<PAGE> 1
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> 2
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> 3
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> 4
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> 5
(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> 6
(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
6
<PAGE> 7
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
7
<PAGE> 8
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."
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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.
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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
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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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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> 13
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.
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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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<PAGE> 15
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
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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
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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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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.
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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> 31
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> 32
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> 33
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> 34
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> 35
-- NOTES --
<PAGE> 36
[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> 37
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)
MONEY MARKET FUND
MUNICIPAL MONEY MARKET FUND
U.S. GOVERNMENT MONEY MARKET FUND
AMERICAN AADVANTAGE MILEAGE FUNDS(R)
MONEY MARKET MILEAGE FUND
<PAGE> 38
The AMERICAN AADVANTAGE MONEY MARKET FUNDSM ("Money Market Fund"), AMERICAN
AADVANTAGE MUNICIPAL MONEY MARKET FUNDSM ("Municipal Money Market Fund") and
AMERICAN AADVANTAGE U.S. GOVERNMENT MONEY MARKET FUNDSM("U.S. Government Money
Market Fund") (collectively, "AAdvantage Funds") and the AMERICAN AADVANTAGE
MONEY MARKET MILEAGE FUNDSM ("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> 39
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> 40
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> 41
(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> 42
(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> 43
(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> 44
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> 45
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> 46
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> 47
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> 48
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> 49
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
PROSPECTUS
13
<PAGE> 50
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
PROSPECTUS
14
<PAGE> 51
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
PROSPECTUS
15
<PAGE> 52
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
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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.
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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
27
<PAGE> 64
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> 65
-- NOTES --
<PAGE> 66
-- NOTES --
<PAGE> 67
-- NOTES --
<PAGE> 68
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> 69
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 1-800-233-3411. For further information on the Funds, refer to the address
and phone number on the back cover.
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 FUNDS LOGO]
--Platinum Class(SM)--
MONEY MARKET FUND
MUNICIPAL MONEY
MARKET FUND
U.S. GOVERNMENT MONEY
MARKET FUND
[AMERICAN AADVANTAGE MILEAGE FUNDS LOGO]
MONEY MARKET
MILEAGE FUND
Available through
JACK WHITE
& COMPANY
1-800-233-3411
<PAGE> 70
The AMERICAN AADVANTAGE MONEY MARKET FUNDSM ("Money Market Fund"), AMERICAN
AADVANTAGE MUNICIPAL MONEY MARKET FUNDSM ("Municipal Money Market Fund") and
AMERICAN AADVANTAGE U.S. GOVERNMENT MONEY MARKET FUNDSM("U.S. Government Money
Market Fund") (collectively, "AAdvantage Funds") and the AMERICAN AADVANTAGE
MONEY MARKET MILEAGE FUNDSM ("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> 71
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> 72
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> 73
(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> 74
(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> 75
(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> 76
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) 233-3411 or write to 9191 Towne Centre
Drive, Second Floor, San Diego, CA 92122.
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 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> 77
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
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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
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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)
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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 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.
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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 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
and 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 Mileage Trust 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:
- 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 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 also 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 AAdvantage Trust, 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 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
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. 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 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 the following expenses: 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, including
creating a separate Board of Trustees of 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
PROSPECTUS
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<PAGE> 89
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.
PROSPECTUS
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<PAGE> 90
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
Orders for purchase of 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 (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
PROSPECTUS
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<PAGE> 91
any order for the purchase of shares and to limit or suspend, without prior
notice, the offering of shares.
Free credit balances arising in the Ultimate Market Account from check
deposits, dividend payments, interest payments and other credits will be swept
into the selected Fund on the business day after posting. Free credit balances
arising from the sale of securities will be swept into a Fund on the business
day following settlement. Amounts swept into a Fund start earning dividends on
the business day on which they are swept into a Fund.
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 whole or in
part by a distribution of readily marketable securities held by the
PROSPECTUS
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<PAGE> 92
applicable Fund's corresponding Portfolio. See the SAI for further information
concerning redemptions in kind.
Automatic redemption has been instituted for participants invested in the
Funds. A sufficient number of shares will be redeemed on settlement date to pay
for all securities transactions. If a shareholder intends to send funds to
settle securities transactions, the funds must be received on the business day
before the settlement date to prevent an automatic redemption. Shares also may
be redeemed to meet any debits in the Ultimate Market Account arising from
MasterCard and checking transactions and will be paid from the shareholder's
account on the day transactions are posted.
Firms may charge a fee for wire redemptions to cover transaction costs.
Redemption proceeds will generally be sent within one Business Day, as
applicable. 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"). 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.
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.
PROSPECTUS
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<PAGE> 93
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
PROSPECTUS
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<PAGE> 94
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 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
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<PAGE> 95
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
27
<PAGE> 96
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 and PlanAhead Class are registered service marks 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> 97
-- NOTES --
<PAGE> 98
-- NOTES --
<PAGE> 99
-- NOTES --
<PAGE> 100
[AMR AADV FUNDS LOGO]
Available through
Jack White & Company's
[ULTIMATE MARKET ACCOUNT LOGO]
9191 Towne Centre Drive
Second Floor
San Diego, CA 92122
1-800-233-3411
PTJW-PRO-0398
<PAGE> 101
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) 973-7977.
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 FUNDS LOGO]
- Platinum Class(SM)-
[AMERICAN AADVANTAGE FUNDS LOGO]
MONEY MARKET FUND
MUNICIPAL MONEY MARKET FUND
U.S. GOVERNMENT MONEY MARKET FUND
[AMERICAN AADVANTAGE MILEAGE FUNDS LOGO]
MONEY MARKET MILEAGE FUND*
Available through
[SOUTHWEST SECURITIES LOGO]
*NOT AVAILABLE FOR RETIREMENT PLANS.
<PAGE> 102
The AMERICAN AADVANTAGE MONEY MARKET FUNDSM ("Money Market Fund"), AMERICAN
AADVANTAGE MUNICIPAL MONEY MARKET FUNDSM ("Municipal Money Market Fund") and
AMERICAN AADVANTAGE U.S. GOVERNMENT MONEY MARKET FUNDSM ("U.S. Government Money
Market Fund") (collectively, "AAdvantage Funds") and the AMERICAN AADVANTAGE
MONEY MARKET MILEAGE FUNDSM ("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 each seeks its investment objective by
investing all of its 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> 103
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, the "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> 104
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> 105
(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> 106
(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> 107
(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> 108
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 as an investment for
cash balances in their brokerage accounts. 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> 109
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> 110
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> 111
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> 112
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 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> 113
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 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
and 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 Mileage Trust 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:
- 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 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 AAdvantage Trust, 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 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
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. 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 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
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Trust or the AMR Trust. A Management Agreement will automatically terminate in
the event of its "assignment" as defined in the 1940 Act.
The AAdvantage Trust and the Mileage Trust are each responsible for expenses
not otherwise assumed by the Manager, including the following expenses: 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
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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 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
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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.
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.
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
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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.
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 close of the Exchange (whichever comes first) on each Business Day.
These purchases will receive that day's dividend.
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
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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 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
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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.
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
PROSPECTUS
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<PAGE> 126
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 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
PROSPECTUS
26
<PAGE> 127
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.
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
PROSPECTUS
27
<PAGE> 128
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 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 and PlanAhead Class are registered service marks 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> 129
-- NOTES --
<PAGE> 130
-- NOTES --
<PAGE> 131
-- NOTES --
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[AMR AADV FUNDS LOGO]
RETIREMENT PLANS ARE NOT ELIGIBLE FOR INVESTMENT IN THE AMERICAN AADVANTAGE
MILEAGE FUNDS. SEE "INTRODUCTION" ON PAGE 8 OF THIS PROSPECTUS FOR A DESCRIPTION
OF ELIGIBILITY REQUIREMENTS.
Available through
[SOUTHWEST SECURITIES LOGO]
1201 Elm Street, Suite 3500
Dallas, Texas
75270
(800) 973-7977
PTSS-PRO-0398
<PAGE> 133
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> 134
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> 135
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> 136
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> 137
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
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<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> 139
<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> 140
<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> 141
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> 142
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> 143
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> 144
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> 145
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> 146
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> 147
<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> 148
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> 149
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> 150
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
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<PAGE> 151
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%.
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<PAGE> 152
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> 153
<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> 154
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> 155
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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<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
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<PAGE> 157
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
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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> 159
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> 160
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> 162
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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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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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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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> 167
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> 168
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> 170
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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<PAGE> 171
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> 172
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> 173
<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> 174
<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> 175
<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> 176
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> 177
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> 178
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> 179
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> 180
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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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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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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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> 184
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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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> 187
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.
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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.
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(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.
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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>
