19% and 5.32%.
The Municipal Money Market Fund also may advertise a tax-equivalent
current and effective yield. The tax- equivalent yields are calculated as
follows:
CURRENT YIELD/(1-APPLICABLE TAX RATE) = CURRENT TAX-EQUIVALENT YIELD
EFFECTIVE YIELD/(1-APPLICABLE TAX RATE) = EFFECTIVE TAX-EQUIVALENT YIELD
Based on these formulas, the current and effective tax-equivalent
yields for the Municipal Money Market Fund for the seven day period ending
October 31, 1997 were 5.29% and 5.37%, respectively (based upon a 39.6%
personal tax rate). Prior to fee waivers, the current and effective
tax-equivalent yields for the Municipal Money Market Fund for the seven day
period ending October 31, 1997 would have been 5.50% and 5.58%, respectively.
The advertised yields for the Variable NAV Funds (as defined in the
prospectus) are computed by dividing the net investment income per share earned
during a 30-day (or one month) period less the aggregate fees that are charged
to all shareholder accounts of the Fund in proportion to the 30-day (or one
month) period and the weighted average size of an account in that Fund by the
maximum offering price per share of the Fund on the last day of the period,
according to the following formula:
6
YIELD = 2{(a- b +1)- 1}
----
cd
where, with respect to a particular Fund, "a" is the dividends and interest
earned during the period; "b" is the sum of the expenses accrued for the period
(net of reimbursement, if any) and the aggregate fees that are charged to all
shareholder accounts in proportion to the 30-day (or one month) period and the
weighted average size of an account in the Fund; "c" is the average daily
number of Fund shares outstanding during the period that were entitled to
receive dividends; and "d" is the maximum offering price per Fund share on the
last day of the period. Based on this formula, the estimated 30-day yield for
the period ended October 31, 1997 for the Short-Term Bond Fund was 5.13%.
19
<PAGE> 94
The Short-Term Bond Fund also may advertise a monthly distribution
rate. The distribution rate gives the return of the Fund based solely on the
dividend payout to that Fund if someone was entitled to the dividends for an
entire month. A monthly distribution rate is calculated from the following
formula:
MONTHLY DISTRIBUTION RATE = A/P*(365/n)
where, with respect to the Fund, "A" is the dividend accrual per share during
the month, "P" is the share price at the end of the month and "n" is the number
of days in the month. Based on this formula, the monthly distribution rate for
the Short-Term Bond Fund for the month of October 1997 was 6.11%. The "monthly
distribution rate" is a non-standardized performance calculation and when used
in an advertisement will be accompanied by the appropriate standardized SEC
calculations.
The advertised total return for a Fund would be calculated by equating
an initial amount invested in 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 and the Funds indicated:
<TABLE>
<CAPTION>
For the period
from commencement
of active
For the one-year For the five-year For the ten-year operations
period ended period ended period ended through
October 31, October 31, October 31, October 31,
----------- ----------- ----------- -----------
1997(1) 1997(1)(2) 1997(1) 1997(1)(3)
------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Balanced Fund 19.52% 14.45% 12.88% 11.44%
Growth and Income Fund 27.60% 18.78% 16.10% 13.54%
International Equity Fund 18.44% 17.70% N/A(2) 11.87%
S&P500 Index Fund N/A(2) N/A(2) N/A(2) N/A(2)
Intermediate Bond Fund N/A(2) N/A(2) N/A(2) N/A(2)
Short-Term Bond Fund 5.90% 5.15% N/A(2) 6.78%
Money Market Fund-Mileage Class 5.14% 4.49% 5.91% 5.93%
Municipal Money Market Fund 3.18% N/A(2) N/A(2) 2.99%
U.S. Government Money Market Fund 5.00% 4.35% N/A(2) 4.27%
</TABLE>
(1) The Institutional Class is the initial class for each American
AAdvantage Fund except the S&P 500 Index Fund. Except for the S&P 500 Index
Fund, performance represents the total returns achieved by the Institutional
Class of the American AAdvantage Funds from the inception date of each Fund up
to the inception date of the Mileage Class of each American AAdvantage Fund,
returns of the Mileage Class of each American AAdvantage Fund since the
inception of the Class and returns of the Funds since their November 1, 1995
inception. Expenses of the Funds are different from those of the Mileage and
Institutional Classes of each American AAdvantage Fund and therefore total
returns for the Funds would vary from the returns shown had they been in
operation since inception of the American AAdvantage Funds. See Appendix A
for historical performance of the S&P 500 Composite Price Index. A portion of
the fees of the Balanced, the Growth and Income, the International Equity, the
Short-Term Income, the Money Market, the Municipal Money Market and the U.S.
Government Money Market Funds has been waived since their 11/1/95 inception.
(2) The Fund was not operational during this period.
(3) The Inception dates are as follows:
20
<PAGE> 95
<TABLE>
<CAPTION>
American AAdvantage Funds American AAdvantage Mileage Funds
------------------------- ----------------------------------
Institutional Class Mileage Class
------------------- -------------
<S> <C> <C> <C>
Balanced 7/17/87 8/1/94 11/1/95
Growth and Income 7/17/87 8/1/94 11/1/95
International Equity 8/7/91 8/1/94 11/1/95
Short-Term Bond 12/3/87 8/1/94 11/1/95
Money Market 9/1/87 11/1/91 11/1/95
Municipal Money Market 11/10/93 11/10/93 11/1/95
U.S. Government Money Market 3/2/92 11/1/93 11/1/95
</TABLE>
Each class of a Fund also may use "aggregate" total return figures for
various periods which represent the cumulative change in value of an investment
in a Fund for the specific period. Such total returns reflect changes in share
prices of a class of a Fund and assume reinvestment of dividends and
distributions.
Each Fund may give total returns from inception using the date when
the current managers began active management as the inception date. However,
returns using the actual inception date of the Fund will also be provided.
In reports or other communications to shareholders or in advertising
material, each Fund may from time to time compare its performance with that of
other mutual funds in rankings prepared by Lipper Analytical Services, Inc.,
Morningstar, Inc., IBC Financial Data, Inc. and other similar independent
services which monitor the performance of mutual funds or publications such as
the "New York Times", "Barrons" and the "Wall Street Journal." Each Fund also
may compare its performance with various indices prepared by independent
services such as Standard & Poor's, Morgan Stanley or Lehman Brothers or to
unmanaged indices that may assume reinvestment of dividends but generally do
not reflect deductions for administrative and management costs.
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.
Advertisements for the Funds may mention that the Funds offer a
variety of investment options. They also may compare the Funds to federally
insured investments, such as bank certificates of deposit and credit union
deposits, including the long-term effects of inflation on these types of
investments. Advertisements also may compare the historical rate of return of
different types of investments. Information concerning broker-dealers who sell
the Funds also may appear in advertisements for the Funds, including their
ranking as established by various publications compared to other
broker-dealers.
From time to time, the Manager may use contests as a means of
promoting the American AAdvantage Mileage Funds. Prizes may include free air
travel and/or hotel accommodations. Listing for certain of the Funds may be
found in newspapers under the heading "Amer AAdvant."
DESCRIPTION OF THE MILEAGE TRUST
The Mileage Trust, organized on February 22, 1995, (originally named
American AAdvantage Funds II) is an entity of the type commonly known as a
"Massachusetts business trust." Under Massachusetts law, shareholders of such
a trust may, under certain circumstances, be held personally liable for its
obligations. However, the Mileage Trust's Declaration of Trust contains an
express disclaimer of shareholder liability for acts or obligations of the
Mileage Trust and provides for indemnification and reimbursement of expenses
out of Mileage Trust property for any shareholder held personally liable for
the obligations of the Mileage Trust. The Declaration of Trust also provides
that the Mileage Trust may maintain appropriate insurance (for example,
fidelity bonding) for the protection of the Mileage Trust, its shareholders,
Trustees, officers, employees and agents to cover possible tort
21
<PAGE> 96
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 Mileage Trust itself was unable to meet
its obligations. The Mileage Trust has not engaged in any other business.
The corresponding Portfolios of the Balanced, the Growth and Income,
the International Equity and the Intermediate Bond Funds utilize a
multi-manager approach designed to reduce volatility by diversifying assets
over multiple investment management firms. Each adviser is carefully chosen by
the Manager through a rigorous screening process.
22
<PAGE> 97
CONTROL PERSONS AND 5% SHAREHOLDERS
The following persons may be deemed to control certain Funds by virtue
of their ownership of more than 25% of the outstanding shares of a Fund as of
January 31, 1998 The effect of their control is:
<TABLE>
<S> <C>
American AAdvantage Short-Term Bond Mileage Fund
- ------------------------------------------------
Bonnie Stern . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45%
760 Park Avenue
New York, NY 10021-4152
American AAdvantage U.S. Government Money Market Mileage Fund
- -------------------------------------------------------------
William H. Regnery II Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27%
P.O. Box 9800
Calabasas, CA 91372-0800
</TABLE>
In addition, the following persons own 5% or more of the outstanding
shares of a Fund or Class as of January 31, 1998:
<TABLE>
<S> <C>
American AAdvantage Growth and Income Mileage Fund
- --------------------------------------------------
Kimberly B., Gale B. and Howard A. Randall . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22%
1140 Parkinson Ave.
Palo Alto, CA 94301-3448
American AAdvantage International Equity Mileage Fund
- -----------------------------------------------------
Ronald P. Soltman and Judith M. Cram JT WROS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15%
6409 Westbourne Dr.
Brentwood, TN 37027-4804
American AAdvantage Short-Term Bond Mileage Fund
- ------------------------------------------------
Robert W. and Martha H. Baker . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11%
17 Ashton Court
Dallas, TX 75230-1977
Christopher and Linda C. Cavallaro . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9%
60 Gerard Avenue
New Hyde Park, NY 11040-1910
Paul A. and Eileen B. Finkel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8%
1101 Hidden Road
Fort Worth, TX 76107-1534
Edward Mueller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8%
200 West Adams, Suite 2500
Chicago, IL 60606-5232
American AAdvantage Municipal Money Market Mileage Fund
- -------------------------------------------------------
Eric and Catherine Kobren . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16%
21A Farm Street
Dover, MA 02030-2303
Harry V. Whitehill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8%
1533 N. Lee Trevino, Suite 210
El Paso, TX 79936-5161
American AAdvantage U.S. Government Money Market Mileage Fund
- -------------------------------------------------------------
William F. Regnerys Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22%
1100 North Market Street
Wilmington, DE 19801-1243
</TABLE>
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<PAGE> 98
<TABLE>
<S> <C>
William Regnery, Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10%
Western Shade Cloth Charitable Foundation
P.O. Box 1369
Boca Grande, FL 33921-1369
Martin H. Proyect, Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6%
OSO Loc Tract D Trust
P.O. Box 98
Santa Fe, NM 87504-0098
</TABLE>
OTHER INFORMATION
American Depository Receipts (ADRs), European Depository Receipts
(EDRs)-ADRs are depository receipts for foreign issuers in registered form
traded in U.S. securities markets, whereas, EDRs are in bearer form and traded
in European securities markets. These securities are not denominated in the
same currency as the securities into which they may be converted. Investing in
ADRs and EDRs involves greater risks than are normally present in domestic
investments. There is generally less publicly available information about
foreign companies and there may be less governmental regulation and supervision
of foreign stock exchanges, brokers and listed companies. In addition, such
companies may use different accounting and financial standards (and certain
currencies may become unavailable for transfer from a foreign currency),
resulting in a Fund's possible inability to convert immediately into U.S.
currency proceeds realized upon the sale of portfolio securities of the
affected foreign companies.
Bank Deposit Notes-Bank deposit notes are obligations of a bank,
rather than bank holding company corporate debt. The only structural
difference between bank deposit notes and certificates of deposit is that
interest on bank deposit notes is calculated on a 30/360 basis as are corporate
notes/bonds. Similar to certificates of deposit, deposit notes represent bank
level investments and, therefore, are senior to all holding company corporate
debt.
Bankers' Acceptances-Bankers' acceptances are short-term credit
instruments designed to enable businesses to obtain funds to finance commercial
transactions. Generally, an acceptance is a time draft drawn on a bank by an
exporter or an importer to obtain a stated amount of funds to pay for specific
merchandise. The draft is then "accepted" by a bank that, in effect,
unconditionally guarantees to pay the face value of the instrument on its
maturity date. The acceptance may then be held by the accepting bank as an
earning asset or it may be sold in the secondary market at the going rate of
discount for a specific maturity. Although maturities for acceptances can be
as long as 270 days, most acceptances have maturities of six months or less.
Cash Equivalents-Cash equivalents include certificates of deposit,
bearer deposit notes, bankers' acceptances, government obligations, commercial
paper, short-term corporate debt securities and repurchase agreements.
Certificates of Deposit-Certificates of deposit are issued against
funds deposited in an eligible bank (including its domestic and foreign
branches, subsidiaries and agencies), are for a definite period of time, earn a
specified rate of return and are normally negotiable.
Cover-Transactions using forward contracts, future contracts, options
on futures contracts and options on indices ("Financial Instruments"), other
than purchased options, expose a Portfolio to an obligation to another party.
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
24
<PAGE> 99
instruments and will, if the guidelines so require, set aside cash,
receivables, or liquid assets in a segregated account with its custodian in the
prescribed amount.
Assets used as cover or held in a segregated account cannot be sold
while the position in the corresponding Financial Instrument is open, unless
they are replaced with other appropriate assets. As a result, the commitment
of a large portion of a Portfolio's assets to cover or to segregated accounts
could impede portfolio management or the Portfolio's ability to meet redemption
requests or other current obligations.
Commercial Paper-Commercial paper refers to promissory notes
representing an unsecured debt of a corporation or finance company with a fixed
maturity of no more than 270 days. A variable amount master demand note (which
is a type of commercial paper) represents a direct borrowing arrangement
involving periodically fluctuating rates of interest under a letter agreement
between a commercial paper issuer and an institutional lender pursuant to which
the lender may determine to invest varying amounts.
Debentures-Debentures are unsecured debt securities. The holder of a
debenture is protected only by the general creditworthiness of the issuer.
Derivatives-Generally, a derivative is a financial arrangement, the
value of which is based on, or "derived" from, a traditional security, asset or
market index. Some "derivatives" such as mortgage-related and other
asset-backed securities are in many respects like any other investment,
although they may be more volatile or less liquid than more traditional debt
securities. There are, in fact, many different types of derivatives and many
different ways to use them. There are a range of risks associated with those
uses.
Forward Foreign Currency Exchange Contracts-A forward foreign currency
exchange contract ("forward contract") is a contract to purchase or sell a
currency at a future date. The two parties to the contract set the number of
days and the price. Forward contracts are used as a hedge against movements in
future foreign exchange rates. The corresponding Portfolio of the
International Equity Fund may enter into forward contracts to purchase or sell
foreign currencies for a fixed amount of U.S. dollars or other foreign
currency.
Forward contracts may serve as long hedges -- for example, the
Portfolio may purchase a forward contract to lock in the U.S. dollar price of a
security denominated in a foreign currency that the Portfolio intends to
acquire. Forward contracts also may serve as short hedges -- for example, the
Portfolio may sell a forward contract to lock in the U.S. dollar equivalent of
the proceeds from the anticipated sale of a security denominated in a foreign
currency or from the anticipated dividend or interest payments denominated in a
foreign currency. The Manager may seek to hedge against changes in the value
of a particular currency by using forward contracts on another foreign currency
or basket of currencies, the value of which the Manager believes will bear a
positive correlation to the value of the currency being hedged.
The cost to the Portfolio of engaging in forward contracts varies with
factors such as the currency involved, the length of the contract period and
the market conditions then prevailing. Because forward contracts are usually
entered into on a principal basis, no fees or commissions are involved. When
the Portfolio enters into a forward contract, it relies on the contra party to
make or take delivery of the underlying currency at the maturity of the
contract. Failure by the contra party to do so would result in the loss of any
expected benefit of the transaction.
Buyers and sellers of forward contracts can enter into offsetting
closing transactions by selling or purchasing, respectively, an instrument
identical to the instrument purchased or sold. Secondary markets generally do
not exist for forward contracts, with the result that closing transactions
generally can be made for forward contracts only by negotiating directly with
the contra party. Thus, there can be no assurance that the Portfolio will in
fact be able to close out a forward contract at a favorable price prior to
maturity. In addition, in the event of insolvency of the contra party, the
Portfolio might be unable to close out a forward contract at any time prior to
maturity. In either event, the Portfolio would continue to be subject to
market risk with respect to the position, and would continue to be required to
maintain a position in the securities or currencies that are the subject of the
hedge or to maintain cash or securities in a segregated account.
The precise matching of forward currency contract amounts and the
value of the securities involved generally will not be possible because the
value of such securities, measured in the foreign currency, will change after
the forward contract has been established. Thus, the Portfolio might need to
purchase or sell foreign
25
<PAGE> 100
currencies in the spot (cash) market to the extent such foreign currencies are
not covered by forward contracts. The projection of short-term currency market
movements is extremely difficult, and the successful execution of a short-term
hedging strategy is highly uncertain.
Full Faith and Credit Obligations of the U.S. Government-Securities
issued or guaranteed by the U.S. Treasury, backed by the full taxing power of
the U.S. Government or the right of the issuer to borrow from the U.S.
Treasury.
Futures Contracts-Futures contracts obligate a purchaser to take
delivery of a specific amount of an obligation underlying the futures contract
at a specified time in the future for a specified price. Likewise, the seller
incurs an obligation to deliver the specified amount of the underlying
obligation against receipt of the specified price. Futures are traded on both
U.S. and foreign commodities exchanges. Only currency futures will be
permitted in the corresponding Portfolio of the International Equity Fund.
Futures contracts will be traded for the same purposes as entering into forward
contracts
The 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.
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<PAGE> 101
If a Portfolio were unable to liquidate a futures contract due to the
absence of a liquid secondary market or the imposition of price limits, it
could incur substantial losses. The Portfolio would continue to be subject to
market risk with respect to the position. In addition, the Portfolio would
continue to be required to make daily variation margin payments and might be
required to maintain the position being hedged by the futures contract or
option thereon or to maintain cash or securities in a segregated account.
To the extent that a Portfolio enters into futures contracts, in each
case other than for bona fide hedging purposes (as defined by the Commodities
Futures Trading Commission ("CFTC"), the aggregate initial margin will not
exceed 5% of the liquidation value of a Portfolio's portfolio, after taking
into account unrealized profits and unrealized losses on any contracts that the
Portfolio has entered into. This policy does not limit to 5% the percentage of
the Portfolio's assets that are at risk in futures contracts.
Futures contracts require the deposit of initial margin valued at a
certain percentage of the contract and possibly adding "variation margin"
should the price of the contract move in an unfavorable direction. As with
forward contracts, the segregated assets must be either cash or high grade
liquid debt securities.
The ordinary spreads between prices in the cash and futures market,
due to differences in the nature of those markets, are subject to distortions.
First, all participants in the futures market are subject to initial deposit
and variation margin requirements. Rather than meeting additional variation
margin deposit requirements, investors may close futures contracts through
offsetting transactions which could distort the normal relationship between the
cash and futures markets. Second, the liquidity of the futures market depends
on participants entering into offsetting transactions rather than making or
taking delivery. To the extent participants decide to make or take delivery,
liquidity in the futures market could be reduced, thus producing distortion.
Third, from the point of view of speculators, the margin deposit requirements
in the futures market are less onerous than margin requirements in the
securities market. Therefore, increased participation by speculators in the
futures market may cause temporary price distortions. Due to the possibility of
distortion, a correct forecast of securities price or currency exchange rate
trends by the investment adviser may still not result in a successful
transaction.
In addition, futures contracts entail risks. Although an investment
adviser believes that use of such contracts will benefit a particular
Portfolio, if that investment adviser's investment judgment about the general
direction of, for example, an index is incorrect, a Portfolio's overall
performance would be poorer than if it had not entered into any such contract.
General Obligation Bonds-General obligation bonds are secured by the
pledge of the issuer's full faith, credit, and usually, taxing power. The
taxing power may be an unlimited ad valorem tax or a limited tax, usually on
real estate and personal property. Most states do not tax real estate, but
leave that power to local units of government.
Illiquid Securities - Historically, illiquid securities have included
securities subject to contractual or legal restrictions on resale because they
have not been registered under the 1933 Act, securities that are otherwise not
readily marketable and repurchase agreements having a remaining maturity of
longer than seven calendar days. Securities that have not been registered
under the 1933 Act are referred to as private placements or restricted
securities and are purchased directly from the issuer or in the secondary
market. Mutual funds do not typically hold a significant amount of these
restricted or other illiquid securities because of the potential for delays on
resale and uncertainty in valuation. Limitations on resale may have an adverse
effect on the marketability of portfolio securities and a mutual fund might be
unable to dispose of restricted or other illiquid securities promptly or at
reasonable prices and might thereby experience difficulty satisfying
redemptions within seven calendar days. A mutual fund also might have to
register such restricted securities in order to dispose of them resulting in
additional expense and delay. Adverse market conditions could impede such a
public offering of securities.
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the 1933 Act, including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be
readily resold or on an issuer's ability to honor a demand for repayment.
However, the fact that there are contractual or legal restrictions on resale of
such investments to the general public or to certain institutions may not be
indicative of their liquidity.
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<PAGE> 102
Index Futures Contracts and Options on Index Futures Contracts-The
Equity 500 Index Portfolio may invest in index futures contracts, options on
index futures contracts and options on securities indices.
Index Futures Contracts-U.S. futures contracts have been
designed by exchanges which have been designated "contracts markets" by the
CFTC and must be executed through a futures commission merchant, or brokerage
firm, which is a member of the relevant contract market. Futures contracts
trade on a number of exchange markets, and through their clearing corporations.
At the same time a futures contract on the Standard & Poor's
500 Composite Stock Price Index (the "S&P 500" or the "Index") is purchased or
sold, the Portfolio must allocate cash or securities as a deposit payment
("initial deposit"). It is expected that the initial deposit would be
approximately 1-1/2% to 5% of a contract's face value. Daily thereafter, the
futures contract is valued and the payment of "variation margin" may be
required.
Options on Index Futures Contracts-The purchase of a call
option on an index futures contract is similar in some respects to the purchase
of a call option on such an index.
The writing of a call option on a futures contract with
respect to the Index constitutes a partial hedge against declining prices of
the underlying securities that are deliverable upon exercise of the futures
contract. If the futures price at expiration of the option is below the
exercise price, the Portfolio will retain the full amount of the option premium
which provides a partial hedge against any decline that may have occurred in
the Portfolio's holdings. The writing of a put option on an index futures
contract constitutes a partial hedge against increasing prices of the
underlying securities that are deliverable upon exercise of the futures
contract. If the futures price at expiration of the option is higher than the
exercise price, the Portfolio will retain the full amount of the option premium
which provides a partial hedge against any increase in the price of securities
that the Portfolio intends to purchase. If a put or call option the Portfolio
has written is exercised, the Portfolio will incur a loss that will be reduced
by the amount of the premium it receives. Depending on the degree of
correlation between changes in the value of its portfolio securities and
changes in the value of its futures positions, the Portfolio's losses from
existing options on futures may to some extent be reduced or increased by
changes in the value of portfolio securities.
The purchase of a put option on a futures contract with
respect to the Index is similar in some respects to the purchase of protective
put options on the Index. For example, the Portfolio may purchase a put option
on an index futures contract to hedge against the risk of lowering securities
values.
The amount of risk the Portfolio assumes when it purchases an
option on a futures contract with respect to the Index is the premium paid for
the option plus related transaction costs. In addition to the correlation
risks discussed above, the purchase of such an option also entails the risk
that changes in the value of the underlying futures contract will not be fully
reflected in the value of the option purchased.
The Equity 500 Index Portfolio Board has adopted the
requirement that index futures contracts and options on index futures contracts
be used as a hedge. Stock index futures may be used on a continual basis to
equitize cash so that the Portfolio may maintain maximum equity exposure. The
Portfolio will not enter into any futures contracts or options on futures
contracts if immediately thereafter the amount of margin deposits on all the
futures contracts of the Portfolio and premiums paid on outstanding options on
futures contracts owned by the Portfolio would exceed 5% of the market value of
the total assets of the Portfolio.
Futures Contracts on Stock Indices-The Portfolio may enter
into contracts providing for the making and acceptance of a cash settlement
based upon changes in the value of an index of securities ("Futures
Contracts"). This investment technique is designed only to hedge against
anticipated future change in general market prices which otherwise might either
adversely affect the value of securities held by the Portfolio or adversely
affect the prices of securities which are intended to be purchased at a later
date for the Portfolio.
In general, each transaction in Futures Contracts involves the
establishment of a position which will move in a direction opposite to that of
the investment being hedged. If these hedging transactions are successful, the
futures positions taken for the Portfolio will rise in value by an amount that
approximately offsets the decline in value of the portion of the Portfolio's
investments that are being hedged. Should general market prices move in an
unexpected manner, the full anticipated benefits of Futures Contracts may not
be achieved or a loss may be realized.
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Although Futures Contracts would be entered into for cash
management purposes only, such transactions do involve certain risks. These
risks could include a lack of correlation between the Futures Contract and the
equity market, a potential lack of liquidity in the secondary market and
incorrect assessments of market trends which may result in worse overall
performance than if a Futures Contract had not been entered into.
Brokerage costs will be incurred and "margin" will be required
to be posted and maintained as a good- faith deposit against performance of
obligations under Futures Contracts written into by the Portfolio. The
Portfolio may not purchase or sell a Futures Contract (or options thereon) if
immediately thereafter its margin deposits on its outstanding Futures Contracts
(and its premium paid on outstanding options thereon) would exceed 5% of the
market value of the Portfolio's total assets.
Options on Securities Indices-The Portfolio may write (sell)
covered call and put options to a limited extent on the Index ("covered
options") in an attempt to increase income. Such options give the holder the
right to receive a cash settlement during the term of the option based upon the
difference between the exercise price and the value of the Index. The
Portfolio may forgo the benefits of appreciation on the Index or may pay more
than the market price or the Index pursuant to call and put options written by
the Portfolio.
By writing a covered call option, the Portfolio forgoes, in
exchange for the premium less the commission ("net premium"), the opportunity
to profit during the option period from an increase in the market value of the
Index above the exercise price. By writing a covered put option, the
Portfolio, in exchange for the net premium received, accepts the risk of a
decline in the market value of the Index below the exercise price.
The Portfolio may terminate its obligation as the writer of a
call or put option by purchasing an option with the same exercise price and
expiration date as the option previously written.
When the Portfolio writes an option, an amount equal to the
net premium received by the Portfolio is included in the liability section of
the Portfolio's Statement of Assets and Liabilities as a deferred credit. The
amount of the deferred credit will be subsequently marked to market to reflect
the current market value of the option written. The current market value of a
traded option is the last sale price or, in the absence of a sale, the mean
between the closing bid and asked price. If an option expires on its
stipulated expiration date or if the Portfolio enters into a closing purchase
transaction, the Portfolio will realize a gain (or loss if the cost of a
closing purchase transaction exceeds the premium received when the option was
sold), and the deferred credit related to such option will be eliminated.
The Portfolio has adopted certain other nonfundamental
policies concerning index option transactions that are discussed above. The
Portfolio's activities in index options also may be restricted by the
requirements of the Code, for qualification as a RIC.
The hours of trading for options on the Index may not conform
to the hours during which the underlying securities are traded. To the extent
that the option markets close before the markets for the underlying securities,
significant price and rate movements can take place in the underlying
securities markets that cannot be reflected in the option markets. It is
impossible to predict the volume of trading that may exist in such options, and
there can be no assurance that viable exchange markets will develop or
continue.
Because options on securities indices require settlement in
cash, BT may be forced to liquidate portfolio securities to meet settlement
obligations.
Options on Stock Indices-The Portfolio may purchase and write
put and call options on stock indices listed on stock exchanges. A stock index
fluctuates with changes in the market values of the stocks included in the
index. Options on stock indices generally are similar to options on stock
except that the delivery requirements are different. Instead of giving the
right to take or make delivery of stock at a specified price, an option on a
stock index gives the holder the right to receive a cash "exercise settlement
amount" equal to (a) the amount, if any, by which the fixed exercise price of
the option exceeds (in the case of a put) or is less than (in the case of a
call) the closing value of the underlying index on the date of exercise,
multiplied by (b) a fixed "index multiplier." The writer of the option is
obligated, in return for the premium received, to make delivery of this amount.
The writer may offset
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<PAGE> 104
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 the
Portfolio will realize a gain or loss from the purchase or writing of options
on an index depends upon movements in the level of stock prices in the stock
market generally or, in the case of certain indices, in an industry or market
segment, rather than movements in the price of a particular stock.
Loan Participation Interests-Loan participation interests represent
interests in bank loans made to corporations. The contractual arrangement with
the bank transfers the cash stream of the underlying bank loan to the
participating investor. Because the issuing bank does not guarantee the
participations, they are subject to the credit risks generally associated with
the underlying corporate borrower. In addition, because it may be necessary
under the terms of the loan participation for the investor to assert through
the issuing bank such rights as may exist against the underlying corporate
borrower, in the event the underlying corporate borrower fails to pay principal
and interest when due, the investor may be subject to delays, expenses and
risks that are greater than those that would have been involved if the investor
had purchased a direct obligation (such as commercial paper) of such borrower.
Moreover, under the terms of the loan participation, the investor may be
regarded as a creditor of the issuing bank (rather than of the underlying
corporate borrower), so that the issuer also may be subject to the risk that
the issuing bank may become insolvent. Further, in the event of the bankruptcy
or insolvency of the corporate borrower, the loan participation may be subject
to certain defenses that can be asserted by such borrower as a result of
improper conduct by the issuing bank. The secondary market, if any, for these
loan participations is extremely limited and any such participations purchased
by the investor are regarded as illiquid.
Loan Transactions-Loan transactions involve the lending of securities
to a broker-dealer or institutional investor for its use in connection with
short sales, arbitrages or other security transactions. The purpose of a
qualified loan transaction is to afford a lender the opportunity to continue to
earn income on the securities loaned and at the same time earn fee income or
income on the collateral held by it.
Securities loans will be made in accordance with the following
conditions: (1) the Portfolio must receive at least 100% collateral in the
form of cash or cash equivalents, securities of the U.S. Government and its
agencies and instrumentalities, and approved bank letters of credit; (2) the
borrower must increase the collateral whenever the market value of the loaned
securities (determined on a daily basis) rises above the level of collateral;
(3) the Portfolio must be able to terminate the loan after notice, at any time;
(4) the Portfolio must receive reasonable interest on the loan or a flat fee
from the borrower, as well as amounts equivalent to any dividends, interest or
other distributions on the securities loaned, and any increase in market value
of the loaned securities; (5) the Portfolio may pay only reasonable custodian
fees in connection with the loan; and (6) voting rights on the securities
loaned may pass to the borrower, provided, however, that if a material event
affecting the investment occurs, the AMR Trust Board or the Equity 500 Index
Portfolio Board, as appropriate, must be able to terminate the loan and vote
proxies or enter into an alternative arrangement with the borrower to enable
the AMR Trust Board or the Equity 500 Index Portfolio Board, as appropriate, to
vote proxies.
While there may be delays in recovery of loaned securities or even a
loss of rights in collateral supplied should the borrower fail financially,
loans will be made only to firms deemed by the AMR Trust Board or the Equity
500 Index Portfolio Board, as appropriate, to be of good financial standing and
will not be made unless the consideration to be earned from such loans would
justify the risk. Such loan transactions are referred to in this Statement of
Additional Information as "qualified" loan transactions.
The cash collateral so acquired through qualified loan transactions
may be invested only in those categories of high quality liquid securities
previously authorized by the AMR Trust Board.
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
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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.
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<PAGE> 106
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 four highest Moody's Investors Service, Inc. ("Moody's") ratings
for long-term obligations (or issuers thereof) are Aaa, Aa, A and Baa.
Obligations rated Aaa are judged by Moody's to be of the best quality.
Obligations rated Aa are judged to be of high quality by all standards.
Together with the Aaa group, such debt comprises what is generally known as
high-grade debt. Moody's states that debt rated Aa is rated lower than Aaa
debt because margins of protection or other elements make long-term risks
appear somewhat larger than for Aaa debt. Obligations which are rated A by
Moody's possess many favorable investment attributes and are considered "upper
medium-grade obligations." Obligations which are rated Baa by Moody's are
considered to be medium grade obligations, i.e., they are neither highly
protected or poorly secured. Interest payments and principal security appear
adequate for the present but certain protective elements may be lacking or may
be characteristically unreliable over any great length of time. Moody's also
supplies numerical indicators 1, 2, and 3 to rating categories. The modifier 1
indicates that the security is in the higher end of its rating category; the
modifier 2 indicates a mid-range ranking; and modifier 3 indicates a ranking
toward the lower end of the category.
The four highest Standard & Poor's ratings for long-term obligations
are AAA, AA, A and BBB. Obligations rated AAA have the highest rating assigned
by Standard & Poor's. Capacity to pay interest and repay principal is
extremely strong. Obligations rated AA have a very strong capacity to pay
interest and repay principal and differs from the highest rated issues only in
a small degree. Obligations rated A have a strong capacity to pay principal
and interest, although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions. Obligations rated
BBB by Standard & Poor's are regarded as having adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
Duff & Phelps' four highest ratings for long-term obligations are AAA,
AA, A and BBB. Obligations rated AAA have the highest credit quality with risk
factors being negligible. Obligations rated AA are of high credit quality and
strong protection factors. Risk is modest but may vary slightly from time to
time because of economic conditions. Obligations rated A have average but
adequate protection factors. However, risk factors are more variable and
greater in periods of economic stress. Obligations rated BBB have below
average protection factors
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<PAGE> 107
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 Municipal Obligations-Moody's ratings for state and
municipal short-term obligations are designated Moody's Investment Grade or
"MIG" with variable rate demand obligations being designated as "VMIG." A VMIG
rating also may be assigned to commercial paper programs which are
characterized as having variable short-term maturities but having neither a
variable rate nor demand feature. Factors used in determination of ratings
include liquidity of the borrower and short-term cyclical elements.
Standard & Poor's uses SP-1, SP-2, and SP-3 to rate short-term
municipal obligations. A rating of SP-1 denotes a very strong or strong
capacity to pay principal and interest.
Ratings of Short-term Obligations-The rating P-1 is the highest
short-term rating assigned by Moody's. Among the factors considered by Moody's
in assigning ratings are the following: (1) evaluations of the management of
the issuer; (2) economic evaluation of the issuer's industry or industries and
an appraisal of speculative-type risks which may be inherent in certain areas;
(3) evaluation of the issuer's products in relation to competition and customer
acceptance; (4) liquidity; (5) amount and quality of long-term debt; (6) trend
of earnings over a period of ten years; (7) financial strength of a parent
company and the relationships which exist with the issuer; and (8) recognition
by the management of obligations which may be present or may arise as a result
of public interest questions and preparations to meet such obligations.
Short-term obligations (or issuers thereof) rated A-1 by Standard &
Poor's have the following characteristics. Liquidity ratios are adequate to
meet cash requirements. The issuer has access to at least two additional
channels of borrowing. Basic earnings and cash flow have an upward trend with
allowance made for unusual circumstances. Typically, the issuer's industry is
well established and the issuer has a strong position within the industry. The
reliability and quality of management are unquestioned. Relative strength or
weakness of the above factors determines whether the issuer's short-term
obligation is rated A-1, A-2, or A-3.
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<PAGE> 108
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
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<PAGE> 109
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.
Rights and Warrants-Rights are short-term warrants issued in
conjunction with new stock issues. Warrants are options to purchase an
issuer's securities at a stated price during a stated term. There is no
specific limit on the percentage of assets a Portfolio may invest in rights and
warrants, although the ability of some of the Portfolios to so invest is
limited by their investment objectives or policies.
Separately Traded Registered Interest and Principal Securities and
Zero Coupon Obligations-Separately traded registered interest and principal
securities or "STRIPS" and zero coupon obligations are securities that do not
make regular interest payments. Instead they are sold at a discount from their
face value. Each Portfolio will take into account as income a portion of the
difference between these obligations' purchase prices and their face values.
Because they do not pay coupon income, the prices of STRIPS and zero coupon
obligations can be very volatile when interest rates change. STRIPS are zero
coupon bonds issued by the U.S. Treasury.
Tax, Revenue or Bond Anticipation Notes-Tax, revenue or bond
anticipation notes are issued by municipalities in expectation of future tax or
other revenues which are payable from these specific taxes or revenues. Bond
anticipation notes usually provide interim financing in advance of an issue of
bonds or notes, the proceeds of which are used to repay the anticipation notes.
Tax-exempt commercial paper is issued by municipalities to help finance
short-term capital or operating needs in anticipation of future tax or other
revenue.
U.S. Government Securities-U.S. Government securities are issued or
guaranteed by the U.S. Government and include U.S. Treasury obligations (see
definition below) and securities issued by U.S. agencies and instrumentalities.
U. S. Government agencies or instrumentalities that issue or guarantee
securities include, but are not limited to, the Federal Housing Administration,
Farmers Home Administration, Export-Import Bank of the United States, Small
Business Administration, GNMA, General Services Administration, Central Bank
for Cooperatives, Federal Home Loan Banks, FHLMC, Federal Intermediate Credit
Banks, Federal Land Banks, Maritime Administration, Tennessee Valley Authority,
District of Columbia Armory Board, Inter-American Development Bank,
Asian-American Development Bank, Agency for International Development, Student
Loan Marketing Association and International Bank of Reconstruction and
Development.
Obligations of U.S. Government agencies and instrumentalities may or
may not be supported by the full faith and credit of the United States. Some
are backed by the right of the issuer to borrow from the Treasury; others are
supported by discretionary authority of the U.S. Government to purchase the
agencies' obligations; while still others, such as the Student Loan Marketing
Association, are supported only by the credit of the instrumentality. In the
case of securities not backed by the full faith and credit of the United
States, the investor must look principally to the agency issuing or
guaranteeing the obligation for ultimate repayment, and may not be able to
assert a claim against the United States itself in the event the agency or
instrumentality does not meet its commitment.
U.S. Treasury Obligations-U.S. Treasury obligations include bills,
notes and bonds issued by the U.S. Treasury and Separately Traded Registered
Interest and Principal component parts of such obligations known as STRIPS.
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<PAGE> 110
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 Delayed Delivery Securities-Delivery of and payment
for securities on a when-issued or delayed delivery basis may take place as
long as a month or more after the date of the purchase commitment. The value of
these securities is subject to market fluctuation during this period and no
income accrues to a Portfolio until settlement takes place. A Portfolio
maintains with the Custodian a segregated account containing high grade liquid
securities in an amount at least equal to these commitments. When entering into
a when-issued or delayed delivery transaction, the Portfolio will rely on the
other party to consummate the transaction; if the other party fails to do so,
the Portfolio may be disadvantaged.
FINANCIAL STATEMENTS
The Mileage Trust's Annual Report to Shareholders for the period ended
October 31, 1997 is supplied with the Statement of Additional Information, and
the financial statements and accompanying notes appearing therein are
incorporated by reference in this Statement of Additional Information.
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APPENDIX A
The following table shows the performance of the S&P 500 Composite
Stock Price Index for the periods indicated. Stock prices fluctuated widely
during the periods but were higher at the end than at the beginning. The
results shown should not be considered as a representation of the income or
capital gain or loss that may be generated by the Index in the future or should
this be considered a representation of the past or future performance of the
S&P 500 Index Fund.
<TABLE>
<CAPTION>
YEAR TOTAL RETURN YEAR TOTAL RETURN YEAR TOTAL RETURN
---- ------------ ---- ------------ ---- ------------
<S> <C> <C> <C> <C> <C>
1997 33.26% 1973 (14.66)% 1949 18.79%
1996 23.03% 1972 18.98% 1948 5.50%
1995 37.49% 1971 14.31% 1947 5.71%
1994 1.32% 1970 4.01% 1946 (8.07)%
1993 9.99% 1969 (8.51)% 1945 36.44%
1992 7.67% 1968 11.06% 1944 19.75%
1991 30.55% 1967 23.98% 1943 25.90%
1990 (3.17)% 1966 (10.06)% 1942 20.34%
1989 31.49% 1965 12.45% 1941 (11.59)%
1988 16.81% 1964 16.48% 1940 (9.78)%
1987 5.23% 1963 22.08% 1939 (0.41)%
1986 18.47% 1962 (8.73)% 1938 31.12%
1985 32.16% 1961 26.89% 1937 (35.03)%
1984 6.27% 1960 0.47% 1936 33.92%
1983 22.51% 1959 11.96% 1935 47.67%
1982 21.41% 1958 43.36% 1934 (1.44)%
1981 (4.91)% 1957 (10.78)% 1933 53.99%
1980 32.42% 1956 6.56% 1932 (8.19)%
1979 18.44% 1955 31.56% 1931 (43.34)%
1978 6.56% 1954 52.62% 1930 (24.90)%
1977 (7.18)% 1953 (0.99)% 1929 (8.42)%
1976 23.84% 1952 18.73% 1928 43.61%
1975 37.20% 1951 24.02% 1927 37.49%
1974 (26.47)% 1950 31.71% 1926 11.62%
</TABLE>
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<PAGE> 112
TABLE OF CONTENTS
<TABLE>
<S> <C>
Investment Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Trustees and Officers of the Mileage Trust and the AMR Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Trustees and Officers of the Equity 500 Index Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Management, Administrative Services and Distribution Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Approach to Stock Selection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Redemptions in Kind . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Investment Advisory Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Portfolio Securities Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Net Asset Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Tax Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Yield and Total Return Quotations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Description of the Mileage Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Control Persons and 5% Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Appendix A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
</TABLE>
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STATEMENT OF ADDITIONAL INFORMATION
AMERICAN AADVANTAGE FUNDS(R)
AMERICAN AADVANTAGE MILEAGE FUNDS(sm)
-- PLATINUM CLASS(sm) --
MARCH 1, 1998
The American AAdvantage Money Market Fund(sm) (the "Money Market Fund"),
the American AAdvantage Municipal Money Market Fund(sm) (the "Municipal Money
Market Fund"), and the American AAdvantage U.S. Government Money Market
Fund(sm), formerly the American AAdvantage U.S. Treasury Money Market Fund (the
"U.S. Government Money Market Fund"), are three separate investment portfolios
of the American AAdvantage Funds (the "AAdvantage Trust"). The American
AAdvantage Money Market Mileage Fund (the "Mileage Fund") is a separate
investment portfolio of the American AAdvantage Mileage Funds (the "Mileage
Trust") (individually, a "Fund" and, collectively, the "Funds"). The AAdvantage
Trust and the Mileage Trust (collectively the "Trusts") are open-end,
diversified management investment companies. Each Fund consists of multiple
classes of shares designed to meet the needs of different groups of investors.
This Statement of Additional Information ("SAI") relates only to the Platinum
Class of the Funds.
Each Fund seeks its investment objective by investing all of its
investable assets in a corresponding portfolio (individually, a "Portfolio" and,
collectively, the "Portfolios") of the AMR Investment Services Trust ("AMR
Trust") that has a similar name and an identical investment objective to the
investing Fund.
This SAI should be read in conjunction with the Platinum Class prospectus
dated March 1, 1998 ("Prospectus"), a copy of which may be obtained without
charge by calling (800) 388-3344.
This SAI is not a prospectus and is authorized for distribution to
prospective investors only if preceded or accompanied by a current Prospectus.
INVESTMENT RESTRICTIONS
Each Fund has the following fundamental investment policy that enables it
to invest in a corresponding Portfolio of the AMR Trust:
Notwithstanding any other limitation, the Fund may invest all of
its investable assets in an open-end management investment company
with substantially the same investment objectives, policies and
limitations as the Fund. For this purpose, "all of the Fund's
investable assets" means that the only investment securities that
will be held by the Fund will be the Fund's interest in the
investment company.
All other fundamental investment policies and the non-fundamental
policies of each Fund and its corresponding Portfolio are identical. Therefore,
although the following discusses the investment policies of each Portfolio and
the AMR Trust's Board of Trustees ("AMR Trust Board"), it applies equally to
each Fund and the AAdvantage Trust's Board of Trustees ("AAdvantage Board") and
the Mileage Trust's Board of Trustees ("Mileage Trust Board"), as applicable.
In addition to the investment limitations noted in the Prospectus, the
following seven restrictions have been adopted by each Portfolio and may be
changed with respect to any Portfolio only by the majority vote of that
Portfolio's outstanding interests. "Majority of the outstanding voting
securities" under the Investment Company Act of 1940, as amended (the "1940
Act"), and as used herein means, with respect to the Portfolio, the lesser of
(a) 67% of the interests of the Portfolio present at the meeting if the holders
of more than 50% of the interests are present and represented at the interest
holders' meeting or (b) more than 50% of the interests of the Portfolio.
Whenever a Fund is requested to vote on a change in the investment restrictions
of its corresponding Portfolio, that Fund will hold a meeting of its
shareholders and will cast its votes as instructed by its shareholders. The
percentage of a Fund's votes representing that Fund's shareholders not voting
will be voted by the AAdvantage Board and the Mileage Trust Board in the same
proportion as those Fund shareholders who do, in fact, vote.
<PAGE> 114
No Portfolio may:
1. Purchase or sell real estate or real estate limited partnership
interests, provided, however, that the Portfolio may invest in securities
secured by real estate or interests therein or issued by companies which
invest in real estate or interests therein when consistent with the other
policies and limitations described in the Prospectus.
2. Purchase or sell commodities (including direct interests and/or leases
in oil, gas or minerals) or commodities contracts, except with respect to
forward foreign currency exchange contracts, foreign currency futures
contracts and when-issued securities when consistent with the other
policies and limitations described in the Prospectus.
3. Engage in the business of underwriting securities issued by others
except to the extent that, in connection with the disposition of
securities, the Portfolio may be deemed an underwriter under federal
securities law.
4. Make loans to any person or firm, provided, however, that the making
of a loan shall not be construed to include (i) the acquisition for
investment of bonds, debentures, notes or other evidences of indebtedness
of any corporation or government which are publicly distributed or (ii)
the entry into repurchase agreements and further provided, however, that
each Portfolio may lend its investment securities to broker-dealers or
other institutional investors in accordance with the guidelines stated in
the Prospectus.
5. Purchase from or sell portfolio securities to its officers, Trustees
or other "interested persons" of the AMR Trust, as defined in the 1940
Act, including its investment advisers and their affiliates, except as
permitted by the 1940 Act and exemptive rules or orders thereunder.
6. Issue senior securities except that the Portfolio may engage in
when-issued and forward commitment transactions.
7. Borrow money, except from banks or through reverse repurchase
agreements for temporary purposes in an aggregate amount not to exceed
10% of the value of its total assets at the time of borrowing. In
addition, although not a fundamental policy, the Portfolios intend to
repay any money borrowed before any additional portfolio securities are
purchased. See "Other Information" for a further description regarding
reverse repurchase agreements.
The following non-fundamental investment restriction applies to each
Portfolio and may be changed with respect to a Portfolio by a majority vote of
the AMR Trust Board: no Portfolio may purchase securities on margin, effect
short sales (except that the Portfolio may obtain such short-term credits as may
be necessary for the clearance of purchases or sales of securities) or purchase
or sell call options or engage in the writing of such options.
All Portfolios may invest up to 10% of their total assets in the
securities of other investment companies to the extent permitted by law. A
Portfolio may incur duplicate advisory or management fees when investing in
another mutual fund.
TRUSTEES AND OFFICERS OF THE TRUSTS AND THE AMR TRUST
The AAdvantage Board, the Mileage Trust Board and the AMR Trust Board
provide broad supervision over each Trust's affairs. AMR Investment Services,
Inc. (the "Manager") is responsible for the management and the administration of
each Trust's assets, and each Trust's officers are responsible for the
respective Trust's operations. The Trustees and officers of the Trusts and the
AMR Trust are listed below, together with their principal occupations during the
past five years. Unless otherwise indicated, the address of each person listed
below is 4333 Amon Carter Boulevard, MD 5645, Fort Worth, Texas 76155.
2
<PAGE> 115
<TABLE>
<CAPTION>
POSITION WITH
NAME, AGE AND ADDRESS EACH TRUST PRINCIPAL OCCUPATION DURING PAST 5 YEARS
- --------------------- ------------- ----------------------------------------
<S> <C> <C>
William F. Quinn* (50) Trustee and President, AMR Investment Services, Inc.
President (1986-Present); Chairman, American Airlines
Employees Federal Credit Union (October
1989-Present); Trustee, American Performance Funds
(1990-1994); Director, Crescent Real Estate
Equities, Inc. (1994 - Present); Trustee, American
AAdvantage Funds (1987-Present); Trustee, American
AAdvantage Mileage Funds (1995-Present).
Alan D. Feld (60) Trustee Partner, Akin, Gump, Strauss, Hauer & Feld, LLP
1700 Pacific Avenue (1960-Present)#; Director, Clear Channel
Suite 4100 Communications (1984-Present); Director,
Dallas, Texas 75201 CenterPoint Properties, Inc. (1994-Present);
Trustee, American AAdvantage Funds (1993-Present);
Trustee, American AAdvantage Funds(1996- Present);
Trustee American AAdvantage Mileage Funds
(1996-Present).
Ben J. Fortson (65) Trustee President and CEO, Fortson Oil Company
301 Commerce Street (1958-Present); Director, Kimbell Art Foundation
Suite 3301 (1964-Present); Director, Burnett Foundation
Fort Worth, Texas 76102 (1987-Present); Honorary Trustee, Texas Christian
University (1986-Present); Trustee, American
AAdvantage Funds (1996-Present); Trustee, American
AAdvantage Mileage Funds (1996-Present).
John S. Justin (81) Trustee Chairman and Chief Executive Officer, Justin
2821 West Seventh Street Industries, Inc. (a diversified holding company)
Fort Worth, Texas 76107 (1969-Present); Executive Board Member, Blue
Cross/Blue Shield of Texas (1985-Present); Board
Member, Zale Lipshy Hospital (June 1993-Present);
Trustee, Texas Christian University (1980-Present);
Director and Executive Board Member, Moncrief
Radiation Center (1985-Present); Director, Texas
New Mexico Enterprises (1984-1993); Director, Texas
New Mexico Power Company (1979-1993); Trustee,
American AAdvantage Funds (1989-Present); Trustee,
American AAdvantage Mileage Funds (1995-Present).
Stephen D. O'Sullivan* (62) Trustee Consultant (1994-Present); Vice President and
Controller (1985-1994), American Airlines, Inc.;
Trustee, American AAdvantage Funds (1987-Present);
Trustee, American AAdvantage Mileage Funds
(1995-Present).
</TABLE>
3
<PAGE> 116
<TABLE>
<CAPTION>
POSITION WITH
NAME, AGE AND ADDRESS EACH TRUST PRINCIPAL OCCUPATION DURING PAST 5 YEARS
- --------------------- ------------- ----------------------------------------
<S> <C> <C>
Roger T. Staubach (56) Trustee Chairman of the Board and Chief Executive Officer
6750 LBJ Freeway of The Staubach Company (a commercial real estate
Dallas, TX 75240 company) (1982-Present); Director, Halliburton
Company (1991-Present); Director, Brinker
International (1993-Present); Director, International
Home Foods, Inc. (1997-Present); National Advisory
Board, The Salvation Army; Trustee, Institute for
Aerobics Research; Member, Executive Council,
Daytop/Dallas; Member, National Board of Governors,
United Way of America, former quarterback of the
Dallas Cowboys professional football team; Trustee,
American AAdvantage Mileage Funds (1995-Present).
Kneeland Youngblood, M.D. (41) (41) Trustee Physician (1982-Present);President, Youngblood
2305 Cedar Springs Road Enterprises, Inc. (a
Suite 401 health care private investment
Dallas, Texas 75201 and management firm) (1983-Present); Trustee,
Teachers Retirement System of Texas (1996-
Present); Director, United States Enrichment
Corporation (1993-Present), Director, Just For the
Kids (1995-Present); Director, Starwood Financial
Trust (1998-Present); Member, Council on Foreign
Relations (1995-Present); Trustee, American AAdvantage
Funds (1996-Present); Trustee, American AAdvantage
Mileage Funds (1996-Present).
Nancy A. Eckl (35) Vice President Vice President, AMR Investment Services, Inc.
(December 1990-Present).
Michael W. Fields (44) Vice President Vice President, AMR Investment Services, Inc.
(August 1988-Present).
Barry Y. Greenberg (34) Vice President Director, Legal and Compliance, AMR Investment
and Assistant Services, Inc. (1995-Present); Branch Chief
Secretary (1992-1995) and Staff Attorney (1988-1992),
Securities and Exchange Commission.
Rebecca L. Harris (31) Treasurer Director of Finance (1995-Present), Controller
(1991-1995), AMR Investment Services, Inc.
John B. Roberson (39) Vice President Vice President, AMR Investments Services, Inc.
(1991-Present).
Thomas E. Jenkins, Jr. (31) Assistant Secretary Senior Compliance Analyst, AMR Investment
Services, Inc. (1996-Present); Staff Accountant
(1994-1996) and Compliance Examiner (1991-1994),
Securities and Exchange Commission.
</TABLE>
4
<PAGE> 117
<TABLE>
<CAPTION>
POSITION WITH
NAME, AGE AND ADDRESS EACH TRUST PRINCIPAL OCCUPATION DURING PAST 5 YEARS
- --------------------- ------------- ----------------------------------------
<S> <C> <C>
Adriana R. Posada (43) Assistant Secretary Senior Compliance Analyst (1996-Present) and
Compliance Analyst (1993-1996), AMR Investment
Services, Inc.; Special Sales Representative,
American Airlines, Inc. (1991-1993).
Robert J. Zutz (45) Assistant Partner, Kirkpatrick & Lockhart LLP (law firm)
1800 Massachusetts Ave. NW Secretary
Washington, D.C. 20036
</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 (excluding reimbursements) are reflected
in the following table for the fiscal year ended October 31, 1997.
<TABLE>
<CAPTION>
Pension or
Retirement
Aggregate Aggregate Benefits Total
Compensation Compensation Accrued as Estimated Compensation
From the From the Part of the Annual From AAdvantage
AAdvantage Mileage Trusts' Benefits Upon Funds Complex
Name of Trustee Trust Trust Expenses Retirement (27 Funds)
- --------------- ------------ ------------ ----------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
William F. Quinn $0 $0 $0 $0 $0
Alan D. Feld $15,962 $15,962 $0 $0 $63,850
Ben J. Fortson $6,802 $6,802 $0 $0 $27,209
John S. Justin $225 $225 $0 $0 $901
Stephen D. O'Sullivan $493 $493 $0 $0 $1,973
Roger T. Staubach $8,269 $8,269 $0 $0 $33,076
Kneeland Youngblood, M.D. $9,525 $9,525 $0 $0 $38,099
</TABLE>
MANAGEMENT, ADMINISTRATIVE SERVICES AND DISTRIBUTION FEES
As described more fully in the Prospectus, the Manager is paid a
management fee as compensation for its administrative services, for paying
investment advisory fees and for providing the Portfolios with advisory and
asset allocation services. Management fees for the AAdvantage Trust for the
fiscal years ended October 31 were approximately as follows: 1995, $7,603,000 of
which approximately $3,985,000 was paid by the Manager to the other investment
advisers; 1996, $10,853,000 of which approximately $5,403,000 was paid by the
Manager to the other investment advisers; and 1997, $13,730,443 of which
approximately $7,061,014 was paid by the Manager to
5
<PAGE> 118
the other investment advisers. Management fees in the amount of approximately
$29,000, $44,000 and $7,309 were waived by the Manager during the fiscal years
ended October 31, 1995, 1996 and 1997, respectively. These amounts include
payments by Portfolios in the AAdvantage Trust other than the Funds.
In addition to the management fee, the Manager is paid an administrative
services fee for providing administrative and management services (other than
investment advisory services) to the Funds. Administrative services fees for the
AAdvantage Trust for the fiscal years ended October 31 were approximately as
follows: 1995, $2,731,000; 1996, $2,893,400; and 1997, $4,538,345.
Administrative service fees in the amount of approximately $9,000 were waived by
the Manager during the fiscal year ended October 31, 1995. These amounts include
payments by Portfolios in the AAdvantage Trust other than the Funds.
Brokers Transaction Services, Inc. ("BTS"), is the distributor of
the Funds' shares and, as such, receives an annualized fee of $50,000 from the
Manager for distributing the shares of the Trusts.
REDEMPTIONS IN KIND
Although each Fund intends to redeem shares in cash, each reserves the
right to pay the redemption price in whole or in part by a distribution of
readily marketable securities held by the applicable Fund's corresponding
Portfolio. However, shareholders always will be entitled to redeem shares for
cash up to the lesser of $250,000 or 1% of the applicable Fund's net asset value
during any 90 day period. Redemption in kind is not as liquid as a cash
redemption. In addition, if redemption is made in kind, shareholders who receive
securities and sell them could receive less than the redemption value of their
securities and could incur certain transactions costs.
NET ASSET VALUE
It is the policy of the Funds to attempt to maintain a constant price per
share of $1.00. There can be no assurance that a $1.00 net asset value per share
will be maintained. The portfolio instruments held by each Fund's corresponding
Portfolio are valued based on the amortized cost valuation technique pursuant to
Rule 2a-7 under the 1940 Act. This involves valuing an instrument at its cost
and thereafter assuming a constant amortization to maturity of any discount or
premium, even though the portfolio security may increase or decrease in market
value. Such market fluctuations are generally in response to changes in interest
rates. Use of the amortized cost valuation method requires the Funds'
corresponding Portfolios to purchase instruments having remaining maturities of
397 days or less, to maintain a dollar-weighted average portfolio maturity of 90
days or less, and to invest only in securities determined by the AMR Trust Board
to be of high quality with minimal credit risks. The corresponding portfolios of
the Money Market Funds may invest in issuers or instruments that at the time of
purchase have received the highest short-term rating by two Rating
Organizations, such as "D-1" by Duff & Phelps and "F-1" by Fitch IBCA, Inc., and
have received the next highest short-term rating by other Rating Organizations,
such as "A-2" by Standard & Poors and "P-2" by Moody's Investors Service, Inc.
See "Ratings of Municipal Obligations" and "Ratings of Short-Term Obligations"
for further information concerning ratings.
TAX INFORMATION
TAXATION OF THE FUNDS
To qualify for treatment as a regulated investment company ("RIC") under
the Internal Revenue Code of 1986, as amended ("Code"), each Fund (each of which
is treated as a separate corporation for these purposes) must, among other
requirements:
Derive at least 90% of its gross income each taxable year from
dividends, interest, payments with respect to securities loans and
gains from the sale or other disposition of securities or certain
other income;
Diversify its investments in securities within certain statutory
limits; and
6
<PAGE> 119
Distribute annually to its shareholders at least 90% of its
investment company taxable income (generally, taxable net investment
income plus net short-term capital gain) plus, in the case of the
Municipal Money Market Fund, net interest income excludable from
gross income under Section 103(a) of the Code ("Distribution
Requirement").
Each Fund has received either a ruling from the Internal Revenue Service
("IRS") or an opinion of counsel that the Fund, as an investor in its
corresponding Portfolio, is deemed to own a proportionate share of the
Portfolio's assets and to earn the income on that share for purposes of
determining whether the Fund satisfies the Income and Diversification
Requirements described above to qualify as a RIC.
See the next section for a discussion of the tax consequences to the
Funds of certain investments by the Portfolios.
TAXATION OF THE PORTFOLIOS
Each Portfolio has received a ruling from the IRS or an opinion of
counsel to the effect that, among other things, each Portfolio is or should be
classified as a separate partnership for federal income tax purposes and is not
a "publicly traded partnership." As a result, each Portfolio is not or should
not be subject to federal income tax; instead, each investor in a Portfolio,
such as a Fund, is required to take into account in determining its federal
income tax liability its share of the Portfolio's income, gains, losses,
deductions, credits and tax preference items, without regard to whether it has
received any cash distributions from the Portfolio.
Because, as noted above, each Fund is deemed to own a proportionate share
of its corresponding Portfolio's assets and to earn a proportionate share of its
corresponding Portfolio's income for purposes of determining whether the Fund
satisfies the requirements to qualify as a RIC, each Portfolio intends to
conduct its operations so that its corresponding Fund will be able to satisfy
all those requirements.
Distributions to a Fund from its corresponding Portfolio (whether
pursuant to a partial or complete withdrawal or otherwise) will not result in
the Fund's recognition of any gain or loss for federal income tax purposes,
except that (1) gain will be recognized to the extent any cash that is
distributed exceeds the Fund's basis for its interest in the Portfolio before
the distribution, (2) income or gain will be recognized if the distribution is
in liquidation of the Fund's entire interest in the Portfolio and includes a
disproportionate share of any unrealized receivables held by the Portfolio and
(3) loss will be recognized if a liquidation distribution consists solely of
cash and/or unrealized receivables. A Fund's basis for its interest in its
corresponding Portfolio generally will equal the amount of cash and the basis of
any property the Fund invests in the Portfolio, increased by the Fund's share of
the Portfolio's net income and gains and decreased by (a) the amount of cash and
the basis of any property the Portfolio distributes to the Fund and (b) the
Fund's share of the Portfolio's losses.
The Municipal Money Market Fund's corresponding Portfolio may acquire
zero coupon or other securities issued with original issue discount. As an
investor in the Portfolio that holds those securities, the Municipal Money
Market Fund would have to include in its income its share of the original issue
discount that accrues on the securities during the taxable year, even if the
Portfolio (and, hence, the Fund) receives no corresponding payment on the
securities during the year. Because each Fund annually must distribute
substantially all of its investment company taxable income, including any
original issue discount, to satisfy the Distribution Requirement and avoid
imposition of the 4% excise tax described in the Prospectus, the Municipal Money
Market Fund may be required in a particular year to distribute as a dividend an
amount that is greater than the total amount of cash it actually receives. Those
distributions would be made from the Fund's cash assets, if any, or the proceeds
of redemption of a portion of the Municipal Money Market Fund's interest in its
corresponding Portfolio (which redemption proceeds would be paid from the
Portfolio's cash assets or the proceeds of sales of portfolio securities, if
necessary). The Portfolio might realize capital gains or losses from any such
sales, which would increase or decrease the Municipal Money Market Fund's
investment company taxable income and/or net capital gain (the excess of net
long-term capital gain over net short-term capital loss). In addition, any such
gains might be realized on the disposition of securities held for less than
three months. Because of the Short-Short Limitation applicable to the Fund, any
such gains would reduce the Portfolio's ability to sell other securities held
for less than three months that it might wish to sell in the ordinary course of
its portfolio management.
7
<PAGE> 120
TAXATION OF THE FUNDS' SHAREHOLDERS
Distributions by the Municipal Money Market Fund of the amount by which
the Fund's share of its corresponding Portfolio's income on tax-exempt
securities exceeds certain amounts disallowed as deductions, designated by the
Fund as "exempt-interest dividends," generally may be excluded from gross income
by its shareholders. Dividends paid by the Municipal Money Market Fund will
qualify as exempt-interest dividends if, at the close of each quarter of its
taxable year, at least 50% of the value of its total assets (including its share
of the Municipal Money Market Portfolio's assets) consists of securities the
interest on which is excludable from gross income under Section 103(a) of the
Code. The Municipal Money Market Fund intends to continue to satisfy this
requirement. The aggregate dividends excludable from shareholders' gross income
may not exceed the Municipal Money Market Fund's net tax-exempt income. The
shareholders' treatment of dividends from the Municipal Money Market Fund under
state and local income tax laws may differ from the treatment thereof under the
Code.
Exempt-interest dividends received by a corporate shareholder may be
indirectly subject to the alternative minimum tax. In addition, entities or
persons who are "substantial users" (or persons related to "substantial users")
of facilities financed by private activity bonds ("PABs") or industrial
development bonds ("IDBs") should consult their tax advisers before purchasing
shares of the Municipal Money Market Fund because, for users of certain of these
facilities, the interest on those bonds is not exempt from federal income tax.
For these purposes, the term "substantial user" is defined generally to include
a "non-exempt person" who regularly uses in trade or business a part of a
facility financed from the proceeds of PABs or IDBs.
Up to 85% of social security and railroad retirement benefits may be
included in taxable income for recipients whose adjusted gross income (including
income from tax-exempt sources such as the Municipal Money Market Fund) plus 50%
of their benefits exceeds certain base amounts. Exempt-interest dividends from
the Municipal Money Market Fund still are tax-exempt to the extent described
above; they are only included in the calculation of whether a recipient's income
exceeds the established amounts.
The foregoing is only a summary of some of the important federal tax
considerations affecting the Funds and their shareholders and is not intended as
a substitute for careful tax planning. Accordingly, prospective investors are
advised to consult their own tax advisers for more detailed information
regarding the above and for information regarding federal, state, local and
foreign taxes.
YIELD AND TOTAL RETURN QUOTATIONS
The Platinum Class of the AAdvantage Trust commenced operations on
November 7, 1995 and the Platinum Class of the Mileage Trust commenced
operations on January 29, 1996. For purposes of advertising performance, and in
accordance with Securities and Exchange Commission staff interpretations, the
Funds in the AAdvantage Trust have adopted the performance of the Institutional
Class of the Funds in the AAdvantage Trust for periods prior to the inception
date. The Mileage Fund has adopted the performance of the American AAdvantage
Money Market Mileage Fund - Mileage Class for periods prior to its inception
date. The performance results for the Platinum Class will be lower, because the
figures for the other classes (except for the Mileage Fund) do not reflect the
12b-1 fees, Administrative Services Plan fees or other class expenses that will
be borne by the Platinum Class.
A quotation of yield on shares of the Funds may appear from time to time
in advertisements and in communications to shareholders and others. Quotations
of yields are indicative of yields for the limited historical period used but
not for the future. Yield will vary as interest rates and other conditions
change. Yield also depends on the quality, length of maturity and type of
instruments invested in by the Funds, and the applicable Fund's operating
expenses. A comparison of the quoted yields offered for various investments is
valid only if yields are calculated in the same manner. In addition, other
similar investment companies may have more or less risk due to differences in
the quality or maturity of securities held.
The yields of the Funds may be calculated in one of two ways:
(1) Current Yield--the net average annualized return without compounding
accrued interest income. For a 7-day current yield, this is computed by
dividing the net change in value over a 7 calendar-day period of a
hypothetical account having one share at the beginning of a 7
calendar-day period by the value of the account at the beginning of this
period to determine the "base period return". The quotient is multiplied
by 365 divided by 7 and stated to two decimal places. A daily current
yield is calculated by multiplying the net
8
<PAGE> 121
change in value over one day by 365 and stating it to two decimal places.
Income other than investment income and capital changes, such as realized
gains and losses from the sale of securities and unrealized appreciation
and depreciation, are excluded in calculating the net change in value of
an account. However, this calculation includes the aggregate fees and
other expenses that are charged to all shareholder accounts in a Fund. In
determining the net change in value of a hypothetical account, this value
is adjusted to reflect the value of any additional shares purchased with
dividends from the original share and dividends declared on both the
original share and any such additional shares.
(2) Effective Yield--the net average annualized return as computed by
compounding accrued interest income. In determining the 7-day effective
yield, a Fund will compute the "base period return" in the same manner
used to compute the "current yield" over a 7 calendar-day period as
described above. One is then added to the base period return and the sum
is raised to the 365/7 power. One is subtracted from the result,
according to the following formula:
EFFECTIVE YIELD = [ (BASE PERIOD RETURN + 1)365/7 ] - 1
The current and effective yields for the Funds are as follows:
<TABLE>
<CAPTION>
Current yield for Effective yield for
Current daily the seven-day period the seven-day period
yield as of ended ended
Platinum Class October 31, 1997 October 31, 1997 October 31, 1997
-------------- ---------------- -------------------- --------------------
<S> <C> <C> <C>
Money Market Fund 4.83% 4.82% 4.94%
Municipal Money Market Fund 2.79% 2.79% 2.83%
U.S. Government Money Market Fund 4.72% 4.64% 4.75%
Mileage Fund 4.69% 4.68% 4.79%
</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,
1997 were 4.62% and 4.69%, respectively (based upon a 39.6% personal tax rate).
The advertised total return for a class of a Fund would be calculated by
equating an initial amount invested in a class of a Fund to the ending
redeemable value, according to the following formula:
P(1 + T)N= ERV
where "P" is a hypothetical initial payment of $1,000; "T" is the average annual
total return for the Fund; "n" is the number of years involved; and "ERV" is the
ending redeemable value of a hypothetical $1,000 payment made in the Fund at the
beginning of the investment period covered.
9
<PAGE> 122
Based on this formula, annualized total returns were as follows for the
periods indicated:
<TABLE>
<CAPTION>
For the For the
For the five-year ten-year For the period from
one-year period period ended period ended commencement of
ended October October 31, October 31, operations through
Platinum Class 31, 1997(1) 1997(1) 1997(1) October 31, 1997(1)
- -------------- --------------- ------------ ------------ -------------------
<S> <C> <C> <C> <C>
Money Market Fund 4.88% 4.59% 5.95% 5.98%
Municipal Money Market Fund 2.82% N/A(2) N/A(2) 2.97%
U. S. Government Money Mkt. Fund (3) 4.63% 4.35% N/A(2) 4.25%
Mileage Fund 4.72% 4.36% 5.81% 5.84%
</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 Fund was not operational during this period.
(3) Prior to March 1, 1997, the U.S. Government Money Market Fund was known as
the U.S. Treasury Money Market Fund and operated under different investment
policies.
Each Fund also may use "aggregate" total return figures for various
periods which represent the cumulative change in value of an investment in a
Fund for the specific period. Such total returns reflect changes in share prices
of a Fund and assume reinvestment of dividends and distributions.
In reports or other communications to shareholders or in advertising
material, each class of a Fund may from time to time compare its performance
with that of other mutual funds in rankings prepared by Lipper Analytical
Services, Inc., Morningstar, Inc., IBC Financial Data, Inc. and other similar
independent services which monitor the performance of mutual funds or
publications such as the "New York Times," "Barrons" and the "Wall Street
Journal." Each Fund also may compare its performance with various indices
prepared by independent services such as Standard & Poor's, Morgan Stanley or
Lehman Brothers or to unmanaged indices that may assume reinvestment of
dividends but generally do not reflect deductions for administrative and
management costs.
Advertisements for the Funds may mention that the Funds offer a variety
of investment options. They also may compare the Funds to federally insured
investments such as bank certificates of deposit and credit union deposits,
including the long-term effects of inflation on these types of investments.
Advertisements also may compare the historical rate of return of different types
of investments. Information concerning broker-dealers who sell the Funds also
may appear in advertisements for the Funds, including their ranking as
established by various publications compared to other broker-dealers.
From time to time, the Manager may use contests as a means of promoting
the American AAdvantage Funds and the American AAdvantage Mileage Funds. Prizes
may include free air travel and/or hotel accommodations. Listings for certain of
the Funds may be found in newspapers under the heading Amer AAdvant.
Each Fund may advertise the standard deviation of its returns for various
time periods and compare its standard deviation to that of various indices.
Standard deviation of returns over time is a measure of volatility. It indicates
the spread of returns about their central tendency or mean. In theory, a Fund
that is more volatile should receive a higher return in exchange for taking
extra risk. Standard deviation is a well-accepted statistic to gauge the
riskiness of an investment strategy and measure its historical volatility as a
predictor of risk, although the measure is subject to time selection bias.
DESCRIPTION OF THE TRUST
The AAdvantage Trust, organized on January 16, 1987 and the Mileage
Trust, organized on February 22, 1995, (originally named American AAdvantage
Funds II) are entities of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable for its obligations. However, each
Trust's Declaration of Trust contains an express disclaimer of shareholder
liability for acts or obligations of the Trust and provides for indemnification
and
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<PAGE> 123
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.
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<PAGE> 124
CONTROL PERSONS AND 5% SHAREHOLDERS
There are no persons deemed to control any of the Funds by virtue of
their ownership of more than 25% of the outstanding shares of a Fund as of
January 31, 1998.
The following persons are record owners of 5% or more of the outstanding
shares of the Platinum Class of the Funds as of January 31, 1998:
<TABLE>
<S> <C>
American AAdvantage Money Market Fund
Southwest Securities, Inc..................................................84%
1201 Elm Street, Suite 4300
Dallas, TX 75270-2180
American AAdvantage Municipal Money Market Fund
Southwest Securities, Inc..................................................87%
1201 Elm Street, Suite 4300
Dallas, TX 75270-2180
American AAdvantage U.S. Government Money Market Fund
Southwest Securities, Inc..................................................89%
1201 Elm Street, Suite 4300
Dallas, TX 75270-2180
American AAdvantage Money Market Mileage Fund
Southwest Securities, Inc..................................................44%
1201 Elm Street, Suite 4300
Dallas, TX 75270-2180
</TABLE>
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
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<PAGE> 125
fluctuating rates of interest under a letter agreement between a commercial
paper issuer and an institutional lender pursuant to which the lender may
determine to invest varying amounts.
Derivatives-Generally, a derivative is a financial arrangement, the value
of which is based on, or "derived" from, a traditional security, asset or market
index. Some "derivatives" such as mortgage-related and other asset-backed
securities are in many respects like any other investment, although they may be
more volatile or less liquid than more traditional debt securities. There are,
in fact, many different types of derivatives and many different ways to use
them. There are a range of risks associated with those uses.
Full Faith and Credit Obligations of the U.S. Government-Securities
issued or guaranteed by the U.S. Treasury, backed by the full taxing power of
the U.S. Government or the right of the issuer to borrow from the U.S. Treasury.
Illiquid Securities. Historically, illiquid securities have included
securities subject to contractual or legal restrictions on resale because they
have not been registered under the 1933 Act, securities that are otherwise not
readily marketable and repurchase agreements having a remaining maturity of
longer than seven calendar days. Securities that have not been registered under
the 1933 Act are referred to as private placements or restricted securities and
are purchased directly from the issuer or in the secondary market. Mutual funds
do not typically hold a significant amount of these restricted or other illiquid
securities because of the potential for delays on resale and uncertainty in
valuation. Limitations on resale may have an adverse effect on the marketability
of portfolio securities and a mutual fund might be unable to dispose of
restricted or other illiquid securities promptly or at reasonable prices and
might thereby experience difficulty satisfying redemptions within seven calendar
days. A mutual fund also might have to register such restricted securities in
order to dispose of them resulting in additional expense and delay. Adverse
market conditions could impede such a public offering of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the 1933 Act, including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. However, the
fact that there are contractual or legal restrictions on resale of such
investments to the general public or to certain institutions may not be
indicative of their liquidity.
Loan Participation Interests-Loan participation interests represent
interests in bank loans made to corporations. The contractual arrangement with
the bank transfers the cash stream of the underlying bank loan to the
participating investor. Because the issuing bank does not guarantee the
participations, they are subject to the credit risks generally associated with
the underlying corporate borrower. In addition, because it may be necessary
under the terms of the loan participation for the investor to assert through the
issuing bank such rights as may exist against the underlying corporate borrower,
in the event the underlying corporate borrower fails to pay principal and
interest when due, the investor may be subject to delays, expenses and risks
that are greater than those that would have been involved if the investor had
purchased a direct obligation (such as commercial paper) of such borrower.
Moreover, under the terms of the loan participation, the investor may be
regarded as a creditor of the issuing bank (rather than of the underlying
corporate borrower), so that the issuer also may be subject to the risk that the
issuing bank may become insolvent. Further, in the event of the bankruptcy or
insolvency of the corporate borrower, the loan participation may be subject to
certain defenses that can be asserted by such borrower as a result of improper
conduct by the issuing bank. The secondary market, if any, for these loan
participations is extremely limited and any such participations purchased by the
investor are regarded as illiquid.
Loan Transactions-Loan transactions involve the lending of securities to
a broker-dealer or institutional investor for its use in connection with short
sales, arbitrages or other security transactions. The purpose of a qualified
loan transaction is to afford a lender the opportunity to continue to earn
income on the securities loaned and at the same time earn fee income or income
on the collateral held by it.
Securities loans will be made in accordance with the following
conditions: (1) the Portfolio must receive at least 100% collateral in the form
of cash or cash equivalents, securities of the U.S. Government and its agencies
and instrumentalities, and approved bank letters of credit; (2) the borrower
must increase the collateral whenever the market value of the loaned securities
(determined on a daily basis) rises above the level of collateral; (3) the
Portfolio must be able to terminate the loan after notice, at any time; (4) the
Portfolio must receive reasonable interest on the loan or a flat fee from the
borrower, as well as amounts equivalent to any dividends, interest or other
distributions on
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<PAGE> 126
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
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<PAGE> 127
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
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strong. Obligations rated AA have a very strong capacity to pay interest and
repay principal and differs from the highest rated issues only in a small
degree.
Duff & Phelps' two highest ratings for long-term obligations are AAA and
AA. Obligations rated AAA have the highest credit quality with risk factors
being negligible. Obligations rated AA are of high credit quality and strong
protection factors. Risk is modest but may vary slightly from time to time
because of economic conditions.
Thomson BankWatch ("BankWatch") long-term debt ratings apply to specific
issues of long-term debt and preferred stock. They specifically assess the
likelihood of an untimely repayment of principal or interest over the term to
maturity of the rated instrument. BankWatch's two highest ratings for long-term
obligations are AAA and AA. Obligations rated AAA indicate that the ability to
repay principal and interest on a timely basis is very high. Obligations rated
AA indicate a superior ability to repay principal and interest on a timely
basis, with limited incremental risk compared to issues rated in the highest
category.
Fitch IBCA, Inc. ("Fitch") investment grade bond ratings provide a guide
to investors in determining the credit risk associated with a particular
security. The ratings represent Fitch's assessment of the issuer's ability to
meet the obligations of a specific debt issue or class of debt in a timely
manner. Obligations rated AAA are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonable
foreseeable events. Bonds rated AA are considered to be investment grade and of
very high credit quality. The obligor's ability to pay interest and repay
principal is very strong, although not quite as strong as bonds rated AAA.
Standard & Poor's, Duff & Phelps and Fitch apply indicators, such as
"+","-," or no character, to indicate relative standing within the major rating
categories.
Ratings of Municipal Obligations-Moody's ratings for state and municipal
short-term obligations are designated Moody's Investment Grade or "MIG" with
variable rate demand obligations being designated as "VMIG." A VMIG rating also
may be assigned to commercial paper programs which are characterized as having
variable short-term maturities but having neither a variable rate nor demand
feature. Factors used in determination of ratings include liquidity of the
borrower and short-term cyclical elements.
Standard & Poor's uses SP-1, SP-2, and SP-3 to rate short-term municipal
obligations. A rating of SP-1 denotes a very strong or strong capacity to pay
principal and interest.
Ratings of Short-term Obligations-The rating P-1 is the highest
short-term rating assigned by Moody's. Among the factors considered by Moody's
in assigning ratings are the following: (1) evaluations of the management of the
issuer; (2) economic evaluation of the issuer's industry or industries and an
appraisal of speculative-type risks which may be inherent in certain areas; (3)
evaluation of the issuer's products in relation to competition and customer
acceptance; (4) liquidity; (5) amount and quality of long-term debt; (6) trend
of earnings over a period of ten years; (7) financial strength of a parent
company and the relationships which exist with the issuer; and (8) recognition
by the management of obligations which may be present or may arise as a result
of public interest questions and preparations to meet such obligations.
Short-term obligations (or issuers thereof) rated A-1 by Standard &
Poor's have the following characteristics. Liquidity ratios are adequate to meet
cash requirements. The issuer has access to at least two additional channels of
borrowing. Basic earnings and cash flow have an upward trend with allowance made
for unusual circumstances. Typically, the issuer's industry is well established
and the issuer has a strong position within the industry. The reliability and
quality of management are unquestioned. Relative strength or weakness of the
above factors determines whether the issuer's short-term obligation is rated
A-1, A-2, or A-3.
The distinguishing feature of Duff & Phelps Credit Ratings' short-term
rating is the refinement of the traditional 1 category. The majority of
short-term debt issuers carry the highest rating, yet quality differences exist
within that tier. Obligations rated D-1+ indicate the highest certainty of
timely payment. Safety is just below risk-free U.S. Treasury obligations.
Obligations rated D-1 have a very high certainty of timely payment. Risk factors
are minor. Obligations rated D-1- have a high certainty of timely payment. Risk
factors are very small. Obligations rated D-2 have good certainty of timely
payment. Liquidity factors and company fundamentals are sound. Although ongoing
funding needs may enlarge total financing requirements, access to capital
markets is good. Risk factors are small.
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<PAGE> 129
Thomson BankWatch short-term ratings are intended to assess the
likelihood of an untimely or incomplete payment of principal or interest.
Obligations rated TBW-1 indicate a very high likelihood that principal and
interest will be paid on a timely basis. While the degree of safety regarding
timely payment of principal and interest is strong for an obligation rated
TBW-2, the relative degree of safety is not as high as for issues rated TBW-1.
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes. A rating of F-1+ indicates exceptionally strong credit
quality. Issues assigned this rating are regarded as having the strongest degree
of assurance for timely payment. Obligations rated F-1 have very strong credit
quality. Issues assigned this rating reflect an assurance of timely payment only
slightly less in degree than issues rated F-1+. Issues assigned a rating of F-2
indicate good credit quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not as great
as for issues assigned F-1+ and F-1 ratings.
Repurchase Agreements-A repurchase agreement, which provides a means to
earn income on funds for periods as short as overnight, is an arrangement under
which the purchaser (e.g., a Portfolio) purchases securities and the seller
agrees, at the time of sale, to repurchase the securities at a specified time
and price. The repurchase price will be higher than the purchase price, the
difference being income to the purchaser, or the purchase and repurchase prices
may be the same, with interest at a stated rate due to the purchaser together
with the repurchase price on repurchase. In either case, the income to the
purchaser is unrelated to the interest rate on the securities subject to the
repurchase agreement.
Each Portfolio may enter into repurchase agreements with any bank or
registered broker-dealer who, in the opinion of the AMR Trust Board presents a
minimum risk of bankruptcy during the term of the agreement based upon
guidelines that periodically are reviewed by the AMR Trust Board. Each Portfolio
may enter into repurchase agreements as a short-term investment of its idle cash
in order to earn income. The securities will be held by a custodian (or agent)
approved by the AMR Trust Board during the term of the agreement. However, if
the market value of the securities subject to the repurchase agreement becomes
less than the repurchase price (including interest), the Portfolio will direct
the seller of the securities to deliver additional securities so that the market
value of all securities subject to the repurchase agreement will equal or exceed
the repurchase price.
In the event of the commencement of bankruptcy or insolvency proceedings
with respect to the seller of the securities before the repurchase of the
securities under a repurchase agreement, a Portfolio may encounter a delay and
incur costs before being able to sell the security being held as collateral.
Delays may involve loss of interest or decline in price of the securities. Apart
from the risk of bankruptcy or insolvency proceedings, there is also the risk
that the seller may fail to repurchase the securities, in which case a Portfolio
may incur a loss if the proceeds to the Portfolio from the sale of the
securities to a third party are less than the repurchase price.
Reverse Repurchase Agreements-The Portfolios may borrow funds for
temporary purposes by entering into reverse repurchase agreements. Pursuant to
such agreements, a Portfolio would sell portfolio securities to financial
institutions such as banks and broker/dealers and agree to repurchase them at a
mutually agreed-upon date and price. The Portfolios intend to enter into reverse
repurchase agreements only to avoid selling securities to meet redemptions
during market conditions deemed unfavorable by the investment adviser possessing
investment authority. At the time a Portfolio enters into a reverse repurchase
agreement, it will place in a segregated custodial account assets such as liquid
high quality debt securities having a value not less than 100% of the repurchase
price (including accrued interest), and will subsequently monitor the account to
ensure that such required value is maintained. Reverse repurchase agreements
involve the risk that the market value of the securities sold by a Portfolio may
decline below the price at which such Portfolio is obligated to repurchase the
securities. Reverse repurchase agreements are considered to be borrowings by an
investment company under the 1940 Act.
Resource Recovery Obligations-Resource recovery obligations are a type of
municipal revenue obligation issued to build facilities such as solid waste
incinerators or waste-to-energy plants. Usually, a private corporation will be
involved and the revenue cash flow will be supported by fees or units paid by
municipalities for use of the facilities. The viability of a resource recovery
project, environmental protection regulations and project operator tax
incentives may affect the value and credit quality of these obligations.
Revenue Obligations-Revenue obligations are backed by the revenue cash
flow of a project or facility.
17
<PAGE> 130
Separately Traded Registered Interest and Principal Securities and Zero
Coupon Obligations-Separately traded registered interest and principal
securities or "STRIPS" and zero coupon obligations are securities that do not
make regular interest payments. Instead they are sold at a discount from their
face value. Each Portfolio will take into account as income a portion of the
difference between these obligations' purchase prices and their face values.
Because they do not pay coupon income, the prices of STRIPS and zero coupon
obligations can be very volatile when interest rates change. STRIPS are zero
coupon bonds issued by the U.S. Treasury.
Tax, Revenue or Bond Anticipation Notes-Tax, revenue or bond anticipation
notes are issued by municipalities in expectation of future tax or other
revenues which are payable from these specific taxes or revenues. Bond
anticipation notes usually provide interim financing in advance of an issue of
bonds or notes, the proceeds of which are used to repay the anticipation notes.
Tax-exempt commercial paper is issued by municipalities to help finance
short-term capital or operating needs in anticipation of future tax or other
revenue.
U.S. Government Securities-U.S. Government securities are issued or
guaranteed by the U.S. Government and include U.S. Treasury obligations (see
definition below) and securities issued by U.S. agencies and instrumentalities.
U. S. Government agencies or instrumentalities that issue or guarantee
securities include, but are not limited to, the Federal Housing Administration,
Farmers Home Administration, Export-Import Bank of the United States, Small
Business Administration, GNMA, General Services Administration, Central Bank for
Cooperatives, Federal Home Loan Banks, FHLMC, Federal Intermediate Credit Banks,
Federal Land Banks, Maritime Administration, Tennessee Valley Authority,
District of Columbia Armory Board, Inter-American Development Bank,
Asian-American Development Bank, Agency for International Development, Student
Loan Marketing Association and International Bank of Reconstruction and
Development.
Obligations of U.S. Government agencies and instrumentalities may or may
not be supported by the full faith and credit of the United States. Some are
backed by the right of the issuer to borrow from the Treasury; others are
supported by discretionary authority of the U.S. Government to purchase the
agencies' obligations; while still others, such as the Student Loan Marketing
Association, are supported only by the credit of the instrumentality. In the
case of securities not backed by the full faith and credit of the United States,
the investor must look principally to the agency issuing or guaranteeing the
obligation for ultimate repayment, and may not be able to assert a claim against
the United States itself in the event the agency or instrumentality does not
meet its commitment.
U.S. Treasury Obligations-U.S. Treasury obligations include bills, notes
and bonds issued by the U.S. Treasury and Separately Traded Registered Interest
and Principal component parts of such obligations known as STRIPS.
Variable or Floating Rate Obligations-A variable rate obligation is one
whose terms provide for the adjustment of its interest rate on set dates and
which, upon such adjustment, can reasonably be expected to have a market value
that approximates its par value. A floating rate obligation is one whose terms
provide for the adjustment of its interest rate whenever a specified interest
rate changes and which, at any time, can reasonably be expected to have a market
value that approximates its par value. Variable or floating rate obligations may
be secured by bank letters of credit.
Pursuant to Rule 2a-7 under the 1940 Act, variable or floating rate
obligations with stated maturities of more than 397 days may be deemed to have
shorter maturities as follows:
(1) An obligation that is issued or guaranteed by the United States
Government or any agency thereof which has a variable rate of interest
readjusted no less frequently than every 762 days will be deemed by a Portfolio
to have a maturity equal to the period remaining until the next readjustment of
the interest rate.
(2) A variable rate obligation, the principal amount of which is
scheduled on the face of the instrument to be paid in 397 days or less, will be
deemed by a Portfolio to have a maturity equal to the period remaining until the
next readjustment of the interest rate.
(3) A variable rate obligation that is subject to a demand feature will
be deemed by a Portfolio to have a maturity equal to the longer of the period
remaining until the next readjustment of the interest rate or the period
remaining until the principal amount can be recovered through demand.
18
<PAGE> 131
(4) A floating rate obligation that is subject to a demand feature will
be deemed by a Portfolio to have a maturity equal to the period remaining until
the principal amount can be recovered through demand.
As used above, an obligation is "subject to a demand feature" when a
Portfolio is entitled to receive the principal amount of the obligation either
at any time on no more than 30 days' notice or at specified intervals not
exceeding one year and upon no more than 30 days' notice.
Variable Rate Auction and Residual Interest Obligations-Variable rate
auction and residual interest obligations are created when an issuer or dealer
separates the principal portion of a long-term, fixed-rate municipal bond into
two long-term, variable-rate instruments. The interest rate on one portion
reflects short-term interest rates, while the interest rate on the other portion
is typically higher than the rate available on the original fixed-rate bond.
FINANCIAL STATEMENTS
The American AAdvantage Money Market Funds' and the American AAdvantage
Mileage Funds' Annual Reports to Shareholders for the fiscal year ended October
31, 1997, as audited by Ernst & Young, LLP, are supplied with the SAI, and the
financial statements and accompanying notes appearing therein are incorporated
by reference in this SAI.
19
<PAGE> 132
TABLE OF CONTENTS
<TABLE>
<S> <C>
Investment Restrictions..................................................................................................1
Trustees and Officers of the Trust and the AMR Trust.....................................................................2
Management, Administrative Services and Distribution Fees................................................................5
Redemptions in Kind......................................................................................................6
Net Asset Value..........................................................................................................6
Tax Information..........................................................................................................6
Yield and Total Return Quotations........................................................................................8
Description of the Trust................................................................................................10
Control Persons and 5% Shareholders.....................................................................................11
Other Information.......................................................................................................11
Financial Statements....................................................................................................18
</TABLE>
<PAGE> 133
AMERICAN AADVANTAGE MILEAGE FUNDS
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements included as a part of this Registration
Statement:
Included in Part A of the Registration Statement: Financial
Highlights
American AAdvantage Mileage Balanced, Growth and Income,
International Equity, Short-Term Bond, Money Market, Municipal
Money Market and U.S. Government Money Market Funds -- for
the period November 1, 1995 (commencement of operations) to
October 31, 1996 and the one year period ended October 31,
1997.
Platinum Class - American AAdvantage Mileage Money Market
Fund: for the period January 29, 1996 (commencement of
offering Platinum Class shares) to October 31, 1996 and the
one year period ended October 31, 1997.
Platinum Class: American AAdvantage Money Market, Municipal
Money Market and U.S. Government Money Market Funds: - for
the period November 7, 1995, (commencement of offering
Platinum Class shares) to October 31, 1996 and the one year
period ended October 31, 1997.
Included in Part B of the Registration Statement:
American AAdvantage Mileage Funds -- Statement of Assets and
Liabilities dated October 31, 1997; Statement of Operations
for the fiscal year ended October 31, 1997; Statements of
Changes in Net Assets for the years ended October 31, 1996 and
October 31, 1997; Notes to Financial Statements; Report of
Ernst & Young LLP, Independent Accountants dated December 19,
1997.
AMR Investment Services Trust -- Schedule of Investments dated
October 31, 1997; Statement of Assets and Liabilities dated
October 31, 1997; Statement of Operations dated October 31,
1997; Statement of Changes in Net Assets dated October 31,
1997; Notes to Financial Statements; Report of Ernst & Young
LLP, Independent Accountants dated December 19, 1997.
(b) Exhibits:
(1) Amended and Restated Declaration of Trust - (ii)
(2) Amended Bylaws - (ii)
(3) Voting trust agreement -- none
<PAGE> 134
(4) Specimen security - none
(5) (a)(i) Management Agreement between American
AAdvantage Mileage Funds and AMR Investment
Services, Inc. dated October 1, 1995 - (ii)
(a)(ii) Supplement to Management Agreement dated
December 17, 1996 (i)
(b)(i) Investment Advisory Agreement between AMR
Investment Services, Inc. and Independence
Investment Associates, Inc. dated November
1, 1995 - (ii)
(b)(ii) Investment Advisory Agreement between AMR
Investment Services, Inc. and Morgan Stanley
Asset Management Inc. dated November 1, 1995
- (ii)
(b)(iii) Investment Advisory Agreement between AMR
Investment Services, Inc. and Templeton
Investment Counsel, Inc. dated November 1,
1995 - (ii)
(b)(iv) Investment Advisory Agreement between AMR
Investment Services, Inc. and Barrow,
Hanley, Mewhinney & Strause, Inc. dated
November 1, 1995 - (ii)
(b)(v) Investment Advisory Agreement between AMR
Investment Services, Inc. and GSB Investment
Management, Inc. dated November 1, 1995 -
(ii)
(b)(vi) Investment Advisory Agreement between AMR
Investment Services, Inc. and Brandywine
Asset Management, Inc. Dated January 16,
1998 - filed herewith
(b)(vii) Investment Advisory Agreement between AMR
Investment Services, Inc. and Hotchkis and
Wiley, a division of the Capital Management
Group of Merrill Lynch Asset Management,
L.P. dated November 12, 1996 - (i)
(6) Distribution Agreement among the American AAdvantage
Mileage Funds, the American AAdvantage Funds and
Brokers Transaction Services, Inc. dated September 1,
1995 - (ii)
(7) Bonus, profit sharing or pension plans -- none
(8) Custodian Agreement between the American AAdvantage
Mileage Funds and State Street Bank and Trust
Company dated December 1, 1997 - filed herewith
(9) (a) Transfer Agency and Service Agreement between
the American AAdvantage Mileage Funds- and
State Street Bank and Trust Company dated
January 1, 1998 -- filed herewith
(b) Securities Lending Authorization Agreement
between American
<PAGE> 135
AAdvantage Mileage Funds and State Street
Bank and Trust Company dated January 2, 1998 -
filed herewith
(10) Opinion and consent of counsel - (ii)
(11) Consent of Independent Auditors - filed herewith
(12) Financial statements omitted from prospectus -- (not
applicable)
(13) Letter of investment intent - (ii)
(14) Prototype retirement plan -- (not applicable)
(15) (a) Plan pursuant to Rule 12b-1 for the Mileage
Class - (ii)
(b) Plan pursuant to Rule 12b-1 for the Platinum
Class - (ii)
(c) Administrative Services Plan for the
Platinum Class - (ii)
(16) Schedule for Computation of Performance Quotations -
(ii)
(17) Financial Data Schedules - filed herewith
(18) Plan Pursuant to Rule 18f-3 - (ii)
Other: Powers of Attorney for Trustees - (i)
- -------------
(i) Incorporated by reference to Post-Effective Amendment No. 4 to the
American AAdvantage Mileage Funds' Registration Statement on Form N-1A
as filed with the Securities and Exchange Commission on February 13,
1997.
(ii) Incorporated by reference to Post-Effective Amendment No. 4 to the
American AAdvantage Mileage Funds' Registration Statement on Form N-1A
as filed with the Securities and Exchange Commission on December 15,
1997.
Item 25. Persons Controlled by or under Common Control with Registrant
None.
Item 26. Number of Holders of Securities
<TABLE>
<CAPTION>
Number of Record Holders
Title of Fund as of November 30, 1997
- ------------- ------------------------
<S> <C>
American AAdvantage Mileage Funds:
Balanced Mileage Fund 130
Growth and Income Mileage Fund 311
Short-Term Bond Mileage Fund 22
</TABLE>
<PAGE> 136
<TABLE>
<S> <C>
International Equity Mileage Fund 199
Money Market Mileage Fund 1,421
Municipal Money Market Mileage Fund 245
U.S. Government Money Market Mileage Fund 166
Platinum Class:
Money Market Mileage Fund 978
</TABLE>
Item 27. Indemnification
Article XI, Section 2 of the Declaration of Trust of the Mileage 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 Mileage 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 Mileage 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 Mileage 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 Mileage 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
<PAGE> 137
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 Mileage Trust, shall be severable, shall
not be exclusive of or affect any other rights to which any Covered Person may
now or hereafter be entitled, shall continue as to a person who has ceased to
be such Trustee or officer and shall inure to the benefit of the heirs,
executors and administrators of such a person. Nothing contained herein shall
affect any rights to indemnification to which Mileage 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 Mileage 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 Mileage 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 Mileage 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
Mileage 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 Mileage Trust, a particular Portfolio or the Trustees. A
Trustee, however, is not protected from liability due to willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in the
conduct of his office.
Article XII, Section 2 provides that, subject to the provisions of
Section 1 of Article XII and to Article XI, the Trustees are not liable for
errors of judgment or mistakes of fact or law, or for any act or omission in
accordance with advice of counsel or other experts or for failing to follow
such advice.
Item 28. I. Business and Other Connections of Investment Manager
AMR Investment Services, Inc., 4333 Amon Carter Boulevard, MD 5645,
Fort Worth, Texas 76155, offers investment management and administrative
services. Information as to the officers and
<PAGE> 138
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 Mileage Trust.
Barrow, Hanley, Mewhinney & Strauss, 3232 McKinney Avenue, Dallas,
Texas 75204.
Brandywine Asset Management, Inc., 201 North Walnut Street,
Wilmington, Delaware 19801.
GSB Investment Management, Inc., 301 Commerce Street, Suite 1501, Fort
Worth, Texas 76102.
Hotchkis & Wiley, 800 West Sixth Street, 5th Floor, Los Angeles,
California 90017.
Independence Investment Associates, Inc., 53 State Street, Boston,
Massachusetts 02109.
Morgan Stanley Asset Management Inc., 1221 Avenue of the Americas,
21st Floor, New York, New York 10020.
Templeton Investment Counsel, Inc. 500 East Broward Blvd., Ft.
Lauderdale, Florida 33394.
Information as to the officers and directors of each of the above
investment advisers is included in that adviser's current Form ADV filed with
the SEC and is incorporated by reference herein.
Item 29. Principal Underwriter
(a) Brokers Transaction Services, Inc., 7001 Preston
Road, Dallas, TX 75205, is the principal underwriter for the Mileage Trust and
the American AAdvantage Funds.
(b) The directors and officers of the Mileage Trust's
principal underwriter are:
<TABLE>
<CAPTION>
Positions & Offices Position
Name with Underwriter with Registrant
- ---- ------------------- ---------------
<S> <C> <C>
Don A. Buckholz Chairman, Director and Chief None
Executive Officer
Raymond E. Wooldridge Chief Operating Officer, None
Director and President
</TABLE>
<PAGE> 139
<TABLE>
<S> <C> <C>
William D. Felder Director, Executive Vice None
President
Sue H. Peden Vice President None
</TABLE>
Item 30. Location of Accounts and Records
The books and other documents required by Rule 31a-1 under the
Investment Company Act of 1940 are maintained as follows: 31a-1(b)(1) -
Journals - in the physical possession of the Trust's custodian; 31-1(b)(2)(I),
(ii) & (iii) - in the physical possession of the Trust's custodian;
31a-1()(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) - in
the physical possession of the Trust's Manager, investment advisers and
custodian; 31a-1(b)(7) - in the physical possession of the Trust's custodian;
31a-1(b)(8) - in the physical possession of the Trust's custodian; 31a-1(b)(9)
- - in the physical possession of the Trust's investment advisers; 31a-1(b)(10) -
in the physical possession of the Trust's Manager; 31a-1(b)(11) - in the
physical possession of the Trust's Manager; 31a-1(b)(12) - in the physical
possession of the Trust's Manager, investment advisers and custodian.
Item 31. Management Services
All substantive provisions of any management-related service
contract are discussed in Part A or Part B.
Item 32. Undertakings
Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of its latest annual report to
Shareholders, upon request and without charge.
Registrant hereby undertakes to carry out all indemnification
provisions of its Declaration of Trust in accordance with Investment Company
Act Release No. 11330 (September 4, 1980) and successor releases.
Insofar as indemnification for liability arising under the Securities
Act of 1933, as amended ("1933 Act"), may be permitted to trustees, officers
and controlling persons of the Registrant pursuant to the provisions in under
Item 27 herein, or otherwise, the Registrant has been advised that in the
opinion of the SEC such indemnification is against public policy as expressed
in the 1933 Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a trustee, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such trustee, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the 1933
Act and will be governed by the final adjudication.
<PAGE> 140
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, and the Investment Company Act of 1940, as amended, the Registrant
certifies that it meets the requirements for effectiveness under this amendment
to its Registration Statement under Rule 485(b) under the Securities Act of
1933 and has duly caused this Post-Effective Amendment No. 6 to its
Registration Statement on Form N-1A to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Fort Worth and the State
of Texas on February 26, 1997.
AMERICAN AADVANTAGE MILEAGE 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. 6 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 February 26, 1998
- -------------------------------- Trustee
William F. Quinn
Alan D. Feld* Trustee February 26, 1998
- --------------------------------
Alan D. Feld
Ben J. Fortson* Trustee February 26, 1998
- --------------------------------
Ben J. Fortson
John S. Justin* Trustee February 26, 1998
- --------------------------------
John S. Justin
Stephen D. O'Sullivan* Trustee February 26, 1998
- -------------------------------
Stephen D. O'Sullivan
Roger T. Staubach* Trustee February 26, 1998
- -------------------------------
Roger T. Staubach
Dr. Kneeland Youngblood * Trustee February 26, 1998
- -------------------------------
Dr. Kneeland Youngblood
*By /s/ William F. Quinn
------------------------------------------
William F. Quinn, Attorney-In-Fact
</TABLE>
<PAGE> 141
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, and the Investment Company Act of 1940, as amended, AMR Investment
Services Trust certifies that it meets the requirements for effectiveness under
this amendment to its Registration Statement under Rule 485(b) under the
Securities Act of 1933 and has duly caused this Post-Effective Amendment No. 6
to the Registration Statement on Form N-1A as it relates to the AMR Investment
Services Trust to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Fort Worth and the State of Texas on February 26,
1998.
AMR INVESTMENT SERVICES TRUST
By: /s/ William F. Quinn
---------------------------------
William F. Quinn
President
Attest:
/s/ Barry Y. Greenberg
- --------------------------------------
Barry Y. Greenberg
Vice President and Assistant Secretary
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Post-Effective Amendment No. 6 to the Registration Statement for
the American AAdvantage Mileage 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 February 26, 1998
- ----------------------------------- Trustee
William F. Quinn
Alan D. Feld* Trustee February 26, 1998
- -----------------------------------
Alan D. Feld
Ben J. Fortson* Trustee February 26, 1998
- -----------------------------------
Ben J. Fortson
John S. Justin* Trustee February 26, 1998
- -----------------------------------
John S. Justin
Stephen D. O'Sullivan* Trustee February 26, 1998
- ----------------------------------
Stephen D. O'Sullivan
Roger T. Staubach* Trustee February 26, 1998
- ----------------------------------
Roger T. Staubach
Dr. Kneeland Youngblood * Trustee February 26, 1998
- ----------------------------------
Dr. Kneeland Youngblood
*By /s/ William F. Quinn
------------------------------------------
William F. Quinn, Attorney-In-Fact
</TABLE>
<PAGE> 142
SIGNATURES
Equity 500 Index Portfolio certifies that it meets the requirements
for effectiveness of this amendment to the Registration Statement under Rule
485(b) under the Securities Act of 1933 and has duly caused this Post-Effective
Amendment No. 6 to the Registration Statement on Form N-1A of the American
AAdvantage Mileage Funds, as it relates to the American AAdvantage S&P 500
Index Mileage Fund, to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Pittsburgh and the Commonwealth of Pennsylvania
on February 26, 1998.
EQUITY 500 INDEX PORTFOLIO
By: Ronald M. Petnuch*
----------------------------------------
Ronald M. Petnuch
President
This Post-Effective Amendment No. 6 to the Registration Statement on
Form N-1A of American AAdvantage Mileage Funds has been signed below by the
following persons in the capacities indicated with respect to the Equity 500
Index Portfolio and on February 26, 1998.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
Charles P Biggar* Trustee
----------------------------------
Charles P. Biggar
Leland Dill* Trustee
----------------------------------
S. Leland Dill
Philip Saunders, Jr.* Trustee
----------------------------------
Philip Saunders, Jr.
Ronald M. Petnuch* President and Treasurer (Chief Executive Officer, Principal
---------------------------------- Financial and Accounting Officer)
Ronald M. Petnuch
/s/ Jay S. Neuman
- -----------------------------------
Jay S. Neuman, Secretary of the Equity 500 Index Portfolio,
as Attorney-in-Fact pursuant to a Power of Attorney
</TABLE>
<PAGE> 143
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description Page
- ------ ----------- ----
<S> <C>
(1) Amended and Restated Declaration of Trust - (ii)
(2) Amended Bylaws - (ii)
(3) Voting trust agreement -- none
(4) Specimen security - none
(a)(i) Management Agreement between American AAdvantage Mileage
Funds and AMR Investment Services, Inc. dated October 1, 1995 -
(ii)
(a)(ii) Supplement to Management Agreement dated December 17, 1996 (i)
(b)(i) Investment Advisory Agreement between AMR Investment Services,
Inc. and Independence Investment Associates, Inc. dated November 1,
1995 - (ii)
(b)(ii) Investment Advisory Agreement between AMR Investment Services,
Inc. and Morgan Stanley Asset Management Inc. dated November 1,
1995 - (ii)
(b)(iii) Investment Advisory Agreement between AMR Investment Services,
Inc. and Templeton Investment Counsel, Inc. dated November 1, 1995
- (ii)
(b)(iv) Investment Advisory Agreement between AMR Investment Services,
Inc. and Barrow, Hanley, Mewhinney & Strause, Inc. dated November 1,
1995 - (ii)
(b)(v) Investment Advisory Agreement between AMR Investment Services,
Inc. and GSB Investment Management, Inc. dated November 1, 1995 - (ii)
(b)(vi) Investment Advisory Agreement between AMR Investment Services,
Inc. and Brandywine Asset Management, Inc. Dated January 16, 1998
- filed herewith
(b)(vii) Investment Advisory Agreement between AMR Investment Services, Inc.
and Hotchkis and Wiley, a division of the Capital Management Group of
Merrill Lynch Asset Management, L.P. dated November 12, 1996 - (i)
(6) Distribution Agreement among the American AAdvantage Mileage Funds, the
American AAdvantage Funds and Brokers Transaction Services, Inc. dated
September 1, 1995 - (ii)
(7) Bonus, profit sharing or pension plans -- none
(8) Custodian Agreement between the American AAdvantage Mileage Funds and
State Street Bank and Trust Company dated December 1, 1997 - filed herewith
</TABLE>
<PAGE> 144
<TABLE>
<S> <C>
(9) (a) Transfer Agency and Service Agreement between the American AAdvantage Mileage Funds and State Street
Bank and Trust Company dated January 1, 1998 - filed herewith
(b) Securities Lending Authorization Agreement between American AAdvantage Funds and State Street Bank and
Trust Company dated January 2, 1998 - filed herewith
(10) Opinion and consent of counsel - (ii)
(11) Consent of Independent Auditors - filed herewith
(12) Financial statements omitted from prospectus (not applicable)
(13) Letter of investment intent - (ii)
(14) Prototype retirement plan -- (not applicable)
(15) (a) Plan pursuant to Rule 12b-1 for the Mileage Class - (ii)
(b) Plan pursuant to Rule 12b-1 for the Platinum Class - (ii)
(c) Administrative Services Plan for the Platinum Class - (ii)
(16) Schedule for Computation of Performance Quotations - (ii)
(17) Financial Data Schedules - filed herewith
(18) Plan Pursuant to Rule 18f-3 - (ii)
Other: Powers of Attorney for Trustees -(i)
</TABLE>
- ----------------
(i) Incorporated by reference to Post-Effective Amendment No. 4 to the
American AAdvantage Mileage Funds' Registration Statement on Form N-1A
as filed with the Securities and Exchange Commission on February 13,
1997.
(ii) Incorporated by reference to Post-Effective Amendment No. 4 to the
American AAdvantage Mileage Funds' Registration Statement on Form N-1A
as filed with the Securities and Exchange Commission on December 15,
1997.
<PAGE> 1
Exhibit 99.b.4.b.vi
AMERICAN AADVANTAGE MILEAGE FUNDS
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made this 16th day of January, 1998 by and between AMR
Investment Services, Inc., a Delaware Corporation (the "Manager"), and
Brandywine Asset Management, Inc., a wholly owned subsidiary of Legg Mason,
Inc. (the "Adviser");
WHEREAS, American AAdvantage Mileage Funds (the "Trust"), a
Massachusetts Business Trust, is an open-end, diversified management investment
company registered under the Investment Company Act of 1940, as amended ("1940
Act"), consisting of several portfolios of shares, each having its own
investment policies; and
WHEREAS, the Trust has retained the Manager to provide the Trust with
business and asset management services, subject to the control of the Trust's
Board of Trustees;
WHEREAS, the Trust's agreement with the Manager permits the Manager to
delegate to other parties certain of its asset management responsibilities; and
WHEREAS, the Manager desires to retain the Adviser to render
investment management services to the Trust with respect to certain of its
investment portfolios and such other investment portfolios as the Trust and the
Adviser may agree upon and so specify in the Schedule(s) attached hereto
(collectively, the "Portfolios") and as described in the Trust's registration
statement on Form N-1A as amended from time to time, and the Adviser is willing
to render such services;
NOW THEREFORE, in consideration of mutual covenants herein contained,
the parties hereto agree as follows:
1. DUTIES OF ADVISER. The Manager employs the Adviser to manage the
investment and reinvestment of such portion, if any, of the Portfolios' assets
as is designated by the Manager from time to time, and, with respect to such
assets, to continuously review, supervise, and administer the investment
program of the Portfolios, to determine in the Adviser's discretion the
securities to be purchased or sold, to provide the Manager and the Trust with
records concerning the Adviser's activities which the Trust is required to
maintain, and to render regular reports to the Manager and to the Trust's
officers and Trustees concerning the Adviser's discharge of the foregoing
responsibilities. The Adviser shall discharge the foregoing responsibilities
subject to the Manager's oversight and the control of the officers and the
Trustees of the Trust and in compliance with such policies as the Trustees may
<PAGE> 2
from time to time establish, and in compliance with the objectives, policies,
and limitations for each such Portfolio set forth in the Trust's current
registration statement as amended from time to time, and applicable laws and
regulations. The Adviser accepts such employment and agrees to render the
services for the compensation specified herein and to provide at its own
expense the office space, furnishings and equipment and the personnel required
by it to perform the services on the terms and for the compensation provided
herein. (With respect to any of the Portfolio assets allocated for management
by the Adviser, the Adviser can request that the Manager make the investment
decisions with respect to that portion of assets which the Adviser deems should
be invested in short-term money market instruments. The Manager agrees to
provide this service.) The Manager will instruct the Trust's Custodian(s) to
hold and/or transfer the Portfolios' assets in accordance with Proper
Instructions received from the Adviser. (For this purpose, the term "Proper
Instructions" shall have the meaning(s) specified in the applicable
agreement(s) between the Trust and its custodian(s).) The Adviser will not be
responsible for the cost of securities or brokerage commissions or any other
Trust expenses except as specified in this Agreement.
2. PORTFOLIO TRANSACTIONS. The Adviser is authorized to select the
brokers or dealers (including, to the extent permitted by law and applicable
Trust guidelines, the Adviser or any of its affiliates) that will execute the
purchases and sales of portfolio securities for the Portfolios and is directed
to use its best efforts to obtain the best net results with respect to brokers'
commissions and discounts as described in the Trust's current registration
statement as amended from time to time. In selecting brokers or dealers, the
Adviser may give consideration to factors other than price, including, but not
limited to, research services and market information. Any such services or
information which the Adviser receives in connection with activities for the
Trust may also be used for the benefit of other clients and customers of the
Adviser or any of its affiliates. The Adviser will promptly communicate to the
Manager and to the officers and the Trustees of the Trust such information
relating to portfolio transactions as they may reasonably request.
3. COMPENSATION OF THE ADVISER. For the services to be rendered by
the Adviser as provided in Sections 1 and 2 of this Agreement, the Manager
shall pay to the Adviser compensation at the rate specified in Schedule A
attached hereto and made a part of this Agreement. Such compensation shall be
paid to the Adviser quarterly in arrears, and shall be calculated by applying
the annual percentage rate(s) as specified in the attached Schedule A to the
average month-end assets of the specified portfolios during the relevant
quarter. Solely for the purpose of calculating the applicable annual
percentage rates specified in the attached Schedule(s), there shall be included
such other assets as are specified in said Schedule(s).
<PAGE> 3
The Adviser agrees that the fee charged to the Manager will be no more
than that charged for any other client of similar type. Furthermore, the
Adviser agrees to notify the Manager on a timely basis of any fee schedule it
enters into with any other client of similar type which is lower than the fee
paid by the Manager.
4. OTHER SERVICES. At the request of the Trust or the Manager, the
Adviser in its discretion may make available to the Trust office facilities,
equipment, personnel, and other services. Such office facilities, equipment,
personnel and services shall be provided for or rendered by the Adviser and
billed to the Trust or the Manager at a price to be agreed upon by the Adviser
and the Trust or the Manager.
5. REPORTS. The Manager (on behalf of the Trust) and the Adviser
agree to furnish to each other, if applicable, current prospectuses, proxy
statements, reports to shareholders, certified statements of financial
condition, and such other information with regard to their affairs as each may
reasonably request.
6. STATUS OF ADVISER. The services of the Adviser to the Trust are
not to be deemed exclusive, and the Adviser and its directors, officers,
employees and affiliates shall be free to render similar services to others so
long as its services to the Trust are not impaired thereby. The Adviser shall
be deemed to be an independent contractor and shall, unless otherwise expressly
provided or authorized, have no authority to act for or represent the Manager
or the Trust in any way or otherwise be deemed an agent to the Manager or the
Trust.
7. CERTAIN RECORDS. Any records required to be maintained and
preserved pursuant to the provisions of Rule 31a-1 and Rule 31a-2 promulgated
under the 1940 Act which are prepared or maintained by the Adviser on behalf of
the Manager or the Trust are the property of the Manager or the Trust and will
be surrendered promptly to the Manager or Trust on request.
8. LIABILITY OF ADVISER. No provision of this Agreement shall be
deemed to protect the Adviser against any liability to the Trust or its
shareholders to which it might otherwise be subject by reason of any willful
misfeasance, bad faith, or gross negligence in the performance of its duties or
the reckless disregard of its obligations under this Agreement.
9. PERMISSIBLE INTERESTS. To the extent permitted by law, Trustees,
agents, and shareholders of the Trust are or may be interested in the Adviser
(or any successor thereof) as directors, partners, officers, or shareholders,
or otherwise; directors, partners, officers, agents, and shareholders of the
Adviser are or may be interested in the Trust as Trustees, shareholders or
otherwise; and the
<PAGE> 4
Adviser (or any successor thereof) is or may be interested in the Trust as a
shareholder or otherwise; provided that all such interests shall be fully
disclosed between the parties on an ongoing basis and in the Trust's
registration statement as required by law.
10. DURATION AND TERMINATION. This Agreement, unless sooner
terminated as provided herein, shall continue for two years after its initial
approval as to each Portfolio and thereafter for periods of one year for so
long as such continuance thereafter is specifically approved at least annually
(a) by the vote of a majority of those Trustees of the Trust who are not
parties to this Agreement or interested persons of any such party, cast in
person at a meeting called for the purpose of voting on such approval, and (b)
by the Trustees of the Trust or by vote of a majority of the outstanding voting
securities of each Portfolio; provided, however, that if the shareholders of
any Portfolio fail to approve the Agreement as provided herein, the Adviser may
continue to serve hereunder in the manner and to the extent permitted by the
1940 Act and rules thereunder. The foregoing requirement that continuance of
this Agreement be "specifically approved at least annually" shall be construed
in a manner consistent with the 1940 Act and the rules and regulations
thereunder. This Agreement may be terminated as to any Portfolio at any time,
without the payment of any penalty, by the Manager, by vote of a majority of
the Trustees of the Trust or by vote of a majority of the outstanding voting
securities of the Portfolio on not less than 30 days' nor more than 60 days'
written notice to the Adviser, or by the Adviser at any time without the
payment of any penalty, on 60 days' written notice to the Trust. This
Agreement will automatically and immediately terminate in the event of its
assignment. Any notice under this Agreement shall be given in writing,
addressed and delivered, or mailed postpaid, to the other party at the primary
office of such party, unless such party has previously designated another
address.
As used in this Section 10, the terms "assignment," "interested
persons," and a "vote of a majority of the outstanding voting securities" shall
have the respective meanings set forth in the 1940 Act and the rules and
regulations thereunder, subject to such exemptions as may be granted by the
Securities and Exchange Commission under said Act.
11. SEVERABILITY. If any provision of this Agreement shall be held
or made invalid by a court decision, statute, rule or otherwise, the remainder
of this Agreement shall not be affected thereby.
A copy of the Declaration of Trust of the Trust is on file with the
Secretary of the Commonwealth of Massachusetts, and notice is hereby given that
this instrument is not binding
<PAGE> 5
upon any of the Trustees, officers, or shareholders of the Trust individually.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as of the day and year first written above.
Brandywine Asset Management, Inc. AMR Investment Services, Inc.
By /s/ CARL M. LINDBERG By /s/ WILLIAM F. QUINN
------------------------------ --------------------------
Title Managing Director and Secretary Title President
------------------------------- ---------
<PAGE> 6
Schedule A
to the
American AAdvantage Mileage Funds
Investment Advisory Agreement
between
AMR Investment Services, Inc.
and
Brandywine Asset Management, Inc.
AMR Investment Services, Inc. shall pay compensation to Brandywine
Asset Management Inc. pursuant to section 3 of the Investment Advisory
Agreement between said for rendering investment management services with
respect to the Growth and Income and Balanced Funds in accordance with the
following annual percentage rates:
1. For assets up to $500 million:
Growth and Income Fund: 0.25%
Balanced Fund: 0.225%
2. For assets $500 - 600 million:
0.225%
3. For assets over $600 million:
0.20%
In calculating the amount of assets under management solely for the
purpose of determining the applicable percentage rate, there shall be included
all other assets or trust assets of American Airlines, Inc. also under
management by the Adviser.
For purposes of calculating the fee for assets between $500 million
and $600 million, the reduced fee rate will be applied pro rata based on assets
for each equity portfolio. For purposes of calculating the fee for assets over
$600 million, the reduced fee rate will be applied pro rata based on assets for
each portfolio.
To the extent that a Fund invests all of its investable assets (i.e.,
securities and cash) in another investment company, however, no portion of the
advisory fee attributable to that Fund as specified above shall be paid for the
period that such Fund's assets are so invested.
DATED: January 16, 1998
<PAGE> 1
Exhibit 99.b.8
Custodian Agreement
This Agreement between American AAdvantage Mileage Funds, a business
trust organized and existing under the laws of Massachusetts with its principal
place of business at 4333 Amon Carter Boulevard, Fort Worth, Texas 76155(the
"TRUST"), and State Street Bank and Trust Company, a Massachusetts trust
company with its principal place of business at 225 Franklin Street, Boston,
Massachusetts 02110 (the "CUSTODIAN"),
Witnesseth:
Whereas, the Trust intends to offer shares in the series set forth on
Schedule D hereto (such series, together with all other series subsequently
established by the Trust and made subject to this Agreement in accordance with
Section 20 and as of the effective date set forth on Schedule D, shall be
referred to herein as the "PORTFOLIO(S)"); and
Whereas, each Portfolio intends to invest all of its investable assets
in the portfolio of AMR Investment Services Trust, an open-end, diversified
management investment company, with which its shares its investment objectives,
Now Therefore, in consideration of the mutual covenants and agreements
hereinafter contained, the parties hereto agree as follows:
Section 1. Employment of Custodian and Property to be Held by It
The Trust hereby employs the Custodian as the custodian of the assets
of the Portfolios of the Trust, including securities which the Trust, on behalf
of the applicable Portfolio desires to be held in places within the United
States ("DOMESTIC SECURITIES") and securities it desires to be held outside the
United States ("FOREIGN SECURITIES") pursuant to the provisions of the Trust's
Declaration of Trust. The Trust on behalf of the Portfolio(s) agrees to
deliver to the Custodian all securities and cash of the Portfolios, and all
payments of income, payments of principal or capital distributions received by
it with respect to all securities owned by the Portfolio(s) from time to time,
and the cash consideration received by it for such new or treasury shares of
each class of beneficial interest of the Trust representing interests in the
Portfolios ("SHARES") as may be issued or sold from time to time. The Custodian
shall not be responsible for any property of a Portfolio held or received by
the Portfolio and not delivered to the Custodian.
Upon receipt of "PROPER INSTRUCTIONS" (as such term is defined in
Section 6 hereof), the Custodian shall on behalf of the applicable Portfolio(s)
from time to time employ one or more sub-custodians, located in the United
States but only in accordance with an applicable vote by the Board of Trustees
of the Trust (the "BOARD OF TRUSTEES") on behalf of the applicable
Portfolio(s), and provided that the Custodian shall have no more or less
responsibility or liability to the Trust on account of any actions or omissions
of any sub-custodian so employed than any such sub-custodian has to the
Custodian. The Custodian may employ as sub-custodian for the Trust's
<PAGE> 2
foreign securities on behalf of the applicable Portfolio(s) the foreign banking
institutions and foreign securities depositories designated in Schedules A and
B hereto but only in accordance with the applicable provisions of Sections 3
and 4.
Section 2. Duties of the Custodian with Respect to Property of the Trust
Held By the Custodian in the United States
Section 2.1 Holding Securities. The Custodian shall hold and
physically segregate for the account of each Portfolio all non-cash property,
to be held by it in the United States including all domestic securities owned
by such Portfolio, other than (a) securities which are maintained pursuant to
Section 2.9 in a clearing agency which acts as a securities depository or in a
book-entry system authorized by the U.S. Department of the Treasury (each, a
"U.S. SECURITIES SYSTEM") and (b) commercial paper of an issuer for which
State Street Bank and Trust Company acts as issuing and paying agent ("DIRECT
PAPER") which is deposited and/or maintained in the Direct Paper System of the
Custodian (the "DIRECT PAPER SYSTEM") pursuant to Section 2.10.
Section 2.2 Delivery of Securities. The Custodian shall release
and deliver domestic securities owned by a Portfolio held by the Custodian or
in a U.S. Securities System account of the Custodian or in the Custodian's
Direct Paper book entry system account ("DIRECT PAPER SYSTEM ACCOUNT") only
upon receipt of Proper Instructions from the Trust on behalf of the applicable
Portfolio, which may be continuing instructions when deemed appropriate by the
parties, and only in the following cases:
1) Upon sale of such securities for the account of the Portfolio
and receipt of payment therefor;
2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the
Portfolio;
3) In the case of a sale effected through a U.S. Securities
System, in accordance with the provisions of Section 2.9
hereof;
4) To the depository agent in connection with tender or other
similar offers for securities of the Portfolio;
5) To the issuer thereof or its agent when such securities are
called, redeemed, retired or otherwise become payable;
provided that, in any such case, the cash or other
consideration is to be delivered to the Custodian;
6) To the issuer thereof, or its agent, for transfer into the
name of the Portfolio or into the name of any nominee or
nominees of the Custodian or into the name or nominee name of
any agent appointed pursuant to Section 2.8 or into the name
or nominee name of any sub-custodian appointed pursuant to
Section 1; or for exchange for a different number of bonds,
certificates or other evidence
2
<PAGE> 3
representing the same aggregate face amount or number of
units; provided that, in any such case, the new securities are
to be delivered to the Custodian;
7) Upon the sale of such securities for the account of the
Portfolio, to the broker or its clearing agent, against a
receipt, for examination in accordance with "street delivery"
custom; provided that in any such case, the Custodian shall
have no responsibility or liability for any loss arising from
the delivery of such securities prior to receiving payment for
such securities except as may arise from the Custodian's own
negligence or willful misconduct;
8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or
readjustment of the securities of the issuer of such
securities, or pursuant to provisions for conversion contained
in such securities, or pursuant to any deposit agreement;
provided that, in any such case, the new securities and cash,
if any, are to be delivered to the Custodian;
9) In the case of warrants, rights or similar securities, the
surrender thereof in the exercise of such warrants, rights or
similar securities or the surrender of interim receipts or
temporary securities for definitive securities; provided that,
in any such case, the new securities and cash, if any, are to
be delivered to the Custodian;
10) For delivery in connection with any loans of securities made
by the Portfolio, but only against receipt of adequate
collateral as agreed upon from time to time by the Custodian
and the Trust on behalf of the Portfolio, which may be in the
form of cash or obligations issued by the United States
government, its agencies or instrumentalities, except that in
connection with any loans for which collateral is to be
credited to the Custodian's account in the book-entry system
authorized by the U.S. Department of the Treasury, the
Custodian will not be held liable or responsible for the
delivery of securities owned by the Portfolio prior to the
receipt of such collateral;
11) For delivery as security in connection with any borrowing by
the Trust on behalf of the Portfolio requiring a pledge of
assets by the Trust on behalf of the Portfolio, but only
against receipt of amounts borrowed;
12) For delivery in accordance with the provisions of any
agreement among the Trust on behalf of the Portfolio, the
Custodian and a broker-dealer registered under the Securities
Exchange Act of 1934 (the "EXCHANGE ACT") and a member of The
National Association of Securities Dealers, Inc. ("NASD"),
relating to compliance with the rules of The Options Clearing
Corporation and of any registered national securities
exchange, or of any similar organization or organizations,
regarding escrow or other arrangements in connection with
transactions by the Portfolio of the Trust;
3
<PAGE> 4
13) For delivery in accordance with the provisions of any
agreement among the Trust on behalf of the Portfolio, the
Custodian, and a Futures Commission Merchant registered under
the Commodity Exchange Act, relating to compliance with the
rules of the Commodity Futures Trading Commission and/or any
Contract Market, or any similar organization or organizations,
regarding account deposits in connection with transactions by
the Portfolio of the Trust;
14) Upon receipt of instructions from the transfer agent for the
Trust (the "TRANSFER AGENT") for delivery to such Transfer
Agent or to the holders of Shares in connection with
distributions in kind, as may be described from time to time
in the currently effective prospectus and statement of
additional information of the Trust related to the Portfolio
(the "PROSPECTUS"), in satisfaction of requests by holders of
Shares for repurchase or redemption; and
15) For any other proper trust purpose, but only upon receipt of
written Proper Instructions specifying the securities of the
Portfolio to be delivered, setting forth the purpose for which
such delivery is to be made, declaring such purpose to be a
proper trust purpose, and naming the person or persons to whom
delivery of such securities shall be made.
Section 2.3 Registration of Securities. Domestic securities held
by the Custodian (other than bearer securities) shall be registered in the name
of the Portfolio or in the name of any nominee of the Trust on behalf of the
Portfolio or of any nominee of the Custodian which nominee shall be assigned
exclusively to the Portfolio, unless the Trust has authorized in writing the
appointment of a nominee to be used in common with other registered investment
companies having the same investment adviser as the Portfolio, or in the name
or nominee name of any agent appointed pursuant to Section 2.8 or in the name
or nominee name of any sub-custodian appointed pursuant to Section 1. All
securities accepted by the Custodian on behalf of the Portfolio under the terms
of this Agreement shall be in "street name" or other good delivery form. If,
however, the Trust directs the Custodian to maintain securities in "street
name", the Custodian shall utilize its best efforts only to timely collect
income due the Trust on such securities and to notify the Trust on a best
efforts basis only of relevant corporate actions including, without limitation,
pendency of calls, maturities, tender or exchange offers.
Section 2.4 Bank Accounts. The Custodian shall open and maintain
a separate bank account or accounts in the United States in the name of each
Portfolio of the Trust, subject only to draft or order by the Custodian acting
pursuant to the terms of this Agreement, and shall hold in such account or
accounts, subject to the provisions hereof, all cash received by it from or for
the account of the Portfolio, other than cash maintained by the Portfolio in a
bank account established and used in accordance with Rule 17f-3 under the
Investment Company Act of 1940, as amended (the "1940 Act"). Trusts held by
the Custodian for a Portfolio may be deposited by it to its credit as Custodian
in the Banking Department of the Custodian or in such other banks or trust
companies as it may in its discretion deem necessary or desirable; provided,
however, that every such bank or trust
4
<PAGE> 5
company shall be qualified to act as a custodian under the 1940 Act and that
each such bank or trust company and the funds to be deposited with each such
bank or trust company shall on behalf of each applicable Portfolio be approved
by vote of a majority of the Board of Trustees. Such funds shall be deposited
by the Custodian in its capacity as Custodian and shall be withdrawable by the
Custodian only in that capacity.
Section 2.5 Availability of Federal Funds. Upon mutual agreement
between the Trust, on behalf of each applicable Portfolio, and the Custodian,
the Custodian shall, upon the receipt of Proper Instructions from the Trust,
make federal funds available to such Portfolio as of specified times agreed
upon from time to time by the Trust and the Custodian in the amount of checks
received in payment for Shares of such Portfolio which are deposited into the
Portfolio's account.
Section 2.6 Collection of Income. Subject to the provisions of
Section 2.3, the Custodian shall collect on a timely basis all income and other
payments with respect to registered domestic securities held hereunder to which
each Portfolio shall be entitled either by law or pursuant to custom in the
securities business, and shall collect on a timely basis all income and other
payments with respect to bearer domestic securities if, on the date of payment
by the issuer, such securities are held by the Custodian or its agent thereof
and shall credit such income, as collected, to such Portfolio's custodian
account. Without limiting the generality of the foregoing, the Custodian shall
detach and present for payment all coupons and other income items requiring
presentation as and when they become due and shall collect interest when due on
securities held hereunder. Income due each Portfolio on securities loaned
pursuant to the provisions of Section 2.2 (10) shall be the responsibility of
the Trust. The Custodian will have no duty or responsibility in connection
therewith, other than to provide the Trust with such information or data as may
be necessary to assist the Trust in arranging for the timely delivery to the
Custodian of the income to which the Portfolio is properly entitled.
Section 2.7 Payment of Trust Monies. Upon receipt of Proper
Instructions from the Trust on behalf of the applicable Portfolio, which may be
continuing instructions when deemed appropriate by the parties, the Custodian
shall pay out monies of a Portfolio in the following cases only:
1) Upon the purchase of domestic securities, options, futures
contracts or options on futures contracts for the account of
the Portfolio but only (a) against the delivery of such
securities or evidence of title to such options, futures
contracts or options on futures contracts to the Custodian (or
any bank, banking firm or trust company doing business in the
United States or abroad which is qualified under the 1940 Act
to act as a custodian and has been designated by the Custodian
as its agent for this purpose) registered in the name of the
Portfolio or in the name of a nominee of the Custodian
referred to in Section 2.3 hereof or in proper form for
transfer; (b) in the case of a purchase effected through a
U.S. Securities System, in accordance with the conditions set
forth in Section 2.9 hereof; (c) in the case of a purchase
involving the Direct Paper System, in accordance with the
conditions set forth in Section 2.10; (d) in the case of
repurchase agreements entered into between the Trust on behalf
of the Portfolio and the Custodian, or another bank, or a
broker-dealer which is a member of NASD, (i) against delivery
of the securities
5
<PAGE> 6
either in certificate form or through an entry crediting the
Custodian's account at the Federal Reserve Bank with such
securities or (ii) against delivery of the receipt evidencing
purchase by the Portfolio of securities owned by the Custodian
along with written evidence of the agreement by the Custodian
to repurchase such securities from the Portfolio or (e) for
transfer to a time deposit account of the Trust in any bank,
whether domestic or foreign; such transfer may be effected
prior to receipt of a confirmation from a broker and/or the
applicable bank pursuant to Proper Instructions from the Trust
as defined herein;
2) In connection with conversion, exchange or surrender of
securities owned by the Portfolio as set forth in Section 2.2
hereof;
3) For the redemption or repurchase of Shares issued as set forth
in Section 5 hereof;
4) For the payment of any expense or liability incurred by the
Portfolio, including but not limited to the following payments
for the account of the Portfolio: interest, taxes,
management, accounting, transfer agent and legal fees, and
operating expenses of the Trust whether or not such expenses
are to be in whole or part capitalized or treated as deferred
expenses;
5) For the payment of any dividends on Shares declared pursuant
to the governing documents of the Trust;
6) For payment of the amount of dividends received in respect of
securities sold short;
7) For any other proper trust purpose, but only upon receipt of
written Proper Instructions specifying the amount of such
payment, setting forth the purpose for which such payment is
to be made, declaring such purpose to be a proper trust
purpose, and naming the person or persons to whom such payment
is to be made.
Section 2.8 Appointment of Agents. The Custodian may at any time
or times in its discretion appoint (and may at any time remove) any other bank
or trust company which is itself qualified under the 1940 Act to act as a
custodian, as its agent to carry out such of the provisions of this Section 2
as the Custodian may from time to time direct; provided, however, that the
appointment of any agent shall not relieve the Custodian of its
responsibilities or liabilities hereunder.
Section 2.9 Deposit of Trust Assets in U.S. Securities Systems.
The Custodian may deposit and/or maintain securities owned by a Portfolio in a
clearing agency registered with the United States Securities and Exchange
Commission (the "SEC") under Section 17A of the Exchange Act , which acts as a
securities depository, or in the book-entry system authorized by the U.S.
Department of the Treasury and certain federal agencies, collectively referred
to herein as "U.S. SECURITIES SYSTEM" in accordance with applicable Federal
Reserve Board and SEC rules and regulations, if any, and subject to the
following provisions:
6
<PAGE> 7
1) The Custodian may keep securities of the Portfolio in a U.S.
Securities System provided that such securities are
represented in an account of the Custodian in the U.S.
Securities System (the "U.S. SECURITIES SYSTEM ACCOUNT")
which account shall not include any assets of the Custodian
other than assets held as a fiduciary, custodian or otherwise
for customers;
2) The records of the Custodian with respect to securities of the
Portfolio which are maintained in a U.S. Securities System
shall identify by book-entry those securities belonging to the
Portfolio;
3) The Custodian shall pay for securities purchased for the
account of the Portfolio upon (i) receipt of advice from the
U.S. Securities System that such securities have been
transferred to the U.S. Securities System Account, and (ii)
the making of an entry on the records of the Custodian to
reflect such payment and transfer for the account of the
Portfolio. The Custodian shall transfer securities sold for
the account of the Portfolio upon (i) receipt of advice from
the U.S. Securities System that payment for such securities
has been transferred to the U.S. Securities System Account,
and (ii) the making of an entry on the records of the
Custodian to reflect such transfer and payment for the account
of the Portfolio. Copies of all advices from the U.S.
Securities System of transfers of securities for the account
of the Portfolio shall identify the Portfolio, be maintained
for the Portfolio by the Custodian and be provided to the
Trust at its request. Upon request, the Custodian shall
furnish the Trust on behalf of the Portfolio confirmation of
each transfer to or from the account of the Portfolio in the
form of a written advice or notice and shall furnish to the
Trust on behalf of the Portfolio copies of daily transaction
sheets reflecting each day's transactions in the U.S.
Securities System for the account of the Portfolio;
4) The Custodian shall provide the Trust for the Portfolio with
any report obtained by the Custodian on the U.S. Securities
System's accounting system, internal accounting control and
procedures for safeguarding securities deposited in the U.S.
Securities System;
5) The Custodian shall have received from the Trust on behalf of
the Portfolio the initial or annual certificate, as the case
may be, required by Section 15 hereof;
6) Anything to the contrary in this Agreement notwithstanding,
the Custodian shall be liable to the Trust for the benefit of
the Portfolio for any loss or damage to the Portfolio
resulting from use of the U.S. Securities System by reason of
any negligence, misfeasance or misconduct of the Custodian or
any of its agents or of any of its or their employees or from
failure of the Custodian or any such agent to enforce
effectively such rights as it may have against the U.S.
Securities System; at the election of the Trust, it shall be
entitled to be subrogated to the rights of the Custodian with
respect to any claim against the U.S. Securities System or any
other person which the Custodian may have as a consequence of
any such loss or
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damage if and to the extent that the Portfolio has not been
made whole for any such loss or damage; the Custodian agrees
to provide reasonable cooperation in connection with such
subrogation.
Section 2.10 Trust Assets Held in the Custodian's Direct Paper
System. The Custodian may deposit and/or maintain securities owned by a
Portfolio in the Direct Paper System of the Custodian subject to the following
provisions:
1) No transaction relating to securities in the Direct Paper
System will be effected in the absence of Proper Instructions
from the Trust on behalf of the Portfolio;
2) The Custodian may keep securities of the Portfolio in the
Direct Paper System only if such securities are represented in
the Direct Paper System Account, which account shall not
include any assets of the Custodian other than assets held as
a fiduciary, custodian or otherwise for customers;
3) The records of the Custodian with respect to securities of the
Portfolio which are maintained in the Direct Paper System
shall identify by book-entry those securities belonging to the
Portfolio;
4) The Custodian shall pay for securities purchased for the
account of the Portfolio upon the making of an entry on the
records of the Custodian to reflect such payment and transfer
of securities to the account of the Portfolio. The Custodian
shall transfer securities sold for the account of the
Portfolio upon the making of an entry on the records of the
Custodian to reflect such transfer and receipt of payment for
the account of the Portfolio;
5) The Custodian shall furnish the Trust on behalf of the
Portfolio confirmation of each transfer to or from the account
of the Portfolio, in the form of a written advice or notice,
of Direct Paper on the next business day following such
transfer and shall furnish to the Trust on behalf of the
Portfolio copies of daily transaction sheets reflecting each
day's transaction in the Direct Paper System for the account
of the Portfolio;
6) The Custodian shall provide the Trust on behalf of the
Portfolio with any report on its system of internal accounting
control as the Trust may reasonably request from time to time.
Section 2.11 Segregated Account. The Custodian shall upon receipt
of Proper Instructions from the Trust on behalf of each applicable Portfolio
establish and maintain a segregated account or accounts for and on behalf of
each such Portfolio, into which account or accounts may be transferred cash
and/or securities, including securities maintained in an account by the
Custodian pursuant to Section 2.9 hereof, (i) in accordance with the provisions
of any agreement among the Trust on behalf of the Portfolio, the Custodian and
a broker-dealer registered under the Exchange Act and a member of the NASD (or
any futures commission
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merchant registered under the Commodity Exchange Act), relating to compliance
with the rules of The Options Clearing Corporation and of any registered
national securities exchange (or the Commodity Futures Trading Commission or
any registered contract market), or of any similar organization or
organizations, regarding escrow or other arrangements in connection with
transactions by the Portfolio, (ii) for purposes of segregating cash or
government securities in connection with options purchased, sold or written by
the Portfolio or commodity futures contracts or options thereon purchased or
sold by the Portfolio, (iii) for the purposes of compliance by the Portfolio
with the procedures required by Investment Company Act Release No. 10666, or
any subsequent release or releases of the SEC relating to the maintenance of
segregated accounts by registered investment companies and (iv) for other
proper trust purposes, but only, in the case of clause (iv), upon receipt of
written Proper Instructions from the Trust on behalf of the applicable
Portfolio setting forth the purpose or purposes of such segregated account and
declaring such purpose(s) to be a proper trust purpose.
Section 2.12 Ownership Certificates for Tax Purposes. The
Custodian shall execute ownership and other certificates and affidavits for all
federal and state tax purposes in connection with receipt of income or other
payments with respect to domestic securities of each Portfolio held by it and
in connection with transfers of securities.
Section 2.13 Proxies. The Custodian shall, with respect to the
domestic securities held hereunder, cause to be promptly executed by the
registered holder of such securities, if the securities are registered
otherwise than in the name of the Portfolio or a nominee of the Portfolio, all
proxies, without indication of the manner in which such proxies are to be
voted, and shall promptly deliver to the Portfolio such proxies, all proxy
soliciting materials and all notices relating to such securities.
Section 2.14 Communications Relating to Portfolio Securities.
Subject to the provisions of Section 2.3, the Custodian shall transmit promptly
to the Trust for each Portfolio all written information (including, without
limitation, pendency of calls and maturities of domestic securities and
expirations of rights in connection therewith and notices of exercise of call
and put options written by the Trust on behalf of the Portfolio and the
maturity of futures contracts purchased or sold by the Portfolio) received by
the Custodian from issuers of the securities being held for the Portfolio.
With respect to tender or exchange offers, the Custodian shall transmit
promptly to the Portfolio all written information received by the Custodian
from issuers of the securities whose tender or exchange is sought and from the
party (or his agents) making the tender or exchange offer. If the Portfolio
desires to take action with respect to any tender offer, exchange offer or any
other similar transaction, the Portfolio shall notify the Custodian at least
three business days prior to the date on which the Custodian is to take such
action.
Section 3. The Custodian as Foreign Custody Manager of the Portfolios
Section 3.1 Definitions. The following capitalized terms shall
have the indicated meanings:
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"COUNTRY RISK" means all factors reasonably related to the systemic risk of
holding Foreign Assets in a particular country including, but not limited to,
such country's political environment; economic and financial infrastructure
(including any Mandatory Securities Depositories operating in the country);
prevailing or developing custody and settlement practices; and laws and
regulations applicable to the safekeeping and recovery of Foreign Assets held
in custody in that country.
"ELIGIBLE FOREIGN CUSTODIAN" has the meaning set forth in section (a)(1) of
Rule 17f-5, including a majority-owned or indirect subsidiary of a U.S. Bank
(as defined in Rule 17f-5), a bank holding company meeting the requirements of
an Eligible Foreign Custodian (as set forth in Rule 17f-5 or by other
appropriate action of the SEC, or a foreign branch of a Bank (as defined in
Section 2(a)(5) of the 1940 Act) meeting the requirements of a custodian under
Section 17(f) of the 1940 Act, except that the term does not include Mandatory
Securities Depositories.
"FOREIGN ASSETS" means any of the Portfolios' investments (including foreign
currencies) for which the primary market is outside the United States and such
cash and cash equivalents as are reasonably necessary to effect the Portfolios'
transactions in such investments.
"FOREIGN CUSTODY MANAGER" has the meaning set forth in section (a)(2) of Rule
17f-5.
"MANDATORY SECURITIES DEPOSITORY" means a foreign securities depository or
clearing agency that, either as a legal or practical matter, must be used if
the Trust, on the Portfolios' behalf, determines to place Foreign Assets in a
country outside the United States (i) because required by law or regulation;
(ii) because securities cannot be withdrawn from such foreign securities
depository or clearing agency; or (iii) because maintaining or effecting trades
in securities outside the foreign securities depository or clearing agency is
not consistent with prevailing or developing custodial or market practices.
Section 3.2 Delegation to the Custodian as Foreign Custody
Manager. The Trust, by resolution adopted by the Board of Trustees, hereby
delegates to the Custodian with respect to the Portfolios, subject to Section
(b) of Rule 17f-5, the responsibilities as Foreign Custody Manager set forth
in this Section 3 with respect to Foreign Assets of the Portfolios held outside
the United States, and the Custodian hereby accepts such delegation, as the
Portfolios' Foreign Custody Manager.
Section 3.3 Countries Covered. The Foreign Custody Manager shall
be responsible for performing the delegated responsibilities defined below only
with respect to the countries and custody arrangements for each such country
listed on Schedule A of this Contract, which list of countries may be amended
from time to time by the Trust with the agreement of the Custodian. The
Foreign Custody Manager shall list on Schedule A the Eligible Foreign
Custodians selected by the Foreign Custody Manager to maintain the assets of
the Portfolios, which list of Eligible Foreign Custodians may be amended from
time to time in the sole discretion of the Foreign Custody Manager. Mandatory
Securities Depositories are listed on Schedule B to this Agreement, which may
be amended from time to time by the Foreign Custody Manager. The
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Foreign Custody Manager will provide amended versions of Schedules A and B in
accordance with Section 3.7 hereof.
Upon the receipt by the Foreign Custody Manager of Proper Instructions
to open an account or to place or maintain Foreign Assets in a country listed
on Schedule A, and the fulfillment by the Trust on behalf of the Portfolios of
the applicable account opening requirements for the country, the Foreign
Custody Manager shall be deemed to have been delegated by the Board of Trustees
on behalf of the Portfolios responsibility as Foreign Custody Manager with
respect to that country and to have accepted such delegation. Following the
receipt of Proper Instructions directing the Foreign Custody Manager to close
the account of a Portfolio with the Eligible Foreign Custodian selected by the
Foreign Custody Manager in a designated country, the delegation by the Board of
Trustees on behalf of the Portfolios to the Custodian as Foreign Custody
Manager for that country shall be deemed to have been withdrawn and the
Custodian shall immediately cease to be the Foreign Custody Manager of the
Portfolios with respect to that country.
The Foreign Custody Manager may withdraw its acceptance of delegated
responsibilities with respect to a designated country upon written notice to
the Trust. Thirty days (or such longer period as to which the parties agree in
writing) after receipt of any such notice by the Trust, the Custodian shall
have no further responsibility as Foreign Custody Manager to the Trust with
respect to the country as to which the Custodian's acceptance of delegation is
withdrawn.
Section 3.4 Scope of Delegated Responsibilities.
3.4.1 Selection of Eligible Foreign Custodians. Subject to the
provisions of this Section 3, the Portfolios' Foreign Custody Manager may place
and maintain the Foreign Assets in the care of the Eligible Foreign Custodian
selected by the Foreign Custody Manager in each country listed on Schedule A,
as amended from time to time.
In performing its delegated responsibilities as Foreign Custody
Manager to place or maintain Foreign Assets with an Eligible Foreign Custodian,
the Foreign Custody Manager shall determine that the Foreign Assets will be
subject to reasonable care, based on the standards applicable to custodians in
the country in which the Foreign Assets will be held by that Eligible Foreign
Custodian, after considering all factors relevant to the safekeeping of such
assets, including, without limitation, the factors specified in Rule
17f-5(c)(1).
3.4.2 Contracts With Eligible Foreign Custodians. The Foreign
Custody Manager shall determine that the contract (or the rules or established
practices or procedures in the case of an Eligible Foreign Custodian that is a
foreign securities depository or clearing agency) governing the foreign custody
arrangements with each Eligible Foreign Custodian selected by the Foreign
Custody Manager will satisfy the requirements of Rule 17f-5(c)(2).
3.4.3 Monitoring. In each case in which the Foreign Custody Manager
maintains Foreign Assets with an Eligible Foreign Custodian selected by the
Foreign Custody Manager, the Foreign Custody Manager shall establish a system
to monitor (i) the appropriateness of maintaining the Foreign Assets with such
Eligible Foreign Custodian and (ii) the contract governing the custody
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arrangements established by the Foreign Custody Manager with the Eligible
Foreign Custodian (or the rules or established practices and procedures in the
case of an Eligible Foreign Custodian selected by the Foreign Custody Manager
which is a foreign securities depository or clearing agency that is not a
Mandatory Securities Depository). In the event the Foreign Custody Manager
determines that the custody arrangements with an Eligible Foreign Custodian it
has selected are no longer appropriate, the Foreign Custody Manager shall
notify the Board of Trustees in accordance with Section 3.7 hereunder.
Section 3.5 Guidelines for the Exercise of Delegated Authority.
For purposes of this Section 3, the Board of Trustees shall be deemed to have
considered and determined to accept such Country Risk as is incurred by placing
and maintaining the Foreign Assets in each country for which the Custodian is
serving as Foreign Custody Manager of the Portfolios. The Trust, on behalf of
the Portfolios, and the Custodian each expressly acknowledge that the Foreign
Custody Manager shall not be delegated any responsibilities under this Section
3 with respect to Mandatory Securities Depositories.
Section 3.6 Standard of Care as Foreign Custody Manager of the
Portfolios. In performing the responsibilities delegated to it, the Foreign
Custody Manager agrees to exercise reasonable care, prudence and diligence such
as a person having responsibility for the safekeeping of assets of management
investment companies registered under the 1940 Act would exercise.
Section 3.7 Reporting Requirements. The Foreign Custody Manager
shall report the withdrawal of the Foreign Assets from an Eligible Foreign
Custodian and the placement of such Foreign Assets with another Eligible
Foreign Custodian by providing to the Board of Trustees amended Schedules A or
B at the end of the calendar quarter in which an amendment to either Schedule
has occurred. The Foreign Custody Manager shall make written reports notifying
the Board of Trustees of any other material change in the foreign custody
arrangements of the Portfolios described in this Article 3 after the occurrence
of the material change.
Section 3.8 Representations with Respect to Rule 17f-5. The
Foreign Custody Manager represents to the Trust that it is a U.S. Bank as
defined in section (a)(7) of Rule 17f-5. The Trust represents to the
Custodian that the Board of Trustees has determined that it is reasonable for
the Board of Trustees to rely on the Custodian to perform the responsibilities
delegated pursuant to this Agreement to the Custodian as the Foreign Custody
Manager of the Portfolios.
Section 3.9 Effective Date and Termination of the Custodian as
Foreign Custody Manager. The Board of Trustees' delegation to the Custodian as
Foreign Custody Manager of the Portfolios shall be effective as of the date of
execution of this Agreement and shall remain in effect until terminated at any
time, without penalty, by written notice from the terminating party to the
non-terminating party. Termination will become effective thirty (30) days
after receipt by the non-terminating party of such notice. The provisions of
Section 3.3 hereof shall govern the delegation to and termination of the
Custodian as Foreign Custody Manager of the Portfolios with respect to
designated countries.
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Section 4. Duties of the Custodian with Respect to Property of the
Portfolios Held Outside of the United States
Section 4.1 Definitions. Capitalized terms in this Section 4
shall have the following meanings:
"FOREIGN SECURITIES SYSTEM" means either a clearing agency or a securities
depository listed on Schedule A hereto or a Mandatory Securities Depository
listed on Schedule B hereto.
"FOREIGN SUB-CUSTODIAN" means a foreign banking institution serving as an
Eligible Foreign Custodian.
Section 4.2 Holding Securities. The Custodian shall identify on
its books as belonging to the Portfolios the foreign securities held by each
Foreign Sub-Custodian or Foreign Securities System. The Custodian may hold
foreign securities for all of its customers, including the Portfolios, with any
Foreign Sub-Custodian in an account that is identified as belonging to the
Custodian for the benefit of its customers, provided however, that (i) the
records of the Custodian with respect to foreign securities of the Portfolios
which are maintained in such account shall identify those securities as
belonging to the Portfolios and (ii) the Custodian shall require that
securities so held by the Foreign Sub-Custodian be held separately from any
assets of such Foreign Sub-Custodian or of other customers of such Foreign
Sub-Custodian.
Section 4.3 Foreign Securities Systems. Foreign securities shall
be maintained in a Foreign Securities System in a designated country only
through arrangements implemented by the Foreign Sub-Custodian in such country
pursuant to the terms of this Agreement.
Section 4.4 Transactions in Foreign Custody Account.
4.4.1 Delivery of Foreign Securities. The Custodian or a Foreign
Sub-Custodian shall release and deliver foreign securities of the Portfolios
held by such Foreign Sub-Custodian, or in a Foreign Securities System account,
only upon receipt of Proper Instructions, which may be continuing instructions
when deemed appropriate by the parties, and only in the following cases:
(i) upon the sale of such foreign securities for the Portfolios in
accordance with market practice generally accepted by
institutional investors in the country where such foreign
securities are held or traded, including, without limitation:
(A) delivery against expectation of receiving later payment;
or (B) in the case of a sale effected through a Foreign
Securities System in accordance with the rules governing the
operation of the Foreign Securities System;
(ii) in connection with any repurchase agreement related to foreign
securities;
(iii) to the depository agent in connection with tender or other
similar offers for foreign securities of the Portfolios;
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(iv) to the issuer thereof or its agent when such foreign
securities are called, redeemed, retired or otherwise become
payable;
(v) to the issuer thereof, or its agent, for transfer into the
name of the Custodian (or the name of the respective Foreign
Sub-Custodian or of any nominee of the Custodian or such
Foreign Sub-Custodian) or for exchange for a different number
of bonds, certificates or other evidence representing the same
aggregate face amount or number of units;
(vi) to brokers, clearing banks or other clearing agents for
examination or trade execution in accordance with market
custom; provided that in any such case the Foreign
Sub-Custodian shall have no responsibility or liability for
any loss arising from the delivery of such securities prior to
receiving payment for such securities except as may arise from
the Foreign Sub-Custodian's own negligence or willful
misconduct;
(vii) for exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or
readjustment of the securities of the issuer of such
securities, or pursuant to provisions for conversion contained
in such securities, or pursuant to any deposit agreement;
(viii) in the case of warrants, rights or similar foreign securities,
the surrender thereof in the exercise of such warrants, rights
or similar securities or the surrender of interim receipts or
temporary securities for definitive securities;
(ix) or delivery as security in connection with any borrowing by
the Portfolios requiring a pledge of assets by the Portfolios;
(x) in connection with trading in options and futures contracts,
including delivery as original margin and variation margin;
(xi) in connection with the lending of foreign securities; and
(xii) for any other proper trust purpose, but only upon receipt of
written Proper Instructions specifying the foreign securities
to be delivered, setting forth the purpose for which such
delivery is to be made, declaring such purpose to be a proper
trust purpose, and naming the person or persons to whom
delivery of such securities shall be made.
4.4.2 Payment of Portfolio Monies. Upon receipt of Proper
Instructions, which may be continuing instructions when deemed appropriate by
the parties, the Custodian shall pay out, or direct the respective Foreign
Sub-Custodian or the respective Foreign Securities System to pay out, monies of
Portfolio in the following cases only:
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(i) upon the purchase of foreign securities for the Portfolio,
unless otherwise directed by Proper Instructions, by (A)
delivering money to the seller thereof or to a dealer therefor
(or an agent for such seller or dealer) against expectation of
receiving later delivery of such foreign securities; or (B) in
the case of a purchase effected through a Foreign Securities
System, in accordance with the rules governing the operation
of such Foreign Securities System;
(ii) in connection with the conversion, exchange or surrender of
foreign securities of the Portfolio;
(iii) for the payment of any expense or liability of the Portfolio,
including but not limited to the following payments:
interest, taxes, investment advisory fees, transfer agency
fees, fees under this Agreement, legal fees, accounting fees,
and other operating expenses;
(iv) for the purchase or sale of foreign exchange or foreign
exchange contracts for the Portfolio, including transactions
executed with or through the Custodian or its Foreign
Sub-Custodians;
(v) in connection with trading in options and futures contracts,
including delivery as original margin and variation margin;
(vii) in connection with the borrowing or lending of foreign
securities; and
(viii) for any other proper trust purpose, but only upon receipt of
written Proper Instructions specifying the amount of such
payment, setting forth the purpose for which such payment is
to be made, declaring such purpose to be a proper trust
purpose, and naming the person or persons to whom such payment
is to be made.
4.4.3 Market Conditions; Market Information. Notwithstanding any
provision of this Agreement to the contrary, settlement and payment for Foreign
Assets received for the account of the Portfolios and delivery of Foreign
Assets maintained for the account of the Portfolios may be effected in
accordance with the customary established securities trading or processing
practices and procedures generally accepted by institutional investors in the
country or market in which the transaction occurs, including, without
limitation, delivering Foreign Assets to the purchaser thereof or to a dealer
therefor (or an agent for such purchaser or dealer) with the expectation of
receiving later payment for such Foreign Assets from such purchaser or dealer.
The Custodian will provide the Trust the information with respect to
custody and settlement practices in countries in which the Custodian employs a
Foreign Sub-Custodian, including without limitation information relating to
Foreign Securities Systems, described on Schedule E hereto at the time or times
set forth on such Schedule. The Custodian may revise Schedule E from time to
time, provided that no such revision shall result in the Trust being provided
with substantively less information than had been previously provided
hereunder.
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Section 4.5 Registration of Foreign Securities. The foreign
securities maintained in the custody of a Foreign Custodian (other than bearer
securities) shall be registered in the name of the applicable Portfolio or in
the name of the Custodian or in the name of any Foreign Sub-Custodian or in the
name of any nominee of the foregoing, and the Trust on behalf of such Portfolio
agrees to hold any such nominee harmless from any liability as a holder of
record of such foreign securities. The Custodian or a Foreign Sub-Custodian
shall not be obligated to accept securities on behalf of a Portfolio under the
terms of this Agreement unless the form of such securities and the manner in
which they are delivered are in accordance with reasonable market practice.
Section 4.6 Bank Accounts. The Custodian shall identify on its
books as belonging to a Portfolio cash (including cash denominated in foreign
currencies) deposited with the Custodian. Where the Custodian is unable to
maintain, or market practice does not facilitate the maintenance of, cash on
the books of the Custodian, a bank account or bank accounts opened and
maintained outside the United States on behalf of a Portfolio with a Foreign
Sub-Custodian shall be subject only to draft or order by the Custodian or such
Foreign Sub-Custodian, acting pursuant to the terms of this Agreement to hold
cash received by or from or for the account of the Portfolio.
Section 4.7 Collection of Income. The Custodian shall use
reasonable commercial efforts to collect all income and other payments with
respect to the Foreign Assets held hereunder to which the Portfolios shall be
entitled and shall credit such income, as collected, to the applicable
Portfolio. In the event that extraordinary measures are required to collect
such income, the Trust and the Custodian shall consult as to such measures and
as to the compensation and expenses of the Custodian relating to such measures.
Section 4.8 Shareholder Rights. With respect to the foreign
securities held pursuant to this Agreement, the Custodian will use its
reasonable commercial efforts to facilitate the exercise of voting and other
shareholder proxy rights, subject always to the laws, regulations and practical
constraints that may exist in the country where such securities are issued.
The Trust acknowledges that local conditions, including lack of regulation,
onerous procedural obligations, lack of notice and other factors may have the
effect of severely limiting the ability of the Trust to exercise shareholder
rights.
Section 4.9 Communications Relating to Foreign Securities. The
Custodian shall transmit promptly to the Trust written information (including,
without limitation, pendency of calls and maturities of foreign securities and
expirations of rights in connection therewith) received by the Custodian via
the Foreign Sub-Custodians from issuers of the foreign securities being held
for the account of the Portfolios. With respect to tender or exchange offers,
the Custodian shall transmit promptly to the Trust written information so
received by the Custodian from issuers of the foreign securities whose tender
or exchange is sought or from the party (or its agents) making the tender or
exchange offer. The Custodian shall not be liable for any untimely exercise of
any tender, exchange or other right or power in connection with foreign
securities or other property of the Portfolios at any time held by it unless
(i) the Custodian or the respective Foreign Sub-Custodian is in actual
possession of such foreign securities or property and (ii) the Custodian
receives Proper Instructions with regard to the exercise of any such right or
power, and
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both (i) and (ii) occur at least three (3) business days prior to the date on
which the Custodian is to take such action to exercise such right or power.
Section 4.10 Liability of Foreign Sub-Custodians and Foreign
Securities Systems. Each agreement pursuant to which the Custodian employs as
a Foreign Sub-Custodian shall, to the extent possible, require the Foreign
Sub-Custodian to exercise reasonable care in the performance of its duties and,
to the extent possible, to indemnify, and hold harmless, the Custodian from and
against any loss, damage, cost, expense, liability or claim arising out of or
in connection with the institution's performance of such obligations. At the
election of the Trust, the Portfolios shall be entitled to be subrogated to the
rights of the Custodian with respect to any claims against a Foreign
Sub-Custodian as a consequence of any such loss, damage, cost, expense,
liability or claim if and to the extent that the Portfolios have not been made
whole for any such loss, damage, cost, expense, liability or claim.
Section 4.11 Tax Law. The Custodian shall have no responsibility
or liability for any obligations now or hereafter imposed on the Trust, the
Portfolios or the Custodian as custodian of the Portfolios by the tax law of
the United States or of any state or political subdivision thereof. It shall
be the responsibility of the Trust to notify the Custodian of the obligations
imposed on the Trust with respect to the Portfolios or the Custodian as
custodian of the Portfolios by the tax law of countries other than those
mentioned in the above sentence, including responsibility for withholding and
other taxes, assessments or other governmental charges, certifications and
governmental reporting. The sole responsibility of the Custodian with regard
to such tax law shall be to use reasonable efforts to assist the Trust with
respect to any claim for exemption or refund under the tax law of countries for
which the Trust has provided such information.
Section 4.12 Conflict. If the Custodian is delegated the
responsibilities of Foreign Custody Manager pursuant to the terms of Section 3
hereof, in the event of any conflict between the provisions of Sections 3 and 4
hereof, the provisions of Section 3 shall prevail.
Section 4(A). Contractual Settlement
Section 4(A).1 Scheme of Contractual Services.
(a) Subject to paragraphs (b) and (c) below and Sections 4.4.1,
4.4.2 and 4.4.3 hereof, the Custodian shall credit or debit
the appropriate account of each Portfolio in connection with
(i) the purchases of, (ii) income or dividends associated
with, or (iii) proceeds of the sale, maturity, redemption, or
other disposition of, securities and other assets held for the
time being on behalf of a Portfolio on a contractual
settlement basis.
(b) The Custodian may make available provisional credit of
settlement, maturity, redemption proceeds on a contractual
settlement basis in the markets set forth on Schedule C hereto
when the Custodian has a reasonable expectation that the
transaction will settle in due course. The Custodian reserves
the right to reverse
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any such crediting at any time before actual receipt of the
item associated with the credit when the Custodian determines
that such transaction will not settle in accordance with its
terms or that amounts due pursuant thereto will not be
collectable, or the Custodian has not been provided with
Proper Instructions with respect thereto. In such instances,
the Custodian may charge the appropriate account of the
applicable Portfolio for the expense of providing funds
associated with such advance in an amount not to exceed a
commercially reasonable rate.
(c) With respect to the markets set forth on Schedule C hereto,
the consideration payable in connection with a purchase
transaction shall be debited from the appropriate account of
the applicable Portfolio upon the contractual settlement date
for the relevant purchase transaction. The Custodian shall
promptly recredit such amount at the time that the Portfolio
notifies the Custodian by Proper Instruction that such
transaction has been canceled.
Section 4(A).2 Markets Eligible for Contractual Services. The
services described in Section 4(A).1 hereof (for the purposes of this Section
4(A), the "Services") shall be provided with respect to the applicable
securities transactions in the countries set forth on Schedule C attached
hereto.
Section 4(A).3 Obligations. All payments made under this Section
4(A) are made subject to actual collection; the Custodian shall not be liable
to the Trust or the Portfolios for any amount that is not actually collected in
accordance with the terms hereof. The provision of the Services is intended to
facilitate settlement in ordinary course. The Custodian may terminate
provision of Services under Section 4(A)1(b) immediately upon notice to Trust,
particularly with respect to the occurrence of force majeure events affecting
settlement, any disorder in markets, or other changed external business
circumstances.
Section 5. Payments for Sales or Repurchases or Redemptions of Shares
The Custodian shall receive from the distributor for the Shares or
from the Transfer Agent and deposit into the account of the appropriate
Portfolio such payments as are received for Shares thereof issued or sold from
time to time by the Trust. The Custodian will provide timely notification to
the Trust on behalf of each such Portfolio and the Transfer Agent of any
receipt by it of payments for Shares of such Portfolio.
From such funds as may be available for the purpose but subject to the
limitations of the Trust's Declaration of Trust and any applicable votes of the
Board of Trustees pursuant thereto, the Custodian shall, upon receipt of
instructions from the Transfer Agent, make funds available for payment to
holders of Shares who have delivered to the Transfer Agent a request for
redemption or repurchase of their Shares. In connection with the redemption or
repurchase of Shares, the Custodian is authorized upon receipt of instructions
from the Transfer Agent to wire funds to or through a commercial bank
designated by the redeeming shareholders. In connection with the redemption or
repurchase of Shares, the Custodian shall honor checks drawn on the Custodian
by a holder of Shares, which checks have been furnished by the Trust to the
holder of
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<PAGE> 19
Shares, when presented to the Custodian in accordance with such procedures and
controls as are mutually agreed upon from time to time between the Trust and
the Custodian.
Section 6. Proper Instructions
Proper Instructions as used throughout this Agreement means a writing
signed or initialed by one or more person or persons as the Board of Trustees
shall have from time to time authorized. Each such writing shall set forth the
specific transaction or type of transaction involved, including a specific
statement of the purpose for which such action is requested. Oral instructions
will be considered Proper Instructions if the Custodian reasonably believes
them to have been given by a person authorized to give such instructions with
respect to the transaction involved. The Trust shall cause all oral
instructions to be confirmed in writing. Upon receipt of a certificate of the
Secretary or an Assistant Secretary as to the authorization by the Board of
Trustees accompanied by a detailed description of procedures approved by the
Board of Trustees, Proper Instructions may include communications effected
directly between electro-mechanical or electronic devices provided that the
Board of Trustees and the Custodian are satisfied that such procedures afford
adequate safeguards for the Portfolios' assets. For purposes of this Section,
Proper Instructions shall include instructions received by the Custodian
pursuant to any three - party agreement which requires a segregated asset
account in accordance with Section 2.11.
Section 7. Actions Permitted without Express Authority
The Custodian may in its discretion, without express authority from
the Trust on behalf of each applicable Portfolio:
1) make payments to itself or others for minor expenses of
handling securities or other similar items relating to its
duties under this Agreement, provided that all such payments
shall be accounted for to the Trust on behalf of the
Portfolio;
2) surrender securities in temporary form for securities in
definitive form;
3) endorse for collection, in the name of the Portfolio, checks,
drafts and other negotiable instruments; and
4) in general, attend to all non-discretionary details in
connection with the sale, exchange, substitution, purchase,
transfer and other dealings with the securities and property
of the Portfolio except as otherwise directed by the Board of
Trustees.
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<PAGE> 20
Section 8. Evidence of Authority
The Custodian shall be protected in acting upon any instructions,
notice, request, consent, certificate or other instrument or paper reasonably
believed by it to be genuine and to have been properly executed by or on behalf
of the Trust. The Custodian may receive and accept a Certified Resolution as
conclusive evidence (a) of the authority of any person to act in accordance
with such resolution or (b) of any determination or of any action by the Board
of Trustees pursuant to the Trust's Declaration of Trust as described in such
resolution, and such resolution may be considered as in full force and effect
until receipt by the Custodian of written notice to the contrary.
Section 9. Duties of Custodian with Respect to the Books of Account and
Calculation of Net Asset Value and Net Income
The Custodian shall cooperate with and supply necessary information to
the entity or entities appointed by the Board of Trustees to keep the books of
account of each Portfolio and/or compute the net asset value per Share of the
outstanding Shares or, if directed in writing to do so by the Trust on behalf
of the Portfolio, shall itself keep such books of account and/or compute such
net asset value per Share. If so directed, the Custodian shall also calculate
daily the net income of the Portfolio as described in the Prospectus related to
such Portfolio and shall advise the Trust and the Transfer Agent daily of the
total amounts of such net income and, if instructed in writing by an officer of
the Trust to do so, shall advise the Transfer Agent periodically of the
division of such net income among its various components. The calculations of
the net asset value per Share and the daily income of each Portfolio shall be
made at the time or times described from time to time in the Prospectus related
to such Portfolio.
Section 10. Records
The Custodian shall with respect to each Portfolio create and maintain
all records relating to its activities and obligations under this Agreement in
such manner as will meet the obligations of the Trust under the 1940 Act, with
particular attention to Section 31 thereof and Rules 31a-1 and 31a-2
thereunder. All such records shall be the property of the Trust and shall at
all times during the regular business hours of the Custodian be open for
inspection by duly authorized officers, employees or agents of the Trust and
employees and agents of the SEC. The Custodian shall, at the Trust's request,
supply the Trust with a tabulation of securities owned by each Portfolio and
held by the Custodian and shall, when requested to do so by the Trust and for
such compensation as shall be agreed upon between the Trust and the Custodian,
include certificate numbers in such tabulations.
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<PAGE> 21
Section 11. Opinion of Trust's Independent Accountant
The Custodian shall take all reasonable action, as the Trust on behalf
of each applicable Portfolio may from time to time request, to obtain from year
to year favorable opinions from the Trust's independent accountants with
respect to its activities hereunder in connection with the preparation of the
Trust's Form N-1A, and Form N-SAR or other annual reports to the SEC and with
respect to any other requirements thereof.
Section 12. Reports to Trust by Independent Public Accountants
The Custodian shall provide the Trust, on behalf of each of the
Portfolios at such times as the Trust may reasonably require, with reports by
independent public accountants on the accounting system, internal accounting
control and procedures for safeguarding securities, futures contracts and
options on futures contracts, including securities deposited and/or maintained
in a U.S. Securities System or a Foreign Securities System (collectively
referred to herein as the "SECURITIES SYSTEMS"), relating to the services
provided by the Custodian under this Agreement; such reports, shall be of
sufficient scope and in sufficient detail, as may reasonably be required by the
Trust to provide reasonable assurance that any material inadequacies would be
disclosed by such examination, and, if there are no such inadequacies, the
reports shall so state.
Section 13. Compensation of Custodian
The Custodian shall be entitled to reasonable compensation for its
services and expenses as Custodian, as agreed upon from time to time between
the Trust on behalf of each applicable Portfolio and the Custodian.
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<PAGE> 22
Section 14. Responsibility of Custodian
So long as and to the extent that it is in the exercise of reasonable
care, the Custodian shall not be responsible for the title, validity or
genuineness of any property or evidence of title thereto received by it or
delivered by it pursuant to this Agreement and shall be held harmless in acting
upon any notice, request, consent, certificate or other instrument reasonably
believed by it to be genuine and to be signed by the proper party or parties,
including any futures commission merchant acting pursuant to the terms of a
three-party futures or options agreement. The Custodian shall be held to the
exercise of reasonable care in carrying out the provisions of this Agreement,
but shall be kept indemnified by and shall be without liability to the Trust
for any action taken or omitted by it in good faith without negligence. It
shall be entitled to rely on and may act upon advice of counsel (who may be
counsel for the Trust) on all matters, and shall be without liability for any
action reasonably taken or omitted pursuant to such advice. The Custodian
shall be without liability to the Trust and the Portfolios for any loss,
liability, claim or expense resulting from or caused by anything which is (A)
part of Country Risk (as defined in Section 3 hereof), including without
limitation nationalization, expropriation, currency restrictions, or acts of
war, revolution, riots or terrorism, or (B) part of the "prevailing country
risk" of the Portfolios, as such term is used in SEC Release Nos. IC- 22658;
IS-1080 (May 12, 1997) or as such term or other similar terms are now or in the
future interpreted by the SEC or by the staff of the Division of Investment
Management thereof.
Except as may arise from the Custodian's own negligence or willful
misconduct or the negligence or willful misconduct of a sub-custodian or agent,
the Custodian shall be without liability to the Trust for any loss, liability,
claim or expense resulting from or caused by; (i) events or circumstances
beyond the reasonable control of the Custodian or any sub-custodian or
Securities System or any agent or nominee of any of the foregoing, including,
without limitation, the interruption, suspension or restriction of trading on
or the closure of any securities market, power or other mechanical or
technological failures or interruptions, computer viruses or communications
disruptions, work stoppages, natural disasters, or other similar events or
acts; (ii) errors by the Trust or the Investment Advisor in their instructions
to the Custodian provided such instructions have been in accordance with this
Agreement; (iii) the insolvency of or acts or omissions by a Securities System;
(iv) any delay or failure of any broker, agent or intermediary, central bank or
other commercially prevalent payment or clearing system to deliver to the
Custodian's sub- custodian or agent securities purchased or in the remittance
or payment made in connection with securities sold; (v) any delay or failure of
any company, corporation, or other body in charge of registering or
transferring securities in the name of the Custodian, the Trust, the
Custodian's sub-custodians, nominees or agents or any consequential losses
arising out of such delay or failure to transfer such securities including
non-receipt of bonus, dividends and rights and other accretions or benefits;
(vi) delays or inability to perform its duties due to any disorder in market
infrastructure with respect to any particular security or Securities System;
and (vii) any provision of any present or future law or regulation or order of
the United States of America, or any state thereof, or any other country, or
political subdivision thereof or of any court of competent jurisdiction.
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<PAGE> 23
The Custodian shall be liable for the acts or omissions of a Foreign
Sub-Custodian (as defined in Section 4 hereof) to the same extent as set forth
with respect to sub-custodians generally in this Agreement.
If the Trust on behalf of a Portfolio requires the Custodian to take
any action with respect to securities, which action involves the payment of
money or which action may, in the opinion of the Custodian, result in the
Custodian or its nominee assigned to the Trust or the Portfolio being liable
for the payment of money or incurring liability of some other form, the Trust
on behalf of the Portfolio, as a prerequisite to requiring the Custodian to
take such action, shall provide indemnity to the Custodian in an amount and
form satisfactory to it.
If the Trust requires the Custodian, its affiliates, subsidiaries or
agents, to advance cash or securities for any purpose (including but not
limited to securities settlements, foreign exchange contracts and assumed
settlement) or in the event that the Custodian or its nominee shall incur or be
assessed any taxes, charges, expenses, assessments, claims or liabilities in
connection with the performance of this Agreement, except such as may arise
from its or its nominee's own negligent action, negligent failure to act or
willful misconduct, any property at any time held for the account of the
applicable Portfolio shall be security therefor and should the Trust fail to
repay the Custodian promptly, the Custodian shall be entitled to utilize
available cash and to dispose of such Portfolio's assets to the extent
necessary to obtain reimbursement.
In no event shall the Custodian be liable for indirect, special or
consequential damages.
Section 15. Mitigation by Custodian
Upon the occurrence of any event connected with the Custodian under
this Agreement which causes or may cause any loss, damage or expense to the
Trust or any Portfolio, the Custodian shall, and shall exercise reasonable
efforts to cause any Foreign Sub-Custodian to, use reasonable efforts under the
circumstances to mitigate the effect of such event and to avoid continuing harm
to the Trust and the Portfolios.
Section 16. Notification of Litigation; Right to proceed
In any case in which the Trust may be asked to indemnify or hold the
Custodian harmless, the Trust shall be fully and promptly advised of all
pertinent facts concerning the situation in question, and it is further
understood that the Custodian will use all reasonable care to identify and
notify the Trust promptly concerning any situation which presents or appears
likely to present the probability of such claim for indemnification against the
Trust; provided, however, that the failure to so advise, identify or notify the
Trust shall not in any way limit the Trust's liability for indemnification
under this Agreement with respect to any such claim to the extent that the
defense thereof is not materially prejudiced by such failure. If the Trust
acknowledges in writing that the Custodian is entitled to indemnification, the
Trust shall have the option to defend the Custodian against any claim which may
be the subject of this indemnification, and in the event that the Trust
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<PAGE> 24
so elects, it will so notify the Custodian, and thereupon the Trust shall take
over complete defense of the claim. In the event the Trust elects to assume
the control of the defense of the claim, the Custodian may participate in such
proceeding and retain additional counsel but shall bear all fees and expenses
of such retention of such counsel, unless (i) the Trust shall have specifically
authorized the retention of such counsel, or (ii) if the Trust and the
Custodian agree that the retention of such counsel is required as a result of a
conflict of interest. In the event the Trust assumes control of any proceeding,
the Trust shall keep the Custodian notified of the progress of such proceeding
and, upon request, consult with the Custodian and counsel. The Trust will,
upon request by the Custodian, either pay in the first instance or reimburse
the Custodian for any expenses subject to indemnity hereunder. The Trust shall
not settle or compromise any proceeding without the prior written consent of
the Custodian unless (i) such settlement or compromise involves no admission of
guilt, wrongdoing, or misconduct by the Custodian, (ii) such settlement or
compromise does not impose any obligations or restrictions on the Custodian
other than obligations to pay money that are subject to indemnity under this
Agreement, and (iii) the Trust shall have paid, or made arrangements
satisfactory to the Custodian for payment of amounts payable by the Custodian
in connection with such settlement. The Custodian shall in no case confess any
claim or make any compromise in any case in which the Trust will be asked to
indemnify the Custodian except with the Trust's prior written consent.
Section 17. Effective Period, Termination and Amendment
This Agreement shall become effective as of its execution, shall
continue in full force and effect until terminated as hereinafter provided, may
be amended at any time by mutual agreement of the parties hereto and may be
terminated by either party by an instrument in writing delivered or mailed,
postage prepaid to the other party, such termination to take effect not sooner
than sixty (60) days after the date of such delivery or mailing; provided,
however that the Custodian shall not with respect to a Portfolio act under
Section 2.9 hereof in the absence of receipt of an initial certificate of the
Secretary or an Assistant Secretary that the Board of Trustees has approved
the initial use of a particular Securities System by such Portfolio, as
required by Rule 17f-4 under the 1940 Act and that the Custodian shall not with
respect to a Portfolio act under Section 2.10 hereof in the absence of receipt
of an initial certificate of the Secretary or an Assistant Secretary that the
Board of Trustees has approved the initial use of the Direct Paper System by
such Portfolio; provided further, however, that the Trust shall not amend or
terminate this Agreement in contravention of any applicable federal or state
regulations, or any provision of the Trust's Declaration of Trust, and further
provided, that the Trust on behalf of one or more of the Portfolios may at any
time by action of its Board of Trustees (i) substitute another bank or trust
company for the Custodian by giving notice as described above to the Custodian,
or (ii) immediately terminate this Agreement in the event of the appointment of
a conservator or receiver for the Custodian by the Comptroller of the Currency
or upon the happening of a like event at the direction of an appropriate
regulatory agency or court of competent jurisdiction.
Upon termination of the Agreement, the Trust on behalf of each
applicable Portfolio shall pay to the Custodian such compensation as may be due
as of the date of such termination and shall likewise reimburse the Custodian
for its reasonable costs, expenses and disbursements.
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<PAGE> 25
Section 18. Successor Custodian
If a successor custodian for the Trust, of one or more of the
Portfolios shall be appointed by the Board of Trustees, the Custodian shall,
upon termination, deliver to such successor custodian at the office of the
Custodian, duly endorsed and in the form for transfer, all securities of each
applicable Portfolio then held by it hereunder and shall transfer to an account
of the successor custodian all of the securities of each such Portfolio held in
a Securities System.
If no such successor custodian shall be appointed, the Custodian
shall, in like manner, upon receipt of a Certified Resolution, deliver at the
office of the Custodian and transfer such securities, funds and other
properties in accordance with such resolution.
In the event that no written order designating a successor custodian
or Certified Resolution shall have been delivered to the Custodian on or before
the date when such termination shall become effective, then the Custodian shall
have the right to deliver to a bank or trust company, which is a "bank" as
defined in the 1940 Act doing business in Boston, Massachusetts, of its own
selection, having an aggregate capital, surplus, and undivided profits, as
shown by its last published report, of not less than $25,000,000, all
securities, funds and other properties held by the Custodian on behalf of each
applicable Portfolio and all instruments held by the Custodian relative thereto
and all other property held by it under this Agreement on behalf of each
applicable Portfolio and to transfer to an account of such successor custodian
all of the securities of each such Portfolio held in any Securities System.
Thereafter, such bank or trust company shall be the successor of the Custodian
under this Agreement.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Trust to procure the Certified Resolution to appoint a successor
custodian, the Custodian shall be entitled to fair compensation for its
services during such period as the Custodian retains possession of such
securities, funds and other properties and the provisions of this Agreement
relating to the duties and obligations of the Custodian shall remain in full
force and effect.
Section 19. Interpretive and Additional Provisions
In connection with the operation of this Agreement, the Custodian and
the Trust on behalf of each of the Portfolios, may from time to time agree on
such provisions interpretive of or in addition to the provisions of this
Agreement as may in their joint opinion be consistent with the general tenor of
this Agreement. Any such interpretive or additional provisions shall be in a
writing signed by both parties and shall be annexed hereto, provided that no
such interpretive or additional provisions shall contravene any applicable
federal or state regulations or any provision of the Trust's Declaration of
Trust. No interpretive or additional provisions made as provided in the
preceding sentence shall be deemed to be an amendment of this Agreement.
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Section 20. Additional Portfolios
In the event that the Trust establishes one or more series of Shares
with respect to which it desires to have the Custodian render services as
custodian pursuant to the terms hereof, it shall so notify the Custodian in
writing, and if the Custodian agrees in writing to provide such services, such
series of Shares shall become a Portfolio hereunder and Schedule D hereto shall
be revised to so reflect.
Section 21. Massachusetts Law to Apply
This Agreement shall be construed and the provisions thereof
interpreted under and in accordance with laws of The Commonwealth of
Massachusetts.
Section 22. Recourse Against Shareholders, Officers and Trustees
This Agreement is executed by the officers of the Trust in their
capacity as such and not individually. Any responsibility or liability of the
Trust (or a particular Portfolio) under any provision of this Contract shall be
satisfied solely from the assets of the Trust or the particular Portfolio,
tangible or intangible, realized or unrealized, and in no event shall the
Custodian, a sub-custodian or agent have any recourse against the shareholders,
officers or Trustees of the Trust under this Contract or against any one
Portfolio for the obligations of any other Portfolio. The execution and
delivery of this Agreement have been authorized by the Board of Trustees, and
this Agreement has been executed and delivered by an authorized officer of the
Trust acting as such; neither such authorization by the Trustees nor execution
and delivery by such officer shall be deemed to have been made by any of them
individually or to impose any liability on them personally, but shall only bind
the assets and property of the Trust.
Section 23. Confidentiality.
None of the parties hereto shall, unless compelled to do so by any
court of competent jurisdiction either before or after the termination of this
Agreement, disclose to any person not authorized by the relevant party to
receive the same any information relating to such party and to the affairs of
such party of which the party disclosing the same shall have become possessed
during the period of this Agreement and each party shall use its best endeavors
to prevent any such disclosure as aforesaid.
Section 24. Assignment.
This Agreement may not be assigned by either party without the written
consent of the other.
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Section 25. Severability.
In the event any provision of this Agreement is held illegal, void or
unenforceable, the balance shall remain in effect.
Section 26. Prior Agreements
This Agreement supersedes and terminates, as of the date hereof, all
prior Agreements between the Trust on behalf of each of the Portfolios and the
Custodian relating to the custody of the Trust's assets.
Section 27. Notices.
Any notice, instruction or other instrument required to be given
hereunder may be delivered in person to the offices of the parties as set forth
herein during normal business hours or delivered prepaid registered mail or by
telex, cable or telecopy to the parties at the following addresses or such
other addresses as may be notified by any party from time to time:
To the Trust: American AAdvantage Mileage Funds
4333 Amon Carter Boulevard, Maildrop 5645
Fort Worth, Texas 76155
Attention: William F. Quinn, President
Telephone: 817-967-3509
Telecopy: 817-967-0768
To the Custodian: State Street Bank and Trust Company
Allan Forbes Building
150 Newport Avenue
North Quincy, Massachusetts 02171
Attention: Frank J. Sidoti, Jr.
Telephone: 617-985-5262
Telecopy: 617-985-6130
Such notice, instruction or other instrument shall be deemed to have
been served in the case of a registered letter at the expiration of five
business days after posting, in the case of cable twenty-four hours after
dispatch and, in the case of telex, immediately on dispatch and if delivered
outside normal business hours it shall be deemed to have been received at the
next time after delivery when normal business hours commence and in the case of
cable, telex or telecopy on the business day after the receipt thereof.
Evidence that the notice was properly addressed, stamped and put into the post
shall be conclusive evidence of posting.
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Section 28. Reproduction of Documents
This Agreement and all schedules, exhibits, attachments and amendments
hereto may be reproduced by any photographic, photostatic, microfilm,
micro-card, miniature photographic or other similar process. The parties
hereto all/each agree that any such reproduction shall be admissible in
evidence as the original itself in any judicial or administrative proceeding,
whether or not the original is in existence and whether or not such
reproduction was made by a party in the regular course of business, and that
any enlargement, facsimile or further reproduction of such reproduction shall
likewise be admissible in evidence.
Section 29. Shareholder Communications Election
SEC Rule 14b-2 requires banks which hold securities for the account of
customers to respond to requests by issuers of securities for the names,
addresses and holdings of beneficial owners of securities of that issuer held
by the bank unless the beneficial owner has expressly objected to disclosure of
this information. In order to comply with the rule, the Custodian needs the
Trust to indicate whether it authorizes the Custodian to provide the Trust's
name, address, and share position to requesting companies whose securities the
Trust owns. If the Trust tells the Custodian "no", the Custodian will not
provide this information to requesting companies. If the Trust tells the
Custodian "yes" or does not check either "yes" or "no" below, the Custodian is
required by the rule to treat the Trust as consenting to disclosure of this
information for all securities owned by the Trust or any funds or accounts
established by the Trust. For the Trust's protection, the Rule prohibits the
requesting company from using the Trust's name and address for any purpose
other than corporate communications. Please indicate below whether the Trust
consents or objects by checking one of the alternatives below.
YES [ ] The Custodian is authorized to release the Trust's
name, address, and share positions.
NO [ ] The Custodian is not authorized to release the
Trust's name, address, and share positions.
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IN WITNESS WHEREOF, each of the parties has caused this instrument to
be executed in its name and behalf by its duly authorized representative and
its seal to be hereunder affixed as of December 1, 1997.
American AAdvantage Mileage Funds
By: /s/ WILLIAM F. QUINN
------------------------------------
Its: President
State Street Bank and Trust Company
By: /s/ RONALD E. LOGUE
------------------------------------
Its: Executive Vice President
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SCHEDULE C
COUNTRIES/SETTLEMENT SYSTEMS WITH RESPECT TO WHICH
CONTRACTUAL SETTLEMENT MAY BE PROVIDED
Australia
Austria
Belgium
Canada
Denmark
Euroclear
Finland
France
Germany
Hong Kong
Italy
Japan
Netherlands
New Zealand
Norway
Portugal
Singapore
Spain
Sweden
Switzerland
United Kingdom
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SCHEDULE D
PORTFOLIOS
<TABLE>
<CAPTION>
Name of Portfolio Effective Date
- -------------------------------------------------------------------------------
<S> <C>
Balanced Mileage Fund January 1, 1998
Growth and Income Mileage Fund January 1, 1998
Intermediate Bond Mileage Fund December 1, 1997
International Equity Mileage Fund January 1, 1998
Limited-Term Income Mileage Fund December 1, 1997
Money Market Mileage Fund December 1, 1997
Municipal Money Market Mileage Fund December 1, 1997
U.S. Government Money Market Mileage Fund December 1, 1997
</TABLE>
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STATE STREET SCHEDULE A
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
<TABLE>
<CAPTION>
COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES
<S> <C> <C>
Argentina Citibank, N.A. --
Australia Westpac Banking Corporation --
Austria Erste Bank der oesterreichischen --
Sparkasen AG
Bahrain The British Bank of the Middle East --
(as delegate of the Hongkong and
Shanghai Banking Corporation Limited)
Bangladesh Standard Chartered Bank --
Belgium Generale Bank --
Bermuda The Bank of Bermuda Limited --
Bolivia Banco Boliviano Americano --
Botswana Barclays Bank of Botswana Limited --
Brazil Citibank, N.A. --
Bulgaria ING Bank N.V. --
Canada Canada Trustco Mortgage Company --
Chile Citibank, N.A. --
People's Republic The Hongkong and Shanghai --
of China Banking Corporation Limited,
Shanghai and Shenzhen branches
Colombia Cititrust Colombia S.A. --
Sociedad Fiduciaria
</TABLE>
<PAGE> 33
STATE STREET SCHEDULE A
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
<TABLE>
<CAPTION>
COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES
<S> <C> <C>
Croatia Privredana banka Zagreb d.d --
Cyprus Barclays Bank PLC --
Cyprus Offshore Banking Unit
Czech Republic Ceskoslovenska Obchodni --
Banka A.S.
Denmark Den Danske Bank --
Ecuador Citibank, N.A. --
Egypt National Bank of Egypt --
Estonia Hansabank --
Finland Merita Bank Ltd. --
France Banque Paribas --
Germany Dresdner Bank AG --
Ghana Barclays Bank of Ghana Limited --
Greece National Bank of Greece S.A Bank of Greece
Hong Kong Standard Chartered Bank --
Hungary Citibank Budapest Rt. --
India Deutsche Bank AG; --
The Hongkong and Shanghai
Banking Corporation Limited
Indonesia Standard Chartered Bank --
</TABLE>
<PAGE> 34
STATE STREET SCHEDULE A
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
<TABLE>
<CAPTION>
COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES
<S> <C> <C>
Ireland Bank of Ireland --
Israel Bank Hapoalim B.M. --
Italy Banque Paribas --
Ivory Coast Societe Generale de Banques --
en Cote d'Ivoire
Jamaica Scotiabank Trust and Merchant Bank --
Japan The Daiwa Bank, Limited; Japan Securities
The Fuji Bank, Limited Depository Center;
Jordan The British Bank of the Middle East --
(as delegate of the Hongkong and
Shanghai Banking Corporation Limited)
Kenya Barclays Bank of Kenya Limited --
Republic of Korea The Hongkong and Shanghai Banking --
Corporation Limited
Latvia Hansabank --
Lebanon The British Bank of the Middle East Custodian and Clearing Center of Financial
(as delegate of the Hongkong and
Instruments for Lebanon (MIDCLEAR) S.A.L.;
Shanghai Banking Corporation Limited)
Lithuania Vilniaus Bankas AB --
Malaysia Standard Chartered Bank --
Malaysia Berhad
Mauritius The Hongkong and Shanghai --
Banking Corporation Limited
</TABLE>
<PAGE> 35
STATE STREET SCHEDULE A
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
<TABLE>
<CAPTION>
COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES
<S> <C> <C>
Mexico Citibank Mexico, S.A. --
Morocco Banque Commerciale du Maroc --
Namibia (via) Standard Bank of South Africa -
The Netherlands MeesPierson N.V. --
New Zealand ANZ Banking Group --
(New Zealand) Limited
Norway Christiania Bank og --
Kreditkasse
Oman The British Bank of the Middle East --
(as delegate of the Hongkong and
Shanghai Banking Corporation Limited)
Pakistan Deutsche Bank AG --
Peru Citibank, N.A. --
Philippines Standard Chartered Bank --
Poland Citibank Poland S.A. --
Portugal Banco Comercial Portugues --
Romania ING Bank, N.V. --
Russia Credit Suisse First Boston, Zurich --
via Credit Suisse First Boston
Limited, Moscow
Singapore The Development Bank --
of Singapore Ltd.
</TABLE>
<PAGE> 36
STATE STREET SCHEDULE A
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
<TABLE>
<CAPTION>
COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES
<S> <C> <C>
Slovak Republic Ceskoslovenska Obchodna --
Banka A.S.
Slovenia Banka Creditanstalt d.d. --
South Africa Standard Bank of South Africa Limited --
Spain Banco Santander, S.A. --
Sri Lanka The Hongkong and Shanghai --
Banking Corporation Limited
Swaziland Barclays Bank of Swaziland Limited --
Sweden Skandinaviska Enskilda Banken --
Switzerland Union Bank of Switzerland --
Taiwan - R.O.C. Central Trust of China --
Thailand Standard Chartered Bank --
Trinidad & Tobago Republic Bank Ltd. --
Tunisia Banque Internationale Arabe de Tunisie --
Turkey Citibank, N.A. --
United Kingdom State Street Bank and Trust --
Uruguay Citibank, N.A. --
Venezuela Citibank, N.A. --
</TABLE>
<PAGE> 37
STATE STREET SCHEDULE A
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
<TABLE>
<CAPTION>
COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES
<S> <C> <C>
Zambia Barclays Bank of Zambia Limited --
Zimbabwe Barclays Bank of Zimbabwe Limited --
Euroclear (The Euroclear System)
Cedel (Cedel Bank, societe anonyme)
INTERSETTLE (for EASDAQ Securities)
</TABLE>
<PAGE> 38
SCHEDULE B
STATE STREET
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
<TABLE>
<CAPTION>
COUNTRY MANDATORY DEPOSITORIES
<S> <C>
Argentina -Caja de Valores S.A.;
-CRYL
Australia -Austraclear Limited;
-Reserve Bank Information and
Transfer System
Austria -Oesterreichische Kontrollbank AG
(Wertpapiersammelbank Division)
Belgium -Caisse Interprofessionnelle de Depots et
de Virements de Titres S.A.;
-Banque Nationale de Belgique
Brazil - Camara de Liquidacao de Sao Paulo, (Calispa);
-Bolsa de Valores de Rio de Janeiro
- All SSB clients presently use Calispa
-Central de Custodia e de Liquidacao Financeira
de Titulos
-Banco Central do Brasil,
Systema Especial de Liquidacao e
Custodia
Bulgaria - Central Depository AD
Canada -The Canadian Depository
for Securities Limited; West Canada
Depository Trust Company [depositories
linked]
</TABLE>
* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
<PAGE> 39
SCHEDULE B
STATE STREET
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
<TABLE>
<CAPTION>
COUNTRY MANDATORY DEPOSITORIES
<S> <C>
People's Republic -Shanghai Securities Central Clearing and
of China Registration Corporation;
-Shenzhen Securities Central Clearing
Co., Ltd.
Croatia Ministry of Finance
Czech Republic -Stredisko cennych papiru(degree);
-Czech National Bank
Denmark -Vaerdipapircentralen - The Danish
Securities Center
Egypt -Misr Company for Clearing, Settlement,
and Central Depository
Estonia - Eesti Vaartpaberite Keskdepositooruim
Finland -The Finnish Central Securities
Depository
France -Societe Interprofessionnelle
pour la Compensation des
Valeurs Mobilieres;
-Banque de France,
Saturne System
Germany -The Deutscher Kassenverein AG
Greece -The Central Securities Depository
(Apothetirion Titlon A.E.);
Hong Kong -The Central Clearing and
Settlement System;
-The Central Money Markets Unit
</TABLE>
* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
<PAGE> 40
SCHEDULE B
STATE STREET
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
<TABLE>
<CAPTION>
COUNTRY MANDATORY DEPOSITORIES
<S> <C>
Hungary -The Central Depository and Clearing
House (Budapest) Ltd.
[Mandatory for Gov't Bonds only;
SSB does not use for other securities]
India The National Securities Depository Limited
Indonesia -Bank of Indonesia
Ireland -The Central Bank of Ireland,
The Gilt Settlement Office
Israel -The Clearing House of the
Tel Aviv Stock Exchange;
-Bank of Israel
Italy -Monte Titoli S.p.A.;
-Banca d'Italia
Japan -Bank of Japan Net System
Republic of Korea -Korea Securities Depository Corporation
Latvia - The Latvian Central Depository
Lebanon -The Central Bank of Lebanon
Lithuania - The Central Securities Depository of Lithuania
Malaysia -Malaysian Central Depository Sdn.
Bhd.;
-Bank Negara Malaysia,
Scripless Securities Trading and Safekeeping
Systems
</TABLE>
* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
<PAGE> 41
SCHEDULE B
STATE STREET
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
<TABLE>
<CAPTION>
COUNTRY MANDATORY DEPOSITORIES
<S> <C>
Mauritius -The Central Depository & Settlement
Co. Ltd.
Mexico -S.D. INDEVAL, S.A. de C.V.
(Instituto para el Deposito de
Valores);
The Netherlands -Nederlands Centraal Instituut voor
Giraal Effectenverkeer B.V. ("NECIGEF");
New Zealand -New Zealand Central Securities
Depository Limited
Norway -Verdipapirsentralen - The Norwegian
Registry of Securities
Oman -Muscat Securities Market
Peru -Caja de Valores y Liquidaciones
(CAVALI, S.A.)
Philippines -The Philippines Central Depository Inc.
-The Book-Entry-System of Bangko
Sentral ng Pilipinas;
-The Registry of Scripless Securities of the
Bureau of the Treasury
Poland -The National Depository of Securities
(Krajowy Depozyt Papierow Wartosciowych);
-National Bank of Poland
Portugal -Central de Valores Mobiliarios
</TABLE>
* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
<PAGE> 42
SCHEDULE B
STATE STREET
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
<TABLE>
<CAPTION>
COUNTRY MANDATORY DEPOSITORIES
<S> <C>
Romania -National Securities Clearing, Settlement and
Depository Co.;
-Bucharest Stock Exchange;
-National Bank of Romania
Singapore -The Central Depository (Pvt.)
Limited;
-Monetary Authority of Singapore
Slovak Republic -Stredisko Cennych Papierov;
-National Bank of Slovakia
Slovenia - Klirinsko Depotna Bruzba
South Africa -The Central Depository Limited
Spain -Servicio de Compensacion y
Liquidacion de Valores, S.A.;
-Banco de Espana,
Anotaciones en Cuenta
Sri Lanka -Central Depository System
(Pvt) Limited
Sweden -Vardepapperscentralen VPC AB -
The Swedish Central Securities Depository
Switzerland -Schweizerische Effekten - Giro AG;
Taiwan - R.O.C. -The Taiwan Securities Central
Depository Company, Ltd.
</TABLE>
* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
<PAGE> 43
SCHEDULE B
STATE STREET
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
<TABLE>
<CAPTION>
COUNTRY MANDATORY DEPOSITORIES
<S> <C>
Thailand -Thailand Securities Depository
Company Limited
Tunisia -STICODEVAM;
-Central Bank of Tunisia;
-Tunisian Treasury
Turkey -Takas ve Saklama Bankasi A.S.;
-Central Bank of Turkey
United Kingdom -The Bank of England,
The Central Gilts Office;
The Central Moneymarkets Office
Uruguay -Central Bank of Uruguay
Zambia -Lusaka Central Depository
</TABLE>
* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
<PAGE> 44
SCHEDULE C
MARKET INFORMATION
<TABLE>
<CAPTION>
PUBLICATION/TYPE OF INFORMATION BRIEF DESCRIPTION
- ------------------------------- -----------------
(FREQUENCY)
<S> <C>
The Guide to Custody in World Markets
(annually): An overview of safekeeping and settlement practices and procedures in each
market in which State Street Bank and Trust Company offers custodial services.
The Depository Review (annually): Information relating to the operating history and structure of depositories
located in the markets in which State Street Bank and Trust Company offers
custodial services, including transnational depositories.
legal opinions (annually): With respect to each market in which State Street Bank and Trust Company
offers custodial services, opinions relating to whether local law restricts
(i) access of a fund's independent public accountants to books and records of
a Foreign Sub-Custodian or Foreign Securities System, (ii) the Fund's ability
to recover in the event of bankruptcy or insolvency of a Foreign Sub-Custodian
or Foreign Securities System, (iii) the Fund's ability to recover in the event
of a loss by a Foreign Sub-Custodian or Foreign Securities System, and (iv)
the ability of a foreign investor to convert cash and cash equivalents to U.S.
dollars.
Network Bulletins (weekly): Developments of interest to investors in the markets in which State Street
Bank and Trust Company offers custodial services.
Foreign Custody Advisories (as
necessary): With respect to markets in which State Street Bank and Trust Company offers
custodial services which exhibit special custody risks, developments which may
impact State Street's ability to deliver expected levels of service.
</TABLE>
<PAGE> 45
DATA ACCESS SERVICES ADDENDUM TO CUSTODIAN AGREEMENT
AGREEMENT between American AAdvantage Mileage Funds (the "Customer")
and State Street Bank and Trust Company ("State Street").
PREAMBLE
WHEREAS, State Street has been appointed as custodian of certain
assets of the Customer pursuant to a certain Custodian Agreement (the
"Custodian Agreement") dated as December 1, 1997;
WHEREAS, State Street has developed and utilizes proprietary
accounting and other systems, including State Street's proprietary
Multicurrency HORIZONR Accounting System, in its role as custodian of the
Customer, and maintains certain Customer-related data ("Customer Data") in
databases under the control and ownership of State Street (the "Data Access
Services"); and
WHEREAS, State Street makes available to the Customer certain Data
Access Services solely for the benefit of the Customer, and intends to provide
additional services, consistent with the terms and conditions of this
Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements herein contained, and for other good and valuable consideration, the
parties agree as follows:
1. SYSTEM AND DATA ACCESS SERVICES
a. System. Subject to the terms and conditions of this
Agreement, State Street hereby agrees to provide the Customer with access to
State Street's Multicurrency HORIZONR Accounting System and the other
information systems (collectively, the "System") as described in Attachment A,
on a remote basis for the purpose of obtaining reports, solely on computer
hardware, system software and telecommunication links, as listed in Attachment
B (the "Designated Configuration") of the Customer, or certain third parties
approved by State Street that serve as investment advisors or investment
managers (the "Investment Advisor") or independent auditors (the "Independent
Auditors") of the Customer and solely with respect to the Customer or on any
designated substitute or back-up equipment configuration with State Street's
written consent, such consent not to be unreasonably withheld.
b. Data Access Services. State Street agrees to make available
to the Customer the Data Access Services subject to the terms and conditions of
this Agreement and data access operating standards and procedures as may be
issued by State Street from time to time. The ability of the Customer to
originate electronic instructions to State Street on behalf of the Customer in
order to (i) effect the transfer or movement of cash or securities held under
custody by State Street or (ii) transmit accounting or other information (such
transactions are referred to herein as "Client Originated Electronic Financial
Instructions"), and (iii) access data for the
<PAGE> 46
purpose of reporting and analysis, shall be deemed to be Data Access Services
for purposes of this Agreement.
c. Additional Services. State Street may from time to time agree
to make available to the Customer additional Systems that are not described in
the attachments to this Agreement. In the absence of any other written
agreement concerning such additional systems, the term "System" shall include,
and this Agreement shall govern, the Customer's access to and use of any
additional System made available by State Street and/or accessed by the
Customer.
2. NO USE OF THIRD PARTY SYSTEMS-LEVEL SOFTWARE
State Street and the Customer acknowledge that in connection with the
Data Access Services provided under this Agreement, the Customer will have
access, through the Data Access Services, to Customer Data and to functions of
State Street's proprietary systems; provided, however that in no event will the
Customer have direct access to any third party systems-level software that
retrieves data for, stores data from, or otherwise supports the System.
3. LIMITATION ON SCOPE OF USE
a. Designated Equipment; Designated Location. The System and the
Data Access Services shall be used and accessed solely on and through the
Designated Configuration at the offices of the Customer or the Investment
Advisor or Independent Auditor located in Fort Worth, Texas ("Designated
Location").
b. Designated Configuration; Trained Personnel. State Street
shall be responsible for supplying, installing and maintaining the Designated
Configuration at the Designated Location. State Street and the Customer agree
that each will engage or retain the services of trained personnel to enable
both parties to perform their respective obligations under this Agreement.
State Street agrees to use commercially reasonable efforts to maintain the
System so that it remains serviceable, provided, however, that State Street
does not guarantee or assure uninterrupted remote access use of the System.
c. Scope of Use. The Customer will use the System and the Data
Access Services only for the processing of securities transactions, the keeping
of books of account for the Customer and accessing data for purposes of
reporting and analysis. The Customer shall not, and shall cause its employees
and agents not to (i) permit any third party to use the System or the Data
Access Services, (ii) sell, rent, license or otherwise use the System or the
Data Access Services in the operation of a service bureau or for any purpose
other than as expressly authorized under this Agreement, (iii) use the System
or the Data Access Services for any fund, trust or other investment vehicle
without the prior written consent of State Street, (iv) allow access to the
System or the Data Access Services through terminals or any other computer or
telecommunications facilities located outside the Designated Locations, (v)
allow or cause any information (other than portfolio holdings, valuations of
portfolio holdings, and other information reasonably necessary for the
management or distribution of the assets of the Customer) transmitted from
State Street's databases, including data from third party sources, available
2
<PAGE> 47
through use of the System or the Data Access Services to be redistributed or
retransmitted to another computer, terminal or other device for other than use
for or on behalf of the Customer or (vi) modify the System in any way,
including without limitation, developing any software for or attaching any
devices or computer programs to any equipment, system, software or database
which forms a part of or is resident on the Designated Configuration.
d. Other Locations. Except in the event of an emergency or of a
planned System shutdown, the Customer's access to services performed by the
System or to Data Access Services at the Designated Location may be transferred
to a different location only upon the prior written consent of State Street.
In the event of an emergency or System shutdown, the Customer may use any
back-up site included in the Designated Configuration or any other back-up site
agreed to by State Street, which agreement will not be unreasonably withheld.
The Customer may secure from State Street the right to access the System or the
Data Access Services through computer and telecommunications facilities or
devices complying with the Designated Configuration at additional locations
only upon the prior written consent of State Street and on terms to be mutually
agreed upon by the parties.
e. Title. Title and all ownership and proprietary rights to the
System, including any enhancements or modifications thereto, whether or not
made by State Street, are and shall remain with State Street.
f. No Modification. Without the prior written consent of State
Street, the Customer shall not modify, enhance or otherwise create derivative
works based upon the System, nor shall the Customer reverse engineer, decompile
or otherwise attempt to secure the source code for all or any part of the
System.
g. Security Procedures. The Customer shall comply with data
access operating standards and procedures and with user identification or other
password control requirements and other security procedures as may be issued
from time to time by State Street for use of the System on a remote basis and
to access the Data Access Services. The Customer shall have access only to the
Customer Data and authorized transactions agreed upon from time to time by
State Street and, upon notice from State Street, the Customer shall discontinue
remote use of the System and access to Data Access Services for any security
reasons cited by State Street; provided, that, in such event, State Street
shall, for a period not less than 180 days (or such other shorter period
specified by the Customer) after such discontinuance, assume responsibility to
provide accounting services under the terms of the Custodian Agreement.
h. Inspections. State Street shall have the right to inspect the
use of the System and the Data Access Services by the Customer and the
Investment Advisor to ensure compliance with this Agreement. The on-site
inspections shall be upon prior written notice to Customer and the Investment
Advisor and at reasonably convenient times and frequencies so as not to result
in an unreasonable disruption of the Customer's or the Investment Advisor's
business.
3
<PAGE> 48
4. PROPRIETARY INFORMATION
a. Proprietary Information. The Customer acknowledges and State
Street represents that the System and the databases, computer programs, screen
formats, report formats, interactive design techniques, documentation and other
information made available to the Customer by State Street as part of the Data
Access Services and through the use of the System constitute copyrighted, trade
secret, or other proprietary information of substantial value to State Street.
Any and all such information provided by State Street to the Customer shall be
deemed proprietary and confidential information of State Street (hereinafter
"Proprietary Information"). The Customer agrees that it will hold such
Proprietary Information in the strictest confidence and secure and protect it
in a manner consistent with its own procedures for the protection of its own
confidential information and to take appropriate action by instruction or
agreement with its employees who are permitted access to the Proprietary
Information to satisfy its obligations hereunder. The Customer further
acknowledges that State Street shall not be required to provide the Investment
Advisor or the Investment Auditor with access to the System unless it has first
received from the Investment Advisor and the Investment Auditor an undertaking
with respect to State Street's Proprietary Information in the form of
Attachment C and/or Attachment C-1 to this Agreement. The Customer shall use
all commercially reasonable efforts to assist State Street in identifying and
preventing any unauthorized use, copying or disclosure of the Proprietary
Information or any portions thereof or any of the logic, formats or designs
contained therein.
b. Cooperation. Without limitation of the foregoing, the
Customer shall advise State Street promptly in the event the Customer learns or
has reason to believe that any person to whom the Customer has given access to
the Proprietary Information, or any portion thereof, has violated or intends to
violate the terms of this Agreement, and the Customer will, at its expense,
co-operate with State Street in seeking injunctive or other equitable relief in
the name of the Customer or State Street against any such person.
c. Injunctive Relief. The Customer acknowledges that the
disclosure of any Proprietary Information, or of any information which at law
or equity ought to remain confidential, will immediately give rise to
continuing irreparable injury to State Street inadequately compensable in
damages at law. In addition, State Street shall be entitled to obtain
immediate injunctive relief against the breach or threatened breach of any of
the foregoing undertakings, in addition to any other legal remedies which may
be available.
d. Survival. The provisions of this Section 4 shall survive the
termination of this Agreement.
5. LIMITATION ON LIABILITY
a. Limitation on Amount and Time for Bringing Action. The
Customer agrees any liability of State Street to the Customer or any third
party arising out of State Street's provision of Data Access Services or the
System under this Agreement shall be limited to the amount paid by the Customer
for the preceding 24 months for such services. In no event shall State Street
be liable to the Customer or any other party for any special, indirect,
punitive or consequential
4
<PAGE> 49
damages even if advised of the possibility of such damages. No action,
regardless of form, arising out of this Agreement may be brought by the
Customer more than two years after the Customer has knowledge that the cause of
action has arisen.
b. Year 2000. State Street will take all steps necessary to
ensure that its products (and those of its third-party suppliers) reflect the
available state of the art technology to offer products that are Year 2000
compliant, including, but not limited to, century recognition of dates,
calculations that correctly compute same century and multi century formulas and
date values, and interface values that reflect the date issues arising between
now and the next one-hundred years. If any changes are required, State Street
will make the changes to its products at no cost to Customer and in a
commercially reasonable time frame and will require third-party suppliers to do
likewise.
c. Limited Warranties. NO OTHER WARRANTIES, WHETHER EXPRESS OR
IMPLIED, INCLUDING, WITHOUT LIMITATION, THE IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, ARE MADE BY STATE STREET.
IN NO EVENT WILL STATE STREET BE LIABLE TO THE CUSTOMER OR ANY OTHER PARTY FOR
ANY CONSEQUENTIAL OR INCIDENTAL DAMAGES WHICH MAY ARISE FROM THE CUSTOMER'S
ACCESS TO THE SYSTEM OR USE OF INFORMATION OBTAINED THEREBY.
d. Third-Party Data. Organizations from which State Street may
obtain certain data included in the System or the Data Access Services are
solely responsible for the contents of such data, and State Street shall have
no liability for claims arising out of the contents of such third-party data,
including, but not limited to, the accuracy thereof.
e. Regulatory Requirements. As between State Street and the
Customer, the Customer shall be solely responsible for the accuracy of any
accounting statements or reports produced using the Data Access Services and
the System and the conformity thereof with any requirements of law.
f. Force Majeure. Neither party shall be liable for any costs or
damages due to delay or nonperformance under this Agreement arising out of any
cause or event beyond such party's reasonable control, including without
limitation, cessation of services hereunder or any damages resulting therefrom
to the other party, or the Customer as a result of work stoppage, power or
other mechanical failure, computer virus, natural disaster, governmental
action, or communication disruption.
6. INDEMNIFICATION
The Customer agrees to indemnify and hold State Street harmless from
any loss, damage or expense including reasonable attorney's fees, (a "loss")
suffered by State Street arising from (i) the negligence or willful misconduct
in the use by the Customer of the Data Access Services or the System, including
any loss incurred by State Street resulting from a security breach at the
Designated Location or committed by the Customer's employees or agents or the
Investment
5
<PAGE> 50
Advisor or the Independent Auditor and (ii) any loss resulting from incorrect
Client Originated Electronic Financial Instructions. State Street shall be
entitled to rely on the validity and authenticity of Client Originated
Electronic Financial Instructions without undertaking any further inquiry as
long as such instruction is undertaken in conformity with security procedures
established by State Street from time to time.
7. FEES
Fees and charges for the use of the System and the Data Access
Services and related payment terms shall be as set forth in the Custody Fee
Schedule in effect from time to time between the parties (the "Fee Schedule").
Any tariffs, duties or taxes imposed or levied by any government or
governmental agency by reason of the transactions contemplated by this
Agreement, including, without limitation, federal, state and local taxes, use,
value added and personal property taxes (other than income, franchise or
similar taxes which may be imposed or assessed against State Street) shall be
borne by the Customer. Any claimed exemption from such tariffs, duties or
taxes shall be supported by proper documentary evidence delivered to State
Street.
8. TRAINING, IMPLEMENTATION AND CONVERSION
a. Training. State Street agrees to provide training, at a
designated State Street training facility or at the Designated Location, to the
Customer's personnel in connection with the use of the System on the Designated
Configuration. The Customer agrees that it will set aside, during regular
business hours or at other times agreed upon by both parties, sufficient time
to enable all operators of the System and the Data Access Services, designated
by the Customer, to receive the training offered by State Street pursuant to
this Agreement.
b. Installation and Conversion. State Street shall be
responsible for the technical installation and conversion ("Installation and
Conversion") of the Designated Configuration. The Customer shall have the
following responsibilities in connection with Installation and Conversion of
the System:
(i) The Customer shall be solely responsible for the timely
acquisition and maintenance of the hardware and software that
attach to the Designated Configuration in order to use the
Data Access Services at the Designated Location.
(ii) State Street and the Customer each agree that they will assign
qualified personnel to actively participate during the
Installation and Conversion phase of the System implementation
to enable both parties to perform their respective obligations
under this Agreement.
6
<PAGE> 51
9. SUPPORT
During the term of this Agreement, State Street agrees to provide the
support services set out in Attachment D to this Agreement.
10. TERM OF AGREEMENT
a. Term of Agreement. This Agreement shall become effective on
the date of its execution by State Street and shall remain in full force and
effect until terminated as herein provided.
b. Termination of Agreement. Either party may terminate this
Agreement (i) for any reason by giving the other party at least one-hundred
and eighty days' prior written notice in the case of notice of termination by
State Street to the Customer or thirty days' notice in the case of notice from
the Customer to State Street of termination; or (ii) immediately for failure of
the other party to comply with any material term and condition of the Agreement
by giving the other party written notice of termination. In the event the
Customer shall cease doing business, shall become subject to proceedings under
the bankruptcy laws (other than a petition for reorganization or similar
proceeding) or shall be adjudicated bankrupt, this Agreement and the rights
granted hereunder shall, at the option of State Street, immediately terminate
with notice to the Customer. This Agreement shall in any event terminate as to
any Customer within 90 days after the termination of the Custodian Agreement
applicable to such Customer.
c. Termination of the Right to Use. Upon termination of this
Agreement for any reason, any right to use the System and access to the Data
Access Services shall terminate and the Customer shall immediately cease use of
the System and the Data Access Services. Immediately upon termination of this
Agreement for any reason, the Customer shall return to State Street all copies
of documentation and other Proprietary Information in its possession; provided,
however, that in the event that either party terminates this Agreement or the
Custodian Agreement for any reason other than the Customer's breach, State
Street shall provide the Data Access Services for a period of time and at a
price to be agreed upon by the parties.
11. MISCELLANEOUS
a. Assignment; Successors. This Agreement and the rights and
obligations of the Customer and State Street hereunder shall not be assigned by
either party without the prior written consent of the other party, except that
State Street may assign this Agreement to a successor of all or a substantial
portion of its business, or to a party controlling, controlled by, or under
common control with State Street.
b. Survival. All provisions regarding indemnification, warranty,
liability and limits thereon, and confidentiality and/or protection of
proprietary rights and trade secrets shall survive the termination of this
Agreement.
7
<PAGE> 52
c. Entire Agreement. This Agreement and the attachments hereto
constitute the entire understanding of the parties hereto with respect to the
Data Access Services and the use of the System and supersedes any and all prior
or contemporaneous representations or agreements, whether oral or written,
between the parties as such may relate to the Data Access Services or the
System, and cannot be modified or altered except in a writing duly executed by
the parties. This Agreement is not intended to supersede or modify the duties
and liabilities of the parties hereto under the Custodian Agreement or any
other agreement between the parties hereto except to the extent that any such
agreement specifically refers to the Data Access Services or the System. No
single waiver or any right hereunder shall be deemed to be a continuing waiver.
d. Severability. If any provision or provisions of this
Agreement shall be held to be invalid, unlawful, or unenforceable, the
validity, legality, and enforceability of the remaining provisions shall not in
any way be affected or impaired.
e. Governing Law. This Agreement shall be interpreted and
construed in accordance with the internal laws of The Commonwealth of
Massachusetts without regard to the conflict of laws provisions thereof.
8
<PAGE> 53
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement effective as of December 1, 1997.
STATE STREET BANK AND TRUST
COMPANY
By: /s/ RONALD E. LOGUE
-------------------------------------
Title: Executive Vice President
----------------------------------
Date: December 1, 1997
-----------------------------------
AMERICAN AADVANTAGE MILEAGE FUNDS
By: /s/ WILLIAM F. QUINN
-------------------------------------
Title: President
----------------------------------
Date: December 1, 1997
-----------------------------------
<PAGE> 54
ATTACHMENT A
Multicurrency HORIZON(R) Accounting System
System Product Description
I. The Multicurrency HORIZON(R) Accounting System is designed to provide
lot level portfolio and general ledger accounting for SEC and ERISA type
requirements and includes the following services: 1) recording of general
ledger entries; 2) calculation of daily income and expense; 3) reconciliation
of daily activity with the trial balance, and 4) appropriate automated feeding
mechanisms to (i) domestic and international settlement systems, (ii) daily,
weekly and monthly evaluation services, (iii) portfolio performance and
analytic services, (iv) customer's internal computing systems and (v) various
State Street provided information services products.
II. GlobalQuest(R) GlobalQuest(R) is designed to provide customer access to
the following information maintained on The Multicurrency HORIZON(R) Accounting
System: 1) cash transactions and balances; 2) purchases and sales; 3) income
receivables; 4) tax refund receivables; 5) daily priced positions; 6) open
trades; 7) settlement status; 8) foreign exchange transactions; 9) trade
history; and 10) daily, weekly and monthly evaluation services.
III. InSight is designed to provide customer access to the following
information maintained on The Multicurrency HORIZON Accounting System: 1) cash
transactions and balances; 2) purchases and sales; 3) income receivables; 4)
tax refund receivables; 5) daily priced positions; 6) open trades; 7)
settlement status; 8) foreign exchange transactions; 9) trade history, and 10)
daily, weekly and monthly evaluation services.
<PAGE> 55
ATTACHMENT B
Designated Configuration
<PAGE> 56
ATTACHMENT C
Undertaking
The undersigned understands that in the course of its employment as
Investment Advisor to American AAdvantage Mileage Funds (the "Customer") it
will have access to State Street Bank and Trust Company's ("State Street")
Multicurrency HORIZON Accounting System and other information systems
(collectively, the "System").
The undersigned acknowledges that the System and the databases,
computer programs, screen formats, report formats, interactive design
techniques, documentation, and other information made available to the
Undersigned by State Street as part of the Data Access Services provided to the
Customer and through the use of the System constitute copyrighted, trade
secret, or other proprietary information of substantial value to State Street.
Any and all such information provided by State Street to the Undersigned shall
be deemed proprietary and confidential information of State Street (hereinafter
"Proprietary Information"). The Undersigned agrees that it will hold such
Proprietary Information in confidence and secure and protect it in a manner
consistent with its own procedures for the protection of its own confidential
information and to take appropriate action by instruction or agreement with its
employees who are permitted access to the Proprietary Information to satisfy
its obligations hereunder.
The Undersigned will not attempt to intercept data, gain access to
data in transmission, or attempt entry into any system or files for which it is
not authorized. It will not intentionally adversely affect the integrity of
the System through the introduction of unauthorized code or data, or through
unauthorized deletion.
Upon notice by State Street for any reason, any right to use the
System and access to the Data Access Services shall terminate and the
Undersigned shall immediately cease use of the System and the Data Access
Services. Immediately upon notice by State Street for any reason, the
Undersigned shall return to State Street all copies of documentation and other
Proprietary Information in its possession.
AMR Investment Services, Inc.
By: /s/ WILLIAM F. QUINN
-----------------------------------
Title: President
--------------------------------
Date: December 1, 1997
---------------------------------
<PAGE> 57
ATTACHMENT C-1
Undertaking
The undersigned understands that in the course of its employment as
Independent Auditor to American AAdvantage Mileage Funds (the "Customer") it
will have access to State Street Bank and Trust Company's ("State Street")
Multicurrency HORIZON Accounting System and other information systems
(collectively, the "System").
The undersigned acknowledges that the System and the databases,
computer programs, screen formats, report formats, interactive design
techniques, documentation, and other information made available to the
Undersigned by State Street as part of the Data Access Services provided to the
Customer and through the use of the System constitute copyrighted, trade
secret, or other proprietary information of substantial value to State Street.
Any and all such information provided by State Street to the Undersigned shall
be deemed proprietary and confidential information of State Street (hereinafter
"Proprietary Information"). The Undersigned agrees that it will hold such
Proprietary Information in confidence and secure and protect it in a manner
consistent with its own procedures for the protection of its own confidential
information and to take appropriate action by instruction or agreement with its
employees who are permitted access to the Proprietary Information to satisfy
its obligations hereunder.
The Undersigned will not attempt to intercept data, gain access to
data in transmission, or attempt entry into any system or files for which it is
not authorized. It will not intentionally adversely affect the integrity of
the System through the introduction of unauthorized code or data, or through
unauthorized deletion.
Upon notice by State Street for any reason, any right to use the
System and access to the Data Access Services shall terminate and the
Undersigned shall immediately cease use of the System and the Data Access
Services. Immediately upon notice by State Street for any reason, the
Undersigned shall return to State Street all copies of documentation and other
Proprietary Information in its possession.
Independent Auditor
By:
-----------------------------------
Title:
--------------------------------
Date:
---------------------------------
<PAGE> 58
ATTACHMENT D
Support
During the term of this Agreement, State Street agrees to provide the
following on-going support services:
a. Telephone Support. The Customer Designated Persons may
contact State Street's HORIZON(R) Help Desk and Customer Assistance Center
between the hours of 8 a.m. and 6 p.m. (Eastern time) on all business days for
the purpose of obtaining answers to questions about the use of the System, or
to report apparent problems with the System. From time to time, the Customer
shall provide to State Street a list of persons, not to exceed five in number,
who shall be permitted to contact State Street for assistance (such persons
being referred to as "the Customer Designated Persons").
b. Technical Support. State Street will provide technical
support to assist the Customer in using the System and the Data Access
Services. The total amount of technical support provided by State Street shall
not exceed 10 resource days per year. State Street shall provide such
additional technical support as is expressly set forth in the fee schedule in
effect from time to time between the parties (the "Fee Schedule"). Technical
support, including during installation and testing, is subject to the fees and
other terms set forth in the Fee Schedule.
c. Maintenance Support. State Street shall use commercially
reasonable efforts to correct system functions that do not work according to
the System Product Description as set forth on Attachment A in priority order
in the next scheduled delivery release or otherwise as soon as is practicable.
d. System Enhancements. State Street will provide to the
Customer any enhancements to the System developed by State Street and made a
part of the System; provided that, sixty (60) days prior to installing any such
enhancement, State Street shall notify the Customer and shall offer the
Customer reasonable training on the enhancement. Charges for system
enhancements shall be as provided in the Fee Schedule. State Street retains
the right to charge for related systems or products that may be developed and
separately made available for use other than through the System.
e. Custom Modifications. In the event the Customer desires
custom modifications in connection with its use of the System, the Customer
shall make a written request to State Street providing specifications for the
desired modification. Any custom modifications may be undertaken by State
Street in its sole discretion in accordance with the Fee Schedule.
f. Limitation on Support. State Street shall have no obligation
to support the Customer's use of the System: (1) for use on any computer
equipment or telecommunication facilities which does not conform to the
Designated Configuration or (ii) in the event the Customer has modified the
System in breach of this Agreement.
<PAGE> 1
Exhibit 99.b.9.a
TRANSFER AGENCY AND SERVICE AGREEMENT
between
AMERICAN AADVANTAGE MILEAGE FUNDS
and
STATE STREET BANK AND TRUST COMPANY
1C-Domestic Trust/Series
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
1. Terms of Appointment; Duties of the Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3. Representations and Warranties of the Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
4. Representations and Warranties of the Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
5. Wire Transfer Operating Guidelines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
6. Data Access and Proprietary Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
7. Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
8. Registration as a Transfer Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
9. Year 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
10. Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
11. Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
12. Standard of Care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
13. Covenants of the Fund and the Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
14. Termination of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
15. Additional Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
16. Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
17. Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
18. Massachusetts Law to Apply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
19. Force Majeure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
20. Consequential Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
21. Merger of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
</TABLE>
<PAGE> 3
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
22. Limitations of Liability of the Trustees
or Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
23. Separate Liability of Portfolios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
24. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
25. Reproduction of Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
26. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
</TABLE>
<PAGE> 4
TRANSFER AGENCY AND SERVICE AGREEMENT
AGREEMENT made as of the 1st day of January, 1998, by and between AMERICAN
AADVANTAGE MILEAGE FUNDS, a Massachusetts business trust, having its principal
office and place of business at 4333 Amon Carter Boulevard, MD5675, Fort Worth,
Texas 76155 (the "Fund"), and STATE STREET BANK AND TRUST COMPANY, a
Massachusetts trust company having its principal office and place of business
at 225 Franklin Street, Boston, Massachusetts 02110 (the "Bank").
WHEREAS, the Fund is authorized to issue shares in separate series, with each
such series representing interests in a separate portfolio of securities and
other assets; and
WHEREAS, the Fund currently offers shares in nine (9) series, such series shall
be named in the attached Schedule A which may be amended by the parties from
time to time (each such series, together with all other series subsequently
established by the Fund and made subject to this Agreement in accordance with
Article 11, being herein referred to as a "Portfolio", and collectively as the
"Portfolios");
WHEREAS, the Fund on behalf of the Portfolios desires to appoint the Bank as
its transfer agent, dividend disbursing agent, custodian of certain retirement
plans (as may be applicable) and agent in connection with certain other
activities, and the Bank desires to accept such appointment;
NOW, THEREFORE, in consideration of the mutual covenants herein contained, the
parties hereto agree as follows:
l. Terms of Appointment; Duties of the Bank
1.1 APPOINTMENT. Subject to the terms and conditions set forth in this
Agreement, the Fund, on behalf of the Portfolios, hereby employs and
appoints the Bank to act as, and the Bank agrees to act as its
transfer agent for the Fund's authorized and issued shares of its
beneficial interest, ("Shares"), dividend disbursing agent, custodian
of certain retirement plans and agent in connection with any
accumulation, open-account or similar plans provided to the
shareholders of each of the respective Portfolios of the Fund
("Shareholders") and set out in the currently effective prospectus and
statement of additional information ("prospectus") of the Fund on
behalf of the applicable Portfolio, including without limitation any
periodic investment plan or periodic withdrawal program.
<PAGE> 5
1.2 TRANSFER AGENT SERVICES. The Bank agrees that it will perform the
following services:
(a) In accordance with procedures established from time to time by
agreement between the Fund on behalf of each of the
Portfolios, as applicable and the Bank, the Bank shall:
(i) receive for acceptance, orders for the purchase of
Shares, and promptly deliver payment and appropriate
documentation thereof to the Custodian of the Fund
authorized pursuant to the Declaration of Trust of
the Fund (the "Custodian");
(ii) pursuant to purchase orders, record the appropriate
number of Shares and hold such Shares in the
appropriate Shareholder account;
(iii) receive for acceptance redemption requests and
redemption directions and deliver the appropriate
documentation thereof to the Custodian;
(iv) in respect to the transactions in items (i), (ii) and
(iii) above, the Bank shall execute transactions
directly with broker-dealers authorized by the Fund;
(v) at the appropriate time as and when it receives
monies paid to it by the Custodian with respect to
any redemption, pay over or cause to be paid over in
the appropriate manner such monies as instructed by
the redeeming Shareholders;
(vi) effect transfers of Shares by the registered owners
thereof upon receipt of appropriate instructions;
(vii) prepare and transmit payments for dividends and
distributions declared by the Fund on behalf of the
applicable Portfolio;
(viii) maintain records of account for and advise the Fund
and its Shareholders as to the foregoing; and
(ix) record the issuance of shares of the Fund and
maintain pursuant to SEC Rule 17Ad-10(e) a record of
the total number of shares of the Fund and each
Portfolio which are authorized, based
<PAGE> 6
upon data provided to it by the Fund on behalf of
each Portfolio, and issued and outstanding. The Bank
shall also provide the Fund and each Portfolio on a
regular basis with the total number of shares which
are authorized and issued and outstanding and shall
have no obligation, when recording the issuance of
shares, to monitor the issuance of such shares or to
take cognizance of any laws relating to the issue or
sale of such Shares, which functions shall be the
sole responsibility of the Fund.
(b) In addition to and neither in lieu nor in contravention of the
services set forth in the above paragraph (a), the Bank shall:
(i) perform the customary services of a transfer agent,
dividend disbursing agent, custodian of certain retirement
plans (as may be applicable) and, as relevant, agent in
connection with accumulation, open-account or similar plans
(including without limitation any periodic investment plan or
periodic withdrawal program), including but not limited to:
maintaining all Shareholder accounts, preparing Shareholder
meeting lists, mailing Shareholder proxies, Shareholder
reports and prospectuses to current Shareholders, withholding
taxes on U.S. resident and non-resident alien accounts,
preparing and filing U.S. Treasury Department Forms 1099 and
other appropriate forms required with respect to dividends and
distributions by federal authorities for all Shareholders,
preparing and mailing confirmation forms and statements of
account to Shareholders for all purchases and redemptions of
Shares and other confirmable transactions in Shareholder
accounts, preparing and mailing activity statements for
Shareholders, and providing Shareholder account information
and (ii) provide a system which will enable the Fund to
monitor the total number of Shares sold in each State and
report such data to the Fund or its designee.
(c) In addition, the Fund shall (i) identify to the Bank in
writing those Shareholder transactions and assets to be
treated as exempt from blue sky reporting for each State and
(ii) verify the establishment of transactions for each State
on the system prior to activation and thereafter monitor the
daily activity for each State. The responsibility of the Bank
for the Fund's blue sky State registration status is solely
limited to the initial establishment of transactions subject
to blue sky compliance by the
<PAGE> 7
Fund and the reporting of such transactions to the Fund as
provided in Section 1.2 (b) above.
(d) Procedures as to who shall provide certain of these services
in Section 1 may be established from time to time by agreement
between the Fund on behalf of each Portfolio and the Bank per
the attached service responsibility schedule. The Bank may at
times perform only a portion of these services and the Fund or
its agent may perform these services on the Fund's behalf.
(e) The Bank shall provide additional services on behalf of the
Fund (e.g., escheatment services) which may be agreed upon in
writing between the Fund and the Bank.
<PAGE> 8
1.3 MILEAGE REPORTING. American Airlines, Inc. ("AA") has authorized the
Fund to allow Shareholders who participate in the AAdvantage Program
as defined below to accumulate points or miles. For purposes of this
Agreement, the following terms shall have the following meanings:
(a) Definitions
o "AAdvantage Account" means the record, maintained by
AA, of a Member's AAdvantage Program activity,
including, without limitation, the accrual and
redemption of AAdvantage Miles by such Member.
o "AAdvantage Miles" means the points or "Miles"
(including bonus points or "Miles") accrued under the
AAdvantage Program Rules by Members for (i) travel on
AA or American Eagle, (ii) travel on, and/or the
purchase of goods or services from, AAdvantage
Participants, or (iii) any other reason permitted by
AA.
o "AAdvantage Participant" means any Person that,
pursuant to an agreement between AA and such Person
regarding such Person's participation in the
AAdvantage Program: (i) provides goods or services to
Members in exchange for the redemption of AAdvantage
Miles, or (ii) in connection with the sale of goods
or services by such Person to Member offers
AAdvantage Miles to such Member.
o "AAdvantage Program" means the travel awards program
or any surviving program under a different name
established and governed by AA, as such program may
be in effect from time to time, pursuant to which,
among other things, Members receive Aadvantage Miles
for travel on AA or for travel on, or for the use or
purchase of goods or services offered by, an
Aadvantage Participant, or for any reason permitted
by AA.
o "Person" shall mean any firm, corporation, group,
organization, affiliate, agent, consultant,
independent contractor or subcontractor, subsidiary,
joint venture, partnership, trust, association,
governmental authority, regulatory agency, natural
person or legal entity.
<PAGE> 9
o "Member" means, as of any date, any individual who is
a member in good standing of the AAdvantage Program.
(b) Mileage Accrual
In accordance with the formula set forth in the Fund's
prospectus, the Bank agrees to calculate the number of
AAdvantage Miles to be posted to a Shareholder's AAdvantage
Account on a monthly basis.
(c) Reports
(i) Bank will provide AA with cartridges or transmissions
listing AAdvantage Miles to be posted by Member name,
AAdvantage Account number, transaction code and other
items as specified in the Report. Bank will submit
these cartridges or transmissions, which will be
merged with the AAdvantage data base maintained by
AA, to AA once each month on the day of the month
specified in writing from the Funds to the Bank. The
cartridges or transmissions will include all
AAdvantage Miles posted through the reporting period.
(ii) To minimize posting errors, Bank will verify that the
Member's AAdvantage Account number is valid prior to
transmission to AA as per the Algorithm outlined in
the Report.
(iii) AA will provide Bank with the following reports:
A. Cartridge or transmission listing of all
AAdvantage Miles posted for Bank by Member
name, AAdvantage Account number, transaction
date, and AAdvantage Miles, issued monthly.
B. Hard copy summary of all AAdvantage Miles
earned through the Funds, issued monthly.
(iv) All data exchanged by the parties will be subject to
the procedures outlined in the Report and any
subsequent amendments of that document agreed upon by
the parties.
(v) AA will be under no obligation to provide additional
reports, but will consider any request by Bank for
such reports, and will
<PAGE> 10
determine, in its reasonable discretion, whether to
honor such requests.
(vi) This Section 1.3 shall survive for at least twelve
(12) months but not more than twenty-four (24) months
after termination or expiration of the Transfer
Agency Agreement in order to correct errors and to
report and account for all AAdvantage Miles earned
during the term of the Agreement, provided however
that the Fund provides all data required to comply
with Section 1.3 herein.
2. Fees and Expenses
2.1 For the performance by the Bank pursuant to this Agreement, the Fund
agrees on behalf of each of the Portfolios to pay the Bank the fees as
set out in the initial fee schedule attached hereto.
2.2 In addition to the fee paid under Section 2.1 above, the Fund agrees
on behalf of each of the Portfolios to reimburse the Bank for
out-of-pocket expenses, including but not limited to confirmation
production, postage, forms, telephone, microfilm, microfiche, mailing
and tabulating proxies, records storage, or advances incurred by the
Bank for the items set out in the fee schedule attached hereto. Such
fees and out-of-pocket expenses and advances identified may be changed
from time to time subject to mutual written agreement between the Fund
and the Bank. In addition, any other expenses incurred by the Bank at
the request or with the consent of the Fund, will be reimbursed by the
Fund on behalf of the applicable Portfolio.
2.3 The Fund agrees on behalf of each of the Portfolios to pay all fees
and reimbursable expenses within twenty days following the receipt of
the respective billing notice. Postage for mailing of dividends,
proxies, Fund reports and other mailings to all shareholder accounts
shall be advanced to the Bank by the Fund at least two (2) days prior
to the mailing date of such materials.
3. Representations and Warranties of the Bank
The Bank represents and warrants to the Fund that:
3.1 It is a trust company duly organized and existing and in good standing
under the laws of The Commonwealth of Massachusetts.
<PAGE> 11
3.2 It is duly qualified to carry on its business in The Commonwealth of
Massachusetts.
3.3 It is empowered under applicable laws and by its Charter and By-Laws
to enter into and perform this Agreement.
3.4 All requisite corporate proceedings have been taken to authorize it to
enter into and perform this Agreement.
3.5 It has and will continue to have access to the necessary facilities,
equipment and personnel to perform its duties and obligations under
this Agreement.
3.6 It will comply with all applicable laws and regulations in performing
its duties required hereunder.
4. Representations and Warranties of the Fund
The Fund represents and warrants to the Bank that:
4.1 It is a business trust duly organized and existing and in good
standing under the laws of The Commonwealth of Massachusetts.
4.2 It is empowered under applicable laws and by its Declaration of Trust
and By-Laws to enter into and perform this Agreement.
4.3 All corporate proceedings required by said Declaration of Trust and
By-Laws have been taken to authorize it to enter into and perform this
Agreement.
4.4 It is an open-end and diversified management investment company
registered under the Investment Company Act of 1940, as amended.
4.5 A registration statement under the Securities Act of 1933, as amended
on behalf of each of the Portfolios is currently effective and will
remain effective, and appropriate state securities law filings have
been made and will continue to be made, with respect to all Shares of
the Fund being offered for sale.
5. Wire Transfer Operating Guidelines/Articles 4A of the Uniform
Commercial Code
5.1 The Bank is authorized to promptly debit the appropriate Fund
account(s) upon the receipt of a payment order in compliance with the
selected security procedure (the "Security Procedure") chosen for
funds transfer and in the amount of money that the Bank has been
instructed to
<PAGE> 12
transfer. The Bank shall execute payment orders in compliance with
the Security Procedure and with the Fund instructions on the execution
date provided that such payment order is received by the close of the
funds- transfer business day of the Bank, unless the payment order
specifies a later time. All payment orders and communications
received after the customary deadline will be deemed to have been
received the next business day.
5.2 The Fund acknowledges that the Security Procedure it has designated on
the Fund Selection Form was selected by the Fund from security
procedures offered by the Bank. The Fund shall restrict access to
confidential information relating to the Security Procedure to
authorized persons as communicated to the Bank in writing. Each party
must notify the other party immediately if it has reason to believe
unauthorized persons may have obtained access to such information or
of any change in that party's authorized personnel. The Bank shall
verify the authenticity of all Fund instructions according to the
Security Procedure.
5.3 The Bank shall process all payment orders on the basis of the account
number contained in the payment order. In the event of a discrepancy
between any name indicated on the payment order and the account
number, the account number shall take precedence and govern.
5.4 The Bank reserves the right to decline to process or delay the
processing of a payment order which (a) is in excess of the collected
balance in the account to be charged at the time of the Bank's receipt
of such payment order; (b) would cause the Bank, in the Bank's
reasonable judgement, to exceed any volume, aggregate dollar, network,
time, credit or similar limits which are applicable to the Bank; or
(c) the Bank, upon reasonable belief after verifying the authenticity
of the payment order according to the Security Procedures is unable
to satisfy itself that the transaction has been properly authorized.
5.5 The Bank shall use reasonable efforts to act on all authorized
requests to cancel or amend payment orders received in compliance with
the Security Procedure provided that such requests are received in a
timely manner affording the Bank reasonable opportunity to act.
However, the Bank assumes no liability if after using reasonable
efforts the request for amendment or cancellation cannot be satisfied.
<PAGE> 13
5.6 The Bank shall assume no responsibility for failure to detect any
erroneous payment order provided that the Bank complies with the
payment order instructions as received and the Bank complies with the
Security Procedure. The Security Procedure is established for the
purpose of authenticating payment orders only and not for the
detection of errors in payment orders.
5.7 The Bank shall assume no responsibility for lost interest with respect
to the refundable amount of any unauthorized payment order, unless the
Bank is notified of the unauthorized payment order within thirty (30)
days of notification by the Bank of the acceptance of such payment
order. In no event (including failure to execute a payment order)
shall the Bank be liable for special, indirect or consequential
damages, even if advised of the possibility of such damages.
5.8 When the Fund initiates or receives Automated Clearing House credit
and debit entries pursuant to these guidelines and the rules of the
National Automated Clearing House Association and the New England
Clearing House Association, the Bank will act as an Originating
Depository Financial Institution and/or receiving depository Financial
Institution, as the case may be, with respect to such entries.
Credits given by the Bank with respect to an ACH credit entry are
provisional until the Bank receives final settlement for such entry
from the Federal Reserve Bank. If the Bank does not receive such
final settlement, the Fund agrees that the Bank shall receive a refund
of the amount credited to the Fund in connection with such entry, and
the party making payment to the Fund via such entry shall not be
deemed to have paid the amount of the entry.
5.9 Confirmation of Bank's execution of payment orders shall ordinarily be
provided within twenty-four (24) hours notice of which may be
delivered through the Bank's proprietary information systems, or by
facsimile or call-back. Fund must report any objections to the
execution of an order within thirty (30) days.
6. Data Access and Proprietary Information
6.1 The Fund acknowledges that the data bases, computer programs, screen
formats, report formats, interactive design techniques, and
documentation manuals furnished to the Fund by the Bank as part of the
Fund's ability to
<PAGE> 14
access certain Fund-related data ("Customer Data") maintained by the
Bank on data bases under the control and ownership of the Bank or
other third party ("Data Access Services") constitute copyrighted,
trade secret, or other proprietary information (collectively,
"Proprietary Information") of substantial value to the Bank or other
third party. In no event shall Proprietary Information be deemed
Customer Data. The Fund agrees to treat all Proprietary Information
as proprietary to the Bank and further agrees that it shall not
divulge any Proprietary Information to any person or organization
except as may be provided hereunder. Without limiting the foregoing,
the Fund agrees for itself and its employees and agents:
(a) to access Customer Data solely from locations as may
be designated in writing by the Bank and solely in
accordance with the Bank's applicable user
documentation;
(b) to refrain from copying or duplicating in any way the
Proprietary Information;
(c) to refrain from obtaining unauthorized access to any
portion of the Proprietary Information, and if such
access is inadvertently obtained, to inform in a
timely manner of such fact and dispose of such
information in accordance with the Bank's
instructions;
(d) excluding the Fund's principal office in Fort Worth,
Texas, to refrain from causing or allowing the data
acquired hereunder from being retransmitted to any
other computer facility or other location, except
with the prior written consent of the Bank;
(e) that the Fund shall have access only to those
authorized transactions agreed upon by the parties;
(f) to honor all reasonable written requests made by the
Bank to protect at the Bank's expense the rights of
the Bank in Proprietary Information at common law,
under federal copyright law and under other federal
or state law.
Each party shall take reasonable efforts to advise its employees of their
obligations pursuant to this Section 6. The obligations of this Section shall
survive any earlier termination of this Agreement.
6.2 (a) The Bank acknowledges that the data, computer programs, report
formats, manuals, records or
<PAGE> 15
other information concerning the AAdvantage Account furnished
to the Bank by the Fund or AA as part of the Bank's obligation
to calculate and report AAdvantage Miles, as well as any other
information identified in writing by the Fund as confidential
immediately prior to or immediately after disclosure by the
Fund to the Bank, constitutes the confidential information of
the Fund ("Fund Confidential Information")
(b) The Bank agrees (i) to hold and maintain in strictest
confidence and not to reveal or disclose the Fund Confidential
Information other than to the fund, AA and to Bank employees
who need to know such information in order to perform Bank's
duties under this Agreement; and (ii) that neither the Bank
nor its employees, agents and/or contractors will use the Fund
Confidential Information in any manner whatsoever, except for
the purpose of carrying out the Bank's duties under this
Agreement.
(c) Notwithstanding any provision to the contrary contained
herein, the Bank shall be allowed to release the Fund
Confidential Information if compelled to do so by a regulatory
authority or court of competent jurisdiction, or if the Bank
believes in good faith that it is obligated by law to provide
such Fund Confidential Information to a regulatory authority
or court of competent jurisdiction, subject to the conditions
that the Bank: (i) gives the Fund prompt notice of the legal
process and the opportunity to seek an appropriate protective
order or to pursue such other legal action necessary to
preserve the confidentiality of the Fund Confidential
Information; and (ii) provides reasonable assistance to and
cooperates with the Fund in its efforts to preserve the
confidentiality of the Fund Confidential Information.
6.3 If the Fund notifies the Bank that any of the Data Access Services do
not operate in material compliance with the most recently issued user
documentation for such services, the Bank shall endeavor in a timely
manner to correct such failure. Organizations from which the Bank may
obtain certain data included in the Data Access Services are solely
responsible for the contents of such data and the Fund agrees to make
no claim against the Bank arising out of the contents of such
third-party data, including, but not limited to, the accuracy thereof.
DATA ACCESS SERVICES AND ALL COMPUTER PROGRAMS AND SOFTWARE
SPECIFICATIONS USED IN CONNECTION THEREWITH ARE PROVIDED ON AN AS IS,
AS AVAILABLE BASIS. THE BANK EXPRESSLY
<PAGE> 16
DISCLAIMS ALL WARRANTIES EXCEPT THOSE EXPRESSLY STATED HEREIN
INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
6.4 If the transactions available to the Fund include the ability to
originate electronic instructions to the Bank in order to (i) effect
the transfer or movement of cash or Shares or (ii) transmit
Shareholder information or other information, then in such event the
Bank shall be entitled to rely on the validity and authenticity of
such instruction without undertaking any further inquiry as long as
such instruction is undertaken in conformity with security procedures
established by the Bank from time to time.
7. Indemnification
7.1 The Bank shall not be responsible for, and the Fund shall on behalf of
the applicable Portfolio indemnify and hold the Bank harmless from and
against, any and all losses, damages, costs, charges, reasonable
counsel fees, payments, expenses and liability arising out of or
attributable to:
(a) All actions of the Bank or its agents or subcontractors
required to be taken pursuant to this Agreement, provided that
such actions are taken in good faith and without negligence or
willful misconduct;
(b) The Fund's lack of good faith, negligence or willful
misconduct which arise out of the material breach of any
representation or warranty of the Fund hereunder;
(c) The reliance on or use by the Bank or its agents or
subcontractors of information, records, documents or services
which (i) are received by the Bank or its agents or
subcontractors, and (ii) have been prepared, maintained or
performed by the Fund or any other person or firm on behalf of
the Fund including but not limited to any previous transfer
agent or registrar;
(d) The reliance on, or the carrying out by the Bank or its agents
or subcontractors of any instructions or requests of the Fund
on behalf of the applicable Portfolio;
(e) The offer or sale of Shares in violation of federal or state
securities laws or regulations requiring
<PAGE> 17
that such Shares be registered or in violation of any stop
order or other determination or ruling by any federal or any
state agency with respect to the offer or sale of such Shares;
(f) upon the Fund's request entering into any agreements required
by the National Securities Clearing Corporation (the "NSCC")
required by the NSCC for the transmission of Fund or
Shareholder data through the NSCC clearing systems.
7.2 At any time the Bank may apply to any officer of the Fund for
instructions, and may consult with Fund counsel with respect to any
matter arising in connection with the services to be performed by the
Bank under this Agreement, and the Bank and its agents or
subcontractors shall not be liable and shall be indemnified by the
Fund on behalf of the applicable Portfolio for any action taken or
omitted by it in reliance upon such instructions or upon the opinion
of such counsel. The Bank, its agents and subcontractors shall be
protected and indemnified in acting upon any paper or document,
reasonably believed to be genuine and to have been signed by the
proper person or persons, or upon any instruction, information, data,
records or documents provided the Bank or its agents or subcontractors
by machine readable input, telex, CRT data entry or other similar
means authorized by the Fund, and shall not be held to have notice of
any change of authority of any person, until receipt of written notice
thereof from the Fund.
7.3 The Bank shall indemnify and hold the Fund harmless from and against
any and all losses, damages, costs, charges, counsel fees, payments,
expenses and liability arising out of or attributable to any action or
failure or omission to act by the Bank as a result of the Bank's lack
of good faith, gross negligence or willful misconduct.
7.4 In order that the indemnification provisions contained in this Section
7 shall apply, upon the assertion of a claim for which the one party
(the "Indemnitor") may be required to indemnify the other party (the
"Indemnitee"), the Indemnitee shall promptly notify the Indemnitor of
such assertion, and shall keep the Indemnitor advised with respect to
all developments concerning such claim. The Indemnitor shall have the
option to participate with the Indemnitee in the defense of such claim
or to defend against said claim in its own name or in the name of the
Indemnitee. The Indemnitee shall in no case confess any claim or make
any compromise in any case in which the Indemnitor may be required to
indemnify the Indemnitee except with the Indemnitor's prior written
consent.
<PAGE> 18
8. Registration as a Transfer Agent
Bank and its record keeping Transfer Agent NFDS are currently
registered with the appropriate federal agency for the registration of
transfer agents, or is otherwise permitted to lawfully conduct its
activities without such registration and that it will remain so
registered for the duration of this Agreement. Bank agrees that it
will promptly notify the Fund in the event of any material change in
its status as a registered transfer agent. Should Bank fail to be
registered with the appropriate federal agency as a transfer agent at
any time during this Agreement, and such failure to register does not
permit Bank to lawfully conduct its activities, the Fund may terminate
this Agreement upon five days written notice to Bank.
9. Year 2000
Notwithstanding anything in this Agreement to the contrary, the Bank's
only warranty with respect to year 2000 compliance is that the Bank's
processing systems and software (the "TA2000 System") will be year
2000 compliant during the term set forth in Section 14 of this
Agreement. As used in this Agreement "year 2000 compliant" shall mean
that the software will perform in accordance with the terms of this
Agreement regardless of the century with respect to which date data is
encountered by the software; provided, that (i) all date data received
by the Bank for use by the software is accurate and in formats
specified by the Bank from time to time, (ii) all date data generated
by the software is accepted by the Fund in formats provided by the
Bank from time to time, and (iii) the Bank shall not be obligated to
provide date data for interface functions such as screens, reports or
data transmission files in any format other than that specified by the
Bank from time to time. Notwithstanding the foregoing, the Bank makes
no representation or warranty as to the ability of any hardware,
firmware, software, products or services provided to the Bank
software, including the TA2000 System, in circumstances where data
received from any fund system or any other system is invalid,
incorrect or otherwise corrupt.
10. Insurance
Bank shall maintain insurance of the types and in the amounts deemed
by it to be appropriate. To the extent that policies of insurance may
provide for coverage of claims for liability by the parties set forth
in this
<PAGE> 19
Agreement, the contracts of insurance shall take precedence, and no
provision of this Agreement shall be construed to relieve an insurer
of any obligation to pay claims to the Fund, Bank or other insured
party which would otherwise be a covered claim in the absence of any
provision of this Agreement provided however, that this Section 10
does not void, reduce or jeopardize the insurance coverage of the
insured party.
11. Security
Bank represents and warrants that, to the best of its knowledge, the
various procedures and systems which Bank has implemented with regard
to the safeguarding from loss or damage attributable to fire, theft or
any other cause (including provision for twenty-four hours a day
restricted access) of the Fund's blank checks, certificates, records
and other data hereunder are adequate, and that it will make such
changes therein from time to time as in its judgment are required for
the secure performance of its obligations hereunder. Bank shall
review such systems and procedures on a periodic basis and the fund
shall have access to review these systems and procedures.
12. Standard of Care
The Bank shall at all times act in good faith and agrees to use its
best efforts within reasonable limits to insure the accuracy of all
services performed under this Agreement, but assumes no responsibility
and shall not be liable for loss or damage due to errors unless said
errors are caused by its negligence, bad faith, or willful misconduct
or that of its employees.
13. Covenants of the Fund and the Bank
13.1 The Fund shall on behalf of each of the Portfolios promptly furnish to
the Bank the following:
(a) A copy of the resolution of the Board of Trustees of the Fund
authorizing the appointment of the Bank and the execution and
delivery of this Agreement.
(b) A copy of the Declaration of Trust and By-Laws of the Fund and
all amendments thereto.
13.2 The Bank hereby agrees to establish and maintain facilities and
procedures reasonably acceptable to the Fund for safekeeping of check
forms and facsimile signature imprinting devices, if any; and for the
<PAGE> 20
preparation or use, and for keeping account of, such forms and devices.
13.3 The Bank shall keep records relating to the services to be performed
hereunder, in the form and manner as it may deem advisable. To the
extent required by Section 31 of the Investment Company Act of 1940,
as amended, and the Rules thereunder, the Bank agrees that all such
records prepared or maintained by the Bank relating to the services to
be performed by the Bank hereunder are the property of the Fund and
will be preserved, maintained and made available in accordance with
such Section and Rules, and will be surrendered promptly to the Fund
on and in accordance with its request.
13.4 The Bank and the Fund agree that all books, records, information and
data pertaining to the business of the other party which are exchanged
or received pursuant to the negotiation or the carrying out of this
Agreement shall remain confidential, and shall not be voluntarily
disclosed to any other person, except as may be required by law.
13.5 In case of any requests or demands for the inspection of the
Shareholder records of the Fund, the Bank will endeavor to notify the
Fund and to secure instructions from an authorized officer of the
Fund as to such inspection. The Bank reserves the right, however, to
exhibit the Shareholder records to any person whenever it is advised
by its counsel that it may be held liable for the failure to exhibit
the Shareholder records to such person.
14. Termination of Agreement
14.1 Unless otherwise provided in this Agreement, this Agreement may be
terminated by either party upon ninety (90) days written notice to the
other.
14.2 Should the Fund exercise its right to terminate, reasonable
out-of-pocket expenses associated with the movement of records and
material will be borne by the Fund on behalf of the applicable
Portfolio(s). Additionally, the Bank reserves the right to charge for
any other reasonable expenses associated with such termination.
15. Additional Funds
In the event that the Fund establishes one or more series of Shares in
addition to the series named in the attached Schedule A with respect
to which it desires to have the Bank render services as transfer agent
under the terms
<PAGE> 21
hereof, it shall so notify the Bank in writing, and if the Bank agrees
in writing to provide such services, such series of Shares shall
become a Portfolio hereunder.
16. Assignment
16.1 Except as provided in Section 16.3 below, neither this Agreement nor
any rights or obligations hereunder may be assigned by either party
without the written consent of the other party.
16.2 This Agreement shall inure to the benefit of and be binding upon the
parties and their respective permitted successors and assigns.
16.3 The Bank may, without further consent on the part of the Fund,
subcontract for the performance hereof with (i) Boston Financial Data
Services, Inc., a Massachusetts corporation ("BFDS") which is duly
registered as a transfer agent pursuant to Section 17A(c)(2) of the
Securities Exchange Act of 1934, as amended ("Section 17A(c)(2)"),
(ii) a BFDS subsidiary duly registered as a transfer agent pursuant to
Section 17A(c)(2) or (iii) a BFDS affiliate; provided, however, that
the Bank shall be as fully responsible to the Fund for the acts and
omissions of any subcontractor as it is for its own acts and
omissions.
17. Amendment
This Agreement may be amended or modified by a written agreement
executed by both parties and authorized or approved by a resolution of
the Board of Trustees of the Fund.
18. Massachusetts Law to Apply
This Agreement shall be construed and the provisions thereof
interpreted under and in accordance with the laws of The Commonwealth
of Massachusetts.
19. Force Majeure
In the event either party is unable to perform its obligations under
the terms of this Agreement because of acts of God, strikes, equipment
or transmission failure or damage reasonably beyond its control, or
other causes reasonably beyond its control, such party shall not be
liable for damages to the other for any damages resulting from such
failure to perform or otherwise from such causes.
<PAGE> 22
20. Consequential Damages
Neither party to this Agreement shall be liable to the other party for
consequential damages under any provision of this Agreement or for any
consequential damages arising out of any act or failure to act
hereunder.
21. Merger of Agreement
This Agreement constitutes the entire agreement between the parties
hereto and supersedes any prior agreement with respect to the subject
matter hereof whether oral or written.
22. Limitations of Liability of the Trustees and Shareholders
A copy of the Declaration of Trust of the Trust is on file with the
Secretary of The Commonwealth of Massachusetts, and notice is hereby
given that this instrument is executed on behalf of the Trustees of
the Trust as Trustees and not individually and that the obligations of
this instrument are not binding upon any of the Trustees or
Shareholders individually but are binding only upon the assets and
property of the Fund.
23. Separate Liability of Portfolios
Notwithstanding any other provision of this Agreement, the parties
agree that the assets and liabilities of each Portfolio of the Fund
are separate and distinct from the assets and liabilities of each
other Portfolio and that no Portfolio shall be liable or shall be
charged for any debt, obligation or liability of any other Portfolio,
whether arising under the Agreement or otherwise.
24. Counterparts
This Agreement may be executed by the parties hereto on any number of
counterparts, and all of said counterparts taken together shall be
deemed to constitute one and the same instrument.
25. Reproduction of Documents
This Agreement and all schedules, exhibits, attachments and amendments
hereto may be reproduced by any photographic, photostatic, microfilm,
micro-card, miniature photographic or other similar process. The
parties hereto each agree that any such reproduction shall be
admissible in evidence as the original itself in
<PAGE> 23
any judicial or administrative proceeding, whether or not the original
is in existence and whether or not such reproduction was made by a
party in the regular course of business, and that any enlargement,
facsimile or further reproduction shall likewise be admissible in
evidence.
26. Notices
All notices under this Agreement shall be made orally, in writing, or
by any other means mutually acceptable to the parties. If in writing,
a notice shall be sufficient if personally delivered, mailed, first
class postage prepaid, or sent via facsimile with return confirmation
to the party entitled to receive such notices at the following
addresses:
(a) if to the Fund, to:
[Fund Name]
4333 Amon Carter Blvd.
MD 5645
Fort Worth, TX 76155
Attention: President
Telephone: (817) 967-3509
Facsimile: (817) 967-0768
<PAGE> 24
(b) if to the Bank, to:
State Street Bank and Trust Company
C/O Boston Financial Data Services, Inc.
Attention: President
2 Heritage Drive
North Quincy, MA 02171
Telephone: (617) 774-3292
Facsimile: (617) 774-2388
or such other address as either party shall have furnished to the
other in writing.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in their names and on their behalf by and through their duly
authorized officers, as of the day and year first above written.
AMERICAN AADVANTAGE MILEAGE FUNDS
BY: /s/ WILLIAM F. QUINN
--------------------------------------
ATTEST:
/s/ BARRY Y. GREENEBRG
-------------------------
STATE STREET BANK AND TRUST COMPANY
BY: /s/ RONALD E. LOGUE
--------------------------------------
Executive Vice President
ATTEST:
/s/ S. CESSO
-------------------------
<PAGE> 25
STATE STREET BANK & TRUST COMPANY
FUND SERVICE RESPONSIBILITIES*
<TABLE>
<CAPTION>
Service Performed Responsibility
----------------- --------------
Bank Fund
---- ----
<S> <C> <C>
1. Receives orders for the purchase X
of Shares.
2. Issue Shares and hold Shares in X
Shareholders accounts.
3. Receive redemption requests. X
4. Effect transactions 1-3 above X
directly with broker-dealers.
5. Pay over monies to redeeming X
Shareholders.
6. Effect transfers of Shares. X
7. Prepare and transmit dividends X
and distributions.
8. Issue Replacement Certificates. N/A
9. Reporting of abandoned property. X
10. Maintain records of account. X
11. Maintain and keep a current and X
accurate control book for each
issue of securities.
12. Mail proxies. X
13. Mail Shareholder reports. X
14. Mail prospectuses to current X
Shareholders.
15. Withhold taxes on U.S. resident X
and non-resident alien accounts.
Shareholders.
</TABLE>
<PAGE> 26
<TABLE>
<CAPTION>
Service Performed Responsibility
----------------- --------------
Bank Fund
---- ----
<S> <C> <C>
16. Prepare and file U.S. Treasury X
Department forms.
17. Prepare and mail account and X
confirmation statements for
18. Provide Shareholder account X
information.
19. Blue sky reporting. X
</TABLE>
* Such services are more fully described in Section 1.2 (a), (b) and (c)
of the Agreement.
AMERICAN AADVANTAGE MILEAGE FUNDS
BY: /S/ WILLIAM F. QUINN
---------------------
ATTEST:
/s/ BARRY Y. GREENBERG
------------------
STATE STREET BANK AND TRUST COMPANY
BY: /s/ RONAL E. LOGUE
-------------------
Executive Vice President
ATTEST:
/s/ S. CESSO
------------------
<PAGE> 27
SCHEDULE A
Balanced Mileage Fund
Growth and Income Mileage Fund
Intermediate Bond Mileage Fund (effective 3/1/98)
International Equity Mileage Fund
Limited-Term Income Mileage Fund
Municipal Money Market Mileage Fund
U.S. Government Money Market Mileage Fund
S&P 500 Index Mileage Fund (effective 3/1/98)
Money Market Mileage Fund
<PAGE> 28
ATTACHMENT 1
DATA FLOW REQUIREMENTS
<PAGE> 1
Exhibit 99.b.9.b
SECURITIES LENDING AUTHORIZATION AGREEMENT
Between
AMERICAN AADVANTAGE MILEAGE FUND
and
STATE STREET BANK AND TRUST COMPANY
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
1. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. APPOINTMENT OF STATE STREET . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
3. SECURITIES TO BE LOANED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
4. BORROWERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
5. SECURITIES LOAN AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
6. LOANS OF AVAILABLE SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
7. DISTRIBUTIONS ON AND VOTING RIGHTS WITH RESPECT TO
LOANED SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
8. COLLATERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
9. INVESTMENT OF CASH COLLATERAL AND COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
10. FEE DISCLOSURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
11. RECORDKEEPING AND REPORTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
12. STANDARD OF CARE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
13. REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
14. INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
15. CONTINUING AGREEMENT AND TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
16. NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
17. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
18. SECURITIES INVESTORS PROTECTION ACT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
19. COUNTERPARTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
20. MODIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
</TABLE>
<PAGE> 3
EXHIBITS AND SCHEDULES
EXHIBIT 4.1
EXHIBIT 4.2
EXHIBIT 5.1
EXHIBIT 5.2
EXHIBIT 5.3
SCHEDULE A
SCHEDULE B
SCHEDULE 8.1
<PAGE> 4
SECURITIES LENDING AUTHORIZATION AGREEMENT
Agreement dated the ____ day of ______________, 19__ between AMERICAN
AADVANTAGE MILEAGE FUNDS, a registered management investment company organized
and existing under the laws of Massachusetts (the "Client"), and STATE STREET
BANK AND TRUST COMPANY, a Massachusetts trust company ("State Street"), setting
forth the terms and conditions under which State Street is authorized to act on
behalf of the Client with respect to the lending of certain securities of the
Client held by State Street as trustee, agent or custodian.
This Agreement shall constitute a separate and discrete agreement
between State Street and each of the series of shares of the Client listed on
Schedule B to this Agreement, as it may be amended by the parties, and no
series of shares of the Client shall be responsible or liable for any of the
obligations of any other series of shares of the Client under this Agreement or
otherwise.
NOW, THEREFORE, in consideration of the mutual promises and of the
mutual covenants contained herein, each of the parties does hereby covenant and
agree as follows:
1. Definitions. For the purposes hereof:
(a) "Available Securities" means the securities of the Client
that are available for Loans pursuant to Section 3.
(b) "Borrower" means any of the entities to which Available
Securities may be loaned under a Securities Loan Agreement, as described in
Section 4.
(c) "Collateral" means collateral delivered by a Borrower to
secure its obligations under a Securities Loan Agreement.
(d) "Investment Manager" when used in any provision, means
the person or entity who has discretionary authority over the investment of the
Available Securities to which the provision applies.
(e) "Loan" means a loan of Available Securities to a
Borrower.
(f) "Loaned Security" shall mean any "security" which is
delivered as a Loan under a Securities Loan Agreement; provided that, if any
new or different security shall be exchanged for any Loaned Security by
recapitalization, merger, consolidation, or other corporate action, such new or
different security shall, effective upon such exchange, be
1
<PAGE> 5
deemed to become a Loaned Security in substitution for the former Loaned
Security for which such exchange was made.
(g) "Market Value" of a security means the market value of
such security (including, in the case of a Loaned Security that is a debt
security, the accrued interest on such security) as determined by the
independent pricing service designated by State Street, or such other
independent sources as may be selected by State Street on a reasonable basis.
(h) "Securities Loan Agreement" means the agreement between a
Borrower and State Street (on behalf of the Client) that governs Loans, as
described in Section 5.
(i) "Replacement Securities" means securities of the same
issuer, class and denomination as Loaned Securities.
2. Appointment of State Street. The Client hereby appoints and
authorizes State Street, as its agent, to lend Available Securities to
Borrowers in accordance with the terms of this Agreement. State Street shall
have the responsibility and authority to do or cause to be done all acts State
Street shall determine to be desirable, necessary, or appropriate to implement
and administer this securities lending program. The Client agrees that State
Street is acting as a fully disclosed agent and not as principal in connection
with the securities lending program. State Street may take action as agent of
the Client on an undisclosed or a disclosed basis.
3. Securities to be Loaned. State Street acts or will act as agent,
trustee or custodian of certain securities owned by the Client. All of the
Client's securities held by State Street as agent, trustee or custodian for
each portfolio as set forth on Schedule B hereto, shall be subject to this
securities lending program and constitute Available Securities hereunder,
except those securities which the Client or the Investment Manager specifically
identifies in notices to State Street as not being Available Securities.
Notwithstanding the foregoing, State Street shall loan no more than thirty
three and one third percent (33 1/3%) of the market value of each portfolio's
total assets, including the aggregate value of all Loans hereunder to Borrowers
with respect to each portfolio. In the absence of any such notice identifying
specific securities, State Street shall have no authority or responsibility for
determining whether any of the Client's securities should be excluded from the
lending program.
4. Borrowers. The Available Securities may be loaned to any Borrower
identified on the Schedule of Borrowers, as such Schedule may be modified from
time to time by State Street and Client, including without limitation, the
Financial Markets Group of State Street; provided, however, if Available
Securities are loaned to the Financial Markets Group, in addition to being
consistent with the terms hereof, said Loan shall be made in accordance with
the terms of the Securities Loan Agreement attached hereto as Exhibit 4.1, as
modified form time to time in accordance with the provisions hereof
(hereinafter, the "State Street Securities Loan Agreement"). The form of the
State Street Securities Loan Agreement may
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be modified by State Street from time to time, without the consent of the
Client, in order to comply with the requirements of law or any regulatory
authority having jurisdiction over State Street, the Client or the securities
lending program or in any other manner that is not material and adverse to the
interests of the Client.
The Client acknowledges that it is aware that State Street, acting as
"Lender's Agent" hereunder and thereunder, is or may be deemed to be the same
legal entity as State Street acting as "Borrower" under the State Street
Securities Loan Agreement, notwithstanding the different designations used
herein and therein or the dual roles assumed by State Street hereunder and
thereunder. Client represents that the power granted herein to State Street,
as agent, to lend U.S. Securities owned by Client (including, in legal effect,
the power granted to State Street to make Loans to itself) and the other powers
granted to State Street, as agent herein, are given expressly for the purpose
of averting and waiving any prohibitions upon such lending or other exercise of
such powers which might exist in the absence of such powers, and that
transactions effected pursuant to and in compliance with this Agreement and the
State Street Securities Loan Agreement will not constitute a breach of trust or
other fiduciary duty by State Street.
The Client further acknowledges that it has granted State Street the
power to effect securities lending transactions with the Financial Markets
Group of State Street and other powers assigned to State Street hereunder and
under the Securities Loan Agreements and the State Street Securities Loan
Agreement as a result of the Client's desire to increase the opportunity for it
to lend securities held in its account on fair and reasonable terms to
qualified Borrowers without such loans being considered a breach of State
Street's fiduciary duty. In connection therewith, each party hereby agrees
that it shall furnish to the other party, upon request (i) the most recent
available audited statement of its financial condition, and (ii) the most
recent available unaudited statement of its financial condition, if more recent
than the audited statement. As long as any Loan is outstanding under this
Agreement, each party shall also promptly deliver to the other party all such
financial information that is subsequently available, and any other financial
information or statements that such other party may reasonably request.
In the event any such Loan is made to the Financial Markets Group,
State Street hereby covenants and agrees for the benefit of the Client that it
has adopted and implemented procedural safeguards to ensure that all actions
taken by it hereunder will be effected by individuals other than, and not under
the supervision of, individuals who are acting in a capacity as Borrower
thereunder, and that all trades effected hereunder will take place at the same
fully negotiated "arms length" prices offered to similarly situated third
parties by State Street when it acts as lending agent, notwithstanding the
inherent conflict of interest with respect to Loans to be effected by State
Street to the Financial Markets Group.
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In the event the Client approves lending to borrowers resident in the
United Kingdom, the Client shall complete Part 1 of the document known as a
"MOD-2 form," which is attached hereto as Exhibit 4.2.
In the event that securities lending activity is undertaken through
its London office, State Street becomes subject to additional regulation in the
UK, and State Street is obliged to notify the you of the following matters:
i. State Street shall make available to you established procedures in
accordance with the requirements of the Securities and Futures
Authority for the effective consideration of complaints concerning
State Street's activities carried on in the UK.
ii. Where a liability in one currency is to be matched by an asset in a
different currency, or where an investment transaction relates to an
investment denominated in a currency other than sterling, a movement
of exchange rates may have a separate effect, favorable or
unfavorable, on the gain or loss which would otherwise be experienced
on the investment.
iii. State Street or an affiliate may have an interest that is material to
the investment or transaction concerned and neither State Street nor
any such affiliate shall be obliged to disclose such interest or
account to you for any profits or benefits made or derived by it or
any of its associates from any such transaction.
iv. Any assets which State Street holds in the form of money shall not be
treated by State Street as the Clients' Money as defined by The
Financial Services (Client Money) Regulations 1991 of the United
Kingdom as amended (the "Clients' Money Regulations") and will not be
held in accordance with the Clients' Money Regulations or such other
regulations as shall amend or replace the Clients' Money Regulations
from time to time.
5. Securities Loan Agreements. The Client acknowledges receipt of
State Street's standard forms of Securities Loan Agreements, attached hereto as
Exhibits 5.1, 5.2 and 5.3, and authorizes State Street to enter into loans with
such Borrowers as may be selected by State Street pursuant to agreements
substantially in the form thereof. Each Securities Loan Agreement shall have
such terms and conditions as State Street may negotiate with the Borrower,
however certain terms of individual loans, including rebate fees to be paid to
the Borrower for the use of cash Collateral, shall be negotiated at the time a
loan is made.
6. Loans of Available Securities. State Street shall have authority
to make Loans of Available Securities to Borrowers, and to deliver such
securities to Borrowers. State Street shall be responsible for determining
whether any such Loan shall be made, and provided that the terms and conditions
are consistent with the terms and conditions hereof, for negotiating
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<PAGE> 8
and establishing the terms of each such Loan. State Street shall have the
authority to terminate any Loan in its discretion, at any time and without
prior notice to the Client.
The Client acknowledges that State Street administers securities
lending programs for other clients of State Street. State Street will allocate
securities lending opportunities among its clients, using reasonable and
equitable methods established by State Street from time to time. State Street
does not represent or warrant that any amount or percentage of the Client's
Available Securities will in fact be loaned to Borrowers. The Client agrees
that it shall have no claim against State Street and State Street shall have
no liability arising from, based on, or relating to, loans made for other
clients, or loan opportunities refused hereunder, whether or not State Street
has made fewer or more loans for any other client, and whether or not any loan
for another client, or the opportunity refused, could have resulted in loans
made under this Agreement.
The Client also acknowledges that, under the applicable Securities
Loan Agreements, the Borrowers will not be required to return Loaned Securities
immediately upon receipt of notice from State Street terminating the applicable
Loan, but instead will be required to return such Loaned Securities within such
period of time following such notice as is specified in the applicable
Securities Loan Agreement. Upon receiving a notice from the Client or the
Investment Manager that Available Securities which have been loaned to a
Borrower should no longer be considered Available Securities (whether because
of the sale of such securities or otherwise), State Street shall use its best
efforts to notify promptly thereafter the Borrower which has borrowed such
securities that the Loan of such securities is terminated and that such
securities are to be returned within the time specified by the applicable
Securities Loan Agreement.
7. Distributions on and Voting Rights with Respect to Loaned
Securities. The Client represents and warrants that it is the beneficial owner
of (or exercises complete investment discretion over) all Available Securities
free and clear of all liens, claims, security interests and encumbrances and no
such security has been sold, and that it is entitled to receive all
distributions made by the issuer with respect to Loaned Securities. Except as
provided in the next sentence, all interest, dividends, and other distributions
paid with respect to Loaned Securities shall be credited to the Client's
custodial account with State Street on the date such amounts are delivered by
the Borrower to State Street. Any non-cash distribution on Loaned Securities
which is in the nature of a stock split or a stock dividend shall be added to
the Loan (and shall be considered to constitute Loaned Securities) as of the
date such non-cash distribution is received by the Borrower; provided that the
Client (or Investment Manager) may, by giving State Street ten (l0) business
days' notice prior to the date of such non-cash distribution, direct State
Street to request that the Borrower deliver such non-cash distribution to State
Street, pursuant to the applicable Securities Loan Agreement, in which case
State Street shall credit such non-cash distribution to the Client's account on
the date it is delivered to State Street.
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The Client acknowledges that it will not be entitled to participate in
any dividend reinvestment program or to vote with respect to securities that
are on loan on the applicable record date for such securities.
The Client also acknowledges that any payments of distributions from
Borrower to the Client are in substitution for the interest or dividend accrued
or paid in respect of Loaned Securities and that the tax treatment of such
payment may differ from the tax treatment of such interest or dividend.
If an installment, call or rights issue becomes payable on or in
respect of any Loaned Securities, State Street shall use all reasonable
endeavors to ensure that any timely instructions from the Client are complied
with, but State Street shall not be required to make any payment unless the
Client has first delivered funds to State Street with which to make such
payment.
8. Collateral.
(a) Receipt of Collateral. The Client authorizes State Street to
receive and to hold in Client's custodial account with State Street, on the
Client's behalf, Collateral from Borrowers to secure the obligations of
Borrowers with respect to any loan of securities made on behalf of the Client
pursuant to the Securities Loan Agreements. Except as provided in Section 8(c)
hereof, all investments of cash Collateral shall be made in accordance with
Section 9 hereof and shall be for the account and at the risk of the Client.
Concurrently with the delivery of the Loaned Securities to the Borrower under
any Loan, State Street shall receive from the Borrower and shall credit to
Client's custodial account, Collateral in any of the forms listed on Schedule
8.1. Said Schedule may be amended from time to time by State Street with the
prior written approval of the Client. With respect to foreign cash Collateral,
State Street will provide the Client with a multicurrency investment vehicle
through which the foreign cash will be converted to U.S. dollars and invested
pursuant to Section 9 hereof ("MCIV").
The Collateral received shall (i) in the case of Loaned Securities
denominated in United States Dollars or whose primary trading market is located
in the United States or sovereign debt issued by foreign governments, have a
value of 102% of the Market Value of the Loaned Securities, or (ii) in the case
of Loaned Securities which are not denominated in United States Dollars or
whose primary trading market is not located in the United States, have a value
of 105% of the Market Value of the Loaned Securities or (iii) have such other
value as may be applicable in the jurisdiction in which such Loaned Securities
are customarily traded; provided, however, that in the event of the application
of part (iii) above, State Street shall consult with the Client and obtain the
Client's written approval. Thereafter, State Street shall take all such action
as is appropriate in order to protect Client's secured position and interests
with respect to the Collateral under the applicable Securities Lending
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Agreement, including without limitation, taking all action to require the
Borrower to deliver additional Collateral.
State Street shall value all Loaned Securities in accordance with its
customary practice as follows. Pursuant to the terms of the applicable
Securities Loan Agreement, State Street shall, in accordance with State
Street's reasonable and customary practices and prevailing industry practices,
mark each Loaned Security and its Collateral to their Market Value each
business day based upon the Market Value of the Collateral and the Loaned
Security at the close of business on the preceding business day employing the
most recently available pricing information, and ensure that each applicable
Securities Loan Agreement shall require each Borrower to deliver additional
Collateral (for a letter of credit Collateral, an additional or replacement
letter of credit) to State Street in accordance with the above percentages in
the event that at the close of business on any business day the Market Value of
the Collateral delivered by such Borrower with respect to a Loaned Security
shall be less than (i) in the case of Loaned Securities denominated in United
States Dollars or whose primary trading market is located in the United States
or sovereign debt issued by foreign governments, 101.5% of the Market Value of
the Loaned Securities or (ii) in the case of Loaned Securities whose primary
trading market is not located in the United States (other than sovereign debt
issued by foreign governments) 104.5% of the Market Value of the Loaned
Securities or (iii) such other mark to market level as may be applicable in the
jurisdiction in which such securities are customarily traded; provided,
however, that in the event of the application of part (iii) above, State Street
shall consult with the Client and obtain its prior written approval.
Thereafter, State Street shall take such action as is appropriate with respect
to the Collateral under the applicable Securities Loan Agreement.
(b) Return of Collateral. The Collateral shall be returned to
Borrower at the termination of the Loan upon the return of the Loaned
Securities by Borrower to State Street in accordance with the applicable
Securities Loan Agreement.
(c) Limitations. State Street shall invest cash Collateral in
accordance with the directions of the Client, including any limitations
established by the Client in a writing identified to this Agreement and
acknowledged in writing by State Street and shall exercise reasonable care,
skill, diligence and prudence in the investment of Collateral. Subject to the
foregoing limits and standard of care, State Street does not assume any market
or investment risk of loss with respect to the currency conversions associated
with the use of MCIV or the investment of cash Collateral. If the value of the
cash Collateral so invested is insufficient to return the rebate fee (i.e., the
return to the Borrower for use of cash Collateral), the full amount of the
Collateral (U.S. dollar or otherwise), or any and all other amounts due to such
Borrower pursuant to the Securities Loan Agreement, the Client shall be solely
responsible for such shortfall and State Street may debit the Client's account.
State Street shall be entitled to charge the Client's accounts for such
shortfall in accordance with Section 9.
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9. Investment of Cash Collateral and Compensation. To the extent
that a Loan is secured by cash Collateral, such cash Collateral, including
money received with respect to the investment of the same, or upon the
maturity, sale, or liquidation of any such investments, shall be invested by
State Street, subject to the directions of the Client or its Investment
Manager, in short-term instruments, short term investment funds maintained by
State Street and other money market mutual funds.
The Client acknowledges that State Street, in providing MCIV, may
receive additional compensation by managing its interest rate exposure.
The Client acknowledges that interests in such mutual funds,
securities lending trusts and other collective investment funds, to which State
Street and/or one or more of its affiliates provide services are not guaranteed
or insured by State Street or any of its affiliates or by the Federal Deposit
Insurance Corporation or any government agency.
The income generated by any investment made pursuant to the preceding
paragraphs of this Section 9 shall be allocated among the Borrower, State
Street, the Client and others, as follows: (a) a portion of such income shall
be paid to the Borrower in accordance with the applicable Securities Loan
Agreement; (b) the balance, if any, shall be split between State Street [as
compensation for its services in connection with this securities lending
program], the Client [as such income shall be credited to the Client's
custodial account], and others. State Street shall be compensated in
accordance with the fee schedule attached hereto as Schedule A.
In the event the income generated by any investment made pursuant to
the first paragraph of this Section 9 does not equal or exceed the amount due
the Borrower (the "rebate fee") in accordance with the agreement between
Borrower and State Street, State Street shall debit the Client's custodial
account by an amount equal to the difference between the net income generated
and the amounts to be paid to the Borrower pursuant to the Securities Loan
Agreement. In the event debits to the Client's custodial account produce a
deficit therein, State Street shall sell or otherwise liquidate investments
made with cash Collateral and credit the net proceeds of such sale or
liquidation to satisfy the deficit.
In the event of a Loan to a Borrower resident in Canada, which is
made over record date for a dividend reinvestment program ("DRP") and is
secured by cash Collateral, the Borrower shall pay the Client a substitute
payment equal to the full amount of the cash dividend declared, and may pay a
loan premium, the amount of which shall be negotiated by State Street, above
the amount of the cash dividend. Such loan premium shall be allocated between
State Street and the Client as follows: (a) a portion of such loan premium
shall be paid to State Street as compensation for its services in connection
with this securities lending program, in accordance with Schedule A and (b) the
remainder of such loan premium shall be credited to the Client's account.
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To the extent that a Loan is secured by non-cash Collateral, the
Borrower shall be required to pay a loan premium, the amount of which shall be
negotiated by State Street. Such loan premium shall be allocated between State
Street and the Client as follows: (a) a portion of such loan premium shall be
paid to State Street as compensation for its services in connection with this
securities lending program, in accordance with Schedule A hereto; and (b) the
remainder of such loan premium shall be credited promptly to the Client's
custodial account.
The Client acknowledges that in the event that the Client's
participation in securities lending generates income for the Client, State
Street may be required to withhold tax or may claim such tax from the Client as
is appropriate in accordance with applicable law.
10. Fee Disclosure. The fees associated with the investment of cash
Collateral in funds maintained or advised by State Street are disclosed on
Schedule A hereto. Said Schedule may be replaced from time to time by State
Street only with the prior written consent of to the Client. An annual report
with respect to such funds is available to the Client, at no expense, upon
request.
11. Recordkeeping and Reports. State Street will establish and
maintain such records as are reasonably necessary to account for Loans that are
made and the income derived therefrom. On a monthly basis, State Street will
provide the Client with a statement describing the Loans made, and the income
derived from the Loans, for each day during the period covered by such
statement. Each party to this Agreement shall comply with the reasonable
requests of the other for information necessary to the requester's performance
of its duties in connection with this securities lending program.
12. Standard of Care. Subject to the requirements of applicable law,
State Street shall not be liable for any loss or damage, including reasonable
counsel fees and court costs, whether or not resulting from their acts or
omissions to act hereunder or otherwise, unless the loss or damage arises out
of State Street's own negligence. Except for any liability, loss, or expense
arising from or connected with State Street's own negligence or State Street's
obligations under Section 14 hereof, the Client agrees to reimburse and hold
State Street harmless from and against any liability, loss and expense,
including reasonable counsel fees and expenses and court costs, arising in
connection with this Agreement or any Loan or arising from or connected with
claims of any third parties, including any Borrower, from and against all taxes
and other governmental charges, and from and against any out-of-pocket or
incidental expenses. State Street may charge any amounts to which it is
entitled hereunder against the Client's custodial account provided the Client
has given its consent. Without limiting the generality of the foregoing, the
Client agrees: (i) that State Street shall not be responsible for any
statements, representations or warranties which any Borrower makes in
connection with any securities loans hereunder, or for the performance by any
Borrower of
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the terms of a Loan, or any agreement related thereto; (ii) that State Street
shall be fully protected in acting in accordance with the oral or written
instructions of any person reasonable believed by State Street to be authorized
to execute this Agreement on behalf of the Client (an "Authorized Person");
(iii) that in the event of a default by a Borrower under a Loan, State Street
shall be fully protected in acting in its sole discretion in a manner it deems
appropriate; and (iv) that State Street shall not be under any duty or
obligation to take action to effect payment by a Borrower of any amounts owed
by the Borrower pursuant to the Loan Agreement, provided State Street timely
advises the Client of the non-payment by the Borrower of any such amount.
The Client acknowledges that, when lending Gilt securities, there is
intraday settlement exposure from the Borrower's settlement bank. In
particular, Client has daily exposure that the Gilt collateral position backed
by the assured payment from the Borrower's settlement bank is unsecured.
State Street, in determining the Market Value of Securities, including
without limitation, Collateral, may rely upon any recognized pricing service
and shall not be liable for any errors made by such service.
13. Representations and Warranties. Each party hereto represents and
warrants that (a) it has the power to execute and deliver this Agreement, to
enter into the transactions contemplated hereby, and to perform its obligations
hereunder; (b) it has taken all necessary action to authorize such execution,
delivery, and performance; (c) this Agreement constitutes a legal, valid, and
binding obligation enforceable against it; and (d) the execution, delivery, and
performance by it of this Agreement will at all times comply with all
applicable laws and regulations.
The Client represents and warrants that (a) it has made its own
determination as to the tax treatment of any dividends, remuneration or other
funds received hereunder; and (b) the financial statements delivered to State
Street pursuant to Section 4 fairly present its financial condition and there
has been no material adverse change in its financial condition or the financial
condition of any parent company since the date of the balance sheet included
within such financial statements. Each Loan shall constitute a present
representation by the Client that there has been no material adverse change in
its financial condition or the financial condition of any parent company that
has not been disclosed in writing to State Street since the date of the most
recent financial statements furnished to State Street pursuant to Section 4.
The person executing this Agreement on behalf of the Client represents
that he or she has the authority to execute this Agreement on behalf of the
Client.
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The Client hereby represents to State Street that prior to instructing
State Street to purchase shares of the Navigator Securities Lending Quality
Trust with cash Collateral: (i) its policies generally permit it to engage in
securities lending transactions; (ii) its policies permit it to purchase shares
of the Navigator Securities Lending Quality Trust with cash Collateral; (iii)
its participation in the securities lending program, including the investment
of cash collateral in the Navigator Securities Lending Trust, and the existing
series' thereof, has been approved by a majority of the directors or trustees
that are not "interested persons" within the meaning of section 2(a)(19) of the
Investment Company Act of 1940, and such directors or trustees will evaluate
the securities lending program no less frequently than annually to determine
that the investment of cash collateral in the Navigator Securities Lending
Trust, including any series thereof, is in the Client's best interest; and (iv)
its prospectus provides appropriate disclosure concerning its securities
lending activity. The Client acknowledges that on an annualized basis, the
management/trust/custody fee for investing cash Collateral in the Navigator
Securities Lending Prime Portfolio is not more than 10.00 basis points netted
out of yield. The trustee may pay out of the assets of the Portfolio all
reasonable expenses and fees of the Portfolio, including professional fees or
disbursements incurred in connection with the operation of the Portfolio. The
Client acknowledges that on an annualized basis, the management/trust/custody
fee for investing cash Collateral in the Navigator Securities Lending Prime
Portfolio is not more than 10.00 basis points netted out of yield. The trustee
may pay out of the assets of the Portfolio all reasonable expenses and fees of
the Portfolio, including professional fees or disbursements incurred in
connection with the operation of the Portfolio.
The Client hereby further represents that it is not subject to the
Employee Retirement Income Security Act of 1974, as amended ("ERISA") with
respect to this Agreement and the Securities; that it qualifies as an
"accredited investor" within the meaning of Rule 501 of Regulation D under the
Securities Act of 1933, as amended.
14. Indemnification.
(a) If at the time of a default by a Borrower with
respect to a Loan (within the meaning of the applicable Securities Loan
Agreement) some or all of the Loaned Securities under such Loan have not been
returned by the Borrower, and subject to the terms of this Agreement, State
Street shall indemnify the Client against the failure of the Borrower as
follows. State Street shall purchase a number of Replacement Securities equal
to the number of such unreturned Loaned Securities, to the extent that such
Replacement Securities are available on the open market. Such Replacement
Securities shall be purchased by applying the proceeds of the Collateral with
respect to such Loan to the purchase of such Replacement Securities. Subject
to the Client's obligations pursuant to Section 8 hereof, if and to the extent
that such proceeds are insufficient or the Collateral is unavailable, the
purchase of such Replacement Securities shall be made at State Street's
expense.
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(b) If after the expiration of the customary settlement
period State Street is unable to purchase Replacement Securities pursuant to
Paragraph (a) hereof, State Street shall: (1) credit to the Client's custodial
account an amount equal to the Market Value of the unreturned Loaned Securities
for which replacement securities are not so purchased, determined as of (i) the
last day the Collateral continues to be successfully marked to market against
the unreturned Loaned Securities; or (ii) the next business day following the
day referred to in (i) above, if higher; or (2) notwithstanding the Borrower
marking-to-market and State Street continuing to search for Replacement
Securities, State Street shall apprise the Client of same and at the direction
of the Client, credit the Client's custodial account with an amount equal to
the Market Value of the unreturned Loaned Securities determined as of the close
of business on the date of the Client's direction.
(c) In addition to making the purchases or credits
required by Paragraphs (a) and (b) hereof, State Street shall credit to the
Client's custodial account the value of all distributions on the Loaned
Securities (not otherwise credited to the Client's accounts with State Street),
the record dates for which occur before the date that State Street purchases
Replacement Securities pursuant to Paragraph (a) or credits the Client's
custodial account pursuant to Paragraph (b).
(d) Any credits required under Paragraphs (b) and (c)
hereof shall be made by application of the proceeds of the Collateral (if any)
that remains after the purchase of Replacement Securities pursuant to Paragraph
(a). If and to the extent that the Collateral is unavailable or the value of
the proceeds of the remaining Collateral is less than the value of the sum of
the credits required to be made under Paragraphs (b) and (c), such credits
shall be made at State Street's expense.
(e) If after application of Paragraphs (a) through (d)
hereof, additional Collateral remains or any previously unavailable Collateral
becomes available or any additional amounts owed by the Borrower with respect
to such Loan are received from the Borrower, State Street shall apply the
proceeds of such Collateral or such additional amounts first to reimburse
itself for any amounts expended by State Street pursuant to Paragraphs (a)
through (d) above, and then to credit to the Client's custodial account all
other amounts owed by the Borrower to the Client with respect to such Loan
under the applicable Securities Loan Agreement.
(f) In the event that State Street is required to make
any payment and/or incur any loss or expense under this Section, State Street
shall, to the extent of such payment, loss, or expense, be subrogated to, and
succeed to, all of the rights of the Client against the Borrower under the
applicable Securities Loan Agreement.
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(g) The provisions of this Section 14 shall not apply to
losses attributable to war, riot, revolution, acts of government or other
similar causes which could inhibit State Street's ability to transact business.
15. Continuing Agreement and Termination. It is the intention of the
parties hereto that this Agreement shall constitute a continuing agreement in
every respect and shall apply to each and every Loan, whether now existing or
hereafter made. The Client and State Street may each at any time terminate
this Agreement upon five (5) business days' written notice to the other to that
effect. The only effects of any such termination of this Agreement will be
that (a) following such termination, no further Loans shall be made hereunder
by State Street on behalf of the Client, and (b) State Street shall, within a
reasonable time after termination of this Agreement, terminate any and all
outstanding Loans. The provisions hereof shall continue in full force and
effect in all other respects until all Loans have been terminated and all
obligations satisfied as herein provided.
16. Notices. Except as otherwise specifically provided herein,
notices under this Agreement may be made orally, in writing, or by any other
means mutually acceptable to the parties. If in writing, a notice shall be
sufficient if delivered to the party entitled to receive such notices at the
following addresses:
If to Client:
AMR Investment Services, Inc.
4333 Amon Carter Blvd.
Bldg. MD 5645
Fort Worth, Texas 76155
Attention: President
Telephone: (817) 967-3509
If to State Street:
State Street Bank and Trust Company
Global Securities Lending Division
Two International Place, Floor 31
Boston, Massachusetts 02110
Attention: Client Services
Telephone: (617) 664-2500
or to such other addresses as either party may furnish the other party by
written notice under this section.
13
<PAGE> 17
Whenever this Agreement permits or requires the Client to give notice
to, direct, provide information to State Street, such notice, direction, or
information shall be provided to State Street on the Client's behalf by any
individual designated for such purpose by the Client in a written notice to
State Street. (This Agreement shall be considered such a designation of the
person executing the Agreement on the Client's behalf.) After its receipt of
such a notice of designation, and until its receipt of a notice revoking such
designation, State Street shall be fully protected in relying upon the notices,
directions, and information given by such designee.
17. Miscellaneous. This Agreement supersedes any other agreement
between the parties or any representations made by one party to the other,
whether oral or in writing, concerning loans of securities by State Street on
behalf of the Client. Subject to the foregoing, this Agreement shall be binding
upon and shall inure to the benefit of the parties hereto and their respective
heirs, representatives, successors, and assigns. This Agreement shall be
governed and construed in accordance with the laws of the Commonwealth of
Massachusetts. The Client hereby irrevocably submits to the jurisdiction of
any Massachusetts state or Federal court sitting in The Commonwealth of
Massachusetts in any action or proceeding arising out of or related to this
Agreement and hereby irrevocably agrees that all claims in respect of such
action or proceeding may be heard and determined in such Massachusetts state or
Federal court except that this provision shall not preclude any party from
removing any action to Federal court. The Client irrevocably consents to the
service of any and all process in any such action or proceeding by the mailing
of copies of such process to the Client at its address specified in Section 16
hereof. The Client agrees that a final judgment in any such action or
proceeding, all appeals having been taken or the time period for such appeals
having expired, shall be conclusive and may be enforced in other jurisdictions
by suit on the judgment or in any other manner provided by law. The provisions
of this Agreement are severable and the invalidity or unenforceability of any
provision hereof shall not affect any other provision of this Agreement. If in
the construction of this Agreement any court should deem any provision to be
invalid because of scope or duration, then such court shall forthwith reduce
such scope or duration to that which is appropriate and enforce this Agreement
in its modified scope or duration.
18. Securities Investors Protection Act of 1970 Notice. CLIENT IS
HEREBY ADVISED AND ACKNOWLEDGES THAT THE PROVISIONS OF THE SECURITIES INVESTOR
PROTECTION ACT OF 1970 MAY NOT PROTECT THE CLIENT WITH RESPECT TO THE LOAN OF
SECURITIES HEREUNDER AND THAT, THEREFORE, THE COLLATERAL DELIVERED TO THE
CLIENT MAY CONSTITUTE THE ONLY SOURCE OF SATISFACTION OF THE BROKER'S OR
DEALER'S OBLIGATION IN THE EVENT THE BROKER OR DEALER FAILS TO RETURN THE
SECURITIES.
14
<PAGE> 18
19. Counterparts. The Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but such
counterparts shall, together, constitute only one (1) instrument.
15
<PAGE> 19
20. Modification. This Agreement shall not be modified, except by an
instrument in writing signed by the party against whom enforcement is sought.
AMERICAN AADVANTAGE MILEAGE FUNDS
Name:
----------------------------
By:
------------------------------
Its:
-----------------------------
STATE STREET BANK AND TRUST COMPANY
Name:
----------------------------
By:
------------------------------
Its:
-----------------------------
16
<PAGE> 20
SCHEDULE A
This Schedule is attached to and made part of the Securities Lending
Authorization Agreement, dated the ____ day of _______, 199_ between
AMERICAN AADVANTAGE MILEAGE FUNDS ("Client") and STATE STREET BANK AND TRUST
COMPANY ("State
Street").
SCHEDULE OF FEES
1. Subject to Paragraph 2 below, all proceeds collected by State Street
on investment of cash Collateral or any fee income, including all interest,
dividends and other distributions shall be allocated as follows:
- Twenty five percent (25 %) payable to State Street.
2. All payments to be allocated under Paragraph 1 above shall be made
after deduction of such other amounts payable to State Street or to the
Borrower under the terms of the attached Securities Lending Authorization
Agreement.
<PAGE> 21
SCHEDULE B
This Schedule is attached to and made part of the Securities Lending
Authorization Agreement, dated the ____ day of _______, 199_ between
AAMERICAN AADVANTAGE MILEAGE FUNDS ("Client") and STATE STREET BANK AND
TRUST COMPANY ("State Street").
<TABLE>
<CAPTION>
FUND NAMES TAXPAYER IDENTIFICATION NUMBER TAX YEAR END
<S> <C> <C>
Balanced Mileage Fund 75-2606360 October 31
Growth and Income Mileage Fund 75-2606359 October 31
International Equity Mileage Fund 75-2606358 October 31
Intermediate Bond Mileage Fund
Limited-Term Income Mileage Fund 75-2606357 October 31
</TABLE>
<PAGE> 1
EXHIBIT 99.b.11
Consent of Independent Auditors
We consent to the reference to our firm under the captions "Financial
Highlights," "Management and Administration of the Trust-Independent Auditor"
and "Shareholder Communications" and to the use of our reports dated December
19, 1997 in the Registration Statement (Form N-1A) and its incorporation by
reference in the related Prospectus of American AAdvantage Funds, filed with
the Securities and Exchange Commission in this Post-Effective Amendment No. 6
to the Registration Statement under the Securities Act of 1933 (File No.
33-91058) and in this Amendment No. 7 to the Registration Statement under the
Investment Company Act of 1940.
/s/ ERNST & YOUNG LLP
----------------------
ERNST & YOUNG LLP
Dallas, Texas
February 24, 1998
